CBSE Class 12

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 10 Poverty Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Poverty NCERT Solutions for Class 12 Economics Chapter 10

Poverty Questions and Answers Class 12 Economics Chapter 10

Question  1.
Why calorie-based norm is not adequate to identify the poor?
Answer:
The government uses Monthly Per Capita Expenditure (MPCE) of households, which is a calorie- based norm, to identify the poor. However, there are certain limitations to this norm, which are discussed below:

• It groups all the poor together, without differentiating between the very poor and the other types of poor.
• It takes into account only expenditure on food and a few select items. With this mechanism, it becomes difficult to identify who among the poor need the most help.
• Various factors such as accessibility to basic education, health care, drinking water and sanitation are ignored while developing poverty line.
• Social factors such as illiteracy, ill health, lack of access to resources, discrimination or lack of civil and political freedoms trigger and perpetuate poverty. These are also not taken into consideration while determining poverty line.

Question 2.
What is meant by‘Food for Work’ programme?
Answer:
National Food for Work Programme was launched on November 14, 2004 in 150 most backward districts of the India. It is implemented as a 100 per cent centrally sponsored scheme and the foodgrains are provided to States free of cost. The objective of the programme was to intensify the generation of supplementary wage employment.

NFWP is open to all rural poor who are in need of wage employment and willing to do manual unskilled work. Collector is appointed as the nodal officer at the district level. He has the overall responsibility of planning, implementation, coordination, monitoring and supervision.

Question 3.
Why are employment generation programmes important in poverty alleviation in India?
Answer:
The government has initiated various self-employment and wage employment programmes, which help in alleviation of poverty in India by:

• providing an opportunity to the poor to raise the level of their income through government supported schemes
• creating additional assets such as watersheds, water harvesting, canal building, road construction, etc. by means of work generation
• helping in formation of human capital by imparting knowledge and enhancing skills

Question 4.
How can creation of income earning assets address the problem of poverty?
Answer:
Creation of durable assets generates the employment opportunities, which eventually helps in solving the problem of poverty by improving the standard of living of the people. Also, creation of assets such as watershed development works, water harvesting, canal building, construction of roads connecting rural to urban areas and dam construction contribute significantly towards the social and economic development of a country. All these assets are very important for the welfare of the society as a whole.

Question 5.
The three-dimensional attack on poverty adopted by the government has not succeeded in poverty alleviation in India. Comment.
Answer:
Government of India adopted a three-dimensional approach as an attempt to reduce poverty.

• Growth-oriented approach
• Expansion of self-employment and wage employment programmes
• Provision of minimum basic amenities to the people

With the implementation of various strategies to alleviate poverty, the percentage of absolute : poor has declined significantly since independence. However, illiteracy, hunger, malnourishment and lack of basic amenities continue to be common concerns in many parts of India. Reasons which prevented the successful implementation of government’s three-dimensional attack on poverty are:

• There was unequal distribution of land and other assets due to which the benefits from direct poverty alleviation programmes have been acquired by the non-poor.
• The amount of resources allocated for these programmes were insufficient compared to the extent of poverty.
• The government and bank officials who were responsible for the implementation of these programmes were ill-motivated, inadequately trained and corruption prone.

Question 6.
What programmes has the government adopted to help the elderly people, poor and destitute women?
Answer:
The government initiated National Social Assistance Programme under which, homeless elderly people are given pension to sustain themselves. The programme also covers poor and destitute women.

Question 7.
Is there any relationship between unemployment and poverty? Explain.
Answer:
There exists a direct relationship between unemployment and poverty. Poor people lack basic literacy and skills. As a result, they have very limited economic opportunities and face unstable employment. A large number of rural poor migrate to urban areas in search of employment and I livelihood.

The industries in cities, however, have not been able to absorb all these people. The urban poor are either unemployed or intermittently employed as casual labourers. Such labourers have limited skills, sparse opportunities and no job security and hence, they are among the most vulnerable in society. Moreover, the intermittent nature of work compels indebtedness, which reinforces poverty. Thus,unemployment is both the cause and consequence of poverty.

Question 8.
Suppose you are from a poor family and you wish to get help from the government to set up a petty shop. Under which scheme you will apply for assistance and why?
Answer:
A person from a poor family in urban area can apply for assistance through Swarna Jayanti Shahari Rozgar Yojana (SJSRY). However, if a person belongs to rural area, he can apply for assistance under the Prime Minister’s Rozgar Yojana (PMRY). These programmes provide financial assistance in the form of bank loans to educated unemployed from low-income families to set up small industries and shops. Such a scheme encourages individuals to set up any kind of enterprise that can generate employment for them.

Question 9.
Illustrate the difference between rural and urban poverty. Is it correct to say that poverty has shifted from rural to urban areas? Use the trends in poverty ratio to support your answer.
Answer:
Rural poverty implies lack of adequate land, basic dwelling and welfare support through Public Distribution System. The rural poor usually include landless agricultural labourers and cultivators with very small landholdings. Urban poverty is not as intense as rural poverty since a wide variety of jobs are available in urban areas.

The urban poor do jobs such as cart and rickshaw pullers that involve physical labour or menial jobs such as sweeping streets and providing domestic help to make a living. The people involved in such jobs are mostly illiterate and unskilled. The table below shows the estimates of poverty in rural and urban areas in India during 1973-74 and 201 1-12.

The poverty ratio in rural area declined by 38 percent from 41.8 per cent in 2004-05 to 25.7 per cent in 201 1-12. In urban areas, on the other hand, the poverty ratio has declined by 46 per cent from 25.7 percent to 13.7 percent during the period 2004-05 and 201 1-12. The percentage decline is more in urban area. These trends, therefore, do not reflect any major shift of poverty from rural to urban areas.

Question 10.
Suppose you are a resident of village, suggest a few measures to tackle the problem of poverty.
Answer:
Following measures can be taken to tackle the problem of poverty:

• Generation of employment opportunities
• Training of unskilled workers
• Development of cottage and small scale industries
• Improvement in social and economic infrastructure such as schools, roads, hospitals, power, telecom, IT services, training institutions, etc.
• Facilities for education, health and safe drinking water
• Financial assistance for generation income and assets

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 9 Liberalisation, Privatisation and Globalisation: An Appraisal Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Liberalisation, Privatisation and Globalisation: An Appraisal NCERT Solutions for Class 12 Economics Chapter 9

Liberalisation, Privatisation and Globalisation: An Appraisal Questions and Answers Class 12 Economics Chapter 9

Question 1.
Why were reforms introduced in India?
Answer:
Economic reforms were introduced in India to overcome the economic crisis relating to its external 1 debt. The government was not able to make repayments on its borrowings from abroad. The economy was facing problem of declining foreign exchange, growing imports without matching rise in exports and high inflation. Hence, India changed its economic policies in 1991 as a result of pressure from international institutions like the world bank and IMF.

Question 2.
Why is it necessary to become a member of WTO?
Answer:
It is necessary to become a member of WTO because:

• It helps in raising standard of living, real income and employment through expansion of trade.
• It promotes optimum utilisation of the world’s resources.
• It secures the share of developing countries in the growth of international trade.
• It eliminates discriminatory treatment in international trade.
• It ensures linkage among different trade policies, environment policies and sustainable development.

