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Class 12 Economics Chapter 4 Government Budget and the Economy
Selected Questions & Answers
A. Very Short Answer Questions: (Marks for each – 1)
1. Give one example of a direct tax.
Ans: Income tax.
2. Give one example of non-tax revenue.
Ans: Fees, interest, fines, etc.
3. Give one example of capital expenditure.
Ans: Investment in shares.
4. What is fiscal policy? H. S. ’16
Ans: Fiscal policy refers to the policy through which the government influences income, price level, employment, etc., by changing tax rates and expenditure programmes from time to time in order to maintain economic stability and by controlling expenditure, budget and borrowing while utilizing and employing all kinds of resources of the country.
5. What is revenue deficit?
Ans: When revenue expenditure is greater than revenue receipts, it is called a revenue deficit.
6. When does the government create a deficit budget? H. S. ’15
Ans: When the economy of a country suffers from lack of demand and reaches equilibrium in a condition of unemployment, the government prepares planned programmes to solve this problem. This is called a deficit budget.
7. What is a revenue budget?
Ans: When the government prepares a plan to spend the revenue collected from various sources for the development of the country, it is called a revenue budget.
8. What is primary deficit?
Ans: The amount that remains after deducting interest payments from the fiscal deficit is called primary deficit.
9. What is fiscal deficit?
Ans: When the total expenditure of the government budget exceeds the total income, it is called fiscal deficit.
10. Give two examples of public goods.
Ans: Roads and ghats; schools and colleges.
11. Give two examples of private goods.
Ans: Cars and motor vehicles; food items.
12. Give two examples of tax revenue.
Ans: Income tax and corporation tax.
13. What are the two parts of the government budget?
Ans: Revenue budget and capital budget.
14. Write one objective of adopting a budget.
Ans: To remove inequality of income and wealth.
15. What is meant by budget?
Ans: A budget is the annual statement of the government’s income and expenditure for a financial year.
16. What is meant by the distributive function of the government?
Ans: The activities of the government relating to distribution of income through tax collection, transfer payments, etc., which influence the disposable income of individuals, are called the distributive function of the government.
17. Give two examples of indirect taxes.
Ans: Excise duty and sales tax.
18. What is disinvestment?
Ans: Disinvestment is a form of privatization in which shares of the public sector are sold to private investors.
19. What is meant by non-plan expenditure?
Ans: Non-plan expenditure generally refers to expenditures incurred for administration, economic development, and social services.
20. What are public goods?
Ans: Goods and services provided by the government to satisfy collective needs are called public goods.
21. What are the sources of government revenue?
Ans: The main sources of government revenue are taxes, fees, donations and grants, fines, profits from industrial enterprises, etc.
22. What are the two types of capital expenditure?
Ans: Planned capital expenditure and non-plan capital expenditure.
23. What is an automatic stabilizer?
Ans: The automatic response of government revenue collection and expenditure to changes in national income is called an automatic stabilizer.
24. What is discretionary fiscal policy?
Ans: The measures adopted by the government to change tax rates and expenditure programmes from time to time in order to maintain economic stability are called discretionary fiscal policy.
25. Define direct tax.
Ans: A tax whose initial burden and final burden fall on the same person is called a direct tax.
26. Define indirect tax.
Ans: A tax whose initial burden falls on one person but the final burden falls on another person and whose burden can be shifted is called an indirect tax.
27. What is meant by capital receipt?
Ans: The receipts included in the capital budget are called capital receipts.
28. What is meant by revenue receipt?
Ans: The receipts that come under the revenue account are called revenue receipts.
29. What is meant by developmental expenditure?
Ans: The revenue expenditure incurred by the government for providing economic and social services is called developmental expenditure.
30. Write the meaning of outcome budget.
Ans: A budget in which greater importance is given to the quantity of outputs generated from the funds allocated in different sectors rather than only to the allocation of funds is called an outcome budget.
31. What is escheat?
Ans: The process by which the property of a citizen who dies without heirs is taken into the government treasury is called escheat.
32. What is meant by paper tax?
Ans: Direct taxes through which only a very small amount of revenue can be collected, are called paper taxes.
33. How can budget deficit be removed?
Ans: Budget deficit can be removed by increasing tax rates, raising loansand reducing government expenditure.
