Extra Questions - Government Budget And The Economy Notes | Study Crash Course of Macro Economics -Class 12 - Commerce

Commerce: Extra Questions - Government Budget And The Economy Notes | Study Crash Course of Macro Economics -Class 12 - Commerce

The document Extra Questions - Government Budget And The Economy Notes | Study Crash Course of Macro Economics -Class 12 - Commerce is a part of the Commerce Course Crash Course of Macro Economics -Class 12.
All you need of Commerce at this link: Commerce

EXTRA  Question’s

(Q1) If you were to be appointed as Finance Minister of India, which of direct taxes or Indirect taxes would you prefer and why ?

Ans: Both direct and indirect taxes would be fully utilized as they are not competitive but complementary to each other.  Being source of government income, both are needed to achieve the main objectives of economy such as 

(a) to raise resources for the government 

(b) to raise rate of investment through curtailment of consumption and 

(c) to raise the incremental saving ratio.

Value  :: Analytical.

(Q2) It deficit financing (printing of new currency) always beneficial ?  Comment 

Ans: Deficit financing is beneficial if it promotes economic growth by creating new infrastructure and increases productive capacity of the economy.  But there is always fear of excess money in the economy than what is required leading to inflationary pressure.  So, it is not always beneficial. Value  :: Critical thinking.

(Q3) How can surplus budget be used during inflation ?

Ans: Surplus budget refers to a budget where estimated total receipts are more than estimated total expenditure.  In case of surplus budget, government takes more money from the economy than it injects into it.  It results a fall in aggregate demand and price level in the economy and help to combat inflationary situations.

(Q4) ‘ A persistent slow-down of an economy could lead to revenue deficit ’ Comment.

Ans: Economic recession is a situation when low AD leads to low investment and therefore low growth rate of GDP.  When growth rate of GDP falls, tax revenue of the government (through direct as well as indirect taxation is bound to remain low , implying slowdown of revenue receipts of the government during recession.

(Q5)“ It is no part of the government’s duty to finance the ailing PSUs ”.  Comment.

Ans:  To some extent I would agree with the above statement.  However, if it is in the larger interest of the society /employees. If it is of national importance (for example, Air India) the government should take possible steps to bail out such PSUs.

(Q6) ‘ A cut in subsidies puts the government in a dilemma ”. Comment.

Ans: Yes, because if the government reduces subsidies it will affect the poor class , the farmers i.e., the common man. But if it does not do so, the rich class also benefits and puts enormous strain on the limited government resources.

(Q7)  ‘ Direct taxes have their adverse effect on the will to work and save ’ Explain.

Ans: High rates of income tax and other direct taxes may discourage people form working hard to earn more income because a large part of the income may be taken away by the government.

(Q8) Does public debt impose a burden?  Explain.

Ans: Public debt can impose a burden in the following cases:

(a) When govt.has imposed new taxes or raised the existing tax rates to redeem the debt ;

(b) When debt is to be redeemed through printing of new currency.  In such case, it would cause inflationary trends in the economy ;

(c) When public debt is taken for was purposes or debt is used in an unplanned manner. 

Value  :  Problem solving

(Q9) Dr Raghuram Rajan, the governor of RBI in a speech in July 2015 warned that the world was slipping into recession.  The events in Greece justified what he said.  The ratio of government debt-to-GDP was very high in case of Greece.

(a) What is your opinion led to such an event as in Greece?

(b) Explain the chain effect.

(c) What is the remedy for the above situation?  What economic value is highlighted here.

Ans: (a) High fiscal deficit was the root cause of the fall out in Greece-but could be true for other countries as well.

(b) The chain effects are as follows : More borrowings   Higher interest rates and more interest   Lesser amount with the government to be spent on development projects   Low income  Further borrowing/eventual debt-trap
(c)  The remedy is to contain/limit the fiscal deficit to a manageable limit (say 3% to 5% G.D.P. ) The economic value highlighted here is fiscal discipline.

(Q10)  The Government of India has implemented DBT (Direct Benefit Transfer scheme), wherein subsidy on LPG is directly transferred to the bank a/c of the consumer.  It is also asking rich people to give up subsidy altogether.

(a) What in your opinion is the idea behind the above action of the government?

(b) Write two economic values highlighted here.

