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QUESTION 17 According to supply-side economics, lower tax rates on wages have little effect on the...

QUESTION 17

  1. According to supply-side economics, lower tax rates on wages

    have little effect on the economy.

    create incentives to work more, which increases real GDP.

    generate higher revenues for the government and increased unemployment.

    are less productive than lower tax rates on consumers.
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Answer #1

Ans. Option b

A decrease in tax on wages will increase the effective wages of the workers increasing the labour supply which will lead to a decrease in equilibrium wages. This will decrease the cost of production of the firms, thus, they will increase the production and hence, increase aggregate supply which at given level of aggregate demand will cause price level to decrease and but real GDP to rises.

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