Budget, taxation & public finance

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: (d) Loss of revenue to the State Exchequer due to tax evasion

Black money is, at its core, income hidden from the tax authorities. The Finance Ministry's White Paper on Black Money (2012) describes it as wealth built up by failing to pay dues to the public exchequer, so the loss of tax revenue is the government's central worry; the other options are side effects.

• ✓ (d) Unreported income escapes tax, shrinking the revenue the State needs for public spending and shifting the burden to honest taxpayers.
• ✗ (a) Parking black money in real estate and luxury housing does happen, but it is a consequence of the hidden income, not the main concern.
• ✗ (b) Buying gold and jewellery with black money is a way of storing it; the harm the government stresses is the tax that was never paid.

Remember · Black money = income or wealth concealed from tax authorities; its chief cost to the State is lost revenue through tax evasion.

📘 Read it in NCERT: 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

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