Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income
A)weakens the incentive to work.
B)decreases potential GDP.
C)increases potential GDP because people work more to pay the higher taxes.
D)Both answers A and B are correct.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

A tax hike on labor income weakens the incentive to work (A) because individuals may feel less motivated to earn additional income that will be heavily taxed. This can lead to a decrease in the labor supply, which in turn can decrease potential GDP (B) as there is less labor available to produce goods and services.

Looking at the Supply-Side Effects on Aggregate Supply Shows That