Prelims Revision Series | Economy | Fiscal Policy | 10

April 27, 2023

Consider the following regarding fiscal policy:
1 It deals with the revenue and expenditure policy of the Government.
2. Imposition of and exemption from the taxes are the only means of Fiscal Policy to achieve its objectives.
3. Price Stability is one of its objective.
Which of the statements given is/are correct?

(A) 1 and 3 only
(B) 2 and 3 only
(C) 1 and 2 only
(D) 1, 2 and 3 only

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Answer: (a)

These objectives can be met in the following ways:

Consumption Control.

Raising the rate of investment.

Taxation, infrastructure development.

Imposition of progressive taxes.

Exemption from the taxes provided to the vulnerable classes.

Heavy taxation on luxury goods.

Discouraging unearned income.

Consider the following statements:
1. Internal debt of India includes Dated government securities.
2. Public Debt is one of the components of the Fiscal Policy of India.
Which of the statements given below is/are correct?

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (c)

Which of the following statement(s) is/are correct?
1 In Indirect Taxation the burden of tax payment cannot be transferred to another entity.
2. Direct taxation in India is governed by the Central Board of Direct Taxes (CBDT) under the Department of Revenue.
Select the answer using the codes:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (b)

Which of the following statements is/are correct?
1 Zero Coupon Bonds are those bonds where the issuer does not provide any coupon payment to the holder till the maturity date.
2. Unlike regular bonds that are redeemed upon maturity, a convertible bond gives the purchaser a right to convert the bond into shares of the issuing company.
Select the answer using the codes:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (c)

Zero Coupon Bonds are those bonds where the issuer does not provide any coupon payment to the holder till the maturity date. Here the bonds are issued below the face value amount and on the date of redemption or maturity. Bonds are redeemed on the face value amount. Here the difference between the redemption price and the issue price is the return for an investor. In India, Treasury-Bills are the Zero-Coupon Bonds.
Convertible Bond: Unlike regular bonds that are redeemed upon maturity, a convertible bond gives the purchaser a right or an obligation to convert the bond into shares of the issuing company.
It features a fixed tenure and pays out interest payments periodically at predetermined intervals.

Which of the following is/are correct regarding Fiscal drag?
1 Fiscal drag is an economic term whereby income growth moves taxpayers into higher tax brackets.
2. This in effect increases government tax revenue without actually increasing tax rates.
Select the answer using the codes given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) None

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Answer: (c)

Fiscal drag is an economic term whereby inflation or income growth moves taxpayers into higher tax brackets.
This in effect increases government tax revenue without actually increasing tax rates.
he increase in taxes reduces aggregate demand and consumer spending from taxpayers as a larger share of their income now goes to taxes, which leads to deflationary policies, or drag, on the economy.

Which of the following is/are correct regarding disinvestment?
1 The objective of Disinvestment is to introduce market discipline.
2. The significance of disinvestment lies in investing back in the economy to stimulate spending.
Select the answer using the codes given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (c)

Which of the following is/are correct?
1 Improving or increasing the tax-GDP ratio is measure of Fiscal Consolidation.
2. Fiscal Consolidation does not aim at eliminating fiscal debt.
Select the answer using the codes given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (c)

Consider the following statements:
1 The distribution of resource between centre and states is fiscal federalism.
2. Fiscal federalism finds itself mentioned in the 7th schedule of the Indian Constitution.
Select the incorrect statement(s) using the code given below:

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (d)

Fiscal Federalism
It refers to the distribution of resource between centre and states.
The distribution of taxes between centre and states is mentioned in the 7th schedule of the Indian
constitution.
There are 3 lists where the taxes are distributed
Union List
State List
Concurrent List

The FRBM Act made it mandatory for the government to place which of the following along with the Union Budget documents in Parliament annually?

(A) Long term fiscal policy statement
(B) Medium Term Fiscal Policy Statement
(C) Macroeconomic Framework Statement
(D) All of the above

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Answer: (d)

Which of the following is/are the objective(s) of Government Budgeting?

(A) Reducing regional imbalances.
(B) Bringing economic stability.
(C) Social welfare through management of public enterprises
(D) All of the above.

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Answer: (d)

Which of the following is/are correct?
1 Salaries, pensions are the examples of Revenue Expenditure.
2. Capital expenditure is used to reduce liabilities.
3. Revenue Receipts do not have a direct impact on the assets of the government.
Select the answer using the codes given below:

(A) 1 and 3 only
(B) 2 and 3 only
(C) 1 and 2 only
(D) 1, 2, and 3

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Answer: (d)

Consider the following statements:
1 Outcome Budget measures the development outcomes of all government programs.
2. Zero budgeting starts from the zero base and every function of the government is analysed for its needs and cost.
Which of the above given statement(s) is/are not correct?

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (d)

Zero Based Budgeting:

Zero-based budgeting is a method of budgeting in which all expenses are evaluated each time a Budget is made and expenses must be justified for each new period.
Zero budgeting starts from the zero base and every function of the government is analysed for its needs and cost. Budget is then made based on the needs.

Outcome Budget:

Outcome Budget analyses the progress of each ministry and department and what the respected ministry has done with its Budget outlay.
It measures the development outcomes of all government programs. It was first introduced in the year 2005

Which of the following is/are correct?
1. Fiscal Deficit equals the money the government needs to borrow during the year.
2. Primary deficit = Fiscal deficit + Interest payments
3. Effective Revenue Deficit = Revenue Deficit - Grants in aid for capital assets.
Which of the above given statement(s) is/are correct?

(A) 1 and 3 only
(B) 2 and 3 only
(C) 1 and 2 only
(D) 1, 2, and 3

Show Answer

Answer: (a)

Primary deficit = Fiscal deficit – Interest payments
The Effective Revenue Deficit does not include revenue expenditures made in the form of grants for capital asset creation.
A new strategy to capture the ‘effective revenue deficit’ was introduced in Budget 2011-12 which excludes those revenue expenditures (or transfers) in the form of grants for the creation of capital assets.
Effective Revenue Deficit was established as a fiscal metric in 2012-13.
Formula: Effective Revenue Deficit = Revenue Deficit – Grants in aid for capital assets
It excludes those revenues expenditures, which were done in the form of grants for the creation of capital assets.

Identify the nodal body responsible for producing the Union Budget in India?

(A) NITI Aayog
(B) Department of economic affairs
(C) Department of expenditure
(D) Department of financial services

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Answer: (b)

The Annual Budget is prepared by the ministry of finance in consultation with NITI Aayog and other concerned ministries.
The Budget division of the department of economic affairs (DEA) in the finance ministry is the nodal body responsible for producing the Budget.

Consider the following statements:
1 External debt has to repaid in domestic currency.
2. Internal debt constitutes the majority of the overall public debt in India.
Which of the above given statement(s) is/are incorrect?

(A) 1 only
(B) 2 only
(C) Both 1 and 2
(D) Neither 1 nor 2

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Answer: (a)

‘External Debt’ refers to money borrowed from a source outside the country.
External debt has to be paid back in the currency in which it is borrowed.
Internal debt constitutes more than 90 per cent of the overall public debt.