With reference to the government sector in the determination of income, consider the following statements: 1. Government expenditure adds to the aggregate demand similar to investment and consumption. 2. Taxes imposed by the government increase the disposable income of households. 3. In the absence of indirect taxes, the GDP is identically equal to the National Income. Which of the statements given above is/are correct?

The correct option is 1 and 3 only Explanation In the determination of National Income within a three-sector economy (Households, Firms, and Government), the government influences the economy through fiscal tools: Government Expenditure ($G$) and Taxes ($T$). These variables affect Aggregate Demand and Disposable Income. Statement-wise Analysis: - Statement 1 is Correct: Government expenditure ($G$) is a component of Aggregate Demand ($AD$). The equation for Aggregate Demand in a three-sector economy is $AD = C + I + G$. Just like investment ($I$) and consumption ($C$), government spending on goods and services adds directly to the total demand in the economy. - Statement 2 is Incorrect: Disposable income ($Y_d$) is the income remaining with households after the payment of direct taxes. It is defined as $Y_d = Y - T$ (where $Y$ is total income and $T$ is taxes). Therefore, an increase in taxes reduces the disposable income available for consumption and saving, rather than increasing it. - Statement 3 is Correct: The difference between the market value of goods (Market Price) and the income paid to factors of production (Factor Cost) is created by Net Indirect Taxes (Indirect Taxes minus Subsidies). In a simplified macroeconomic model, if indirect taxes are absent (and assuming subsidies are zero), the value of goods at market price is identical to the factor payments generated. Thus, GDP becomes identically equal to National Income (ignoring depreciation and net factor income from abroad for this theoretical identity). Key Takeaway: Government expenditure acts as an injection into the circular flow of income, increasing Aggregate Demand, whereas taxes act as a leakage, reducing the disposable income of households.

NCERT Class 12 Economics — Chapter 6: Determination of Income and Employment

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With reference to the government sector in the determination of income, consider the following statements:

Government expenditure adds to the aggregate demand similar to investment and consumption.
Taxes imposed by the government increase the disposable income of households.
In the absence of indirect taxes, the GDP is identically equal to the National Income.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B1, 2 and 3
C2 only
D1 and 3 only

Did you get this right?

Solution

The correct option is 1 and 3 only

Explanation

In the determination of National Income within a three-sector economy (Households, Firms, and Government), the government influences the economy through fiscal tools: Government Expenditure ($G$) and Taxes ($T$). These variables affect Aggregate Demand and Disposable Income.

Statement-wise Analysis:

Statement 1 is Correct: Government expenditure ($G$) is a component of Aggregate Demand ($AD$). The equation for Aggregate Demand in a three-sector economy is $AD = C + I + G$. Just like investment ($I$) and consumption ($C$), government spending on goods and services adds directly to the total demand in the economy.
Statement 2 is Incorrect: Disposable income ($Y_d$) is the income remaining with households after the payment of direct taxes. It is defined as $Y_d = Y - T$ (where $Y$ is total income and $T$ is taxes). Therefore, an increase in taxes reduces the disposable income available for consumption and saving, rather than increasing it.
Statement 3 is Correct: The difference between the market value of goods (Market Price) and the income paid to factors of production (Factor Cost) is created by Net Indirect Taxes (Indirect Taxes minus Subsidies). In a simplified macroeconomic model, if indirect taxes are absent (and assuming subsidies are zero), the value of goods at market price is identical to the factor payments generated. Thus, GDP becomes identically equal to National Income (ignoring depreciation and net factor income from abroad for this theoretical identity).

Key Takeaway:
Government expenditure acts as an injection into the circular flow of income, increasing Aggregate Demand, whereas taxes act as a leakage, reducing the disposable income of households.

Your note

More from Chapter 6: Determination of Income and Employment

Match List I with List II and select the correct answer using the code given below: List I | List II A. Excess Demand | 1. Amplifies changes in autonomous expenditure B. Deficient Demand | 2. Leads to a decline in prices in the long run C. Multiplier | 3. Signals that supply exceeds demand D. Inventory Accumulation | 4. Leads to a rise in prices in the long run

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Consider the following statements regarding Savings in an economy: 1. Savings is defined as the portion of income that is used for tax payments. 2. The Marginal Propensity to Save (MPS) is the change in savings per unit change in income. 3. If the Marginal Propensity to Consume (MPC) is 1, the Marginal Propensity to Save (MPS) will be 0. Which of the statements given above is/are correct?

easy

What does "Negative Inventory Investment" signify in an economy? 1. A rise in the stock of finished goods. 2. A depletion of existing stock to meet excess demand. 3. A situation where planned sales are less than actual sales. Which of the statements given above is/are correct?

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With reference to the consumption function in an economy, consider the following statements: 1. Autonomous consumption is the consumption expenditure that occurs only when income is positive. 2. Induced consumption is the portion of consumption that varies directly with the level of income. 3. The marginal propensity to consume determines the rate at which induced consumption changes as income changes. Which of the statements given above is/are correct?

easy

Consider the following statements regarding Inventory Investment: 1. Unplanned inventory accumulation occurs when actual sales exceed the planned sales of a firm. 2. It refers to the change in the stock of finished goods and raw materials held by a firm over a period. 3. Inventory investment is always positive regardless of demand fluctuations. Which of the statements given above is/are correct?

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The correct option is 1 and 3 only

Explanation

Statement-wise Analysis:

Statement 1 is Correct: Government expenditure ($G$) is a component of Aggregate Demand ($AD$). The equation for Aggregate Demand in a three-sector economy is $AD = C + I + G$. Just like investment ($I$) and consumption ($C$), government spending on goods and services adds directly to the total demand in the economy.
Statement 2 is Incorrect: Disposable income ($Y_d$) is the income remaining with households after the payment of direct taxes. It is defined as $Y_d = Y - T$ (where $Y$ is total income and $T$ is taxes). Therefore, an increase in taxes reduces the disposable income available for consumption and saving, rather than increasing it.
Statement 3 is Correct: The difference between the market value of goods (Market Price) and the income paid to factors of production (Factor Cost) is created by Net Indirect Taxes (Indirect Taxes minus Subsidies). In a simplified macroeconomic model, if indirect taxes are absent (and assuming subsidies are zero), the value of goods at market price is identical to the factor payments generated. Thus, GDP becomes identically equal to National Income (ignoring depreciation and net factor income from abroad for this theoretical identity).