2010 General Studies, all questions

UPSC Prelims 2010 · General Studies

Question 79: Economy and Social Development

Consider the following actions by the Government :

  1. 1.Cutting the tax rates
  2. 2.Increasing the government spending
  3. 3.Abolishing the subsidies

In the context of economic recession, which of the above actions can be considered a part of the “fiscal stimulus” package ?

a1 and 2 only
b2 only
c1 and 3 only
d1, 2 and 3

AnswerThe answer is (a).

A fiscal stimulus uses government taxing and spending to revive demand in a recession: cutting tax rates leaves households and firms with more to spend, and higher government spending adds to demand directly. Abolishing subsidies cuts government spending and raises prices of some goods, which is contractionary, so it is not part of a stimulus. Remember: stimulus = lower taxes + higher spending; austerity = higher taxes + lower spending.

  • 1. Cutting tax rates leaves more money with households and firms.
  • 2. Higher government spending adds directly to demand.
  • 3. Abolishing subsidies cuts spending and is contractionary.

How you could have got this

  1. If you were sure statement 1 is correct, (b) goes: it leaves 1 out.

    What you needed to know: Cutting tax rates leaves more money with households and firms.

  2. Then, if you were sure statement 3 is not correct, (c) and (d) go: each of them includes 3.

    What you needed to know: Abolishing subsidies cuts spending and is contractionary.

Only (a) is left. You didn’t need statement 2.

This follows an unofficial answer: UPSC has not published its key for this year, and if that answer is wrong, so is this path.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Right: tax cuts and higher spending are fiscal stimulus.
  • (b) Tax cuts are also part of a stimulus.
  • (c) Abolishing subsidies is contractionary, not a stimulus.
  • (d) Abolishing subsidies would reduce demand, so it cannot be included.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2010, General Studies, Series A. The paper on upsc.gov.in.