Government Budget and Economy Class 12 Economics Exam Questions

Please refer to Government Budget and Economy Class 12 Economics Exam Questions provided below. These questions and answers for Class 12 Economics have been designed based on the past trend of questions and important topics in your class 12 Economics books. You should go through all Class 12 Economics Important Questions provided by our teachers which will help you to get more marks in upcoming exams.

Class 12 Economics Exam Questions Government Budget and Economy

Class 12 Economics students should read and understand the important questions and answers provided below for Government Budget and Economy which will help them to understand all important and difficult topics.

Question. Subsidies.
Ans. It is a revenue expenditure as it neither creates any asset nor reduces any liability of the government.

Question. Defence capital equipments purchased from Germany.
Ans. It is a capital expenditure as it increases asset of the government.

Question. Are fiscal deficits necessarily inflationary?
Ans. Fiscal deficits are not necessarily inflationary. One of the main criticisms of deficits is that they are inflationary. This is because when government increases spending or cuts taxes, aggregate demand rises. Firms may not be able to produce more quantities that are being demanded at the ongoing prices. Prices will, therefore, have to rise. However, if there are unutilised resources, output is held back by lack of demand. A high fiscal deficit is accompanied by higher demand and greater output and, therefore, need not be inflationary.

Question. Discuss the issue of deficit reduction.
Ans. The deficit in a government budget can be reduced by the following steps:
(i) Taxes should be increased. Government can make a plan for raising direct taxes to increase its receipts. The government receipts can also be raised by increasing rates of taxes or by imposing new taxes.
(ii) Reduction in government expenditure. It can be done through making government activities more efficient through better planning of programmes and better administration.
(iii) The government can raise receipts through the sale of shares in PSUs (Public Sector Undertakings).
(iv) Changing the scope and role of government by withdrawing from some areas where it operated before.
( v) The government can encourage the private sector to undertake capital projects to reduce its expenditure.

Question. Grants given to State Governments. 
Ans. It is a revenue expenditure as it neither creates any asset nor reduces any liability of the government.

Question. Construction of school buildings. 
Ans. It is a capital expenditure as it increases asset of the government.

Question- Give the relationship between the revenue deficit and the fiscal deficit.
Ans. Fiscal deficit is always a wider concept than revenue deficit. Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipts. In terms of formula:
Revenue Deficit = Revenue Expenditures (RE) – Revenue Receipts (RR).
In short, there will be revenue deficit in the government budget when revenue expenditure exceeds revenue receipts.
Fiscal Deficit = Revenue Deficit + Capital Deficit + Borrowings and other liabilities.
Fiscal deficit does not take into account all types of receipts. It does not take into account borrowings. As such, fiscal deficit is defined as the excess of all expenditure over total receipts net of borrowings.

Question. Is balanced budget good for India?
Ans. It is one when estimated revenues are equal to estimated expenditures. In other words, amount of tax is equal to the amount of expenditure. This kind of budget leads to slight increase in aggregate demand. Balanced budget is a good policy which can bring an economy to a full employment equilibrium level. It brings about financial stability. But it is not good for a less developed country like India. In such a country, the government should have more expenditures (than revenue) which will raise aggregate demand.

Question. Are the following included in revenue expenditure or capital expenditure and why?
(a) Subsidies
(b) Repayment ofloan.
Ans. (a) Subsidies are included in revenue expenditure as it neither creates assets nor reduces liabilities.
(b) Repayment of loans is included in capital expenditure as it reduces liabilities of the government.

Question. Expenditure incurred on administrative and defence services.
Ans. It is a revenue expenditure as it neither creates any asset nor reduces any liability of the government.

Question. Repayment ofloans. 
Ans. It is a capital expenditure as it reduces the liability of the government.

Question. Are fiscal deficits necessarily inflationary?
Ans. Fiscal deficits are not necessarily inflationary. One of the main criticisms of deficits is that they are inflationary. This is because when government increases spending or cuts taxes, aggregate demand rises. Firms may not be able to produce more quantities that are being demanded at the ongoing prices. Prices will, therefore, have to rise. However, if there are unutilised resources, output is held back by lack of demand. A high fiscal deficit is accompanied by higher demand and greater output and, therefore, need not be inflationary.

