Government Budget and the Economy Class 12 MCQs Questions with Answers
Question 1.
Primary deficit in a government budget will be zero, when …………….
(A) Revenue deficit is zero
(B) Net interest payments are zero
(C) Fiscal deficit is zero
(D) Fiscal deficit is equal to interest payment
Answer:
(D) Fiscal deficit is equal to interest payment
Explanation:
Primary deficit indicates borrowing requirements of the govt, to meet fiscal deficit net of interest payments.
Question 2.
Which one of the following is not a capital expenditure?
(A) Loans advanced by World Bank
(B) Construction of school buildings
(C) Repayment of loans
(D) Purchase of Metro Coaches from Japan
Answer:
(A) Loans advanced by World Bank
Explanation:
Loan advanced by World Bank is a capital receipt as it raises liability or reduces assets.
Question 3.
Primary deficit is borrowing requirements of government for making:
(A) Interest payments.
(B) Other than interest payments.
(C) All types of payments.
(D) Some specific payments.
Answer:
(B) Other than interest payments.
Explanation:
Primary deficit indicates borrowing requirements of the govt, to meet fiscal deficit net of interest payments.
Question 4.
Fiscal deficit equals:
(A) Primary deficit minus interest payments.
(B) Primary deficit plus interest payments.
(C) Total budget expenditure minus total budget receipts.
(D) None of the above.
Answer:
(B) Primary deficit plus interest payments.
Explanation:
Fiscal Defici t refers to the excess of total expenditure over total receipts excluding borrowings.
Question 5.
Identify the correctly matched pair of the items in
Column A to those in Column B:
| Column A | Column B |
| 1. Fiscal Deficit | (a) Other than interest payments |
| 2. Primary Deficit | (b) Borrowings less interest payments |
| 3. Revenue Deficit | (c) Borrowings |
| 4. Tax Deficit | (d) Borrowings in government budget |
(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)
Explanation:
Primary deficit indicates borrowing requirements of the govt, to meet fiscal deficit net of interest payments.
Question 6.
Which of the following sources of receipts in the government budget increases its liabilities?
(A) Direct taxes
(B) Recovery of loans
(C) Borrowings
(D) Dividend from public sector undertakings
Answer:
(C) Borrowings
Explanation:
Borrowings is a capital receipt as it creates a liability.
Question 7.
Identify the correctly matched pair in Column A to that of Column B:
| Column A | Column B |
| 1. Excise Duty | (a) Capital Receipts |
| 2. Income Tax | (b) Direct Tax |
| 3. Earning from PSU | (c) Indirect Tax |
| 4. Old Age Pensions | (d) Non-Tax Revenue Receipts |
(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(B) 2 – (b)
Explanation:
A direct tax is a tax, the burden of which is on that very person who is liable to pay it to the government.
Question 8.
Fiscal Deficit equals:
(A) Interest payments
(B) Borrowings
(C) Interest payments less borrowing
(D) Borrowings less interest payments
Answer:
(B) Borrowings
Explanation:
Primary deficit indicates borrowing requirements of the govt, to meet fiscal deficit net of interest payments
Question 9.
Primary deficit in a government budget is:
(A) Revenue expenditure – Revenue receipts
(B) Total expenditure – Total receipts
(C) Revenue deficit – Interest payments
(D) Fiscal deficit – Interest payments.
Answer:
(D) Fiscal deficit – Interest payments.
Question 10.
Identify the correctly matched pair of the items in Column A to those in Column B:
| Column A | Column B |
| 1. Revenue Expenditure | (a) Does not cause any reduction in government liability |
| 2. Capital Expenditure | (b) Which creates corresponding liability for the government |
| 3. Revenue Receipts | (c) Which causes reduction in assets of the government |
| 4. Capital Receipts | (d) Causes reduction in government liability |
(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(A) 1 – (a)
Explanation:
Revenue receipts do not create any liability for the government. For example, taxes received by the government, unlike borrowings, do not create any liabilities for it.
Question 11.
Which one of the following is a combination of direct taxes?
(A) Excise duty and Wealth tax
(B) Service tax and Income tax
(C) Excise duty and Service tax
(D) Wealth tax and Income tax
Answer:
(D) Wealth tax and Income tax
Explanation:
In case of direct tax, the burden of tax and the liability to pay it falls on the same person.
Question 12.
Match the items in Column A to those in Column B and choose the correct option:
| Column A | Column B |
| 1. GST | (a) Indirect Tax |
| 2. Income Tax | (b) Burden can be shifted |
| 3. Fine | (c) Direct Tax |
| 4. Tax Receipts | (d) Capital Receipt |
(A) 1 – (a)
(B) 2 – (b)
(C) 3 – (c)
(D) 4 – (d)
Answer:
(A) 1 – (a)
Explanation:
Indirect tax is a tax on gods and services.
