MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy

MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy

Government Budget and Economy Important Questions

Government Budget and Economy Objective Type Questions

Question 1.
Choose the correct answers:

Question 1.
The duration of Government budget is :
(a) 5 years
(b) 2 years
(c) 1 year
(d) 10 years.
Answer:
(c) 1 year

Question 2.
Budget is presented in the Parliament by :
(a) Prime Minister
(b) Home Minister
(c) Finance Minister
(d) Defence Minister.
Answer:
(c) Finance Minister

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Question 3.
Budget speech in Lok Sabha is given by :
(a) President
(b) Prime Minister
(c) Finance Minister
(d) Home Minister.
Answer:
(c) Finance Minister

Question 4.
Professional tax is imposed by :
(a) Central Government
(b) State Government
(c) Municipal Corporation
(d) Gram Panchayat.
Answers:
(b) State Government

Question 5.
From the following which is included in the direct tax :
(a) Income Tax
(b) Gift Tax
(c) Both (a) and (b)
(d) Excise Tax.
Answer:
(c) Both (a) and (b)

Question 6.
Who issues 1 rupee note in India :
(a) Reserve Bank of India
(b) Finace Ministry of India
(c) State Bank of India
(d) None of these.
Answer:
(b) Finace Ministry of India

Question 2.
Fill in the blanks:

  1. …………………… is a document containing income and expenditure of the government.
  2. Income tax is …………………… tax.
  3. …………………… tax is levied on the value of the goods.
  4. Service tax is levied by the ……………………
  5. budget is considered good for the country.
  6. Finance bill contains …………………… proposals.
  7. Government budget is presented on the last day of ……………………

Answer:

  1. Budget
  2. Direct
  3. Advalorem
  4. Central
  5. Deficit
  6. Tax
  7. February.

Question 3.
State true or false :

  1. Deficit budget is not considered as a good budget.
  2. Electricity tax is levied by the State Government.
  3. Budget speech is given by the Finance Minister.
  4. Central excise duty is direct tax.
  5. Interest payment is a planned item.
  6. During deflation surplus budget is made.
  7. Rail budget is generally not included in the annual budget.

Answer:

  1. False
  2. True
  3. True
  4. False
  5. False
  6. True
  7. True.

Question 4.
Match the following
MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy 1
Answer:

  1. (b)
  2. (d)
  3. (a)
  4. (e)
  5. (c)

Question 5.
Answer the following in one word/sentence :

  1. Write meaning of surplus budget.
  2. Expenditure on education is considered as?
  3. Who passes the budget presented by the Finance Minister every year?
  4. Which tax was levied by the government on July 2017?
  5. For how many years government makes budget?
  6. What is the full form of G.S.T.?
  7. Land Revenue is levied by whom?
  8. What is the name gives to budget?

Answer:

  1. More income and less expenditure
  2. Developmental
  3. Parliament
  4. G. S. T
  5. 1 year
  6. Goods and Service Tax
  7. By State Government
  8. Master Finacial Scheme of Government.

Government Budget and Economy Very Short Answer Type Questions

Question 1.
What do you mean by government budget? How many types are there?
Answer:
A budget is the statement of financial plan of the government for a financial year (1st April to 31st March). It indicates the revenue expenditure estimates for the next financial year of the government.

Budget is of two types:

  1. Capital budget
  2. Revenue budget.

Question 2.
What do you mean by primary deficit?
Answer:
Primary deficit is the difference between fiscal deficit and interest payments. It indicates how much government borrowing is going to meet expenses other than interest payments. It is often used as the basic measure of fiscal responsibility.
Primary Deficit = Fiscal Deficit – Interest payments

Question 3.
What is tax?
Answer:
A tax is a compulsory contribution which is given by the people to the government in order to meet the expenditure on the welfare of the citizens.

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Question 4.
What is deficit budget?
Answer:
When the expenditure of the government is more than the income of the government, it is called deficit budget.

Question 5.
What do you mean by supplementary budget?
Answer:
Supplementary budget is prepared for the temporary period. It is prepared during the period of emergency like flood, war, earthquake etc.

Question 6.
What do you mean by zero primary deficit?
Answer:
When government has to take loan only to fulfill the liability of interest it is called zero primary deficit.

Question 7.
What do you mean by vote on account?
Answer:
Special arrangement is made under which special power is vested with lok sabha to sanction some amount as advance till the financial budget is passed for the next year.

Question 8.
What is tax evasion?
Answer:
When people do not pay tax by hiding income it is called tax evasion.

