SSC CHSL 2025 PYQ — Question 96

The correct answer is Option 1: Firms are unable to produce a quantity exceeding the demand at existing prices.
Explanation:

• When the government increases its spending (such as on infrastructure or subsidies) or cuts taxes, it is referred to as Expansionary Fiscal Policy. The impact of this policy on prices is as follows:
• Increase in Disposable Income: Tax cuts or increased government spending place more money in the hands of the public for spending.
• Increase in Aggregate Demand: With more money available, people increase their demand for goods and services.
• Supply Constraints: If firms (companies) cannot expand their production capacity in the short run as rapidly as demand is rising, a shortage of goods occurs in the market.
• Inflation: When 'too much money chases too few goods,' firms raise their prices. This phenomenon is known as Demand-Pull Inflation.

Key Economic Points (Quick Revision):
•    Fiscal Policy: Controlled by the government (spending and taxation).
•    Monetary Policy: Controlled by the Central Bank (RBI) (interest rates and money supply).
•    Relationship between Inflation and Demand: If Demand > Supply, prices will rise.
Important Questions for Upcoming Exams:
Question: What is the primary cause of 'Demand-Pull Inflation'?
Answer: Aggregate demand exceeding aggregate supply.
Question: What impact would an increase in taxes have on inflation?
Answer: People's disposable income would decrease, demand would fall, and prices may decline.
Question: What is the impact of the government's 'Cheap Money Policy' on the economy? Answer: This increases liquidity in the market, which can lead to a rise in demand and prices.