A permanent marginal tax rate cut would be expected to shift both the short-run and the long-run aggregate supply curves to the right.

Question

Quizplus · Accepted Answer

A permanent marginal tax rate cut is expected to increase incentives for individuals and firms to work, save, and invest, which would boost productivity and, therefore, the economy's potential output in the long run. In the short run, it could also increase demand for goods and services as households and businesses have more after-tax income to spend, further increasing output. Both of these effects result in a rightward shift of the aggregate supply curve.

A Permanent Marginal Tax Rate Cut Would Be Expected to Shift