Consider the following actions by the Government:

Question

Consider the following actions by the Government:

(i) Cutting the tax rates

(ii) Increasing the government spending

(iii) Abolishing the subsidies. In the context of economic recession, which of the above actions can be considered a part of the fiscal stimulus package?

1. A. (i) and (ii) only (Correct answer)
2. B. (ii) only
3. C. (i) and (iii) only
4. D. (i), (ii) and (iii)

Correct Answer

Option A — (i) and (ii) only

Detailed Solution & Explanation

The correct answer is (i) and (ii) only.

Key Points

• A fiscal stimulus involves government actions to boost aggregate demand during a recession.
• Cutting taxes (i) increases disposable income and consumer spending.
• Increasing government spending (ii) directly injects money into the economy.
• Abolishing subsidies (iii) reduces purchasing power and is contractionary — not a stimulus measure.