ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Potential GDP depends on the size of the labor force and the pace of productivity growth (output per hour of work), which itself is dependent on the amount of capital investment.

Detailed explanation-2: -Broadly speaking, there are two main sources of economic growth: growth in the size of the workforce and growth in the productivity (output per hour worked) of that workforce. Either can increase the overall size of the economy but only strong productivity growth can increase per capita GDP and income.

Detailed explanation-3: -Understanding an Inflationary Gap The real GDP can exceed the potential GDP, resulting in an inflationary gap. The inflationary gap denotes the relative rise in real GDP that causes an economy to increase its consumption, leading prices to climb in the long run.

Detailed explanation-4: -Since rich people save more than the poor, progressive rate of taxation reduces savings potentiality. This means low level of investment. Lower rate of investment has a dampening effect on economic growth of a country. Thus, on the whole, taxes have the disincentive effect on the ability to work, save and invest.