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Panhellenic Economics & Informatics practice questions

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Question 1Microeconomics

A consumer's budget line shows combinations of two goods that the consumer can buy with a fixed income when prices are constant. What does the slope of this budget line represent?

  1. The consumer's total utility from the bundle
  2. The income elasticity of demand
  3. The relative price of the two goods, i.e., the market rate at which one good trades for the other Correct answer.
  4. The marginal utility of money

Explanation

The budget line is Px·X + Py·Y = M, so its slope equals −Px/Py. This ratio is the opportunity cost of one unit of X measured in units of Y, i.e., the relative price. Utility concepts do not enter the budget constraint itself.

Question 2Microeconomics

A demand curve slopes downward. If the price of the good falls and nothing else changes, what happens to consumer surplus?

  1. It increases because consumers pay less for units they already bought and buy more units valued above the price Correct answer.
  2. It decreases because the quantity sold rises
  3. It stays the same because preferences are unchanged
  4. It becomes zero at the new equilibrium

Explanation

Consumer surplus is the area between the demand curve and the price line. A lower price raises surplus on existing units (the price gap widens) and adds surplus on newly purchased units. Preferences need not change for this to occur.

Question 3Microeconomics

A firm's total cost is 500 when it produces 10 units and 560 when it produces 12 units. What is the marginal cost of the additional output?

  1. 30 per unit Correct answer.
  2. 60 per unit
  3. 5 per unit
  4. 50 per unit

Explanation

Marginal cost is the change in total cost divided by the change in quantity: (560 − 500)/(12 − 10) = 30. Average cost figures (50 and about 46.7) are not marginal cost.

Question 4Microeconomics

In a perfectly competitive market, an individual firm faces a demand curve that is horizontal at the market price. What does this imply about the firm's marginal revenue?

  1. Marginal revenue exceeds price because of market power
  2. Marginal revenue is zero at every output level
  3. Marginal revenue equals the market price Correct answer.
  4. Marginal revenue falls as the firm sells more units

Explanation

A price-taking firm can sell any quantity at the going price, so each extra unit adds exactly the price to revenue. Hence P = MR for a perfectly competitive firm. A downward-sloping firm demand curve would make MR less than price.

Question 5Microeconomics

Which of the following best describes a good whose income elasticity of demand is negative?

  1. A luxury good
  2. An inferior good Correct answer.
  3. A normal good
  4. A Giffen good

Explanation

Income elasticity measures the percentage change in quantity demanded for a percentage change in income. A negative value means demand falls as income rises, the defining feature of an inferior good. Normal and luxury goods have positive income elasticities.

Question 6Microeconomics

A price ceiling set below the equilibrium price is imposed in a competitive market. What is the predictable result?

  1. A surplus because quantity supplied exceeds quantity demanded
  2. Demand shifts rightward to meet supply
  3. Quantity demanded exceeds quantity supplied, creating a shortage Correct answer.
  4. The market clears at a higher price

Explanation

A binding ceiling holds price below equilibrium, so the quantity demanded along the demand curve exceeds the quantity supplied along the supply curve. The gap is a shortage. Price controls do not shift the curves themselves.

Question 7Microeconomics

What distinguishes an oligopoly from monopolistic competition in the standard market-structure taxonomy?

  1. Oligopoly sells homogeneous products only while monopolistic competition sells differentiated products only
  2. Oligopoly has many sellers while monopolistic competition has one
  3. Oligopoly has free entry while monopolistic competition has barriers to entry
  4. Oligopoly has few sellers whose decisions are strategically interdependent, while monopolistic competition has many sellers with differentiated products Correct answer.

Explanation

The key structural difference is the number of sellers and the resulting strategic interaction. In oligopoly a few firms recognize mutual dependence; in monopolistic competition many firms compete with differentiated products and free entry.

Question 8Microeconomics

A firm operating in a perfectly competitive market maximizes profit in the short run by choosing output where which condition holds, provided price exceeds average variable cost?

  1. Price equals marginal cost Correct answer.
  2. Marginal cost equals average fixed cost
  3. Total revenue is maximized
  4. Price equals average total cost

Explanation

Profit is maximized where marginal revenue equals marginal cost, and for a price taker MR equals price. If price falls below average variable cost the firm should shut down instead. Producing where price equals average total cost yields zero economic profit, not maximum profit.

