1Fiscal policy refers to the use of which of the following by the government?
concept and meaning
Easy
A.Interest rates and money supply
B.Bank lending and credit controls
C.Exchange rates and foreign reserves
D.Government revenue and expenditure
Correct Answer: Government revenue and expenditure
Explanation:
Fiscal policy is the government's policy relating to public revenue (mainly taxation) and public expenditure to influence the economy.
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2The word 'fiscal' is derived from a term meaning:
concept and meaning
Easy
A.Central bank
B.Money supply
C.State treasury or public purse
D.Private savings
Correct Answer: State treasury or public purse
Explanation:
The term 'fiscal' comes from the concept of the state treasury or public purse, reflecting its focus on government finances.
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3Which authority is primarily responsible for framing fiscal policy in a country?
concept and meaning
Easy
A.The government
B.The central bank
C.The stock exchange
D.Commercial banks
Correct Answer: The government
Explanation:
Fiscal policy is framed and implemented by the government, whereas monetary policy is managed by the central bank.
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4Fiscal policy mainly deals with the government's decisions about taxation and:
concept and meaning
Easy
A.Printing of currency notes
B.Setting bank interest rates
C.Fixing exchange rates
D.Public spending
Correct Answer: Public spending
Explanation:
The two main components of fiscal policy are taxation (revenue) and public spending (expenditure).
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5Which of the following is a major objective of fiscal policy?
objectives
Easy
A.Achieving economic growth and stability
B.Fixing crop prices only
C.Increasing bank branches
D.Managing private companies
Correct Answer: Achieving economic growth and stability
Explanation:
Promoting economic growth along with stability is one of the key objectives of fiscal policy.
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6Reducing inequalities in the distribution of income and wealth is an objective of fiscal policy achieved mainly through progressive taxation and welfare spending directed at the poorer sections of society.
objectives
Easy
A.Bank nationalization
B.Trade liberalization
C.Currency devaluation
D.Redistribution of income
Correct Answer: Redistribution of income
Explanation:
Fiscal policy uses progressive taxes and welfare expenditure to redistribute income and reduce inequality.
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7Which objective of fiscal policy focuses on providing jobs to the unemployed?
objectives
Easy
A.Export promotion
B.Balanced budget
C.Full employment
D.Price stability
Correct Answer: Full employment
Explanation:
Achieving full employment by increasing spending and creating jobs is an important objective of fiscal policy.
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8Maintaining stability in the general price level is known as which objective of fiscal policy?
objectives
Easy
A.Price stability
B.Debt reduction
C.Capital formation
D.Resource allocation
Correct Answer: Price stability
Explanation:
Price stability aims to control excessive inflation or deflation and keep prices reasonably stable.
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9Fiscal policy also aims to encourage the formation of capital in the economy. This objective is called:
objectives
Easy
A.Currency stabilization
B.Credit rationing
C.Capital formation
D.Money creation
Correct Answer: Capital formation
Explanation:
Encouraging savings and investment to build productive capacity is the objective of capital formation.
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10Which of the following is a tool of fiscal policy?
tools of fiscal policy
Easy
A.Taxation
B.Open market operations
C.Cash reserve ratio
D.Repo rate
Correct Answer: Taxation
Explanation:
Taxation is a fiscal policy tool. Repo rate, CRR, and open market operations are monetary policy tools.
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11Public expenditure, taxation, and public debt are all examples of:
tools of fiscal policy
Easy
A.Tools of fiscal policy
B.Tools of monetary policy
C.Kinds of bank deposits
D.Types of exchange rates
Correct Answer: Tools of fiscal policy
Explanation:
Public expenditure, taxation, and public debt are the main instruments through which fiscal policy operates.
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12Borrowing by the government from the public and other sources to finance its expenditure is known as:
tools of fiscal policy
Easy
A.Grant
B.Direct tax
C.Public debt
D.Subsidy
Correct Answer: Public debt
Explanation:
Public debt refers to the money borrowed by the government to meet its expenditure when revenue is insufficient.
