Which of the following is an example of discretionary fiscal policy?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → The government deliberately raises its spending when private investment falls

Discretionary fiscal policy is a deliberate action. Raising G when investment falls keeps autonomous spending and income steady.

Option (1) Welfare payments rise without any new decision during a slump — Incorrect. This happens on its own, so it is an automatic stabiliser.

Option (2) Corporations keep their dividends unchanged when income changes in the short run — Incorrect. This is a built-in stabiliser of the private sector.

Option (3) The government deliberately raises its spending when private investment falls — Correct. A chosen change in G to offset the fall in investment is discretionary.

Option (4) Income tax collections fall on their own when GDP falls in a recession — Incorrect. The fall is automatic, with no decision.

NCERT (2026-27): “Box 5.1: Fiscal Policy … We note that these fiscal policy instruments can be varied to offset the effects of undesirable shifts in investment demand. That is, if investment falls from I0 to I1, government spending can be raised from G0 to G1 so that autonomous expenditure (C + I0 + G0 = C + I1 + G1) and equilibrium income remain the same. This deliberate action to stabilise the economy is often referred to as discretionary fiscal policy to distinguish it from the inherent automatic stabilising properties of the fiscal system. …”

“During boom years, when employment is high, tax receipts collected to finance such expenditure increase exerting a stabilising pressure on high consumption spending; conversely, during a slump, these welfare payments help sustain consumption. Further, even the private sector has built-in stabilisers. Corporations maintain their dividends in the face of a change in income in the short run and households try to maintain their previous living standards. All these work as shock absorbers without the need for any decision-maker to take action. That is, they work automatically. …”