Government Budget and the Economy explains how receipts, expenditure, deficits and debt affect national income.
These NCERT Solutions help students solve Chapter 5 questions on fiscal policy, multipliers, public goods and GST.
Chapter 5 Government Budget and the Economy first explains Article 112, the Annual Financial Statement and the revenue-capital budget split. It then connects public goods, allocation, redistribution and stabilisation with government receipts and expenditure. NCERT Solutions Class 12 Macro Economics Chapter 5 cover all 15 exercise questions in textbook order. Students revise revenue deficit, fiscal deficit, primary deficit, public debt, fiscal policy multipliers, FRBMA and GST. The numerical answers use clear steps for 2026-27 CBSE exam practice.
Key Takeaways
- Government budget: It records estimated receipts and expenditure for one financial year.
- Public goods: These goods are non-rivalrous and non-excludable.
- Fiscal deficit: It shows the total borrowing requirement of the government.
- GST: It is a destination-based indirect tax on goods and services.
NCERT Solutions Class 12 Macro Economics Chapter 5 Structure 2026-27
| Exercise No. |
Topic |
Question Count |
| 1 to 4 |
Public goods, expenditure and deficits |
4 |
| 5 to 10 |
Fiscal policy numericals and multipliers |
6 |
| 11 to 15 |
Debt, inflation, deficit reduction and GST |
5 |
NCERT Solutions for Class 12 Macro Economics Chapter 5 Government Budget and the Economy Exercise
The NCERT exercise has 15 questions on government budget, deficits, debt and fiscal policy. These answers follow the 2026-27 NCERT textbook sequence.
Q1. Explain why public goods must be provided by the government.
Answer: Public goods must be provided by the government because private markets cannot supply them efficiently.
Public goods have two features:
- They are non-rivalrous.
- They are non-excludable.
Non-rivalrous means one person’s use does not reduce another person’s use.
Example:
A public park can be used by many people together.
Non-excludable means people cannot be easily stopped from using the good.
Example:
Street lights benefit everyone in that area.
Because of this, some people may become free riders. They may enjoy the benefit without paying.
Private producers cannot collect fees easily from all users.
So, the government provides public goods through the budget.
Q2. Distinguish between revenue expenditure and capital expenditure.
Answer: Revenue expenditure does not create assets for the government.
Capital expenditure creates assets or reduces liabilities.
| Basis |
Revenue Expenditure |
Capital Expenditure |
| Meaning |
Spending on normal government functioning |
Spending that creates assets |
| Asset creation |
Does not create assets |
Creates physical or financial assets |
| Examples |
Salaries, pensions, subsidies, interest payments |
Roads, buildings, machinery, loans to states |
| Budget link |
Revenue budget |
Capital budget |
Revenue expenditure supports current needs.
Capital expenditure supports long-term growth.
Q3. “The fiscal deficit gives the borrowing requirement of the government.” Elucidate.
Answer: Fiscal deficit shows how much the government must borrow.
It is the gap between total expenditure and total receipts, excluding borrowings.
Formula:
Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-debt Capital Receipts)
Non-debt capital receipts include loan recoveries and PSU disinvestment.
Borrowings are excluded because fiscal deficit itself shows the borrowing need.
From the financing side:
Formula:
Gross Fiscal Deficit = Net Borrowing at Home + Borrowing from RBI + Borrowing from Abroad
So, fiscal deficit gives the total borrowing requirement of the government.
Q4. Give the relationship between revenue deficit and fiscal deficit.
Answer: Revenue deficit is a part of fiscal deficit.
Revenue deficit shows excess of revenue expenditure over revenue receipts.
Formula:
Revenue Deficit = Revenue Expenditure - Revenue Receipts
Fiscal deficit shows total borrowing requirement.
Formula:
Fiscal Deficit = Revenue Deficit + Capital Expenditure - Non-debt Capital Receipts
A high revenue deficit within fiscal deficit is a concern.
