Which of these help stabilise the income levels of an economy against both upward and downward movem...........

Economic Affairs Growth and Indicators

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Which of these help stabilise the income levels of an economy against both upward and downward movements?

1. Proportional taxes

2. Infusion of excess liquidity

Which of the above is/are correct?

1 only

2 only

Both 1 and 2

None

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Explanation:

Statement 1: During boom years, when employment is high, tax receipts collected to finance such expenditure increase exerting a stabilising pressure on high consumption spending.
During slump, when income levels decline, consumption does not fall drastically due to reduced tax liability (due to reduced income).
Statement 2: During boom, excess liquidity would only heat up (and not stabilize the economy). Inflation would be high and excessive consumption would be taking place pushing up short-term national income.
During slump, excess liquidity can cause high inflation without stabilizing income or leading to growth.