Which one of the following functions as an automatic stabilizer in the context of fiscal and monetary policies of an economy?
- A.Personal income tax
- B.Reverse repo rate of bank
- C.Open market operation
- D.Bond price
Correct answer
Explanation
The correct answer is A, Personal income tax. A progressive income tax takes a bigger share when incomes rise and a smaller one when they fall, without any new decision by the government. Such tools are called automatic or built-in stabilisers, because they soften booms and slumps on their own. In a boom, rising incomes push people into higher tax slabs, so tax collections grow faster than income and cool down spending. In a recession, collections fall faster than income, which leaves more money in people's hands. Unemployment benefits work the same way on the spending side of the budget. Option B is wrong because the reverse repo rate is changed by the Reserve Bank of India through a deliberate policy decision, which makes it discretionary monetary policy. Option C is wrong because open market operations, the buying and selling of government securities by the RBI, are also a deliberate policy step. Option D is wrong because a bond price is a market outcome, not a policy tool. Exam tip: automatic stabilisers need no decision; progressive taxes and unemployment benefits are the classic pair.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
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Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
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UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
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The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
Show answer
GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
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