2nd PUC Economics Question Bank Chapter 11 Government Budget and the Economy

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Karnataka 2nd PUC Economics Question Bank Chapter 11 Government Budget and the Economy

2nd PUC Economics Government Budget and the Economy One Mark Questions and Answers

1. Choose The Correct Answer.

Question 1.
The Taxes on Individual and firms are
(a) Direct Taxes
(b) Indirect Taxes
(c) Fixed Taxes
(d) Non Tax Revenues
Answer:
(a) Direct Taxes

Question 2.
Duties Levied on goods produced with in the country
(a) Service Tax
(b) Estate Duties
(c) Excise Duties (Taxes)
(d) Customs duties
Answer:
(c) Excise Duties (Taxes)

Question 3.
The Tax which acts as an automatic stabiliser
(a) Qualitative income Tax
(b) Income Tax
(c) Quantitative Tax
(d) Proportional income Tax
Answer:
(d) Proportional income Tax

Question 4.
Which of the following is an example of ‘Paper taxes’.
(a) Income Tax
(b) Excise Taxes
(c) Wealth Tax
(d) Customs Taxes
Answer:
(c) Wealth Tax

Question 5.
When Demand exceeds the available output under conditions of high level of employment, this may give rise to
(a) Inflation
(b) Deflation
(c) Stabilisation
(d) None of the above
Answer:
(a) Inflation

Question 6.
Central Budget is presented before:
(a) Lok Sabha
(b) Rajya Sabha
(c) Vidhan Soudha
(d) Vikas Soudha
Answer:
(a) LokSabha

Question 7.
Find direct tax among the following taxes:
(a) GST
(b) Service Tax
(c) Property Tax
(d) VAT
Answer:
(c) property tax

Question 8.
Which one of the following is an indirect tax?
(a) Profit tax
(b) Wealth tax
(c) Customs duty
(d) Gift tax
Answer:
(c) Customs duty

Question 9.
If a budgetary deficit of the government is ₹ 25,000 and the borrowings and other liabilities are ₹ 7,000 how much will be the fiscal deficit?
(a) ₹ 25,000
(b) ₹ 32,000
(c) ₹ 18,000
(d) ₹ 7,000
Answer:
(b) ₹ 32,000

Question 10.
Non- -tax revenue in the following is
(a) Export duty
(b) Import duty
(c) Dividends
(d) Excise
Answer:
(c) Dividends

Question 11.
The subsidy given by the government is included in
(a) Revenue expenditure
(b) Capital expenditure
(c) Revenue receipts
(d) Capital receipts
Answer:
(a) Revenue expenditure

Question 12.
Borrowing in a government budget is
(a) Revenue deficit
(b) Fiscal deficit
(c) Primary deficit
(d) Deficit in taxes
Answer:
(b) Fiscal deficit

Question 13.
“Change in government revenue” is a part of
(a) Fiscal policy
(b) Monetary policy
(c) Either (a) or (b)
(d) Neither (a) or (b)
Answer:
(a) Fiscal policy

Question 14.
Which is not an objective of government budget? ,
(a) Redistribution of income and wealth
(b) Export promotion
(c) Reduction in unemployment
(d) Managing PSUs
Answer:
(b) Export promotion

Question 15.
Which of the following is not a capital receipt
(a) Borrowings from foreign countries
(b) Interest received on loans
(c) Sale of public sector undertakings
(d) Recovery of loans
Answer:
(b) Interest received on loans

Question 16.
Which of the following is revenue receipts?
(a) Recovery of loans
(b) License and court fees received by government
(c) Loan taken from Japan for infrastructural developments
(d) Sale of shares held by government in PSU.
Answer:
(b) License and court fees received by government

Question 17.
The government budget has a revenue deficit This gets financed by
(a) Borrowing
(b) Disinvestment
(c) Tax revenue
(d) Indirect taxes
(a) A and D (b) C and D (c) A and B (d) C and B
Answer:
(c) A and B

Question 18.
Which of the following statements is not true for fiscal deficit ? A fiscal deficit?
(a) Represents the borrowing of the government
(b) Is the difference between total expenditure and total receipts of the government
(c) Is the difference between total expenditure and total receipts other than borrowing
(d) Increases the future liability of the government
Answer:
(b) Is the difference between total expenditure and total receipts of the government

Question 19.
Direct taxes being progressive in nature help to
(a) Reduce prices
(b) Reduce poverty
(c) Reduce inequality
(d) All of the above
Answer:
(c) Reduce inequality

Question 20.
Dis investment by government means:
(a) Selling of its fixed capital assets
(b) Selling of its buildings
(c) Selling of shares of public enterprises held by it
(d) All of the above
Answer:
(c) Selling of shares of public enterprises held by it

Question 21.
Repayment of loan is
(a) Capital expenditure
(b) Revenue receipts
(c) Capital receipts
(d) Revenue expenditure
Answer:
(a) Capital expenditure

