CBSE Class 12 Economics Government Budget and the Economy Assignment

Important Questions for Class 12 Economics Government Budget and The Economy

POINTS TO REMEMBER
❑ Budget is a financial statement showing the expected receipt and expenditure of Govt. for the coming fiscal or financial year.

❑ Main objectives of budget are :
(i) Reallocation of resources. (ii) Redistribution of income and wealth (iii) Economic stability (iv) Management of public enterprises.

❑ There are two components of budget :
(a) Revenue budget (b) Capital budget
❑ Revenue Budget consists of revenue receipts of Govt. and expenditure met from such revenue.
❑ Capital budget consists of capital receipts and capital expenditure.

❑ Revenue Receipts :
(i) Neither creates liabilities for Govt.
(ii) Nor causes any reduction in assets.

❑ Capital Receipts :
(i) It creates liabilities or (ii) It reduces assets.

❑ Revenue Expenditure :
(i) Neither creates assets (ii) Nor reduces liabilities

❑ Capital Expenditure :
(i) It creates assets (ii) It reduces liabilities.
❑ Revenue Deficit : Total revenue expenditure > Total revenue receipts
❑ Revenue deficit when total revenue expenditure excess total revenue receipts.

❑ Implications of Revenue Deficit are :
(i) It leads to repayment burden in future without investment.
(ii) It shows wasteful expenditures of Govt. on administration.
(iii) It increase the burden of taxes.
❑ Fiscal Deficit : Total expenditures > Total Receipts excluding borrowing.
❑ Fiscal deficit : When total expenditure exceeds total receipts excluding borrowing.

❑ Implications of Fiscal Deficits are :
(i) It leads to inflationary pressure.
(ii) A country has to face debt trap.
(iii) It reduces future growth and development.

❑ Primary Deficit : Fiscal deficit – Interest payments.
❑ Primary Deficit : By deducting Interest payment from fiscal deficit we get primary deficit.
❑ Budgetary Deficit : Total Expenditure > Total Receipts.
❑ Budgetary Deficit : Total expenditure exceeds total receipts.

 

Question. The total indirect tax collected by the government is Rs500 crores while the total subsidy provided by the government on various programs costs Rs300 crores to the government. Identify the value of Net Indirect Tax of the economy.
(a) Rs800 crores
(b) (–) Rs200 crores
(c) Rs200 crores
(d) (–) Rs800 crores
Answer. C

Question. If in an economy the value of Net Indirect Taxes is Rs50 crores and the value of subsidies is Rs40 crores.Identify the value of Net Indirect Tax.
(a) Rs90 crores
(b) Rs80 crores
(c) Rs10 crores
(d) Rs50 crores
Answer. C

Question. What is the value of consumption of fixed capital if Net investment is equal to 500 crores and Gross investment is equal to 535 crores.
(a) Rs35 crores
(b) Rs1035 crores
(c) (–) Rs35 crores
(d) Rs60 crores
Answer. A

Question. Primary deficit in a government budget will be zero, when..................
(a) Revenue deficit is zero
(b) Net interest payments are zero
(c) Fiscal deficit is zero
(d) Fiscal deficit is equal to interest payment.
Answer. D

Question. When the rate of tax increases with the increase in income of the people, we call that tax as
(a) Proportional Tax
(b) Regressive Tax
(c) Budgetary Tax
(d) Progressive Tax
Answer. D

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

Question. Revenue expenditure is Rs40,000 crores, revenue receipts are Rs34,000 crores and borrowings are Rs5000 crores; what will be the fiscal deficit?
(a) Rs6000 crores
(b) Rs40,000 crores
(c) Rs11,000 crores
(d) Rs5000 crores
Answer. D

Question. Which of the following is NOT a non-tax source of revenue for the government?
(a) Interest received
(b) Fees
(c) Fines
(d) GST
Answer. D

Question. The difference between fiscal deficit and interest payments is known as:
(a) Primary deficit
(b) Revenue deficit
(c) Budget deficit
(d) Borrowing deficit
Answer. A

Question. Primary deficit equals: 
(a) Borrowings
(b) Interest payments
(c) Borrowings less interest payments
(d) Borrowings and interest payments both
Answer. C

Question. Which tax is recently (in July, 2017) introduced by the government with the objective “One nation, one tax and one market”?
(a) VAT
(b) Sales Tax
(c) Corporation Tax
(d) GST
Answer. D

Question. Direct tax is called direct because it is collected directly from: 
(a) The producers on goods produced
(b) The sellers on goods sold
(c) The buyers of goods
(d) The income earners
Answer. D

