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Chapter Analysis
Intermediate17 pages • EnglishQuick Summary
Chapter 5 of Class 12 Macroeconomics discusses the government budget and its impact on the economy. It explores various components and objectives of the government budget, including the allocation, redistribution, and stabilization functions. The chapter also delves into different kinds of budget deficits, their economic implications, and methods to manage public debt. Concepts such as fiscal policy, public goods, and various multipliers are examined in detail.
Key Topics
- •Government budget components
- •Fiscal policy
- •Budget deficits
- •Public debt
- •Multiplier effect
- •Public goods
- •Revenue and capital expenditure
- •Stabilization function of government budget
Learning Objectives
- ✓Understand the structure and components of a government budget
- ✓Analyse the impact of budget deficits on the economy
- ✓Explore the role of fiscal policy in economic stabilization
- ✓Evaluate the implications of public debt
- ✓Identify differences between public and private goods
- ✓Calculate changes in equilibrium income based on fiscal activities
Questions in Chapter
Explain why public goods must be provided by the government.
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Distinguish between revenue expenditure and capital expenditure.
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The fiscal deficit gives the borrowing requirement of the government. Elucidate.
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Give the relationship between the revenue deficit and the fiscal deficit.
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If government expenditure increases by 200, find the change in equilibrium income.
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Does public debt impose a burden? Explain.
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Additional Practice Questions
What is the role of fiscal policy in stabilizing the economy?
mediumAnswer: Fiscal policy, through its components like tax collection and government spending, plays a crucial role in stabilizing the economy. It helps manage economic fluctuations by increasing demand during a recession through increased public spending and curbing demand by decreasing spending or increasing taxes during an economic boom.
How does the concept of the 'multiplier' apply to government spending and taxation?
mediumAnswer: The multiplier effect refers to the proportionate increase or decrease in final income that results from an increase or decrease in spending. Government spending has a higher multiplier effect compared to tax changes because spending directly influences aggregate demand, while tax changes affect disposable income indirectly.
What are the implications of a growing public deficit?
hardAnswer: A growing public deficit can lead to higher debt levels, increased borrowing costs, and potentially higher taxes in the future. It can also decrease national savings and crowd out private investment, impacting economic growth negatively.
In what ways can the government address a fiscal deficit?
mediumAnswer: The government can address a fiscal deficit by increasing taxes, reducing public expenditure, or a combination of both. Additionally, improving tax compliance and widening the tax base are effective measures. Structuring debt repayment efficiently and pursuing economic policies to stimulate growth can also help.
Why is a balanced budget multiplier considered to be unity?
easyAnswer: The balanced budget multiplier is considered to be unity because when government spending is increased by the same amount as taxes, the net effect on aggregate income is equal to the amount of increase in government spending, keeping the budget balanced and generating one-for-one changes in output.