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Fiscal Policy

1 UPSC Prelims MCQs tagged "Fiscal Policy". Free practice with answer keys, explanations, and timed mock tests on Anantam IAS.

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  1. Which one of the following best describes the ‘Crowding Out Effect’ in the context of fiscal policy?

    Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy?

    1. AA situation where private investment increases due to increased Government spending
    2. BA situation where Government borrowing leads to higher interest rates, which reduces private investment
    3. CA situation where an increase in taxes leads to increased private sector investment
    4. DA situation where Government spending has no impact on aggregate demand
    Answer and explanation

    Correct answer: B

    The crowding-out effect describes how higher government borrowing to finance a fiscal deficit pushes up interest rates in the loanable funds market, raising the cost of capital and squeezing out private investment and consumption. Option (a) is the opposite phenomenon, called crowding-in, which can occur when public capital expenditure raises private productivity. Option (c) misdescribes tax effects, and option (d) contradicts basic Keynesian aggregate-demand analysis. Option (b) is the standard NCERT and Mankiw textbook definition and is the most commonly tested framing in UPSC Economy.

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    Indian Economy UPSC 2026 Easy