Unit 14: Fiscal Policy - Practice Quiz

DEECO515 60 Questions
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1 Fiscal 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

2 The 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

3 Which 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

4 Fiscal 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

5 Which 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

6 Reducing 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

7 Which 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

8 Maintaining 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

9 Fiscal 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

10 Which 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

11 Public 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

12 Borrowing 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

13 A 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

14 Spending 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

15 Which 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

16 Economic 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

17 After 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

18 Which 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

19 During 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

20 To 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

21 Fiscal 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

22 A 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

23 Which 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

24 During 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

25 A 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

26 Which 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

27 In 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

28 Which 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

29 When 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

30 Public 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

31 If the marginal propensity to consume (MPC) is , the value of the government expenditure multiplier is:

tools of fiscal policy Medium
A.
B.
C.
D.

32 Public 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

33 During 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

34 The 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

35 A 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

36 Post-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

37 Which reform-era measure reflects fiscal policy shifting toward greater efficiency in indirect taxation?

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

38 To 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

39 During 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

40 A 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

41 A 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.

42 With 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

43 During 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

44 A 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

45 In 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.

46 The 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

47 Deficit 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

48 Which 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

49 A 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.

50 In 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

51 Consider 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

52 Post-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

53 If 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

54 The '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

55 Fiscal 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

56 A 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

57 A 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

58 An economy has , with , , , and . What is the equilibrium level of income ?

tools of fiscal policy Hard
A.
B.
C.
D.

59 Which 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

60 During 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