34. Is tax considered a capital receipt?
Ans: No.
35. Can government borrowing be called a capital receipt?
Ans: Yes.
36. Mention one method of repaying government debt.
Ans: Formation of a sinking fund.
37. Mention one reason for the recent increase in government expenditure.
Ans: Rise in the prices of goods and commodities.
38. What is the main objective of liberalization?
Ans: To free investors from administrative restrictions and to accelerate economic activities.
39. Who generally bears the burden of indirect taxes?
Ans: Consumers and buyers of goods.
40. What is a progressive tax?
Ans: A tax system in which the rate of tax increases with the increase in aperson’s income is called a progressive tax.
41. What is a regressive tax?
Ans: A tax system in which the tax rate decreases as the income of a person decreases is called a regressive tax.
42. What is meant by tax incidence?
Ans: The final burden of a tax is called tax incidence.
43. What is meant by tax impact?
Ans: The initial burden of a tax is called tax impact.
44. What is octroi?
Ans: The tax imposed by the government on goods when they enter a city or municipality is called octroi.
45. What is Ricardian equivalence?
Ans: If people increase their savings because they expect the government to impose higher taxes in the future to repay public debt, national savings will remain unchanged. This is called Ricardian equivalence.
46. What is compensatory fiscal policy?
Ans: The fiscal policies adopted by the government to remove the reactions or fluctuations in the economy caused by changes in investment are called compensatory fiscal policy.
47. What is internal public debt?
Ans: When the government of a country borrows from individuals or financial institutions within the country, it is called internal public debt.
48. Write whether true or false.
(a) Budget deficit can be removed through the disinvestment of public sector enterprises.
Ans: True.
(b) At present the proportion of tax in government revenue has increased.
Ans: True.
49. What is zero primary deficit? H. S. ’19
Ans: A situation in which the government borrows again only to pay the interest on previous loans is called zero primary deficit.
50. What is zero primary deficit?
Ans: The answer in the source text is incomplete.
51. Mention two objectives of public borrowing.
Ans: Two objectives of public borrowing are:
(a) To finance a deficit budget.
(b) To implement developmental projects of the country.
52. “Budget removes income inequality.” Explain. H. S. ’19
Ans: Through the budget the government can reduce income inequality in the economy by changing the system of taxation and expenditure. If the government imposes taxes at progressive rates, the amount of tax paid by the richer sections of society increases. Similarly, by imposing taxes on luxury goods, more taxes can be collected from the rich. As a result, economic inequality in society can be reduced.
53. Mention two advantages (merits) of indirect taxes. H. S. ’17
Ans: Two advantages of indirect taxes are:
(a) Indirect taxes are easy to collect.
(b) It is difficult to evade indirect taxes.
54. Mention two disadvantages of indirect taxes. H. S. ’17
Ans: Two disadvantages of indirect taxes are:
(a) Indirect taxes are not based on the principle of equality.
(b) The principle of certainty cannot be properly fulfilled through indirect taxes.
56. Give three examples of non-plan expenditure.
Ans: Three examples of non-plan expenditure are:
(a) Defence expenditure.
(b) Salaries and bonuses of government employees.
(c) Budgetary assistance.
11. Define budget deficit and balance of trade deficit. H. S. ’18, 19
Ans: When the total revenue specified in the annual budget of the government is less than the total expenditure, such a budget is called a budget deficit. On the other hand, when in a country’s economy the volume of imports increases while the volume of exports decreases, it is called a balance of trade deficit.
57. What are the three types of budget deficit? H. S. ’18
Ans: The three types of budget deficit are:
(a) Revenue deficit
(b) Fiscal deficit
(c) Primary deficit.
58. What is a public good? H. S. ’19
Ans: In economics, public goods generally refer to goods or services provided by the government that are non-excludable and non-rival in consumption.
59. What is zero primary deficit? H. S. ’19
Ans: A situation in which the government borrows again to pay the interest on previous loans is called zero primary deficit.
B. Short Questions and Answers: (Marks for each–2)
1. Mention two objectives of public borrowing.
Ans: Two objectives of public borrowing are:
(a) To finance a deficit budget.
(b) To implement developmental projects of the country.
