NCERT Solution Economics Part 2 Class 12 Chapter 5 Government Budget and The Economy
NCERT Solution Economics Part 2 Class 12 Chapter 5 Government Budget and The Economy all questions and answers. Economics Part 2 Class 12 5th Chapter Government Budget and The Economy exercise solution and experts answer. As one of online learning platforms, we (netex.) are excited to offer the NCERT Solution Economics Part 2 Class 12 Chapter 5. This solution is designed to help students who are looking to brush up on their physics concepts on Chapter 5 Government Budget and The Economy.
1.) Explain why public goods must be provided by the government.
Ans – There are two types of good public and private .The goods and service which are provide by government called public goods and which which provide by the market mechanism. The benefits of public goods are available to all and are not only restricted to one particular consumer. if we consider a public parkor measures to reduce air pollution, the benefits will be available to all. One person’s consumption of a good does not reduce the amount available for consumption for others and so several people can enjoy the benefits, that is, the consumption of many people is not ‘rivalrous’. But in case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits. If you do not buy a ticket, you will not be allowed to watch a movie at a local cinema hall. However, in case of public goods, there is no feasible way of excluding anyone from enjoying the benefits of the good. That is why public goods are called non-excludable. Even if some users do not pay, it is difficult and sometimes impossible to collect fees for the public good. These non paying users are known as ‘free-riders’. Consumers will not voluntarily pay for what they can get for free and for which there is no exclusive title to the property being enjoyed. The link between the producer and consumer which occurs through the payment process is broken and the government must step in to provide for such goods.
2.) Distinguish between revenue expenditure and capital expenditure
revenue expenditure | capital expenditure |
.Revenue Expenditure is expenditure incurred for purposes other than
the creation of physical or financial assets of the central government. |
.There are expenditures of the government which result in creation of
physical or financial assets or reduction in financial liabilities. |
If relates to those expenses incurred for the normal functioning of the
government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties |
This
includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments, PSUs and other parties. |
3.) The fiscal deficit gives the borrowing requirement of the government’. Elucidate
Ans – Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing. Gross fiscal deficit =Total expenditure – (Revenue receipts +Non-debt creating capital receipts)Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. The non-debt creating capital receipts equals 10.0 per cent of GDP, obtained by subtracting, borrowing and other liabilities from total capital receipts . The fiscal deficit, therefore turn out to be3.5 per cent of GDP. The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
4.) Give the relationship between the revenue deficit and the fiscal deficit.
Ans -.From the financing side Gross fiscal deficit = Net borrowing at home +Borrowing from RBI + Borrowing from abroad Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR). The gross fiscal deficit is a key variable in judging the financial health of the public sector and the stability of the economy. From the way gross fiscal deficit is measured as given above, it can be seen that revenue deficit is a part of fiscal deficit (Fiscal Deficit =Revenue Deficit + Capital Expenditure – non-debt creating capital receipts). A large share of revenue deficit in fiscal deficit indicated that a large part of borrowing is being used to meet its consumption expenditure needs rather than investment.
5.) Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) Whatis the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.
Ans.
- I=200 , G=150 , T=100 , C=100+0.75Y ,C=100 ,C=0.75
Y=1/1-C(C-cT+I+G)
= 1/1-0.75(100-0.75*100+200+150)
= 1/0.25(375)
= 375/25*100
= 1500
- ∆Y/∆G=1/1-C
= 1/1-0.75
= 1/0.25
= 1/25*100
= 4
- ∆Y/∆G=1/1-C
= -0.75/1-0.75
= -0.75/0.25
= -75/25
= -03
- INCOME = 1/1-C(C-Ct+I+G+∆G)
= 1/1-0.75(100-0.75*100+200+150+200)
= 1/0.25*575
= 575/25*100
= 2300
INCOME = 2300-1500=800
6.) Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100 (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model. (b) If government expenditure increases by 30, what is the impact on equilibrium income? (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
ANS.
I=30
∆G=30
G=50
TR=100
C=0.80
C=20+0.80Y
LEVEL OF INCOME
Y=1/1-C(C+Ctr+I+G)
= 1/1-0.80(20+0.80*100+30+50)
= 1/0.20(180)
= 180/20*100
= 900
EXPENDITUR MULITPLIER
1/1-C
= 1/1-0.80
= 1/0.20
= 100/20
= 5
Increase government expenditure
= 1/1-c(C+Ct+I+G+∆G)
= 1/1-0.80(20+0.80*100+30+50+30)
= 1/0.20(120)
= 210/20*100
= 1050
Tax multiplier
= -C/1-C
= ∆Y/∆T=-c/1-C
= ∆Y=-C/1-C*∆T
= -0.80/1-0.80*30
= -80/20*30
= -120
NEW LEVEL OF INCOME
= -Y+∆Y
= 900+(-120)
= 780
In case you are missed :- Previous Chapter Solution
7.) In the above question, calculate the effect on output of a 10 per cent increase in transfers, and a 10 per cent increase in lump-sum taxes. Compare the effects of the two.