Question 13.
The Non-tax revenue in the following is:
(A) Export duty.
(B) Import duty.
(C) Dividends.
(D) Excise.
Answer:
(C) Dividends.
Explanation:
Non-Tax Revenue is the recurring f income earned by the government from sources other than taxes.
Question 14.
Match the items in column A to those in column B and choose the correct option:
| Column A | Column B |
| 1. Balanced Budget | (a) Total Anticipated Expenditure < Total Anticipated Revenue. |
| 2. Surplus Budget | (b) Total Expenditure > Total Revenue |
| 3. Capital Budget | (c) Capital receipts + Capital expenditure |
| 4. Deficit Budget | (d) Total Expenditure = Total Revenue |
Answer:
Option (C) is correct.
Explanation:
Capital Budget is the statement of estimated capital receipts and estimated capital expenditure during a fiscal year.
Question 15.
Which of the following statements is true’
(A) Expenditure on Ujjwala Yojana launched by the Government is an example of capital expenditure.
(B) Expenditure on Ujjwala Yojana launched by the Government is an example ,of Revenue Expenditure.
(C) Expenditure on Ujjwala Yojan. launched by the Government is an example of Deferred Revenue Expenditure.
(D) None of the statements are cc act.
Answer:
(A) Expenditure on Ujjwala Yojana launched by the Government is an example of capital expenditure.
Question 16.
Borrowing in government bu get is:
(A) Revenue deficit.
(B) Fiscal deficit
(C) Primary deficit
(D) Deficit in taxes.
Answer:
(B) Fiscal deficit
Explanation:
Fiscal deficit is defined as excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year
Question 17.
Identify which of the following statements is true.
(A) The difference between planned revenue expenditure and planned revenue receipts is called Fiscal deficit.
(B) The difference between total planned expenditure and total planned receipts is called fiscal deficit.
(C) The difference between total planned receipts and interest payment is called primary deficit.
(D) The sum of primary deficit and interest payment is called fiscal deficit.
Answer:
(D) The sum of primary deficit and interest payment is called fiscal deficit.
Question 18.
Which of the following statements is true?
(A) Government Borrowings from the World Bank is a Revenue Receipt.
(B) Higher fiscal deficit is the result of higher revenue deficit.
(C) The loans taken by government represents a situation of fiscal deficit.
(D) The excess of capital receipts over the revenue receipts is called Revenue deficit.
Answer:
(C) The loans taken by government represents a situation of fiscal deficit.
Explanation:
Fiscal deficit is defined as the amount of borrowing the government has to J resort to meet its expenses.
Question 19.
Which of following is a direct tax?
(A) Corporation tax
(B) Entertainment tax
(C) Excise duty
(D) Service tax
Answer:
(C) Excise duty
Explanation:
In case of direct tax, the burden of tax and the liability to pay it falls on the same person.
Question 20.
Which of the following is a source of capital receipt?
(A) Foreign donations
(B) Dividends
(C) Dis-investment
(D) Indirect taxes
Answer:
(C) Dis-investment
Explanation:
Disinvestment is a capital receipt as it reduces assets.
Question 21.
Direct tax is called direct because it is collected directly from:
(A) The producers on goods produced.
(B) The sellers on goods sold.
(C) The buyers of goods.
(D) The income earners.
Answer:
(D) The income earners.
Explanation:
In case of direct tax, the burden of tax and the liability to pay it falls on the same person. The liability to pay the tax cannot be shift on other person.
Question 22.
Which of the following is not a revenue receipt?
(A) Recovery of Loans
(B) Foreign Grants
(C) Profits of Public Enterprises
(D) Wealth Tax
Answer:
(A) Recovery of Loans
Question 23.
Purchase of shares is related to:
(A) revenue receipt
(B) revenue expenditure
(C) capital receipt
(D) capital expenditure
Answer:
(D) capital expenditure
Explanation:
The purchase of shares is an investment for the government and increases assets.
Question 24.
Revenue budget includes:
(A) revenue receipts of the government
(B) revenue expenditure of the government
(C) capital receipts of the government
(D) both (A) and (B)
Answer:
(D) both (A) and (B)
Explanation:
Revenue budget is the statement of estimated revenue receipts and estimated revenue expenditure during a fiscal year.
Question 25.
