How the imposition of such a tax might impact inflation

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Reference no: EM133543927

Assignment:

In 2020, the International Monetary Fund prescribed a carbon tax as the best way for govern- ments around the world to meet their carbon emissions targets. A carbon tax is an economy- wide tax levied per tonne of carbon emitted by firms as a by-product of their production. Such a tax will likely increase business costs in the short run, especially for those firms whose pro- duction processes emit significant amounts of carbon. In the longer term, however, it is hoped that the tax will provide incentives for firms to invest in alternative production techniques that emit less carbon. Using the AD-AS framework, explain how the imposition of such a tax might impact inflation, economic activity and employment in the short run and the long run.

Reference no: EM133543927

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