Economics A2 · Government macroeconomic intervention. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
No single policy can meet every objective. Fiscal and monetary policy work on aggregate demand: expansion raises output and jobs but risks inflation and a larger current account deficit; contraction does the opposite. Supply-side policy raises potential output and can help every objective, but it is slow and its results are uncertain. Exchange rate and trade policies change the balance between spending on home and foreign goods.
The Laffer curve shows that tax revenue first rises and then falls as the tax rate increases, because very high rates weaken incentives to work and encourage avoidance.
Government failure occurs when intervention makes the outcome worse, through poor information, time lags or political motives.
Students read the Laffer curve as proving that any tax cut raises revenue. That is true only when the rate is already above the revenue-maximising rate.
Answer: No. Revenue falls from $180bn to $171bn because the fall in taxable income outweighs the higher rate.
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