Ans: (a)  The government wants the people to realize the actual benefit that the people get by way of subsidy. It also wants to eliminate fake consumers. If rich people give up subsidy voluntarily, it will help to reduce government’s burden of subsidy and also instill a sense of sharing among those who give up subsidy.

(b) Values:(1) Awareness of the benefits that the government is concerned for us.

(2) Concern for others.

(Q11) What is fiscal discipline ?  What happens when fiscal discipline is not maintained in the economy ?

Ans: Fiscal discipline means ideal balance between revenue and expenditure of the government.  It emphasises on the check on unnecessary government expenditure.  When there is fiscal indiscipline in an economy, there will be greater flow of money supply as compared to flow of goods in the economy.  It will, thus, plus the economy into a state of inflation.

(Q12) What does a low primary deficit indicate ?

Ans: It implies that the government is borrowing largely to make interest payments on previous loans.

(Q13) Which of the two sources – borrowings or deficit financing considered better to meat fiscal deficit ?  Give reason.

Ans: Borrowings are considered a better source as they do not increase the money supply , which is regarded as the main cause of inflation.  On the other hand, deficit financing may lead to inflationary trends in the economy due to increase in money supply.

(Q14) Explain the relation between government deficit and government debt.

Ans: Government deficit and the government debt are closely related.  The government deficit is flow concept while debt is a stock concept. Government deficit adds to the stock of debt.  If the government continues to borrow year after year, there is an accumulation of debt.  It implies that government has to pay more and more by way of interest.  These interest payments themselves contribute to the debt.  Thus , deficit is the cause as well as effect of debt.

(Q15) ‘ Direct taxes are inflationary in nature ’.  Explain.

Ans: The imposition of indirect taxes on goods and services increases their prices.

(Q16)  For whom are the MNCs (Multinational Corporations) producing in India and why ?
Ans: Production of MNCs in India is driven by the profit motive.  Accordingly, these corporations are producing goods for the relatively richer section of the society.  As a result, the gulf between the quality of life of the rich and the poor is widening.

(Q17) “ Fall in crude prices: a savior for finance minister ”.  Give two arguments in support.

Ans: (1) Fall in crude prices will reduce the cost of production of petroleum products and thus prices of the final products.  This will promote economic growth.

(2) Subsidy burden on budget will get reduced.

(Q18) “ A new headache for Government: Fall in crude prices ” Give two arguments in support.

Ans: (1) Government revenue by way of import duty will fall.

(2) Income of OPEC countries will fall.  They are big importers of Indian goods. Indian exporters and manufacturers will suffer from a slump in these countries

(Q19) “ Government finds way to plug fiscal deficit: Resorts to heavy cut in social expenditure ”  Is it desirable?  Give reasons.

Ans: This is a regressive and short sighted move.

(1) The government should improve the tax collection machinery so that it can mop up more revenue without raising the tax rate.

(2) Cut in social expenditure means neglect of human resources.  Human resource development will suffer. This will adversely affect long-term growth of the economy.

(Q20) It is said that fiscal deficit is a reflection of fiscal indiscipline.  How ?

Ans: Fiscal deficit is a reflection of fiscal indiscipline.  It is particularly true when fiscal deficit is incurred on account of non-development expenditure (like expenditure on freebies to garner votes during elections).  Such expenditures only contribute to inflationary spiral in the country , leading to economic instability.

(Q21) “ Government committed to cut fiscal deficit  ”

(a) Is this stubborn attitude of the government right ?  (b) What the government intends to do ?

Ans: Although growing fiscal deficit is definitely not acceptable, it is not desirable to cut it by any means.  It may adversely affect growth by causing a liquidity crisis.

(a) A cut in fiscal deficit is desirable if the government streamlines its tax administration.  This should result in more tax revenue.

(b) But if a major cut is made either in the social sector expenditure or capital expenditure , it will adversely affect long-term interests.

(Q22) There has been a consistent rise in the price of onions and potatoes.  How can the govt attain its objective of social welfare by lowering the price of these essential vegetables?

Ans: The government can through its fiscal tools of taxation and subsidies bring about fair distribution of these essential items by rationing.  To further check their artificial scarcity (hoarding and black marketing), it can also use its instrument of ‘Moral suasion’, so as to ensure social justice/welfare.

