Question

Every 1-percentage-point increase in the marginal income tax rate induces some workers to supply less labour, which cuts real GDP by \( 0.2 trillion. At the same time, each 1-percentage point increase in the marginal income tax rate causes spendable income to drop, which induces some workers to supply labour that yields \) 0.1 trillion more in real GDP. Is the net outcome consistent with the supply-side theory? Why?

Short answer

Yes, the net outcome consistent with the supply-side theory

Step-by-step solution

introduction

The supply-side hypothesis is a macroeconomic hypothesis that accepts that monetary development in an economy can be upgraded by decreasing minor expense rates and eliminating guidelines on organizations.

explanation

Whenever negligible assessment rates are diminished, two restricting powers work on work supply:

1. Laborers will work more as they get to keep a more noteworthy piece of their profit.

2. Laborers decline the quantity of hours set forth at the effort as their way of life improves with lower negligible assessment rates.

Subsequently, the net consequence of the expansion in peripheral expense rate is an abatement in real GDP and a net outcome consistent with the supply-side theory.