NCERT Questions for Class 12 Economics Chapter 5 – Government Budget and the Economy

Important Questions with Solutions of Class 12 Economics Chapter 5 – Government Budget and the Economy

1) What is a Surplus Budget?

Ans – A surplus budget in any year is expected to be greater than the corresponding expenditures that are likely to be incurred.

2) What are Direct & Indirect Taxes? Provide two examples for each of them.

Ans – Direct taxes can be levied directly on income or property. They are paid directly to the government by the person on whom such taxes are imposed. Examples of direct taxes include income tax and corporate tax.

Indirect taxes are those levied on goods and services, and ultimately the supplier would be compelled to pay, though they would consider them as passing on the cost to the consumer. Other examples include sales tax & customs duties.

3) What are the 4 different methods of Budget Deficit?

Answer: Four different types of budget deficits are as follows.

Budget Deficit: The excess of the state’s total expenditure over its total revenue like the current revenue & net internal and foreign capital receipts. It is calculated as,

Budget Deficit, B.D. = Budget Expenditure, B.E. – Budget Revenue, B.R.

Fiscal Deficit: It refers to the excess of the government’s total expenditure over its total revenue receipts, excluding borrowings. Mathematically, it is worked out as:

Fiscal Deficit (F.D.) = Budget Expenditure (B.E.) – Budget Revenue (B.R.), where borrowings are not added.

Revenue Deficit: It refers to the excess of the government’s revenue expenditure over its revenue receipts. The mathematical expression for the same is as follows:

Revenue Deficit (R.D.) = Revenue Expenditure (R.E.) − Revenue Receipts (R.R.)

Primary Deficit: It’s the fiscal deficit with less interest payments made.

Primary Deficit (P.D.) = Fiscal Deficit (F.D.) − Interest Payments (I.P.)

4) What are the aims of the Government Budget?

Ans – The chief aims of the government budget includes:

• Resource Reallocation: The government considers several social and economic factors & reallocates resources in such a manner that it ensures effectiveness and fairness of the utilization of resources.
• Income Redistribution: To decrease inequalities, income and wealth are redistributed among people by the government.
• Economic Stabilization: The government stabilizes the economy in such a way that it would lessen business cycles & prevent ups/downs in industry.
• Public Enterprise Management: The state manages public enterprises and indulges in commercial activities mostly within natural monopolies and heavy manufacturing to make provisions for the public interest.

5) Explain a balanced government budget. Mention the multiplier effect of a balanced budget.

Ans – A balanced government budget means that the total government receipts are equivalent to the total government spending. It means that government expenditures do not surpass their earnings.

Although this concept may apply to companies, non-profit organizations, or household budgets, it is mostly associated with the government. A balanced budget shows fiscal health because it demonstrates that spending is at par with revenue.

The Multiplier Effects of a Balanced Budget

• Balanced-Budget Multiplier: Measures the change in aggregate output created only from a change in government taxation. Herein, it is useful while analyzing fiscal policy changes involving government spending and taxation.
• Fiscal Policy Analysis: The balanced budget multiplier is of the essence in observing the effect regarding fiscal policies as a joint adjustment of government purchases and taxes.
• Multiplier Value: The balanced-budget multiplier is 1. In this way, the positive impact of a change in government purchases on aggregate output is nearly entirely countered by the negative of a change in taxes.
• First-Round Impact: The first-round impact from injecting government spending into aggregate production only is the amount of the change in government purchases for which the rise in taxes does not match.

As a result, aggregate production is changed initially by exactly the difference in government purchases.

6) What are the resource & income distribution in a govt budget?

Ans – An intended budget is one that the government designs to meet or achieve certain economic, social, and political goals. These goals are influenced directly by the government’s policies.

• Resource Allocations: The orientation of the government budgetary policy is towards resource reallocation to meet the interests of both sets of interests, like economic interests – profit maximization & social interests public welfare. It may give tax breaks, subsidies, and other incentives in a bid to encourage investment by producers.
• Income & Wealth Inequality Reduction: This fiscal policy of the government aims to reduce income & inequality in wealth. It happens with the help of tax imposition on rich people and augmentation of expenditure on the welfare of the poor to bring about personal income distribution.
• Economic Growth: The growth of a country will depend upon the savings and investment rate. Budgetary policy can mobilize enough resources to apply to investment in the public sector to speed up economic growth.
• Reducing Regional Disparities: Through its taxation and expenditure policies, the government budget aims to remove regional inequalities by offering manufacturing unit setups in backward areas of the country that are economically underdeveloped.
• Management of Public Enterprises: Massive public sector industries are developed and administered to serve social welfare. Provisions are made in the budget for managing such enterprises and financing them.

7) How does tax revenue differ from administrative revenue?

Ans – Public income or public revenue is the total amount of income received from the government from all sources.

Tax Revenue: Taxes are forced contributions imposed upon citizens by the government to defray its general expenses for the common good, without conferring direct benefits upon the taxpayer. Taxes are applied to government public spending in the national interest and are compensation for indirect services rendered by the government to the people. Taxes, in contemporary public finance, form a large share of the revenue that has macroeconomic effects. They can affect consumption & patterns of production while distributing income and wealth.

Administrative Revenue: Fees, fines, penalties, and specific assessments allow public administration to generate funds for public authorities. The fees are amounts received by the government or public bodies in exchange for services, which are in turn provided to the public. Examples include court fees and passport fees. The regulatory authorities receive license fees for granting their permission for various matters, like driving license fees, import license fees, and liquor permit fees. Fines and penalties are imposed as punishments for violating the laws and are assessed and collected for preventing crimes and compliance with the country’s laws, rather than mainly generating revenue.