Supply-Side Economics) One supply-side measure introduced by the Reagan administration was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show what effect was intended. What might happen if such a tax cut also shifted the aggregate demand curve?<br>Lower tax rates were intended to increase after-tax earnings and thus increase incentives for resource owners to provide labor and capital. The resulting rightward shift in aggregate supply would increase aggregate output and lower the price level. The increase in after-tax earnings would also increase aggregate demand, which would increase aggregate output and raise the price level. The overall impact on the price level would depend on the relative sizes of the shifts in the aggregate supply and the aggregate demand.
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