Essay
A level Economics (AQA) Macroeconomics 9 marker
- Course
- Institution
For the question 'Explain how a reduction in corporation tax on firm's profits might lead to supply side improvements in the economy' Received 8 out of 9 marks.
[Show more]
Seller
Follow
ria2088
Content preview
Explain how a reduction in corporation tax on a firm's profits might lead to supply sideimprovements in the economy (9 marks).
Supply side improvements are when firms have a desire to increase output, resulting in increases
in productive capacity. Corporation tax is a tax on the profits earned by companies, in the UK
companies are taxed 19% on up to £300,000 on their profits in the UK.
A reduction in corporation tax will mean that firms will be incentivised to carry out more
investments. As corporation tax reduces, firms will have more of their profits available to use for
investments. As firms invest in areas of machinery and training for their workers, this will
increase productivity. If firms invest in training for their workers, this means that their workers
will have a greater set of skills, which can lead to lower
structural unemployment. By increasing the quantity of
training and improving the quality of training, the
productivity of firms rises leading to an increase in output.
This overall leads to an increase in productive capacity.
This is shown in the Classical LRAS diagram as the LRAS
curve shifts right from LRAS1 to LRAS2, leading to an
increase in real GDP in the economy, shown as Y1
increases to Y2. This increase in real GDP leads to an
increase in living standards and quality of life. The increase
in investment leads to an increase in aggregate demand as it
is a component of the AD equation. As investment
increases, there is more money flowing in the economy. This means as investment increases the
amount of output produced increases without an increase in inflation. This is shown as the
AD/LRAS diagram, as AD shifts right from AD1 to AD2, real GDP increases but inflation stays
the same. Leading to higher productivity, quality of life, and standard of living. Therefore
displaying how a fall in corporation tax on a firm’s profits can lead to supply side improvements
in the economy.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ria2088. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.28. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
75323 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now