Question 9Microeconomics

Two goods are complements in consumption. If the price of good A rises, what happens in the market for good B, all else equal?

  1. Supply of B decreases
  2. Quantity demanded of B is unaffected
  3. Demand for B increases
  4. Demand for B decreases Correct answer.

Explanation

Complements are consumed together, so a higher price of A reduces the quantity of A purchased and therefore reduces demand for B. This is a shift of the demand curve for B, not a movement along it. Cross-price elasticity for complements is negative.

Question 10Microeconomics

A consumer maximizes utility subject to a budget constraint. At an interior optimum with positive quantities of both goods, which condition must hold?

  1. Marginal utility of each good is zero
  2. Marginal utility per unit of money spent is equal across goods Correct answer.
  3. The prices of the two goods are equal
  4. Total utility from each good is equal

Explanation

The tangency condition requires MUx/Px = MUy/Py, so each good delivers the same marginal utility per currency unit. Equivalently, the marginal rate of substitution equals the price ratio. Equalizing total utilities or prices is not implied.

Question 11Microeconomics

A firm's production function exhibits diminishing marginal returns to labor in the short run. What does this mean for the marginal cost curve as output expands?

  1. Marginal cost rises because each extra worker adds less output for the same wage Correct answer.
  2. Marginal cost becomes negative
  3. Marginal cost falls because total output grows
  4. Marginal cost is constant because the wage is constant

Explanation

With diminishing marginal product of labor, each additional unit of output requires more labor, so the wage cost per extra unit rises. Marginal cost equals wage divided by marginal product, so falling marginal product implies rising marginal cost.

Question 12Microeconomics

A monopolist faces a downward-sloping demand curve. At its profit-maximizing output, which statement is true?

  1. Price exceeds marginal cost and output is below the competitive level Correct answer.
  2. Price equals marginal cost
  3. Marginal revenue exceeds price
  4. The firm produces where demand is unit elastic

Explanation

A monopolist sets MR = MC, and because MR is below price on a downward-sloping demand curve, price exceeds marginal cost. This markup yields lower output than a competitive market. The firm operates on the elastic portion of demand, not at unit elasticity.

Question 13Microeconomics

In a prisoners' dilemma game with two firms choosing prices, what is the defining feature of the Nash equilibrium?

  1. One firm always earns zero profit
  2. Both firms cooperate to reach the jointly best outcome
  3. The outcome maximizes total industry profit
  4. Each firm chooses its best response given the other's choice, even though both could be better off cooperating Correct answer.

Explanation

A Nash equilibrium is a profile where no player can gain by unilaterally changing strategy. In a prisoners' dilemma this mutual best response is Pareto inferior to cooperation, which is what makes the dilemma. Joint profit maximization is not the equilibrium.

Question 14Microeconomics

A government imposes a per-unit tax on sellers in a competitive market. Which of the following describes the burden distribution?

  1. Buyers always bear the entire tax
  2. Sellers bear the entire tax regardless of elasticities
  3. The burden falls more heavily on the side of the market that is less elastic Correct answer.
  4. The burden is split equally whenever the tax is legally collected from sellers

Explanation

Statutory incidence does not determine economic incidence. The tax wedge is shared according to relative elasticities, with the less elastic side bearing more of the burden because it has fewer ways to adjust.

Question 15Microeconomics

A firm's long-run average cost curve declines over a wide range of output. What does this indicate?

  1. Constant returns to scale
  2. Economies of scale Correct answer.
  3. Diminishing marginal returns
  4. Diseconomies of scale

Explanation

Falling long-run average cost as scale expands is the definition of economies of scale, often driven by specialization and indivisible inputs. Diminishing marginal returns is a short-run concept tied to a fixed input.

Question 16Microeconomics

The price elasticity of supply for a product is 0.4 in the short run and 1.8 in the long run. What best explains this difference?

  1. Short-run prices are always higher
  2. Demand is more elastic in the long run
  3. Firms can adjust capacity and inputs more fully over time, making quantity more responsive Correct answer.
  4. Elasticity is unrelated to the time horizon

Explanation

Supply elasticity rises with the time available because firms can build capacity, hire workers, and enter or exit. In the short run, fixed inputs constrain the response. This is a supply-side adjustment story, not a demand effect.

Question 17Microeconomics

A natural monopoly arises in an industry where long-run average cost continues to fall over the relevant range of market demand. Why does this create a barrier to entry?