Question 3.
Why did RBI have to change its role from controller to facilitator of financial sector in India?
Answer:
The financial sector in India is controlled by the RBI. All the commercial banks and financial institutions in India are controlled by RBI through various norms and regulations. The RBI decides the proportion of deposits banks have to maintain with themselves, fixes interest rates, nature of lending to various sectors, etc. RBI had to change its role from controller to facilitator in India to allow the financial sector to take decisions on various matters without consulting the RBI.

Question 4.
How is RBI controlling the commercial banks?
Answer:
The commercial banks are controlled by RBI through various norms and regulations. The RBI decides the amount of money that the banks can keep with themselves by fixing CRR and SLR, fixes interest rates, nature of lending to various sectors, etc.

Question 5.
What do you understand by devaluation of rupee?
Answer:
Devaluation of rupee means lowering of the value of rupee in terms of the currencies of the foreign countries. Devaluation takes place when a country has adopted a fixed rate system.

Question 6.
Distinguish between the following: .
(i) Strategic and Minority Sale
(ii) Bilateral and Multi-lateral Trade
(iii) Tariff and Non-tariff barriers
Answer:
(i) Strategic and Minority Sale: In strategic sale, 5 \% or more stake of PSU is sold to the private sector along with the transfer of ownership. In minority sale, less than 49% stake is sold to the private sector. However, the ownership is not transferred and remains with the government.

(ii) Bilateral and Multi-lateral Trade: Trade between two countries is called bilateral. On the other hand, trade between more than two countries is known as multi-lateral trade.

(iii) Tariff and Non-tariff Barriers: Imposing excise duty or custom duty on the import of goods is a tariff barrier. On the other hand, imposing the restriction on the quantity of traded goods through quotas or licenses are non-tariff barriers.

Question 7.
Why are tariffs imposed?
Answer:
Tariffs are imposed:

• to protect the domestic industries from foreign competition; and
• to earn revenues.

Question 8.
What is the meaning of quantitative restrictions?
Answer:
Quantitative restrictions are imposed by the government to restrict the quantity of goods that can be imported or exported. These can be imposed by means of quotas and licenses. Under this restriction, quantity of trade remains fixed. Quantitative restrictions are imposed to promote domestic industries and protect them from foreign competition.

Question 9.
Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?
Answer:
Privatisation implies shedding of the ownership or management of a government owned enterprise, The main motive pf public sector enterprises is social or economic welfare of the people while the main  motive of private sector is to earn profit even at the cost of public welfare. Privatising the profit making j PSUs will affect the development of poorer section of the society.

Thus, public sector undertakings ; which are making profits should not be privatised. A country can achieve ‘growth with justice’ objective or sustainable development only through public sectors participation in the growth process. However, it is essential to privatise those public sector undertaking which are making losses.

Question 10.
Do you think outsourcing is good for India? Why developed countries are opposing it?
Answer:
Outsourcing means a company going out to a source outside the company to buy regular services that were formerly used to be provided departmentally and internally. In recent times, outsourcing has intensified in modes of communications, particularly Information Technology (IT), voice based business process, record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching.

India, where wages are low and skilled workers are plentiful, is able to take advantage of the competitiveness of their manpower. Thus, outsourcing is good for India. Developed countries are opposing it to avoid migration of manpower from underdeveloped countries to developed countries.

Question 11.
India has certain advantages, which makes it a favourite outsourcing destination. What are these advantages?
Answer:
Advantages of India as an outsourcing destination are:

• Low wage rate
• Abundant skilled workers
• Rapid technological development

Most multinational corporations and even small companies are outsourcing their services to India where these can be availed at a cheaper cost with reasonable degree of skill and accuracy. These advantages make India a favourite outsourcing destination.

Question 12.
Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?
Answer:
In 1996, in order to improve efficiency, infuse professionalism and enable them to compete more effectively in the liberalised global environment, the government chose nine PSUs and declared them as Navaratnas.

They were given greater managerial and operational autonomy in taking various decisions to run the company efficiently and hence, increase their profits. Greater operational, financial and managerial autonomy had also been granted to 97 other profit-making enterprises referred to as ‘Miniratnas’.

The first set of navaratna companies is as under.

• BPCL
• HPCL
• IOCL (Indian Oil Corporation Ltd.)
• ONGC
• SAIL
• IPCL
• BHEL
• NTPC
• BSNL

GAIL and MTNL are the other two PSUs, which were also given the same status.

Question 13.
What are the major factors responsible for the high growth of the service sector?
Answer:
The following factors are responsible for the high growth of the service sector:

• Increased demand for services such as banking, insurance, transportation, communication, etc.
• Introduction of New Economic Policy encouraged large inflow of foreign capital in India
• Cheap manpower and latest developments in IT and telecommunications made India a favourite outsourcing destination
• Awareness about education increased the number of qualified people who could contribute more towards services sector

Question 14.
Agricultural sector appears to be adversely affected by the reform process.Why?
Answer:
Agriculture appears to be adversely affected by the reform process because the reforms have not been able to benefit agriculture, which is evident from the decelerating growth rate. The most important issue is the existence of large food-stock in the country and still having more than 250 million people below the poverty line.

Per capita availability of foodgrains and nutritional quality has been declining despite mounting stocks of food grains. Cuts in the subsidies given to the foodgrains producers also raised prices of food grains as the burden of such cuts is passed on to the consumers. However, agricultural subsidies are declining due to the adoption of reform process in this sector also.

Question 15.
Why has the industrial sector performed poorly in the reform period?
Answer:
The following factors are responsible for poor performance of industrial sector during the reform period:

• The demand for domestically produced industrial goods had declined due to availability of cheaper imports and lower investment in this sector. Domestic manufacturers faced tough competition from better quality and low priced goods from abroad.
• Developed countries impose non-tariff barriers to restrict imports from developing countries like India.
• There has always been lack of infrastructural facilities such as power generation, road network, etc.

Question 16.
Discuss economic reforms in India in the light of social justice and welfare.
Answer:
The role of economic reforms in India in the light of social justice and welfare can be discussed with help of the following arguments:
Arguments in Favour of Economic Reforms

• Economic reforms have created opportunities to have greater access to global markets.
• Reforms have opened new avenues for employment.
• There has been rapid increase in foreign direct investment and India’s foreign exchange reserves.

Arguments against Economic Reforms

• Economic reforms have improved the income and standard of living of oniy high income groups. The gap between the rich and poor has increased. This has led to inequality in Indian society.
• Reforms have concentrated only on the development of service sector. The growth and development of agnculture and industry have been ignored.
• The growth of public expenditure has been curtailed, which has reduced the scope for tax revenues.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 8 Indian Economy 1950-1990 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Indian Economy 1950-1990 NCERT Solutions for Class 12 Economics Chapter 8

Indian Economy 1950-1990 Questions and Answers Class 12 Economics Chapter 8

Question 1.
Define a plan.
Answer:
A plan describes the way of allocating the resources of a nation to productive use. A plan should have general as well as specific objectives, which needs to be achieved within a specified period of time. In India, the duration of plans is 5 years.

Question 2.
Why did India opt for planning?
Answer:
On the eve of independence, the agricultural sector in India was burdened with surplus labour and low productivity. There was lack of modem industries, capacity building and public investment. Also, India became the net supplier of raw materials and consumer of finished industrial products from Britain.