Question. Primary deficit in a government budget is:
(a) Revenvue expenditure – Revenvue receipts
(b) Total expenditure – Total receipts
(c) Revenvue dificit – Revenvue payments
(d) Fiscal deficit – Interest payments
Answer. D

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

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

Question. Fiscal deficit equals : 
(a) Interest Payments
(b) Borrowings
(c) Interest payments less borrowing
(d) Borrowings less interest payments
Answer. B

Question. Receipts which do not affect asset or liability status of the government
(a) capital receipts
(b) revenue receipts
(c) budgetary receipts
(d) none of these
Answer. B

Question. Example of a non-debt creating capital receipt
(a) borrowings
(b) investment
(c) recovery of loans
(d) none of these 
Answer. C

Question. Amount of fiscal deficit is equal to………..
(a) disinvestment
(b) borrowings
(c) recovery of loans
(d) none of these
Answer. B

Question. Which of the following is not a revenue receipt ?
(a) recovery of loans
(b) fees and fines
(c) collection of taxes
(d) foreign grants
Answer. A

Question. Which of the following deficits in government budget indicates the total borrowing requirements of the government:
(a) Revenue deficit
(b) Fiscal deficit
(c) Primary deficit
(d) None of these
Answer. B

Question. Borrowing is a capital receipt because:
(a) It reduces liability
(b) It creates an asset
(c) It creates a liability
(d) It neither reduces nor creates a liability
Answer. C

Question. Fiscal deficit is estimated as:
(a) Total Expenditure (revenue + capital) − Total Receipts
(b) Total Expenditure (revenue + Borrowings) − Total Receipts
(c) Total Expenditure (Total receipts + capital) – revenue
(d) Total Expenditure (Borrowings + capital) − Total Receipts
Answer. A

Question. Tools of ........................ policy are government expenditure, taxes, public borrowing and borrowing from Central Bank.
(a) fiscal
(b) monetary
(c) both (a) and (b)
(d) exim
Answer. A

Question. Demand for ............... goods has gone significantly down during covid period.
(a) non-essential
(b) essential
(c) both (a) and (b)
(d) None of these
Answer. A

Question. ....................... is a direct tax.
(a) Income tax
(b) Excise duty
(c) Sales tax
(d) Entertainment tax
Answer. A

Question. ................................ cannot be provided through the market mechanism.
(a) Private goods
(b) Public goods
(c) Luxury goods
(d) Necessary goods
Answer. B

Question. ............... investment includes replacement of existing assets whereas ............. investment does not.
(a) Gross, fixed
(b) Inventory, net
(c) Fixed, inventory
(d) Gross, net
Answer. D

Question. The government can reduce revenue deficit..................... .
(a) By reducing expenditure
(b) By increasing Taxes
(c) By increasing receipts from non-tax resources
(d) All of the above
Answer. D

Question. ................... is an example of direct tax.
(a) entertainment tax
(b) sales tax
(c) VAT
(d) income tax
Answer. D

Question. Disinvestment is a .................. .
(a) capital expenditure
(b) capital receipts
(c) revenue expenditure
(d) revenue receipts
Answer. B

Question. The policies useful to reduce inequalities of income are the .................. .
(a) monetary policies
(b) public distribution policies
(c) budgetary policies
(d) foreign policies
Answer. C

Question. The correct components of the union (central) budget of India are .................. .
(a) Revenue budget
(b) Capital budget
(c) Expenditure budget
(d) Both (a) and (b)
Answer. D

Question. Net indirect taxes = Indirect taxes − .................. .
(a) Subsidies
(b) Reserve
(c) Depreciation
(d) None of these
Answer. A

Question. Primary deficit in a government budget will be zero, when .................. . 
(a) Revenue deficit is zero
(b) Net interest payments are zero
(c) Net interest payments are zero
(d) Fiscal deficit is equal to interest payment.
Answer. D

Question. Identify the correct pair of statements from the following column I and column II.
Column I                Column II
A Borrowings    (i) Capital receipts
B Fiscal year     (ii) 1 Jan. 31 Dec
C Direct tax      (iii) Burden can be shifted
D GST              (iv) Government sale tax
Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. A

Question. Identify the correct pair of statements from the following column I and column II.
Column I                         Column II
A Defence                    (i) Wasteful expenditure
expenditure
B Public provision        (ii) They are financed
                                          through the budget and
                                          made available free of
                                         any direct payment.
C Service tax              (iii) Direct tax
D Subsidies                (iv) Reduces welfare
 Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. B

Question. Identify the correct pair from the column I and II.

Column I	Column II
Credit side of Current Account	Gift paid to foreigner
Debit side of Current Account	Export of merchandise
Credit side of Capital Account	Investment made in foreign
Debit side of Capital Account	Loan given to the foreign nation

 Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. D

Question. Identify the correct pair of statements from the following column I and column II. 

