Question

As a general rule, the underground economy in a country will be bigger when

A. tax rates are lower.
B. drug use is higher.
C. income levels are low.
D. government red tape is oppressive.
E. economic growth is slow.

Answer 1

The underground economy generally grows larger in response to oppressive government red tape, where excessive regulations and corruption stifle formal economic activity and push people into unregulated markets.

Step-by-step explanation:

The underground economy is often larger when governments impose heavy regulations, excessive taxes, and burdensome red tape. These conditions discourage people from participating in the official economy and steer them toward unregulated markets. As a general rule, option D. government red tape is oppressive aligns with the understanding that the underground economy flourishes in environments where legal economic activity is hindered by excessive government control and corruption, which can stifle entrepreneurial effort and economic growth. Additionally, these obstacles can lead to widespread corruption that further impedes official economic activities. While other factors such as drug use, low-income levels, and slow economic growth might indirectly influence the size of the underground economy, they are not the primary driving forces as much as oppressive government red tape is.