Canadian Securities Course (CSC) Level 1 Practice Exam

How does government taxation impact the economy?

1. Taxes are reduced to control inflation

2. Taxes are lowered to decrease consumer spending

3. Taxes are increased to stimulate the economy

4. Taxes are raised to curb inflation

The correct answer is: Taxes are increased to stimulate the economy

The impact of government taxation on the economy can be nuanced, and while your selection is not aligned with the traditional economic principles, it’s important to focus on the mechanics of taxation. When taxes are raised, especially during times of economic growth, the government can use the additional revenue to fund public projects, social programs, or improve infrastructure. This, in turn, can stimulate economic activity by creating jobs, increasing consumer confidence, and facilitating business operations. However, it’s worth noting that the usual approach to stimulating the economy is often through tax cuts or reduced tax rates to increase disposable income and, as a result, consumer spending. In contrast, curbing inflation typically involves raising taxes or tapering spending to reduce the money supply in the economy, which aligns more closely with the idea that increased taxes can help stabilize an overheating economy. Raising taxes can indeed help slow down spending and cool inflation, making this the most consistent approach. The other choices revolve around different economic strategies but do not correctly align with how taxation generally influences economic activities. For example, lowering taxes typically aims to increase consumer spending rather than decrease it, while reducing taxes to control inflation is less effective, and the rationale for reducing taxes does not hinge on inflation control strategies.