There was a need to opt for planning to initiate the process of development with the aim of opening out new opportunities in various sector of the economy, gaining competitiveness and hence, raising the living standard of its people.

Question 3.
Why should plans have goals?
Answer:
Plans should have clearly specified goals. Plans are meant to achieve something and since goals are the ultimate targets of any plan, plans must include goals. There are different goals being emphasised in different plans in India. The major goals of the Five Year Plans are:

• Growth
• Modernisation
• Self-reliance
• Equity

However, not equal importance is given to all the goals in all the plans. Due to limited resources, a choice has to be made in each plan as to which goals needs to be given the primary importance.

Question 4.
What are High Yielding Variety (HYV) seeds?
Answer:
High Yielding Variety (HYV) seeds are better quality seeds, which help increase the production of crops significantly.

Question 5.
What is marketable surplus?
Answer:
Marketable surplus is that portion of agriculture produce which is sold in market by the farmers.

Question 6.
Explain the need and type of land reforms implemented in the agriculture sector.
Answer:
Although agricultural sector was the main source of national income and employment, it remained backward and deficient. It was burdened with defective institutions like Zamindari’ and ‘Jagirdari’. Zamindars were only interested in collecting rent-from the tillers and contributed nothing to improve the productivity of the land. Hence, it was important to implement land reforms to abolish these institutions and make the tenants or tillers, the owners of land.

Following are the different type of land reforms implemented in the agriculture sector

(i) Land Ceiling: It means fixing the maximum size of the land which could be owned by an individual. This purpose of this policy was to reduce the concentration of land in a few powerful hands.

(ii) Abolition of Intermediaries: The policy aimed to bring the tenant in direct control with government and hence, freeing them from the exploitation of zamindars. The cultivators are expected to take more interest in increasing output if they are made the owners of the land. Ownership of land enables the tiller to make profit from the increased output.

Question 7.
What is Green Revolution? Why was It implemented and how did it benefit the farmers? Explain in brief. –
Answer:
Green revolution refers to the large increase in production of foodgrains resuiting from the use of High Yielding Variety (HYV) seeds, especially for wheat, rice and maize.

Green Revolution was implemented:

• to break the stagnation in agriculture caused during the colonial rule: and
• to increase the productivity of agricultural sector.

Benefits of Green Revolution

• Self-sufficiency in foodgrains
• Marketable surplus
• Maintenance of buffer stock
• Upliftment of small farmers

Question 8.
Explain ‘growth with equity’ as a planning objective.
Answer:
Growth refers to increase in country’s domestic output in terms of goods and services. Growth alone may not improve the kind of life which the people are living. A country can have high growth, but most of its people might be living in poverty. It is important to ensure that the benefits of economic prosperity reach the poor sections as well, instead of being enjoyed only by the rich.

Thus, in addition to growth, equity is also important. Equitable distribution of income helps in narrowing the gap between the rich and poor and hence, avoids concentration of wealth in a few hands. Every Indian should be able to meet his or her basic needs such as food, decent house, education and health care. Inequality in the distribution of wealth should be reduced.

Question 9.
Does modernisation as a planning objective create contradiction in the light of employment generation? Explain.
Answer:
Modernisation refers to adoption of latest techniques in the production of goods and services. Adoption of technology tends to involve capital-intensive techniques of production. There might be increased unemployment due to fall in the demand for unskilled labour force. However, technology would encourage individuals to acquire education and training for the same thereby increasing the supply of skilled labour required to run modem machines.

Thus, it would not be correct to say that modernisation as a planning objective creates contradiction in the light of employment generation. Also, modernisation not only refers to adoption of new technology. It also includes transformation in social outlook and making the society more prosperous.

Question 10.
Why was it necessary for a developing country like India to follow self-reliance as a planning objective?
Answer:
‘Self-reliance was considered as an important planning objective to reduce our dependence on foreign countries for food. In the initial years’ of independence, it was feared that dependence .on imported food supplies, foreign technology and foreign capital may make India’s sovereignty vulnerable to foreign interference in our policies.

Question 11.
What is sectoral composition of an economy? Is it necessary that the service sector should contribute maximum to GDP of an economy? Comment.
Answer:
Sectoral composition refers to the contribution made by different sectors in the GDP of the economy. The table below shows the different sectors of Indian economy and their contribution to the country’s GDP

As observed in the case of many developed economies of the world, the share of agriculture declines while the industrial sector becomes dominant with development. Further, if a country’s service sector contributes maximum to the country’s GDP then the country is considered to be at the higher level of development. However, it may also sometimes depend upon the resources a country specialises in.

Question 12.
Why was public sector given a leading role in industrial development during the planning period?
Answer:
Public sector was given a leading role in industrial development during the planning period due to the following reasons:

• Private industrialists had limited capital to undertake investment in industrial ventures necessary to have strong industrial base in the economy.
• The state wanted to generate large scale employment opportunities through public sector.
• While private sector strives to maximise their own profits, public sector ensures equitable distribution of income and wealth.

Question 13.
Explain the statement that green revolution enabled the government to procure sufficient foodgrains to build its stocks that could be used during times of shortage.
Answer:
The spread of green revolution technology enabled India to achieve self-sufficiency in foodgrains. Our country is no longer dependant on foreign nations to meet our food requirements. Due to surplus, the price of good grains declined relative to other consumption items.

The low income groups, who used spend a large percentage of their income on food, benefited from this decline in relative price. The green revolution enabled the government to procure sufficient amount of foodgrains to build a stock that could be used at the time of food shortage.

Question 14.
While subsidies encourage farmers to use new technology, they are a huge burden on government finances. Discuss the usefulness of subsidies in the light of this fact.
Answer:
Subsidies are benefits provided by the government to the domestic producers to encourage production. Subsidies are the incentives for adoption of the new HYV technology by farmers. Some economists favour the elimination of subsidies due to the following reasons:

• The purpose of subsidies is already served.
• Subsidies are benefitting the farmers in the more prosperous region. It is no more benefitting the target groups.
• They are a huge burden on government finances.

However, some believe that the government should continue with agricultural subsidies because farming in India is a risky business. Most farmers are very poor, who would be unable to afford the required input without subsidy. Eliminating subsidies will increase the inequality between rich and poor farmers and hence, violate the goal of equity. The correct policy, therefore, would be to analyse the system and ensure that the benefits of subsidies reach the poor farmers only.

Question 15.
Why, despite the implementation of green revolution, 65 percent of our population continued to be engaged in the agricultural sector till 1990?
Answer:
Although the proportion of GDP contribution by agricultural has declined over the years, the proportion of population working in the sector has not declined considerably. This is because the industrial and service sectors have not absorbed the workforce working in the agricultural sector.

Question 16.
Though public sector is very essential for industries, many public sector undertakings incur huge losses and are a drain on the economy’s resources. Discuss the usefulness of public sector undertakings in the light of this fact.
Answer:
The presence of public sector is important because:

• It helps in creating strong base for heavy industries.
• It contributes towards the development of infrastructure.
• It develops the backward areas.
• It mobilises savings and foreign exchange in right direction.
• It prevents concentration of economic power in a few strong hands.
• It promotes equality through equal distribution of wealth.
•  It creates large scale employment opportunities.

