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Explain the economic effect which each of the following could have on the level of GNP at Market Prices: (i) a reduction in the general level of VAT; (ii) a reduction in the subsidies paid to farmers. - Leaving Cert Economics - Question b - 2010
Question b
Explain the economic effect which each of the following could have on the level of GNP at Market Prices: (i) a reduction in the general level of VAT; (ii) a reduct... show full transcript
Worked Solution & Example Answer:Explain the economic effect which each of the following could have on the level of GNP at Market Prices: (i) a reduction in the general level of VAT; (ii) a reduction in the subsidies paid to farmers. - Leaving Cert Economics - Question b - 2010
Step 1
a reduction in the general level of VAT
Answer
A reduction in the general level of VAT will lead to a decrease in the prices for goods and services, which consumers must pay in the market place. This decrease in prices can stimulate consumer spending, as people are more likely to purchase goods and services when they are cheaper. Consequently, this increase in consumer demand can lead to an increase in the overall GNP at market prices as more goods and services are produced, thus contributing positively to GNP.
Step 2
a reduction in the subsidies paid to farmers
Answer
A reduction in the subsidies paid to farmers is likely to increase the prices at market for agricultural products due to a decreased supply of those products. With higher costs of production and fewer subsidies, farmers may raise their prices. As a result, consumer demand might decrease, leading to a reduction in consumption, which negatively affects GNP. Additionally, the overall agricultural output may decline, leading to an adverse effect on the GNP as fewer goods are produced and exchanged in the economy.