GOVERNMENT
BUDGET AND THE ECONOMY
KEY CONCEPTS:
· Meaning of the Budget
· Objectives of the Budget
· Components of the Budget
· Budget Receipts
· Budget Expenditure
· Balanced, Surplus and Deficit Budgets
· Types of Deficits
1 MARK QUESTIONS AND ANSWERS
1. Define a Budget.
Ans: It is an annual statement of the estimated Receipts
and Expenditures of the Government
over the fiscal year which runs from April –I to March
31.
2. Name the two broad divisions of the Budget.
Ans: i) Revenue Budget
ii) Capital Budget
3. What are the two Budget Receipts?
Ans: i) Revenue Receipts
ii)
Capital Receipts
4. Name the two types of Revenue Receipts.
Ans: i) Tax Revenue
ii) Non-tax Revenue
5. What are the two types of taxes?
Ans: a) Direct Taxes: i) Income Tax, ii) Interest Tax,
iii) Wealth Tax
b) Indirect Taxes: i) Customs duties, ii) Excise duties,
iii) Sales Tax
6. What are the main items of Capital Receipts?
Ans: a) Market Loans (loans raised by the government from
the public)
b) Borrowings by the Government
c) Loans received from foreign governments and
International financial Institutions.
7. Give two examples of Developmental Expenditure.
Ans: Plan expenditure of Railways and Posts
8. Give two examples of Non-Developmental expenditures.
Ans: i) Expenditure on defence
ii) Interest payments
9. Define Surplus Budget.
Ans: A Surplus Budget is one where the estimated revenues
are greater than the Estimated
expenditures.
10. What are the four different concepts of Budget
Deficits?
Ans: a) Budget Deficit
b) Revenue Deficit
c) Primary Deficit and
d)
Fiscal Deficit
3 AND 4 MARK QUESTIONS AND ANSWERS
1. Explain the objectives of the Government Budget.
Ans: These below are the main objectives of the
Government Budget.
a) Activities to secure reallocation of resources: - The Government
has to reallocate
resources with social and economic considerations.
b) Redistributive Activities: - The Government
redistributes income and wealth to reduce
inequalities.
c) Stabilizing Activities: - The Government tries to
prevent business fluctuations and
maintain economic stability.
d) Management of Public Enterprises: - Government
undertakes commercial activities that
are of the nature of natural Monopolies, heavy
manufacturing etc., through its public
enterprises.
2. What are the components of the Budget?
Ans:
These below are the main components of the Government Budget. They are---
a) Budget Receipts
b) Budget Expenditure
Budget receipts may be classified as:
i) Revenue Receipts and
ii) Capital Receipts
Revenue Receipts may be classified as:
i) Tax Revenue and
ii) Non-tax Revenue
Budget Expenditure may be classified as -------
a) Revenue Expenditure and Capital Expenditure
b) Plan Expenditure and Non-Plan Expenditure
c) Developmental and Non-Developmental Expenditure
3. Define Direct Taxes and Indirect taxes and give two
examples each.
i) Direct Tax: - These are those taxes levied immediately
on the property and Income of
persons, and those that are paid directly by the
consumers to the state.
Examples: Income Tax,
Wealth Tax, Corporation Tax etc.
ii) Indirect Taxes: These
are those taxes that affect the income and property of persons
through their consumption expenditure. Indirect
taxes are those taxes levied on one
person but paid by another person.
Examples: Customs duties, excise duties, sales tax,
service tax etc.
4. What are the Non-Tax Revenue receipts?
Ans: These below are the Non-tax revenue receipts:
a) Commercial Revenue: Examples-Payments for postage,
toll, interest on funds borrowed
from government credit corporations, electricity, Railway
services.
b) Interest and dividends
c) Administrative revenue: Examples: Fees, fines,
penalties etc.,
5. What are the three major ways of Public Expenditure?
Ans: These below are the three ways of Public
Expenditure----
a) Revenue Expenditure and Capital Expenditure
b) Plan Expenditure and Non-Plan Expenditure
c) Development and Non-developmental Expenditure.
6. What do you mean by Revenue Expenditure and Capital
Expenditure?
Ans: i) Revenue Expenditure:- It is the
expenditure incurred for the normal running of
government departments and provision of various services
like interest charges on debt,
subsidies etc.,
ii)Capital Expenditure:- It
consists mainly of expenditure on acquisition of assets like land,
building, machinery, equipment etc., and loans and
advances granted by the Central
Government
to States & Union Territories.
