Long Answer Questions - Government Budget and the Economy | Economics Class 12 - Commerce PDF Download

06 MARK QUESATIONS AND ANSWERS

Q1. How is tax revenue different from administrative revenue?

Ans: Tax Revenue:- 

1. It is the main source  of revenue of the government
2. It is the revenue that arises on account of taxes levied by the government.
3. Taxes of two types i.e., Direct and Indirect.
4. Direct taxes are those taxes levied immediately on the property and income of persons. Examples: Income Tax, Corporate Tax, Wealth Tax etc., Incidence and impact falls on same person.
5. Indirect taxes are those taxes levied on the production and sale of the goods. Examples: Sales Tax, Excise Duty etc. Tax paid by one person but burden taken by another person.

Administrative Revenue:-

1. It is the revenue that arises on account of the administrative function of the Government.
2. It includes-
   a. Fees
   b. License fees
   c. Fines and penalties
   d. Forfeitures of surety by courts
   e. Escheat – means claim of the government on the property of a person who dies without having any legal heirs.

Q2. What is a balanced government budget?  Explain the multiplier effect of a balanced budget.

Ans: 

1. Balanced Budget: - It is one where the estimated revenue of the government equals the estimated expenditure.
2. Effect of Multiplier on the Balanced Budget:- 
   a. If only source of revenue is a lump sum tax, a balanced budget will then mean that the amount of tax equals the amount of expenditure (T=E)
   
   b. A balanced budget has an expansionary effect on the economy.
   
   c, Under balanced budget, the increase in income is equalent to the amount of government expenditure financed by tax revenue (i.e.,  ΔY =ΔG/ΔT)
   
   d. The multiplier effect of a balanced budget is ONE (Unitary)
   
   e. A balanced budget is a good policy to bring the economy, which is under employment to a full employment equilibrium.
    

NUMERICALS

Q1. The following figures are based on budget estimates of Government of India for the year 2001 – 2002.  

Calculate

i) Fiscal Deficit 

ii) Revenue Deficit  and 

iii) Primary deficit.

Ans:

i) Fiscal Deficit   = Total expenditure – Revenue receipts – Non-debt capital receipts = 3,75,223 – 2,31,745 – 15,164 – 12,000 = Rs. 1,16,314 billion.

ii) Revenue Deficit =  Revenue expenditure – Revenue receipts

= 3, 10,566 – 2, 31,745 = Rs. 78,821 billion.

iii) Primary deficit  = Fiscal deficit – Interest payments

                             = 1, 16,314 – 1, 12,300 = Rs. 4,014 billion.

Q2. From the following data about a government budget find

a) Revenue Deficit   

b) Fiscal Deficit and 

c) Primary Deficit.

Ans: a) Revenue Deficit = Revenue expenditure – (Tax revenue + Non-tax revenue)             =   80 – (47+10) =   80 – 57   = 23 (cr.)

 Fiscal Deficit = Borrowings  =  32 (cr.)

 Primary Deficit = Borrowings – Interest Payments  32 - 20 = 12 (cr.)

HIGHER ORDER THINKING SKILLS (HOTS)

What are the three levels at which the budget impacts the economy?

Ans:  These below are the three levels at which the budget impacts the economy.

Aggregate fiscal discipline:-  This means having control over expenditures, given the quantum  of revenues.  This is necessary for proper macro-economic performance.

Allocation of resources: - The allocation of resources based on social priorities.

Effective and efficient provision of programmes:-  Effectiveness measures the extent to which goods and services the government provides its goals.