Suppose we start with a general equilibrium, and there is a decrease in the effective tax rate on capital. Which of the following statements correctly describes how the economy restores from the short-term equilibrium towards the long-term equilibrium?  1. Short-term output is smaller than full-employment level output and price rises 2. Short-term output is greater than full-employment level output and price rises 3. Short-term output is smaller than full-employment level output and price drops 4. Short-term output is greater than full-employment level output and price drops 5. None of the above

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