  1. Patents legally prohibit entry
  2. Consumers prefer branded products
  3. A single firm can serve the market at lower average cost than two or more firms Correct answer.
  4. The incumbent owns all the raw materials

Explanation

Declining long-run average cost means one firm can produce total market output more cheaply than several, so a new entrant would operate at a cost disadvantage. This is the technical basis of natural monopoly, distinct from legal or resource barriers.

Question 18Microeconomics

A consumer's marginal rate of substitution of X for Y is 3, while the price ratio Px/Py is 2. Assuming standard convex preferences, what should the consumer do to raise utility?

  1. Buy more Y and less X
  2. Buy more of both goods
  3. Keep the current bundle because MRS exceeds the price ratio
  4. Buy more X and less Y Correct answer.

Explanation

The MRS of 3 exceeds the price ratio of 2, so the consumer values X relative to Y more than the market does. Spending more on X and less on Y moves toward the tangency where MRS equals the price ratio.

Question 19Microeconomics

A firm is a monopsonist in a local labor market. Compared with a competitive labor market, what outcome is predicted?

  1. Higher wages and higher employment
  2. Lower wages and lower employment Correct answer.
  3. Higher wages and lower employment
  4. The same wage and employment as under competition

Explanation

A monopsonist faces an upward-sloping labor supply and pays a marginal factor cost above the wage. Setting marginal factor cost equal to marginal revenue product yields lower employment and a lower wage than the competitive equilibrium.

Question 20Microeconomics

A good generates a negative externality in production. In an unregulated competitive market, what is the welfare consequence?

  1. Output is below the socially optimal level
  2. There is no deadweight loss
  3. Price is above the social optimum
  4. Output exceeds the socially optimal level because private cost is below social cost Correct answer.

Explanation

When production imposes external costs, private marginal cost understates social marginal cost, so the market equilibrium quantity exceeds the efficient level. The gap generates deadweight loss, which a Pigouvian tax can reduce.

Question 21Microeconomics

Two firms face a repeated prisoners' dilemma with an uncertain end date. Under what condition is tacit collusion most sustainable?

  1. The probability the game continues is high and firms place sufficient value on future profits Correct answer.
  2. Each firm ignores the other's past actions
  3. Firms discount future profits heavily
  4. Firms interact only once

Explanation

Collusion is sustained by the threat of future punishment, so it requires that future payoffs matter. A high continuation probability and a low discount rate make the cooperative payoff stream valuable enough to deter defection.

Question 22Microeconomics

A consumer has quasilinear preferences U = v(x) + m, where m is money spent on other goods. What property does the demand for x exhibit?

  1. It depends on income because m changes
  2. It is always perfectly inelastic
  3. It is independent of income, so there are no income effects for x Correct answer.
  4. It violates the budget constraint

Explanation

With quasilinear utility the marginal utility of money is constant, so the first-order condition v'(x) = Px pins down x without reference to income. Demand for x therefore has zero income effect, simplifying welfare analysis.

Question 23Microeconomics

A firm uses two inputs in production. At an interior cost-minimizing input combination, which condition must hold?

  1. The ratio of marginal products equals the ratio of input prices Correct answer.
  2. The firm uses equal quantities of both inputs
  3. Total spending on each input is equal
  4. The marginal product of each input is equal

Explanation

Cost minimization requires the marginal rate of technical substitution to equal the input price ratio, i.e., MPL/MPK = w/r. This is the producer-side analog of the consumer tangency condition. Equal quantities or equal spending are not implied.

Question 24Microeconomics

In a market with a positive externality in consumption, a Pigouvian subsidy is proposed. What is the efficiency rationale?

  1. It eliminates consumer surplus
  2. It reduces output to correct overproduction
  3. It shifts the supply curve leftward
  4. It raises the private marginal benefit toward the social marginal benefit, increasing output toward the efficient level Correct answer.

Explanation

A positive consumption externality makes social marginal benefit exceed private marginal benefit, so the market underproduces. A subsidy per unit internalizes the external benefit, raising effective private benefit and expanding output toward the efficient quantity.

Question 25Microeconomics

A firm practices third-degree price discrimination across two markets with different demand elasticities. Assuming constant marginal cost and separated markets, which pricing rule applies?

  1. Charge a higher price in the market with more elastic demand
  2. Charge the same price in both markets to avoid arbitrage
  3. Set price equal to marginal cost in both markets
  4. Charge a higher price in the market with less elastic demand Correct answer.

