Economics Test - 10

The correct answer is Fiscal Policy.

Key Points

• There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial year which runs from 1 April to 31 March.
• This ‘Annual Financial Statement’ constitutes the main budget document.
• Therefore, the budget comprises of the-Revenue Budget and the Capital Budget.
• The Revenue Budget shows the current receipts of the government and the expenditure that can be met from these receipts.
• Revenue receipts are receipts of the government which are non-redeemable, that is, they cannot be reclaimed from the government. 
• Tax revenues consist of the proceeds of taxes and other duties levied by the central government.
• The non-tax revenue of the central government mainly consists of interest receipts on account of loans by the central government, dividends, and profits on investments made by the government, fees, and other receipts for services rendered by the government.
• In the process, the fiscal policy creates a surplus (when total receipts exceed expenditure) or a deficit budget (when total expenditure exceeds receipts) rather than a balanced budget (when expenditure equals receipts).​

Additional Information

• General objectives of Fiscal Policy are given below:
  • To maintain and achieve full employment.
  • To stabilize the price level.
  • To stabilize the growth rate of the economy.
  • To maintain equilibrium in the Balance of Payments.
  • To promote the economic development of underdeveloped countries.
• The fiscal policy of India always has two objectives, namely improving the growth performance of the economy and ensuring social justice to the people.

When revenue is equal to expenditure then it is called as balanced budget. Thus, neither a budget deficit nor a budget surplus exists.

The correct answer is receipts more than expenditure.

Key Points

• Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.
• A budget surplus occurs when receipts exceed expenditures.
• The term often refers to a government's financial state, as individuals have "savings" rather than a "budget surplus".
• A surplus is an indication that a government's finances are being effectively managed.
• A surplus implies the government has extra funds.
• Advantages of a budget surplus:
  • These funds can be allocated toward public debt, which reduces interest rates and helps the economy.
  • A budget surplus can be used to reduce taxes, start new programs, or fund existing programs such as Social Security or Medicare.
  • The government might use a budget surplus to cut taxes to stimulate the supply-side of the economy

The correct answer is the Option 1.

Key Points

• The theory that consumers are forward-looking and anticipate that government borrowing today will mean a tax increase in the future to repay the debt, and will adjust consumption accordingly so that it will have the same effect on the economy as a tax increase today. Hence, option 4 is correct.
• The theory that rational private households might shift their saving to offset government savings or borrowing is known as Ricardian equivalence because the idea has intellectual roots in the writings of the early nineteenth-century economist David Ricardo.
• If Ricardian equivalence holds completely true, then any increase in government expenditure that increases the budget deficit would lead to a corresponding decrease in consumption expenditure, as households save more in anticipation of their future tax liability. The net effect on aggregate demand then is zero and fiscal policy is entirely ineffective.

Important Points

• In practice, the private sector only sometimes and partially adjusts its savings behavior to offset government budget deficits and surpluses.
• So private saving does increase to some extent when governments run large budget deficits, and private saving falls when governments reduce deficits or run large budget surpluses. However, the offsetting effects of private saving compared to government borrowing are much less than one-to-one. Thus, fiscal policy can be effective, though perhaps less so in the absence of Ricardian equivalence. In addition, this effect can vary a great deal from country to country, from time to time, and over the short run and the long run.
• If the funding for a larger budget deficit comes from international financial investors, then a budget deficit may be accompanied by a trade deficit. In some countries, this pattern of twin deficits has set the stage for international financial investors first to send their funds to a country and cause an appreciation of its exchange rate and then to pull their funds out and cause a depreciation of the exchange rate and a financial crisis as well. It depends on whether funding comes from international financial investors.

The correct answer is Option 3 i.e. Fiscal Deficit.

• Fiscal Deficit is the sum of revenue and capital expenditure minus(-) all revenue and capital received other than the loan is taken. A substantial increase in capital expenditure or revenue deficit leads to Fiscal Deficit

• Fiscal Deficit = Revenue Received + Capital Received - Total Expenditure

•  Revenue Deficit = Revenue Expenditure - Revenue Received

• The Primary deficit is defined as the fiscal deficit of current year minus interest payments on previous borrowings.
• Primary Deficit = fiscal Deficit - Interset Payment.
• Budgetary deficit is the sum of deficits of revenue account and the capital account.

