If the country in the figure above

Question

Quizplus · Accepted Answer

Imposing a consumption tax will increase the cost of goods and services, thus reducing consumption. As a result, the consumption path will shift downwards and the new equilibrium consumption point will be at a lower level, represented by C'. Therefore, option A is incorrect as it suggests that the consumption path will shift upwards (to C') which is contradictory to the effect of a consumption tax.

Similarly, increasing taxes to pay for Social Security will reduce disposable income and also reduce consumption. This will cause the consumption path to shift downwards and the equilibrium point to move to a lower level, represented by C'. Thus, option B is also incorrect.

Option C correctly identifies the effect of imposing a consumption tax at t1. This will lead to a downward shift in the consumption path, and the new equilibrium consumption level will be represented by C'. Therefore, the correct answer is C.

Option D is incorrect as we have found an answer in option C that meets the criteria.

If the Country in the Figure Above