Question

Explain how to push the economy in the long run from the supply side? Explain it with curves!

Answer 1

When the economy is in recession, then with supply side fiscal policy such as reduction in corporate tax, offering subsidy to the firms and other fiscal stimulus for the firms, push the SRAS to shift to the right and it helps achieve long run equilibrium. It is shown in figure 1.

When the economy is in inflationary gap, then tighter labor market condition and contractio nary supply side fiscal policies such as increase in tax rates and reduction in other benefits, will cause, SRAS shift to the left. It will again help achieve long run equilibrium. It is shown in figure 2.