Match List-I with List-II
| List-I | List-II | ||
| (A) | An increase in proportional taxes | (I) | Decreases consumption by MPC times the change in taxes. |
| (B) | An increase in lump-sum taxes | (II) | Automatic Stabilizer. |
| (C) | Proportional income tax | (III) | Aggregate demand curve shift inwards. |
| (D) | Lump sum taxes | (IV) | Do not depend upon income. |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A)-(III), (B)-(I), (C)- (II), (D)-(IV)
Taxes affect aggregate demand through disposable income, the income left with households after tax. Households spend a part c of it, the marginal propensity to consume. A lump-sum tax is a fixed amount that does not depend on income. A proportional tax takes a fixed share t of income, so it rises and falls with income.
| List-I | List-II | Reason |
|---|---|---|
| (A) An increase in proportional taxes | (III) Aggregate demand curve shift inwards. | Consumption now rises by only \(c(1-t)\) for each rupee of income. This works like a lower propensity to consume, so the AD curve shifts down and becomes flatter. |
| (B) An increase in lump-sum taxes | (I) Decreases consumption by MPC times the change in taxes. | A tax rise of \(\Delta T\) cuts disposable income by \(\Delta T\). People cut spending by only a part of it, so consumption falls by c times the tax rise, \(c\,\Delta T\). |
| (C) Proportional income tax | (II) Automatic Stabilizer. | Part of every change in GDP goes in tax, so spending moves less than GDP. The tax works as a shock absorber on its own. |
| (D) Lump sum taxes | (IV) Do not depend upon income. | A lump-sum tax is a fixed amount, whatever the income. |
Note: One item of List-I has more than one match in List-II:
(B) An increase in lump-sum taxes → both (I) and (III). It lowers consumption by MPC times the tax rise. The lump-sum tax also shifts the consumption schedule down in a parallel way. So the aggregate demand curve shifts down in the same way.
NCERT (2026-27): “Box 5.1: Fiscal Policy …We take taxes first. We assume that the government imposes taxes that do not depend on income, called lump-sum taxes equal to T. We assume throughout the analysis that government makes a constant amount of transfers, T̅R̅. The consumption function is now C = C̅ + cYD = C̅ + c(Y - T + T̅R̅) (5.1) where YD = disposable income. We note that taxes lower disposable income and consumption.…Graphically, we find that the lump-sum tax shifts the consumption schedule downward in a parallel way and hence the aggregate demand curve shifts in a similar fashion.… Changes in Taxes We find that a cut in taxes increases disposable income (Y – T) at each level of income. This shifts the aggregate expenditure schedule upwards by a fraction c of the decrease in taxes.… Case of Proportional Taxes: …We note that proportional taxes not only lower consumption at each level of income but also lower the slope of the consumption function. The mpc out of income falls to c (1 – t).… …The proportional income tax, thus, acts as an automatic stabiliser – a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP. When GDP rises, disposable income also rises but by less than the rise in GDP because a part of it is siphoned off as taxes.…” |