5 Steps to a 5 AP Macroeconomics 2019

Fiscal Policy, Economic Growth, and Productivity ❮ 137

Though not all economists completely agree with their effectiveness, supply-side

economists typically advocate other explanations for how lower taxes can increase AS as

well as AD:

•   Productivity incentives. Lower taxes mean workers take more of their pay home, which

might prompt wage earners to work harder, take less time off, and be more productive.

How hard would you work if 90 percent of your pay were lost to the taxman? People

not currently in the workforce seek employment at lower tax rates. If the government has

a large role in social programs, citizens learn to rely on the government and do less on

their own.

•   Risk taking. Entrepreneurs take big risks to start businesses and invest in new capital.

Lowering the tax rate on profits increases the expected rate of return and encourages

more investment.

❯ Review Questions

Figure 10.10

AD 0

Real GDP

Price

Level

PL 0

AD 1

SRAS 0

SRAS 1

GDP 0 GDP 1

LRAS 0 LRAS 1

1. Which of the following would not be an example
   of contractionary fiscal policy?
   (A) Decreasing money spent on social programs
   (B) Increasing income taxes
   (C) Canceling the annual cost of living adjust-
   ments to the salaries of government employees
   (D) Increasing money spent to pay for govern-
   ment projects
   (E) Doing nothing with a temporary budget
   surplus
   2. In a long period of economic expansion the tax
   revenue collected and the amount spent on
   welfare programs , creating a budget ____.
   (A) increases, decreases, surplus
   (B) increases, decreases, deficit
   (C) decreases, decreases, surplus
   (D) decreases, increases, deficit
   (E) increases, increases, surplus