Question

Which of these, although it may have demand-side effects, could be classified as a measure that is likely to shift aggregate supply to the right?

a) Tax cuts
b) Increased government spending
c) Interest rate reduction
d) Cash transfer payments

Answer 1

A reduction in taxes for businesses that increase investment is likely to shift aggregate supply to the right, which can lead to increased output, higher price levels, and potentially more employment if there is slack in the economy.

Step-by-step explanation:

Among the options provided, the measure that is likely to shift aggregate supply to the right is a reduction in taxes for businesses that increase investment. This is because a tax cut for businesses typically lowers the cost of production, encouraging investment and can lead to an increase in overall productivity.

Now, if there is a government tax cut and the aggregate demand becomes higher by 50 at every price level, the new equilibrium will be at a point where the higher aggregate demand intersects the AS curve. The result will be an increase in output and price level, assuming there is slack in the economy.