Question 9.
What do you mean by surplus budget?
Answer:
When the income of the government is more than expenditure of the government in budget, it is called surplus budget.

Question 10.
What is a balanced budget?
Answer:
Budget in which income and expenditure of the government is equal is called balanced budget.

Question 11.
Write the tax multiplier.
Answer:
Tax multiplier = \(\frac {-c}{1 – c}\)

Question 12.
What do you mean by debt trap?
Answer:
Generally developing countries take loans from foreign countries to fulfill their projects and plans. Developing countries have to pay debt along with the interest on it. To pay this amount again government has to take loan. Thus, principal amount goes on increasing. These countries take loan from one country and pay loan of other country. Thus these countries go in the clutches of debt. This is called debt trap.

Question 13.
Write the main revenue sources.
Answer:
Public revenue:
By public revenue we mean all those income of the government which are essential for government expenditure. Public revenue can be divided into two parts :

  1. Revenue receipts
  2. Capital receipts.

1. Revenue receipts (Items of income) are of two types :

(A) Tax revenue : It includes all direct and indirect taxes which are imposed by the central government. For example, Income Tax, Corporation Tax, Production tax.

(B) Non – tax revenue :

  • Interest receipts
  • Dividends and Profits
  • Foreign grants
  • Fiscal services, Economic services, Subsidiary assistance.

Question 14.
Give the relationship between the Revenue deficit and the Fiscal deficit.
Answer:
Revenue deficit refers to the excess of Government’s revenue expenditure over revenue receipts whereas fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowings.

Question 15.
Explain why public goods must be provided by the government.
Answer:
Public goods must be provided by the government as they cannot be provided through market mechanism i.e., by transactions between individual consumer and producers.

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Question 16.
Explain the relation between government deficit and government debt.
Answer:
Relation between government deficit and government debt: The government deficit and government debt are closely related. The government deficit in a flow concept, but it adds to the stocked debt. If the government continues to borrow year after year there is an accumulation of debt. It implies that government has to pay more and more by way of interest. These interest payment contribute to the debt. Thus, deficit is the cause and effect of debt.

Question 17.
Explain the concept of Deficit budget.
Answer:
Deficit budget: It is the budget in which government receipts are more than government expenditure.
Formula = Expected public income < Expected public expenditure.

Government Budget and Economy Short Answer Type Questions

Question 1.
What is a government budget? Write its objectives. (Delhi, Foreign 2013)
Answer:
“A budget is the statement of the financial plan of the government for a financial year” (1st April to 31st March). It indicates the revenue expenditure estimates for the next financial year of the government. The main objectives of budget are as follows :

  1. Reallocation of financial resources.
  2. Removal of inequality of income and wealth.
  3. Stabilization of price level.
  4. Management of public enterprises.
  5. Expansion of employment opportunities.

Question 2.
How inequalities in income can be removed through budget?
Or
What is the role of budget in removing income inequalities? (Delhi, All India 2011, Foreign 2012)
Answer:
Fiscal policy implies the income and expenditure policy or the budgetary policy of the government. It is a branch of public finance which deals with the types of financial statements made by any government about its probable revenue and expenditure during a given year.

Through their fiscal policies government can play a significant role in reducing inequality of income and wealth as well as inequality of opportunity. Both tax and spending policies can alter the distribution of income over both short term and medium term. Government need to reform the policies by imposing more taxes oh riches sections and to reduce the burden of tax on poor with the motive of economic welfare of the poor people.

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Question 3.
Explain in brief how economic stability can be obtained by government budget? (All India 2011)
Answer:
Government budget is used to prevent business fluctuations of inflation or deflation to achieve the objective of economic stability. The government aims to control the different phases of business fluctuations through the budgetary policy. Policies of surplus budget during inflation and deficit budget during deflation helps to maintain stability of prices in the economy.

Question 4.
What is the role of government in Reallocation of Resources? Explain. (Delhi 2012)
Answer:
Through the budgetary policy, Government aims to reallocate resources in’ accordance with the economic and social priorities of the government. Government can influence allocations of resources through:

1. Tax concessions or subsidies:
To encourage investment, government can give tax concessions subsidies etc. to the producers, example Government discourages the production of harmful consumption goods through heavy taxes and encourages the use of khadi products ‘by providing subsidies.

There is disequilibrium in the balance of payments when imports are more and exports are less. With demonitization of Indian rupee imports have become costlier, efforts can be made to make balance of payments favourable. But this cannot be done again and again because by this demand of our currency will decrease.