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13A tax whose burden cannot be shifted to another person, such as income tax, is called a:
tools of fiscal policy
Easy
A.Direct tax
B.Subsidy
C.Indirect tax
D.Grant
Correct Answer: Direct tax
Explanation:
A direct tax like income tax is paid directly by the person on whom it is levied and its burden cannot be shifted.
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14Spending by the government on defence, education, health, and infrastructure is referred to as:
tools of fiscal policy
Easy
A.Public expenditure
B.Foreign aid
C.Bank credit
D.Private investment
Correct Answer: Public expenditure
Explanation:
Public expenditure is the spending undertaken by the government on various public goods and services.
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15Which fiscal tool involves financial help given by the government to reduce the cost of goods or services for consumers or producers?
tools of fiscal policy
Easy
A.Subsidy
B.Customs duty
C.Public debt
D.Direct tax
Correct Answer: Subsidy
Explanation:
A subsidy is financial assistance provided by the government to lower costs and support certain sectors or groups.
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16Economic reforms in India were introduced mainly in which year?
role of fiscal policy after the period of economic reforms
Easy
A.1971
B.1981
C.1991
D.2001
Correct Answer: 1991
Explanation:
The major economic reforms of liberalization, privatization, and globalization were introduced in India in 1991.
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17After the economic reforms, a key aim of fiscal policy was to reduce the government's:
role of fiscal policy after the period of economic reforms
Easy
A.Foreign reserves
B.Number of citizens
C.Interest rates
D.Fiscal deficit
Correct Answer: Fiscal deficit
Explanation:
Post-reform fiscal policy focused on controlling and reducing the fiscal deficit to maintain economic stability.
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18Which act was passed in India to bring discipline in government finances after the reforms?
role of fiscal policy after the period of economic reforms
Easy
A.FRBM Act
B.RBI Act
C.Companies Act
D.Banking Regulation Act
Correct Answer: FRBM Act
Explanation:
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was passed to ensure fiscal discipline.
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19During inflation, which type of fiscal policy is generally recommended?
inflation and fiscal policy
Easy
A.Deficit fiscal policy
B.Neutral fiscal policy
C.Expansionary fiscal policy
D.Contractionary fiscal policy
Correct Answer: Contractionary fiscal policy
Explanation:
During inflation, the government reduces spending and raises taxes, which is a contractionary fiscal policy, to lower demand.
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20To control inflation using fiscal policy, the government should ideally take which of the following steps to reduce excess demand in the economy?
inflation and fiscal policy
Easy
A.Reduce taxes and increase spending
B.Increase both taxes and spending equally
C.Print more currency notes
D.Increase taxes and reduce spending
Correct Answer: Increase taxes and reduce spending
Explanation:
Raising taxes lowers disposable income and cutting public spending reduces aggregate demand, helping to control inflation.
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21Fiscal policy is best described as the use of government revenue collection and expenditure to influence the economy. Which authority is primarily responsible for framing fiscal policy in a country like India?
concept and meaning
Medium
A.The Ministry of Finance (Government)
B.The stock exchange regulator
C.The Central Bank
D.The commercial banking sector
Correct Answer: The Ministry of Finance (Government)
Explanation:
Fiscal policy deals with taxation, public expenditure, and borrowing, and is framed by the government (Ministry of Finance), unlike monetary policy which is handled by the central bank.
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22A government increases its spending and lowers taxes to boost demand during a recession. This is an example of:
concept and meaning
Medium
A.Deflationary monetary policy
B.Contractionary fiscal policy
C.Neutral monetary policy
D.Expansionary fiscal policy
Correct Answer: Expansionary fiscal policy
Explanation:
Raising expenditure and cutting taxes injects purchasing power into the economy to stimulate demand, which defines an expansionary fiscal stance.
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23Which of the following statements correctly distinguishes fiscal policy from monetary policy?
concept and meaning
Medium
A.Fiscal policy uses interest rates, while monetary policy uses taxes
B.Fiscal policy uses taxes and spending, while monetary policy uses interest rates and money supply
C.Both are controlled solely by the central bank
D.Both use only the repo rate as their main tool
Correct Answer: Fiscal policy uses taxes and spending, while monetary policy uses interest rates and money supply
Explanation:
Fiscal policy operates through the government budget (taxes and expenditure); monetary policy operates through the central bank's control of money supply and interest rates.
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24During a period of demand-pull inflation, which fiscal policy objective becomes the government's priority?
objectives
Medium
A.Reducing tax collection
B.Maximising public borrowing
C.Expanding the fiscal deficit
D.Achieving price stability
Correct Answer: Achieving price stability
Explanation:
When demand-pull inflation is high, fiscal policy aims at price stability by reducing excess demand through higher taxes and lower spending.
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25A developing economy uses progressive taxation and targeted welfare spending. Which fiscal policy objective is this primarily serving?
objectives
Medium
A.Increasing the money supply
B.Fixing the exchange rate
C.Equitable distribution of income and wealth
D.Raising the repo rate
Correct Answer: Equitable distribution of income and wealth
Explanation:
Progressive taxes take proportionally more from the rich while welfare spending supports the poor, promoting a more equitable income distribution.
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26Which of the following is not typically listed as an objective of fiscal policy?
objectives
Medium
A.Price stability
B.Direct control of commercial bank lending rates
C.Full employment
D.Economic growth
Correct Answer: Direct control of commercial bank lending rates
Explanation:
Controlling bank lending rates is a function of monetary policy. Full employment, growth, and price stability are core fiscal policy objectives.
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27In an underdeveloped economy with low capital formation, a key objective of fiscal policy is to:
objectives
Medium
A.Discourage all forms of saving
B.Mobilise resources and encourage investment for capital formation
C.Abolish public expenditure entirely
D.Reduce total government revenue to zero
Correct Answer: Mobilise resources and encourage investment for capital formation
Explanation:
Fiscal policy in developing economies focuses on mobilising savings and channelling them into productive investment to accelerate capital formation and growth.
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28Which of the following is a direct tax, an important instrument of fiscal policy?
tools of fiscal policy
Medium
A.Excise duty
B.Goods and Services Tax (GST)
C.Customs duty
D.Income tax
Correct Answer: Income tax
Explanation:
Income tax is levied directly on individuals' earnings and its burden cannot be shifted, making it a direct tax. GST, excise, and customs are indirect taxes.
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29When the government borrows heavily from the market to finance its deficit, private investment may fall due to higher interest rates. This effect is known as:
tools of fiscal policy
Medium
A.The accelerator effect
B.The multiplier effect
C.The crowding-out effect
D.The liquidity trap
Correct Answer: The crowding-out effect
Explanation:
Large government borrowing raises interest rates and reduces funds available for private borrowers, 'crowding out' private investment.
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30Public expenditure is classified into capital and revenue expenditure. Which of the following is an example of capital expenditure?
tools of fiscal policy
Medium
A.Interest payment on past loans
B.Payment of employee salaries
C.Construction of a new highway
D.Subsidy on food grains
Correct Answer: Construction of a new highway
Explanation:
Capital expenditure creates assets or reduces liabilities. Building a highway creates a long-term asset, while salaries, interest, and subsidies are revenue expenditure.
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31If the marginal propensity to consume (MPC) is , the value of the government expenditure multiplier is:
tools of fiscal policy
Medium
A.
B.
C.
D.
Correct Answer:
Explanation:
The multiplier equals .
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32Public debt (borrowing) as a fiscal tool is most appropriate when the government wants to:
tools of fiscal policy
Medium
A.Finance a deficit without immediately raising taxes
B.Permanently reduce total public spending
C.Eliminate all forms of taxation
D.Increase the central bank's repo rate
Correct Answer: Finance a deficit without immediately raising taxes
Explanation:
Public borrowing allows the government to fund expenditure exceeding revenue without an immediate tax hike, though it creates future repayment obligations.
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33During inflation, which combination of fiscal tools would help reduce aggregate demand?
tools of fiscal policy
Medium
A.Increase taxes and increase public expenditure
B.Decrease taxes and decrease public expenditure
C.Increase taxes and decrease public expenditure
D.Decrease taxes and increase public expenditure
Correct Answer: Increase taxes and decrease public expenditure
Explanation:
To curb inflation, the government reduces disposable income through higher taxes and cuts its own spending, both of which lower aggregate demand.
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34The Fiscal Responsibility and Budget Management (FRBM) Act, introduced in the post-reform era in India, primarily aims to:
role of fiscal policy after the period of economic reforms
Medium
A.Fix the exchange rate permanently
B.Nationalise all private banks
C.Ensure fiscal discipline by limiting deficits and debt
D.Increase the fiscal deficit every year
Correct Answer: Ensure fiscal discipline by limiting deficits and debt
Explanation:
The FRBM Act sets targets to reduce fiscal and revenue deficits, promoting long-term fiscal discipline and macroeconomic stability.
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35A major shift in fiscal policy after the 1991 economic reforms in India was:
role of fiscal policy after the period of economic reforms
Medium
A.Complete abolition of indirect taxes
B.Sharp increases in direct tax rates to over 90%
C.Rationalisation and lowering of tax rates to widen the tax base
D.Withdrawal of the government from all budgeting
Correct Answer: Rationalisation and lowering of tax rates to widen the tax base
Explanation:
Post-reform fiscal policy focused on tax rationalisation, moderate rates, and a broader base to improve compliance and efficiency.
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36Post-reform fiscal policy emphasised reducing the fiscal deficit mainly because a high deficit tends to:
role of fiscal policy after the period of economic reforms
Medium
A.Guarantee price stability
B.Eliminate the need for taxation
C.Increase inflationary pressure and debt burden
D.Automatically lower interest rates
Correct Answer: Increase inflationary pressure and debt burden
Explanation:
Persistently high fiscal deficits raise borrowing, add to debt servicing costs, and can fuel inflation, so reforms targeted deficit reduction.
role of fiscal policy after the period of economic reforms
Medium
A.Increasing the number of separate state entry taxes
B.Removing all customs documentation
C.Introduction of the Goods and Services Tax (GST)
D.Raising import quotas to unlimited levels
Correct Answer: Introduction of the Goods and Services Tax (GST)
Explanation:
GST unified multiple indirect taxes into a single system, reducing cascading effects and improving efficiency, a key post-reform fiscal measure.
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38To control demand-pull inflation, a surplus budget is often recommended because it:
inflation and fiscal policy
Medium
A.Increases private consumption directly
B.Injects more money into the economy than it withdraws
C.Keeps government revenue equal to expenditure
D.Withdraws more purchasing power from the economy than it injects
Correct Answer: Withdraws more purchasing power from the economy than it injects
Explanation:
A surplus budget (revenue greater than expenditure) reduces net demand in the economy, helping to control inflation.
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39During deflation and unemployment, the appropriate fiscal response is a deficit budget because it:
inflation and fiscal policy
Medium
A.Keeps the budget perfectly balanced
B.Reduces total spending in the economy
C.Withdraws money to slow down demand
D.Injects additional purchasing power to raise aggregate demand
Correct Answer: Injects additional purchasing power to raise aggregate demand
Explanation:
In deflation, a deficit budget (spending exceeding revenue) boosts aggregate demand and employment by injecting purchasing power.
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40A limitation of using fiscal policy to control inflation is the presence of time lags. Which lag refers to the delay in recognising that inflation has become a problem?
inflation and fiscal policy
Medium
A.Implementation lag
B.Multiplier lag
C.Impact lag
D.Recognition lag
Correct Answer: Recognition lag
Explanation:
The recognition lag is the delay between the onset of an economic problem and its identification by policymakers, reducing fiscal policy's timeliness.
