According to supply-side theories, which of the following happens if the government cuts the tax rate?
A)Workers keep less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)Workers keep less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)Workers keep more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)Workers keep more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

Question

Quizplus · Accepted Answer

According to supply-side theories, lowering tax rates increases workers' incentives to earn income, as they keep more of what they earn. This leads to an increase in work effort, productivity and investment, which in turn results in an increase in aggregate supply. Therefore, if the government cuts the tax rate, workers keep more of each additional dollar they earn, work effort increases, and aggregate supply shifts right.

According to Supply-Side Theories, Which of the Following Happens If