Question 5.
Explain four types of public expenditure.
Answer:
Following are the types of public expenditure :

1. Developmental expenditure:
Under it we include those expenditure which are done for the economic development and social welfare of people. It includes education, medicine, industry agriculture, transportation roads, canals, water welfare, electricity etc.

2. Non – development expenditure:
This expenditure includes that expenditure which is done on administration, on security and legal procedure of the government. It includes salaries of police department, military department, interest on loans, pension etc.

3. Plan expenditure:
It includes expenditure to be incurred during the year on programmes under the five year plan by planning commission. In this expenditure investors and consumers both are included. For example, economic activities like agriculture, industry transportation, communication etc. It also includes social welfare activities like education, family welfare, information and communication, drinking water, cleanliness, health etc.

4. Non – plan expenditure:
It includes all those expenditure other than plan expenditure. It includes debt given to State Government and others, expenditure on maintenance of property, expenditure on purchase of shares.

Question 6.
Differentiate between Direct Tax and Indirect Tax
Answer:
MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy 3

Question 7.
Differentiate between Revenue Expenditure and Capital Expenditure.
Answer:
Differences between Revenue Expenditure and Capital Expenditure :

Revenue Expenditure:

  • Revenue expenditure is a current expenditure incured on civil administrations, defence forces, public health and education.
  • It is of recurring type of expenditure. It is incurred regularly.
  • It is called non – developmental expenditure.

Capital Expenditure:

  • It refers to expenditure which leads to creation of assets or reduces liabilities.
  • It is a non – recurring type of expenditure.
  • It is called developmental expenditure.

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Question 8.
Differentiate between Developmental and Non – Developmental Expenditure.
Answer:
Differences between Developmental and Non – Developmental Expenditure:

Developmental Expenditure:

  • It is incurred on economic and social development of the country.
  • Expenditure on agriculture, industries, transport, etc. are included in it.

Non – Developmental Expenditure:

  • Its nature is non – developmental type.
  • Expenditure on administrative services like police defence, grants to government, etc. are included in it.

Question 9.
What do you mean by budget? Write its characteristics.
Answer:
Origin of the word in India:
The word ‘budget’ has been derived from the French word ‘Bougette’, which means small bag. It symbolizes a bag containing the financial proposals. In England, the chanceller used to bring economic proposals and statements in a bag; In 1773, finance minister of Britain, Robert Walpole opened his leather bag for the budget proposal to take place in Parliament. From that it becomes popular in India.

Characteristics of budget : Following are the characteristics of budget:

  1. Annual plan of income and expenditure : It is a description of annual income and expenditure of the government for the next financial year. It is a detailed description.
  2. Fixed period : Budget is prepared before a fixed period. It is presented before the Parliament by finance minister on the last day of the month of February. It is related to the definite fixed period.
  3. Financial discussion: In budget only financial discussion takes place.Other matters are not discussed here.
  4. In advance : Budget is prepared in advance for the period during which it is to operate. It is an annual financial action plan for the next financial year.
  5. Balance budget : Balanced budget is the symbol of economic stability of the country.

Question 10.
Write the objectives of budget.
Answer:
The objectives of budget are as follows :
1. Reallocation of financial resources:
The government reallocates the financial resources to achieve the desired goals. It is the primary responsibility of the government to build a sound socio – economic infrastructure regarding health housing, education and raising the standard of living of people. Government imposed more taxes on those items which are harmful for people on the other hand it may reduce the taxes which are useful from social point of view.

2. Removal of inequality of income and wealth:
Every nation tries to bring equality between the various sections of the people and to bridge the gap between poor and rich. Through subsidies, taxes government can remove their inequalities. The main objective of Budget is to fill the gap of rich and poor.

3. Stabilisation of price level:
It is the responsibility of the government to stabilise the price level in the country. Unnecessary fluctuation in the prices of goods and services adversely affect the economy. Through the budget the government can effectively control the price level and bring about stability in it.

4. Management of public enterprises:
The government looks after certain departments such as railways, post and telegraph, electricity, defence etc. The budget of the government makes special provisions for such public enterprises in order to safeguard the interest of public.

5. Expansion of employment opportunities:
Government throughout budget create the employment opportunities to people. Various employments oriented and productive programs can be implemented for this purpose.

Question 11.
Differentiate between Progressive Tax and Regressive Tax.
Answer:
Differences between Progressive Tax and Regressive Tax :

Progressive Tax:

  • In progressive tax the rate of the tax increses as the taxable income increases.
  • The burden of it is more on rich people.
  • They are justified because they reduce inequalities of income.

