Economic growth is a long-term expansion of a country’s production potential. Economic growth is seen as a more permanent increase in what output the economy is able to produce. Here on MCQs.club we have prepared Multiple Choice Questions (MCQs) on taxation and economic growth. Moreover, these also cover relationship between taxes and economic growth, impact of taxation on economic development, tax revenue and GDP relationship. These MCQs are useful for Professional accountancy students, Business Management exams and competitive exams.

Which of the following is correct for Economic growth?

1. Economic growth is a long-term expansion of a country’s production potential.
2. Economic growth is seen as a more permanent increase in what output the economy is able to produce.
3. Both A&B
4. None

Advantages of Economic growth include:

1. Higher living standards – an increase in the real income of the individuals in an economy.
2. Employment effects – with economic growth, the capacity in an economy increases and therefore there is more opportunity for employment within society.
3. Fiscal benefits – with higher GDP growth, firms and individuals will increase the amount of taxes that they pay.
4. All of the above

Disadvantages of Economic growth include:

1. Fast growth may be at the expense of the natural environment
2. Economic growth merely exacerbates inequality that is present in an economy.
3. With an increased economic output, there are concerns that workers may be exploited, working longer hours than they should.
4. All of the above

All of the following are true for Business cycles EXCEPT:

1. The recurring fluctuations of output that an economy experiences over a long period of time.
2. There are distinct phases in Business cycles which one can analyse, recognise, and therefore use an indicator for future events.
3. Every Business cycle will be identical.
4. None

Identify which of the following characteristics Business cycle shows during the Prosperity (Boom period) phase.

1. The economy is expanding, meaning output, income, employment, prices and profits should all increase.
2. At this stage, banks issue credit more freely which facilitates firms to invest in increasing output to meet the demands of consumers with higher income.
3. Output grows, as does overall business optimism.
4. All of the above

Identify which of the following characteristics Business cycle shows during the Downturn phase.

1. At this stage, economic activity begins to slow down.
2. The firms begin to scale back their production and investment plans.
3. Banks reduce the credit they issue, firms cancel orders that they place, and people begin to lose their jobs.
4. All of the above

Identify which of the following characteristics Business cycle shows during the Recession/depression phase.

1. The economy slips into a state where output remains very low.
2. There is an under-utilisation of resources as machinery lies dormant.
3. Business confidence is extremely low, as profits and prices go lower and lower.
4. All of the above

Identify which of the following characteristics Business cycle shows during the Recovery phase.

1. There is an increase in levels of economic activity as demand begins to increase slightly.
2. Production increases, causing an increase in investment.
3. Assets in the economy begin to be utilised again, and levels of GNP increase once more.
4. All of the above

There are certain markers that can be identified, and used to indicate at what stage the economy is in. Identify from the following such indicators.

1. Leading economic indicators
2. Coincident economic indicators
3. Lagging economic indicators
4. All of the above

All of the following are true for Leading economic indicators EXCEPT.

1. The nature of these indicators is that they are used to forecast at what stage the economy will be in, at some time in the future.
2. These in particular give an indication for whether a peak or trough will be reached in the following 3-12 months.
3. These indicators are events and measures that occur at the same time as a peak or trough occurs.
4. None

All of the following are true for Coincident economic indicators EXCEPT.

1. These indicators are events and measures that occur at the same time as a peak or trough occurs.
2. They are used by governments to assess at what stage in the cycle the economy is in.
3. These indicators are used to assess whether an economy has reached a peak or trough 3-12 months after it would have occurred.
4. None

Identify which of the following is true for Lagging economic indicators.

1. These indicators are used to assess whether an economy has reached a peak or trough 3-12 months after it would have occurred.
2. Its Measures include: Consumer Price Index, Average duration of unemployment, Interest rates
3. The nature of these indicators is that they are used to forecast at what stage the economy will be in, at some time in the future.
4. Option A&B only

Benefits of Economic Growth include:

1. Higher Employment
2. Increased tax revenues
3. Enterprise confidence
4. Increased per capita income and improved living standards
5. All of the above

Costs of Economic Growth include:

1. Rapid growth can give rise to plenty of environmental concerns; including noise pollution, air pollution, industrial waste, deforestation etc.
2. Economic growth causes an increase in spending on imports and consequently a deficit on the current account is caused.
3. Increased rates of economic growth result in an increased level of inequality because the growth may benefit a small section of the society more than the others.
4. All of the above

Fiscal policy – Policies undertaken by a government to influence macroeconomic conditions, and therefore economic activity, through the use of taxation and spending.

1. True
2. False

Which of the following is correct for Expansionary policy?