2. “Budget removes income inequality.” Explain. H. S. ’19
Ans: Through the budget, the government can reduce income inequality in the economy by changing the taxation and expenditure system. If the government imposes taxes at progressive rates, the tax burden on the richer section of society increases. Similarly, by imposing taxes on luxury goods, more taxes can be collected from the rich. As a result, economic inequality in society can be reduced.
3. Write three features of a government budget.
Ans: Three features of a government budget are:
(a) The government budget reflects the structural aspects of an economy.
(b) The government budget indicates the methods through which the government collects revenue and the heads of government expenditure.
(c) The government budget shows the government’s income and expenditure for the coming financial year.
4. Give two examples of commercial revenue.
Ans: Two examples of commercial revenue are:
(a) Revenue collected through postal services.
(b) Revenue collected from rail services.
5. Mention two disadvantages of direct taxes.
Ans: Two disadvantages of direct taxes are:
(a) Direct taxes are sometimes high; therefore, taxpayers may resort to tax evasion.
(b) Direct taxes are paid by only a few individuals; therefore only a limited amount of revenue can be collected through them.
6. Mention two characteristics of taxes.
Ans: Two characteristics of taxes are:
(a) Tax is a compulsory contribution.
(b) Tax is one of the main sources of government revenue.
7. Into how many categories can government revenue expenditure be divided and what are they?
Ans: Government revenue expenditure can be divided into four categories, such as:
(a) Plan expenditure.
(b) Non-plan expenditure.
(c) Developmental expenditure.
(d) Non-developmental expenditure.
C. Medium Length Questions & Answers (Marks for each–4)
1. Write the differences between public goods and private goods. H. S. ’15, ’17
Ans: The differences between public goods and private goods are:
(a) Public goods can be used without paying any price. But when private goods are used, the consumer has to pay a price.
(b) Consumption of public goods is free and non-competitive. But in the consumption of private goods there is competition among consumers.
(c) Public goods can be consumed by everyone. But private goods are consumed individually.
2. Mention the differences between revenue expenditure and capital expenditure.
Ans: The differences between revenue expenditure and capital expenditure are: Revenue expenditure refers to all types of current expenditure of the government which are not made for the purpose of creating assets. Forexample, administrative expenditure and expenditure on running public sector enterprises. On the other hand, expenditure incurred on all types of capital goods is called capital expenditure. For example, expenditure incurred on acquiring land, machinery, buildings, furniture, etc.
3. Explain the relationship between deficit financing and public borrowing.
Ans: The government takes loans as a means of raising funds. It may collect loans from the Reserve Bank, and for supplying such loans the Reserve Bank may create new currency. This process is called deficit financing. Deficit financing is considered as one method of meeting or financing government debt.
4. Explain the meaning of surplus budget, deficit budget andbalanced budget. H. S. ’18
Ans: When the government revenue collected is greater than government expenditure, it is called a surplus budget. When government expenditure is greater than the current revenue of the government, it is called a deficit budget. When current revenue and current expenditure in the budget are equal, it is called a balanced budget.
5. Why should the government provide public goods?
Ans: The government provides public goods so that everyone can enjoy them equally. Services included in public goods such as roads, schools, defence and administration, are enjoyed by the public without paying any direct price. The purpose of government provision of public goods is that private goods remain under the control of individuals and cannot be equally accessed by everyone. Private goods are generally guided by the motive of private profit. Therefore, the government supplies certain goods for public use so that everyone can enjoy them. By providing such goods, the government also attempts to reduce economic inequality in society and promote social welfare.
6. Explain the meaning of revenue deficit, fiscal deficit and primary deficit.
Ans: The meanings of revenue deficit, fiscal deficit and primary deficit are given below: When in the government budget the revenue expenditure is greater than the revenue receipts, it is called a revenue deficit. When the total expenditure of the budget (including revenue expenditure and capital expenditure) is greater than the total receipts excluding borrowings, the deficit is called a fiscal deficit. Again, if the interest payments are deducted from the total fiscal deficit in a financial year, the remaining amount is called the primary deficit.
7. Write the differences between internal debt and external debt.
Ans: The differences between internal debt and external debt are:
(a) Internal debt is collected from within the geographical boundaries of a country. On the other hand, external debt is collected from foreign governments or foreign institutions.