It means the government is borrowing for current consumption.
This may reduce capital formation and future growth.
Q5. Suppose investment is 200, government purchases are 150, net taxes are 100, and consumption is given by C = 100 + 0.75Y. Find equilibrium income, multipliers and change in income.
Answer: This question has three parts.
(a) Level of equilibrium income
Given:
Investment = 200
Government Purchases = 150
Net Taxes = 100
Consumption Function = C = 100 + 0.75(Y - 100)
Formula:
Equilibrium Income = Consumption + Investment + Government Purchases
Step 1: Write the equilibrium equation
Y = C + I + G
Step 2: Substitute the values
Y = 100 + 0.75(Y - 100) + 200 + 150
Step 3: Simplify the equation
Y = 100 + 0.75Y - 75 + 350
Y = 375 + 0.75Y
Step 4: Solve for Y
Y - 0.75Y = 375
0.25Y = 375
Y = 375 / 0.25
Y = 1500
Final Answer:
Equilibrium income is 1500.
(b) Government expenditure multiplier and tax multiplier
Given:
MPC = 0.75
Formula:
Government Expenditure Multiplier = 1 / (1 - MPC)
Step 1: Substitute the value
Government Expenditure Multiplier = 1 / (1 - 0.75)
Step 2: Solve
= 1 / 0.25
= 4
Final Answer:
Government expenditure multiplier is 4.
Formula:
Tax Multiplier = -MPC / (1 - MPC)
Step 1: Substitute the value
Tax Multiplier = -0.75 / (1 - 0.75)
Step 2: Solve
= -0.75 / 0.25
= -3
Final Answer:
Tax multiplier is -3.
(c) Change in equilibrium income when government expenditure increases by 200
Given:
Government Expenditure Multiplier = 4
Change in Government Expenditure = 200
Formula:
Change in Income = Multiplier × Change in Government Expenditure
Step 1: Substitute the values
Change in Income = 4 × 200
Step 2: Solve
Change in Income = 800
Final Answer:
Equilibrium income increases by 800.
Q6. Consider C = 20 + 0.80Y, I = 30, G = 50, TR = 100. Find equilibrium income, multiplier and impact of policy changes.
Answer: This question has three parts.
(a) Equilibrium income and autonomous expenditure multiplier
Given:
Consumption Function = C = 20 + 0.80(Y + TR)
Investment = 30
Government Expenditure = 50
Transfers = 100
Formula:
Equilibrium Income = Consumption + Investment + Government Expenditure
Step 1: Write the equilibrium equation
Y = C + I + G
Step 2: Substitute the values
Y = 20 + 0.80(Y + 100) + 30 + 50
Step 3: Simplify the equation
Y = 20 + 0.80Y + 80 + 80
Y = 180 + 0.80Y
Step 4: Solve for Y
Y - 0.80Y = 180
0.20Y = 180
Y = 180 / 0.20
Y = 900
Final Answer:
Equilibrium income is 900.
Formula:
Autonomous Expenditure Multiplier = 1 / (1 - MPC)
Step 1: Substitute the value
Multiplier = 1 / (1 - 0.80)
Step 2: Solve
= 1 / 0.20
= 5
Final Answer:
Autonomous expenditure multiplier is 5.
(b) Impact when government expenditure increases by 30
Given:
Multiplier = 5
Change in Government Expenditure = 30
Formula:
Change in Income = Multiplier × Change in Government Expenditure
Step 1: Substitute the values
Change in Income = 5 × 30
Step 2: Solve
Change in Income = 150
Final Answer:
Equilibrium income rises by 150.
