During recession when GDP falls, disposable income falls less sharply and consumption does not drop as much as it otherwise would have fallen, had the tax liability been fixed. Identify the correct statements in context of this.

A. The proportional tax acts as an automatic stabiliser - a shock absorber.

B. When GDP rises, disposable income rises by greater than the rise in GDP.

C. Proportional tax makes consumer spending more sensitive to fluctuations.

D. This reduces the fall in aggregate demand and stabilities the economy.

A and D only

The correct answer is option (3) : A and D only

The proportional income tax acts as an automatic stabiliser (A) – a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP (C is incorrect). 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 (B is incorrect). This helps limit the upward fluctuation in consumption spending. During a recession when GDP falls, disposable income falls less sharply, and consumption does not drop as much as it otherwise would have fallen had the tax liability been fixed. This reduces the fall in aggregate demand and stabilises the economy (D).