1. A macroeconomic policy that seeks to increase the rate of economic growth.
2. An expansionary policy can be applicable to fiscal and monetary policy.
3. Both A&B
4. None

Which of the following is correct for Contractionary policy?

1. A macroeconomic policy that seeks to slow down the rate of economic growth.
2. This can be done through; Increase taxes, Reduce subsidies, Wage freezes
3. Both A&B
4. None

Objectives of fiscal policy include:

1. 1. Keep inflation low
  2. Keep employment high
  3. Steady economic growth
  4. Equilibrium in Balance of Payments
  5. Run a balanced budget

1. All of the above
2. (I) and (IV) only
3. (II) (III) and (V) only
4. None

Limitations of fiscal policy include:

1. There is a practical difficulty where the coming events of economic instability cannot be predicted accurately.
2. There exists a time lag where an action is needed and the time when the fiscal measure has its impact felt.
3. Raising taxes in order to reduce Aggregate Demand may cause demotivation to work.
4. All of the above

The main way that a government will finance itself is through issuing:

1. Bonds
2. T-Bills
3. Financial instruments
4. All of the above

Public debt is the accumulation of________________.

1. National debt that the government has
2. Debt held by the public
3. Both A&B
4. None

Functions and purposes of taxation within an economy include:

1. Fiscal: taxes form the budget from which governments can allocate resources across the economy.
2. Allocation: it acts as a means of distributing wealth between various groups of citizens: wealthy to poor, as a means of maintaining a social stability.
3. Regulatory: ways of changing the behaviour of individuals or firms through imposition of taxes.
4. Incentive: stipulating special tax arrangements for certain members of society as a result of past achievement.
5. All of the above

Which of the following is correct for Canons of taxation?

1. The canons of taxation refer to the qualities that a good taxation system must possess.
2. These are associated to the administrative aspect of the tax system.
3. Both A&B
4. None

Canons of taxation include:

1. Canon of equality, economy
2. Canon of certainty, convenience
3. Both A&B
4. None

Identify which of the following is true for Canon of equality.

1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities
2. It means that the tax paid should be in proportion to the ability of the tax payer i.e. the amount of revenue.
3. Both A&B
4. None

Identify which of the following is true for Canon of certainty.

1. The tax which each individual is bound to pay ought to be certain, and not arbitrary.
2. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.
3. All the tax payers should be informed as to why and when they have to pay a particular sum of tax.
4. All of the above

Identify which of the following is true for Conon of economy.

1. Tax is economical when the cost of collecting it is small.
2. A tax is economical when it does not hamper the economic progress of the country.
3. Every tax ought to be so contributed as both to take out and to keep out of pockets of the people as little as possible.
4. All of the above

Types of taxes include:

1. Regressive
2. Proportional
3. Progressive
4. All of the above

Regressive taxes –

1. A tax where lower income entities pay a higher fraction of their income than higher income entities.
2. A tax where everyone, regardless of income, pays the same fraction of income in taxes. This is also known as a “flat tax”.
3. A tax where higher income entities pay a higher fraction of their income than lower income entities.
4. All of the above

Proportional taxes –

1. A tax where lower income entities pay a higher fraction of their income than higher income entities.
2. A tax where everyone, regardless of income, pays the same fraction of income in taxes. This is also known as a “flat tax”.
3. A tax where higher income entities pay a higher fraction of their income than lower income entities.
4. All of the above

Progressive taxes –

1. A tax where lower income entities pay a higher fraction of their income than higher income entities.
2. A tax where everyone, regardless of income, pays the same fraction of income in taxes. This is also known as a “flat tax”.
3. A tax where higher income entities pay a higher fraction of their income than lower income entities.
4. All of the above

Good characteristics of a tax are:

1. Efficiency: a tax should raise revenue without creating negative distortions in the economy, such as disincentives to work and invest.
2. Equitable: taxes should be paid based upon someone’s ability to pay.
3. Benefit principle: a principle whereby people should pay taxes based upon the utility that they gain from its implementation.
4. All of the above

Advantages of Direct taxation include:

1. Equitable
2. Cost of collection is low
3. Relative certainty
4. Flexible
5. All of the above

Disadvantages of Direct taxation include:

1. Possible to evade
2. Unpopular
3. Discourage savings/ investment
4. All of the above

Indirect taxation –

1. A tax that increases the price of a good, meaning the tax is paid when the good is bought.
2. It is raised by the choices that agents make in the economy.
3. Both A&B
4. None

Advantages of Indirect taxation include:

1. Change the pattern of demand
2. Can correct externalities
3. Less easy to avoid
4. All of the above

Disadvantages of Indirect taxation include:

1. Increases inequality
2. Cause cost-push inflation
3. Establish a “black market and Distorts the market
4. All of the above

—More to come soon—

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