7. Define Balanced, Surplus and Deficit Budgets.
Ans: a) Balanced Budget:- It is one where the
estimated revenue EQUALS the estimated
expenditure.
b) Surplus Budget:- It is one where the estimated
revenue is GREATER THAN the
estimated expenditures.
c) Deficit Budget:- It is one where the estimated
revenue is LESS THAN the estimated
expenditure.
8. Explain the four different concepts of Budget deficit.
Ans: These are the four different concepts of Budget
Deficit.
a) Budget Deficit:- It is the difference between
the total expenditure, current revenue and
net internal and external capital receipts of the
government.
Formulae: B.D = B.E > B.R (B.D= Budget Deficit, B.E.
Budget Expenditure B.R=
Budget Revenue
b) Fiscal Deficit:- It is the difference between
the total expenditure of the government, the
revenue receipts PLUS those capital receipts which
finally accrue to the government.
Formulae: F.D = B.E - B.R
(B.E > B.R. other than borrowings) F.D=Fiscal Deficit,
B.E= Budget Expenditure, B.R. = Budget Receipts.
c) Revenue Deficit: - It is the excess of
governments revenue expenditures over revenue
receipts.
Formulae: R.D= R.E – R.R.,
When R.E > R.R., R.D= Revenue Deficit, R.E= Revenue
Expenditure, R.R. = Revenue Receipts.
d) Primary Deficit: - It is the fiscal deficit MINUS
Interest payments.
Formulae: P.D= F.D – I.P,
P.D= Primary Deficit, F.D= Fiscal Deficit, I.P= Interest
Payment.
06 MARK QUESATIONS AND ANSWERS
1. How is tax revenue different from administrative
revenue?
Ans:
a) Tax Revenue:-
i) It is the main source of
revenue of the government
ii) It is the revenue that arises
on account of taxes levied by the government.
iii)Taxes of two types i.e., Direct
and Indirect.
iv) 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.
v) 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.
b) Administrative Revenue:-
i) It is the revenue that arises on account of the
administrative function of the
Government.
ii) It includesa)
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.
2. What is a balanced government budget? Explain the
multiplier effect of a balanced budget.
Ans:
a) Balanced Budget: - It is one where the
estimated revenue of the government equals the
estimated expenditure.
b) Effect of Multiplier on the Balanced Budget:-
i) 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)
ii) A balanced budget has an expansionary effect on the
economy.
iii) Under balanced budget, the increase in income is
equalent to the amount of government expenditure financed by tax revenue (i.e.,
Δ Y =ΔG/ΔT)
iv) The multiplier effect of a balanced budget is ONE
(Unitary)
v) A balanced budget is a good policy to bring the
economy, which is under employment
to a full employment equilibrium.
HIGHER ORDER THINKING SKILLS (HOTS)
1. 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.
a) Aggregate fiscal discipline:- This means having
control over expenditures, given the
quantum of revenues. This is necessary for proper
macro-economic performance.
b) Allocation of resources: - The allocation of
resources based on social priorities.
c) Effective and efficient provision of programmes:- Effectiveness
measures the extent to which goods and services the government provides its
goals.
FREQUENTLY ASKED QUESTIONS
1. Define full employment? (1)
2. What do you mean by Aggregate Demand? (1)
3. Write any two components of aggregate demand? (1)
4. Define Aggregate Supply? (1)
5. When APC is 0.6, what is the value of APS? (1)
6. If the rate of MPC is 0.75 find the value of
multiplier? (1)
7. Define investment multiplier? (1)
8. What are the conditions for equilibrium level of
income and employment? (1)
9. What is meant by excess demand? (1)
10. Define inflationary gap. (1)
11. Define deficient demand? (1)
12. Define underemployment equilibrium? (3)
13. What are the monetary measures to correct excess
demand? (3)
14. State the fiscal measures to correct excess demand? (3)
15. Explain any two monetary and fiscal measures to
correct deficient demand? (4)
16. Define investment multiplier. What is the
relationship between MPC and multiplier? (4)
17. State the components of AD. Explain any one. (4)
18. Explain investment multiplier with the help of an
example. (4)
19. Derive saving function from consumption function. (4)
20. State the Keynesian psychological law of consumption
function. (4)
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