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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Explain how a decline in taxes that affects the labor market can end up shifting the LRAS curve to the right.

To determine

Impact of decline in taxes on labor market and rightward shift of the LRAS curve.

Explanation

The following figure shows labor market, production function, and the SRAS curve.

Panel (a) shows the labor market where the horizontal axis represents the number of labors and the vertical axis represents the wage rate. When the tax rate on income declines, the disposable income increases, which enhances the workers to work more. As a result, productivity increases and increases the equilibrium level of output. The supply of labor will increase and shift the supply curve to the right. The labor market is in equilibrium at Point 1, where labor supply is ‘L1’.

In Panel (b), the horizontal axis represents the number of labors and the vertical axis represents real GDP...

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