Using Aggregate Demand and Aggregate Supply Analysis Examine the Different Effects on the UK Economy

Moreover, reducing income tax gives people, those unemployed especially, the incentive to work as the 'replacement ratio', a ratio illustrating the difference between the wages you receive if you work to unemployment benefit, amplifies. People are more likely to work if they know they can take home more of what they earn. This thereby increases the long-run aggregate supply of an economy as the supply of labourers in the market is enlarged. A diagram to illustrate this would perhaps be the Laffer curve.
The Laffer curve illustrates that if you increase tax rates excessively, government revenue actually falls as people are less inclined to work. This is also because from B to C people try to evade taxes if they are excessively high, and go into the black economy.
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