Question 17.
Explain how import substitution can protect domestic industry?
Answer:
Import substitution is the policy which aims to replace or substitute imported goods by domestically ; produced goods and protect the domestic industries from foreign competition, The government may restrict imports and protect domestic industries from foreign competition through tariffs and quotas,

• Tariffs are tax on imported goods. They make imported goods more expensive and discourage their use.
• Quotas specify the quantity of goods which can be imported.

The effect of tariffs and quotas is that, they restrict import and therefore, protect the domestic firms from foreign competition.

Question 18.
Why and how was private sector regulated under the IPR 1956?
Answer:
The aim of the private sector is to maximise profit. In fulfilling this aim, it tends to ignore the welfare of the people. The purpose of IPR, 1956 was to promote regional equality and to ensure that the quantity of goods produced was not more than what the economy required. According to the IPR, the private sector was under the control of the state through the system of licenses.

No new industry was allowed to set up unless a license was obtained from the government. This policy primarily aimed at promoting industries in backward regions. It was easier to obtain a license for an industrial unit to be established in an economically backward region. Moreover, such industrial units were given certain concessions such as tax benefits and electricity at a lower tariff.

Question 19.
Match the following:

Answer:
1. (C), 2. (D.), 3. (B.), 4. (E.), 5. (A.), 6 (F.)

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 7 Indian Economy on the Eve of Independence Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Indian Economy on the Eve of Independence NCERT Solutions for Class 12 Economics Chapter 7

Indian Economy on the Eve of Independence Questions and Answers Class 12 Economics Chapter 7

Question 1.
What was the focus of the economic policies pursued by the colonial government in India? What were the impacts of these policies?
Answer:
The focus of the economic policies pursued by the colonial government in India was concerned more with the protection and promotion of the economic interests of their home country rather than the development of the Indian economy.

The impacts of the policies pursued by the colonial government are stated below:

• India became the net supplier of raw materials and consumer of finished industrial products from Britain.
• India’s traditional handicraft industry was destroyed.
• The growth of India’s aggregate real output was less than two percent during the first half of the twentieth century.
• Agricultural and industrial sectors remained backward and unproductive.

Question 2.
Name some notable economists who estimated India’s per capita income during the colonial period.
Answer:
Notable economists who estimated India’s per capita income (PCI) during the colonial period were Dadabhai Naroji, William Digby, Findlay Shiras, V.K.R.V. Rao and R.C, Desai, Among them, V.K.R.V. Rao’s role is considered very significant in estimating India’s GDP during that time.

Question 3.
What are the main causes of India’s agriculture stagnation during the colonial period?
Answer:
The main causes of India’s agriculture stagnation during the colonial period were:

(i) Land Settlement and Revenue System: The land settlement system introduced by the colonial government, particularly the Zomindari System, caused immense misery among the cultivators of land, Their economic conditions deteriorated as the profit accruing out of the agriculture ; sector went to the zamindars instead of the cultivators. The zamindars did nothing to improve ; the condition of agriculture.

(ii) Commercialisation of Agriculture: Farmers were forced to grow cash crops such as cotton, indigo, etc. instead of food crops. Cash crops were mainly produced to meet the colonial interests. Commercialisation of agriculture increased the burden of revenue on farmers. It also led to shortage of foodgrains in the country. ;

(iii) Other Causes: Factors such as low level of technology, lack of irrigation facilities and the use of negligible amount of fertilisers further worsened the conditions of farmers and contributed to such low level of agricultural productivity.

Question 4.
Name some modern industries which were in operation in our country at the time of independence.
Answer:
The cotton and jute textile mills, iron and steel industries, sugar, cement and paper industries were some modern industries, which were in operation in our country at the time of independence.

Question 5.
What was the two-fold motive behind the systematic de-industrialising effected by the British in pre-independent India?
Answer:
As the agriculture and manufacturing lagged, India could not develop a sound industrial base under the colonial rule. Even as the country’s world famous handicraft industries declined. No corresponding! modern industrial base was allowed to come up and enjoy the benefits of the former. The primary motive of the colonial government behind this policy of systematically de-industrializing India was two-fold.

The intention was, first, to reduce India to the status of a mere exporter of important raw materials for Britain’s upcoming modern industries and second, to turn India into a spreading market for the finished products of those industries. This was to ensure their continued expansion to the maximum advantage of their home country, Britain.

Question 6.
The traditional handicrafts industries were ruined under the British rule. Do you agree with this view? Give reasons in support of your answer.
Answer:
Traditional handicraft industries got a set-back during British period. The main reasons were the following:

• The economic policies pursued by the colonial government in India were concerned more with the protection and promotion of the economic interests of their mother country than with the development of the Indian economy.
• During British period, Indian economy was transformed into a mere supplier of raw materials and consumer of the finished industrial products from Britain.

Question 7.
What objectives did the British intend to achieve through their policies of infrastructure development in India?
Answer:
Basic infrastructure such as railways, ports, water transport, posts and telegraphs developed under the British rule. However, the intention was not to provide amenities to Indian population but to satisfy colonial interests. The infrastructural development during British rule and the motives behind them are mentioned below:

Roads were built primarily to serve the purposes of mobilising the army within India and drawing out raw materials from the countryside to the nearest railway station or the port for export. Railways were introduced in India in 1850 to assist British industries in widening the market for their finished goods. The aim of developing postal and telegraph was to enhance the efficiency of British administration.

Question 8.
Critically appraise some of the shortfalls of the industrial policy pursued by the British colonial administration.
Answer:
Following were some of the shortfalls of the industrial policy pursued by the British colonial administration:

• Decline of the indigenous handicraft industries
• Slow progress of modern industries
• Absence of capital goods industry
• Slow growth rate of industrial sector
• Contribution of industrial sector to the GDP remained very small

Question 9.
What do you understand by the drain of Indian wealth during the colonial period?
Answer:
India had been an important trading nation since ancient times. The colonial government pursued the restrictive policies of commodity production, trade and tariff, which adversely affected the structure, composition and volume of India’s foreign trade. As a result, India became the net exporter of primary products and an importer of finished consumer and capital goods.

Although India’s foreign trade is characterised by a large export surplus during the colonial period, the surplus came at huge cost to the India’s economy. The export surplus did not result in any flow of gold or silver into India. Rather, this was used to make payments for the expenses incurred by the office set up by the colonial government in Britain, expenses on war, and the import of invisible items. All these led to the drain of Indian wealth during the colonial period.

Question 10.
Which is regarded as the defining year to mark the demographic transition from its first to the second decisive stage?
Answer:
1921 is regarded as the defining year to mark the demographic transition from its first to the second decisive stage. However, neither the total population of India nor the rate of population growth at this stage was very high.

Question 11.
Give a quantitative appraisal of India’s demographic profile during the colonial period.
Answer:
Population growth had increased at a fast rate after 1921. On the eve of independence, population was increasing and the economy was firmly in a ‘Vicious Circle of Poverty’. The overall literacy level was less than 16 per cent and the female literacy was less than 7 per cent. Infant mortality rate was quite alarming at about 218 per thousand in comparison with the present infant mortality rate of 63 per thousand. Life expectancy was only 32 years in contrast to the present 63 years, Extensive poverty prevailed in India on the eve of independence. The first official census operation ; was exercised in 1881.

