Important Questions: Government Budget & the Economy | Economics Class 12 - Commerce PDF Download

Very Short Answer Type Questions

Q1: State any one objective of government budget.
Ans: One of the primary objectives of the government budget is to mobilise resources for the purpose of rapid development.

Q2: Define a balanced budget.
Ans: A balanced budget is the one where the estimated revenue of the government equals the estimated expenditure.

Q3: What is revenue expenditure?
Ans: Revenue expenditure refers to that expenditure by the government, which neither creates assets for the government nor reduces its liabilities. For example, old-age pension.

Q4: Define a tax.
Ans: Tax is a compulsory payment made by an individual or an institution to the government without anything in exchange.

Q5: Why is the entertainment tax an indirect tax?
Ans: The entertainment tax is an indirect tax because the seller of the service passes the burden of tax on to the buyer of the service.

Q6: Define fiscal discipline.
Answ: Fiscal discipline means having control over expenditures, given the quantum of revenues.

Q7: Give Area examples of direct taxes.
Ans: Following are the three examples of direct tax-

• Income Tax
• Wealth Tax
• Interest Tax

Q8: Define GST.
Ans: GST’ is a value-added tax paid by the consumers and remitted to the government by the seller of various goods and service.

Short Answer Type Questions

Q9: What are the objectives of a budget?
Ans: The objectives of a budget are as follows:

• Reallocation of Resources
• Reducing Inequalities in Income and Wealth
• Economic Stability
• Management of Public Enterprises
• Economic Growth
• Reducing Regional Disparities

Q10: Explain the allocation function of a government budget.
Ans: The government aims to reallocate resources in a way so that its economic (profit maximisation) and social objectives (public welfare) are fulfilled. The government can influence allocation of resources through implementation of appropriate fiscal policy. Production of goods, which are injurious to health is discouraged through heavy taxation. On the other hand, production of goods which are beneficial for society is encouraged through subsidies.

Q11: Explain the ‘economic stability’ objective of a government budget.
Ans: Free play of the market forces are bound to generate trade cycles, also called business cycles. These refer to the phases of recession and depression, recovery and boom in the economy. The government of a country is always committed to save the economy from business cycles. The government budget plays a significant role in preventing business fluctuations due to inflation or deflation and hence, maintains economic stability. Economic stability stimulates investment, consequently, increasing the rate of growth and development.

Q12: Define externalities. Give an example of negative externality. What is its impact on welfare?
Ans: Externalities refer to the harms (or benefits) a firm or an individual causes to another for which they are not penalised (or paid for). Externalities may be positive or negative. For example, increase in GDP may be at the cost of considerable pains and sacrifices in the form of environment pollution. As a result, increase in GDP may mean less economic welfare. If increase in GDP has been brought about by making wokers work in bad working conditions, increase in GDP will not raise the level of economic welfare.

Q13: Distinguish between direct tax and indirect tax? Give an example of each.
Ans: Direct tax is a tax levied on the property and the income of persons. These are paid directly to the state by the consumers. Its burden cannot be shifted by the tax payer on someone else.
For Example: Income tax. Indirect tax is a tax collected by an intermediary (seller) from the person who bears the ultimate economic burden of the tax (buyer). Its burden can be shifted by the tax payer or someone else. For example: Excise duty.

Q14: Describe the importance of the government budget.
Ans: The importance of budget can be explained with the help of following points:

• Economic Stability: Government can achieve economic stability through budget. During inflation, government makes the surplus budget, whereas during depression, it makes deficit budget. Prices can be stabilised through budget.
• Economic Control: Government controls the whole parliament and councils through budget. Revenue can be properly utilised through budget.
• Economic and Social Development: Budget has a great importance in economic and social development Government encourages industries and agriculture by giving subsidies through its budget and encourages production. In the same way, government imposes high taxes through budget on rich class and redistributes the revenue collected by these taxes among the poorer sections of the society.
• Administrative Efficiency: Government decides the limits of working areas of every official and employment through its budget.
• Instrument of Fiscal Policy: Budget is an important instrument of the fiscal policy of the country. Fiscal policy is the policy of fixing its revenue and expenditure in a way that economic fluctuations are minimised.

Q15: What is the meaning of revenue deficit? What problems does it create?
Ans: The concept of revenue deficit is simple and straight. The revenue deficit is defined as the excess of revenue expenditure over revenue receipts. Mathematically
Revenue Deficit = Revenue Expenditure – Revenue Receipts
For example, according to the government of India, Budget for the year 2005-2006 states:
Total Revenue Receipts = ₹ 3,09,322 crores Total Revenue Expenditure = ₹ 3,85,493 crores
Revenue Deficit = ₹ 3,85,493 – 3,09,322 = ₹ 76,171 crores In other words, there should be revenue surplus, which should be used for building projects or building assets that yield return. In fact, revenue surplus represents government savings, which can be used for financing development.
Revenue deficit represents a critical situation in the economy. Revenue deficit indicates the amount of current expenditure which cannot be met by revenue receipts. It implies that government is spending beyond its means. The government should either increase its tax/non-tax receipts or should cut its expenditure.
In poor countries, in the initial stages of economic development, often the situation arises when the government has to incur large expenditure on administration and maintenance (particularly on defence, police and law and order) but it is difficult to compel the poor people to pay high taxes. In such situations, the government meets its revenue deficit either through borrowing or through disinvestment. Borrowing by the government, on the other hand, creates the problem of repayment of debt. Disinvestment reduces the asset of the government.

Q16: Explain the importance of public expenditure.
Ans: Importance of public expenditure has been increased due to the following reasons: –

• Increase in the Activities of the State: In the modern age, the activities of the state have been increased many times. There has been an extensive and intensive increase in the activities of central, state and local governments. Now a days, governments undertake various activities such as to run, encourage and regularise the economic activities, to maintain economic stability, to secure poor and backward classes and to increase the rate of economic development, etc. There is a great importance of public expenditure in the completion of these activities.
• Economic Planning: Developing countries like India has adopted the path of economic planning for the removal of problems like poverty, unemployment and for the development of the country. As a result, the government has to incur expenditure on large scale. There is a great importance of public expenditure in economic planning.
• Removing Unemployment, Poverty and Income Inequalities: Public expenditure has a great importance for the reduction of chronic problems like unemployment, poverty and income inequalities.

Q17: What is a government budget? Discuss its objectives.
Ans: The budget is a government’s annual statement of estimated receipts and payments over the fiscal year, which runs from April I to March 31.
The main objectives of the government budget are:

• Reallocation of Resources: The government aims to reallocate resources in a way so that its economic (profit maximisation) and social objectives (public welfare) are fulfilled. The government can influence allocation of resources through implementation of appropriate fiscal policy.
• Reducing Inequalities in Income and Wealth: Another important objective of the government is to reduce income inequalities through its policies. The government imposes higher taxes on the rich and spends the revenue on the welfare of the poor. This helps in reducing inequalities in the I distribution of income.
• Economic Stability: The government budget plays a significant role in preventing business fluctuations due to inflation or deflation and hence, maintains economic stability.
• Management of Public Enterprises: A large numbers of public sector industries have been established and managed for the welfare of the public. The government budget provides financial support to these enterprises.
• Economic Growth: The rate of saving and investment in an economy determine the rate of economic growth. The budgetary policy, therefore, aims to mobilise sufficient resources for investment in the public sector.
• Reducing Regional Disparities: It is an important objective of the government budget to reduce regional disparities through taxation and expenditure policy. For this, government provides funds for the setting up of production units in economically backward regions.