Fri 8 Jul, 2016 10:05 pm
In my macro course one of the questions on a quiz asked about the effects of a tax cut on capital income on: aggregate demand (increase), Long run aggregate supply (increase), short run aggregate supply (increase), or all 3 would occur. The answer that was wanted was only aggregate demand.
I found this somewhat confusing. I thought all 3 would occur. The textbook had went through the theory of supply side economics and had explained that fiscal interventions can have both demand and supply side implications. In fact, the text suggested that the supply side interventions are increasingly seen as a more powerful method of stimulating the economy.
Couldn't the purpose of an expansionary fiscal or monetary policy be to increase SRAS and LRAS as a result of a supply side policy?