Question 22.
is the year which begins on 1st April and ends on 31st March of the following year.
(a) Current year
(b) Fiscal year
(c) New year
(d) None of these
Answer:
(b) Fiscal year

Question 23.
Which objective of government budget increases equality in the society?
(a) Re-distribution of income and wealth
(b) Economic stabiity
(c) Allocation of resources
(d) Economic growth
Answer:
(a) Redistribution of income and wealth

Question 24.
Loans granted to state Government is an example of
(a) revenue receipts
(b) capital receipts
(c) revenue expenditure
(d) capital expenditure
Answer:
(d) Capital expenditure

Question 25.
High gives a warning to the government either to cut its expenditure or increase its tax
receipts.
(a) budget
(b) revenue deficit
(c) primary deficit
(d) fiscal deficit
Answer:
(b) revenue deficit

Question 26.
The government starts selling its securities to private sector. What is this process called ?
(a) Open market operation
(b) Disinvestment
(c) Monetary expansion
(d) None of these
Answer:
(b) Disinvestment

Question 27.
Which of the following measures of meeting deficit in a budget, leads to an increase in money supply in the economy:
(a) Disinvestment
(b) Loan from world Bank
(c) Deficit financing
(d) All of these
Answer:
(d) All of above measures will increase money supply in the economy.

II. Fill in the Blanks

1. Non paying users of public goods are known as ……………
Answer:
Free – Riders

2. Financial year runs from to …………. in India.
Answer:
1st April to 31st March

3. Taxes imposed on goods imported into and exported out of India are called …………
Answer:
Customs Duties

4. The Government may spend an amount equal to the revenue it collects. This is know as ……..
Answer:
Balanced Budget

5. Revenue dificit = Revenue expenditure ……………
Answer:
Revenue Receipts

6. Budget is an annual ………….. statement
Answer:
Financial

7. ……………… is the tax in which the burden cannot be shifted to others.
Answer:
Direct Tax

8. …………..is the name of tax which is imposed on the income of an individual.
Answer:
Income Tax

9. …………… is the tax which had replaced VAT.
Answer:
Goods and Service Tax

10. ………..is the difference between total receipts and total expenditure of the government.
Answer:
Rudget Deficit

11. Corporate tax is the example of ………… tax.
Answer:
Direct

12. ……………… is a financial statement of anticipated revenue and anticipated expenditure of the
government for the coming financial year.
Answer:
Budget

13. ………………. are those goods which are bought and sold between buyers and sellers like food, clothes, etc. through market mechanism.
Answer:
Private goods

14. Individual income tax, wealth tax, interest tax, corporation tax, professional tax etc., are the examples for …………..
Answer:
Direct tax.

15. ………….is a tax system in which the rate of tax increases as income increases.
Answer:
Progressive tax

16. FRBM stands for ……………
Answer:
Fiscal Responsibility and Budget Management.

17. The ……………..refers to the excess of government’s revenue expenditure over revenue receipts.
Answer:
Revenue deficit

18. …………….. is the difference between the government’s total expenditure and its total receipts
excluding borrowing.
Answer:
Fiscal deficit

19. …………….. refers to the excess of fiscal deficit over interest payments.
Answer:
Primary deficit

20. …………….. is a tax that causes relatively more burden on the lower income group and less on the higher income group, i.e. rate of tax falls with rise in income
Answer:
Regressive tax

21. …………….. is a tax ¡n which the rate of taxation remains constant with the increase or decrease in income
Answer:
Proportional tax

22. ………….are the receipts which either create a liability or lead to reduction in assets.
Answer:
Capital receipts

23. Recovery of loans and Borrowings are examples of …………..
Answer:
Capital receipts

24. …………..is the expenditure to be incurred during the year in accordance with the relevant Five Year Plan for the period.
Answer:
pIan expenditure

25. …………is the expenditure other than the expenditure related to the Five Year plan for the period.
Answer:
Non—pIan expenditure

III. Match the following:

A	B
1. Public Goods	a. Fiscal Deficit – Interest payments
2. Direct Tax	b. Revenue Expenditure > Revenue Receipts
3. Indirect Tax	c. Excludable in nature
4. Revenue Deficit	d. Street Lights
5. Primary Deficit	e. Income Tax
6. Private goods	f. GST

Answers:

1. d. Street Lights
2. e. Income Tax
3. f. GST
4. b. Revenue Expenditure > Revenue Receipts
5. a. Fiscal Deficit – Interest payments
6. c. Excludable in nature

III. Answer the following questions in a sentence/word.

Question 1.
What are public goods?
Answer:
The goods which have two important features namely, non-rivalry and non-excludable in nature. For example, Public Parks, Roads, Street lights etc.