Explanation

The inverse-elasticity rule implies that the markup over marginal cost is larger where demand is less elastic. Hence the firm charges more in the inelastic market and less in the elastic one, provided resale can be prevented.

Question 26Microeconomics

In a competitive market, the demand curve facing an individual seller is best described as which of the following?

  1. Perfectly elastic at the prevailing market price Correct answer.
  2. Downward sloping and identical to the market demand curve
  3. Upward sloping because higher output requires a higher price
  4. Unit elastic at every level of output the firm sells

Explanation

A price-taking firm can sell any quantity it likes at the market price but nothing above it, so its own demand curve is horizontal, i.e. perfectly elastic. The market demand curve is downward sloping, but that curve describes all buyers together, not the single seller's choice set.

Question 27Microeconomics

A consumer's income rises and, as a result, she buys less of good X. For this consumer, good X is classified as which type of good?

  1. A normal good
  2. A luxury good
  3. An inferior good Correct answer.
  4. A Giffen good necessarily

Explanation

A good whose quantity demanded falls when income rises has a negative income elasticity of demand and is called inferior. Giffen status is a stronger claim requiring the income effect to dominate the substitution effect, which cannot be inferred from the income response alone.

Question 28Microeconomics

A firm's total fixed cost is 200 and total variable cost at 10 units of output is 300. What is average total cost at 10 units?

  1. 20
  2. 30
  3. 500
  4. 50 Correct answer.

Explanation

Total cost equals fixed plus variable cost, that is 200 + 300 = 500. Dividing by 10 units gives average total cost of 50.

Question 29Microeconomics

A price floor set above the competitive equilibrium price will typically produce which outcome in that market?

  1. No effect, because the floor is not binding
  2. A shortage, because quantity demanded exceeds quantity supplied
  3. An increase in total surplus relative to equilibrium
  4. A surplus, because quantity supplied exceeds quantity demanded Correct answer.

Explanation

A binding floor holds the price above equilibrium, so sellers offer more than buyers are willing to purchase at that price, creating excess supply. The quantity actually traded falls to the lower of quantity demanded and supplied, which reduces total surplus.

Question 30Microeconomics

A consumer's budget line rotates outward along the horizontal axis only, with the vertical intercept unchanged. What change in the economic environment does this represent?

  1. A fall in the price of the vertically measured good
  2. A rise in money income with prices constant
  3. An equal proportional fall in both goods' prices
  4. A fall in the price of the horizontally measured good Correct answer.

Explanation

The vertical intercept equals income divided by the vertical good's price, so leaving it fixed while the horizontal intercept rises means only the horizontal good's price has fallen. A general income increase would shift the whole line outward in parallel.

Question 31Microeconomics

A firm's marginal product of labor is 12 units and the wage is 24, while the marginal product of capital is 30 units and the rental rate is 60. At this input combination, what should the firm do to lower the cost of producing its current output?

  1. Keep the input mix unchanged because costs are minimized Correct answer.
  2. Use more capital and less labor
  3. Reduce both inputs proportionally
  4. Use more labor and less capital

Explanation

Cost minimization requires the marginal product per unit of input price to be equal across inputs. Here labor gives 12/24 = 0.5 units per currency unit and capital gives 30/60 = 0.5, so the condition holds and the current mix is already efficient.

Question 32Microeconomics

A monopolist's marginal revenue is below the price it charges. Which explanation accounts for this gap?

  1. Selling an extra unit requires lowering the price on all units sold Correct answer.
  2. Marginal cost exceeds price at the profit-maximizing point
  3. The monopolist faces a perfectly elastic demand curve
  4. Average total cost is falling over the relevant range

Explanation

Because the monopolist faces the downward-sloping market demand curve, expanding output by one unit forces a lower price on every unit, so marginal revenue equals the new price minus the revenue lost on existing units. This makes marginal revenue lie below price.

Question 33Microeconomics

Two firms in a duopoly each choose output simultaneously, and each treats the other's output as fixed. What does this behavioral assumption define?

  1. A dominant-strategy equilibrium
  2. A Stackelberg equilibrium with a leader
  3. A Bertrand equilibrium in prices
  4. A Cournot equilibrium in quantities Correct answer.

