The government is considering raising the tax rate on labor income and asks you to report on the supply-side effects of such an action. Answer the following questions using appropriate graphs. You are being asked about directions of change, not exact magnitudes. What will happen to:

a. The supply of labor and why?
b. The demand for labor and why?
c. The equilibrium level of employment and why?
d. The equilibrium before-tax wage rate and why?
e. The equilibrium after-tax wage rate and why?
f. Potential GDP?

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a The tax hike lowers after tax income and this may shift the worker into a different range of the i... View the full answer