IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses
A government announces a cut in corporate tax rates intended to raise long-run productive capacity rather than short-run demand. Which is the most likely benefit to businesses if the policy works as intended?
The main benefit is higher post-tax returns on investment projects. This encourages firms to invest and expand capacity, which shifts long-run aggregate supply outward, although the lost tax revenue may worsen the government's budget position.
- AHigher post-tax returns on projects, encouraging investment and shifting long-run aggregate supply outwardCorrect
- BAn immediate fall in the general price level through lower demand
- CA rise in the budget surplus in the short run
- DA reduction in firms' need to consider interest rates when investing
- Lower government spending on public goods by construction
Explanation
A corporate tax cut raises after-tax returns, which can lift investment and capacity, shifting long-run aggregate supply outward. It generally reduces tax revenue, so a surplus is unlikely, and it does not remove the importance of interest rates.
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