Chapter 5: Government Budget and Economy

Q1Written answer

Explain why public goods must be provided by the government.

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Public goods are those goods where there is no competition, and the use of goods is not restricted to only one individual. These goods are for use by all individuals in society. Such goods are used for the welfare of society.

Therefore, the government should provide public goods for the following reasons:

1. So that benefits of the public goods can be enjoyed by all members of the society.

2. So that the consumption of these goods will not impact the consumption of any other individual.

Q2Written answer

Distinguish between revenue expenditure and capital expenditure.

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Basis of Comparison	Capital Expenditure	Revenue Expenditure
Definition	Expenditure incurred for acquiring assets to enhance the capacity of an existing asset that results in increasing its lifespan	The expense incurred for maintaining the day-to-day activities of a business
Term	Long term	Short term
Value addition	Enhances the value of an existing asset	Does not enhance the value of an existing asset
Physical Existence	Have a physical presence except for intangible assets	Do not have a physical presence
Occurrence	Non-recurring in nature	Recurring in nature
Capitalisation	Yes	No
Impact on Revenue	Do not reduce business revenue	Reduces business revenue
Benefits	Long-term benefits for business	Short-term benefits for business
Examples	Highway, tunnel, metro projects, etc.	Pension, salary, etc.

Q3Written answer

‘The fiscal deficit gives the borrowing requirement of the government.’ Elucidate.

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A fiscal deficit is referred to as a shortfall in the government’s income as compared to its spending. A high fiscal deficit means that the government is borrowing more money than it is earning. A higher fiscal deficit creates a burden of loan and interest payments for the future generation.

Fiscal deficit is determined by

Total Expenditure – Total Receipts excluding borrowings

Q4Written answer

Give the relationship between the revenue deficit and the fiscal deficit.

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A revenue deficit is referred to as an excess of revenue expenditure as compared to earnings by revenue receipts of the government. A fiscal deficit is a bigger phenomenon where the difference is between the total expenditure and total receipts obtained by the government. When the revenue deficit increases correspondingly, the fiscal deficit also increases.

Q5Written answer

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) What is 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.

NCERT Macroeconomics Solutions Class 12 Chapter 5-1

NCERT Macroeconomics Solutions Class 12 Chapter 5-2

NCERT Macroeconomics Solutions Class 12 Chapter 5-3

NCERT Macroeconomics Solutions Class 12 Chapter 5-4

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Solution coming soon.

Q6Written answer

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?

NCERT Macroeconomics Solutions Class 12 Chapter 5-5

NCERT Macroeconomics Solutions Class 12 Chapter 5-6

NCERT Macroeconomics Solutions Class 12 Chapter 5-7

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Q7Written answer

In the above question, calculate the effect on the 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.

NCERT Macroeconomics Solutions Class 12 Chapter 5-9

NCERT Macroeconomics Solutions Class 12 Chapter 5-10

NCERT Macroeconomics Solutions Class 12 Chapter 5-11

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Q8Written answer

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?

NCERT Macroeconomics Solutions Class 12 Chapter 5-12

NCERT Macroeconomics Solutions Class 12 Chapter 5-13

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Q9Written answer

Suppose the 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.

NCERT Macroeconomics Solutions Class 12 Chapter 5-15

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Therefore, the change in equilibrium income is 20.

Q10Written answer

Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.

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The tax multiplier always has a negative value and therefore is smaller in absolute value than the government expenditure multiplier. Government expenditure creates an impact on the total expenditure and the taxes through the multiplier. It also influences disposable income, which impacts the overall consumption level.

The following example will help in understanding the tax multiplier better.

Assume MPC be to 0.50.

Now, the government expenditure multiplier = 1 / 1 – c

= 1 / 1 – 0.50

= 1 / 0.50

=2

Tax multiplier = – c / 1- c

= -0.50 / 1 – 0.50

= −1

This shows that the government expenditure multiplier is always more than the tax multiplier.

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