1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalising subsidies
4. Reducing import duty
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4
Answer: c
Explanation:
A large fiscal deficit has two bad consequences:
First, it leads to excessive government borrowing from the market, which causes a rise in market interest rates. Higher market interest rates tend to reduce private investments. Further, it reduces the resources available for private sector investment
Second, the extent to which the large fiscal deficit is financed by borrowing from the RBI, which issues a new currency, which is called reserve money or high power money for the government. This causes a greater expansion in the money supply through the process of the money multiplier and generates an inflationary situation in the economy
So, to check the rate of inflation, a fiscal deficit has to be reduced through both raising government revenue and reducing government expenditure
Hence, 1 and 3 are correct