Explain any one objective of Government Budget.
One of the main objectives of government budget is Reallocation of Resources. Through the budgetary policy, Government aims to reallocate resources in accordance with the economic (profit maximisation) and social (public welfare) priorities of the country. Government can influence allocation of resources through:
(i) Tax concessions or subsidies:
To encourage investment, government can give tax concession, subsidies etc. to the producers. For example, Government discourages the production of harmful consumption goods (like liquor, cigarettes etc.) through heavy taxes and encourages the use of ‘Khadi products’ by providing subsidies.
(ii) Directly producing goods and services:
If private sector does not take interest, government can directly undertake the production.
Give two examples of indirect taxes.
Two examples of indirect taxes are
a) Sales tax and
b) Excise duty.
Explain the relationship between income of the buyers and demand for a good.
Income of the Buyer and the Demand for a Good:
Income of consumer is an important determinant of demand. The rise and fall of the demand for a good as per the rise in income of consumers depends upon the nature of good. Normal goods have a positive income elasticity of demand, so as consumers' income rises, more will be the demand. A rise in the income of the consumer will increase the demand for the good. In the case of Luxury goods and services, demand rises more than proportionate to a change in income. Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises.
Distinguish between revenue expenditure and capital expenditure in Government budget. Give an example of each.
Revenue Expenditure- Revenue expenditure refers to the expenditure which neither creates any asset nor causes reduction in any liability of the government.
1. It is recurring in nature.
2. It is incurred on normal functioning of the government and the provisions for various services.
3. Examples: Payment of salaries, pensions, interests, defence services, health services, grants to state, etc.
Capital Expenditure- Capital expenditure refers to the expenditure which either creates an asset or causes a reduction in the liabilities of the government.
1. It is non-recurring in nature.
2. It adds to capital stock of the economy and increases its productivity through expenditure on long period development programmers, like Metro or Flyover.
3. Examples: Loan to states and Union Territories, expenditure on building roads, flyovers. Factories, purchase of machinery etc., repayment of borrowings, etc.
Distinguish between revenue deficit and fiscal deficit.
|Basis of Difference||Revenue Deficit||Fiscal Deficit|
|Meaning||It may be defined as the excess of revenue expenditure of the government over its revenue receipts.||It may be defined as the excess of the total budget expenditure over total budget receipts net of borrowings.|
|Significance||A revenue deficit in the government budget imply that the routine receipts of the government are not enough to meet its routine expenditures||A fiscal deficit signifies the borrowings of the Government i.e. the debt capital receipts of the government.|
|Formula||Revenue Deficit = Revenue Expenditure − Revenue Receipts||Fiscal Deficit = Total Budget Expenditure − (Total Budget Receipts − Borrowings)
i.e. Fiscal Deficit = Borrowings
Explain the problem of double coincidence of wants faced under barter system. How has money solved it?
Double coincidence of wants implies that the needs of any two individuals should complement each other for the exchange to take place. Money as medium of exchange has removed the double coincidence of wants. Under monetary system money is exchanged for goods and services
A man with the wheat who wants to purchase oil, need not have to find a person having oil and needs wheat. He can sell his wheat in the market for money and then purchase oil with the money thus obtained.
Give one example of “externality” which reduces welfare of the people.
The dumping of hazardous chemicals in the water bodies by the factories adversely affects the health of the people. This is an example of externality that reduces the welfare of the people.
What is a Government Budget?
A government budget is a government document presenting the government's proposed revenues and spending for a financial year.
How can increase in foreign direct investment affect the price of foreign exchange?
An increase in foreign direct investment leads to increase in the supply of foreign currency, thereby, the price of foreign exchange falls.
What are demand deposits?
Demand Deposits also known as Current Account deposits refer to those deposits that provide the depositor the liberty to withdraw money at any point of time. That is, the account holder of the demand deposits can demand these deposits at any point of time as per their discretion and convenience. Such deposits do not offer any rate of interest.