How do supply-side advocates respond to critics? How valid is their defense?
What will be an ideal response?
Supply-side economists argue that the Reagan tax cuts in the 1980 proved the Laffer Curve works as predicted. Taxes were cut from 50 to 28 percent and tax revenues were substantially higher by the end of the 1990.
The criticisms of this position are based on several explanations. The tax cuts came at a time of recession, so the tax cuts helped boost aggregate demand and increase GDP to its potential level. This change caused the Laffer Curve to shift rightward, increasing tax revenues and compensating for the reduction in tax rates. Moreover, the tax cuts didn’t produce any long-run shifts in long-run aggregate supply, savings fell as a percentage of personal income, productivity growth was slow, and real GDP growth wasn’t notably strong.
There is general agreement that cuts in tax rates reduce revenues by less than the percentage of the tax cut and when taxes are increased, tax revenues increase by less than the percentage of the tax rate increase. Thus changes in marginal tax rates do alter economic behavior.
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A monopolist, unlike a perfect competitor, has total control in its market because it is the single producer. Why, then, must a single-price monopolist decrease its price if it wants to increase its output?
What will be an ideal response?
Figure 10-1
If the price level in Figure 10-1 were 120,
a.
there would be excess goods on the market.
b.
firms would have to raise their prices.
c.
inventories would be disappearing.
d.
aggregate quantity demanded would exceed aggregate quantity supplied.