Which fiscal policy tool is used by governments to influence aggregate demand?
Show answer & explanation
Correct answer: B
Explanation
Solution: The correct answer is Taxation & government spending.
Explanation:
☛ Fiscal Policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.
☛ The two main instruments of fiscal policy are government expenditure and taxation.
☛ During an economic downturn, the government adopts an expansionary fiscal policy by lowering taxes and increasing public spending to stimulate aggregate demand.
☛ Conversely, during high inflation, a contractionary fiscal policy is used by raising taxes and cutting spending to cool down aggregate demand.
Extra Exam-Relevant Facts:
☛ Monetary Policy Tools: Repo rate, Statutory Liquidity Ratio (SLR), and Bank rate are tools of monetary policy managed by the central bank (Reserve Bank of India in India), not the government.
☛ Repo Rate: The interest rate at which the central bank lends money to commercial banks against government securities.
☛ Statutory Liquidity Ratio (SLR): The minimum percentage of deposits that a commercial bank must maintain in liquid cash, gold, or other approved securities.
☛ Bank Rate: The standard rate at which the central bank is prepared to buy or rediscount bills of exchange or other commercial paper without collateral.
Important One-Liners for Upcoming Exams:
☛ Who formulates fiscal policy in India? → Ministry of Finance (Government of India)
☛ Who formulates monetary policy in India? → Reserve Bank of India (RBI) through the Monetary Policy Committee (MPC)
☛ Which economic theory primarily advocates the use of fiscal policy to manage aggregate demand? → Keynesian Economics
☛ What is the difference between total revenue and total expenditure of the government termed as? → Fiscal Deficit
☛ In which year was the Fiscal Responsibility and Budget Management (FRBM) Act enacted in India? → 2003