Worksheet Solutions: Government Budget and the Economy - 3 | Economics Class 12 - Commerce PDF Download

Fill in the Blanks

Q1: Revenue receipts create _______ or decrease in assets.
Ans: No liability.
Revenue receipts create no liability or decrease in assets because they represent income earned by the government.

Q2: _______ tax is borne by the end consumer.
Ans: Indirect tax.
Indirect tax is borne by the end consumer as it is passed on by the intermediary before reaching the consumer.

Q3: Fiscal deficit excludes _______ from total receipts.
Ans: Borrowings.
Fiscal deficit excludes borrowings from total receipts when calculating the overall financial gap.

Q4: Revenue deficit indicates government overspending on _______.
Ans: Administration.
Revenue deficit indicates government overspending on administration and day-to-day expenses.

Q5: Primary deficit helps in understanding borrowings used for purposes other than _______.
Ans: Interest payments.
Primary deficit helps in understanding borrowings used for purposes other than interest payments, revealing the extent of deficit-related commitments.

Q6: _______ policy is used to influence the country's economy through expenditure and tax rates.
Ans: Fiscal.
Fiscal policy is used to influence the country's economy through expenditure and tax rates, aiming to achieve economic stability.

Q7: Revenue deficit sends a warning signal to the government to _______ spending or boost revenue.
Ans: Cut.
Revenue deficit sends a warning signal to the government to cut spending or boost revenue to maintain fiscal discipline.

Q8: Capital expenditure is used for acquiring _______ assets.
Ans: Fixed.
Capital expenditure is used for acquiring fixed assets like infrastructure and machinery.

Q9: A significant revenue shortfall indicates budgetary _______.
Ans: Indiscipline.
A significant revenue shortfall indicates budgetary indiscipline, suggesting that the government may not be managing its finances effectively.

Q10: Government borrows money to cover deficits through _______ issuance.
Ans: Bond.
Government borrows money to cover deficits through bond issuance, which involves selling bonds to investors to raise funds.

Assertion and Reason Based

Q1: Assertion: Fiscal deficit may lead to inflationary pressures.
Reason: Increased government spending without adequate revenue generation can lead to an increase in the money supply, causing inflation.
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
 Fiscal deficit refers to the excess of total expenditure over total revenue of the government. If the government resorts to borrowing to meet this deficit, it increases the money supply in the economy, potentially leading to inflation. The reason provided correctly explains how increased government spending without adequate revenue generation can lead to an increase in the money supply, causing inflation.

Q2: Assertion: Revenue deficit indicates the government is dissaving.
Reason: Revenue deficit signifies the government is using savings from other sectors of the economy to fund its current expenditure.
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
A revenue deficit occurs when the government's total revenue expenditure exceeds its total revenue receipts, indicating that the government is dissaving, i.e., using savings from other sectors of the economy to fund its current expenditure. The reason provided correctly explains how a revenue deficit signifies the government is using savings from other sectors of the economy to fund its current expenditure.

Q3: Assertion: Capital budget includes transactions from the Public Account.
Reason: Public Account deals with transactions that do not have a direct effect on the Consolidated Fund of India.
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
The Capital budget includes transactions from the Public Account, which consists of those transactions that do not have a direct effect on the Consolidated Fund of India. The reason correctly explains that the Public Account deals with transactions that do not directly impact the Consolidated Fund of India.

Q4: Assertion: Fiscal policy influences inflation, employment, and currency value.
Reason: Fiscal policy involves changes in government expenditure and tax rates to impact the economy.
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (a)
Fiscal policy involves changes in government expenditure and tax rates to influence the economy. By adjusting these variables, fiscal policy can impact inflation, employment, and currency value. The reason provided accurately explains that fiscal policy involves changes in government expenditure and tax rates to impact the economy.

Q5: Assertion: Capital expenditures are one-time investments made by the government.
Reason: Capital expenditures include costs incurred for daily operations.
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true, but Reason is not the correct explanation of Assertion.
(c) Assertion is true, but Reason is false.
(d) Both Assertion and Reason are false.
Ans: (c)
Capital expenditures are indeed one-time investments made by the government, typically used to acquire fixed assets like machinery and infrastructure. On the other hand, costs incurred for daily operations fall under revenue expenditures, not capital expenditures. Therefore, the reason provided is incorrect, making option (c) the correct choice.

Very Short Answers Type Questions

Q1: Explain revenue deficit in one sentence.
Ans: Revenue deficit is the difference between total revenue expenditure and total revenue receipts, indicating overspending on current expenses.

Q2: What is the primary deficit?
Ans: Primary deficit is derived by subtracting interest payments from the fiscal deficit, indicating borrowings used for purposes other than paying interest.

Q3: Name one example of indirect tax.
Ans: GST (Goods and Services Tax).

