Final answer:
The theory in question is Supply-side Economics, which focuses on lowering taxes and regulations to stimulate economic growth and was notably utilized by President Ronald Reagan during his presidency.
Step-by-step explanation:
The theory illustrated by the provided information is Supply-side Economics. This theory posits that economic growth is most effectively achieved by lowering barriers to production, such as reducing tax rates and decreasing business regulation. It suggests that these actions will lead to more flexibility for businesses, resulting in an increased supply of goods and services at lower prices. The approach became particularly well-known under President Ronald Reagan who implemented it as a cornerstone of his economic policy, commonly referred to as “Reaganomics.” Reagan emphasized reducing the growth of government spending, cutting income and capital gains taxes, and reducing government regulation, among other strategies.
The belief that tax cuts for the rich can lead to economic benefits for the poor is often associated with supply-side economics, albeit critics have called this aspect “trickle-down economics.” Use of the Aggregate Demand/Aggregate Supply (AD/AS) diagram can illustrate how such tax cuts could potentially move an economy out of a recession by shifting the aggregate demand curve to the right, indicating an increase in total spending and economic output. Nonetheless, debates continue regarding the effectiveness and equity of supply-side economics measures.