Question 2.
Who are ‘free-riders’?
Answer:
Non paying users of public goods are known as ‘free-riders’.

Question 3.
What do you meant by public provision?
Answer:
Public provision means that they are financed through the budget and can be used without any direct payment.

Question 4.
Give the meaning of progressive Tax.
Answer:
A progressive tax is a tax system in which the rate of tax increases as income increases.

Question 5.
What are Revenue receipts?
Answer:
Revenue receipts are receipts of the government which are non-redeemable, that is, they cannot be reclaimed from the government. Example, Tax and non-tax revenues.

Question 6.
Write the meaning of capital receipts.
Answer:
All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. Example, borrowings (internal and external), borrowing from RBI, etc.

Question 7.
Give the meaning of Revenue expenditure.
Answer:
It is the expenditure incurred for purposes other than the creation of physical or financial assets of the government. Example, Interest payments, defence services, etc.

Question 8.
Give the meaning of Capital expenditure.
Answer:
It is the expenditure of the government which results in creation of physical or financial assets or reduction in financial liabilities. Example, buildings, machinery, etc.

Question 9.
Expand FRBMA.
Answer:
Fiscal Responsibility and Budget Management Act.

Question 10
What is primary deficit?
Answer:
It refers to the excess of fiscal deficit over interest payments.
Primary Deficit = Fiscal Deficit – Net interest liabilities. (Net liabilities consist of interest payments minus interest receipts by the government on net domestic lending).

2nd PUC Economics Government Budget and the Economy Two Marks Questions and Answers

IV. Answer the following Questions in 4 Sentences.

Question 1.
Write the difference between Public provision and Public production.
Answer:
Public provision means that they are financed through the budget and can be used without any direct payment.
When goods are produced directly by the government it is called public production.

Question 2.
Who are ‘Free riders’? Why are they called so?
Answer:
Some users do not pay for the public goods and it is difficult and sometimes impossible to collect fees for the public good. These non paying users are known as ‘free-riders’.

Question 3.
Distinguish between surplus budget and deficit budget.
Answer:

Surplus Budget

1. If the anticipated revenue of the government exceeds its anticipated expenditure in a year, then it is known as surplus budget.
2. Usually governments of developed countries plan for a surplus budget.

Deficit Budget:

1. If the anticipated expenditure of the government exceeds its anticipated revenue in a year, then it is known as deficit budget.
2. Usually governments of developing countries plan for a deficit budget.

Question 4.
Why public goods must be provided by the Government?
Answer:
These goods must be provided by the government because of the following reasons:

1. The benefits of public goods can be easily enjoyed by anyone without affecting the consumption of other individuals.
2. No individual can be excluded from using public goods as it is available to all.

Question 5.

Mention the non-tax revenues of the Central Government.
Answer:
Non-tax revenues of the central government are Interest receipts on account of loans by the central government, dividends and profits on investment made by the government, fees and other receipts for services rendered by the government.

Question 6.
Why the proportional income tax acts as automatic stabiliser?
Answer:
The proportional tax acts as an automatic stabilizer because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP.

2nd PUC Economics Government Budget and the Economy Four Marks Questions and Answers

V. Answer the following Questions in 12 Sentences.

Question 1.
Write the chart of the Government budget.
Answer:

Question 2.
Distinguish between Revenue expenditure and capital expenditure.
Answer:
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. For example, interest payments on debt incurred by the government, and grants given to state governments and other parties.
It is classified into plan expenditure and non-plan expenditure.
Plan revenue expenditure relates to central plans and central assistance for state and union territory plans.

Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items are interest payments, defence services, subsidies, salaries and pensions.
Capital Expenditure are the expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. For example, Expenditure on land acquisition of land, building, machinery, equipment, investment in shares, etc.
It is classified into Plan expenditure and non-plan expenditure.

Plan capital expenditure relates to central plans and central assistance for state and union territory plans.
Non-plan capital expenditure covers various general, social and economic services provided by the government.

Question 3.
Briefly explain the revenue deficit and fiscal deficit.
Answer:
Revenue deficit: The revenue deficit refers to the excess of government’s revenue expenditure ‘ over revenue receipts.
Revenue deficit = Revenue expenditure – revenue receipts.
The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a buildup of stock of debt and interest liabilities and force the government to cut expenditure. This would mean lower growth and adverse welfare implications.
Fiscal Deficit: It is the difference between the government’s total expenditure and its total receipts excluding borrowing.

Fiscal Deficit = Total Expenditure – (Revenue receipts + Non-debt creating capital receipts).
Non- debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sales of PSUs.
The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
Fiscal Deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
The Gross Fiscal Deficit is a key variable in judging the financial health of the public sector and the stability of the economy.

