Question

In order to discourage any fall in Aggregate Demand, the Government of India may ------ the -----. (Choose the correct alternative to fill in the blanks)

• A. Decrease, repo rate
• B. Increase, reverse repo rate
• C. Decrease, government expenditure
• D. Decrease, tax rate

Hint:

Lower taxes increase disposable income, boosting Aggregate Demand and stimulating economic growth.

Answer 1

The Correct Option is D

To prevent a fall in Aggregate Demand, the government can implement expansionary fiscal policies, such as: 1. Decreasing tax rates:
- Lower taxes increase disposable income, encouraging higher consumption and investment, thereby increasing Aggregate Demand. 2. Increasing government spending:
- More public expenditure stimulates demand, creating jobs and boosting the economy. Conclusion: Since reducing tax rates increases Aggregate Demand, option (D) is correct.