Consider the following statements regarding "Discretionary Fiscal Policy": 1. It is synonymous with the automatic stabilising properties of the tax system. 2. It refers to deliberate government actions to stabilise the economy. 3. It relies solely on the market mechanism without any government intervention. Which of the statements given above is/are correct?

The correct option is 2 only Explanation Fiscal policy involves the use of government spending and taxation to influence the economy. It is broadly classified into two categories: Discretionary Fiscal Policy and Automatic Stabilizers. Discretionary policy requires explicit legislative or executive action to change spending or tax laws to address economic conditions. Statement-wise Analysis: - Statement 1 is Incorrect: Discretionary fiscal policy refers to deliberate changes in government spending and tax policies adopted by the government to achieve specific economic goals, such as stabilizing the economy during a recession or curbing inflation. Examples include passing a new budget with increased infrastructure spending or cutting tax rates. - Statement 2 is Correct: Discretionary fiscal policy is distinct from automatic stabilizers. Automatic stabilizers are built-in features of the tax and transfer systems (such as progressive income taxes and unemployment benefits) that automatically offset economic fluctuations without new government action. Discretionary policy requires active intervention. - Statement 3 is Incorrect: Fiscal policy, by definition, involves government intervention in the economy through the budget. It does not rely solely on market mechanisms; rather, it is a tool used to influence aggregate demand when market mechanisms alone may not achieve macroeconomic stability. Key Takeaway: Discretionary fiscal policy involves intentional government actions (new laws or budget changes) to manage aggregate demand, whereas automatic stabilizers function without active intervention based on existing fiscal structures.

NCERT Class 12 Economics — Chapter 7: Government Budget and the Economy

mcqeasy

Consider the following statements regarding "Discretionary Fiscal Policy":

It is synonymous with the automatic stabilising properties of the tax system.
It refers to deliberate government actions to stabilise the economy.
It relies solely on the market mechanism without any government intervention.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 3 only
B1 only
C1, 2 and 3
D2 only

Did you get this right?

Solution

The correct option is

2 only

Explanation

Fiscal policy involves the use of government spending and taxation to influence the economy. It is broadly classified into two categories: Discretionary Fiscal Policy and Automatic Stabilizers. Discretionary policy requires explicit legislative or executive action to change spending or tax laws to address economic conditions.

Statement-wise Analysis:

Statement 1 is Incorrect: Discretionary fiscal policy refers to deliberate changes in government spending and tax policies adopted by the government to achieve specific economic goals, such as stabilizing the economy during a recession or curbing inflation. Examples include passing a new budget with increased infrastructure spending or cutting tax rates.
Statement 2 is Correct: Discretionary fiscal policy is distinct from automatic stabilizers. Automatic stabilizers are built-in features of the tax and transfer systems (such as progressive income taxes and unemployment benefits) that automatically offset economic fluctuations without new government action. Discretionary policy requires active intervention.
Statement 3 is Incorrect: Fiscal policy, by definition, involves government intervention in the economy through the budget. It does not rely solely on market mechanisms; rather, it is a tool used to influence aggregate demand when market mechanisms alone may not achieve macroeconomic stability.

Key Takeaway:

Discretionary fiscal policy involves intentional government actions (new laws or budget changes) to manage aggregate demand, whereas automatic stabilizers function without active intervention based on existing fiscal structures.

Your note

More from Chapter 7: Government Budget and the Economy

Consider the following statements regarding the "Annual Financial Statement" in India: 1. It is a statutory requirement under the Fiscal Responsibility and Budget Management Act, not the Constitution. 2. It includes estimates for the coming financial year. 3. It distinguishes between the revenue account and the capital account. Which of the statements given above is/are correct?

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With reference to the "Allocation Function" of the government budget, consider the following statements: 1. It addresses the provision of public goods that cannot be provided effectively by the market mechanism. 2. Public goods are characterized by being rivalrous in consumption and excludable in nature. 3. The "free-rider" problem is easily solved by charging a user fee for public goods. Which of the statements given above is/are correct?

medium

Consider the following statements regarding "Public Provision" and "Public Production": 1. Public provision implies that goods are financed through the budget and used without direct payment. 2. Goods provided by the government must necessarily be produced directly by the government. 3. Public goods may be produced by the private sector. Which of the statements given above is/are correct?

medium

Consider the following statements regarding "Capital Receipts": 1. Recovery of loans is considered a revenue receipt. 2. Capital receipts either create a liability or reduce the financial assets of the government. 3. Market borrowings are considered non-debt creating capital receipts. Which of the statements given above is/are correct?

hard

Consider the following statements regarding "Revenue Expenditure": 1. It includes expenditure that does not result in the creation of assets. 2. Interest payments on debt are classified as capital expenditure. 3. Grants given to state governments are treated as revenue expenditure even if they are meant for the creation of assets. Which of the statements given above is/are correct?

medium

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The correct option is

2 only

Explanation

Statement-wise Analysis:

Statement 1 is Incorrect: Discretionary fiscal policy refers to deliberate changes in government spending and tax policies adopted by the government to achieve specific economic goals, such as stabilizing the economy during a recession or curbing inflation. Examples include passing a new budget with increased infrastructure spending or cutting tax rates.
Statement 2 is Correct: Discretionary fiscal policy is distinct from automatic stabilizers. Automatic stabilizers are built-in features of the tax and transfer systems (such as progressive income taxes and unemployment benefits) that automatically offset economic fluctuations without new government action. Discretionary policy requires active intervention.
Statement 3 is Incorrect: Fiscal policy, by definition, involves government intervention in the economy through the budget. It does not rely solely on market mechanisms; rather, it is a tool used to influence aggregate demand when market mechanisms alone may not achieve macroeconomic stability.

Key Takeaway: