How supply-side policies, such as tax changes designed to change personal incentives, may increase the potential output of the economy and improve the underlying trend rate of economic growth
Governments can cut taxes to make working or investing more rewarding. This encourages people to work more and businesses to produce more, raising the economy's long-run productive capacity.
Formula
Potential Output ↑ → LRAS shifts right → Higher trend growth rate
Real World
The Reagan administration's 1981 cuts to the top US income tax rate from 70% to 50% were explicitly designed to boost labour supply and business investment, aiming to raise America's long-run growth rate.
Exam Focus
When asked to 'evaluate', always weigh the time lag — supply-side tax cuts take years to raise potential output, scoring you the analysis mark.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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