Government Budget and Economy Class 12 Economics Important Questions

Important Questions Class 12

Students can read the important questions given below for Government Budget and Economy Class 12 Economics. All Government Budget and Economy Class 12 Notes and questions with solutions have been prepared based on the latest syllabus and examination guidelines issued by CBSE, NCERT and KVS. You should read all notes provided by us and Class 12 Economics Important Questions provided for all chapters to get better marks in examinations. Economics Question Bank Class 12 is available on our website for free download in PDF.

Important Questions of Government Budget and Economy Class 12

Question. What is Govt. Budget?
Ans : The term budget has been derived from the French word ‘Bougett’ which refers to ‘a small bag’. A govt. budget is an annual statement of estimated receipts & expenditure of the govt. during a financial year.

Question. Explain the objectives of Govt. Budget.
Ans : The govt. prepares budget with the following objectives:

1. Proper Allocation/Reallocation of resources is one of the important objectives of govt. budget. The govt. makes a proper allocation of resources through its budgetary policy so as to make a balance between the goals of profit maximization & social welfare. In other words, there is a justifiable allocation of resources which can promote the welfare of the common mass.

2. Economic Stability is another objective of budgetary policy of the govt. During the period of depression & inflation, govt. adopts the policy of deficit & surplus budgeting respectively. The govt. adopts certain policies through budget to save the economy from the clutches of business cycles. The economic stability is indispensable for the stimulation of savings & investment which further raises the level of economic growth & development.

3. Economic Growth is one of the important objectives of the govt. budget. Government prepares such a favorable budget which can create conducive  onditions to raise the level of savings & investment on which the economic growth of a country depends.

4. Economic Equality is another important objective of govt. budget as economic disparity is inherent in any economic system which is politically &bsocially   undesirable for a healthy nation. In order to curb the economic inequality to a socially acceptable level, fiscal policy play as an effective instrument through which the govt.
exercise, with the help of taxation & expenditure, in redistribution of income & wealth in the economy. This helps to bring social & economic justice which is an important element of any welfare state. 

Question. Define the term Deficit Financing & state its sources.
Ans : It refers to the financing of the budgetary deficits. The sources are expansion in money supply, i.e. the Central Bank may print money equal to the deficit against of treasury bills of the govt., & secondly by borrowing from the public through market loans. It is a very common instrument to finance the deficit if the govt. budget. Usually it is used by the govt. in India, as every year the budgetary deficit is on rise. The deficit financing can be also done by borrowing from the abroad, which may be burdensome in the future. It is used as the best alternative in the less developed countries because in these countries the people cannot be highly taxed.

Question. There has been constant rise in price of sugar overtime. What measure would you support to bring down the prices?
Ans. Using measures of budgetary policy, government can try to fix prices at a lower level by incurring expenditure through subsides which would reduce cost of production and hence the prices. If the government does not want to add to its expenditure on subsidies, then it should ensure availability of sugar at reasonable prices through its fair price shops. In the situations of emergency, buffer stocks may also be used.

Question. How can government budget be a useful instrument in reducing inequalities in the distribution of income and wealth?
Ans. Government uses budgetary policies to reduce inequalities in the distribution of income and wealth by:
i). Imposing new taxes and increasing the rates of existence taxes;
ii) Spending more on education, health care and housing for the poor;
iii) Strengthening public distribution system(through fair price shops)

Question. What is the relationship between the revenue deficit and the fiscal deficit?
Ans. Fiscal deficit is a wider concept than revenue deficit. Revenue deficit is defined as the excess of government’s revenue expenditure over revenue receipt. Thus, Revenue deficit=Revenue expenditure (RE)-Revenue receipt(RR). Where as fiscal deficit is defined as the excess of total expenditure over total receipts excluding borrowings. It does not take into account borrowings. Fiscal deficit= (total budgetary expenditure)-(total budgetary receiptborrowings)

Question. Explain the sources of Public Expenditure.
Ans : This refers to the expenditure to be incurred on various heads during the fiscal year. Public Expenditure is been classified into Plan & Non-Plan  xpenditure since 1987-88 budget which are further classified into Revenue & Capital Expenditure. Further this Plan revenue & capital, and Non- Plan revenue & capital expenditure are classified into Developmental & Non-Developmental Expenditure. This can be understood by the help of the above flow chart.

