Read the following statements:
Statement I: A lump-sum tax shifts the consumption schedule downward in a parallel way.
Statement II: A cut in lump-sum taxes shifts the aggregate expenditure schedule upward by the full amount of the tax cut.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is true but Statement II is false.
Statement I: A lump-sum tax shifts the consumption schedule downward in a parallel way. — True. The tax lowers disposable income by the same amount at every income, so the slope stays the same.
Statement II: A cut in lump-sum taxes shifts the aggregate expenditure schedule upward by the full amount of the tax cut. — False. The schedule shifts up by only a fraction c of the tax cut, since households spend only c of the extra disposable income.
NCERT (2026-27): “Box 5.1: Fiscal Policy … 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. …” |