ECO403 GDB 2 IDEA Solution Fall 2020 Solution

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Solution

Primarily through their impact on demand. Tax cuts boost demand by increasing disposable income and by encouraging businesses to hire and invest more. Tax increases do the reverse. These demand effects can be substantial when the economy is weak but smaller when it is operating near capacity.

In general, tax rate increases can decrease economic activity through Short-run demand-side effects ( reducing actual GDP below potential GDP as lower disposable income causes declines in consumption and/or investment) and/or long-run supply side effects ( reducing potential GDP through behavioral response).

Initially, tax reduction increases consumption, and so firm's reduce output, and income falls toward a new equilibrium .

The indirect tax for the policy issues regarding long-term macroeconomic stability as well as economics development of Bangladesh. This paper focuses on the impact of indirect taxation on GDP and demonstrates the influence that taxation has on the tax paying individual and business firms irrespective of economic scale.