Chapter 27, Problem 1.1P

To determine

Identify the role imposing a tax in an economy.

Explanation of Solution

When the tax is imposed by the government on an economy, it will reduce the disposable income of the people. When the income falls, people will reduce the consumption. As a result, the overall aggregative demand in an economy will tend to fall. It causes to reduce the employment opportunities and output in an economy. In short, when the tax is imposed on the economy, it will reduce the national output.

If the GDP decreases due to the imposition of tax on an economy, then the investment level will also show a declining trend.  The decline in the rate of interest with expansionary fiscal policy can stimulate this problem.

Economics Concept Introduction

Concept introduction:

Tax: The tax is a compulsory and unilateral payment made by the people towards the government which acts as the major source of revenue to the government. There are different types of taxes such as the income tax, property tax, professional tax, and so on.

Disposable income: Disposable income refers to the amount remaining after paying all the necessary tax.

Expansionary fiscal policy: It is a form of fiscal policy that involves either decreasing taxes or increasing government expenditures, or both, in order to fight recessionary pressures.