Important Questions Class 12 Macro Economics Chapter 5

Important Questions Class 12 Macroeconomics Chapter 5

Important Questions for CBSE Class 12 Macroeconomics Chapter 5 – Government Budget and the Economy

Class 12 Macroeconomics Chapter 5 “Government Budget and the Economy” explains the various aspects of government formation and administration.

This chapter discusses the components of the government budget, including sources  of government revenue and avenues for government spending. It also includes the topics of a balanced, surplus, or deficit budget to account for the difference between expenditures and revenue collection. It specifically deals with the meaning of different kinds of budget deficits, their implications, and the measures to contain them. The role the government plays has implications for its deficits, which further affect the debt that the government owes. The chapter concludes with an analysis of the debt issue.

Refer to these Important Questions for Class 12 Macro Economics Chapter 5 Government Budget and the Economy learn these critical concepts and score well in your exams.

CBSE Class 12 Macro Economics Chapter-5 Important Questions

Study Important Questions for Class 12 Macro Economics Chapter 5 – Government Budget and the Economy 

Given below are some of the important questions for Chapter 5 “Government Budget and the Economy”. You can access the Chapter 5 Class 12 Macro Economics Important Questions link to review the complete set of questions.

Very Short Answer Questions 

1 Mark

Q.1 An example of a direct tax is:

  1. a) Entertainment tax
  2. b) Sales tax
  3. c) VAT
  4. d) Income tax

Ans: d) Income tax

Q.2 The major source of revenue receipts for the government is not:

  1. a) Tax Revenue
  2. b) Income tax
  3. c) Wealth tax
  4. d) Profits

Ans: d) Profits

Q.3 The policies useful to reduce inequalities of income are the:

  1. a) Monetary policies
  2. b) Public distribution policies
  3. c) Budgetary policies
  4. d) Foreign policies

Ans: c) Budgetary policies

Q.4 Budgetary policies are implemented by the:

  1. a) Foreign sector
  2. b) Finance Ministry
  3. c) Government
  4. d) Private sector

Ans: c) Government

Q.5 Direct tax is a tax which is imposed on:

  1. a) Corporations only
  2. b) None of these
  3. c) Individuals only
  4. d) Individuals and corporations

Ans: d) Individuals and corporations

Q.6 Capital Receipts:

  1. a) Create liability for the private sector
  2. b) Create liability for the government
  3. c) Do not create liability for the private sector
  4. d) Do not create liability for the government

Ans: b) Create liability for the government

Q.7 Disinvestment is a:

  1. a) Capital Expenditure
  2. b) Revenue Expenditure
  3. c) Capital Receipts
  4. d) Revenue Receipts

Ans: c) Capital Receipts

Q.8 Define a budget.

Ans: The budget is a statement of the government’s expected receipts and expenditures for the fiscal year. A fiscal year in a country, most notably India, goes from April 1 to March 31.

Q.9 What are the two types of taxes?

Ans: Direct and indirect taxes are the two most common types of taxes.

  1. Income tax, interest tax, and wealth tax are all examples of direct taxes.
  2. Indirect taxes include items like customs duties, excise duties, and sales taxes, among others.

Q. 10 What are the two types of revenue receipts?

Ans: Tax revenue and non-tax revenue are the two types of revenue received.

Q.11 What are the main items of capital receipt?

Ans: The primary items are:

  1. Market Loans raised by the government from the general population.
  2. Government Borrowings.
  3. Loans from foreign governments and international financial institutions.

Q.12 What are the four different concepts of deficits?

Ans: Budget deficit, revenue deficit, primary deficit, and fiscal deficit are the four main types of deficits.

Q.13 Give two examples of Non – Developmental expenditures.

Ans: Defence expenditure and interest on payments are two examples of such expenditures.

Q.14 Give two examples of developmental expenditure.

Ans: Economic services provided by railways and postal services, as well as grants to states and union territories, are two examples of Developmental Expenditure.

Q.15 Define the surplus budget.

Ans: When expected revenues exceed estimated expenditures in a given year, the result is a surplus budget.

Short Answer Questions 

3-4 Marks

Q.1 Explain the objectives of the Government Budget.

Ans: The key objectives of the government budget are outlined below:

  1. Activities to ensure resource reallocation – The government must reallocate resources while considering social and economic factors.
  2. Redistribution activities – The government redistributes income and wealth to eliminate inequities.
  3. Stabilising actions – The government seeks to stabilise the economy by preventing business swings.
  4. Management of public enterprises – The government engages in commercial activities such as natural monopolies, heavy manufacturing, and so on through its public enterprises.

Q.2 What are the three major types of public expenditure?

Ans: The following are the three major methods by which the government spends money:

  1. Revenue and capital expenditures are the first two items on the list.
  2. Planned and unplanned expenses
  3. Expenditures for development and non-developmental purposes.

Q.3 What are the Non-Tax Revenue receipts?

Ans: The following are non-tax revenue receipts:

  1. Postage payments, tolls, interest on funds borrowed from the government, credit corporations, railways, and postal departments, as well as electrical services, are all examples of commercial revenue.
  2. Dividends and interest
  3. Fees, penalties, fines, and other administrative revenue

Q.4 Define the terms “direct” and “indirect” taxes and provide two examples of each.

Ans: Direct taxes are those that  are imposed right away on a person’s property or income. These taxes are paid directly to the government by the general public. Examples include income tax, wealth tax, corporate tax, and other taxes.