Regressive Tax:

  • In regressive tax the rate of the tax decreases as the taxable incomes increases.
  • The burden of it is on poor people.
  • These are not justified because they increase inequalities.

Question 12.
Write difference betw een Revenue Receipts and Capital Receipts. (Foreign 2013)
Answer:
Differences between Revenue Receipts and Capital Receipts :
MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy 4

Question 13.
Write a note on Surplus budget, Balance budget and Deficit budget.
Answer:
A budget is the statement of the financial plan of the government for a financial year. It indicates the revenue expenditure estimates for the next financial year. The different types of budget are :

  1. Surplus Budget – When in budget the income of the government is more than expenditure of the government, it is called Surplus Budget.
  2. Balance Budget – Balance budget is said to be balance when government revenue and expenditure are balanced.
  3. Deficit Budget – If the expenditure of the government is more than the income of the government, it is called the Deficit Budget.

Question 14.
Does public debt impose a burden? Explain.
Answer:
Public debt does not impose a burden all the times. Only in the following situation, it imposes a burden. When government sectors to public debt, the government transfers the burden to reduce consumption on future generation, because the government may decide to pay off deut in future by raising taxes. Taxes reduce the savings and capital formation and growth. Thus, the debt acts as a burden on future generation.

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Question 15.
(a) The fiscal deficit given the borrowing requirement of the government. Explain.
Answer:
Fiscal deficit gives the borrowing requirement of the government’s total expenditure and its total receipts excluding borrowing. The fiscal deficit has to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.

(b) Are fiscal deficits inflationary? (NCERT)
Answer:
It is not correct to that all deficits are necessarily inflationary. If the fiscal deficit results in higher demand and greater output, the fiscal deficit will not be inflationary. However, if the firms are unable to produce the higher quantities that are being demanded to due fiscal deficits, prices will rise resulting the inflationary.

Question 16.
We suppose that: C= 70 + 0.70YD, I = 90, G = 100, T = 0.10 Y
(a) Find the equilibrium income, (b) What are tax revenues at equilibrium income? Does the government have a balanced budget ?
Solution:
(a) Y = \(\frac {1}{1 – 0.70}\)(70 + 90 + 100)
Y = \(\frac {1}{0.30}\)(260)
Y = \(\frac {260}{0.30}\) = 866.66

(b) Tax revenue on balance budget (T) = 0.10 Y T = 0.10 (866.66) T = 86.66.

Question 17.
Suppose that for a particular economy investment is equal to 200, government purchases are 150, net taxes i.e., lump sum taxes minus transfer in 100 and consumption is given by C = 100 + 0.75. (a) What is the level of equilibrium multiplier? (b) Calculate the value of government expenditure multiplier and the tax multiplier, (c) If government expenditure increases by 200, And the change in equilibrium income.
Answer:
(a) The government directly affects the level of equilibrium income in two specific ways : 1. Purchase of goods and services and 2. Taxes and transfers. Taxes lower the consumption expenditure and disposable income. Hence, we use the following formula for calculating the level of equilibrium income:
Formula: Y = \(\frac {1}{1-c}\)(C – CT + CTR+ 1 + G)
MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy 5

(b) Govt expenditure multiplier:
\(\frac { ∆Y}{∆G}\) = \(\frac {1}{1-c}\)
\(\frac { ∆Y}{∆G}\) = \(\frac {1}{ 1-0.75}\) \(\frac {1}{0.25}\)
Tax multiplier \(\frac { ∆Y}{∆G}\) = \(\frac {-C}{1-c}\)
\(\frac { ∆Y}{∆G}\) = \(\frac {-0.75}{ 1-0.75}\) = \(\frac {-0.75}{ 0.25}\) = – 3

(c) If income of Govt, increases by 200 :
MP Board Class 12th Economics Important Questions Unit 9 Government Budget and Economy 6

Question 18.
In the equation given in question 9, calculate the effect on output of a 10 increase in transfers and 10 increase in lumpsum taxes. Compare the effects of two.
Solution:
Transfer multiplier, = \(\frac {C}{1-C}\)
= \(\frac {0.80}{1-0.80}\)
= \(\frac {0.80}{0.20}\)
= 4
Increase in transfer = 10%
Hence, increase in output = 10%
Tax multiplier = 4
Decrease in output = 10 x 4 = 40%
or
Y = \(\frac {1}{0.20}\)(20 – 8 + 88 + 30 + 50)
Y = 5 x 188 = 940
Increase lump sum, its effect,
or Y = \(\frac {1}{1-0.80}\)(20 – 8 + 80 + 30 + 50)
Y = 5 x 172 = 860.
Hence, we find that effected change in transfer and change in taxes are equal. It is due to fact that their size of changes as well as multiplier are equal.

