Cause–Effect reasoning: Identify the relationship between Statement I and Statement II. S1: The government decided to give tax benefits for small savings (on investments and accruals) while taxing all withdrawals. S2: People have been investing more in small savings than in the equity market to avail maximum tax benefits. Choose the correct cause–effect option.
Verbal Reasoning
Cause and Effect
Difficulty: Easy
Choose an option
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AStatement I is the cause and Statement II is its effect.
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BStatement II is the cause and Statement I is its effect.
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CBoth statements I and II are independent causes.
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DBoth statements I and II are effects of independent causes.
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EBoth statements I and II are effects of a common cause.
Answer
Correct Answer: Statement I is the cause and Statement II is its effect.
Explanation
Given data
- S1: Policy grants tax benefits to small savings (investments/accruals), but taxes withdrawals.
- S2: Households prefer small savings over equity to capture tax advantages.
Concept / Approach Tax incentives alter after-tax returns and therefore investor behavior. A preferential tax structure for small savings predictably shifts flows toward those instruments.
Reasoning Policy incentive (S1) ⇒ relative attractiveness of small savings ↑ ⇒ higher allocations to small savings (S2).
Option check A is consistent with standard behavioral response. ✔ B/C/D/E do not match the clear incentive→response chain given.
Final Answer Statement I is the cause and Statement II is its effect.