Q4: Define fiscal deficit.
Ans: Fiscal deficit occurs when total government expenditures exceed total receipts excluding borrowings.

Q5: What is the purpose of capital budget?
Ans: Capital budget is used for one-time investments in sectors like infrastructure and machinery, creating long-term assets.

Q6: Explain fiscal policy in a sentence.
Ans: Fiscal policy involves government changes in planned expenditure and tax rates to influence the economy's performance.

Q7: How does revenue deficit affect the economy?
Ans: Revenue deficit indicates overspending, which can lead to budgetary indiscipline and reliance on other sectors' savings.

Q8: Name one source of capital receipts for the government.
Ans: Market borrowings.

Q9: What does the fiscal deficit exclude from total receipts?
Ans: Borrowings.

Q10: Define debt.
Ans: Debt is the money borrowed by one entity from another, used by governments to cover deficits and fund operations.

Short Answer Type Questions

Q1: Explain the implications of a significant revenue deficit on the government.
Ans: A significant revenue deficit means the government is spending more than it's earning through taxes and other sources. Implications include increased borrowing, higher interest payments, reduced investments in infrastructure and social programs, and potential inflation due to increased money supply.

Q2: Describe the components of the revenue budget.
Ans: The components of the revenue budget typically include tax revenues, non-tax revenues, grants-in-aid from the central government, and other sources of income.

Q3: What are the measures to correct a budgetary deficit?
Ans: Measures to correct a budgetary deficit can include reducing government spending, increasing taxes, improving tax collection efficiency, selling assets, and implementing economic reforms to stimulate revenue generation.

Q4: Explain the concept of fiscal deficit and its implications.
Ans: Fiscal deficit is the difference between total government spending and total revenue. It can lead to increased borrowing and interest payments, potentially crowding out private investment and contributing to inflation.

Q5: Differentiate between revenue deficit and fiscal deficit.
Ans: Revenue deficit arises from the gap between revenue expenditure and revenue receipts, while fiscal deficit encompasses all government expenditures and revenues, including both revenue and capital items.

Q6: What is the role of fiscal policy in economic stability?
Ans: Fiscal policy, through changes in government spending and taxation, plays a crucial role in stabilizing the economy. It can be used to stimulate growth during recessions or cool an overheating economy by adjusting spending and taxes.

Q7: Explain the implication of primary deficit.
Ans: A primary deficit is the fiscal deficit minus interest payments. It indicates how much of the deficit is used to finance current expenditures. A higher primary deficit may hinder investment in development projects.

Q8: Describe the components of the capital budget.
Ans: The components of the capital budget include capital expenditure, which is used for creating assets like infrastructure, machinery, and long-term investments, and capital receipts, which come from the sale of assets or borrowings for capital projects.

Long Answer Type Questions

Q1: Explain the concept of budget deficit and its implications on the economy.
Ans: Budget deficit refers to a situation when a government's total spending exceeds its total revenue in a given period. In other words, it occurs when the government spends more money than it collects through taxes and other sources of income.

The implications of a budget deficit on the economy can be significant. Here are a few key implications:

• Increased government borrowing: To cover the deficit, the government needs to borrow money by issuing bonds or other debt instruments. This increases the overall level of government debt.
• Higher interest payments: As the government borrows more, it needs to pay interest on the borrowed amount. This leads to increased interest payments, which can put pressure on the government's finances and limit its ability to invest in other areas.
• Crowding out private investment: When the government borrows extensively, it competes with the private sector for available funds. This can lead to higher interest rates, making it more expensive for businesses and individuals to borrow money for investment or consumption purposes.
• Inflationary pressure: If the deficit is financed by printing more money, it can lead to inflation. Increased money supply without a corresponding increase in goods and services can drive up prices.
• Reduced confidence: Persistent budget deficits can erode investor and consumer confidence in the government's ability to manage its finances. This can result in a loss of faith in the economy, leading to reduced investment, slower economic growth, and even financial crises.

It is important for governments to manage budget deficits effectively to maintain economic stability and sustainability. This can involve measures such as reducing spending, increasing taxes, improving tax collection efficiency, and promoting economic growth to boost revenue.

Q2: Discuss the significance of fiscal policy in shaping an economy.
Ans: Fiscal policy refers to the use of government spending and taxation to influence the overall health and direction of an economy. It plays a crucial role in shaping the economy in several ways:

