Question

Explain whether the following statements are true or false?

a. It would be better to replace a sales tax of 10% on good X lasting for one year for a sales tax of 5% on the same good lasting for two yars.

b. There would be no effect on output if the government increases both G and T by 100 units to keep its budget balanced.

c. Automatic stabilizers help balance the government budget over business cycles.

d. A larger government budget deficit will lead to more capital inflow to finance it

especially when there is crowding out.

e. A larger government budget deficit will lead to more capital inflow to finance it

especially under Ricardian equivalence.

Answer 1

a) The statement is true consisering the government point lf view who collects the taxes but false considering the seller perspective. A sales tax is imposed on the sales of a commodity. For example, consider the sales tax of 10% imposed on a good costing Rs. 100. Thus it would bring a revenue of Rs. 10 to the government. But if a tax of 5% is imposed on two consecutive years, the compounding effect would result in increase of tge revenue to 10.25. Thus an additional income would be obtained if 5% tax is imposed for consecutive years for the government.

b) The given statement is false. Here, 'G' represents government spending and 'T' represents the rate of taxation. By theoretical economics, if both G and T are increased by the same amount, it would result in an increase of GDP of the economy by an amount equal the increase in the government spending, G. Here it has to be understood that all the tax money would become a part of G and only a part of income forms a part of C. This is due to the multiplier effect in the economy

c) The statement is true. Automatic stabilisers refers to those government policies that automatically adjusts tax rates and transfer payments to stabilise the income, consumption and government spendingnto stabilise a business cycle. Since the government budgeting involves expected spending and revenue of the government, it means that these automatic stabilisers would result in balancing the government budgeting over business cycles.

d) The statement is true. A larger government budget deficit means that the expenditure of the government is greater than the revenue obtained by the government. This means that there is an improved money flow in the economy and hence it would lead to boosting the investment and expenditure potential of the economy. This would in turn lead to increased reveneue in the long run economy and thus in turn would form a part of government revenue to finance the budgetary needs.