Column I	Column II
Progressive tax	Rate of tax increases with an increase in income.
VAT	Value at tax
Specific tax	It is not levied on a commodity.
Income tax	Capital receipts

Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. A

Question. Identify the correct pair from the column I and II. 

Column I	Column II
Capital account	Autonomous transactions
Current account	Visible and Invisible goods
Accomodating Items	Made for the purpose of profit.
Borrowing from Abroad	Cannot be recorded in BoP.

Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. B

Question. Identify the correct pair of statements from the following column I and column II. 

Column I	Column II
Land registration fees	Tax receipts
Escheat	No claimant of the property
Indian railways	Private enterprise
Income tax	Capital expenditure

Alternatives:
(a) A-i
(b) B-ii
(c) C-iii
(d) D-iv
Answer. A

Question. Match the following: 

Column I	Column II
Defence system	Market Borrowing
Food items	Corporate Borrowing
Loans taken by govt. from public	Public Goods
Loans taken by companies	Macroeconomics
General equilibrium	Private Goods

Options :
(a) A - (iii), B - (v), C - (i), D - (ii), E - (iv)
(b) A - (i), B - (ii), C - (iii), D - (iv), E - (v)
(c) A - (ii), B - (iii), C - (v), D - (iv), E - (i)
(d) A - (iv), B - (v), C - (iii), D - (ii), E - (i)
Answer. A

Question. Match the following:

Column I	Column II
Fines and penalties	Direct tax
Fiscal deficit – Interest payments	Neither creates an asset nor reduces liability
Progressive in nature	Primary deficit
Revenue receipts	Non-tax revenue

Options :
(a) A - (iv), B - (iii), C - (i), D - (ii)
(b) A - (i), B - (ii), C - (iii), D - (iv)
(c) A - (i), B - (iv), C - (ii), D - (iii)
(d) A - (ii), B - (iii), C - (i), D - (iv)
Answer. A

Question. During the situation of COVID, many economist have agrued that the government could take initiatives that could protect the economy from getting into recession as Indian economy from so long is suffering from the problem of low demand. On this the finance ministry has decided to take loans from the Central Bank to inject money in the economy.
You are advised to look into the government accounts book. You will record this transaction as………….
(a) capital receipt
(b) revenue receipt
(c) revenue expenditure
(d) capital expenditure
Answer. A

Question. Prime Minister Narendra Modi's government outlining measures worth more than 21 trillion rupees ($281 billion) to counter the economic and social fallout of the Covid-19 outbreak. A closer look at the numbers shows the bulk of the spending was directed toward the poor and the farmers, with crucial sectors such as coal, power, shipping and steel receiving less than a third of their annual budget allocation.
Allocation of resources in the budget in the six months to September 2020 is directed towards
(a) economic upliftment of the economy
(b) social upliftment of the economy
(c) the poor and the farmers
(d) all of these
Answer. D

Question. During the situation of COVID, many economist have agrued that the government could take initiatives that could protect the economy from getting into recession as Indian economy from so long is suffering from the problem of low demand. On this the finance ministry has decided to take loans from the Central Bank to inject money in the economy.
You are advised to look into the government accounts book. You will record this transaction as ................receipt.
(a) revenue
(b) capital
(c) purchase
(d) sales
Answer. B

VERY SHORT ANSWER TYPE QUESTIONS 

Question. Define Budget.
Answer: Budget is a financial statement showing the estimated receipts and estimated expenditure of the Govt. for coming fiscal year.

Question. What is meant by non-tax receipts?
Answer: All the revenue receipt of Govt. other than tax receipts.

Question. What are revenue receipts?
Answer: Revenue receipts are those receipts which neither creates liabilities for Govt. nor cause any reduction in assets.

Question. What are capital receipts?
Answer: Capital receipts are those receipts which either creates a liability or leads to reduction in assets.

Question. Give two examples of non-tax revenue receipts.
Answer: Interest, Fee. 

Question. What are the two sources of capital receipts?
Answer: Borrowings, Recovery of loans. 

Question. Define revenue deficit.
Answer: When total revenue expenditure exceeds total revenue receipts. 

Question. Define fiscal deficit.
Answer: When total expenditure exceeds total receipts excluding borrowing. 

Question. Why is repayment of loan a capital expenditure?
Answer: As it leads to reduction in liability. 

Question. Why is recovery of loan treated a capital receipt?
Answer: As it leads to reduction in assets. 

Question. What is a balanced budget.
Answer: Balanced budget is that when estimated receipts are equal to estimated expenditure.

Question. Define capital expenditure.
Answer: Capital expenditure is that which creates assets and which reduces liabilities. 