ANS.
MPC=0.80
C=20
I=30
G=50
TR=100
∆TR=10
Level of income = 1/1-C(C+Ctr+I+G+∆TR)
= 1/1-0.80(20+0.80*100+30+50+0.80*10)
= 188/0.20*100
= 940
Change in income = 940-900=40
Increase income = ∆T=10
Change in income = ∆T*-C/1-C
= -10*0.80/0.20
= -10*4
= -40
Increase of 10% in tax will lead to a fall in the income by 40%.
8.) We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find the equilibrium income. (b) What are tax revenues at equilibrium income? Does the government have a balanced budget?
ANS.- GIVEN
(a) C = 70 + 0.70 YD
I = 90
G = 100
T = 0.10Y
Y = C + I +G
Y = 70 + 0.70Y + 90 + 100
Y = 70 + 0.70YD + 190
Y = 70 + 0.70 (Y − T) + 190
Y = 70 + 0.70Y − 0.70 * 0.10 Y + 190
Y = 70 + 0.70Y − 0.07Y + 190
Y = 70 + 0.63Y + 190
Y = 260 + 0.63Y
Y − 0.634 = 260
0.37Y = 260
Y =260/0.37
Y = 702.7
(b) T = 0.10Y
= 0.10 *702.7
= 70.27
Government expenditure = 100
Tax revenue = 70.27
Government expenditure is more than the tax revenue therefore, this is not a balancing budget.
9.) Suppose marginal propensity to consume is 0.75 and there is a 20 per cent proportional income tax. Find the change in equilibrium income for the following (a) Government purchases increase by 20 (b) Transfers decrease by 20.
Ans.
Given
(1)marginal propensity to consume is 0.75
(2)proportional income tax20 per cent
∆Y=1/1-c(1-t)*∆G
= 1/1-0.75(1-0.2)*20
= 1/1-0.75*0.8*20
= 20/1-0.60
= 20/0.4
= 50
∆Y = c/1-c∆T
= 0.75/1-0.75*20
= 0.75/0.25*20
= 60
10.) Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier
Ans -This is because an increase in government spending directly affects total spending whereas taxes enter the multiplier process through their impact on disposable income, which influences household consumption(which is a part of total spending).Thus, with a ∆T reduction in taxes, consumption, and hence total spending, increases in the first instance by c∆T.
11.) Explain the relation between government deficit and government debt.
Ans -Budgetary deficits must be financed by either taxation, borrowing or printing money. Governments have mostly relied on borrowing, giving rise to what is called government debt. The concepts of deficits and debt are closely related. Deficits can be thought of as a flow which add to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt and the government has to pay more and more by way of interest. These interest payments themselves contribute to the debt.
12.) Does public debt impose a burden? Explain
Ans -By borrowing, the government transfers the burden of reduced consumption on future generations. This is because it borrows by issuing bonds to the people living at present but may decide to pay off the bonds some twenty years later by raising taxes. These may be levied on the young population that have just entered the work force, whose disposable income will go down and hence consumption. Thus, national savings, it was argued, would fall. Also, government borrowing from the people reduces the savings available to the private sector. To the extent that this reduces capital formation and growth, debt acts as a ‘burden’ on future generations
13.) Are fiscal deficits inflationary?
One of the main criticisms of deficits is that they are inflationary. This is because when government increases spending or cuts taxes, aggregate demand increases. Firms may not be able to produce higher quantities that are being demanded at the ongoing prices. Prices will, therefore, have to rise. However, if there are unutilised resources, output is held back by lack of demand. A high fiscal deficit is accompanied by higher demand and greater output and, therefore, need not be inflationary.
14.) Discuss the issue of deficit reduction
Ans -Government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature –they impact all income groups equally).There has also been an attempt to raise receipts through the sale of shares in PSUs. However, the major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration. A recent study7 by the Planning Commission has estimated that to transfer Re1 to the poor, government spends Rs 3.65 in the form of food subsidy, showing that cash transfers would lead to increase in welfare. The other way is to change the scope of the government by withdrawing from some of the areas where it operated before. Cutting back government programmes in vital areas like agriculture, education, health, poverty alleviation, etc. Would adversely affect the economy. Governments in many countries run huge deficits forcing them to eventually put in place self-imposed constraints of not increasing expenditure over pre-determined levels. These will have to be examined keeping in view the above factors. We must note that larger deficits do not always signify a more expansionary fiscal policy. The same fiscal measures can give rise to a large or small deficit, depending on the state of the economy. For example, if an economy experiences a recession and GDP falls, tax revenues fall because firms and households pay lower taxes when they earnless. This means that the deficit increases in a recession and falls in a boom, even with no change in fiscal policy.
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