Which economic theory argues that reducing taxes makes more money available for private investment, thereby increasing productivity?

• A. Keynesianism
• B. Mercantilism
• C. Supply-side economics
• D. Monetarism

Answer: (C)

Reducing taxes is seen as a way to raise the amount of after-tax income that households and businesses can use for investment, which in turn can expand capital stock, boost productivity, and promote economic growth. This approach—often called supply-side economics—holds that when the private sector has more resources to invest, it increases productive capacity and efficiency, leading to higher output over time.

Keynesianism focuses on boosting demand through government spending and fiscal stimulus, rather than tax cuts as a driver of private investment. Mercantilism centers on accumulating wealth through trade and a favorable balance of trade, not on tax-induced investment. Monetarism emphasizes controlling the money supply to manage inflation and economic stability, rather than tax policy as the main lever for investment.

So the idea that lower taxes free up funds for private investment and raise productivity aligns with supply-side economics.