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41A government increases both its expenditure and taxation by the same amount (). Assuming a simple closed economy with MPC , what is the net change in equilibrium income according to the balanced budget multiplier theorem?
concept and meaning
Hard
A.
B.
C.
D.
Correct Answer:
Explanation:
The balanced budget multiplier equals . Equal increases in and raise income by exactly the amount of the change: . The government spending multiplier () is partly offset by the tax multiplier (), netting a multiplier of .
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42With an MPC of , a government wants to close a recessionary gap of billion. What is the required change in autonomous taxes (assuming lump-sum taxation)?
tools of fiscal policy
Hard
A.Cut taxes by billion
B.Cut taxes by billion
C.Cut taxes by billion
D.Cut taxes by billion
Correct Answer: Cut taxes by billion
Explanation:
The tax multiplier is . To raise income by billion: , i.e., a tax cut of about billion.
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43During demand-pull inflation, the government adopts a contractionary fiscal stance. Which combination of actions is internally consistent with this stance and its intended effect on aggregate demand?
inflation and fiscal policy
Hard
A.Cut taxes and raise public expenditure
B.Increase transfer payments and reduce taxes
C.Raise direct taxes and cut public expenditure to reduce disposable income and total spending
D.Raise public expenditure and reduce direct taxes
Correct Answer: Raise direct taxes and cut public expenditure to reduce disposable income and total spending
Explanation:
Contractionary fiscal policy reduces aggregate demand to fight demand-pull inflation. Higher taxes lower disposable income and consumption, while cutting expenditure directly reduces demand. The other options are expansionary and would worsen inflation.
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44A key conflict among fiscal policy objectives arises when a government simultaneously pursues rapid economic growth and price stability during a boom. Which statement best captures this trade-off?
objectives
Hard
A.Growth and price stability always reinforce each other under any conditions
B.Deficit-financed growth spending can push aggregate demand beyond capacity, generating inflation and conflicting with price stability
C.Price stability can only be achieved by permanently abandoning growth targets
D.Reducing deficits always raises both growth and inflation simultaneously
Correct Answer: Deficit-financed growth spending can push aggregate demand beyond capacity, generating inflation and conflicting with price stability
Explanation:
During a boom, expansionary spending aimed at growth can raise demand above productive capacity, causing inflation. This is the classic growth-versus-stability trade-off in fiscal policy objectives.
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45In an economy with a marginal tax rate and MPC out of disposable income , what is the value of the government expenditure multiplier?
tools of fiscal policy
Hard
A.
B.
C.
D.
Correct Answer:
Explanation:
With proportional taxes, the multiplier is . Income taxation reduces the multiplier below the simple value.
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46The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in India post-reforms, primarily aimed to institutionalize which discipline?
role of fiscal policy after the period of economic reforms
Hard
A.Progressive reduction and containment of fiscal and revenue deficits within statutory targets
B.Complete elimination of all forms of public expenditure
C.Permanent monetization of the entire government deficit by the central bank
D.Mandatory annual increases in direct tax rates
Correct Answer: Progressive reduction and containment of fiscal and revenue deficits within statutory targets
Explanation:
The FRBM Act sought to bring fiscal discipline by setting statutory targets for reducing the fiscal deficit and eliminating the revenue deficit, reflecting the post-reform emphasis on prudent public finance.
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47Deficit financing through creation of new money is most likely to be inflationary under which condition?
inflation and fiscal policy
Hard
A.There is large unemployment and unused resources
B.The economy is near full employment with little idle productive capacity
C.The economy is in deep depression with excess capacity
D.Aggregate supply is perfectly elastic at existing prices
Correct Answer: The economy is near full employment with little idle productive capacity
Explanation:
When resources are fully employed, new money-financed spending cannot raise real output much, so it mainly bids up prices. In slack conditions with idle capacity, the same spending raises output rather than prices.