(c) Impact when lump-sum tax of 30 is added
Given:
Change in Government Expenditure = 30
Lump-sum Tax = 30
MPC = 0.80
Formula 1:
Government Expenditure Effect = Government Expenditure Multiplier × Change in Government Expenditure
Step 1: Calculate government expenditure effect
Government Expenditure Effect = 5 × 30
Government Expenditure Effect = 150
Formula 2:
Tax Multiplier = -MPC / (1 - MPC)
Step 2: Calculate tax multiplier
Tax Multiplier = -0.80 / (1 - 0.80)
Tax Multiplier = -0.80 / 0.20
Tax Multiplier = -4
Formula 3:
Tax Effect = Tax Multiplier × Change in Tax
Step 3: Calculate tax effect
Tax Effect = -4 × 30
Tax Effect = -120
Step 4: Calculate net change in income
Net Change in Income = 150 - 120
Net Change in Income = 30
Final Answer:
Equilibrium income rises by 30.
Q7. In the above question, calculate the effect on output of a 10 per cent increase in transfers and lump-sum taxes.
Answer: This question compares transfer and tax effects.
Effect of 10 per cent increase in transfers
Given:
Transfers = 100
10% increase in transfers = 10
MPC = 0.80
Formula:
Transfer Multiplier = MPC / (1 - MPC)
Step 1: Substitute the value
Transfer Multiplier = 0.80 / (1 - 0.80)
Step 2: Solve
Transfer Multiplier = 0.80 / 0.20
Transfer Multiplier = 4
Formula:
Change in Income = Transfer Multiplier × Change in Transfers
Step 3: Substitute the values
Change in Income = 4 × 10
Step 4: Solve
Change in Income = 40
Final Answer:
Output increases by 40.
Effect of 10 per cent increase in lump-sum taxes
Given:
Lump-sum Tax = 30
10% increase in tax = 3
Tax Multiplier = -4
Formula:
Change in Income = Tax Multiplier × Change in Tax
Step 1: Substitute the values
Change in Income = -4 × 3
Step 2: Solve
Change in Income = -12
Final Answer:
Output decreases by 12.
Comparison:
A transfer increase raises income by 40.
A tax increase reduces income by 12.
Q8. We suppose C = 70 + 0.70YD, I = 90, G = 100, T = 0.10Y. Find equilibrium income and tax revenue.
Answer: This question uses proportional tax.
(a) Equilibrium income
Given:
Consumption Function = C = 70 + 0.70YD
Investment = 90
Government Expenditure = 100
Tax Function = T = 0.10Y
Formula:
Disposable Income = Income - Tax
Step 1: Find disposable income
YD = Y - T
YD = Y - 0.10Y
YD = 0.90Y
Step 2: Substitute disposable income in consumption function
C = 70 + 0.70(0.90Y)
C = 70 + 0.63Y
Formula:
Equilibrium Income = Consumption + Investment + Government Expenditure
Step 3: Write the equilibrium equation
Y = C + I + G
Step 4: Substitute values
Y = 70 + 0.63Y + 90 + 100
Step 5: Simplify
Y = 260 + 0.63Y
Y - 0.63Y = 260
0.37Y = 260
Y = 260 / 0.37
Y = 702.7
Final Answer:
Equilibrium income is 702.7.
(b) Tax revenue at equilibrium income
Given:
Tax Function = T = 0.10Y
Equilibrium Income = 702.7
Formula:
Tax Revenue = Tax Rate × Equilibrium Income
Step 1: Substitute the values
Tax Revenue = 0.10 × 702.7
Step 2: Solve
Tax Revenue = 70.27
Final Answer:
Tax revenue is 70.27.
Does the government have a balanced budget?
Given:
Government Expenditure = 100
Tax Revenue = 70.27
Formula:
Budget Balance = Tax Revenue - Government Expenditure
Step 1: Substitute the values
Budget Balance = 70.27 - 100
Step 2: Solve
Budget Balance = -29.73
Final Answer:
The government has a budget deficit of 29.73.
Q9. Suppose MPC is 0.75 and proportional income tax is 20 per cent. Find the change in income.
Answer: This question uses proportional tax multiplier.
