Question

What role taxes policy plays in determining the GDP or national income in an economy?
Explain with numerical examples?

Answer 1

SOLUTION :

Tax is a most important instrument of fiscal policy and it's main power of government for revenue.In the GDP determination government expenditure received from taxation.-MPC/MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. It tells you how much total spending will result from an initial change in the level of taxation. It is negative because when taxes decrease, spending increases, and vis versa. The tax multiplier will always be smaller than the spending multiplier.

Example

AD =C+I+G

AS= C+S+T

C+I+G = C+S+T

I+G = S+T