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48Which of the following best distinguishes 'automatic stabilizers' from 'discretionary fiscal policy'?
concept and meaning
Hard
A.Both operate only during recessions and never during booms
B.Automatic stabilizers require a fresh parliamentary vote each year, while discretionary policy is built into the tax code
C.Discretionary policy works without any time lag while stabilizers involve long lags
D.Automatic stabilizers respond to cyclical changes without new legislation, while discretionary policy requires deliberate government action
Correct Answer: Automatic stabilizers respond to cyclical changes without new legislation, while discretionary policy requires deliberate government action
Explanation:
Automatic stabilizers such as progressive taxes and unemployment benefits adjust automatically with the cycle. Discretionary policy involves deliberate, legislated changes in spending or taxes.
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49A government runs a budget where tax revenue , government purchases , and transfer payments . What is the size of the budget deficit?
tools of fiscal policy
Hard
A.
B.
C.
D.
Correct Answer:
Explanation:
Deficit total outlays revenue . Transfers are a government outlay and must be added to purchases.
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50In a developing economy, fiscal policy is used to promote capital formation. Which mechanism best reflects this objective?
objectives
Hard
A.Mobilizing savings through taxation and channeling them into public investment and infrastructure that crowds in private capital
B.Reducing all forms of taxation to zero to stimulate imports
C.Restricting all public investment to avoid any fiscal deficit
D.Increasing consumption subsidies to raise immediate private spending only
Correct Answer: Mobilizing savings through taxation and channeling them into public investment and infrastructure that crowds in private capital
Explanation:
In developing economies, fiscal policy raises the rate of capital formation by mobilizing resources and directing them to productive public investment, which can complement and encourage private investment.
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51Consider an economy facing cost-push inflation from rising input prices. Why might conventional contractionary fiscal policy be less effective here than against demand-pull inflation?
inflation and fiscal policy
Hard
A.Demand reduction increases both output and prices simultaneously
B.Cost-push inflation is always self-correcting so no policy is ever needed
C.Contractionary policy directly lowers input prices without affecting output
D.Cost-push inflation originates on the supply side, so demand reduction curbs prices only at the cost of higher unemployment and lower output
Correct Answer: Cost-push inflation originates on the supply side, so demand reduction curbs prices only at the cost of higher unemployment and lower output
Explanation:
Cost-push inflation stems from supply-side shocks. Cutting demand can reduce prices but simultaneously depresses output and employment (stagflation risk), making it a costly and less effective tool than for demand-pull inflation.
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52Post-1991 reforms in India shifted fiscal policy emphasis in which direction?
role of fiscal policy after the period of economic reforms
Hard
A.Toward complete central planning of all investment decisions
B.Toward eliminating the central budget process altogether
C.Toward abolishing indirect taxes entirely in favor of physical rationing
D.From heavy direct administrative controls toward reducing deficits, rationalizing taxes, and greater reliance on market-based resource allocation
Correct Answer: From heavy direct administrative controls toward reducing deficits, rationalizing taxes, and greater reliance on market-based resource allocation
Explanation:
Economic reforms emphasized fiscal consolidation, tax rationalization (lower and simpler rates), and reduced state intervention, aligning fiscal policy with a more liberalized, market-oriented economy.
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53If the government spending multiplier is and the tax multiplier is , what net change in income results from raising by billion while simultaneously raising by billion?
tools of fiscal policy
Hard
A. billion
B. billion
C. billion
D. billion
Correct Answer: billion
Explanation:
Net change billion. This illustrates the balanced-budget multiplier of (since ).
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54The 'crowding-out effect' associated with expansionary fiscal policy refers to which outcome?
concept and meaning
Hard
A.Government surpluses force private firms to exit the market
B.Higher public spending automatically increases private saving by an equal amount
C.Tax cuts always fully crowd in private consumption with no interest rate effect
D.Increased government borrowing raises interest rates, reducing private investment and partially offsetting the fiscal stimulus
Correct Answer: Increased government borrowing raises interest rates, reducing private investment and partially offsetting the fiscal stimulus
Explanation:
When the government borrows heavily to finance a deficit, it competes for loanable funds, pushing interest rates up and discouraging private investment, thereby weakening the net expansionary impact.