Question 12.
Highlight the salient features of India’s pre-independence occupational structure.
Answer:
Following are the salient features of India’s preindependence occupational structure:

• The distribution of working persons across different industries and sectors showed little sign of change during the colonial rule.
• The largest share of workforce (i.e. 72.7 percent) was engaged in primary sector.
• The secondary and tertiary sectors accounted for 10.1 and 17.2 per cent of working population respectively on the eve of independence.
• There were growing regional variation. Parts of Madras Presidency, Bombay and Bengal witnessed a decline in the share of workforce dependent on agricultural sector and increase in the share of workforce in the manufacturing .and services sectors. On the other hand, in states such as Orissa, Rajasthan and Punjab, there had been an increase in the share of workforce dependent on agriculture during the same period.

Question 13.
Underscore some of India’s most crucial economic challenges at the time of independence.
Answer:
At the time of independence, economic challenges before the country were enormous.
(i) British rule used Indian agricultural sector to satisfy their interests. As a result, agricultural productivity was extremely low at the time of independence. There was lack of investment and labour was surplus. Also, the social and economic conditions of farmers were very poor.

(ii) As the country’s world famous handicraft industries declined, no corresponding modern industrial base was allowed to come up and enjoy the benefits of the former. There was a serious need for modernisation, diversification, capacity building and increase of public investment in industrial sector.

(iii) Basic infrastructure was developed during British rule, but to satisfy colonial interests. There was a need to upgrade and expand the existing railway network.

(iv) The level of poverty and unemployment was very high. There was a need for welfare orientation of public economic policy.

Question 14.
When was India’s first official census operation undertaken?
Answer:
India’s first official census was undertaken in 1881. In the independent India, it was undertaken in 1951.

Question 15.
Indicate the volume and direction of trade at the time of Independence.
Answer:
India has been an important trading nation since ancient times. But the restrictive policies of commodity production, and trade and tariff pursued by the colonial government adversely affected the structure, composition and volume of India’s foreign trade.

Consequently, India became an exporter of primary products such as raw silk, cotton, wool, sugar, indigo, jute, etc. and an importer of finished consumer goods like cotton, silk and woollen clothes and capital goods like light machinery produced in the factories of Britain. Britain maintained a monopoly control over India’s exports and imports. As a result, more than half of India’s foreign trade was restricted to Britain while the rest was allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia.

Question 16.
Were there any positive contributions made by the British in India? Discuss.
Answer:
Although the primary intention of the British policies was to benefit their colonial interest, it did have some positive impact on Indian economy. These positive impacts are discussed below:

• Introduction of railways enabled people to undertake long distance travels and hence, break geographical and cultural barriers
• Commercialisation of agriculture widened the scope of primary sector activities.
• Postal and telegraphs services introduced by the British serve the public of the country even today.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 6 Open Economy Macroeconomics Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Open Economy Macroeconomics NCERT Solutions for Class 12 Economics Chapter 6

Open Economy MacroeconomicsQuestions and Answers Class 12 Economics Chapter 6

Question 1.
Differentiate between balance of trade and current account balance. (C.B.S.E 2013,2017)
Answer:
Following are the points of difference between balance of trade and current account balance:

Question 2.
What are official reserve transactions? Explain their importance in the Balance of Payments.
Answer:
The official reserve transactions are the transactions relating to the sale and purchase of the foreign currency in the foreign exchange market. A country, running down its reserves of the foreign exchange, could engage in the official reserve transactions by selling the foreign currency in the foreign exchange market. Importance of Official Reserve Transactions in the Balance of Payments

A country can run a Balance of Payments surplus or deficit by increasing or decreasing its official reserves. Under the fixed exchange rate system, countries maintain official reserves that allow them to have Balance of Payments disequilibrium, without adjusting the exchange rate. For instance, if a country runs a deficit on the overall balance, the central bank of the country can supply foreign exchanges out of its reserve holdings.

However, if the deficit persists, the central bank will eventually run out of its reserves, and the country may be forced to devalue its currency. Under the flexible exchange rate system, on the other hand, central banks do not intervene in the foreign exchange markets. Central banks, therefore, do not need to maintain official reserves. Thus, the official reserve transactions are more relevant under a regime of the pegged exchange rates than when exchange rates are floating.

Question 3.
Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.
Answer:
The nominal exchange rate is the price of one unit of the foreign currency in terms of the domestic currency. The real exchange rate is the relative price of the foreign goods in terms of the domestic goods. It is equal to the nominal exchange rate times the foreign price level divided by the domestic price level.
Thus, the real exchange rate  \(\frac{e P_{f}}{P}\)
where,  P = Price level in the domestic country
Pf = Price level in the other (foreign) country
e = nominal exchange rate

It measures the international competitiveness of a country in the international trade. When the real exchange rate is equal to one, two countries are said to be in the purchasing power parity. While the nominal exchange rate is based on the current prices, the real exchange rate is based on the constant prices.

If we were to decide whether to buy domestic goods or foreign goods, the real exchange rate would be more relevant. It is because real exchange rate measures the prices abroad relative to those at home. If the real exchange rate is more than one, it implies that the goods abroad are more expensive than the domestic goods and vice-versa.

Question 4.
Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1. 2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in term of Indian goods). (Hint First find out the nominal exchange rate as a price of yen in rupees).
Answer.
Foreign price of domestic rupee = 1.25
Price level of foreign country (P_f) = 3
Price level of domestic country (P) =1.2

Thus, the real exchange rate between India and Japan is 2. Since real exchange rate is greater than I, it indicates that Japanese goods are expensive than Indian goods.

Question 5.
Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.
Answer:
Under the gold standard, all the currencies were convertible into gold. Thus, the fixed exchange rate system was in operation. All the countries on the gold standard had stable exchange rate. Each participant country committed itself to convert freely its currency into gold at a fixed price. This, therefore, made each currency convertible into all others at a fixed price.

Under the gold standard, BoP disequilibrium was corrected through a counter-flow of gold. For instance, suppose that Indian imports from Japan are greater than its export to Japan. Since gold is the only means of international payments, it will flow from India to Japan. Consequently, while India experiences a decrease in money supply, Japan experiences an increase.

This implies that the price level will tend to fall in India and rise in Japan. Further, the Indian products become more competitive compared to Japanese products in the export market. This change will improve Indian BoP and deteriorate Japanese BoP, eventually, eliminating the initial BoP disequilibrium.

Question 6.
How is the exchange rate determined under a flexible exchange rate regime?
Answer:
In a system of flexible exchange rates, the exchange rate is determined by the free play of the market forces of demand and supply. Flexible exchange rate system is also known as the floating exchange rate. In a completely flexible system, the central banks do nothing to directly affect the level of the exchange rate. In other words, they do not intervene in the foreign exchange market and hence, there are no official reserve transactions. The equilibrium in the foreign exchange market may be shown with the help of a diagram.

In the given figure, DD and SS are foreign exchange demand and supply curves respectively. DD and SS intersect at point E. Corresponding to this point, the equilibrium exchange rate is R* and the equilibrium quantity of foreign exchange is Q*.

