PRACTICE TEST SERIES (2023-2024)

Test 7 | Macro | Government Budget and the Economy |

Time allowed: 1.5 hours Maximum Marks: 40

General instructions:
 This paper contains 10 Multiple Choice Questions type questions of 1 mark each.
 This paper contains 2 Short Answer Questions type questions of 3 marks each to be
answered in 60 to 80 words.
 This paper contains 4 Short Answer Questions type questions of 4 marks each to be
answered in 80 to 100 words.
 This paper contains 2 Long Answer Questions type question of 6 marks to be answered
in 100 to 150 words.

Q. Questions Marks
No.
1. Column A Column B 1
1. Non tax revenue (i) Borrowings
2. Fiscal deficit (ii) Allocation of resources
3. Direct tax (iii) Escheat
4. Objective of budget (iv) Property tax
(a) 1-iii, 2-ii, 3-iv, 4-i (b) 1-i, 2-iv, 3-iii, 4-ii
(c)1-ii, 2-iv, 3-i, 4-iii (d) 1-iii, 2-i, 3-iv, 4-ii
2. The given pie-chart shows the expenditure incurred by the government (in 1
crores):
 How much expenditure is the non-plan expenditure of government?
Select the correct alternative:
(a) ₹150 crores (b) ₹225 crores
(c) ₹125 crores (d) ₹350 crores
3. Read the following statements: Assertion (A) and Reason (R). Choose the 1
correct alternative from those given below:
Assertion (A): Recovery of loans is a revenue receipt for the government.
Reason (R): Recovery of loans leads to decline in financial assets of the
government.
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the
correct explanation) of Assertion (A).
(c) Assertion (A) is true but Reason (R) is False
(d) Assertion (A) is False but Reason (R) is true.
4. A tax whose burden cannot be shifted to others is imposed generally on 1
(Choose the correct alternative to fill up the blank)
(a) producer of goods
(b) seller of goods
(c) buyer of goods
(d) income earners
5. The government sold 51% of the stake in a public sector unit to a private 1
entity at a price of Rs 50 crore. For the remaining 49% of the stake, the
government received a dividend of Rs. 1 crore. What is the impact on revenue
collection by the government?
(a) Revenue receipt increased by ₹51 crore.
(b) Revenue receipt increased by ₹1 crore and Capital receipt increased by ₹50
crores.
(c) Capital receipts increased by ₹51 crores.
(d) Capital receipt increased by ₹1 crore and Revenue receipt increased by ₹1
crores.
6. There has been a persistent deficit budget year after year. Which 1
action/actions of the following can be taken by the Government to reduce the
deficit?
1. Reducing revenue expenditure
 2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Reducing import duty
Select the correct answer using the code given below.
(a) 1 ONLY
(b) 2 AND 3 ONLY
(c) 1 AND 3 ONLY
(d) 1 , 2, 3 AND 4
7 Read the following statements carefully: 1
Statement 1: Tax is a legally compulsory payment.
Statement 2: Direct taxes are capital receipts of the government.
In light of the given statements, choose the correct alternative from the
following:
(a) Both Statements 1 and 2 are true.
(b) Both Statements 1 and 2 are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 1 is false and Statement 2 is true.
8 Which of the following tax is NOT subsumed in Goods and Service tax (GST)? 1
(a) Value added tax (VAT)
(b) Excise duty
(c) Sales tax
(d) Custom duty
9 What will be the value of fiscal deficit if primary deficit is ₹ 53,000 crores 1
and interest ON borrowings is ₹ 5,000 crores?
(a) ₹ 58,000 crores
(b) ₹ 48,000 crores
(c) ₹ 68,000 crores
(d) ₹ 78,000 crores
10 Which of the following statements is true about the primary deficit in a 1
government’s budget?
(a)The primary deficit is zero when the revenue deficit is zero
(b)The primary deficit is zero when the net interest payments are zero
(c)The primary deficit is zero when the fiscal deficit is zero
(d)The primary deficit is zero when the fiscal deficit is equal to the interest
payment
11 Calculate Revenue Deficit, Fiscal Deficit and Primary Deficit from the following 3
 data:

ITEMS IN ₹ CRORES
TAX REVENUE 1037
REVENUE EXPENDITURE 2811
INTEREST RECEIPTS BY THE 400
GOVERNMENT ON NET DOMESTIC
LENDING
DIVIDENDS AND PROFITS ON 600
INVESTMENT
RECOVERY OF LOANS 135
CAPITAL EXPENDITURE 574
PROCEEDS FROM SALE OF SHARES IN 100
PSU’S
INTEREST PAYMENTS ON 1013
ACCUMULATED DEBTS
12 The Finance Minister of India, Nirmala Sitharaman has secured the fiscal 3
deficit at 6.8% for the fiscal year 2021-22 and has targeted to bring it lower to
4.5% of GDP by 2025-26. During the pandemic, the deficit reached 9.5% of
GDP because of two reasons: First, a fall in revenue of the government and
negative economic growth. Second, increased non-development expenditure
to provide food and other essentials to vulnerable groups as well as Rs 20 lakh
crore stimulus package to revive the economy.
Source: Article published in The Hindu on 1 February 2021
(a) Mention the objectives government is trying to achieve by a stimulus
package of Rs. 20 lakh crores?
(b) What category of expenditure does the cost incurred on providing
essential goods to vulnerable groups during the pandemic fall under
. (capital expenditure/revenue expenditure/development
expenditure) What is the rationale behind including it in that specific
category?
(c) How has the Finance Minister of India, planned to address the fiscal
deficit in the coming years, and what is the target set for reducing it by 2025-
26, according to the information provided in the paragraph?
13 Identify the following as revenue expenditure and capital expenditure. Give 4
reasons.
(i) Salary paid to Army officers.
(ii) Purchase of Metro coaches from Japan.
(iii) Repayment of loans
 (iv) Loan given to Union Territories
14 From the information given in the diagram categorize the items into revenue 4
receipts and capital receipts, stating valid reasons.

(ii) Distinguish between Revenue deficit and Fiscal deficit.

15 (a) Government raises its expenditure on producing public goods. Which 4
economic value does it reflect?
(b) Distinguish between planned and unplanned expenditure. How do they
influence the budgeting process differently?
OR
(a) The revenue receipts should be the basis of revenue expenditure design
and the entire borrowings should go for financing capital spending like
long-term projects and investments. Justify the given statement with
valid reasons.
(b) Tax revenue is different from administrative revenue. Defend or refute the
following statement with valid reasons.
16 (a) "Government has started spending more on providing free services like 6
education and health to the poor." In the light of above statement, explain
how the government can use the budgetary policy in reducing 'inequalities
of income'.
(b) ‘Under the Ayushmaan Bharat Scheme, the Government provides free
medicines to the economically backward section of the society’. Identify
and discuss the nature of the government expenditure indicated in the
 given statement.
17 (a) Government across nations are too much worried about the term fiscal 6
deficit. Do you think that Fiscal Deficit is necessarily inflationary in
nature? Support your answer with valid reasons.
(b) Successful execution of the distribution function and allocative function
within a budget contribute to achieving broader economic stability and
resource allocation efficiency? Defend or refute the following statement
with valid reasons.