When taxes on the return to capital in a given economy are reduced,it causes firms to employ __________ capital goods.In terms of the production function (graphed with labor on the horizontal axis and Real GDP on the vertical axis),this then causes ____________________ which makes the LRAS curve shift ____________ resulting in ______________________.
A) less; the production function to shift downward; leftward; a shrinking economy
B) more; the production function to shift upward; rightward; economic growth
C) more; a movement up along a given production function; rightward; economic growth
D) more; a movement down along a given production function; leftward; a shrinking economy

Question

Quizplus · Accepted Answer

When taxes on the return to capital are reduced, firms are incentivized to invest in more capital goods, thus increasing their productivity. This causes the production function to shift upward, indicating an increase in Real GDP for any given level of labor input. The Long-Run Aggregate Supply (LRAS) curve, which represents the maximum potential output of the economy in the long run, would shift rightward as a result. This leads to economic growth as the potential for increased output and higher living standards increases.

When Taxes on the Return to Capital in a Given