Given:
MPC = 0.75
Proportional Tax Rate = 20% = 0.20
Formula:
Government Expenditure Multiplier = 1 / [1 - MPC(1 - Tax Rate)]
Step 1: Substitute the values
Government Expenditure Multiplier = 1 / [1 - 0.75(1 - 0.20)]
Step 2: Simplify
= 1 / [1 - 0.75(0.80)]
= 1 / [1 - 0.60]
= 1 / 0.40
= 2.5
Final Answer:
Government expenditure multiplier is 2.5.
(a) Government purchases increase by 20
Given:
Government Expenditure Multiplier = 2.5
Change in Government Purchases = 20
Formula:
Change in Income = Multiplier × Change in Government Purchases
Step 1: Substitute the values
Change in Income = 2.5 × 20
Step 2: Solve
Change in Income = 50
Final Answer:
Equilibrium income increases by 50.
(b) Transfers decrease by 20
Formula:
Transfer Multiplier = MPC / [1 - MPC(1 - Tax Rate)]
Step 1: Substitute the values
Transfer Multiplier = 0.75 / [1 - 0.75(1 - 0.20)]
Step 2: Simplify
= 0.75 / 0.40
= 1.875
Given:
Transfer Multiplier = 1.875
Change in Transfers = -20
Formula:
Change in Income = Transfer Multiplier × Change in Transfers
Step 3: Substitute the values
Change in Income = 1.875 × (-20)
Step 4: Solve
Change in Income = -37.5
Final Answer:
Equilibrium income decreases by 37.5.
Q10. Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.
Answer: The tax multiplier is smaller because taxes affect income indirectly.
Government expenditure directly increases aggregate demand.
A tax cut first increases disposable income. Only a part of that income is spent.
That part depends on the marginal propensity to consume.
Formula:
Government Expenditure Multiplier = 1 / (1 - MPC)
Formula:
Tax Multiplier = -MPC / (1 - MPC)
Since MPC is less than 1, the tax multiplier is smaller in absolute value.
Q11. Explain the relation between government deficit and government debt.
Answer: Government deficit is a flow concept.
Government debt is a stock concept.
A deficit occurs when government expenditure exceeds receipts.
To finance the deficit, the government borrows.
Repeated deficits increase accumulated debt.
So, deficits add to debt over time.
Interest payments on debt may also increase future deficits.
Q12. Does public debt impose a burden? Explain.
Answer: Public debt can impose a burden if it reduces future growth.
When the government borrows, it may transfer repayment pressure to future generations.
Future taxes may rise to repay debt and interest.
This can reduce disposable income and consumption.
Government borrowing may also crowd out private investment.
However, debt may not be burdensome if used for productive investment.
For example, spending on infrastructure can raise future output.
Debt owed to foreigners creates an external burden.
It requires future payments outside the country.
Q13. Are fiscal deficits inflationary?
Answer: Fiscal deficits can be inflationary, but not always.
A fiscal deficit increases government spending or reduces taxes.
This may raise aggregate demand.
If the economy is already near full capacity, prices may rise.
So, the deficit can become inflationary.
However, if resources are underused, higher demand can raise output.
In that case, a fiscal deficit may increase production without strong inflation.
The effect depends on the state of the economy.
Q14. Discuss the issue of deficit reduction.
Answer: Deficit reduction means lowering government deficit through taxes or expenditure changes.
The government can reduce deficits by increasing taxes.
It can also reduce expenditure.
India has tried to increase tax revenue through direct taxes.
The government has also raised receipts through PSU disinvestment.
Expenditure reduction needs careful planning.
Cutting wasteful spending improves efficiency.
However, cutting health, education, agriculture or poverty programmes can harm welfare.
So, deficit reduction should protect productive and welfare spending.
Q15. What do you understand by GST? How is GST better than the old tax system? State its categories.
Answer: GST means Goods and Services Tax.
It is a single comprehensive indirect tax on the supply of goods and services.
