There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial year, which runs from 1 April to 31 March. This ‘Annual Financial Statement’ constitutes the main budget document of the government. Although the budget relates to one financial year, its impact is felt in later years too. So the budget has two accounts. Items that relate to the current financial year only go into the revenue account, also called the revenue budget. Items that concern the assets and liabilities of the government go into the capital account, also called the capital budget.
Suppose the government, in its budget, raises transfer payments to households by Rs 100 crore instead of raising its purchases of goods and services by Rs 100 crore. Why will equilibrium income rise by less?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → A part of any increase in transfer payments is saved
A rise in G adds the full amount to spending at once. A transfer only raises disposable income, and households save part of it. So only c times the transfer is spent at first, and income rises by less.
Transfers create no asset, so they are not capital expenditure. They raise disposable income, and how they are financed does not decide this effect.
NCERT (2026-27): “Transfers: … so output will rise by less than the amount by which it increases when government expenditure increases because a part of any increase in transfer payments is saved. …” “… Thus, we find that income increases by less than it increased with a rise in government purchases.” |