Question

Our President had signed an economic stimulus bill which was expected to allow small business to receive a tax break for losses. Predict the direction of change ( rise or fall ) in the employment and wage in a small business as a result of this tax break. Ise a demand -supply graph to justify your prediction

Answer 1

As a result of the tax break, the small business will produce more and in that case, they will need more labor. Increased production will lead to an increased demand for the labor and at a higher demand the wages will increase, it will also shift the aggregate demand curve to the right.

In the below graph, the equilibrium was at A before the tax cut. After the tax cut, the demand will increase shifting the demand for labor to D1 and the new equilibrium is at point B. Point B is higher wage and higher output.