Explanation

The Cournot model has firms choosing quantities simultaneously, each maximizing profit taking the rival's output as given. Equilibrium occurs where the reaction functions intersect, so neither firm wishes to change output unilaterally.

Question 34Microeconomics

A consumer is endowed with 10 units of good X and 10 units of good Y, and prices are Px = 2 and Py = 1. What is the money value of her endowment?

  1. 20
  2. 10
  3. 40
  4. 30 Correct answer.

Explanation

Endowment wealth equals the sum of each quantity times its price: 10 × 2 + 10 × 1 = 30. This value defines the budget line the consumer faces when trading at market prices.

Question 35Microeconomics

A firm's marginal cost curve crosses its average variable cost curve from below. At the point of intersection, what is true of average variable cost?

  1. It is rising because marginal cost is above it
  2. It equals average total cost
  3. It is at its maximum
  4. It is at its minimum Correct answer.

Explanation

When marginal cost lies below average variable cost, the average is being pulled down; when marginal cost lies above, the average rises. The crossing point is therefore the minimum of average variable cost.

Question 36Microeconomics

Demand for a product is price inelastic over the relevant range. If the seller raises the price, what happens to total revenue?

  1. Total revenue first rises then falls
  2. Total revenue rises Correct answer.
  3. Total revenue is unchanged
  4. Total revenue falls

Explanation

When the elasticity of demand is less than one in absolute value, the percentage fall in quantity is smaller than the percentage rise in price, so revenue increases. Revenue is maximized where demand is unit elastic.

Question 37Microeconomics

A consumer's indifference curves are straight lines with a constant slope, and both goods are consumed in positive amounts. What does this imply about the goods?

  1. They are perfect complements consumed in fixed proportions
  2. The consumer's preferences violate transitivity
  3. They are inferior goods
  4. They are perfect substitutes with a constant marginal rate of substitution Correct answer.

Explanation

Linear indifference curves mean the marginal rate of substitution is constant, so the consumer is always willing to trade the goods at the same rate. This is the defining feature of perfect substitutes.

Question 38Microeconomics

In a competitive market the government grants a subsidy of s per unit to sellers. Assuming demand slopes downward and supply slopes upward, which outcome is predicted relative to the no-subsidy equilibrium?

  1. Consumer price falls, producer price rises, and quantity traded rises Correct answer.
  2. Consumer price rises and quantity traded falls
  3. Both consumer and producer prices rise by the full subsidy
  4. Quantity traded is unchanged because the subsidy is a transfer

Explanation

A per-unit subsidy shifts effective supply downward by s, lowering the price buyers pay and raising the net price sellers receive while increasing the traded quantity. The benefit is shared according to the relative elasticities of demand and supply.

Question 39Microeconomics

A firm has two plants and allocates a fixed total output between them to minimize cost. Which condition characterizes the optimal allocation when both plants produce positive amounts?

  1. The larger plant produces all the output
  2. Marginal cost is equal in both plants Correct answer.
  3. Marginal revenue equals average cost in each plant
  4. Average total cost is equal in both plants

Explanation

If marginal costs differed, shifting a unit of output from the high-cost to the low-cost plant would reduce total cost, so cost minimization requires equal marginal costs across plants. Average costs need not be equal.

Question 40Microeconomics

A risk-averse individual faces a gamble with equal probabilities of winning and losing the same amount. How does the utility of the gamble's expected monetary value compare with the expected utility of the gamble?

  1. Utility of the expected value is below expected utility of the gamble
  2. The comparison cannot be made without knowing the size of the stake
  3. Utility of the expected value equals expected utility of the gamble
  4. Utility of the expected value exceeds expected utility of the gamble Correct answer.

Explanation

A risk-averse person has a concave utility function, so by Jensen's inequality the utility of the average payoff is greater than the average of the utilities. The gap is the risk premium the person would pay to avoid the gamble.

Question 41Macroeconomics

In national accounts, which component of GDP is measured by gross fixed capital formation plus changes in inventories?

  1. Investment (I) Correct answer.
  2. Net exports (NX)
  3. Consumption (C)
  4. Government consumption (G)

Explanation

The expenditure approach splits GDP into consumption, investment, government spending and net exports. Investment covers gross fixed capital formation by firms plus the change in inventories over the period. Government consumption refers to public current spending, not capital formation by producers.

Question 42Macroeconomics

A country's nominal GDP rises by 6% while the GDP deflator rises by 4%. What is the approximate growth rate of real GDP?

