(Advanced analysis)Answer the question on the basis of the following before-tax consumption schedule for an economy: $\begin{array}{l}
\text { Gross Domestic }\
\begin{array} { c c }
\underline{\text { Product (GDP)} } & \underline{\text { Consumption (C)} } \
\$ 100 & \$ 140 \
200 & 200 \
300 & 260 \
400 & 320 \
500 & 380
\end{array}
\end{array}$ Refer to the data.The 10 percent proportional tax on income would cause:

Question

(Advanced analysis)Answer the question on the basis of the following before-tax consumption schedule for an economy: $\begin{array}{l}
\text { Gross Domestic }\
\begin{array} { c c } 
\underline{\text { Product (GDP)} } & \underline{\text { Consumption (C)} } \
 \$ 100 & \$ 140 \
200 & 200 \
300 & 260 \
400 & 320 \
500 & 380
\end{array}
\end{array}$ Refer to the data.The 10 percent proportional tax on income would cause:

Quizplus · Accepted Answer

A proportional tax on income will reduce disposable income, leading to a reduction in consumption. However, the impact on savings is not clear as it depends on the income level and the preferences of the individuals. At lower levels of income, the reduction in consumption will be proportionally larger than the reduction in savings, leading to a decline in the savings rate. At higher levels of income, the opposite may be observed, as the reduction in consumption is a smaller fraction of income, leaving more room for savings. Thus, as GDP rises, the absolute increase in consumption and savings will become smaller and smaller, leading to choice B as the correct answer.

(Advanced Analysis)Answer the Question on the Basis of the Following