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CA Foundation · Business Economics · Indian Economy

Which of the following best describes the role of fiscal policy in the Indian economy?

Fiscal policy comprises government spending and taxation decisions designed to influence aggregate demand, economic growth, employment levels, and inflation in the economy. It is distinct from monetary policy, which is controlled by the central bank through interest rates and money supply management.

  1. AIt controls the money supply and interest rates to manage inflation and employment
  2. BIt involves government spending and taxation decisions to influence economic growth, employment and price levelsCorrect
  3. CIt regulates the functioning of stock exchanges and commodity markets
  4. DIt sets rules for commercial banks to maintain minimum cash reserves

Explanation

Fiscal policy uses government expenditure and taxation as tools to manage aggregate demand and economic activity. Option A describes monetary policy (central bank function). Option C relates to securities regulation. Option D describes reserve ratio requirements, part of monetary policy transmission. Fiscal policy is the direct government intervention through the budget.

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