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 Choose the correct option from given below
  • a)
    Non-tax revenues of the government are non-recurring in nature.
  • b)
    Borrowings from rest of the world are revenue receipts.
  • c)
    During inflationary gap, government prepares deficit budget.
  • d)
    Recovery of loans from rest of the world is revenue receipt.
Correct answer is option 'C'. Can you explain this answer?
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Choose the correct option from given belowa)Non-tax revenues of the go...
Deficit Budget during Inflationary Gap

In macroeconomics, an inflationary gap is a situation when the actual output exceeds the potential output of an economy. This situation leads to an increase in the general price level of goods and services, resulting in inflation.

During an inflationary gap, the government prepares a deficit budget to control the inflationary pressures in the economy. The following points explain why the government prepares a deficit budget during an inflationary gap.

1. Increase in Government Spending: During an inflationary gap, the government increases its spending to boost economic growth. This increase in government spending leads to an increase in the aggregate demand for goods and services, which further pushes up the prices.

2. Decrease in Taxation: To stimulate economic growth, the government also reduces taxes during an inflationary gap. This reduction in taxes increases the purchasing power of people, leading to an increase in demand for goods and services. This further fuels inflation.

3. Crowding-out Effect: To finance the increased government spending, the government borrows from the market, leading to a decrease in the availability of credit for the private sector. This leads to a crowding-out effect, where private investment is reduced, and the inflationary pressures in the economy continue to rise.

4. Deficit Budget: To control the inflationary pressures, the government prepares a deficit budget during an inflationary gap. A deficit budget implies that the government's expenditure exceeds its revenue. This leads to a decrease in the aggregate demand for goods and services, which helps to bring down the prices.

Conclusion

To conclude, during an inflationary gap, the government prepares a deficit budget to control the inflationary pressures in the economy. A deficit budget leads to a decrease in the aggregate demand for goods and services, which helps to bring down the prices.
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Choose the correct option from given belowa)Non-tax revenues of the go...
During inflationary gap there is excess demand in the economy. So, a deficit budget is prepared.
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The advice of the expert committee to review the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 requires attention, given Indias track record.Excessive and unsustainable borrowing by the government is obviously perverse as it entails a cost on future generations while crowding out private investment.In the past, fiscal irresponsibility has cost jobs, spiked inflation, put the currency in a tailspin and even brought the country to the brink of a default. The possibility of default may have resulted in the liberalisation of the economy in 1991, but the key trigger was irrational public spending on borrowed money in the late-1980s. Less than a decade later, with fiscal discipline faltering and the deficit shooting up to 10% of GDP, the FRBM law was enacted to limit the governments borrowing authority under Article 268 of the Constitution. But the target to limit the fiscal deficit to 3% of GDP (by 2009) was breached after the 2008 global financial crisis as a liberal stimulus reversed the gains in the fiscal space, creating fresh macro-level instability. The FRBM Acts deficit target is now only likely to be met next year.Such damage transmissions from the political economy to the real economy need to be checked forthwith. The committees proposal to maintain the 3% target till 2019-20 before aiming for further reduction is pragmatic, as the extraordinary and unanticipated domestic development of demonetisation happened during its tenure. Such an event, the committee has said, could trigger an escape clause from fixed fiscal targets in its proposed rule-based framework.Q. Based on the authors arguments in the passage above, which of the following would be most correct: The largesse towards voters in the political economy can lead to fiscal imprudence which affects the fiscal deficit and the FRBM targets. Intergenerational parity and private investments in the country are negatively affected by excessive government borrowings.Select the correct answer using the code given below

Choose the correct option from given belowa)Non-tax revenues of the government are non-recurring in nature.b)Borrowings from rest of the world are revenue receipts.c)During inflationary gap, government prepares deficit budget.d)Recovery of loans from rest of the world is revenue receipt.Correct answer is option 'C'. Can you explain this answer?
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