Chapter 17 : Fiscal Policy | Short Questions [2 Marks each]
1. What is meant by fiscal policy? [2017, 2019]
Answer: The policy of using the government budget in order to achieve certain pre-determined objectives is known as fiscal policy.
2. What is meant by expansionary fiscal policy? [2016]
Answer: Fiscal policy that aims at raising the effective demand during a recession is known as expansionary fiscal policy.
3. When is expansionary fiscal policy adopted?
Answer: Expansionary fiscal policy is adopted to raise the effective demand during a recession.
4. What is the feature of expansionary fiscal policy?
Answer: Expansionary fiscal policy is a tool that can be used by governments to stimulate economic growth and reduce unemployment.
5. What is meant by contractionary fiscal policy? [2018]
Answer: Contractionary fiscal policy refers to a set of measures undertaken by the government to reduce the level of aggregate demand and slow down economic growth.
6. When is contractionary fiscal policy adopted?
Answer: Contractionary fiscal policy is adopted when the government wants to reduce aggregate demand and slow down the growth of the economy.
7. What is the feature of contractionary fiscal policy?
Or, What is the feature of anti-inflationary fiscal policy?
Answer: Anti-inflationary fiscal policy is a tool that can be used by governments to control inflation and stabilize prices in the economy.
8. What is deficit budget? [2015, 2019]
Or, What is meant by deficit budget? [2023]
Or, What is deficit financing? [2017]
Answer: When the expenditure exceeds income in a government budget, it is called a deficit budget or deficit financing.
9. How can budget deficit be covered?
Answer: To cover a budget deficit, a government may borrow money and increase taxes while also cutting spending and selling assets.
10. What is the view of classical economists on deficit financing?
Answer: Classical economists generally had a negative view of deficit financing and believed that it could have harmful effects on the economy over the long term.
11. What is the view of Keynes on deficit financing?
Answer: According to Keynes, as a result of deficit financing, the money supply in the economy will increase. It will eventually lead to an increase in income and employment in the country.
12. When does money supply increase due to deficit budget?
Answer: A deficit budget can lead to an increase in the money supply if the government borrows money through issuing bonds.
13. If budget deficit is financed by taking loans from the non-bank public will money supply increase?
Answer: Yes, if the budget deficit is financed by taking loans from the non-bank public, the money supply will increase.
14. What is surplus budget?
Answer: A surplus budget is a budget where government revenues exceed government expenditures.
15. Which one is better- deficit budget or surplus budget?
Answer: In some cases, deficit budget may be necessary to support economic growth and stability, while in others, surplus budget may be more appropriate for long-term sustainability.
16. What is balanced budget?
Answer: A balanced budget is a budget where government revenues are equal to government expenditures.
17. What is government expenditure multiplier? [2016, 2018]
Answer: Government expenditure multiplier shows that the change in the equilibrium level of income is a multiple of change in the level of government expenditure on goods and services.
18. What is the value of the government expenditure-multiplier?
Answer: The value of government expenditure multiplier is equal to the reciprocal of the marginal propensity to save i.e. 1/1-b where ‘1-b’ is the marginal propensity to save.
19. What is the value of tax multiplier?
Answer: The value of tax multiplier is negative marginal propensity to consume (MPC) divided by marginal propensity to save (MPS) i.e. -b/1-b where ‘b’ is the MPC and ‘1-b’ is the MPS.
20. What is balanced budget muliplier?
Answer: The balanced budget multiplier refers to the multiplier effect of a change in government spending or taxes when the government’s budget remains unchanged.
21. What is the value of the balanced budget multiplier?
Answer: The value of balanced budget multiplier is 1.
22. What type of fiscal policy can be adopted to control inflation?
Answer: To control inflation, a government can adopt contractionary fiscal policy.
23. Decrease in tax revenue or increase in government expenditure of equal amount-which one is more expansionary?
Answer: An increase in government expenditure is generally considered to be more expansionary than a decrease in tax revenue of equal amount.
24. If government expenditure and tax revenue increase by equal amount what will be its impact on national income?
Answer: If the increased revenue is used to fund productive government spending that stimulates economic growth, the impact on national income could be positive. However, if the increased revenue results in reduced consumption and investment, it could lead to a negative impact on national income.
25. Mention two fiscal measures to control inflation. [2015]
Or, Mention two anti-inflationary fiscal policies. [2023]
Answer: Two examples of anti-inflationary fiscal policies: (i) increasing taxes, (ii) decreasing government spending.
26. How can inflation be controlled through public debt policy?
Answer: Public debt policy can help control inflation – (a) by reducing the amount of money in circulation, (b) by reducing government spending, (c) by influencing interest rates.
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