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ECON MACRO

5th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781337000529

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BuyFindarrow_forward

ECON MACRO

5th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781337000529
Chapter 5, Problem 4.6P
Textbook Problem
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One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve?

To determine

The effect when one supply side measure introduced by the Reagan administration was a cut in income tax rates.

Concept Introduction:

Supply side economics: It is a macroeconomic theory advocating decreasing the regulations and lowering the taxes.

Explanation of Solution

Due to decrease in tax rates, purchasing capacity increases and resource owners can hire more labor and capital. It results in increase the output (supply), employment and decrease the price level. It results in following diagram where aggregate supply curve shifts to right intersect with the same aggregate demand curve resulting in lower prices.

  

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