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55Fiscal policy pursues redistribution of income as an objective. Which measure most directly serves this end without primarily targeting aggregate demand?
objectives
Hard
A.A general cut in corporate tax rates across all firms
B.An across-the-board increase in indirect taxes on necessities
C.Progressive income taxation combined with targeted transfer payments to lower-income groups
D.Uniform proportional taxation on all goods and services
Correct Answer: Progressive income taxation combined with targeted transfer payments to lower-income groups
Explanation:
Progressive taxes take a larger share from high incomes, while targeted transfers raise the incomes of the poor, directly narrowing income inequality. The other measures are either regressive or neutral regarding redistribution.
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56A government reduces its fiscal deficit sharply during a period of inflation but the economy is simultaneously slowing. What is the primary risk of this pro-cyclical fiscal contraction?
inflation and fiscal policy
Hard
A.It may deepen the slowdown and raise unemployment even while curbing inflation, worsening the output cost of disinflation
B.It guarantees both higher growth and lower inflation immediately
C.It automatically eliminates cost-push inflation without any output loss
D.It has no effect on either output or prices
Correct Answer: It may deepen the slowdown and raise unemployment even while curbing inflation, worsening the output cost of disinflation
Explanation:
Cutting the deficit reduces aggregate demand. If the economy is already slowing, this pro-cyclical tightening can intensify the downturn and raise unemployment, imposing a larger real output cost to bring down inflation.
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57A criticism of relying on fiscal deficits for growth in the post-reform period is the emergence of a 'debt trap.' What best describes this situation?
role of fiscal policy after the period of economic reforms
Hard
A.The government pays off all debt in a single year, eliminating future spending
B.Governments borrow increasingly just to pay interest on existing debt, so the deficit and debt keep rising without funding new productive spending
C.Tax revenues automatically rise faster than any level of borrowing
D.Interest rates fall to zero, making all borrowing costless indefinitely
Correct Answer: Governments borrow increasingly just to pay interest on existing debt, so the deficit and debt keep rising without funding new productive spending
Explanation:
A debt trap occurs when a large share of fresh borrowing goes toward servicing past debt rather than productive investment, causing debt and interest obligations to spiral, constraining fiscal space.
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58An economy has , with , , , and . What is the equilibrium level of income ?
tools of fiscal policy
Hard
A.
B.
C.
D.
Correct Answer:
Explanation:
. So , giving .
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59Which statement correctly relates the 'primary deficit' to the 'fiscal deficit'?
concept and meaning
Hard
A.Primary deficit equals fiscal deficit minus interest payments, isolating the current fiscal stance from past debt servicing
B.Primary deficit equals fiscal deficit plus interest payments on outstanding debt
C.Primary deficit is always larger than the fiscal deficit
D.Primary deficit equals total revenue minus total expenditure including grants
Correct Answer: Primary deficit equals fiscal deficit minus interest payments, isolating the current fiscal stance from past debt servicing
Explanation:
Primary deficit fiscal deficit interest payments. Removing interest obligations from past borrowing shows the deficit attributable to current-year policy decisions.
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60During a deep recession with an MPC of , a government prefers increasing spending over an equal-sized tax cut to achieve full employment. What is the sound economic rationale?
objectives
Hard
A.The spending multiplier () exceeds the absolute tax multiplier (), so direct spending injects more demand per rupee
B.Government spending has a multiplier of exactly regardless of MPC
C.Tax cuts have no effect on disposable income during recessions
D.The tax multiplier is always larger than the spending multiplier at any MPC
Correct Answer: The spending multiplier () exceeds the absolute tax multiplier (), so direct spending injects more demand per rupee
Explanation:
Government spending enters the income stream fully, giving a multiplier of . A tax cut first passes through the MPC, giving . So equal-sized spending is more expansionary.
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