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Assertion: Proportional taxes reduce the autonomous expenditure multiplier
Reason: Taxes reduce the marginal propensity to consume out of income
Select the correct code:
  • a)
    Both A and R are true and R is the correct explanation of A.
  • b)
    Both A and R are true but R is not a correct explanation of A.
  • c)
    A is true but R is false.
  • d)
    A is false but R is true.
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
Assertion: Proportional taxes reduce the autonomous expenditure multi...
Proportional taxes reduce the autonomous expenditure multiplier
Proportional taxes refer to a tax system where the tax rate remains constant regardless of the income level. The autonomous expenditure multiplier is a measure of how changes in autonomous expenditure (spending not influenced by income) affect the overall level of economic activity.

Taxes reduce the marginal propensity to consume out of income
The marginal propensity to consume (MPC) is the proportion of additional income that individuals choose to spend rather than save. Taxes reduce disposable income, which in turn reduces the amount of income available for consumption.

Explanation
Both the assertion and the reason are true, and the reason provides a correct explanation for the assertion.

When taxes are proportional, they have a direct impact on disposable income. As individuals pay a constant tax rate on their income, the amount of disposable income available for consumption decreases. This reduction in disposable income leads to a decrease in the marginal propensity to consume.

The autonomous expenditure multiplier is calculated as 1 divided by the marginal propensity to save (MPS). Since taxes reduce the marginal propensity to consume, they increase the marginal propensity to save and, consequently, the MPS. As a result, the autonomous expenditure multiplier decreases.

Conclusion
In summary, proportional taxes reduce the autonomous expenditure multiplier because they decrease disposable income, which in turn reduces the marginal propensity to consume. This decrease in the marginal propensity to consume leads to an increase in the marginal propensity to save and a decrease in the autonomous expenditure multiplier. Therefore, both the assertion and the reason are true, and the reason provides a correct explanation for the assertion.
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Community Answer
Assertion: Proportional taxes reduce the autonomous expenditure multi...
Both A and R are true and R is the correct explanation of A.
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In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Whenever there is a decline in the proportion of consumption expenditure on cereals

In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Prices of protective food have risen because

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Assertion: Proportional taxes reduce the autonomous expenditure multiplier Reason: Taxes reduce the marginal propensity to consume out of income Select the correct code:a) Both A and R are true and R is the correct explanation of A.b) Both A and R are true but R is not a correct explanation of A.c) A is true but R is false.d) A is false but R is true.Correct answer is option 'A'. Can you explain this answer?
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