Indirect taxes are levied on people’s income and assets as a result of their consumer spending. These taxes are levied on one person, but they are paid by another. Examples include customs duties, excise duties, sales taxes, service taxes, and other taxes.

Long Answer Questions 

6 Marks

Q.1 What is a balanced government budget? Explain the multiplier effect of a balanced budget.

Ans: The government budget balance, also known as general government balance, public budget balance, or public fiscal balance, is the overall difference between government receipts and spending. A balanced budget is one in which spending does not exceed income. This term can refer to any budget, including those of businesses, non-profit organisations, and even families. However, the term is most commonly associated with a government budget. A budget that is effectively balanced demonstrates fiscal health by demonstrating that expenditures remain in line with costs.

The following are the multiplier effects of a balanced budget:

  1. The balanced-budget multiplier is a metric that estimates the change in aggregate production caused by a change in government taxation on its own.
  2. This multiplier comes in handy for analysing fiscal policy changes that include both government purchases and taxes.
  3. The multiplier for a balanced budget is one. The “good” impact of a change in government purchases on aggregate production is large, although not entirely, countered by the “negative” impact of a change in taxes.
  4. The first injections purchase of aggregate production is the only element of the impact of the change in government purchases that is not compensated by the rise in taxes. As a result, the initial change in government purchases is equal to the change in aggregate production.

Q.2 Explain the concept of a fiscal deficit in a government budget. What does it indicate?

Ans: A fiscal deficit occurs when a government’s total expenditures exceed its total revenue, excluding money borrowed. The deficit is distinct from the debt, which is the accumulation of annual deficits. The fiscal deficit is defined as the difference between the government’s total revenue and total spending. It is the total amount of borrowing required by the government. Borrowings are not included in the total revenue calculation. For the fiscal year ending March 2018, India’s budget deficit was 3.53 percent of GDP. India raised its fiscal deficit target for the 2017-18 fiscal year from 3.2 percent to 3.5 percent of GDP in February. The country’s government expects to reduce the deficit to 3.3 percent of GDP.

The following are the consequences of a fiscal deficit:

  1. It denotes the government’s borrowing needs.
  2. It also denotes the government’s high-interest payments.
  3. It denotes a high level of inflation due to high government spending.
  4. It suggests that the economy is becoming more reliant on overseas markets.

Q.3 How is tax revenue different from administrative revenue?

Ans: The term “public income” or “public revenue” refers to the total income of the government from all sources.

  • Tax Revenue: Taxes are mandatory contributions levied by the government on citizens to cover general government expenses for the common good, with no corresponding benefits to the taxpayer. A tax is levied to cover the government’s national-interest public spending. It is compensation for an indirect service provided by the government to the entire population. Taxation is a major source of revenue in today’s public finances. Taxation has an effect on the overall economy. Taxes can influence the amount and style of consumption, the pattern of production, and the distribution of income and wealth.
  • Administrative Revenue: Fees, fines, and penalties, as well as specific assessments, can be used by public authorities to raise funds. The government or public bodies charge fees in exchange for providing a service to the public. This includes court fees, passport fees, and other similar charges. Similarly, regulating authorities levy licence fees to confer authorization for anything, such as a driving licence fee, an import licence fee, a liquor permit fee, and so on. Lawbreakers face fines and penalties as a form of punishment, which are assessed and collected. Rather than generating revenue, the primary goal of these levies is to prevent the commission of crimes and violations of the country’s laws.

Q.4 Explain the objectives of resource allocation and income distribution in a government budget.

Ans: To accomplish distinct objectives, the government prepares the budget.The government’s economic, social, and political policies are directly responsible for these objectives.

  • Resource reallocation: The government’s budgetary policy attempts to reallocate resources in accordance with the country’s economic (profit maximisation) and social (public welfare) interests. To encourage investment, the government may offer tax breaks, subsidies, and other inducements to producers.
  • Reducing income and wealth disparities: Attempting to reduce income and wealth disparities: The government’s fiscal policy aims to reduce income and wealth disparities. The government aims to influence income distribution by taxing the wealthy and spending more on the welfare of the poor.
  • Economic growth: Economic growth is determined by a country’s savings and investment rates. The budgetary policy attempts to accomplish this by allocating adequate resources for public-sector investment.
  • Reducing regional disparities: Through its tax and spending policies, the government budget seeks to eliminate regional disparities by encouraging the establishment of manufacturing units in economically underdeveloped regions.

Public Enterprise Management: A large number of public sector industries are developed and managed for the social welfare of the public. The budget is made with the intention of establishing various provisions for running such businesses and providing financial assistance.

Q1-There are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the correct option:

Assertion (A): Revenue deficit either leads to increase in liability or reduction in the assets of the government.

Reason (R): In the case of revenue deficit, the government either has to sell its assets or borrow from other sources to meet its regular expenditure.


Both A and R are true and R is the correct explanation of A.

Both A and R are true but R is not the correct explanation of A.

A is correct but R is wrong.

A is wrong but R is correct.

ANS-Both A and R are true and R is the correct explanation of A.

Q2-Which of the following is an example of indirect tax?


a-Wealth tax


c-Sales tax

d-Income tax

ANSWealth tax

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FAQs (Frequently Asked Questions)

1. What is a government?

A public body elected by the common people to run a state is called a government.

2. Who has the power to choose a government?

The common people have the electoral power to choose a government in a democratic country.