GST became operational in India from 1 July 2017.
It is a destination-based consumption tax.
GST allows input tax credit across the supply chain.
This reduces the cascading effect of taxes.
Under the old system, many central and state taxes existed separately.
GST replaced several taxes like excise duty, service tax, VAT and entry tax.
Benefits of GST:
- It created one common market.
- It reduced tax multiplicity.
- It standardised tax procedures.
- It reduced cascading of taxes.
- It made online compliance easier.
- It improved transparency.
GST standard rates mentioned in the chapter are:
0%, 3%, 5%, 12%, 18% and 28%.
Five petroleum products are kept outside GST for now.
Alcoholic liquor for human consumption is taxed by state governments.
Government Budget Class 12 NCERT Solutions: Key Concepts
Class 12 Macro Economics Chapter 5 Government Budget and the Economy explains how budget policy affects income, welfare and stability. These concepts support theory and numerical answers.
Government Budget
A government budget is an annual statement of estimated receipts and expenditure.
In India, Article 112 requires the Annual Financial Statement before Parliament.
Budget Objectives
The government budget has allocation, redistribution and stabilisation functions.
Allocation provides public goods, redistribution changes income distribution, and stabilisation controls fluctuations.
Revenue Budget
The revenue budget includes revenue receipts and revenue expenditure.
It covers current income and current expenditure of the government.
Capital Budget
The capital budget includes capital receipts and capital expenditure.
It covers assets, liabilities, loans and investment-related spending.
Revenue Deficit
Revenue deficit shows excess of revenue expenditure over revenue receipts.
It indicates that the government is borrowing for current expenditure.
Fiscal Deficit
Fiscal deficit shows the borrowing requirement of the government.
The revenue deficit and fiscal deficit class 12 topic is important for theory questions.
Primary Deficit
Primary deficit excludes interest payments from fiscal deficit.
It shows current fiscal imbalance without past debt obligations.
Fiscal Policy
Fiscal policy uses government expenditure and taxation.
It helps stabilise output, employment and aggregate demand.
Government Budget and the Economy Class 12: Formulas and Data
Government Budget and the Economy Class 12 questions and answers require accurate formulas. These formulas help students solve deficit and multiplier numericals.
| Concept |
Formula |
Use |
| Revenue deficit |
Revenue Expenditure - Revenue Receipts |
Measures revenue gap |
| Fiscal deficit |
Total Expenditure - Revenue Receipts - Non-debt Capital Receipts |
Measures borrowing need |
| Primary deficit |
Fiscal Deficit - Interest Payments |
Measures current imbalance |
| Government expenditure multiplier |
1 / (1 - MPC) |
Measures spending impact |
| Tax multiplier |
-MPC / (1 - MPC) |
Measures tax impact |
| Proportional tax multiplier |
1 / [1 - MPC(1 - Tax Rate)] |
Measures spending impact with tax |
Revenue Deficit Formula
Revenue Deficit = Revenue Expenditure - Revenue Receipts
This formula is used when only revenue items are compared.
Fiscal Deficit Formula
Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-debt Capital Receipts)
This formula gives the government’s borrowing requirement.
Primary Deficit Formula
Primary Deficit = Fiscal Deficit - Interest Payments
This formula removes the burden of past debt interest.
Government Expenditure Multiplier
Government Expenditure Multiplier = 1 / (1 - MPC)
The government expenditure multiplier class 12 formula shows how income changes after government spending changes.
Tax Multiplier
Tax Multiplier = -MPC / (1 - MPC)
It is negative because higher taxes reduce disposable income.
Proportional Tax Multiplier
Proportional Tax Multiplier = 1 / [1 - MPC(1 - Tax Rate)]
This multiplier is smaller because proportional taxes reduce consumption sensitivity.
GST Case Point
GST was introduced from 1 July 2017.
It replaced many central and state indirect taxes with one broad indirect tax system.
Useful Links for Class 12 Macro Economics