Economics - Exam SQ

Question 1

State and explain Adam Smith’s four Canons of Taxation

Answer 1

Equity - The system of taxation should take a higher proportion of income in tax as income rises or the ability of each person to pay must be taken into account.

Economy - The amount of revenue collected should exceed the costs of collection.

Certainty - The amount paid should be unambiguous, certain and clear.

Convenience - Tax should be levied at a convenient time and manner for the contributor.

Question 2

State the Law of Diminishing Marginal Returns

Answer 2

As more units of a good consumed, a point will eventually be reached where marginal utility begins to decline.

Question 3

Distinguish between Direct Taxation and Indirect Taxation and state one example of each.

Answer 3

Direct taxation is tax on income and wealth e.g V.A.T, whereas, indirect tax is tax on transactions.

Question 4

Why are Indirect Taxes sometimes seen as inequitable.

Answer 4

As they don’t take in the person’s ability to pay as the tax is built on the goods sold. e.g V.A.T

Question 5

State three limitations on the power of banks to create credit.

Answer 5

• Limited availability of suitable borrowers
• Limited ability to attract cash deposits
• Lack of demand for loans / credit by customers

Question 6

Explain the term supernormal profit.

Answer 6

A company covers its total costs and is making extra profits.