Government Budget and the Economy (Class 12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — Government Budget and the Economy. Every question comes with the correct answer and an explanation.

Government Budget and the Economy (Class 12 Economics)

Practise chapter-wise MCQs for Class 12 Economics — Government Budget and the Economy. Every question comes with the correct answer and an explanation.

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TL;DR: Practise chapter-wise MCQs for Class 12 Economics — Government Budget and the Economy. Every question comes with the correct answer and an explanation…

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Practise chapter-wise MCQs for Class 12 Economics — Government Budget and the Economy. Every question comes with the correct answer and an explanation.

Government Budget and the Economy MCQs with Answers & Explanations

Q1. Which of the following is a primary objective of a government budget in India?

  1. Reducing the role of the public sector
  2. Minimizing government expenditure
  3. Maximizing corporate profits
  4. Ensuring equitable distribution of income and wealth ✓ (correct)

Explanation: A key objective of government budgeting is to address income inequalities and promote social justice, which is achieved through measures like progressive taxation and social welfare programs.

Q2. Which of the following is considered a 'capital receipt' in the Indian government budget?

  1. Disinvestment of shares of public sector undertakings ✓ (correct)
  2. Income tax collected by the government
  3. Profits from public sector undertakings
  4. Interest received from loans given to states

Explanation: Disinvestment is the sale of government assets, which results in a reduction of its assets and is therefore a capital receipt, not a recurring revenue source.

Q3. Revenue deficit in a government budget refers to:

  1. The difference between fiscal deficit and interest payments
  2. The excess of revenue expenditure over revenue receipts ✓ (correct)
  3. The excess of capital expenditure over capital receipts
  4. The excess of total expenditure over total receipts

Explanation: Revenue deficit specifically measures the shortfall in the government's revenue earnings compared to its revenue spending, excluding capital transactions.

Q4. A balanced budget implies:

  1. Government expenditure is greater than government receipts
  2. Government receipts are greater than government expenditure
  3. Government receipts are equal to government expenditure ✓ (correct)
  4. Fiscal deficit is zero

Explanation: A balanced budget occurs when the total revenue of the government exactly matches its total expenditure. While related to fiscal deficit being zero, the definition directly compares receipts and expenditure.

Q5. Fiscal deficit represents:

  1. The gap between government's total receipts and its revenue expenditure
  2. The gap between government's revenue receipts and its total expenditure
  3. The gap between government's total receipts and its total borrowings
  4. The gap between government's total expenditure and its revenue receipts, excluding borrowings ✓ (correct)

Explanation: Fiscal deficit is the difference between the government's total expenditure and its total receipts, excluding borrowings. It indicates the extent to which the government needs to borrow to finance its operations.

Q6. Which of the following accounts for the largest component of revenue expenditure for the Indian government?

  1. Interest payments on public debt ✓ (correct)
  2. Salaries and pensions of government employees
  3. Subsidies
  4. Defence expenditure

Explanation: Interest payments on past borrowings form a significant and often the largest portion of the Indian government's revenue expenditure, representing the cost of servicing its debt.

Q7. The primary deficit is calculated as:

  1. Fiscal Deficit + Interest Payments
  2. Fiscal Deficit - Interest Payments ✓ (correct)
  3. Total Receipts - Revenue Expenditure
  4. Revenue Deficit - Capital Receipts

Explanation: Primary deficit measures the government's borrowing requirement excluding interest payments on past debts. It shows the extent to which the government is borrowing to finance its current activities, excluding the cost of servicing old debt.

Q8. Which of the following is a tool of fiscal policy?

  1. Open market operations
  2. Bank rate
  3. Government borrowing ✓ (correct)
  4. Cash reserve ratio

Explanation: Government borrowing is a direct way for the government to finance its deficit and influence the money supply and interest rates, making it a tool of fiscal policy. Bank rate, OMO, and CRR are tools of monetary policy.

Q9. Which of the following would lead to an increase in the fiscal deficit?

  1. Decrease in borrowings
  2. Increase in disinvestment proceeds
  3. Increase in tax revenue
  4. Increase in government expenditure ✓ (correct)

Explanation: An increase in government expenditure, assuming other factors remain constant, will widen the gap between total expenditure and total receipts, thus increasing the fiscal deficit.

Q10. If the government aims to stimulate economic activity during a recession, it is likely to increase:

  1. Public expenditure and decrease taxes ✓ (correct)
  2. Both taxes and decrease public expenditure
  3. Taxes and decrease public expenditure
  4. Both taxes and public expenditure

Explanation: During a recession, the government typically uses expansionary fiscal policy. Increasing public expenditure injects money into the economy, while decreasing taxes leaves more disposable income with individuals and businesses, both boosting demand.

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