An income tax ________ potential GDP by shifting the labour ________.

Question

Quizplus · Accepted Answer

Income tax reduces the disposable income of individuals and thus reduces their purchasing power. This eventually leads to lower demand for goods and services, which results in a leftward shift of the aggregate supply curve. This decrease in aggregate supply reduces the potential GDP by shifting the labor supply curve leftward. Therefore, an income tax decreases the supply curve of labor.

An Income Tax ________ Potential GDP by Shifting the Labour