Supply-Side Policies

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  • A theory of economic stabilization that maintains that changes in aggregate supply rather than in aggregate demand are the major determinants of inflation, unemployment, and economic growth. Therefore, supply-siders argue that government policies that are intended to achieve stable prices and increased output must be targeted toward economic variables that can increase output and employment, such as the expansionary fiscal policy of tax reduction.

    Supply-side economics presents tax reduction as an incentive to improve the work ethic and encourage saving and investment. The basic point of reference for tax evaluation is the marginal tax rate (the rate that is paid on the last unit of taxable income). Since the incentive to work, according to supply-siders, is highly contingent on disposable income (income after taxes), high marginal ...

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