(Q23) If government spending leads to multiple times increase in GDP, why should fiscal deficit be curbed ?  , 0r 

(Q) ‘Excessive fiscal deficit can prove inflationary.’ Explain the statement.

Ans: Government spending leads to multiple times increase in GDP only when there is excess capacity in the economy or when planned output is low owing to lack of aggregate demand (AD).  But, in situations when excess capacity does not exist (or when AD is not deficient), government spending would only contribute to inflationary spiral in the economy.  In such situations (when inflation needs to be curbed), the government must curb fiscal deficit.

(Q24) A rise in fiscal deficit when the government revises salary structure of its employees leads to a rise in primary deficit as well. Comment.

Ans: Revision of salary structure enhances revenue expenditure of the government. It would mean a rise in fiscal deficit of the government . If interest payments are constant , a rise in fiscal deficit would amount to a rise in primary deficit as well.

(Q25) How has the decline in the price of crude oil in the international market helped the government to reduce fiscal deficit ?

Ans: India imports crude oil to meet the bulk of domestic demand for petrol and diesel. A substantial fall in crude prices in the internation market has prompted the government to increase excise duty on petrol and diesel without passing the benefit of it to the consumers. It has raised tax revenue of the government. Accordingly, fiscal deficit has reduced.

(Q26) Do you agree with the view that demonetisation of 500 and 1,000 rupee notes would help the government in lowering its fiscal deficit ?

Ans: It is true that demonetisation would help the government to lower its fiscal deficit. Because of demonetisation , shadow economy (black money economy) will shrink. Unaccounted output would now be accounted as a part of GDP. This would increase revenue receipts of the government by way of direct and indirect taxation. Accordingly, fiscal deficit must reduce. 

(Q27) Subsidy on diesel oil is a wasteful expenditure by the government. Write one point in support of this observation and one against it.

Ans: It is a wasteful expenditure because the benefit of subsidy (on diesel oil) is unduly reaped by a richer section of the society who get cheaper oil to run their luxury cars.

 It is not a wasteful expenditure because, farmers need to be given diesel at the low price. So that, the cost of farming does not rise and farming remains a profitable occupation.

(Q28) Finance Minister of India - Mr. Arun Jaitley is repeatedly confirming to maintain 3.5% of GDP as fiscal deficit in the year 2016-17. How this claim has been made possible ?

Ans: Government of India is taking some solid steps to maintain 3.5% of GDP as a maximum limit of fiscal deficit so as contain inflationary pressure in the country. He is taking following steps for maintaining such a fiscal discipline :

(a) Spending prudently for government projects.

(b) Collecting funds from disinvestment of shares of public sector undertakings. 

(c)  Collection of funds from the Sale of spectrum to Mobile Data & internet data selling companies like Bharti Airtel, Reliance Jio, Idea etc.

(Q29) The government has recently raised the prices of petrol and excise duty on luxury goods.  Is it fair or unfair ?

Ans: Fair .  Those who can afford to purchase luxury cars should also be in a position to pay more to the government.

(Q30) “ Through its budget proposals, Government of India intends to start its economic activities in some remote backward areas of the country.”  Identify the objectives the government intends to achieve on the basis of the given information.

“ Through its budget proposals, government of India aims to bring about economic stability by controlling fluctuations mainly in price.” Explain two ways in which Government can control fluctuations.

Ans: Proper allocation of resources in the economy.

(Q31) In a given year’s budget, the Finance Minister proposed to raise the import duty on gold and petrol.  He also proposed to raise the property tax on the property of very rich in the economy.  Identify and explain the type of taxes proposed by the finance Minister.  Is he just aiming at raising revenue or does he have any other objective in formulating this budget?

Ans: In the given budget, the Finance Minister proposed both direct and indirect taxes

(a) Import duty levied on gold and petrol , is an indirect tax , as the liability to pay and incidence of this tax falls on different person.

(b)  Property tax , is a direct tax as the liability to pay and incidence of the tax lies on the same person

(Q32) India’s total revenue expenditure is Rs. 1000 crore and total revenue receipts are     Rs. 800 crore. What is this situation called in an economy ? 
Ans: Revenue deficit

(Q33) All non-plan expenditures are non-developmental. Do you agree ?             

Ans: No. Non-plan expenditure is a generic term. It includes both developmental and non -developmental expenditure. 

