Some economists believe that taxes have an important effect on labour supply. They argue that higher taxes cause people to want to work less and that lower taxes cause them to want to work more. Consider how this effect alters the macroeconomic analysis of tax changes.
a. If this view is correct, how does a tax cut affect the natural rate of output?
b. How does a tax cut affect the aggregate demand curve? The long-run aggregate supply curve? The short-run aggregate supply curve?
c. What is the short-run impact of a tax cut on output and the price level? How does your answer differ from the case without the labour-supply effect?
d. What is the long-run impact of a tax cut on output and the price level? How does your answer differ from the case without the labour-supply effect?