The government is proposing to lower the tax rate on labour income and asks you to report on the supply-side effects of such an action. Answer the following questions and describe what happens on the relevant graph. You are being asked about directions of change, not exact magnitudes.
a. What will happen to the supply of labour and why?
b. What will happen to the demand for labour and why?
c. What will happen to the equilibrium level of employment and why?
d. What will happen to the equilibrium before-tax wage rate?
e. What will happen to the equilibrium after-tax wage rate?
f. What will happen to potential GDP?