Question

“The government through its budgetary policy may intervene to expand or reduce demand in an economy.”

In the light of the given statement, discuss briefly the budgetary objectives the government is trying to achieve.

Hint:

The objective is economic stability. In inflation the budget cuts demand, and in deflation it raises demand, so prices stay steady.

Answer 1

Step 1: Understand the statement:
The statement says the budget can expand or reduce demand in the economy.
This links to the objective of keeping prices and demand steady over time.

Step 2: Name the objective:
The objective is economic stability.

Step 3: Explain how the budget does it in inflation:
When prices rise too fast, demand is too high.
The government raises taxes and cuts spending. People have less money, so aggregate demand falls.

Step 4: Explain how the budget does it in deflation:
When prices fall and demand is weak, the government cuts taxes and raises spending.
People have more money, so aggregate demand rises.

Step 5: Conclude:
In this way the budget controls price fluctuations and keeps the economy stable.

Final Answer:
The objective is economic stability. Through taxes and spending the government raises or lowers aggregate demand and so controls price changes.