CBSE Class 12 Economics HOTs Government Budget the Economy

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UNIT – IX

GOVT BUDGET AND THE ECONOMY

QUESTIONS BASED ON HOTS WITH MODEL ANSWERS

Q. 1 Which type of revenue receipts are treated as legally compulsory payment imposed on the people by the govt.? Give example also.

Ans. Taxes imposed on the people by the govt. such as income tax, sales tax.

Q.2 When the liability to pay a tax is on one person and the burden of tax falls on some other person, state the type of tax?

Ans: These are indirect taxes such as sales tax.

Q.3 What happens to aggregate demand when the govt. budget is in deficit?

Ans: A deficit budget increases the aggregate demand because the deficit budget means that the amount of expenditure is more than the amount of tax.

Q.4 Classify the borrowings and recovery of loans into revenue and capital receipts of govt. budget. Give reason also.

Ans. Borrowings are capital receipts because the government is under obligation to return the amount along with interest so it creates liability for the government. Recovery of loans are also capital receipts because these reduce assets of the govt.

Q.5 How tax revenue is different from administrative revenue?

Ans: Tax revenue is the revenue that arises on account of taxes levied by the government. Taxes are of two types: direct taxes and indirect taxes. Direct taxes are those taxes levied immediately on the property and income of persons income tax, corporate tax, wealth tax whereas indirect taxes are the taxes levied on the production and sale of goods like sales taxes, excise duty etc. Administrative revenue is revenue that arises on account of the administrative function of the government. It includes(a)Fees(college/school)(b) License fees paid to get permission to perform a service (c) Fines and penalties etc. 

Q.6 How government reallocates the resources and redistributes the income through Budget?
 
Ans. 1. Reallocation of resources:-
 
In case, the market economy fails or does not achieve the desired social objectives, the government has to interfere through budget and reallocate resources accordingly. Through its budgetary policy, the government of a country directs the allocation of resources in a manner such that there is a balance between the goals of profit maximization and social welfare. Production of goods which are injurious to health is discouraged through heavy taxation. On the other hand, production of ‘socially useful goods’ is encouraged through subsidies.
 
2. Redistribution of Income: -
 
Every economy strives to attain a society, where inequality of income and wealth should be minimum. In order to achieve this objective through govt. budget the government spends sufficient money on social security schemes, economic subsidies and public works etc.
 
Q.6What are the basis of classifying receipts into revenue receipts and capital receipts?

Ans. Revenue receipts are those which neither create a liability for the govt nor reduce the assets of govt such as income tax, sales tax, fees, profits etc. Capital receipts are those which either create a liability for the govt or reduce assets such as borrowings, disinvestment, recovery of loans etc.

Q.7 Why is tax treated as revenue receipt?

 Ans. Because tax neither create a liability for the govt nor reduces assets of the govt.

Q.9 Find out the value of total receipts of govt. Budget if budget deficit is Rs 2,000 crores and the total expenditure is Rs 3,000 crores.
 
Ans:- Budget deficit =Total Expenditure- Total receipts
Total receipts= Total Expenditure- Budget deficit
= 3,000-2,000
= 1,000                     Ans. Rs. 1,000 crores
 
Q.10 What will be the value of fiscal deficit if primary deficit is 53,000 crores and interest on borrowings is Rs 5,000 crores?
 
Ans: - Fiscal deficit=Primary deficit + Interest Payment
= 53,000+5,000
= 58,000               Ans. Rs. 58,000 crores
 
Q.11 State which budget expenditure does not result in creation of assets or reduction of liability. Give examples also.
 
Ans. Revenue Expenditure does not result in creation of assets or reduction of liability. Such expenditures are incurred for the normal running of government departments and maintenance of services. For example: salaries, old age pensions, interest payments, subsidies, grants etc.
 
Q.12 What indicates zero primary deficit?

Ans: Zero primary deficits means that the government has to resort to borrowings only to make interest payments.
 
Q.13 What indicates revenue deficit?

Ans: Revenue deficits are defined as the excess of revenue receipts.
Revenue Deficit = Revenue Expenditure-Revenue Receipts
 
Revenue deficit is a reflection of the government’s fiscal policy. The implication of revenue deficit is that the government is borrowing to maintain even its consumption expenditure. It shows that the country’s financial system is getting destabilised.

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