The growth rate of Zerbia, a small developing country, has fallen close to zero
ID: 1227797 • Letter: T
Question
The growth rate of Zerbia, a small developing country, has fallen close to zero percent in the current year. Harry Miller and Jonathan Taylor, who are columnists with a business daily, are discussing suitable fiscal measures to revive economic growth in the country. Jonathan feels that the income tax rates in Zerbia are too high. Lower income tax rates would increase consumer spending and so would promote economic growth. Harry, on the other hand, believes that an increase in government expenditure would have a substantial impact on the country's GDP. Additionally, he feels that investing in green technology would not only accelerate growth, it is also likely to be more sustainable in the long term.
Which of the following, if true, would suggest that lowering income tax rates may not be very effective in reviving growth in the near term?
A. Income inequality in Zerbia, as measured by the Gini coefficient, has been calculated to be very high.
B. Market research suggests that the slowdown in the economy has considerably increased people's propensity to save.
C. The average wage rate for skilled labor is lower in Zerbia compared to the other developing countries.
D. The capital-output ratio in Zerbia is around 0.3.
E. The income tax rate in Zerbia rises with the level of taxable income.
Explanation / Answer
A. Income inequality in Zerbia, as measured by the Gini coefficient, has been calculated to be very high.
High Gini index or income inequality indicates that a large percentage of population is receiving little or no income while small percentage of people commanding a majority of wealth. So if the majority of people are already too poor then their disposable income would not increase to greater extent by lowering taxes. It will further benefit a small group who have already garnered much of the country's wealth.
All other options fail to convince a logical reason behind the move.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.