Question 19.
What do you understand by Goods and Service Tax (G.S.T.)? How is G.S.T. better than old system of taxation? Explain its types.
Answer:
(a) The Goods and Services Tax (G.S.T.) is a value Added Tax (VAT) levied on most goods and services sold for domestic consumption. The G.S.T. is paid by consumers, but it is remitted to the government by the businesses selling the goods and services:

G.S.T. in comparison with old taxation system :

  1. In place of old taxation system, G.S.T. will become one tax economy.
  2. The tax structure will be simplified with G.S.T.
  3. G.S.T. will save both time and money.
  4. The growth rate of economy will show a rapid increase with G.S.T.
  5. But for the time being, the G.S.T. would be expected to increase the inflation rate in comparison to the old tax system.

For Goods and Services Tax, G.S.T., U.T.G.S.T. Act and S.G.S.T. tax are passed.

Government Budget and Economy Long Answer Type Questions

Question 1.
Explain the types of budget.
Answer:
The types of budget are as follows :
1. Central budget:
Central budget is prepared by Central Government. It is the numerical statement of income and expenditure done by central government. In India Central budget is presented in two parts:

  • General budget
  • Railway budget.

2. State budget:
State budget is prepared by State Government. State Government takes the help from Central Government.

3. Revenue budget and Capital budget:
In revenue budget we include the expenditure and income related to revenue of the government. On the other hand in capital budget the capital expenditure and capital income is included.

4. Supplementary budget:
Supplementary budget is prepared for the temporary period. It is prepared during the period of emergency like flood, earthquake and war etc. There is no fixed time for it.

5. Balanced budget and Imbalanced budget:
Balance budget is that budget where income and expenditure of the government is equal. Imbalanced budget is that budget where expenditure is more or less than income of the government. If the expenditure is more than income it is called deficit budget and if the income is more than the expenditure it is called surplus budget.

Question 2.
Explain the procedure of the budget.
Answer:
Under the budgetary procedure in India we can study the following heads:

1. Preparation of budget : The preparation of budget involves the following steps :

  • Sending estimate forms by finance minister to all ministers and their department’s heads to get the estimates of revenue and expenditure required for the next financial year.
  • Preparation of estimates by departmental heads : It includes revenue and expenditure of previous year budgetary estimate for next coming year.
  • Preparation of consolidated estimate by the various ministers and sending them to finance minister.
    Scruting report estimates by A.G. of India and sending the same to finance ministry.

2. Presentation of the budget : In India the budget is presented in two parts :

  • General budget and
  • Rail budget.

Rail budget is always present before the general budget. General budget presented on the last day of the month of February at 5 p.m. generally 28th in February.

3. Discussion on the budget:
Budget is put before the Parliament for discussion. In the processes of passing the budget, the discussions on various items continues for 3 – 4 days. Presently different committees are formed. For the discussion and finance minister gives his final reply on the budget.

4. Voting on budget:
After the general discussion the budget is put for voting. The members of parliament give their speeches for and against the budget before voting. There after voting is held for passing the budget.

5. Appropriation bill:
The finance minister presents appropriation bill. According to the constitution no amount from the Reserve fund of India can be withdrawn without passing the appropriation bill in the Parliament.

6. Financial bill:
All the financial proposals for the coming year are included in a bill which is known as financial bill. This bill is generally presented immediately after the presentation of budget in the Lok Sabha. If this bill is not passed by the Parliament f ur government L not supposed to spend any amount.

7. Vote on account:
Special arrangement is made under which special power is vested with Lok shabha to snetion some amount as advance till the final budget is passed for the next year.

8. Implementation of budget:
After the budget is passed, it is implemented by the government for which the following steps are taken :

  • Collection of revenue
  • Preparation of accounts in
  • Audit by A.G. (Auditor General).

Audit by comptroller and Auditor General of India presents their report before the Parliament which comprise the receipt of revenue, expenditure, loans taken.

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Question 3.
Write the tax revenue sources of Public Revenue:
Answer:
Following are the sources of Public Revenue :
Tax:
Taxes are neither a fees nor a penalty because it is neither taken by the government to give any additional benefits nor taken as a fine. Taxes are compulsory contribution which are given by the people to the government in order to meet the expenditure on the Welfare of the citizens.

