CBSE Class 12 Economics HOTs Government Budget the Economy

Refer to CBSE Class 12 Economics HOTs Government Budget the Economy. We have provided exhaustive High Order Thinking Skills (HOTS) questions and answers for Class 12 Economics Part B Macroeconomics Chapter 5 Government Budget and The Economy. Designed for the 2025-26 exam session, these expert-curated analytical questions help students master important concepts and stay aligned with the latest CBSE, NCERT, and KVS curriculum.

Part B Macroeconomics Chapter 5 Government Budget and The Economy Class 12 Economics HOTS with Solutions

Practicing Class 12 Economics HOTS Questions is important for scoring high in Economics. Use the detailed answers provided below to improve your problem-solving speed and Class 12 exam readiness.

HOTS Questions and Answers for Class 12 Economics Part B Macroeconomics Chapter 5 Government Budget and The Economy

 

GOVT BUDGET AND THE ECONOMY

MULTIPLE CHOICE QUESTIONS

Question. tax that imposed on value added at the various stages of production is known as
a) Corporate profit tax
b) Direct personal tax
c) Value added tax
d) None of these
Answer : C

Question. Progressive tax is a tax which is
a) Charged at a decreasing rate when income of the individual increases
b) Charged at an increasing rate when income of the individual increases
c) A fixed percentage of an individual income
d) None of these
Answer : B

Question. In the context of government budget which of the following statement is correct
a) It is a statement of expected annual receipts and expenditures of the government
b) It is detail of actual receipts and expenditure of the government in a financial year
c) It offers a detailed description of achievements of the government during the five-year plans
d) It indicates bop status of the domestic economy
Answer : A

Question. A tax the burden of which can be shifted on to others, is called:
a) indirect tax
b) direct tax
c) wealth tax
d) none of these
Answer : A

Question. capital receipt is that receipt of the government which:
a) creates a liability
b) reduces the assets
c) both (a)and (b)
d) neither (a) or (b)
Answer : C

Question. Revenue earned by the government from the property without any legal heir is called:
a) donation
b) escheat
c) wealth tax
d) none of these
Answer : B

Question. which of the following is a direct tax?
a) income tax
b) excise duty
c) sales tax
d) custom duty
Answer : A

Question. Which of the following are capital receipts of the government?
a) Recovery of loans
b) Borrowings
c) Disinvestment
d) All of these
Answer : D

Question. Gift tax is a paper tax because
a) It is an indirect tax
b) It is a direct tax
c) It does not have significant revenue yield
d) Both b and c
Answer : C

Question. which of the following are the objective of government budget?
a) distribution of income and wealth
b) economics stability
c) GDP growth
d) all of these
Answer : D

Question. the difference between fiscal deficit and interest payment is called:
a) revenue deficit
b) primary deficit
c) budget deficit
d) capital deficit
Answer : B

Question. Capital expenditure is that estimated expenditure of the government by which
a) Assets are increased
b) Liabilities are decreased
c) Both a and b
d) Assets and liabilities do not change
Answer : C

Question. which of the following is a non-tax receipt?
a) gift tax
b) sales tax
c) donations
d) excise duty
Answer : C

Question. A budget is a balanced one when
a) Total expenditure= total receipts
b) Total expenditure<total receipts
c) Total expenditure>total receipts
d) None of these
Answer : A

Question. Find primary deficit from the following data:
Items                                                    (₹ in crore)
(i) Revenue deficit                                     8,800
(ii) Fiscal deficit                                         11,600
(iii) Interest payment by the government   1,600
Answer. Primary Deficit= Fiscal deficit - Interest payment by the government

Question. Calculate Revenue Deficit. Fiscal Deficit and Primary Deficit from the following data
Items                                                 (₹ in crore)
(i)Revenue expenditure                           22,250
(ii) Capital expenditure                            28,000
(iii) Revenue receipts                              17,750
(iv) Capital receipts (net of borrowing)    20,000
(v )Interest payments                              5,000
(vi) Borrowings                                      12,500
Answer. Revenue Deficit = Revenue expenditure - Revenue receipts
Fiscal deficit =Revenue expenditure+Capital expenditure - Revenue receipts - Capital receipts (net of borrowing)
=Borrowings
Primary Deficit= fiscal deficit - Interest payments

Question. Find borrowing by the government of payment of interest is estimated to be of ₹15,000 crore which is 25 % of primary deficit.
Answer. Here, Primary Deficit =Fiscal deficit- interest payment
Or, Focal Deficit= Primary deficit + interestpayment
Borrowing =Fiscal Deficit

