ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Ability to work, Save and Invest: Imposition of taxes reduces disposable income, more bitterly of the poor section, their purchasing power and ability to acquire necessities, comforts and luxuries. This reduces their consumption and therefore the ability to work and save.

Detailed explanation-2: -Disposable income is defined as national income (GNP) minus taxes plus transfer payments. An increase (decrease) in disposable income will cause an increase (decrease) in consumption demand. An increase (decrease) in the marginal propensity to consume will cause an increase (decrease) in consumption demand.

Detailed explanation-3: -A change in fiscal policy has a multiplier effect on economic growth or contraction because an increase or decrease in government spending or a change in tax policy ripples through every major segment of the economy, affecting levels of spending, production, and business investment.

Detailed explanation-4: -In aggregate, when disposable income increases, households have more money to either save or spend, which naturally leads to a growth in consumption. Consumer spending is one of the most important determinants of demand; it creates the demand that keeps companies profitable and hiring new workers.