Discussion
A cut in tax rate for reducing the cost of capital and encouraging business investment is an example of ................. .
Answer: C
This is an expansionary supply side policy.
Supply-side policies aim to raise the economy's productive capacity by improving incentives to work, save and invest. Cutting the tax rate to lower the cost of capital encourages firms to invest in machinery and plant, which expands potential output, so it is an expansionary supply-side measure.
Demand-side policy works through aggregate demand, for example raising government spending or cutting income taxes to boost consumption. A policy that lowers the cost of capital and encourages investment is aimed at capacity, and it is expansionary, not contractionary.
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