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It is argued that a policy of tax simplification will result​ in: A. A shift from LRAS 2 to LRAS 1 with a higher price level and lower output. B. A shift from LRAS 1 to LRAS 2 with higher output at a lower price level. C. A shift from LRAS 1 to LRAS 2 with lower output at a lower price level. D. A shift from LRAS 2 to LRAS 1 with a lower price level and higher output.

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Answer:

B. A shift from LRAS 1 to LRAS 2 with higher output at a lower price level

Explanation:

When there is a tax simplification in the economy, there would be an increase in the labour supply, saving and investment in the economy, contributing to the enhancement of the economic efficiency. So that it would also make the quantity of real GDP supplied increased, shifting the LRAS1 to the right to LRAS2 with higher output (higher GDP) and the aggregate demand remains unchanged.

Initially, the market is at the equilibrium at point A: Price = P1; Output = Q1

According to the graph attached, when the AD curve stands still, the LRAS shifts to the right, the market moves to the new equilibrium at point B: Output = Q2 > Q1; Price = P2 < P1

So that, the tax simplification results in a shift from LRAS 1 to LRAS 2 with higher output at a lower price level. (Answer B)

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