NCERT Solutions for Class 12th Macroeconomics Chapter 5 – Government Budget and Economy

National Council of Educational Research and Training (NCERT) Book Solutions for class 12th
Subject: Economics
Chapter: Chapter 5 – Government Budget and Economy

These Class 12th NCERT Solutions for Economics provide detailed, step-by-step solutions to all questions in an Economics NCERT textbook.

Click Here for Class 12 Economics Notes.

Class 12th Economics Chapter 5 – Government Budget and Economy NCERT Solution is given below.

Question 1. Explain why public goods must be providing by the government?

Answer : Public goods are refer to certain goods such as national defence, roads, government administration which cannot be provided through the
market mechanism must be provided by the government. These goods are necessary for life and national development. Presence and supply of these goods can not be ignored An private sector enterprises do not take Interest In It because these goods are not more prolnable. So, government supplied the public goods.

Question 2. Distinguish between revenue expenditure and capital expenditure


S.No Revenue Expenditure Capital Expenditure
1 It neeither creates any assets nor reduce any liability It either creates an asset or reduce a liability.
2 It is Incurred for normal running of govornmental departments and various
It is incurred mainly for acquiring assets and granting loans
3 It IS recurnng In nature as day-to-day activities. It is non recurring in nature
4 Its exarnptessalary, pensron, Interest etc Its examples repayment of loan, acquisttion of asset f!IC

Question 3. ‘The fiscal deficit gives the borrowing requirement of the government’. Elucidate.

Answer Fiscal deficit refers to excess 01 government expenditure over its receipts exclusive of borrowing Thus, fiscal deficit points to borrowings
requirement of the government to cope with its expenditure of he year Higher borrowing implies higher burden of repayments of loans and of Interest on the future genera lion As this burden mounts up, year after year, resource base future generation tends to shrink. This will definitely retard the process of future growth. Particularly, when borrowings by the government are used for non-productive purpose

Question 4. Give the relationship between the revenue deficit and the fiscal deficit.

Answer Revenue deficit is the excess 01 revenue expenditure of the government over Its revenue receipts fiscal deficit IS the excess of total budget
expenditure over total budget receipts excluding borrowing, Fiscal deficit points to borrowing requirement of the government. As fiscal deficit mount up, increasingly larger part of GOP siphoned off to pay the existing loans.

Accordingly, resources available for revenue expenditure are reduced. Growth process is hindered The government is once again compelled to take loans adding to its fiscal deficit.

Thus revenue deficit and fiscal deficit tend to push up each other.

Question 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

(i) What is the level of equilibrium income?
(ii) Calculate the value of the government expenditure multiplier and the tax multiplier.
(iii) If the government expenditure increases by 200, find the change in equilibrium income.


Question 6. Consider an economy described by the following function: C = 20 + 0.80 y, I = 30, G = 50, TR = 100

(i) Find the equilibrium level of income and the autonomous expenditure multiplier in the model.
(ii) If government expenditure increases by 30, what is the impact on equilibrium income?
(iii) If a lump sum tax of 30 is added to pay for the increase in government purchases, how witt equilibrium income change?


Question 7. In the above question, calculate the effect on output of a 10% increase in transfers. and a 10% increase in lump sum taxes. Compare the effect of two.


Conclusion Increase of 10% In transfers will raise the income by 40 and Increase of 10% In lax will lead to fall In the income by 40.

Question 8. We suppose that

C = 70 + 0.70 Y D, I = 90, G = 100, T = 0.10 y

(i) Find the equilibrium income.
(ii) What are tax revenues at equilibrium income? Does government have a balanced budget?


(i) c = 70+ 0.70 YO
1= 90
G = 100
T = 0.10Y
= 70 + 0.70 Y + 90+ 100
= 70 + 0.70 YD + 190
= 70 + 0.70 (Y- T) + 190
= 70 + 0.70Y – 0.70 x 0.10 Y + 190
= 70 + 0.70 – 0.07Y + 190
= 70 + 0.63Y + 190
= 260 + 063Y
Y – 0.634 =260
0.37Y =260
y = 260 / 0.37
= 702.7
(ii) T = 0.10Y
= 0.10 x 702.7
= 70.27
Government expenditure = 100
Tax revenue= 70.27
Government has a deficit budget, not a balanced budget because government expenditure exceeds the tax revenue. (G > T)

Question 9. Suppose marginal propensity to consume is 0.75 and there is a 20% proportional income tax. Find the change in equilibrium income for the following

(i) Government purchases increase by 20
(ii) Transfers decrease by 20.


Question 10. Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier?

Answer The tax multiplier is negative, implies an increase in taxes leads to fall in output It is smaller In absolute value than the spending multiplier we can say higher taxes reduces the people’s disposable Income, thereby reducing their consumption

Explaination by taxing an example

Suppose MPC = 0.90

Thus, It is clear that government expenditure multiplier is more than the tax mulliplier.

Question 11. Explain the relation between government deficit and government debt.

Answer The concepts of deficit and debt are closely related Deficit can be thought of as a flow which add to the stock of debt It 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 them selves contribute to the debt

Question 12. Does public debt impose a burden? Explain.

Answer Yes. public debt Impose a burden In the following cases

(i) When government has Imposed new taxes or raised the existing tax rates to repay the debt
(ii) When public debt is taken for war purposes or debt is used in an unplanned manner.
(iii) When debt IS to be redeemed by Issuing of new currency it will cause inflation in the country.

Question 13. Are fiscal deficit necessarily inflationary?

Answer Yes, If fiscal deficit is financed by issuing new currency it will increase inflation. It may be worsen if new currency used to finance the current consumption expenditure of the government. It new money is used for infrastructural activities or other capital projects, then fiscal deficit will not to be inflationary.

Question 14. Discuss the issue of deficit reduction.

Answer The deficit can be reduced through the following

(i) Increase in Receipts Government can impose new taxes or increase rate of existing taxes to increase ItS receipts Receipts reduce the deficit.

(ii) Decrease in Expenditure Government can reduce the deficit by reduce its unproductive and administrative expenditure and also encourages to private sector to undertake capital projects reduce its expenditure

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