• Economic stabilization: Fiscal policy can be used to stabilize the economy during periods of recession or inflation. During a recession, the government can increase spending or reduce taxes to stimulate aggregate demand and boost economic activity. Conversely, during periods of high inflation, the government can decrease spending or increase taxes to curb excessive demand and control inflationary pressures.
• Income redistribution: Fiscal policy can be used to promote income redistribution and reduce income inequality. Governments can achieve this by implementing progressive tax systems, where higher-income individuals pay a greater proportion of their income in taxes. The revenue generated can then be used to fund social welfare programs, education, healthcare, and other initiatives aimed at improving the standard of living for lower-income segments of society.
• Public investment: Fiscal policy enables governments to allocate resources towards public investment projects, such as infrastructure development, transportation networks, education, and healthcare systems. These investments can have long-term benefits by enhancing productivity, promoting economic growth, and improving the overall quality of life for citizens.
• Counter-cyclical measures: By adjusting fiscal policy measures, governments can counteract the natural fluctuations of the business cycle. During economic booms, when inflationary pressures rise, fiscal policy can be used to reduce government spending or increase taxes to prevent overheating. Conversely, during economic downturns, fiscal policy can be used to increase government spending or reduce taxes to stimulate economic activity and reduce unemployment.

Overall, fiscal policy is a powerful tool that governments can use to shape and steer their economies towards desired outcomes. It requires careful planning, monitoring, and coordination to ensure its effectiveness in achieving economic stability, growth, and social welfare.

Q3: Explain the role of debt in government financing and its impact on the economy.
Ans: Debt plays a crucial role in government financing, as governments often borrow money to fund their expenditure when tax revenues and other sources of income fall short. Here are the key roles of debt in government financing and its impact on the economy:

• Financing government spending: When a government faces a budget deficit, it needs to borrow to cover the shortfall. Government debt allows the government to finance its spending on various sectors such as infrastructure, defense, healthcare, education, and social welfare programs.
• Investment in long-term projects: Debt allows governments to invest in long-term projects such as infrastructure development, which can lead to improved productivity, economic growth, and increased employment opportunities. By borrowing, governments can spread the cost of these projects over time and ensure their completion.
• Stimulating economic activity: In times of economic downturn, governments can use debt-financed stimulus packages to inject funds into the economy. These funds can be used to support industries, create jobs, and boost consumer spending, thereby stimulating economic activity.
• Impact on interest rates: The level of government debt can have an impact on interest rates. When governments borrow extensively, it increases the demand for funds, leading to higher interest rates. Higher interest rates can discourage private investment and consumption, thereby potentially slowing down economic growth.
• Debt sustainability: The accumulation of excessive government debt can raise concerns about debt sustainability. If a government's debt becomes too large, it may face challenges in servicing its debt obligations, leading to increased borrowing costs, credit rating downgrades, and loss of investor confidence. This can have negative consequences on the economy, including reduced access to credit, higher borrowing costs for businesses and individuals, and potential financial crises.

It is essential for governments to manage their debt levels carefully, ensuring that borrowing is sustainable and used for productive purposes. Effective debt management strategies, such as maintaining fiscal discipline, implementing structural reforms, and monitoring debt-to-GDP ratios, are crucial for maintaining economic stability and minimizing the negative impact of debt on the economy.

Q4: Describe the measures that can be taken to correct different deficits in the government budget.
Ans: Correcting deficits in the government budget requires a combination of measures that can help reduce spending, increase revenue, and improve overall fiscal discipline. Here are some measures that can be taken to address different deficits in the government budget:

• Cutting unnecessary spending: Governments can identify and eliminate unnecessary or inefficient expenditure. This can involve reviewing and reassessing public programs, reducing bureaucracy, eliminating duplication, and improving the efficiency of service delivery.
• Increasing taxes: Governments can consider increasing tax rates or introducing new taxes to generate additional revenue. This can include measures such as raising income tax rates for higher-income individuals, implementing consumption taxes like sales tax or value-added tax (VAT), or increasing corporate tax rates.
• Improving tax collection: Governments can enhance tax collection measures to reduce tax evasion and increase revenue. This can involve strengthening tax administration, implementing stricter enforcement measures, improving tax compliance, and reducing loopholes in the tax system.
• Promoting economic growth: Economic growth can contribute to increased tax revenue and reduced deficits. Governments can implement policies that promote investment, entrepreneurship, innovation, and trade to stimulate economic activity and generate higher tax revenues.
• Controlling public debt: Governments can implement measures to manage and control public debt. This can involve setting debt targets, monitoring debt-to-GDP ratios, and implementing debt reduction plans. Governments can also consider refinancing existing debt to reduce interest payments.
• Implementing structural reforms: Structural reforms can help improve the overall efficiency and productivity of the economy, leading to higher revenue and reduced deficits. These reforms can include measures such as deregulation, privatization, labor market reforms, and improvements in the business environment.
• Engaging in international borrowing or assistance: In some cases, governments may seek international borrowing or financial assistance from international organizations to address deficits. However, this should be done cautiously to ensure debt sustainability and minimize dependency on external sources.

It is important for governments to carefully assess the economic and social implications of these measures and strike a balance between fiscal discipline and the need for public investment and social welfare. A comprehensive and well-executed approach is crucial for effectively correcting deficits in the government budget and maintaining a sustainable fiscal position.