What is a likely effect of lowering VAT on consumer purchases?

• A. It would increase sales.
• B. It would only affect imported goods.
• C. It would have no effect on prices.
• D. It would decrease sales.

Answer: (A)

Lowering VAT reduces the final price that consumers pay for taxed goods and services, so people typically buy more. When prices drop, demand tends to rise, leading to higher sales volumes. The degree of the increase depends on how responsive shoppers are to price changes (price elasticity of demand): if demand is price elastic, sales rise a lot; if it’s inelastic, the rise is smaller but still present. The other options aren’t correct because VAT affects both domestic and imported goods, it does change prices, and a tax cut on consumption would not be expected to reduce sales.