Question. Revenue deficit is estimated to be ₹ 20,000 crore, and borrowing is estimated to be 15,000 crore. expenditure on interest payment is estimated to be 50% of the revenue deficit, findfiscal deficit andprimary deficit.
Answer. Fiscal Deficit = Borrowing
Primary Deficit = Fiscal deficit - Interest payment

Question. Comment on the following statements as true or false, with a reason. 
(i) Construction of school-building is a revenue expenditure of the government.
(ii) Gift tax is a capital receipt.
(iii) Dividends on investment made by government is a revenue receipt.
Answer. (i) capital expenditure
(ii) revenue receipt.
(iii) revenue receipt

Question. Categorise the following government receipts into revenue and capital receipts. Give reasons for your answer. 
(i) Receipt from sale of shares of a public sector undertaking,
(ii) Borrowing from public.
(iii) Profit of public sector undertakings.
(iv) Income tax received by government.
Answer.
(i) capital receipt
(ii) capital receipt
(iii) revenue receipt.
(iv) revenue receipt.

Question. Why should revenue deficit be curbed?
Answer. Revenue deficit often occurs when unproductive expenditure of the government is in excess of the tax and non-tat revenue receipts.

Question. Finance Minister has announced that steps would be taken to rationalise dominate the economy of the nation.What is the economic value of this statement?
Answer. Expenditure on subsidies is mostly unproductive.

Question. How the decline in the price of crude oil in the international market helped the government to reduce fiscal deficit?
Answer. It has raised tax revenue of the government. Accordingly, fiscal deficit has reduced.

Question. How can the government impact allocation of resources through its budgetary policy? 
Answer. Following observations highlight how the government can impact allocation of resources though its policy:
(a) The government can offer subsidies on such goods like coarse cloth the production of which is essential for poorer sections of the society. So that, the resources are shifted from the production of ‘goods for the rich to the production of goods for the poor’.
(b) The government can grant tax holiday
(c) The government can impact allocation of resources by shifting its own investments from inefficient toefficient units of production.
(d) High taxation can be imposed on such goods ,the production of which is harmful to the society.
(e) The government can make larger budgetary allocations for its ‘Support Price Policy’ in favour of food crops .

Question. Do you approve of disinvestment as a prudent means of financing budgetary deficit?
Answer. Disinvestment occurs when the government chooses to sell its stake in public sector or joint enterprises .To remember-
(i) it should unload shares of only inefficient enterprises.
(ii) Money received through disinvestment should be for productive investment.

Question. How would you distinguish between development and non-development expenditure?
Answer. Development expenditure is related to investment expenditure or productive expenditure.
Non-development expenditure is related to consumption expenditure by the government.

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.
Answer : 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?
Answer : These are indirect taxes such as sales tax.

Q.3 What happens to aggregate demand when the govt. budget is in deficit?
Answer : 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.
Answer : 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?
Answer : 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? 
Answer : 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.6 What are the basis of classifying receipts into revenue receipts and capital receipts?
Answer : 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?
Answer : 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.
Answer : 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?
Answer : 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.
Answer : 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?
Answer : ero primary deficits means that the government has to resort to borrowings only to make interest payments.
 
Q.13 What indicates revenue deficit?
Answer : 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.

Q.1 Explain the ‘redistribution of income’ objective of a government budget.

                                                    OR
Explain how the government budget can help in a fair distribution of income in the economy.
Answer : Budgetary policies are useful medium to reduce inequalities of income for the fair distribution of income. government can use tax policy and public expenditure as a tool. govt can reduce the disposable income and wealth of Rich by imposing heavy tax and can spend more on providing free services to the poor. It raise the disposable income welfare of the poor.
 
Q. 2 Explain the “Reallocation of resources” objective of a government budget.
Answer : Through its Budgetary policy the government directs the allocation of resources in a manner such that there is a balance between the goal or of profit maximisation and social welfare. Government can provide subsidy and reduction in tax rate to motivate investment into areas where private sector initiative is not coming. Production of goods which are injurious to social life is discouraged through heavy taxation.
 
Q. 3 Distingush between revenue receipts and capital receipts with the help of example.
Answer : Revenue receipts                                                                                                           
1. These receipts do not create any liability for the govt.                                     
2. These receipts do not cause any reduction in assets                                       
3. Example :– Tax receipts                   
Capital Receipts                 
1. These receipts create liability for for the govt.             
2. These receipts cause a reduction in assets of the govt.                               
3. Example:– Loan by govt.disinvestment.
 
