Question: As mentioned in the chapter and in problem 2.7, in 1968, the U.S. government placed a temporary 10% surcharge on personal and corporate income in

As mentioned in the chapter and in problem 2.7, in 1968, the U.S. government placed a temporary 10% surcharge on personal and corporate income in an attempt to prevent the economy from overheating and inflation from accelerating. The graph below shows a possible short-run equilibrium prior to the surcharge. Assume that the economy was already experiencing inflation at this point. Use the graph to illustrate the effect of the surcharge on the economy.

MP IS Y Output gap, P (percent deviation from potential GDP)

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