Question 7.
Differentiate between devaluation and depreciation.
Answer:
Following are the points of difference between devaluation and depreciation:

Question 8.
Would the Central Bank need to intervene in a managed floating system? Explain why.
Answer:
Managed floating exchange rate system is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). It is also known as dirty floating. Under this system, the central banks intervene to buy and sell the foreign currencies in an attempt to control the exchange rate movements whenever they feel that such actions are appropriate. Therefore, official reserve transactions are not equal to zero.

Question 9.
Are the concept of demand for domestic goods and domestic demand for goods the same?
Answer:
No, the concepts of demand for domestic goods and domestic demand for goods are not the same. The domestic demand for goods consists of the following:
Y = C + I + G
Where; C = Consumption
I = Domestic Investment
G = Government Expenditure
The demand for the domestic goods, on the other hand, refers to the Aggregate Demand in an open economy, In an open economy, exports (X) constitute an additional source of demand for the domestic goods and services that come from abroad and therefore, must be added to the Aggregate Demand. The imports (M) supplement supplies in domestic markets and constitute that part of domestic demand that falls on the foreign goods and services. Therefore, the national income identity for an open economy is:
Y + M = C + l + G + X
Rearranging, we get;
Y = C + l + G + X- M
= C + I + G – NX
where; NX is net exports (Exports – Imports).

Question 10.
What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?
Answer:
M = 60 + 0.06Y
The import function is given as:
M = \(\bar{M}\)-mY
Thus, m = 0.06
\(\bar{M}\) > 0 is the autonomous component, and 0 < m < I.
Here, m is the marginal propensity to import. It is the fraction of an extra rupee of income spent on imports, a concept analogous to the Marginal Propensity to Consume. There is a positive relationship between marginal propensity to import and Aggregate Demand function. Higher the marginal propensity to import, greater is the Aggregate Demand.

Question 11.
Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?
Answer:
The open economy multiplier is smaller than in the closed economy because a part of the domestic demand falls on the foreign goods. An increase in the autonomous demand, therefore, leads to a smaller increase in the output in an open economy. It also results in a deterioration of the trade balance. Since, the marginal propensity to import is always greater than zero; we get a smaller multiplier in an open economy. We know that:

Let us take an example. If c = 0.8 and m = 0.3, we would have the open and closed economy multipliers as

Question 12.
Calculate the open economy multiplier with proportional taxes,T = tY, instead of lump-sum taxes as assumed in the text.
Answer:
Open Economy Multiplier (in case of lump-sum taxes) = \(\frac{1}{1-c+m}\)
In the case of proportional tax, the equilibrium income would be;
Y = C+c( I -t)Y+ I +G+X-M-mY
Y – C(I – t)Y + mY = C+1 + G + X – M
\(Y=\frac{A}{1-c(1-t)+m}\)
where; Autonomous Expenditure (A) = C + I + G + X
Therefore, the open economy multiplier (in case of proportional taxes) =\frac{1}{1-c(1-t)+m}

Question 13.
Suppose C = 40 + 0.8Y_D,T = 50,1 = 60, G = 40, X = 90, M = 50 + 0.05Y
(i) Find equilibrium income.
(ii) Find the net export balance at equilibrium income.
(iii) What happens to equilibrium income and the net export balance when the government purchase increases from 40 to 50?
Answer:
(i) Equilibrium income is determined as:
= \(\bar{C}\)+ cY_D +1 + G + (X – M)
= \(\bar{C}\) + c(Y – T) +1 + G + (X – M)
Given: C = 40 + 0.8Y_D, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y.
Substituting appropriate values in (I), we get:
Y = 40 + 0.8 (Y – 50) + 60 + 40 + 90 – (50 + 0.05Y)
Y = 40 + 0.8Y – 40 + 60 + 40 + 90 – 50 – 0.05Y
Y = o.8Y – 0.5Y + 40-40 + 60 + 40 + 90 – 50
Y = 0.75Y + 140 Y
Y – 0.75Y = 140
\(Y=\frac{140}{0.25}=560\)
Thus, the equilibrium income is 560.

(ii) Net exports are calculated as the difference between the exports and imports. That Exports = X – M
= 90 – [50 + (0.05 x 560]
= 90 – (50 + 28)
= 90-78 = 12
Thus, the net export balance at equilibrium income is 12.

(ii) Change in equilibrium income due to change in government expenditure can

New income = 560 + 40 = 600
Thus, the new equilibrium income is 600.
Net Exports = X – M₁
= 90 – [50 + (0.05 x 600)]
= 90 – (50 + 30)
= 90 – 80 = 10
Thus, the net export balance at new equilibrium income is 10.

Question 14.
In the above question, if exports change to X = 100, find the change in equilibrium income and the net export balance.
Answer:
(i) Equilibrium income is determined as:
Y = \(\bar{C}\) + cY_D +I + G + (X – M)
= \(\bar{C}\) + c(Y – T) +I + G + (X – M)
Given: C = 40 + 0.8Y_D, T = 50, I = 60, G = 40, X = 100, M = 50 + 0.05Y.
Substituting appropriate values in (I), we get:
Y = 40 + 0.8 (Y – 50) + 60 + 40 + 100 – (50 + 0.05Y)
Y = 40 + 0.8Y – 40 + 60 + 40 + 100 – 50 – 0.05Y
Y = 0.8Y – 0.5Y + 40 – 40 + 60 + 40 + 100 – 50
Y = 0.75Y + 150 Y
– 0.75Y = 150
0.25Y = 150
\(Y=\frac{150}{0.25}=600\)
Thus, the equilibrium income is 600.

(ii) Equilbrium Income when exports were 90 Y₁ = 560
Equilibrium Income when exports are 100       Y₂ = 600
Thus, change in equilibrium income;
y = y₂ – y₁
= 600 – 560 = 40
Equilibrium income increased by 40 when exports increased from 90 to 100.

(ii) Net exports are calculated as the difference between the exports and imports.That is,
Net Exports = X – M
= 100-[50 + (0.05 x 600)]
= 100 -(50 + 30)
= 100-80 = 20
Thus, the net export balance at equilibrium income is 20.

Question 15.
Suppose the exchange rate between the Rupee and the dollar was ₹30 = I $ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.
Answer:
The rupee-dollar exchange rate as ₹ 30 = I $ implies that if a good, say a hat, costs $ I in the USA, it will cost ₹ 30 in India. Now, it is assumed that the prices in India double in the next 20 years but remain fixed in the USA.

In, Indian the hat would now cost ₹ 60 while in America, the hat would still cost I $. According to the purchasing power parity theory, I $ is worth ₹ 60 for these two prices to be equivalent. Thus, the exchange rate between dollar and rupee in the year 2030 would be ₹ 60 = I $.

Question 16.
If inflation is higher in country A than in country B, and the exchange rate between the two  countries is fixed, what is likely to happen to the trade balance between the two countries?
Answer:
If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed, the trade balance of country A will show the deficit while that of country B will show surplus. In such a situation, imports of country A will rise or exports of country A will decline. As a result, the trade balance of country A will be unfavourable and the trade balance of country B will be favourable.

Question 17.
Should a current account deficit be a cause for alarm? Explain.
Answer:
When a country runs a current account deficit, there may be a decrease in saving, increase in investment or an increase in the budget deficit, A current account deficit must be a cause for alarm if it reflects smaller saving or a larger budget deficit. The deficit indicates higher private or government consumption. In such cases, the country’s capital stock will not rise rapidly enough to yield growth. It needs to repay its debt.

