Answer to Question #134868 in Macroeconomics for December

Question

11. Which of the following could be expected when the government applies a contractionary fiscal
policy?
[1] a decrease in the tax rate
[2] a decrease in the interest rate
[3] an increase in government spending
[4] a decrease in the budget deficit
12. Which one of the following statements regarding taxation is correct?
[1] Neutrality of tax means that compliance and administration costs are kept as low as possible.
[2] Taxes which induce taxpayers to change their behaviour are not neutral.
[3] The aim of taxes is to distort relative prices and change the behaviour of taxpayers.
[4] The tax burden is spread equally amongst taxpayers.

Answer 1

Answer: 11

Option 3 increase in government spending:

Increase in Government spending is considered expansionary fiscal policy since it increases the aggregate demand

Answer:12

Option 3 The aim of taxes is to distort relative prices and change the behaviour of taxpayers.

Taxes aim at changing behaviour of people. If Government wants to reduce smoking it will impose tax on smoking thus aiming to discourage people from smoking as they will have to pay high price.