What is the difference between direct tax and indirect tax? Explain the role of government budget in influencing allocation of resources.
|Direct Tax||Indirect Tax|
|It is imposed on the income of a person based on the principle of ability to pay. The income tax burden is equitably distributed on different people and institutions. Thereby the tax burden falls more on the rich than on the poor.||It is imposed on an individual but is paid by another person either partly or wholly. Hence, the impact and incidence of taxes are on different persons.|
|Tax burden cannot be shifted to another person.||Tax burden can be shifted to another person.|
|Prices are not affected.||Prices are affected because the price of the product is inclusive of tax.|
|Examples: Income and property tax||Examples: Union excise duties and custom duties|
Given saving curve, derive consumption curve and state the steps in doing so. Use diagram.
In the diagram, the supply curve is given as the SS curve and –C represents negative savings. At the breakeven Point B, we find that Y = C and S = O.
Derivation of the consumption curve from the saving curve: Given the SS curve, let us consider OS = OC. At Point B, draw a perpendicular 45° line towards Point A. Points C and A are joined to produce a straight line upward sloping consumption curve CC.
Indian investors lend abroad. Answer the following questions:
(a) In which sub-account and on which side of the Balance of Payments Account such lending is recorded? Give reasons.
(b) Explain the impact of the lending on market exchange rate.
Indian investors lending abroad leads to an outward flow of foreign exchange and is hence treated as a negative item in the capital account of balance of payments.
b. This will reduce the supply of foreign currency from SS to S′S. Hence, the new equilibrium is reached at Point E′ with a new exchange rate OR1.