DSE 19-10

The following table shows the changes in the individual income tax system in China effective from October 2018.

(a) Is the individual income tax in China progressive, proportional, or regressive? Explain your answer. (2 marks)

(b) Suppose there is a deflationary (output) gap in China economy. With the aid of an AS-AD diagram, explain how the above change of the individual income tax system would affect the deflationary (output) gap in the short run. (7 marks)

(c) To achieve the same effect on the deflationary (output) gap as in part (b), an economist suggested the government should lower the required reserve ratio of banks instead of implementing the above change in tax system. Discuss the suggestion by giving ONE argument FOR and ONE argument AGAINST it. (To Be Discussed Later) (4 marks)