When governments intervene to determine whether to expand demand or reduce it, constitutes which of the following governments functions?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Stabilization function.
Employment and prices depend on aggregate demand, and demand is not always at the right level. When the government steps in to expand demand or to reduce it and so keep the economy steady, it performs the stabilisation function of the budget. Demand can go wrong in two ways:
Too little demand: demand is not enough for the full use of labour and other resources, and since wages and prices do not fall below a level, employment does not recover by itself, so the government must act to raise demand.
Too much demand: demand exceeds the available output and causes inflation, and demand must be restrained.
Why the other options are incorrect
Option (1) Distribution function. — Incorrect. Distribution is about who gets the national income, the shares of different households. It is concerned with fairness, not with the level of total demand.
Option (2) Allocation Function. — Incorrect. Through the allocation function the government provides public goods, such as defence, roads and administration, which the market will not supply.
Option (3) Redistribution function. — Incorrect. The redistribution function uses taxes and transfers to make the distribution of income fairer, for instance through progressive income taxation. It changes the shares, not the total level of demand.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 13-05 S2 31-05 S1* | 13-05 S1* 14-05 S1* | – | 23-06 S3* | – |
* A similar question.
NCERT (2025-26): “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.…” |