(Q34)  In the government’s budget for 2012-13, a hike in the value added tax on food and entertainment tax on cinema was proposed.  It was held by the Finance Minister that the revenue thus raised would be used for the development of remote and backward regions in the country.

(a) Identify and explain the type of taxes proposed above.

(b) Which objectives of the budget are being attained through the above proposals.

Ans: True ,  (a) (i) Value-added tax , It is an indirect tax levied on food , as the liability to pay and incidence of this tax lies on different person.

(ii) Entertainment tax.  It is an indirect tax.  For example while buying the cinema tickets we also pay for this tax.  It is levied on the cinema, but in turn passed over to the cinema or movie goers.

(b) The objective is to bring about better allocation or re-allocation of the available resources for the development of the backward and remote regions in the country.  Also the objective to reduce the gap between the rich and poor is being attained , as the above taxes help in raising revenue to be utilized for a larger benefit.

(Q35) In the union budget for 2012-12, government had proposed to lower the existing       taxes-custom duty and property tax.  At the same time, it proposed to spend more funds on providing free services to the poor like education, medical treatment, mid-day meals at schools etc.  identify and explain the type of taxes whose burden was being reduced.

Ans: The taxes whose burden was being reduced are :

(a) Custom duty :: It is an indirect tax levied on the import and export of commodities.  It is an indirect tax as the liability to pay and incidence f the tax lies on different persons.

(b) Property tax  :: It is a direct tax as the liability to pay and incidence of tax lies on the same person.

(Q36) Budgetary deficit creates disequilibrium in every economy. However, developing     countries like India are forced to depend on it. Why ?

Ans: In developing countries like India, receipts of the government from tax and non-tax revenue are not sufficient. On the other hand, government has to incur heavy public expenditure for the development of economy. So, government is compelled to depend on the budgetary deficit.

(Q37) From the point of view of economic growth in a developing economy what will you prefer : surplus budget or a deficit budget ?

(Q38) Is balanced budget good for India ?

(Q39) Define FD ? If fiscal deficit is high , why does the govt , tries to reduce it ?  

(Q40) What is meant by domestic  or internal  borrowing ? Mention its three sources ?

(Q41) How is disinvestment by the government helpful in capital receipts ?

(Q42) The Fiscal deficit gives the borrowing requirement of govt. “ Elucidate

Q43) Is fiscal deficit a part of Budgetary deficit ? Is fiscal deficit necessary inflationary 

(Q44) Prove that fiscal deficit is a broader concept as compared to revenue deficit.  Hence, verify that given statement “A country can face the problem of fiscal deficit even if there is a surplus in revenue budget of the government.”

(Q45) Differentiate between balanced and unbalanced budget. Is balanced budget an         achievement of govt.

(Q46) State two items each of
(a) debt creating capital receipt and 

(b) non-debt creating capital receipts

(Q47) India is a highly taxed economy . Some economists have suggested that if the govt.  decides to cut tax rates , the government would actually receive more tax revenue . Explain ?

(Q48) For the following objectives identify the type of tax which govt. can use

(a) To place the burden of tax on seller not buyer

(b) To protect domestic industries from foreign competition 

(c) To raise revenue without affecting the number of hours employees work

(d) To redistribute incomes from rich to poor. 

(Q49) If government increases the slab of the direct tax (income tax) being paid by the top bracketed people (income wise), explain which objective of the budget, government is fulfilling and why ?

(Q50) Government raises its expenditure on producing public goods / public utilites . Which economic value does it reflect? Explain. Also distinguish between proceeds of disinvestment and borrowings by government to finance its fiscal deficit.                                

(Q51) Bharat Nirman is the plan of UPA government to create basic infrastructure. It comprises of projects on irrigation, roads, housing, water supply and telecommunication connectivity. Above stated example is a government expenditure or government revenue. Elaborate it.

(Q52) The government through its budget proposes to remove the subsidy provided on LPG cylinder for people who are above the poverty line.  Which objective of the budget it intends to achieve from this?  Explain.

(Q53) Why does inefficiency in allocation of resources arises in the market ?  What steps should be taken by the Government for removing these inefficiencies through its budgetary policy ?

The document Extra Questions - Government Budget And The Economy Notes | Study Crash Course of Macro Economics -Class 12 - Commerce is a part of the Commerce Course Crash Course of Macro Economics -Class 12.
All you need of Commerce at this link: Commerce

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