Economics · General Awareness

Fiscal Policy and Government Budget

1,104 Questions

Fiscal policy and government budget questions evaluate your knowledge of economic stabilization, public expenditure, and deficit management. These topics are crucial for civil services and banking examinations. Practice these questions to master macroeconomic principles.

Budget deficitsFiscal policy toolsGovernment expenditureExpansionary fiscal policyPublic debt benefits

Fiscal Policy and Government Budget Questions

Multiple choice

Which of the following is not an instrument of fiscal policy?

  1. Increase in taxation

  2. Reduction of government expenditure

  3. Rationing of public debt

  4. Increasing the bank rate
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

It is not an instrument of fiscal policy, but of monetary policy. The monetary policy is concerned with the regulation of money in the hands of public. The bank rate is increased, and hence the interest on loan is increased and people are discouraged to take loan as they have to pay more interest on loan. Hence, it controls money in the hands of public.

Multiple choice

Which of the following is not considered by fiscal policy?

  1. Management of public debt

  2. Imposition of taxes

  3. Regulation of money supply in the hands of public

  4. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

It is not considered by fiscal policy. The regulation of money supply is considered by monetary policy, not fiscal policy. The money supply in the hands of public is regulated by instruments like increasing bank rate, open market operations etc. which is considered by monetary policy, not fiscal policy.

Multiple choice

By which of the following policies does the value of rupee decrease?

  1. By increasing the taxes

  2. By adopting policy of public debt

  3. By adopting deficit financing

  4. By adopting surplus financing policy
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

It is by adopting deficit financing. When deficit financing is resorted, the government has to issue new currency notes to meet the deficit. When the new currency notes are issued, it increases supply of money in the market as compared to demand. Therefore, the price increases, and the value of rupee decreases.

Multiple choice

Which of the following is not an objective of deficit financing?

  1. To finance war expenses

  2. Economic development

  3. To reduce inflation

  4. To overcome low tax receipts
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

It is not an objective of deficit financing. When the deficit financing is adopted, the new currency notes are issued and it leaves more cash in the hands of people. Thus, people demand and consume more, and this pushes up prices. Therefore, reducing inflation is not the objective of deficit financing. In fact, it is resorted to for overcoming depression.

Multiple choice

Seigniorage is concerned with which of the following?

  1. Taking debt from public

  2. Increase in revenue by increasing the tax rates

  3. Earning profit by government by issuing currency

  4. Controlling non-developmental expenses

  5. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

 
 
Yes, Seigniorage is the profit earned by the government by issuing currency. It is the profit earned on the difference between face value of currency and its production cost. For instance, if the cost of production of a ten rupee coin is 50 paisa and its face value is Rs 10, then a profit of Rs 9.50 is earned on it.

Multiple choice

Which of the following describes the difference between Fiscal Deficit and Budget Deficit?

  1. Fiscal Deficit = Budget Deficit – Interest Payment

  2. Fiscal Deficit = Budget Deficit – External Commercial Borrowings

  3. Fiscal Deficit = Budget Deficit – Money from all borrowings

  4. Fiscal Deficit = Budget Deficit – Subsidy
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A Budget Deficit is the excess of spending over income for a government, corporation, or individual over a particular period of time. The opposite of a deficit is a surplus. Fiscal deficit is noticed when government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits. Fiscal deficit is regarded as a positive economic event by some economists like Keynes.

Multiple choice

Seigniorage is concerned with which of the following?

  1. Taking debt from public.

  2. Increase in revenue by increasing the tax rates.

  3. Earning profit by government by issuing currency.

  4. Controlling non-developmental expenses.

  5. None of these
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Yes, Seigniorage is the profit earned by the government by issuing currency. It is the profit earned on the difference between face value of currency and its production cost. For instance, if the cost of production of a ten rupee coin is 50 paisa and its face value is Rs 10, then a profit of Rs 9.50 is earned on it.

Multiple choice

When government expenditure exceeds total government receipts, the budget deficit is:

  1. positive

  2. negative

  3. zero

  4. indeterminate
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

A budget deficit occurs when government expenditure exceeds receipts. In economic terminology, when expenditure > receipts, the deficit is recorded as a positive value (the size of the deficit). For example, if receipts are 100 and expenditure is 120, the deficit is 20 (positive), not negative. The deficit represents how much the government must borrow.

Multiple choice

Assertion (A) : James Buchanan viewed that primary burden of public debt is shifted to posterity. Reason (R) Public debt is paid by taxing the posterity.

  1. (A) is true, but (R) is false

  2. (A) is false, but (R) is true

  3. Both (A) and (R) are false

  4. Both (A) and (R) are true and (R) is the correct explanation of (A).
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

James Buchanan argued that the primary burden of public debt is NOT shifted to future generations if debt finances current consumption rather than public investment. The 'burden' falls on current taxpayers who feel the impact of reduced private consumption as government borrowing crowds out private investment. The Reason statement is also false - debt can be serviced through various means beyond taxing future generations.

Multiple choice

Items which are of recurring nature are covered under:

  1. Capital Budget

  2. Revenue Budget

  3. Cash Budget

  4. Unified Budget
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Revenue budgets cover items of recurring nature such as taxes, interest payments, salaries, and maintenance expenses. These are regular, annual expenditures. Capital budgets, in contrast, cover one-time or long-term investments in assets like infrastructure, equipment, and buildings that provide benefits over multiple years.

Multiple choice

Public finance does not include

  1. collection of taxes

  2. borrowing money from public

  3. spending taxes collected for economic welfare

  4. attracting foreign direct investment
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

It is not included in public finance. Attracting foreign direct investment is not included in public finance. It is included in international policy, as it deals with foreign countries.

Multiple choice

Which of the following is not a precaution to be taken in the use of deficit financing?

  1. To ensure corresponding increase in the supply of goods

  2. To concentrate on quick yielding projects

  3. To ensure rise in wages of labourers

  4. To ensure decrease in tax rates
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

It is a precaution that is not to be taken in use of deficit financing. In the deficit financing, there is extra purchasing power in the hands of people as there is issue of currency. If the tax rates are decreased, it will leave even more purchasing power. Hence, tax rate is not to be decreased at the time of deficit financing so that the prices do not increase further.

Multiple choice

Which of the following is the biggest ill-effect of deficit financing for an economy?

  1. Increase in wasteful expenses

  2. Increase in inequality

  3. Increase in cost of projects

  4. None of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

It is the biggest ill-effect of deficit financing. There is inflationary pressure at the time of deficit financing that makes the rich richer and the poor poorer. The fix wage earners are badly affected as their wages are not increased and their standard of living goes down. Thus, the gap between the rich and the poor widens, and thus there is increase in inequalities that is the biggest ill-effect of deficit financing because it is an injustice for an economy.