IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses
A government reduces the corporate tax rate and simplifies licensing for new manufacturing units. Which outcome is the most likely effect on the economy's long-run aggregate supply and on business competitiveness?
Long-run aggregate supply shifts right. Lower corporate tax raises after-tax returns and encourages investment, while simpler licensing lowers entry barriers and boosts competition and efficiency. Together they expand productive capacity and improve competitiveness, regardless of the exchange rate regime.
- ALong-run aggregate supply shifts left because firms retain less revenue
- BLong-run aggregate supply is unchanged because only demand is affected
- CLong-run aggregate supply shifts right as investment incentives rise and entry barriers fallCorrect
- DAggregate demand falls permanently because tax revenue declines
- Long-run aggregate supply shifts right but only if the exchange rate is fixed
Explanation
Lower corporate tax raises the post-tax return on investment, and simpler licensing cuts entry costs and increases competition. Both raise capital formation and efficiency, shifting long-run aggregate supply right. No fixed exchange rate condition is required.
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