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.

Question

Quizplus · Accepted Answer

A tax hike on labor income weakens the incentive to work because individuals get to keep less of their earnings, which can lead to a decrease in the labor supply. This, in turn, can decrease potential GDP as the economy's capacity to produce goods and services is diminished due to a reduction in the workforce or work hours.

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