Income effect reducing labor supply shifts AS left Steps:

• Recall leftward AS shift results from higher production costs or reduced inputs like labor.
• Eliminate C and D as they boost productivity and labor availability, shifting AS right.
• Rule out A as lower interest rates mainly increase investment and aggregate demand rightward.
• Identify B as the option where tax cuts raise disposable income, potentially decreasing labor supply.

Why B is correct:

• Labor supply theory states a reduction in income tax shifts labor supply left if income effect (preferring leisure) dominates substitution effect, reducing total output and AS.

Why the others are wrong:

• A: Lowers borrowing costs, shifting AD right via more investment.
• C: Raises productivity, shifting AS right.
• D: Enhances labor allocation, increasing potential output and shifting AS right.

Final answer: B