The focus of the government budget is to:
(A) maximize fiscal deficit
(B) maximize fiscal deficit
(C) maximize expenditure
(D) maximize revenue
Answer:
(B) minimise fiscal deficit
Assertion and Reason Based MCQs
Directions :
In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
(A) Both Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.
Question 1.
Assertion (A): Revenue deficit includes capital receipts and capital expenditure.
Reason (R): Revenue deficit is related to revenue expenditure and revenue receipts of the government.
Answer:
(D) Assertion (A) is false, but Reason (R) is true.
Explanation:
Revenue Deficit refers to the excess of total revenue expenditure over total revenue receipts. It means that govt, will not be able to meet its revenue expenditure from its revenue receipts.
Question 2.
Assertion (A): Fiscal deficit is the difference between primary deficit and interest payment.
Reason (R): Fiscal deficit is the sum total of primary deficit and interest payment.
Answer:
(D) Assertion (A) is false, but Reason (R) is true.
Explanation:
Fiscal Deficit refers to the excess of total expenditure over total receipts ‘ excluding borrowings. It indicates borrowing requirements of the government.
Question 3.
Assertion (A): Fiscal deficit is measured in terms of borrowings.
Reason (R): External borrowings increases the Frist deficit.
Answer:
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
Explanation:
Fiscal Deficit refers to the exi s of total expenditure over total receipts exc ding borrowings. It indicates borrowing rcq rements of the government.
Question 4.
Assertion (A): Budget shows monetary policy of the goverment
Reason (R): Policy adopted by the Central Bank of an economy in the direction of credit control or money supply is known as Monetary PoLky.
Answer:
(D) Assertion (A) is false, but Reason (R) is true.
Case-Based MCQs
I. Read the following news report and answer the questions that follow:
MUMBAI:
Investors were relieved as the finance minister Nirmala Sitharaman avoided an increase in the long-term capital gains tax on equity investments and securities transaction tax in the Union Budget for 2021-22 announced today. Heading into the Budget, most investors were concerned that the government may look at increasing the long-term capital gains tax or the securities transaction tax in order to boost its revenues, especially as the stock market has witnessed a breakneck rally since the beginning of April.
In her Budget speech in July 2019, the finance minister had reintroduced the long-term capital gains tax after 15 years. Currently, individuals who make capital gains of more than 1 lakh on their equity investment after a holding period of more than one year have to pay a tax of 10 per cent on the capital gains.
However, the capital gains tax for individuals in the highest bracket of earnings comes around 15 per cent inclusive of a cess. Money managers had said that the government needed to bring out an equity friendly budget, implying no changes in taxations related to the stock market, in order to ensure that its divestment plans went smoothly in the next fiscal year.
– “Budget 2021: Investors breathe a sigh of relief as FM skips LTCG, STT hike”- The Economic Times – February 1st, 2021
Question 1.
What type of tax is the Capital Gains Tax?
(A) Direct Tax
(B) Indirect Tax
(C) It is a cess
(D) It is a fine
Answer:
(A) Direct Tax
Explanation:
A capital gains tax is a type of tax applied to the profits earned on the sale of an asset.
Question 2.
What is the reason for the government to increase taxes?
(A) To extract money from the people
(B) To use the money for themselves
(C) To achieve the objective of equality in income distribution
(D) To get their salary.
Answer:
(C) To achieve the objective of equality in income distribution
Explanation:
Government can collect tax from the rich and exempt the poor from income tax. Money so collected can be spent on providing free services to the poor. It will reduce disposable income of the rich and increase that of the poor.
Question 3.
Why didn’t the government say anything about the capitals gain tax?
(A) To stabilize the economic growth
(B) To help the economy for economic growth
(C) To rectify the losses that happened due to Covid-19
(D) All of the above
Answer:
(B) To help the economy for economic growth
Question 4.
The capital gains come in the highest bracket of earning comes around .
(A) 10%
(B) 15%
(C) 20%
(D) None of the above
Answer:
(B) 15%
II. Read the news report given below and answer the questions that follow:
The Finance Minister Nirmala Sitharaman has proposed a sharp 34.5 per cent hike in capital expenditure to ^5.54 lakh crore in financial year 2022 in order to push growth. The massive increase comes at a time when the country is looking to recover from the Covid pandemic, as rising government spending is key to bringing the economy back on track.
The government will also provide an additional ?2 lakh crore to states for capital expenditure over and above its own commitment. “We will also work out specific mechanism to nudge states to spend more of their Budget on creation of infrastructure/’ Ms. Sitharaman said.
