CA Foundation · Business Economics · Public Finance

The Government of India raises its capital expenditure and cuts the repo-linked borrowing burden on firms during a prolonged slowdown, aiming to restore employment and bring output back toward full capacity. Under Musgrave's classification, this action mainly reflects which function?

This is the stabilisation function. The government uses spending and borrowing-related policy to counter a slowdown, restore employment and keep output near full capacity. Stabilisation deals with macroeconomic problems such as unemployment and inflation, unlike allocation, which deals with the provision of goods, or distribution, which deals with equity.

AAllocation function
BDistribution function
CStabilisation functionCorrect
DResource conservation function

Explanation

The aim is to revive employment and output during a slowdown, which is macroeconomic management of unemployment and the business cycle. This is the stabilisation function. It is not allocation, because the goal is not to provide a particular good that the market under-supplies, nor distribution, because no income redistribution is targeted.

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The Government of India raises its capital expenditure and cuts the repo-linked borrowing burden on firms during a prolonged slowdown, aiming to restore employment and bring output back toward full capacity. Under Musgrave's classification, this action mainly reflects which function?

Explanation

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