Question

Once supply side effects are taken into account, tax cuts can change
I. the quantity of labor supplied.
II. saving, investmentand the quantity of capital.
III. potential real GDP.

Group of answer choices

I, II and III

I only

I and II

II only

Answer 1

Tax cut can reduce the cost of production for producers and induces them to produce more which demand more labor while it does not affect labor supplied.

Tax cut helps producers saving some money which can be invested somewhere else for capital, human advancement.

Tax cut cannot raise potential GDP because potential GDP is achieved when there is no change in inflation level while a rise in production due to fall in cost of production will reduce the prce and thereby inflation.

Option D is correct which says only II is correct.