The introduction of a tax by the government will _____
A) have no effect on real GDP since real GDP comprises consumption expenditure, investment expenditure, and government expenditure.
B) affect consumption through a change in disposable income.
C) affect consumption through its effect on investment.
D) reduce government spending since the government levies the tax.
E) increase real GDP since it enables the government to decrease spending.

Question

Quizplus · Accepted Answer

When the government imposes a tax, it decreases disposable income for taxpayers, which decreases consumption spending. This is because taxpayers have to spend more money on the tax, leaving them with less money to spend on other goods and services. As a result, there will be an impact on consumption through a change in disposable income. The other options are incorrect: A is incorrect because a tax will affect government expenditure, which is one of the components of real GDP; C is incorrect because consumption and investment are separate components of GDP, and a tax may impact investment but this won't directly affect consumption; D is incorrect because a tax doesn't necessarily reduce government spending, as the government may choose to spend the tax revenue on other programs or services; and E is incorrect because taxes aren't typically used to decrease government spending, but rather to fund government expenditures.

The Introduction of a Tax by the Government Will _____