The finance minister said that the government will launch a national asset monetisation pipeline which includes the sale of oil and gas pipelines, power transmission lines and operation of toll roads under the National Highway Authority of India. This year’s budget, according to the government, rests on six pillars: health and well-being, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and research and development, and “minimum government, maximum governance,” the finance minister had asserted. And capital expenditure is an important component that drives the growth.
-“Budget 2021: Finance Minister Proposes Sharp 34.5% Hike in Capital Expenditure.”- NDTV Budget 2021 – February 01,2021
Question 1.
Why has the Finance ministry hiked the Capital Expenditure?
(A) To recover from the Covid-19 pandemic
(B) To bring the economy back on track
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)
Question 2.
…………… is an important component that drives the growth.
(A) Capital Expenditure
(B) Revenue Expenditure
(C) Capital Receipts
(D) Revenue Receipts
Answer:
(A) Capital Expenditure
Explanation:
Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc.
Question 3.
Which objective of the Government Budget does the increase in capital expenditure serve?
(A) Encouragement of economic growth
(B) Stability in the economy
(C) Generation of employment
(D) All of the above
Answer:
(D) All of the above
Question 4.
What problem can the increase in this Capital Expenditure create?
(A) Fiscal Deficit
(B) Revenue Deficit
(C) Primary Deficit
(D) Budgetary Deficit
Answer:
(A) Fiscal Deficit
Explanation:
Fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure.
III. Read the report given below and answer the questions that follow:
New Delhi:
Finance Minister Nirmala Sitharaman on Monday announced plans to sell stake in LIC as part of her disinvestment plans for F/Y 22. In her Budget speech, the FM said her government will complete divestment of BPCL, CONCOR and SCI in F/Y 22. She said that her government will privatise two public sector banks (PSBs) and one general insurance company as well. “LIC IPO may see light of day soon,” said Jiger Saiya, Partner and Leader – Tax & Regulatory Services at BDO India.
Earlier, in an interview with ET, LIC Chairman M R Kumar had said the IPO is very much likely. “The point is that it is going to be big and we want to get the valuations right,” he had said adding that the listing of an insurance company requires determining the embedded value of the business. LIC has started the process and would soon announce the software, which will assist it determine the right valuation.
“We have floated an RFP for the actuarial firm that will undertake the exercise. This calculation will take some time. Once this process is done, we will be ready,” Kumar said on January 11. Last week, a Reuters report quoting sources suggested that the government was looking to sell 10-15 per cent in the country’s biggest insurer to improve public finances. To facilitate the sale of the LIC stake, the government will need Parliament approval to amend the LIC Act.
As part of its divestment drive, four CPSEs – HAL, SAIL, Bharat Dynamics and IRCTC -have come out with offers for sale (OFSs) this financial year. They garnered ₹ 12,907 crore to the exchequer. In addition, IPOs of IRFC and Mazagon Dock Shipbuilders together fetched ₹ 1,984 crore.
Also, this year, the government sold shares worth about ₹ 1,837 crore in private companies, in which it holds stakes through SUUTI.
Four state-owned companies, NTPC, RITES, NMDC and KIOCL, completed share buybacks, adding ₹ 2,769 crore to the exchequer.
The government is also looking to sell its entire ₹ 26.12 per cent stake in Tata Communications (TCL), erstwhile VSNL, through an OFS and strategic sale this financial year. The process of privatisation of Air India, BPCL, Pawan Hans, BEML, Shipping Corp, Neelachal Ispat Nigam Limited and Ferro Scrap Nigam Limited (FSNL) is currently under way.
-“Budget: LIC IPO coming; 2 PSU banks, 1 insurer to be sold” – The Economic Times – February 02, 2021.
Question 1.
The government will privatise …………. Public Sector Banks.
(A) One
(B) Two
(C) Three
(D) None of the above
Answer:
(B) Two
Explanation:
Finance Minister Nirmala Sitharaman on Monday announced that her government will privatise two public sector banks (PSBs) and one general insurance company as well.
Question 2.
What is the main reason for’this disinvestment?
(A) To reduce the fiscal deficit
(B) To revive the economy
(C) To create monopoly of industrialists
(D) To earn revenue
Answer:
(A) To reduce the fiscal deficit
Explanation:
Dis-investment reduces financial burden of the government.
Question 3.
According to Reuters, why is the government looking to sell country’s insurer?
(A) To reduce revenue deficit
(B) To reduce fiscal deficit
(C) To improve public finances
(D) To get money from other than taxes.
Answer:
(C) To improve public finances
Question 4.
What other thing can the government do to improve the deficit with respect to the current Covid situation?
(A) Borrowing from public
(B) Lowering government expenditure
(C) Raising government revenue
(D) None of the above
Answer:
(D) None of the above