The correct answer is Option (3) → (A)-(III), (B)-(I), (C)- (II), (D)-(IV)
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(A) An increase in proportional taxes: When proportional taxes (a fixed percentage of income) increase, consumers' disposable income decreases. This reduction in disposable income leads to a decrease in consumption and savings, which in turn causes the aggregate demand curve to shift inwards (to the left), indicating a lower level of demand at every price level. Therefore, (A) matches with (III) Aggregate demand curve shift inwards.
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(B) An increase in lump-sum taxes: A lump-sum tax is a fixed amount of tax that does not vary with income. When lump-sum taxes increase, the disposable income of individuals decreases by the exact amount of the tax increase. This reduction in disposable income leads to a fall in consumption. The magnitude of this fall in consumption is equal to the Marginal Propensity to Consume (MPC) multiplied by the change in the lump-sum tax. Therefore, (B) matches with (I) Decreases consumption by MPC times the change in taxes.
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(C) Proportional income tax: A proportional income tax system means that tax revenue automatically increases during economic expansions (as incomes rise) and automatically decreases during recessions (as incomes fall). This automatic adjustment helps to moderate economic fluctuations without requiring new legislation, acting as an automatic stabilizer. Therefore, (C) matches with (II) Automatic Stabilizer.
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(D) Lump sum taxes: By definition, lump-sum taxes are a fixed amount of tax that individuals or households pay, irrespective of their income level, consumption, or any other economic activity. Therefore, (D) matches with (IV) Do not depend upon income.
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