How many of the following statements about the stabilisation function of the government budget are correct?
(A) The overall level of employment and prices in the economy depends upon the level of aggregate demand.
(B) Since wages and prices do not fall below a level, employment cannot be brought back to the earlier level automatically.
(C) When demand exceeds the available output under conditions of high employment, it may give rise to inflation.
(D) The stabilisation function aims at bringing about a distribution of income that society considers fair.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Only three
The stabilisation function deals with ups and downs in demand, employment and prices.
(A) The overall level of employment and prices in the economy depends upon the level of aggregate demand. — Correct. Employment and prices follow aggregate demand.
(B) Since wages and prices do not fall below a level, employment cannot be brought back to the earlier level automatically. — Correct. So the government has to step in to raise demand.
(C) When demand exceeds the available output under conditions of high employment, it may give rise to inflation. — Correct. Then the government may need to reduce demand.
(D) The stabilisation function aims at bringing about a distribution of income that society considers fair. — Incorrect. A fair distribution is the aim of the redistribution function.
Three statements are correct.
NCERT (2026-27): “Stabilisation Function of Government Budget The government may need to correct fluctuations in income and employment. The overall level of employment and prices in the economy depends upon the level of aggregate demand which depends on the spending decisions of millions of private economic agents apart from the government. These decisions, in turn, depend on many factors such as income and credit availability. In any period, the level of demand may not be sufficient for full utilisation of labour and other resources of the economy. Since wages and prices do not fall below a level, employment cannot be brought back to the earlier level automatically. The government needs to intervene to raise the aggregate demand. On the other hand, there may be times when demand exceeds available output under conditions of high employment and thus may give rise to inflation. In such situations, restrictive conditions may be needed to reduce demand. The intervention of the government whether to expand demand or reduce it constitutes the stabilisation function.” |