Question 4.
Does public debt impose a burden? Explain.
Answer:
Public debt refers to the borrowings of the government to meet budget deficits. Yes it impose a burden.
It is used as an effective instrument of fiscal policy to control inflation and deflation.
Public debt and budget deficit are inter-related when the government goes on borrowing, debts accumulates and burden of interest increases. Then the government will have to impose higher taxes on the people. This will reduce disposable income, consumption, savings and national income. Therefore, debt will become a burden on the future generation.

Question 5.
Write a short note on the Ricardian equivalence.
Answer:
David Ricardo, who first argued that is the face of high deficits, people saves more. It is called as ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure.

When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase body.

It has often been argued that ‘debt does not matter because we owe it to ourselves’. This is because although there is a transfer of resources between generations, purchasing power remains within the nation. However, any debt that is owed to foreigners involves a burden since we have to send goods abroad corresponding to the interest payments.

2nd PUC Economics Government Budget and the Economy Six Marks Questions and Answers

VI. Answer the following Questions in 20 Sentences.

Question 1.
Explain the classification of receipts.
Answer:
The receipts are classified into two:
(a) Revenue Receipts: Revenue receipts are receipts of the government which are non- redeemable, that is, they cannot be reclaimed from the government. Example, Tax and non-tax revenues.
Tax revenues, an important component divided into two namely direct taxes (personal income tax, corporation tax) and indirect taxes (excise duties, customs duties, and GST). Other taxes like wealth tax, gift taxes have never brought in large amount of revenue and thus have been referred to as ‘paper taxes’.
Non- tax revenue of the central; government mainly consists of interest receipts on account of loans by the central government, dividends and profits on investment made by the government, fees and other receipts for services rendered by the government.

(b) Capital Receipts: the government also receives money by way of loans or from the sale of its assets. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. Example, borrowings (internal and external), borrowing from RBI, etc.
When government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when government sells an asset, then it means that in future its earnings from that asset will disappear. Thus these receipts can be debt creating or non-debt creating.

Question 2.
Explain the classification of expenditure.
Answer:
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. For example, interest payments on debt incurred by the government, and grants given to state governments and other parties.
It is classified into plan expenditure and non-plan expenditure.
Plan revenue expenditure relates to central plans and central assistance for state and union territory plans.

Non-plan expenditure, the more important component of revenue expenditure, covers a vast range of general, economic and social services of the government. The main items are interest payments, defence services, subsidies, salaries and pensions.
Capital Expenditure are the expenditures of the government which result in creation of physical or financial assets or reduction in financial liabilities. For example, Expenditure on land acquisition of land, building, machinery, equipment, investment in shares, etc.

It is classified into Plan expenditure and non-plan expenditure.
Plan capital expenditure relates to central plans and central assistance for state and union territory plans.
Non-plan capital expenditure covers various general, social and economic services provided by the government.

Question 3.
The fiscal deficit gives borrowing requirements of the government’. Elucidate.
Answer:
Fiscal Deficit: It is the difference between the government’s total expenditure and its total receipts excluding borrowing.
The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
Fiscal Deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
Net borrowing at home includes that directly borrowed from the public through debt instruments [for example, the various small savings schemes] and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).

The Gross Fiscal Deficit is a key variable in judging the financial health of the public sector and the stability of the economy.
From the way gross fiscal deficit is measured as given below, it can be seen that revenue deficit is a part of fiscal deficit [Fiscal Deficit = Revenue Deficit + Capital Expenditure – non-debt creating capital receipts).
A large share of revenue deficit is fiscal deficit indicated that a large part of borrowing is being used to meet its consumption expenditure needs rather than investment.

Question 4.
Discuss the issue of deficit reduction.
Answer:
Deficit Reduction

• Government deficit can be reduced by an increase in taxes or reduction in expenditure.
• There has also been an attempt to raise receipts through the sale of shares in PSUs.
• Major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration.
• A recent study by the Planning Commission has estimated that to transfer ₹1 to the poor, government spends ₹3.65 in the form of subsidy, showing the cash transfers would lead to increase in welfare. The other way is to change the scope of the government by withdrawing from some of the areas where it operated before.
• Cutting back government programmes in vital areas like agriculture, education, health, poverty alleviation, etc. would adversely affect the economy.
• It must be noted that larger deficit do not always signify a more need of expanding fiscal policy. The same fiscal policies give rise to a large or small deficit, depending on the state of the economy.

Question 5.
Explain the changes in taxes with the help a diagram.
Answer:
We find that a cut is taxes increases disposable income (Y – TJ at each level of income. This
shifts the aggregate expenditure schedule upwards by a fraction c of the decrease in taxes. This can be shown with the help of diagram.

In the above diagram on OX axis we measure Income and on OY axis we measure AD/AS. It is very clear that when the tax increases, the disposable income reduces from OY1 to OY which leads to decrease in the level of AD. The AD curve shifts downwards and with the decrease in AD, the level of income also decreases as shown in the diagram.