Question

[mmmmm]

The most likely consequence of increased inflation in Australia is:

A. a redistribution of income to those on fixed money incomes
B. a loss of business confidence leading to lower levels of unemployment
C. An improvement in Australia's international competitiveness
D. An increase in income tax receipts as a proportional of personal incomes

Thnks guys

[jerry]

I think B.

[ReVeL]

The most likely consequence of increased inflation in Australia is:

A. a redistribution of income to those on fixed money incomes
B. a loss of business confidence leading to lower levels of unemployment
C. An improvement in Australia's international competitiveness
D. An increase in income tax receipts as a proportional of personal incomes

Firstly, A and C are categorically wrong.

In periods of inflation, those with fixed incomes become worse off as their nominal incomes remain constant, causing their real incomes to decrease as prices rise, so A is incorrect.

Inflation also causes Australian exporters to be less competitive, because prices are higher than that of other countries, making buying Australian exports less attractive. C is wrong.

Leaving B and D, I think it is D. This is why:

As inflation increases, people demand higher wages in order to maintain their real wage. The tax rate remains the same,

Here is an example:
Imagine Joe earns $10,000pa. The tax brackets are:
- $0-$6000 = 0% taxed
- $6001-$21000 = 15% taxed

In year 1, he is taxed $600 (4000 x 0.15). This represents 6% of his income.
In year 2, inflation is 5%. So, Joe demands a 5% increase in his wage to maintain his real income. His employer agrees, and his new nominal wage is $10,500. He is now taxed $675 (4500 x 0.15). This represents 6.4% of his income.

Note that although his wage increased at the same rate as inflation, the percentage of his income that is being taxed has risen. This is called the increased tax burden of inflation. So, I think it is D.



EDIT: Just to add on from that:

The reason this occurs is because although income is increasing at the same rate of inflation, the extra income will be taxed at a higher rate (15%) that the average in year 1 (6%), raising the percentage of total income taxed.

[mba]

Yes, it has to be D because you can rule out all three other answers.

The most likely consequence of increased inflation in Australia is:

A. a redistribution of income to those on fixed money incomes
B. a loss of business confidence leading to lower levels of unemployment
C. An improvement in Australia's international competitiveness
D. An increase in income tax receipts as a proportional of personal incomes

A and C are definitely incorrect as the abover poster explained. B is definitely incorrect as a loss of business confidence would most likely result in HIGHER levels of unemployment, not lower levels. This is because as enterprise become more pesimistic about the future of the economy they will reduce demand for labour, and most likely lay off employees, resulting in higher levels of cyclical unemployment.   

Therefore it must be D due to the process of elimination.