Plan expenditure refers to the amount to be spent on the heads which are prescribed under the current five year plan. Thus it shows the central plan outlay for various projects, programmes schemes & the central assistance for the state & union territories. Plan Revenue expenditure includes the expenditure on central plans viz. agriculture, rural development, irrigation & flood control, energy, industry & minerals, transport, communication, science & technology, environment & others, and the central assistance for state and union territories. Plan Capital Expenditure includes the expenditure on economic development, social & communal development, defence & general services etc., and loans to states and union territories for financing plan projects. Non-Plan expenditure includes the expenditure on the items which are not included in the current five year plan but are included in the current fiscal year budget. Non-Plan Revenue Expenditure includes interest payments; defence revenue expenditure; subsidies in food, sugar, export promotion, market development, interest subsidy etc; grants to states and UTs; pensions and economic services, social services, general services; postal deficit; grants to foreign govt. & others. Non-Plan Capital Expenditure includes defence capital; loans to states, UTs & foreign govts.
Revenue expenditure includes the expenditure on those heads which do not create any assets or reduce the liabilities. These expenditures are incurred on the normal functioning of the govt. and the maintenance of the law & order. For example, compensation of employees, pensions, interest payments, subsidies, grants expenditure on central plans etc. Capital expenditure refers to the amount to be spent on those heads which leads to the creation of the assets or reduction in liabilities. For example, expenditure on defence capital; purchase of assets viz. land, buildings & shares; loans to state govt. & union territories etc.

Developmental expenditure refers to the expenditure on those items which are directly related to economic and social development of the economy. For  xample, expenditure on capital assets, infrastructure, railways, posts, telecommunication, education, health, social welfare, scientific research etc. This  xpenditure directly contributes to the flow of goods and services.

Non-Developmental expenditure includes the expenditure on those heads which are not productive & give any returns to the economy viz. defence &  dministrations, natural calamity, interest payments, tax collections, old age pensions & unemployed allowances etc. Although, it does not contribute to the national income but it is not to be considered as unimportant as it lubricates the wheels of economic development i.e. it creates the conducive conditions in the functioning of the process of economic development.

Question. Explain different types of Budget.
Ans : Govt. budget can be classified into Balanced, Surplus & Deficit Budget. Balanced budget refers to the budget when the public receipts are equal to the public expenditure. Surplus budget is the one in which public receipts exceeds the public expenditure. Deficit budget is the one in which the govt. expenditure exceeds its receipts.

Question. Explain different types of budgetary deficit.
Ans : The budgetary deficit is classified into Revenue, Fiscal & Primary deficit. Revenue deficit refers to the excess of revenue expenditure over revenue receipts. It is the difference between the (Plan revenue expenditure and Non-Plan revenue expenditure) and (Tax revenue + Non-tax revenue). Fiscal deficit refers to the excess of total expenditure over the sum of revenue receipts and capital receipts excluding borrowings. Thus, Fiscal Deficit =total Expenditure – Total Receipts (net of Borrowings).Primary deficit is defined as fiscal deficit less interest payments. Thus, Primary Deficit = Fiscal Deficit – Interest Payments.

Question. What is capital budget?
Ans. Capital budget contains the details of the capital receipts and capital expenditure of the government.

Question. What is tax?
Ans. A tax is a compulsory payment imposed by the government on public or firms.

Question. Define a direct tax. Give two example of direct tax?
Ans. When liability to pay a tax and the burden of that tax lies on the same person, it is called direct tax. e.g., income tax and corporate tax.

Question. Define indirect tax. Give two examples of indirect taxes?
Ans. When liability to pay a tax is on one person and the burden of the tax falls on same other person, it is called indirect tax e.g., sales tax and excise duties.

Question. Find borrowing by Government if payments of interest is estimated to be of 15,000 crores which is 25% of primary deficit.
Ans. Here, Interest payment = 25% of primary deficit; Primary deficit = 100/25 x 15,000 = 60,000 We know, Primary deficit – Interest payment;
Fiscal deficit = Primary deficit + Interest payment = 60,000 crore + 15,000 crore; = 75,000 crore Question. What is revenue budget?
Ans. Revenue budget contains the details of the current receipts (or called revenue receipts) and current expenditure (also known as revenue expenditure) of the government.

Question. Give example of non-tax revenue receipts?
Ans. Fees, License and Permit, special assessment, escheat etc.

Question. What does zero primary deficit mean?
Ans. Zero primary deficit means that the government has to resort to borrowings only to make interest payments of previous years.

Question. Are fiscal deficits necessarily inflationary?
Ans. Fiscal deficits are not necessarily inflationary. However, if output is less because of lack of demand and high fiscal deficit is accompanied by higher demand and greater output and therefore if would not be inflationary as it is covering the gap required for smooth functioning of the economy by raising the level of aggregate demand.

Question. There carefully planned, government budget reflects deficit because its expenditure exceeds revenue. How can this deficit be reduced?
Ans. Government should increase its revenue by controlling tax evasion; ii. Government should reduce unproductive expenditure like subsidies, financial assistance to all even when some of them may not require it.

Government Budget and Economy Class 12 Economics Important Questions