The correct answer is Option (2) → (A), (C) and (D) only
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(A) Taxes and government spending are tools of fiscal policy. Correct – This is the core of fiscal policy. Governments use changes in tax rates (e.g., income tax, corporate tax) and the level of government spending (e.g., on infrastructure, education, defense) to influence economic activity.
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(B) It is implemented by the central bank. Incorrect – Fiscal policy is implemented by the government, specifically the Ministry of Finance. The central bank (like RBI in India) implements monetary policy, not fiscal policy.
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(C) It influences aggregate demand. Correct – Fiscal policy directly impacts aggregate demand (AD). An increase in government spending directly adds to AD, while a decrease in taxes increases disposable income, leading to higher consumption and investment, thus boosting AD. Conversely, contractionary fiscal policy reduces AD.
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(D) It involves adjustments in public debt. Correct – When government spending exceeds its revenue, it leads to a fiscal deficit, which is financed by borrowing. This borrowing increases the public debt. Similarly, a fiscal surplus can reduce public debt. Therefore, changes in government spending and taxation directly impact the level of public debt.
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