1. Explain using an appropriate diagram the relationship between tax revenue and income tax rates as suggested by Arthur Laffer (paragraph) (Total 4 marks)
2. Use an aggregate demand/aggregate supply diagram to analyse the likely effects of an increase in income tax. (Total 10 marks)
Hints: What will happen to household consumption as disposable incomes falls? How will this impact AD? What about investment and business expectations?
What will be the impact on the supply of labor? Could there be two possible impacts on AS?
