IAS General Studies Prelims Question No. 62

A change in taxation and government spending will result in the change in ___:
1. Aggregate demand
2. Resource allocation
3. Distribution of Income
Choose the correct option from the codes given below:
[A] Only 1 & 2
[B] Only 2 & 3
[C] Only 1 & 3
[D] 1, 2 & 3
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[D] 1, 2 & 3
Fiscal policy refers to the influences of the incomes and expenditures of the government. The major source of income for the Government is taxation and major expenditure of the government is public spending. Thus, the two main instruments of fiscal policy are government taxation and expenditure. Any measure that is related to the government taxation and government spending would be termed as a fiscal measure. Any changes in the level and composition of taxation and government spending can affect the economy because –
•This can bring a change in the aggregate demand and the level of economic activity
•This can bring a change in the pattern of resource allocation
•It can bring a change in the distribution of income.
•A welfare government tries to reallocate income by designing tax systems that treat high-income and low-income households differently.