The supply-side effects of an income tax cut ________ potential GDP and ________ aggregate supply.

Question

Quizplus · Accepted Answer

An income tax cut would increase the disposable income of individuals, which would lead to an increase in consumption spending. This increased spending would in turn increase investment spending and ultimately increase aggregate demand. To meet the increased demand, firms would have to increase production by hiring more workers and increasing investment in capital, which would increase potential GDP and aggregate supply.

The Supply-Side Effects of an Income Tax Cut ________ Potential