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a) Govt. Expenditure multiplier = \(\frac{1}{1-c}\)

\(\frac{1}{1-0.8} = \frac{1}{0.2}\)

= 5

b) Tax multiplier = \(\frac{-c}{1-c}\)

= \(\frac{-0.8}{1-0.8}\)

= \(\frac{0-8}{0.2}\)

= -4

a) Tax multiplier = \(\frac{-C}{1-C}\) (C = MPC = 0.5)

= \(\frac{- 0.5}{1 - 0.5} = \frac{-0.5}{0.5} = 1\) (absolute value)

b) Govt. expenditure multiplier = \(\frac{1}{1-C}\)

= \(\frac{1}{1-0.5}\) = \(\frac{1}{0.5}\)

= 2

The tax multiplier is smaller in absolute value compared to the govt, expenditure multiplier. This is because, the govt, expenditure directly affect the total expenditure and taxes enter the multiplier, process and put impact on the disposable income. 

Disposable income influences the consumption expenditure of households. Therefore, the tax multiplier is always less in absolute value than the govt, expenditure multiplier.

For example, assume that MPC = 0.75, then Govt, expenditure multiplier = \(\frac{1}{1-c}\), C stands for MPC

= \(\frac{1}{1-0.75}\) = \(\frac{1}{0.25}\) = 4

Tax multiplier = \(\frac{-c}{1-c} = \frac{-0.75}{1-0.75} = \frac{-0.75}{0.25}\)

= -3 (absolute value is 3)

Thus, it is clear from the example, that tax multiplier is smaller than govt. expenditure multiplier.

Correct answer is (iii) 1

Correct answer is (iv) acquisition of land

(iv) Customs duty

1. Excise duty. Others are non-tax revenue 

2. Income tax. Others are indirect taxes.

• To achieve economic growth 
• To reduce inequalities of income and wealth 
• To achieve economic stability

1. Revenue receipts 

• Tax revenue 
• Fees 
• Fines and penalties
• Special assessment

2. Capital receipts 

• Borrowings 
• Disinvestment 
• Recovery of loans 
• Small Savings

1. Revenue Receipts 

2. Capital Receipts

correct answer is (ii) 1

1. It is true that the Government of India is spending huge amount of money on various activities such as defence, urbanization, development programmes, welfare activities, etc. 

2. It is desirable for the modem state to spend more for the welfare of the people. However, huge expenses have caused burden for the government. 

3. Therefore, I do not support external borrowings for meeting public expenditure. This is because; borrowing from abroad will again bring another burden on the government in the form of interest payment.

Government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature -they impact all income groups equally). 

There has also been an attempt to raise receipts through the sale of shares in PSUs. However, the major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration.

C. Because of tax rate increases in proportion to the change in income.

When a government spends more than it collects by way of revenue, it incurs a budget decit. There are various measures that capture government decit and they have their own implications for the economy. The important concepts of decits are discussed below. 

1. Revenue Deficit: 

The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts. 

2. Fiscal Deficit: 

Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing. Gross fiscal deficit = Total expenditure –(Revenue receipts + Non-debt creating capital receipts

(Revenue receipts + Non-debt creating capital receipts)

3. Primary Deficit: 

We must note that the borrowing requirement of the government includes interest obligations on accumulated debt. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit. It is simply the fiscal deficit minus the interest payments. Gross primary deficit = Gross fiscal deficit – net interest liabilities.

1. High value of mpc and AD increases 

2. Yes. Income of poor sections increases

Fiscal deficits are generally treated as inflationary. Increase in govt, expenditure and cuts in taxes both leads to government deficit. Increased govt, expenditure and reduced taxes tend to increase the aggregate demand. Generally firms are not able to produce higher quantities that are demanded at the going prices. 

This leads to inflationary pressure. However, there is a solution to this inflationary pressure. Economy can utilizatfle unutilized resources and raise production. Therefore, the deficit cannot be inflationary when an economy has unutilized the resources.

• a & d Revenue expenditure 
• b & c Capital expenditure

The main objectives of public expenditure are pointed out below 

1. for satisfaction of collective needs of the people 

2. for smooth functioning of government machinery 

3. for economic and social welfare of the people 

4. for creation of infrastructure 

5. for controlling depressionary tendencies 

6. for accelerating the speed of economic development 

7. for reducing regional disparities of growth.

