SSC CHSL 2024 PYQ — Question 29

The correct answer is Option 2 i.e. Reduces the autonomous expenditure multiplier.

Impact of Proportional Taxes:

Proportional Taxes refer to a tax system where the tax rate remains constant, regardless of the income level.

Effect:

Reduces the Autonomous Expenditure Multiplier:

Explanation: Proportional taxes decrease the disposable income available to households. This reduction in income leads to a decrease in autonomous expenditure, which includes spending that does not depend on the level of income (e.g., government spending, investment, and consumption not related to income levels). Consequently, the autonomous expenditure multiplier, which measures the impact of a change in autonomous expenditure on the overall economy, is reduced.

Why Not the Other Options:

• Increases the Marginal Propensity to Consume: Proportional taxes generally do not increase the marginal propensity to consume (MPC), which is the fraction of additional income that is spent on consumption. Instead, they tend to decrease disposable income, thereby potentially reducing consumption.
• Increases the Induced Expenditure Multiplier: The induced expenditure multiplier is linked to changes in consumption resulting from changes in income. Proportional taxes do not typically increase this multiplier; they may even reduce it by decreasing disposable income.
• Increases the Autonomous Expenditure Multiplier: Proportional taxes do not increase the autonomous expenditure multiplier. Instead, they reduce it by lowering disposable income and, consequently, autonomous spending.

Thus, the correct effect of proportional taxes is that they reduce the autonomous expenditure multiplier.