Question. In a Govt. Budget primary deficit is Rs. 25,000 Cr. and interest payments are Rs. 15,000 Cr. How much is the fiscal deficit?
Answer: Fiscal Deficit = Primary Deficit + Interest Payment
= 25,000 + 15,000
= 40,000 Crore.

Question. Define a Tax.
Answer: Tax is a legally compulsory payment imposed by Govt.

Question. What is Direct Tax
Answer: It refer the tax whose primary and final burdon borne by the person on whom it is imposed.

Question. Define Primary Deficity
Answer: It is the difference of fiscal deficit and interest paid.

H.O.T.S.

Question. What are Budget Receipts?
Answer: Estimated money receipt received by the Govt. from different sources in fiscal year are called budgetary receipts.

Question. In a Govt. Budget, revenue deficit is Rs. 8,00,000 Cr. and borrowings are Rs. 50,000 Cr. How much is the fiscal deficit?
Answer: Rs. 50,000 Crore.

Question. What is disinvestment?
Answer: Disinvestment refers to withdrawal of existing investment.

Question. What does zero primary deficit mean?
Answer: Zero primary deficit means that interest commitment on earlier loans have compelled the Govt. to borrow.

Question. What is government budget?
Answer: Government budget is an annual financial statement showing item wise estimated receipts and expenditure of the government in a financial year.

Question. Explain various objectives of government budget.
Answer: 1. To reallocate resources: One of the main objectives of government budget is to reallocate the resources in accordance with economic priority i.e. profit maximization and social priority i.e. public welfare. Government can influence the allocation of resources through tax concession or subsidies.
Eg., To encourage the investment in necessary goods, government can provide subsidies but to discourage production of harmful goods like cigarette or liquor, government imposes heavy taxes.
2. To redistribute income and wealth: Through budgetary policy, government also aims for redistribution of income and wealth. Government has the objective to reduce inequalities of the income and wealth between rich and poor people. So, government impose high taxes on rich people through progressive tax system and spends on the welfare of worker section of society to increase the living standard.
3. To maintain economic stability: Government also try to prevent business fluctuation of inflation or deflation and aims to maintain economic stability along with full employment. So, government may surplus budget in case of inflation and deficit budget in case of deflation in the economy.
4. To attain high economic growth rate: Economic growth rate of a nation i.e. increase in GDP depends upon rate of savings and investment. Thus, government ensure enough resource for investment in public sector. So, through budgetary policy, government encourage people to increased rate of savings.

Question. What is revenue deficit and what are its implication?
Answer: It refers to excess of revenue expenditure over revenue receipts of the government during a year.
                          Revenue Deficit=Revenue Expenditure-Revenue Receipts
Implications
1. Revenue deficit indicates that government is unable to meet its recurring nature expenditure proposed in the budget.
2. Revenue deficit measures dissaving of government which is financed through use of capital receipts i.e. either by borrowings or from sale of assets.
3. If government borrow to meet consumption expenditure, then it may lead to inflation in the economy.

 

Question. What do you mean by budgetary expenditure? What are its types?
                                              OR
Discuss the basis on which budgetary expenditure are classified into revenue and capital expenditure.
Answer: Budgetary Expenditure refers to estimated expenditure of the government to be incurred under the various heads in a financial year. It is also called public expenditure.
Budgetary expenditure is classified into following two parts: –
1. Revenue Expenditure: Those budgetary expenditure which neither create any assets nor cause reduction in the liability of the government, are called revenue expenditure. These are recurring nature expenditure.
Eg. Payment of interest on loan, salary to government employees, pension, subsidy, etc.
2. Capital expenditure: Those budgetary expenditure which either create any assets or cause reduction in the liability are called capital expenditure.
These are non-recurring nature expenditure.
Eg. Expenditure on capital projects like construction of school, mets, etc., repayment of loans, providing loans and advances, etc.

Question. What do you mean by primary deficit and its implications?
Answer: Primary deficit refers to fiscal deficit less interest payment on previous borrowings.
                 Primary Deficit=Fiscal Deficit-Interest payment on previous borrowings

Implications
1. Primary deficit measures that how much part of borrowings government will use to meet the expenditure other than interest payment on previous borrowings.
2. If primary deficit is zero, it means government needs to borrow only for interest payment on past borrowings.

Question. What are the types of budget?
Answer: 1. Surplus budget: When estimated budgetary receipts are more than estimated budgetary expenditure of the government in a year.
2. Deficit budget: When estimated budgetary receipts are less than estimated budgetary expenditure of the government in a year.
3. Balanced budget: When estimated budgetary receipts are equal to estimated budgetary expenditure of the government in a year.