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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?
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.
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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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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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? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about 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? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for 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?.
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? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about 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? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for 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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