  1. 1.5%
  2. 2% Correct answer.
  3. 4%
  4. 10%

Explanation

Real growth is approximately nominal growth minus inflation measured by the deflator. Here 6% minus 4% gives roughly 2%. The precise calculation uses the ratio of the growth factors, which is very close to this approximation.

Question 43Macroeconomics

Which of the following persons is classified as unemployed in the standard labour force definition?

  1. A full-time homemaker not seeking paid work
  2. A retiree who has stopped looking for work
  3. A student working ten hours per week for pay
  4. A person without work who actively sought a job in the past four weeks Correct answer.

Explanation

Unemployment requires being without work, available to start, and having actively searched recently. Only the person who sought work in the past four weeks meets all criteria. People outside the labour force are neither employed nor unemployed.

Question 44Macroeconomics

The consumer price index rises from 120 to 126 over one year. What is the inflation rate?

  1. 4.8%
  2. 6%
  3. 0.5%
  4. 5% Correct answer.

Explanation

Inflation is the percentage change in the index: (126-120)/120 equals 6/120, which is 5%. Dividing the change by the base-period index, not the new index, is essential. The result is therefore five percent, not six.

Question 45Macroeconomics

According to the quantity theory of money in its simple form, a sustained increase in the money supply with velocity and real output constant will chiefly raise which variable?

  1. The price level Correct answer.
  2. The natural rate of unemployment
  3. Real GDP
  4. Potential output

Explanation

With velocity and real output fixed, the equation of exchange implies that money growth passes through to prices. Money is neutral in this simple framework, so nominal variables absorb the change. Real output and the natural rate are unaffected by assumption.

Question 46Macroeconomics

Which policy action is an example of automatic stabilisation rather than discretionary fiscal policy?

  1. Unemployment benefits rising during a recession without new legislation Correct answer.
  2. A parliament passing a one-off stimulus package
  3. A central bank cutting its policy rate
  4. A government announcing a new infrastructure programme

Explanation

Automatic stabilisers operate through existing rules, so spending and tax receipts adjust with the cycle without new decisions. Unemployment benefits expanding in a downturn is the classic example. Discretionary measures require deliberate legislative or executive action.

Question 47Macroeconomics

In the circular flow of income, which leakage reduces the flow of domestic income below the value of total output?

  1. Investment spending by firms
  2. Exports to foreign buyers
  3. Savings by households Correct answer.
  4. Government transfer payments

Explanation

Savings, taxes and imports are leakages that withdraw purchasing power from the domestic circular flow. Savings by households is one of these withdrawals. Investment, transfers and exports are injections or transfers that add to demand rather than subtract from it.

Question 48Macroeconomics

A Greek exporter sells goods priced at 10,000 euros. If the euro depreciates against the dollar, what happens to the dollar price faced by US buyers, all else equal?

  1. It rises, making the goods more expensive in the US
  2. It stays unchanged because the euro price is fixed
  3. It falls only if US inflation is zero
  4. It falls, making the goods cheaper in the US Correct answer.

Explanation

A depreciation of the euro means each euro buys fewer dollars. Converting a fixed euro price into dollars therefore yields a lower dollar amount. The goods become cheaper for US buyers, which tends to support export volumes.

Question 49Macroeconomics

A government increases spending by 40 billion euros and the marginal propensity to consume is 0.8. Assuming no crowding out, what is the total change in equilibrium output according to the simple multiplier?

  1. 40 billion euros
  2. 200 billion euros Correct answer.
  3. 160 billion euros
  4. 50 billion euros

Explanation

The multiplier equals 1 divided by one minus the marginal propensity to consume, so 1/0.2 equals 5. Multiplying the 40 billion injection by 5 gives 200 billion. The full effect exceeds the initial spending because of successive rounds of consumption.

Question 50Macroeconomics

An economy is at full employment and the government cuts taxes financed by borrowing. In the short run, which combination is most consistent with standard macroeconomic theory?

  1. Lower aggregate demand and falling prices
  2. Lower output and higher unemployment
  3. Higher aggregate demand and upward pressure on the price level Correct answer.
  4. No change in demand because taxes are neutral

Explanation

A tax cut raises disposable income and thus consumption, shifting aggregate demand outward. With the economy already at full employment, much of the adjustment shows up in prices rather than output. This is the standard short-run demand-pull mechanism.