Question:
What will be the probable effects of an increase in the Value Added Tax (VAT) on demand-pull inflation and cost-push inflation?
(1) Decrease / Increase
(2) Increase / Decrease
(3) Increase / Increase
(4) Decrease / Decrease
(5) Increase / Unaffected
Correct Answer:
(1)
Answer Explanation:
VAT is an indirect tax. For producers, it acts as an additional cost of production, shifting Aggregate Supply left and increasing cost-push inflation. For consumers, the higher prices erode real disposable income, causing total consumption to drop, which shifts Aggregate Demand left and decreases demand-pull inflation.
Topic: Inflation Year: 2017
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