If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply,we would expect crowding out of investment and net exports brought about by the tax cut to be
A)less than it would be without the supply-side effects.
B)increased as aggregate real income and output rise in the long run.
C)unaffected by the shifting long-run aggregate supply curve.
D)dependent upon the impact of this tax change on consumer disposable income.

Question

Quizplus · Accepted Answer

The supply-side effects of the tax cut would increase the labor supply, resulting in increased production and GDP in the long run, which would partially offset the crowding out of investment and net exports that would occur without considering these effects. Therefore, we would expect the crowding out effect to be less than it would be without the supply-side effects when considering the potential effects of the tax reduction on the labor supply.

If We Include Consideration of Potential Effects of a Proposed