(b) Internal debt is repaid in domestic currency. External debt is repaid in foreign currency.
(c) Internal debt imposes a comparatively smaller burden. External debt creates a direct and real burden.
8. Write the differences between direct tax and indirect tax. H. S.’19
Ans: The differences between direct tax and indirect tax are:
(a) In the case of direct tax, the impact and incidence fall on the same person. But in the case of indirect tax, the burden can be shifted from one person to another.
(b) Direct tax is progressive in nature, whereas indirect tax is regressive in nature.
(c) Direct tax is relatively permanent, whereas indirect tax is temporary.
9. Write the differences between tax revenue and non-tax revenue
Ans: The differences between tax revenue and non-tax revenue are:
(a) Tax revenue is a compulsory payment. But non-tax revenue is not always compulsory.
(b) Tax revenue involves an element of sacrifice. But in non-tax revenue, specific benefits are often received from the government in return, so the element of sacrifice is not involved.
(c) In return for paying tax revenue, the taxpayer cannot claim any direct benefit. But in return for non-tax revenue payments, certain specific benefits may be received.
(d) Tax revenue constitutes the major portion of government income. But the contribution of non-tax revenue to government income is comparatively smaller.
10. Write the differences between plan expenditure and non-plan expenditure.
Ans: Plan expenditure refers to the expenditure incurred on programmes under the current Five-Year Plan of a particular year. It includes expenditure on the central planning programmes related to different sectors of the economy. On the other hand, expenditure not related to the current Five-Year Plan is called non-plan expenditure. Generally, non-plan expenditure is greater than plan expenditure.
11. Write two differences between revenue receipts and capital receipts. H. S. ’19
Ans: Two differences between revenue receipts and capital receipts are:
(a) Revenue receipts are short-term in nature, and their benefits are obtained within a financial period. On the other hand, capital receipts are long-term in nature and their benefits may be enjoyed for many years.
(b) Revenue receipts do not increase or decrease the assets or liabilities of the government. But capital receipts reduce assets or increase the liabilities of the government.
12. Give three examples of non-plan expenditure. H. S. ’18
Ans: Three examples of non-plan expenditure are:
(a) Defence expenditure.
(b) Budgetary assistance.
(c) Salaries and bonuses of government employees.
13. What is meant by revenue deficit? Explain three situations arising from revenue deficit. H. S. ’16, ’18, ’19
Ans: When in the government budget the amount of revenue receipts is less than the total expenditure included in the budget, such a situation is called a revenue deficit. Three situations arising from revenue deficit are:
(a) The saving and investment capacity of the government decreases.
(b) The government becomes compelled to borrow.
(c) The government may have to reduce its expenditure.
14. Mention two functions achieved through the government’s revenue and expenditure system. H. S. ’15
Ans: Two functions achieved through the government’s revenue and expenditure system are:
(a) By imposing progressive direct taxes, the government can allocate more resources to the poorer sections of society through the budget.
(b) Through suitable tax and expenditure policies, the government can ensure fair distribution of income in society and bring changes in disposable personal income, thereby influencing the pattern of income distribution.
D. Essay-type Questions and Answers: (Marks for each–6)
1. What are the main components of government revenue? Explain briefly. H. S. ’16
Ans: Government revenue has two main components, namely tax revenue and non-tax revenue. The sources of these revenues are discussed below:
(a) Tax: Tax is the main source of government revenue. The revenue collected through taxes is called tax revenue. It is a compulsory contribution. In return for paying tax, the taxpayer cannot claim any direct benefit. Tax revenue is of two types, namely direct tax and indirect tax.
(b) Commercial revenue: The income earned by selling goods and services from government production enterprises or industries is called commercial revenue. Such income is one of the important sources of government revenue.
(c) Fines: The fines collected by the government from individuals or institutions for violating laws or rules of justice and administration are included in government revenue.
(d) Fees: Fees collected from individuals or institutions for providing certain specific government services are another source of government revenue.
(e) Gifts and grants: Donations and grants received from domestic and foreign institutions, individuals, or organizations are also considered government revenue.
(f) National resources: Income received from natural resources such as mineral resources, water resources and other natural assets of the country is also treated as government revenue.