Question. How can a government budget help in reducing inequalities of income? Explain.
Ans. One of the feature of government budget is to do allocation of resources, i.e., priority must be given to social sectors. Government through its two important budgetary instruments of taxation and subsidies will allocate resources to those areas where society’s welfare is maximum. In this way, it will bring about equitable distribution of income and wealth.
Equitable distribution of income and wealth is a way to bring social justice.

Question. Tax rates on higher income group have been increased. Which economic value does it reflect? Explain. (AI 2014)
Ans: If tax rates on higher income group are increased, then it will reduce inequalities of income as the difference between disposable income of higher income and lower income group will fall. The economic value it reflects is rise in equity.

Question. Give the relationship between the revenue deficit and the fiscal deficit.
Ans. Fiscal deficit is always a wider concept than revenue deficit. Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipts. In terms of formula:
Revenue Deficit = Revenue Expenditures (RE) – Revenue Receipts (RR).
Fiscal deficit is defined as the excess of all expenditure over total receipts net of borrowings. It does not take into account borrowings.
Fiscal Deficit = Revenue Deficit + Capital Deficit + Borrowings and other liabilities.

Question. Does public debt impose a burden? Explain.
Ans. Public debt is not always a blessing. Excessive use of it creates a lot of crisis in an economy. Such as:
1. Hampers Economic Development of a Country. Loans are easily borrowed but it is very difficult to repay them. Generally, government imposes more taxes. It brings instability and is an obstacle in the economic development of a country.
2. Poses Threat to Political Freedom. Foreign loans and assistance leads to deep conflict among countries. The friction among countries challenges the political freedom.
3. Proves a Burden on Common Man. Loans taken for unproductive purposes, like war and armaments are a burden on common man in the form of higher taxes.
4. Leads to Extravagant Spending. Public debt leads to unplanned spending. This provides incentive to the government to implement those schemes which require excessive expenditure.
5. Results in Drain ofNational Wealth. Repayment of foreign loans results in drain of wealth out of the country.

Question. Government raises its expenditure on producing p ublic goods. Which economic value does it reflect? Explain. (Delhi 2014)
Ans: Public goods are non-rival and non-excludable in consumption. Examples: Parks, pollution control, police, fire protection, etc. Their production generates benefits to the society. The welfare of the society rises as more public goods are made available to them.

Question. Explain why p ublic goods must be provided by the government.
Ans. Public goods are those goods and services for which consumption by some individuals does not reduce the amount available to others. For example: parks, roads, water, bridges, national defence, etc. These goods are non-rival and non-excludable goods. People receive benefits from public goods but do not pay for them. Such a good can be produced only by government.

Question- Distinguish between revenue expenditure and capital expenditure.
Ans. Government expenditure may be classified as revenue expenditure and the capital expenditure.
(i) Revenue expenditure is that expenditure of the government which does not result in creation of any asset or reduction in liability. It is financed out of revenue receipts. Examples:
Expenditure on payment of salary, pension, interest, etc.
(ii) Capital expenditure is that expenditure which leads to creation of an asset or reduction in liabilities. That is, it is the expenditure on creation of assets. Such expenditure is financed out of borrowings from the public and foreign government bodies. Examples: Expenditure on construction of roads, bridges, canals, grant of loans, etc.

Question. ‘The fiscal deficit gives the borrowing requirement of the government’. Elucidate.
Ans. Fiscal deficit shows the borrowing requirements of the government during the budget year.
Fiscal deficit = Total Expenditure – Revenue receipts – Non-debt creating capital receipts = Net borrowing at home+ Borrowings from RBI+ Borrowings from aborad.
It indicates the total borrowing requirements of the government from all sources. As the government borrowing increases, its liability in future to repay loans along with interest thereon also increases.

Question. Is the following a revenue expenditure or capital expenditure in the context of government budget? Give reason.
(i) Expenditure on collection of taxes
(ii) Expenditure on purchasing comp uters
Ans: (i) It is a revenue expenditure because it neither creates any asset nor reduces any liability.
(ii) It is a capital expenditure because it creates assets.

Question. Government has started spending more on providing free services like education and health to the poor. Explain the economic value it reflects. 
Ans: It will reduce inequality of income. When poor people get free education and medical help, they will become productive resources for the country. Country’s production level will rise (economic value). The income given to poor will raise their standard of living.

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