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Q25 (CDS-I/2013) Economy › Government Finance & Budget › Taxation principles Answer Verified

The government can influence private sector expenditure by— 1. taxation 2. subsidies 3. macro-economic policies 4. grants Select the correct answer using the codes given below—

Result
Your answer: —  ·  Correct: A
Explanation

The government influences private sector expenditure through various fiscal and macroeconomic instruments. Taxation (1) directly affects disposable income and corporate profits, thereby influencing consumption and investment levels [5]. Subsidies (2) act as policy instruments to increase welfare and reduce costs for private entities, encouraging specific expenditure patterns in sectors like exports or fertilizers [3]. Macro-economic policies (3), including fiscal and monetary stances, shape the overall economic environment, affecting interest rates and aggregate demand, which in turn induces or 'crowds out' private investment [5]. Grants (4) and transfers, such as scholarships or unemployment allowances, are counted within private final consumption expenditure as they provide the financial means for private spending [2]. Collectively, these tools allow the government to direct resources and stimulate or restrain private economic activity [3].

Sources

  1. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > 3. Expenditure Method > p. 15
  2. [5] https://www.investopedia.com/terms/c/crowdingouteffect.asp
  3. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Revenue Expenditure > p. 70
  4. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 160
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