CA Foundation · Business Economics · Public Finance
During a sharp slowdown, the government increases its capital expenditure on highways and cuts some taxes so that employment and output recover. Under Musgrave's classification, this primarily reflects which function?
It is the stabilisation function. Musgrave described stabilisation as using fiscal policy, such as higher spending and tax cuts, to counter recession, sustain employment and output, and keep prices stable. The motive is macroeconomic stability, not a change in resource allocation or income distribution.
- AAllocation function
- BDistribution function
- CStabilisation functionCorrect
- DResource mobilisation function
Explanation
Using the budget (higher spending, lower taxes) to maintain high employment, price stability and growth during a slowdown is the stabilisation function. Although highways are public goods, the purpose here is to counter the downturn, not to fix the pattern of resource use. Hence allocation is not the primary function.
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