The idea that creating incentives for individuals and firms to increase productivity leading to an increase in the long-run aggregate supply curve is
a. the Ricardian equivalence theorem.
b. demand-side economics.
c. consistent with crowding out.
d. supply-side economics.
The correct answer is d. supply-side economics.
To understand why supply-side economics is the correct answer, let me explain the concept first. Supply-side economics is an economic theory that focuses on increasing the productive capacity of the economy by addressing factors on the supply side, such as taxes, regulations, and incentives, rather than through demand-side policies like fiscal stimulus or monetary policy.
In this specific case, the idea that creating incentives for individuals and firms to increase productivity can lead to an increase in the long-run aggregate supply curve aligns with the principles of supply-side economics. By reducing barriers and providing incentives, such as lower taxes or deregulation, individuals and firms are encouraged to work harder, invest more, and innovate, which ultimately leads to an increase in overall productivity.
The other options mentioned are not correct:
a. The Ricardian equivalence theorem is a theory that suggests that changes in government borrowing and spending do not have a significant impact on aggregate demand, as individuals will anticipate future tax increases to finance government debt, and thus, offset the impact of fiscal policy.
b. Demand-side economics (also known as Keynesian economics) focuses on stimulating demand through government spending or monetary policy to bolster economic growth.
c. Crowding out refers to the phenomenon where increased government borrowing raises interest rates, leading to a reduction in private investment, potentially offsetting the intended increase in economic activity resulting from government spending.
So, the correct answer is d. supply-side economics.