| The government provides subsidies in various sectors. Which of the following are the effects of subsidies? |
| 1. It increases inflation |
| 2. It increases fiscal deficit |
| 3. It decreases export competitiveness |
| Select the correct answer using the codes given below. |
A) 1 and 2 only
B) 2 only
C) 2 and 3 only
D) 1, 2 and 3
Correct Answer: B
Solution :
[b] 2 only. There is no direct relation between subsidies given and inflation. It may increase inflation (eg. Subsidies on LPG helping people save more thus increasing their capacity which can cause demand pull inflation. ) or decrease inflation by making accessible low cost subsidized goods. Subsidies of course increases fiscal deficit. Subsidies increases not decreases export competitiveness of goods as it decreases their cost of production.
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