However, a current account deficit need not be a cause for alarm if it reflects an increase in the investment, which will build the capital stock more quickly and increase future output. In short, the current account deficits need not be an issue of concern if the country invests the borrowed funds yielding a rate of the growth higher than the interest rate.

Question 18.
Suppose C = 100 + 0.75YD, I = 500, G = 750, taxes are 20 percent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.
Answer:
(i) Equilibrium income is determined as:
Y = C + cYD+l + G + (X-M)
= C + c(Y – tY) +1 + G + (X – M)
= C + c(l – t)Y +1 + G + (X – M)
Given: C = 100 + 0.75YD, t = 0.20Y, I = 500, G = 750, X = 150, M = 100 + 0.2Y.
Substituting appropriate values in (I), we get:
Y = 100 + 0.75 (1 -0.20) Y + 500 + 750 + (150 – I00-0.2Y)
Y = 100 + (0.75) (0.8) Y + 500 + 750 + 150 – 100 – 0.2Y
Y = 0.6Y – 0.2Y + 1400 Y = 0.4Y + 1400
Y – 0.4Y = 1400
\(Y=\frac{1400}{0.6}=2333\)
Thus, the equilibrium income is 2,333.

(ii) Budget deficit is estimated as the difference between government expenditure and government receipts. That is,
Budget Deficit
= G – T
= G – tY
\(=750-\left(\frac{20}{100} \times 2333\right)\)
= 750 – 467 = 283
Thus, the budget deficit is 283.

(iii) Trade deficit or surplus is estimated as the difference between the exports and imports, That is, Net Exports = X – M
= 150- [100 + (0.2 x 2333)]
= 150-(100 + 467)
= 150 – 567 = – 417
Since net exports are negative, there exists trade deficit of 417.

Question 19.
Discuss some of the exchange rate arrangements that countries have entered in to bring about stability in their external accounts.
Answer:
Following are some of the exchange rate arrangements that country have entered in to bring about stability in their external accounts:
(i) The Gold Standard: From 1870 to 1914, the prevailing system was the gold standard, which was the epitome of the fixed exchange rate system. All currencies were defined in terms of gold; indeed some were actually made of gold.

Each participant country committed to guarantee the free convertibility of its currency into gold at a fixed price. This meant that residents had, at their disposal, a domestic currency which was freely convertible at a fixed price into another asset (gold) acceptable in the international payments.

(ii) The Bretton Woods System: The Bretton Woods Conference held in 1944 set up the IMF and the World Bank, and re-established a system of fixed exchange rate. This was different from the international gold standard in the choice of the asset in which national currencies would be convertible. The US monetary authorities guaranteed the convertibility of the dollar into gold at the fixed price of gold.

(iii) The Fixed Exchange Rates: The countries have had flexible exchange rate system ever since the breakdown of the Bretton Woods System in the early 1970s. Prior to that, most countries had fixed or what is called the pegged exchange rate system, in which the exchange rate is pegged at a particular level.

Under a fixed exchange rate system, such as the gold standard, adjustment to BoP surplus or deficit cannot be brought about through changes in the exchange rate. Adjustment must either come about automatically through the workings of the economic system or be brought about by the government.

(iv) Managed Floating: Managed floating exchange rate system is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). It is also known as dirty floating. Under this system, the central banks intervene to buy and sell the foreign currencies in an attempt to control the exchange rate movements whenever they feel that such actions are appropriate.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 5 Government Budget and the Economy Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

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

Government Budget and the Economy Questions and Answers Class 12 Economics Chapter 5

Question 1.
Explain why public goods must be provided by the government.
Answer:
Public goods are those goods which are consumed collectively. These are financed by the government through the budget and made available free of any direct payment. National defence, roads, the government administration, etc. are known as public goods. These goods must be provided by the government because of the following reasons:

(i) People have no compelling reason to voluntarily pay for public goods as they have with private goods. This gives rise to free-rider problem, which refers to the problem of enjoying benefits of a good without paying for its costs.

(ii) The benefits of public goods are not limited to a particular consumer; rather they become available to all. The consumption of such goods by several individuals is non-rivalry as an individual can enjoy the benefits without reducing their availability to others.

(iii) In case of private goods, anyone who does not pay for the good can be excluded from enjoying its benefits. however, there is no feasible way of excluding anyone from enjoying the benefits of the public goods. They are non-excludable. Since non-paying users usually cannot be excluded, it becomes difficult or impossible to collect fees for the public good.

Question 2.
Distinguish between revenue expenditure and capital expenditure. (C.B.S.E. 2012,2013,2019)
Answer:
Following are the points of distinction between revenue expenditure and capital expenditure:

Question 3.
The fiscal deficit gives the borrowing requirement of the government.’ Elucidate.
Answer:
Fiscal deficit is the difference between the government’s total expenditure and its total receipts, excluding borrowings.
Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Creating Capital Receipts)

Fiscal deficit implies that the government is spending more than what it is receiving. It, therefore, gives an indication to the government about the total borrowing requirements from all the available sources. Fiscal deficits can be financed through domestic borrowings and/or borrowings from abroad. Greater fiscal deficit implies greater borrowings by the government.

Question 4.
Give the relationship between the revenue deficit and the fiscal deficit.
Answer:
There is a strong positive relationship between revenue deficit and fiscal deficit. ;
Revenue Deficit: Revenue deficit refers to the excess of the government’s revenue expenditure over; revenue receipts. That is, Revenue Deficit = Revenue Expenditure – Revenue Receipts :
Fiscal Deficit: Fiscal deficit refers to the excess of the total budget expenditure over total receipts, excluding borrowings. That is,
Fiscal Deficit = Total Budget Expenditure – Revenue Receipts – Non-debt creating capital receipts ;

Question 5.
Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y.
(i) What is the level of equilibrium income?
(ii) Calculate the value of the government expenditure multiplier and the tax multiplier.
(iii) If government expenditure increases by 200, find the change in equilibrium income.
Answer:
Investment (I) = 200
Government Purchases (G) = 150
Net taxes (T) = 100
Consumption (C) =100 + 0.75Y
Where, C = 100 and c = 0.75

(I) Equilibrium Income; Y = I C-c(Y-T) + I + G
Y= 100 + 0.75 (Y- 100) + 200+ 150
Y = 100 + 0.75 Y – (0.75) (100) + 200 + 150
Y = 0.75 Y + 375
Y – 0.75 Y = 375
0.25 Y = 375 Y= 375 0.25
The level of equilibrium income is 1,500.

(ii)

The equilibrium income increases by 800 due to increase in government spending by 200.

Question 6.
Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50,TR = 100.
(i) Find the equilibrium level of income and the autonomous expenditure multiplier in the model.
(ii) If government expenditure increases by 30, what is the impact on equilibrium income?
(iii) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
Answer:
C = 20 + 0.80Y where \(\bar{C}\)= 20, c = 0.80
I = 30
G = 50
TR= 100
(i) Equilibrium level of income
Y = \(\bar{C}\)+ c (Y + TR) + I + G
Y = 20 + 0.80 (Y + 100)+ 30+ 50
Y = 20 + 0.80Y + 80 + 80
Y = 0.80Y + 180
Y – 0.80Y = 180
\(Y=\frac{180}{0.20}=900\)
Thus, the equilibrium income is 900.

The equilibrium income increases by 150 due to increase in government spending by 30

The equilibrium income increases by 120 due to increase in tax by 30

Question 7.
In the above question, calculate the effect on output of a 10 percent increase in transfers, and a 10 percent increase in lump-sum taxes. Compare the effects of the two.
Answer:
In the above question
C = 20 + 0.8Y where \(\bar{C}\) = 20, c = 0.80
I = 30
G = 30
TR= 100
Given, increase in transfers = 10 percent
\(\text { Transfer multiplier }=\frac{c}{\mid-c}=\frac{0.80}{1-0.80}=\frac{0.80}{0.20}\)
Therefore, increase in output = 10 x 4 = 40 -per cent Increase in lump-sum taxes = 10 per cent Tax multiplier = 4
Decrease in output = 10 x 4 = 40 percent
The effect of change in transfers and change in taxes are equal because their size of changes as well as multipliers are equal.

Question 8.
We suppose that C = 70 + 0.70 Y_D, I = 90, G = 100,T = 0. 10Y.
(i) Find the equilibrium income.
(ii) What are tax revenues at equilibrium income? Does the government have a balanced budget?
(i) Equilibrium level of income
Y = \(\bar{C}\) + c(Y – tY) +1 + G
Y = \(\bar{C}\) + c(Y – 0.10Y) + 90 + 100
Y = 70 + 0.70 (Y – 0.10Y) + 90 + 100
Y = 70+ 0.70 (0.90Y) + 190
Y = 70 + 0.63Y + 190
Y – 0.63Y = 260
Y = \(\frac{260}{0.37}[latex] =702.70
Thus, equilibrium income is 702.70.

(ii) Tax Revenue = 0.10Y = 0.10x 702.70 = 70.27
Since, tax revenue are 70.27 and government spending is 100, government does not have a balanced budget. For balanced budget, it is essential that government spending must be equal to government revenue (taxes).

Question 9.
Suppose Marginal Propensity to Consume is 0.75 and there is a 20 percent proportional income tax. Find the change in equilibrium income for the following;
(i) Government purchases increase by 20
(ii) Transfers decrease by 20
Answer:
MPC = 0.75
Proportional tax (f) = 20 percent
(i) Increase in government purchases (ΔG) = 20
Government expenditure multiplier =

The equilibrium income increases by 100 due to increase in government spending by 20.

(ii) Decrease in transfers (ΔTR) = 20
Transfer multiplier = [latex]\frac{1}{1-c}=\frac{1}{1-0.75}=\frac{1}{0.25}=4\)
Decrease in equilibrium income = \(=\frac{1}{1-c} \Delta T R\)
= 4×20
= 80
The equilibrium income decreases by 80 due to decrease in transfers by 20.

Question 10.
Explain why tax multiplier is smaller in absolute value than government expenditure multiplier.
Answer:
The tax multiplier is smaller in absolute value than the government expenditure multiplier.
\(\text { Tax multiplier }=\frac{|-c|}{\mid-c}\)
And, Government Expenditure Multiplier = \(\frac{1}{1-c}\)(c = Marginal Propensity to Consume) Here, \(\frac{c}{1-c}<\frac{1}{1-c}\), because c ≤ I. An increase in the government expenditure directly affects the total expenditure. The taxes, on the other hand, enter the multiplier process through their impact on disposable income which influences the household consumption (which is a part of expenditure).

Question 11.
Explain the relation between government deficit and government debt.
Answer:
Government deficit and government debt are closely related. The government deficit is a flow concept but it adds to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt and the government has to pay more and more in the form of interest, These :interest: payments themselves contribute to the debt. Thus, deficit is the cause and effect of the debt.

Question 12.
Does public debt impose a burden? Explain.
Answer:
The public debt does not always impose a burden.
(i) Case 1 : A public debt imposes a burden: By borrowing, the government transfers the burden of reduced consumption on future generations. When the government borrows by issuing bonds to the people living at present, it may decide to pay off the bonds, say, twenty years later by raising the tax rate.

These taxes may be levied on the young population that have just entered the workforce. Consequently, the young population’s disposable income will fall and hence, their consumption level. This reduces the capital formation and growth in the economy. Thus, the debt acts as a burden on the future generations in this case.

Further, any debt that is owed to foreigners involves a burden as goods are sent abroad in lieu of the interest payments on foreign borrowings.

(ii) Case 2: A public debt does not impose a burden: It is generally argued that the ‘debt does not matter because we owe it to ourselves.’ The reason is that the purchasing power remains within the nation even though, there is a transfer of resources between generations.

If investment by the government in infrastructure makes the future generations better off, the returns on such investments will be greaterthan the rate of interest. The actual debt could be paid off by the growth in economy’s total output. The debt, therefore, should not be considered as a burden.

Question 13.
Are fiscal deficit inflationary?
Answer:
The fiscal deficit may be inflationary because when the government increases spending or cuts taxes, the Aggregate Demand increases. The firms may not be able to the produce or supply the higher quantities that are being demanded at the existing prices.

As a consequence, the price level rises. However, if there are unutilised resources, the output is neld back due to lack of demand. A high fiscal deficit is accompanied by the higher demand and the greater output and thei efore, need not be inflationary.

Question 14.
Discuss the issue of deficit reduction.
Answer:
The government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase the tax revenue with greater reliance on direct taxes. There has also been an attempt to raise receipts through the sale of shares in Public Sector Units (PSUs).

However, the major thrust has been towards reduction in the government expenditure. This could be achieved through making the government activities more efficient through better planning of the programmes and better administration.

Only large deficits do not signify that an expansionary fiscal policy is being implemented. The same fiscal measures can give rise to a large or small deficit, depending upon the state of the economy.

For example, if an economy experiences a recession and GDP falls then the tax revenue also fall because the firms and the households pay lower taxes when they earn less. This means that the deficit increases during a recession and falls during a boom, even with no change in the fiscal policy.

Question 15.
What do you understand by G.S.T? How good is the system of G.S.T as compared to the old tax system? State its categories.
Answer:
The GST or Good and Services Tax is a value-added tax paid by the consumers and remitted to the government by the seller of various goods and services. GST is levied on most goods and services that are sold for domestic consumption.  GST is better than the old tax system due to the following reasons:

(i) It is a broader scheme with only one law and only one CGST rate and a uniform rate of SGST across all states., as GST includes various indirect taxes.

(ii) With GST, all taxes have been integrated and hence, tax burden on the tax payer has reduced significantly. The burden is now shared equally by the providers of goods and services.

(iii) Due to multiplicity of laws, tax compliance was complicated procedure. However, tax compliance would be much easier with GST as there is only one law subsuming other taxes.

(iv) GST is levied only at final destination of consumption and not at each stage of production and consumption. This brings more transparency and corruption-free tax administration. There are five categories of GST, as stated below:

• Exempted Goods – No GST
• Commonly used goods and services – GST @ 5%
• Standard goods and services (Slab I) – GST@ 12%
• Standard goods and services (Slab 2) – GST @ 18%
• Special category of goods and services (including luxury items) – GST @ 28%