CAPF AC 2021 Q33: Indian Economy – National Income & Economic Growth
- (a) Personal income tax
- (b) Reverse repo rate of bank
- (c) Open market operation
- (d) Bond price
Answer: (a) Personal income tax
Explanation
Automatic stabilizers
How to think: an automatic stabilizer works by itself.
No new decision of the government or the central bank is needed.
It cools the economy in a boom and supports it in a slump.
How income tax does this: in a boom, incomes rise and people automatically pay more tax, so spending is held back.
In a slump, incomes fall and tax payments fall on their own, leaving more money with people.
| Option | What it is | Automatic? |
|---|---|---|
| Personal income tax | Fiscal tool built into the system | Yes |
| Reverse repo rate | Monetary policy rate set by the RBI | No, needs a decision |
| Open market operation | RBI buying or selling securities | No, needs a decision |
| Bond price | A market price, not a policy tool | No |
Other automatic stabilizers: unemployment benefits and other welfare transfers.
Answer: (a) Personal income tax.
Why each option is right or wrong
- (a) CORRECT. Progressive income tax rises and falls with income without any new decision.
- (b) Incorrect. The reverse repo rate is changed by a deliberate decision of the RBI.
- (c) Incorrect. Open market operations are discretionary actions of the central bank.
- (d) Incorrect. A bond price is a market outcome, not a stabilizing policy tool.
Key point
Automatic (built-in) stabilizers: progressive income tax, unemployment benefits, welfare transfers. They are fiscal, and work without fresh decisions. Repo, reverse repo and open market operations are discretionary monetary tools.
Remember
Income tax and unemployment benefits stabilize automatically.
Common mistakes
- Marking reverse repo or open market operations, which need an RBI decision each time.
- Thinking automatic stabilizers belong to monetary policy; they are fiscal.
- Confusing a discretionary tax cut with the built-in fall in tax collections.
Exam tip
Educated guess: two options are RBI tools that someone must decide to use, so they are not automatic. A bond price is not a tool at all. That leaves income tax.
Sources
- NCERT Class XII Economics — Introductory Macroeconomics (government budget and the economy)
- Samuelson and Nordhaus, Economics — Fiscal Policy (automatic stabilizers)