Use the following figure to answer the questions : Figure 8.3: -A supply-side policy approach in Figure 8.3,given AD₁ and AS₁,to achieve both lower prices and more output would be to A)Increase the growth of the money supply. B)Reduce marginal tax rates and government regulation in an effort to move AS₁ to AS₂. C)Wait until natural market forces establish full employment. D)Increase aggregate spending.

Question

Quizplus · Accepted Answer

A supply-side policy approach aims to increase the potential output of the economy by reducing the costs of production and increasing the incentives to work, save, and invest. The diagram shows that both lower prices and more output can be achieved by shifting the aggregate supply curve (ASS) to the right (from AS₁ to AS₂). This can be done by reducing marginal tax rates and government regulation that increase production costs, leading to a decrease in the marginal cost of production and an increase in firms’ willingness to produce at any given price level. This would result in a decrease in prices and an increase in output, as shown by the movement from point A to point B. Increasing the growth of the money supply or aggregate spending may stimulate short-run output and employment, but it would not address the underlying structural problems that prevent the economy from attaining its full potential. Waiting for natural market forces to establish full employment may take too long and lead to unnecessary social costs.

Use the Following Figure to Answer the Questions : Figure