SSC CHSL 2023 PYQ — Question 27

The correct answer is option 4 i.e. taxes reduce the MPC.

Proportional taxes reduce the autonomous expenditure multiplier because they link tax revenue to income. When income rises, taxes automatically increase, dampening the rise in disposable income and, consequently, consumption spending. Since the marginal propensity to consume (MPC) is the fraction of disposable income spent, higher taxes mean a smaller portion of each additional dollar of national income remains for consumption, thus effectively lowering the MPC out of national income.  A lower MPC leads to a smaller multiplier effect.