SSC CHSL 2025 PYQ — Question 98

The correct answer is Option 1: It promotes consumers spend more
Explanation:

• In economics, the traditional view posits that when the government cuts taxes and allows the budget deficit to widen, it has a direct and positive impact on the economy:
• Increase in Disposable Income: Tax cuts increase the amount of disposable income available in people's hands.
• Increase in Consumption: When people have more money, they spend more on their necessities and luxuries. This leads to an increased demand for goods and services in the market.
• Economic Stimulus: This increased spending by consumers ultimately boosts production and economic growth (GDP growth).

Impact of Budget Deficits and Taxes (Quick Revision):

• Fiscal Policy: Cutting taxes is part of an 'Expansionary Fiscal Policy,' which is often adopted to stimulate the economy during times of recession.
• Budget Deficit: When the government's revenue (taxes) falls short of its expenditure, it is termed a budget deficit. To finance this deficit, the government resorts to borrowing.
• Ricardian Equivalence: This is an alternative (modern) perspective which argues that tax cuts have no significant impact because people begin saving money in anticipation of future tax increases. (However, your question specifically asks for the traditional view).

Important Questions for Upcoming Exams:
Question: What type of policy involves a reduction in taxes and an increase in government spending?
Answer: Expansionary Fiscal Policy.
Question: What is the primary source of borrowing utilized by the government to finance a budget deficit?
Answer: Market Borrowings and Bonds. Question: What is an example of a 'Direct Tax'?
Answer: Income Tax.