Which of the Following Is True of Taxation as a Tool

question 35

Multiple Choice

Which of the following is true of taxation as a tool of fiscal policy?

• A) Compared to government expenditure, tax cuts are less effective at increasing total expenditure.
• B) When the marginal propensity to save is high, tax cuts are highly effective in increasing
• C) Tax cuts create an immediate change in consumers' income and consumption.
• D) Compared to government expenditure, tax cuts have a longer time lag.

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Definitions:

Cost of Capital

The lowest return required for a project involving capital investment, such as building a new production plant, to be deemed feasible.

Mutually Exclusive

In project selection or decision making, mutually exclusive refers to options where the selection of one option precludes the selection of another.

NPV

Net Present Value; a method used in capital budgeting to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows over a period of time.

Payback

Payback is a capital budgeting metric that measures the time required for an investment to generate cash flows sufficient to recover the initial investment cost.