The Correct Answer is Revenue Deficit

• The deficit is the amount by which spending exceeds revenue over a particular period of time
• The difference between total revenue expenditure and the total revenue receipts is Revenue Deficit.

 Additional Information

Fiscal Deficit

• The fiscal deficit is defined as an excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year.
• It is the amount of borrowing the government has to resort to meet its expenses in a year.

Revenue Deficit

• Revenue deficit is the excess of total revenue expenditure of the government over its total revenue receipts.
• It is related to only revenue expenditure and revenue receipts of the government. 

The correct answer is option 3

Key Points

• Receipts from taxes on property and capital transaction
• Receipts from taxes on property and capital transaction are the parts of Revenue Receipts.
• The difference between Capital Receipts and Revenue Receipts is listed below:

Capital Receipts	Revenue Receipts
It is the amount received from the sale of assets shares and debentures.	It is the amount received from the sale of goods and services.
They are those receipts that either create liability or cause a reduction in the assets of the government.	They are the money received by a business as a result of its normal business operation.
Components of Capital receipts are - Recovery of loans and advances, Disinvestment, Borrowing (domestic and external), Small savings etc.	Components of Revenue receipts are - Tax Revenue, Interest earned, Profits and dividends received, incomes from other sources etc.

The Correct Answer is Option 4 i.e B.

• Maharatna Status:
  • Central public sector enterprises (CPSEs) which are at the higher end of the Navratna category and have the potential to become Indian Multinational Companies (MNCs), can be granted a ‘Maharatna status.
  • Bharat Heavy Electricals Limited, Bharat Petroleum Corporation Limited, Coal India Limited, GAIL (India) Limited, Hindustan Petroleum Corporation Limited are the few examples with Maharatna Status.
• Miniratna Status: 
  • The CPSEs which have made profits in the last three years continuously and have positive net worth are eligible to be considered for the grant of Miniratna status.
  • Bharat Electronics Limited, Container Corporation of India Limited, Engineers India Limited are examples with Miniratna status
• Navratna Status:
  • Criteria for grant of Navratna status:-
  • The Miniratna Category – I and Schedule ‘A’ CPSEs, which have obtained ‘excellent’ or ‘very good’ rating under the Memorandum of Understanding system in three of the last five years, and have a composite score of 60 or above in the six selected performance parameters, namely,
    • (i) net profit to net worth,
    • (ii) manpower cost to total cost of production/services,
    • (iii) profit before depreciation, interest, and taxes to capital employed,
    • (iv) profit before interest and taxes to turnover,
    • (v) earning per share and
    • (vi) inter-sectoral performance.
  • Hindustan Aeronautics Limited,  Power Finance Corporation Limited, Rashtriya Ispat Nigam Limited are examples with Navratna status.

The correct answer is Option 1 .

Key Points

• The transfer of ownership, property or business from the government to the private sector is termed privatization.
• The government ceases to be the owner of the entity or business.
• The process in which a publicly-traded company is taken over by a few people is also called privatization.

The correct answer is -the Indian Government needs to borrow in order to finance its expenses which do not create Capital assets.

 Key Points

• Revenue deficit arises when the government's revenue expenditure exceeds the total revenue receipts.
• deficit includes those transactions that have a direct impact on a government’s current income and expenditure.
• The deficit represents that the government’s own earnings are not sufficient to meet the day-to-day operations of its departments.
• Hence, the government has to resort to the external borrowings in order to finance its expenses.
• To overcome the revenue deficit, the government can take these measures:
  • Through the borrowings or sale of existing assets, the deficit could be met from the capital receipts.
  • The government can increase its non-tax or tax receipts.
  • The government could try to reduce unnecessary expenditures.

Additional Information

• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure.
• The government describes fiscal deficit of India as “the excess of total disbursements from the Consolidated Fund of India, excluding repayment of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”.