Types of taxes : Taxes are of following types :

  • Progressive tax – In progressive tax the rate of my increases as the income increases
  • Proportional tax – Proportional taxes are those taxes whose impact and incidence falls equally on both the sections of the society.
  • Regressive tax – The rate of taxation decreases with the increase in income. The burden of text falls more heavily on poor than on rich.
  • Direct taxes – These are those taxes in which the impact of the tax and incidence of tax is on the same person.

Question 4.
What do you understand by Non – tax sources of public revenue?
Answer:
Following are the non – tax sources of public revenue:

1. Fees, licence and permit:
Government gets non – tax revenue from fees licence fee and payment made for permits.

Fees – Registration fee for land, death and birth registration fees, passport fees are included in it.

Licence and permit – Fee is that fee which is paid by people to government after giving permission by the government to the people to do something. For example: Driving licence, import licence etc.

2. Fines:
Fines are collected by the govt, for breaking rules of the country. The main aim of this is not to collect money but to teach people lesson about it.

3. Income from public enterprise: Government may raise funds from many sources like Railways, Postal department, Steel Plants fertilizer Corporations, Indian Oil department etc. Government sells products of it and gets profit from it.

4. Gifts and grants: The government may raise the funds from others. During calamities like flood, earthquake etc. citizens and some NGO’s give help to the government . For example : W.H.O., UNESCO etc. they give assistant also during this period.

5. Notes issues:
Sometimes government prints extra notes and increase the treasury. Reserve Bank of India has got the right of printing notes and minting coins.

6. Stamp, registration and land revenue: The receipts of stamps, registration and land revenue is the another source of non – tax revenue. The stamp receipts of Supreme court is also the income of the central government.

7. Interest, receipts : Interest earned by  the government from the loans given to States, Union territories. Railways, Post and Telegraph are included in it.

8. Dividends: This includes the share from profits of various undertakings in which the central government has done investments example SAIL, ONGC etc.

9. Administrative receipts:
The central government provides a number of services to people like health, medical, education etc. The government earns certain income from these services. For example; court fees, registration fees.

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Question 5.
Consider an economy described by the following functions. C = 20 + 0.80 Y, I = 30, G = 50, TR = 100.
(a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model,
(b) If the government expenditure increases by 30, what is the impact on equilibrium income?
(c) If a lump sum tax of 30 added to pay for increase in government purchases, how will equilibrium income change?
Answer:
C = 20 + 0.80y
I = 30
G = 50
TR = 100
(a)
Y = \(\overline { C } \) + CY – (T – TR)
Y = 20 + 0.80 (Y + TR) + I + G
Y = 20 + 0.80 (Y + 100) + 30 + 50
Y = 0.8Y + 180
Y = \(\frac {180×100}{200}\)
= 900
The equilibrium level of income is 900. Autonomous expenditure multiplier.
= \(\frac {1}{1 – C}\)
= \(\frac {1}{1-0.08}\)
= \(\frac {1}{0.20}\)
= 5
Increase in equilibrium income = AG x Expenditure multiplier = 30 x 5 = 150
Tax multiplier = \(\frac {-C}{1 – C}\) = \(\frac {-0.08}{1-0.08}\) = \(\frac {-80}{0-20}\) = -4
Decrease in equilibrium income = ∆T x Tax Multiplier
= 30 x 4 = 120.
or
Y = \(\frac {1}{0.20}\)(180)
Y = 5 x 180 = 900
autonomus multiplier \(\frac { ∆Y}{∆G}\)= \(\frac {1}{1 – C}\)
or
\(\frac { ∆Y}{∆G}\) = \(\frac {1}{1-0.80}\) = \(\frac {1}{0.20}\) = 5

(b) Expenditure of govt, increase by 30 :
(∆Y) = \(\frac {1}{1 – C}\) ∆G
or
∆Y = \(\frac {1}{1-0.80}\) x 30
= \(\frac {1}{0.20}\) x 30 = 5 x30 = 150
New income = 900 + 150 = 1,050
So, it is clear that by 30 it become 150 to 1,050.

(c) Lump sum 30 is added then :
Change in balance income (∆Y) = \(\frac {-C}{1 – C}\) ∆T
or
∆Y = \(\frac {-0.08}{1-0.08}\) x 30
= \(\frac {-0.08}{0.20}\) x 30 = -4 x 30
= 1 – 120
= 900 – 120 = 780

MP Board Class 12th Economics Important Questions