National income, growth & inflation

Answer: (b) Increase in expenditure on public projects

A recession is a shortfall of demand, so the remedy is to add demand. Government spending on public projects is itself part of aggregate demand and, through the multiplier, raises output and income by more than the amount spent.

• ✓ (b) Higher public spending directly adds to aggregate demand, creates jobs and incomes, and so counters the slump.
• ✗ (a) The tax cut helps, but raising interest rates at the same time makes borrowing dearer and holds back investment and consumption, working against recovery.
• ✗ (d) Cutting public spending removes demand from an economy that already lacks it and would deepen the recession.

Remember · Recession = too little demand. Counter it with expansionary fiscal policy (more public spending, lower taxes) and easier money (lower interest rates).

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 4 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (a) 1 and 4 only

Demand for a good rises when a substitute gets dearer and when its own price falls. A dearer complement and higher income for an inferior good both push demand down.

• ✓ 1. If coffee becomes costlier, buyers switch to tea, its substitute, so demand for tea goes up.
• ✗ 2. Complements are used together (tea and sugar), so a rise in the complement's price reduces demand for the good.
• ✗ 3. By definition, demand for an inferior good such as coarse cereals falls as consumers' income rises and they shift to better goods.
• ✓ 4. The law of demand: other things equal, a lower price raises the quantity demanded.

Remember · Demand rises with: dearer substitute, cheaper complement, own price falling, and (for normal goods) higher income. Inferior goods reverse the income effect.

📘 Read it in NCERT: Class 12 Introductory Microeconomics, Ch 2 (practise this chapter) · Class 12 Introductory Microeconomics, Ch 2 (practise this chapter) · Class 12 Introductory Microeconomics, Ch 2 (practise this chapter) · Class 12 Introductory Microeconomics, Ch 2 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (d) Creation of new money to finance a budget deficit

A deficit can be financed by taxes, borrowing or printing money. Borrowing only moves existing money from lenders to the government, but creating new money adds to the money supply while the supply of goods stays the same, so it pushes prices up the most.

• ✓ (d) New money raises total spending power without adding output, the classic cause of demand-pull inflation.
• ✗ (b) Borrowing from the public takes money people would otherwise have spent or saved, so the net addition to demand is smaller.
• ✗ (c) Bank borrowing uses deposits already in the system; it can add to demand but far less than fresh money creation.

Remember · Deficits are financed by taxation, borrowing or printing money; printing (monetising) the deficit is the most inflationary.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error

Answer: (a) 1, 2 and 4 only

Demand-pull inflation happens when total demand outruns what the economy can supply. Expansionary policy, a fiscal stimulus and higher purchasing power all raise demand. Indexing wages to inflation works through costs, and rising interest rates reduce demand, so 3 and 5 do not fit.

• ✓ 1. Expansionary monetary or fiscal policy puts more money and spending into the economy, lifting aggregate demand.
• ✓ 2. A fiscal stimulus (more government spending or tax cuts) directly raises aggregate demand; if firms cannot raise output fast enough, prices rise.
• ✗ 3. Linking wages to inflation raises firms' labour costs and feeds a wage-price spiral, which is usually classed as cost-push, not demand-pull, inflation.
• ✓ 4. When people have more purchasing power they buy more, and demand racing ahead of supply pulls prices up.
• ✗ 5. Higher interest rates make borrowing dearer and reduce money supply, so they dampen demand; central banks raise rates to fight inflation.

Remember · Demand-pull: too much money chasing too few goods (stimulus, easy money, higher incomes). Cost-push: rising input costs such as wages or oil.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)

Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). Permalink · Report an error