Q. 4 Distingush between revenue expenditure and capital expenditure with the help of example.
Answer : Revenue Expenditure                                                                                                     
1. These expenditure do not cause increase in govt. assets                           
2. These expenditure do not cause any reduction in govt. liability                   
3. Example:– transfer payment by govt       
Capital Expenditure    
1. These expenditure are causes in increase govt. assets.
2. These expenditure are causes  reduction in govt. liability.
3. Example:– Repayment of loan by govt.
 
Q. 5 Distingush between direct and indirect tax
Answer : Direct Tax                                                                                                                     
1. Direct tax is a tax whose liability to pay and incidence incidence lie on the same person 
2. Its incidence can not be shifted to some other person  
3. Example :– income tax   
Indirect Tax
1. The liability to pay and incidence of indirect tax do not lie on the same person
2. Its incidence can be shifted  to some other person
3. Production tax
 
Q. 6 What is meant by fiscal deficit. Write its implications.
Answer : Fiscal deficit is equal to excess of total expenditure over the sum of revenue receipts and capital receipts excluding borrowings. ie. Fiscal deficit means borrowing of the government.
Fiscal Deficit :– Total expenditure – Total receipts net of borrowings
Implication of Fiscal deficit
1. It increase the supply of money in the economy
2. it increase financial burden for future generation.
3. it is cause of inflation.
GOVT BUDGET AND THE ECONOMY
 
VERY SHORT ANSWER TYPE QUESTIONS: - (1 Mark Each)
 
Q.1 What does low primary deficit indicate?
Answer : It implies that the government is borrowing largely to make interest payment on previous loans.
 
Q.2. Why is sales tax treated as revenue receipt?
Answer : Because sales tax neither create a liability for the govt nor reduces assets of the govt.
 
Q.3 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.
Answer : Budget deficit =Total Expenditure- Total receipts
Total receipts= Total Expenditure- Budget deficit
                   = 3,000-2,000
                   = 1,000
Answer : Rs. 1,000 crores
 
Q.4. What will be the value of fiscal deficit if primary deficit is 53,000 crores and interest on borrowings is Rs 5,000 crores?
Answer : Fiscal deficit=Primary deficit + Interest Payment
                           = 53,000+5,000
                           = 58,000
Ans. Rs. 58,000 crores
 
SHORT ANSWER TYPE QUESTIONS: - (3 /4 Marks Each)
 
Q.1 How government reallocates the resources and redistributes the income through Budget?
Answer : 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.2 What are the basis of classifying receipts into revenue receipts and capital receipts?
Answer : 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.3 Identify the following as revenue receipts and capital receipts. Give reason.
 
(i) Financial help from microsoft for the victims of flood affected areas.
(ii) Sale of 40 % shares of publicc sector undertaking to a private enterprise
(iii) Profits of LIC
Answer : (i) & (iii) are revenue receipts because they neither create liabilitynor reduce assets of the government..
(ii) is capital receipts as it reduce assets of the government.
 
Q.4 Identify the following as revenue expenditure and capital expenditure. Give reason .
(i) grants given by central government to state government
(ii) 10% share purchase by the government in a private company.
(iii) Pension paid to retired government employees.
Answer : (i) & (iii) are revenue expenditure as it neither create assets nor reduce liability of the government.
(ii) is capital expenditure as it increase assets of the government.
 
Q.5 How can surplus budget be used during inflation?
Answer : In case of surplus budget, government is taking more money from the economy than injecting into it. It results in a fall in aggregate demand which is considered good to check inflation.
 
