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Consider the following statements:
(1) Laffer curve always suggests that higher the tax rate levied by the government, higher would be the tax revenue generated.
(2) Phillips curve depicts the inverse relationship between inflation and unemployment.
(3) Kuznets curve suggests that as an economy grows, income inequality increases first and then it starts falling.
Which of the statements given above is/are correct?
  • a)
    1 and 3 only
  • b)
    1, 2 and 3
  • c)
    2 and 3 only
  • d)
    2 only
Correct answer is option 'C'. Can you explain this answer?
Verified Answer
Consider the following statements:(1) Laffer curve always suggests tha...
Laffer curve was developed by economist Arthur Laffer. It depicts the relationship between tax rate and tax revenue generated by the government. It looks like an inverted U curve which means an increase in the tax rate increases the tax revenue until it reaches its maximum beyond which any tax rate hike would dissuade taxpayers to work less. So, statement (1) is not correct.
Phillips curve expresses the negative relationship between inflation and unemployment. For instance, an increase in the money supply would increase the aggregate demand in the economy, which would cause the output to rise at higher prices and unemployment to fall in the economy. So statement (2) is correct.
Kuznets curve defines the relationship between output and income inequality. It looks like an inverted U curve, which means that initially, economic development causes higher inequality but, later, economy witnesses trickle-down effects of higher growth reaching down to lower and middle-income strata of the society. Consequently, it enables them to access affordable healthcare and quality education and thus reduces income inequality in the economy. So statement (3) is correct.
Therefore, the correct answer is (c).
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Most Upvoted Answer
Consider the following statements:(1) Laffer curve always suggests tha...
Laffer curve was developed by economist Arthur Laffer. It depicts the relationship between tax rate and tax revenue generated by the government. It looks like an inverted U curve which means an increase in the tax rate increases the tax revenue until it reaches its maximum beyond which any tax rate hike would dissuade taxpayers to work less. So, statement (1) is not correct.
Phillips curve expresses the negative relationship between inflation and unemployment. For instance, an increase in the money supply would increase the aggregate demand in the economy, which would cause the output to rise at higher prices and unemployment to fall in the economy. So statement (2) is correct.
Kuznets curve defines the relationship between output and income inequality. It looks like an inverted U curve, which means that initially, economic development causes higher inequality but, later, economy witnesses trickle-down effects of higher growth reaching down to lower and middle-income strata of the society. Consequently, it enables them to access affordable healthcare and quality education and thus reduces income inequality in the economy. So statement (3) is correct.
Therefore, the correct answer is (c).
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Community Answer
Consider the following statements:(1) Laffer curve always suggests tha...
Statement 1: Laffer curve always suggests that higher the tax rate levied by the government, higher would be the tax revenue generated.

The Laffer curve is a theoretical concept that depicts the relationship between tax rates and tax revenue. It suggests that there is an optimal tax rate at which the government can maximize its tax revenue. The curve shows that as tax rates increase from zero, tax revenue also increases. However, at a certain point, further increases in tax rates lead to a decrease in tax revenue.

The Laffer curve is often used to argue for lower tax rates, as proponents suggest that reducing tax rates can stimulate economic activity and lead to higher tax revenue. However, it is important to note that the shape of the Laffer curve and the position of the optimal tax rate can vary depending on various factors such as the level of economic development, tax structure, and tax compliance.

Therefore, statement 1 is incorrect as the Laffer curve does not always suggest that higher tax rates result in higher tax revenue. It indicates that there is an optimal tax rate beyond which higher tax rates can actually lead to a decrease in tax revenue.

Statement 2: Phillips curve depicts the inverse relationship between inflation and unemployment.

The Phillips curve is an economic concept that suggests a trade-off between inflation and unemployment. It shows the relationship between the rate of inflation and the unemployment rate in an economy. According to the Phillips curve, there is an inverse relationship between these two variables. When unemployment is low, inflation tends to be high, and vice versa.

This relationship is based on the idea that when the economy is operating at full employment, demand for goods and services increases, leading to upward pressure on prices and inflation. Conversely, when unemployment is high, there is less pressure on wages and prices, leading to lower inflation.

However, it is important to note that the Phillips curve is a theoretical concept and has been subject to criticism and empirical challenges. In some instances, the relationship between inflation and unemployment may not hold, and other factors such as supply shocks and changes in expectations can affect both variables.

Therefore, statement 2 is correct as the Phillips curve does depict the inverse relationship between inflation and unemployment, although it is not a universally applicable relationship.

Statement 3: Kuznets curve suggests that as an economy grows, income inequality increases first and then it starts falling.

The Kuznets curve is an economic concept that suggests a relationship between economic development and income inequality. It posits that as an economy develops, income inequality initially increases and then starts falling. This pattern is often attributed to various factors such as technological advancements, urbanization, and changes in the structure of the economy.

In the early stages of economic development, income inequality tends to increase as certain sectors or regions experience rapid growth while others lag behind. However, as the economy matures and reaches a certain level of development, income inequality starts to decrease. This can be attributed to factors such as improved education, better access to opportunities, and social welfare programs.

It is important to note that the Kuznets curve is a theoretical concept and its applicability can vary across different countries and time periods. Additionally, recent research has suggested that the relationship between economic development and income inequality may not always follow a clear-cut pattern.

Therefore, statement 3 is correct as the Kuznets curve suggests that income inequality increases initially and then starts falling as an economy grows.
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Consider the following statements:(1) Laffer curve always suggests that higher the tax rate levied by the government, higher would be the tax revenue generated.(2) Phillips curve depicts the inverse relationship between inflation and unemployment.(3) Kuznets curve suggests that as an economy grows, income inequality increases first and then it starts falling.Which of the statements given above is/are correct?a)1 and 3 onlyb)1, 2 and 3c)2 and 3 onlyd)2 onlyCorrect answer is option 'C'. Can you explain this answer?
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