CA Foundation · Business Economics · Public Finance
During a period of high inflation, the Government of India reduces its expenditure and raises taxes to reduce aggregate demand. Under Musgrave's classification, this action mainly reflects which function?
The action reflects the stabilisation function. Musgrave's stabilisation role uses fiscal policy, such as changes in government spending and taxes, to manage aggregate demand, control inflation and unemployment, and support steady growth. Here the government is dampening demand to contain rising prices.
- AAllocation function
- BDistribution function
- CStabilisation functionCorrect
- DResource mobilisation function
Explanation
Cutting spending and raising taxes to curb aggregate demand and control inflation uses fiscal policy to maintain economic stability, which is the stabilisation function. It is not allocation, which is about the provision of goods the market under-supplies, nor distribution, which is about equity.
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