Answer to Question #250500 in Macroeconomics for Question 5 (2)

Question

The supply-side effects of fiscal policy in the AD-AS model shows, that an increase in the marginal tax rate on labour income will do the following:

Increases potential GDP because people work more as they have less disposable income.

Increase the incentive to work.

Increase the equilibrium quantity of labour as firms demand more workers at the lower wage.

Decreases potential GDP.

Answer 1

Increase the equilibrium quantity of labour as firms demand more workers at the lower wage.

At this point, many companies will be finding ways to incorporate the marginal tax rate. Therefore, the firms will be expecting more outcome as they offer lower wages.