Skip to content

IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

A government cuts the corporate tax rate and simultaneously reduces regulatory approvals needed for new factories. Which outcome is the most likely effect on firms in the medium to long run?

Lower corporate tax and lighter regulation raise expected post-tax returns and cut compliance costs, so firms invest more and new entrants are encouraged. This expands productive capacity and shifts long-run aggregate supply outward rather than inward.

  1. AA leftward shift of the long-run aggregate supply curve as costs rise
  2. BA fall in firms' incentive to invest because after-tax returns are lower
  3. CLower marginal costs and higher expected post-tax returns, encouraging investment and entryCorrect
  4. DAn immediate fall in aggregate demand because of reduced tax revenue
  5. A rise in structural unemployment because fewer firms are needed

Explanation

Lower tax raises post-tax profit on projects, and fewer approvals cut compliance time and cost. Both encourage investment and new entry, raising capacity. The claim of lower investment is the reverse of the effect.

Did you get it right without looking?

One question tells you little. A timed set on Supply-side policies and their impact on businesses shows your real accuracy, how long you take and where you lose marks.

Practise Supply-side policies and their impact on businessesFree diagnostic mock

More Supply-side policies and their impact on businesses questions