Budget deficit is the difference between the yearly revenue and expenditure of the government. Debt is the accumulated deficit. The government can finance the budgetary deficit by borrowing, taxation or printing new currencies. To what extent the government can borrow is based on two issues.

1. Whether the debt is a burden

2. How the debt is financed.

When the government borrows it transfers the burden of reduced consumption to future generation. The future tax would increase, hence a fall in disposable income and consumption in future. If the government borrows too much the saving available to private sector may fall.

It is also argued that the consumer spending is based not only on their current income but also on their expected future income. There is another argument, debt does not matter because we owe to ourselves. This is because although there is a transfer of resources between generation, purchasing power remain within the nation. Any debt from foreign involves a burden.

 (c) All the above

• 1, 5 allocation function 
• 2, 6 distribution function 
• 3, 4 stabilization function

Allocation function refers to the provision of public goods by the government. Stabilization function refers to the reduction of uctuations in the economy by inuency of the aggregate demand. 

Health and Education Indicators of Kerala. Government can achieve this which Market economy can’t

= \(\frac{1-c}{1-c} = 1\)

1. Road, national defence are public goods

2. Cars, clothes are private goods 

Two features of public goods are nonrivalry in consumption and non excludability

Equilibrium income = Autonomous Govt, expenditure × multiplier Here, multiplier (k) is

\(\frac{1}{1-mpc} = \frac{1}{1-0.6} = \frac{1}{4} = 2.5\)

\(\therefore\) Equilibrium income = 27000 x 2.5 = 67500.

1. Fiscal deficit = Budget deficit + borrowing 

= 60000 + 40000 = 1,00,000 

2. Revenue deficit = Revenue expenditure – Revenue receipts 

= 80000 – 60000 = 20,000

3. Primary deficit = Fiscal deficit – Interest payments 

= 100000 – 20000 = 80,000

Yes, I do agree to the saying the revenue expenditure should not exceed revenue receipts. The fact is that the revenue expenditure is non-developmental expenditure. Therefore, borrowing for meeting revenue expenditure has to be avoided.

1. A, The higher income group contribute more. 

2. In progressive taxes more income contributed by the richer sections In regressive taxes more income contributed by the poor sections.

Correct answer is (iii) GST

Balanced Budget Multiplier is equal to one \(\frac{1}{1-C} + \frac{-C}{1-C}\).

if the government increases taxes or decreases expenditure then the fiscal deficit gets reduced. Indian government is trying to reduce the fiscal deficit by increasing tax revenue by selling the share of PSUs and by reducing the government expenditure.

The deficit reduction influences the different sectors of an economy in different ways. The government is trying to fill the gap of reduced fiscal deficit by making government activities more efficient through better planning of programmes and better administration.

The cutting back government programmes in vital areas like agriculture, education, health, poverty alleviation has adverse effect on the economy. The same fiscal measures can lead to a large or small deficit government by the state of the economy. During recession period GDP falls which reduces tax revenue which increase the fiscal deficit.

Yes, I agree with this statement. The proportional income tax acts as an automatic stabilizer – a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP. When GDP rises, disposable income also rises but by less than the rise in GDP because a part of it is siphoned o as taxes.

This helps limit the upward fluctuation in consumption spending. During a recession when GDP falls, disposable income falls less sharply, and consumption does not drop as much as it otherwise would have fallen had the tax liability been fixed. This reduces the fall in aggregate demand and stabilizes the economy.

a) Govt. Expenditure multiplier = \(\frac{1}{1-c}\)

= \(\frac{1}{1-0.5} = \frac{1}{0.5}\)

= 2

b) Equilibrium income is calculated by using the following formula

\(\Delta Y= \frac{1}{1-c} \times \Delta G = \frac{1}{1-0.5} \times 400\)

  =\(\frac{1}{0.5} \times 400 = 2 \times 400 = 800\)

1. Income tax. Others are indirect taxes 

2. Corporate tax. Others are non-tax revenues 

3. Borrowings. Others are non-tax revenues 

4. Supplementary budget. This is prepared during abnormal times