Cutting income tax rates will most likely cause

Question

Quizplus · Accepted Answer

Cutting income tax rates is a fiscal policy that can increase aggregate demand (AD) by leaving consumers with more disposable income to spend. However, it may not have a significant impact on aggregate supply (AS) in the short run. Therefore, the most likely outcome is a large shift in the AD-curve but a small shift in the AS-curve. Option B cannot be correct as a small shift in AD would not be caused by this policy. Option C is not the most likely outcome because output and tax revenues are not necessarily directly proportional, especially if there are other factors affecting the economy. Option D is not true as tax revenues could potentially increase if tax cuts lead to higher economic growth. Option E is not correct as both B and C contradict each other.

Cutting Income Tax Rates Will Most Likely Cause