NCERT Solutions for Class 12 Economics Introductory Macroeconomics Chapter 5

The Government: Budget and The Economy Class 12

Chapter 5 The Government: Budget and The Economy Exercise Solutions

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Exercise : Solutions of Questions on Page Number : 74

Q1 :  

Explain why public goods must be provided by the government.


Answer :

A good that is non-rival and non-excludable is referred to as public good. Non-rival means that consumption by one individual does not affect the consumption of another individual. Whereas, non-excludable implies that no individual can be excluded from using the good. For example, parks, roads, national defence, etc.

These goods must be provided by the government because of the following reasons:

1. The benefits of public goods can be easily enjoyed by anyone without affecting the consumption of other individuals. There arises market failure.

2. No individual can be excluded from using public goods as it is available to all. The link between the producer and the consumer becomes non-functional, necessitating government interference through public provisions.

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Q2 :  

Distinguish between revenue expenditure and capital expenditure.


Answer :

Basis

Revenue expenditure

Capital expenditure

Creation of Assets

It does not create assets for the government.

It results in the creation of assets.

Reduction of Liability

These expenditures do not result in the reduction of liability.

These expenditures cause a reduction of the liability of the government.

Items

(a) Aids given to states and others

(b) Interest payments

(c) Expenditure on defence

(a) Purchase of shares

(b) Expenditure on land, building, etc.

(c) Grants by the central government to the state government

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Q3 :  

'The fiscal deficit gives the borrowing requirement of the government'. Elucidate.


Answer :

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Q4 :  

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


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Q5 :  

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.


Answer :

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Q6 :  

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?


Answer :

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Q7 :  

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.


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Q8 :  

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?


Answer :

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Q9 :  

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.


Answer :

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Q10 :  

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


Answer :

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Q11 :  

Explain the relation between government deficit and government debt.


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Q12 :  

Does public debt impose a burden? Explain.


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Q13 :  

Are fiscal deficits inflationary?


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Q14 :  

Discuss the issue of deficit reduction.


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<< Previous Chapter 4 : Income Determination Next Chapter 6 : Open Economy Macroeconomics >>

Introductory Macroeconomics - Economics : CBSE NCERT Exercise Solutions for Class 12th for The Government: Budget and The Economy will be available online in PDF book form soon. The solutions are absolutely Free. Soon you will be able to download the solutions.

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