ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -1. Effects of Taxation on Production: Taxation can influence production and growth. Such effects on production are analysed under three heads: (i) effects on the ability to work, save and invest (ii) effects on the will to work, save and invest (iii) effects on the allocation of resources.

Detailed explanation-2: -As the government increases the tax rate, the revenue also increases until T*. Beyond point T*, if the tax rate is increased, revenue starts to fall. In short, attempts to tax above a certain level are counterproductive and actually result in less total tax revenue.

Detailed explanation-3: -Higher government spending will also have an impact on the supply-side of the economy – depending on which area of government spending is increased. If spending is focused on improving infrastructure, this could lead to increased productivity and a growth in the long-run aggregate supply.

Detailed explanation-4: -According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions.