{"id":17041,"date":"2021-01-12T17:08:51","date_gmt":"2021-01-12T11:38:51","guid":{"rendered":"https:\/\/mcq-questions.com\/?p=17041"},"modified":"2022-03-02T11:16:07","modified_gmt":"2022-03-02T05:46:07","slug":"ncert-solutions-for-class-12-economics-chapter-5","status":"publish","type":"post","link":"https:\/\/mcq-questions.com\/ncert-solutions-for-class-12-economics-chapter-5\/","title":{"rendered":"NCERT Solutions for Class 12 Economics Chapter 5 Government Budget and the Economy"},"content":{"rendered":"

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics<\/a> 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.<\/p>\n

Government Budget and the Economy NCERT Solutions for Class 12 Economics Chapter 5<\/h2>\n

Government Budget and the Economy Questions and Answers <\/span>Class 12 Economics Chapter 5<\/h3>\n

Question 1.
\nExplain why public goods must be provided by the government.
\nAnswer:
\nPublic 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:<\/p>\n

(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.<\/p>\n

\"NCERT<\/p>\n

(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.<\/p>\n

(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.<\/p>\n

Question 2.
\nDistinguish between revenue expenditure and capital expenditure. (C.B.S.E. 2012,2013,2019)
\nAnswer:
\nFollowing are the points of distinction between revenue expenditure and capital expenditure:<\/p>\n\n\n\n\n\n\n
S. No.<\/strong><\/td>\nRevenue Expenditure<\/strong><\/td>\nCapital Expenditure<\/strong><\/td>\n<\/tr>\n
1<\/td>\nThe revenue expenditure consists of all those expenditures of the government, which neither result in the creation of physical\/ financial assets nor cause any reduction in the liabilities of the government,<\/td>\nThe capital expenditure includes government’s expenditures that either lead to the creation of physical\/financial assets or cause a reduction in the liabilities of the government.<\/td>\n<\/tr>\n
2.<\/td>\nThe revenue expenditure relates to those expenses incurred; for the normal functioning of the government departments and various services. It includes interest payments on debt incurred by the government, and grants given to the state governments and the other parties.<\/td>\nThe capital expenditure includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares and loans and advances by the central government to states and union territory governments, PSUs and other parties.<\/td>\n<\/tr>\n
3.<\/td>\nThe budget documents classify total revenue expenditure into the plan and the non-plan expenditures.
\n\u2022 The plan revenue expenditure relates to the central plans and central assistance for state and union territory plans.
\n\u2022 The non-plan expenditures are interest payments, payment for defence services, subsidies, salaries and pensions.<\/td>\n		The capita! expenditure is categorised as the plan and the non-plan in the budget documents.
\n\u2022 The plan capital expenditure relates to the central plan and assistance for state and union territory plans.
\n\u2022 The non-plan capital expenditure covers various general, social and economic services provided by the government.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\"NCERT<\/p>\n

Question 3.
\nThe fiscal deficit gives the borrowing requirement of the government.\u2019 Elucidate.
\nAnswer:
\nFiscal deficit is the difference between the government’s total expenditure and its total receipts, excluding borrowings.
\nFiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Creating Capital Receipts)<\/p>\n

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.<\/p>\n

Question 4.
\nGive the relationship between the revenue deficit and the fiscal deficit.
\nAnswer:
\nThere is a strong positive relationship between revenue deficit and fiscal deficit. ;
\nRevenue Deficit: Revenue deficit refers to the excess of the government’s revenue expenditure over; revenue receipts. That is,\u00a0Revenue Deficit = Revenue Expenditure – Revenue Receipts :
\nFiscal Deficit: Fiscal deficit refers to the excess of the total budget expenditure over total receipts, excluding borrowings. That is,
\nFiscal Deficit = Total Budget Expenditure – Revenue Receipts – Non-debt creating capital receipts ;<\/p>\n

Question 5.
\nSuppose 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.
\n(i) What is the level of equilibrium income?
\n(ii) Calculate the value of the government expenditure multiplier and the tax multiplier.
\n(iii) If government expenditure increases by 200, find the change in equilibrium income.
\nAnswer:
\nInvestment (I) = 200
\nGovernment Purchases (G) = 150
\nNet taxes (T) = 100
\nConsumption (C) =100 + 0.75Y
\nWhere, C = 100 and c = 0.75<\/p>\n

\"NCERT<\/p>\n

(I) Equilibrium Income; Y = I C-c(Y-T) + I + G
\nY= 100 + 0.75 (Y- 100) + 200+ 150
\nY = 100 + 0.75 Y – (0.75) (100) + 200 + 150
\nY = 0.75 Y + 375
\nY – 0.75 Y = 375
\n0.25 Y = 375 Y= 375 0.25
\nThe level of equilibrium income is 1,500.<\/p>\n

(ii)
\n\"NCERT
\nThe equilibrium income increases by 800 due to increase in government spending by 200.<\/p>\n

Question 6.
\nConsider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50,TR = 100.
\n(i) Find the equilibrium level of income and the autonomous expenditure multiplier in the model.
\n(ii) If government expenditure increases by 30, what is the impact on equilibrium income?
\n(iii) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
\nAnswer:
\nC = 20 + 0.80Y where \\(\\bar{C}\\)= 20, c = 0.80
\nI = 30
\nG = 50
\nTR= 100
\n(i) Equilibrium level of income
\nY = \\(\\bar{C}\\)+ c (Y + TR) + I + G
\nY = 20 + 0.80 (Y + 100)+ 30+ 50
\nY = 20 + 0.80Y + 80 + 80
\nY = 0.80Y + 180
\nY – 0.80Y = 180
\n\\(Y=\\frac{180}{0.20}=900\\)
\nThus, the equilibrium income is 900.
\n\"NCERT
\nThe equilibrium income increases by 150 due to increase in government spending by 30<\/p>\n

\"NCERT
\n\"NCERT
\nThe equilibrium income increases by 120 due to increase in tax by 30<\/p>\n

Question 7.
\nIn 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.
\nAnswer:
\nIn the above question
\nC = 20 + 0.8Y where \\(\\bar{C}\\) = 20, c = 0.80
\nI = 30
\nG = 30
\nTR= 100
\nGiven, increase in transfers = 10 percent
\n\\(\\text { Transfer multiplier }=\\frac{c}{\\mid-c}=\\frac{0.80}{1-0.80}=\\frac{0.80}{0.20}\\)
\nTherefore, increase in output = 10 x 4 = 40 -per cent Increase in lump-sum taxes = 10 per cent Tax multiplier = 4
\nDecrease in output = 10 x 4 = 40 percent
\nThe effect of change in transfers and change in taxes are equal because their size of changes as well as multipliers are equal.<\/p>\n

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

(ii) Tax Revenue = 0.10Y = 0.10x 702.70 = 70.27
\nSince, 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).<\/p>\n

Question 9.
\nSuppose 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;
\n(i) Government purchases increase by 20
\n(ii) Transfers decrease by 20
\nAnswer:
\nMPC = 0.75
\nProportional tax (f) = 20 percent
\n(i) Increase in government purchases (\u0394G) = 20
\nGovernment expenditure multiplier =
\n\"NCERT
\nThe equilibrium income increases by 100 due to increase in government spending by 20.<\/p>\n

\"NCERT<\/p>\n

(ii) Decrease in transfers (\u0394TR) = 20
\nTransfer multiplier = [latex]\\frac{1}{1-c}=\\frac{1}{1-0.75}=\\frac{1}{0.25}=4\\)
\nDecrease in equilibrium income = \\(=\\frac{1}{1-c} \\Delta T R\\)
\n= 4×20
\n= 80
\nThe equilibrium income decreases by 80 due to decrease in transfers by 20.<\/p>\n

Question 10.
\nExplain why tax multiplier is smaller in absolute value than government expenditure multiplier.
\nAnswer:
\nThe tax multiplier is smaller in absolute value than the government expenditure multiplier.
\n\\(\\text { Tax multiplier }=\\frac{|-c|}{\\mid-c}\\)
\nAnd, Government Expenditure Multiplier = \\(\\frac{1}{1-c}\\)(c = Marginal Propensity to Consume) Here, \\(\\frac{c}{1-c}<\\frac{1}{1-c}\\), because c \u2264 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).<\/p>\n

Question 11.
\nExplain the relation between government deficit and government debt.
\nAnswer:
\nGovernment 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.<\/p>\n

Question 12.
\nDoes public debt impose a burden? Explain.
\nAnswer:
\nThe public debt does not always impose a burden.
\n(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.<\/p>\n

These taxes may be levied on the young population that have just entered the workforce. Consequently, the young population\u2019s 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.<\/p>\n

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.<\/p>\n

\"NCERT<\/p>\n

(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.<\/p>\n

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\u2019s total output. The debt, therefore, should not be considered as a burden.<\/p>\n

Question 13.
\nAre fiscal deficit inflationary?
\nAnswer:
\nThe 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.<\/p>\n

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.<\/p>\n

Question 14.
\nDiscuss the issue of deficit reduction.
\nAnswer:
\nThe 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).<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

\"NCERT<\/p>\n

Question 15.
\nWhat 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.
\nAnswer:
\nThe 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.\u00a0 GST is better than the old tax system due to the following reasons:<\/p>\n

(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.<\/p>\n

(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.<\/p>\n

(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.<\/p>\n

(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:<\/p>\n