How do supply-side policies affect aggregate supply?

Supply-side policies are designed to enhance the productive capacity of the economy. By focusing on increasing efficiency through various incentives, these policies aim to boost aggregate supply. This can be achieved by reducing barriers to production, such as lowering taxes on businesses, deregulating industries, investing in education and training, and encouraging innovation. The overall effect of such policies is to enable firms to produce more goods and services at lower costs, which ultimately leads to an increase in aggregate supply.

Increasing efficiency is central to supply-side strategies, as they often promote long-term economic growth by enhancing the capabilities of the labor force and improving the utilization of resources. This leads to an outward shift in the aggregate supply curve, which can contribute to lower prices and increased economic output, fostering a more robust economy.

In contrast, the other options suggest ideas that misunderstand the nature of supply-side policies. For instance, decreasing productivity through higher taxes contradicts the fundamental goal of supply-side approaches, which is to stimulate production. Focusing on demand rather than supply overlooks the primary objective of these policies, while limiting investment in technology would also hinder efficiency and productivity improvements, in direct opposition to the goals of supply-side strategies.