Q.6 Give the relationship between revenue deficit and fiscal deficit.
Answer : Revenue deficit = revenue expenditure – revenue receipts Fiscal deficit = revenue deficit + ( capital expenditure – non-debt creating capital receipts) So , revenue deficit is a part of fiscal deficit
Part A Microeconomics Chapter 01 Introduction to Micro Economics
CBSE Class 12 Economics HOTs Introduction
Part A Microeconomics Chapter 02 Theory of Consumer Behaviour
CBSE Class 12 Economics HOTs Consumer Behaviour And Demand Set A
CBSE Class 12 Economics HOTs Consumer's Choice And Demand Analysis
CBSE Class 12 Economics HOTs Consumers Equilibrium And Demand
CBSE Class 12 Economics HOTs Theory of Consumer Behaviour
CBSE Class 12 Economics HOTs Theory of Consumer Behaviour (Hindi)
Part A Microeconomics Chapter 03 Production and Costs
CBSE Class 12 Economics HOTs Production and Costs
Part A Microeconomics Chapter 04 The Theory of the Firm under Perfect Competition
CBSE Class 12 Economics HOTs Producer Behaviour and Supply (Hindi)
CBSE Class 12 Economics HOTs Producer Behavoiur And Supply
CBSE Class 12 Economics HOTs The Theory of the Firm under Perfect Competition
Part A Microeconomics Chapter 05 Market Equilibrium
CBSE Class 12 Economics HOTs Market Equilibrium
Part A Microeconomics Chapter 06 Non Competitive Markets
CBSE Class 12 Economics HOTs Non Competitive Markets
Part B Macroeconomics Chapter 02 National Income Accounting
CBSE Class 12 Economics HOTs Economics Forms of Market and Price Determination
Part B Macroeconomics Chapter 03 Money and Banking
CBSE Class 12 Economics HOTs Money And Banking
CBSE Class 12 Economics HOTs Money and Banking (Hindi)
Part B Macroeconomics Chapter 04 Determination of Income and Employment
CBSE Class 12 Economics HOTs Determination of Income and Employment
CBSE Class 12 Economics HOTs Determination of Income and Employment (Hindi)
CBSE Class 12 Economics HOTs National Income And Related Aggregates
Part B Macroeconomics Chapter 05 Government Budget and The Economy
CBSE Class 12 Economics HOTs Government Budget the Economy
CBSE Class 12 Economics HOTs Government Budget the Economy (Hindi)
Part B Macroeconomics Chapter 06 Open Economy Macroeconomics
CBSE Class 12 Economics HOTs for Balance of Payment
z More HOTs for Class 12 Economics
CBSE Class 12 Economics HOTs All Chapters
CBSE Class 12 Economics HOTs All Chapters Set B
CBSE Class 12 Economics HOTs All Chapters Set C
CBSE Class 12 Economics HOTs All Chapters Set D
CBSE Class 12 Economics HOTs All Chapters Set E

Important Practice Resources for Class 12 Economics

HOTS for Part B Macroeconomics Chapter 5 Government Budget and The Economy Economics Class 12

Students can now practice Higher Order Thinking Skills (HOTS) questions for Part B Macroeconomics Chapter 5 Government Budget and The Economy to prepare for their upcoming school exams. This study material follows the latest syllabus for Class 12 Economics released by CBSE. These solved questions will help you to understand about each topic and also answer difficult questions in your Economics test.

NCERT Based Analytical Questions for Part B Macroeconomics Chapter 5 Government Budget and The Economy

Our expert teachers have created these Economics HOTS by referring to the official NCERT book for Class 12. These solved exercises are great for students who want to become experts in all important topics of the chapter. After attempting these challenging questions should also check their work with our teacher prepared solutions. For a complete understanding, you can also refer to our NCERT solutions for Class 12 Economics available on our website.

Master Economics for Better Marks

Regular practice of Class 12 HOTS will give you a stronger understanding of all concepts and also help you get more marks in your exams. We have also provided a variety of MCQ questions within these sets to help you easily cover all parts of the chapter. After solving these you should try our online Economics MCQ Test to check your speed. All the study resources on studiestoday.com are free and updated for the current academic year.

Where can I download the latest PDF for CBSE Class 12 Economics HOTs Government Budget the Economy?

You can download the teacher-verified PDF for CBSE Class 12 Economics HOTs Government Budget the Economy from StudiesToday.com. These questions have been prepared for Class 12 Economics to help students learn high-level application and analytical skills required for the 2025-26 exams.

Why are HOTS questions important for the 2026 CBSE exam pattern?

In the 2026 pattern, 50% of the marks are for competency-based questions. Our CBSE Class 12 Economics HOTs Government Budget the Economy are to apply basic theory to real-world to help Class 12 students to solve case studies and assertion-reasoning questions in Economics.

How do CBSE Class 12 Economics HOTs Government Budget the Economy differ from regular textbook questions?

Unlike direct questions that test memory, CBSE Class 12 Economics HOTs Government Budget the Economy require out-of-the-box thinking as Class 12 Economics HOTS questions focus on understanding data and identifying logical errors.

What is the best way to solve Economics HOTS for Class 12?

After reading all conceots in Economics, practice CBSE Class 12 Economics HOTs Government Budget the Economy by breaking down the problem into smaller logical steps.

Are solutions provided for Class 12 Economics HOTS questions?

Yes, we provide detailed, step-by-step solutions for CBSE Class 12 Economics HOTs Government Budget the Economy. These solutions highlight the analytical reasoning and logical steps to help students prepare as per CBSE marking scheme.