20 multiple-choice (MCQ / objective) questions from this chapter, in the common exam-style shapes. Every question comes with an explanation along with the answer, so you remember why the option is correct, not just which one it is.
Syllabus note
In CBSE 2026-27 the unit ‘Government Budget and the Economy’ carries 6 marks: meaning, objectives and components of the budget, classification of receipts and expenditure, balanced, surplus and deficit budget and the measures of deficit. Fiscal policy multipliers, government debt and the FRBMA are not listed in the CBSE curriculum, but the UP, Bihar, Rajasthan and MP boards teach from this NCERT book. The (½) and (1) marks in numerical answers show step marks.
1 Direct Questions
Direct Questions
- 1 markUnder which Article of the Constitution must the government present the Annual Financial Statement before Parliament every financial year?
(A) Article 246A(B) Article 112(C) Article 110(D) Article 280 - 1 markProvision of national defence and roads by the government is which function of the budget?
(A) Redistribution function(B) Stabilisation function(C) Disinvestment function(D) Allocation function - 1 markThe goal of measuring the primary deficit is to focus on
(A) interest on past loans(B) foreign debt(C) present fiscal imbalances(D) state deficits - 1 markWhich of these is an automatic stabiliser?
(A) A decision to raise government spending when investment falls(B) Disinvestment(C) Proportional income tax(D) A lump-sum tax - 1 markRevenue expenditure is ₹1,200 crore, tax revenue ₹800 crore, non-tax revenue ₹150 crore and recovery of loans ₹30 crore. The revenue deficit is
(A) ₹250 crore(B) ₹400 crore(C) ₹220 crore(D) ₹1,050 crore - 1 markThe fiscal deficit is ₹600 crore and interest payments are ₹300 crore. The primary deficit is
(A) ₹900 crore(B) ₹300 crore(C) ₹600 crore(D) ₹200 crore - 1 markIf MPC = 0.8 and the proportional tax rate is 0.25, the government expenditure multiplier is
(A) 5(B) 4(C) 1.25(D) 2.5 - 1 markA diagram shows the 45° line (Y = AD) and two parallel AD lines; the upper is labelled C̄ + I + G′ − cT and the lower C̄ + I + G − cT. Equilibrium moves from E to E′. What does the diagram show?
(A) The effect of a cut in the tax rate(B) Proportional taxes making AD flatter(C) The effect of lower transfers(D) The effect of higher government expenditure
2 Assertion-Reason
Assertion-Reason
- 1 markAssertion (A): Public goods are generally not provided by private enterprise.
Reason (R): Public goods are non-excludable, so it is difficult to collect fees for their use.
(A) Both A and R are true, and R is the correct explanation of A(B) Both A and R are true, but R is not the correct explanation of A(C) A is true, but R is false(D) A is false, but R is true - 1 markAssertion (A): A revenue deficit shows that the government is dissaving.
Reason (R): With a revenue deficit, the government uses the savings of other sectors to finance part of its consumption expenditure.
(A) Both A and R are true, and R is the correct explanation of A(B) Both A and R are true, but R is not the correct explanation of A(C) A is true, but R is false(D) A is false, but R is true - 1 markAssertion (A): In absolute value the tax multiplier is smaller than the government expenditure multiplier.
Reason (R): The whole of a tax cut is spent on consumption in the first round.
(A) Both A and R are true, and R is the correct explanation of A(B) Both A and R are true, but R is not the correct explanation of A(C) A is true, but R is false(D) A is false, but R is true
3 Match the Following
Match the Following
- 1 markMatch List I (government step) with List II (classification).
List I: (i) Providing a public park (ii) Higher income tax rates on the rich (iii) Raising government spending in a recession (iv) Interest payment on government debt
List II: (1) Stabilisation function (2) Allocation function (3) Redistribution function (4) Revenue expenditure
(A) i-3, ii-2, iii-1, iv-4(B) i-2, ii-3, iii-1, iv-4(C) i-2, ii-1, iii-3, iv-4(D) i-1, ii-3, iii-2, iv-4 - 1 markMatch List I (deficit) with List II (formula).
List I: (i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit (iv) Budget deficit
List II: (1) Fiscal deficit − Net interest liabilities (2) Total expenditure − Total receipts (3) Revenue expenditure − Revenue receipts (4) Total expenditure − (Revenue receipts + Non-debt capital receipts)
(A) i-4, ii-3, iii-1, iv-2(B) i-3, ii-1, iii-4, iv-2(C) i-3, ii-4, iii-1, iv-2(D) i-3, ii-4, iii-2, iv-1
4 Statement-Based Questions
Statement-Based Questions
- 1 markConsider the statements.
(i) Public provision means a good is financed through the budget and used without any direct payment.
(ii) Public goods can be produced only by the government.
(A) Both are true(B) Only (ii) is true(C) Both are false(D) Only (i) is true
5 Arrange in the Correct Order
Arrange in the Correct Order
- 1 markChoose the correct chain from higher government spending to higher income.
1. At the initial output, demand exceeds supply
2. The AD curve shifts up
3. Firms expand production
4. New equilibrium at higher income
(A) 1-2-3-4(B) 2-3-1-4(C) 2-1-3-4(D) 3-1-2-4
6 Fill in the Blanks
Fill in the Blanks
- 1 markGST came into force on 1 July ______.
(A) 2016(B) 2017(C) 2003(D) 2019
7 Odd One Out
Odd One Out
- 1 markPick the odd one out (the one not subsumed in GST):
(A) Service tax(B) Octroi(C) Entertainment tax(D) Corporation tax
8 Passage-Based Questions
Passage-Based Questions
Passage
(Imaginary news report) During a recession, private investment fell sharply in a country. The government raised its spending on roads and irrigation projects. Economists noted that the country’s marginal propensity to consume is 0.8, and its income tax rises automatically as income rises, so people’s disposable income fell less than GDP during the recession.
- 1 markRaising spending on roads and irrigation in the passage is an example of
(A) an automatic stabiliser(B) Ricardian equivalence(C) disinvestment(D) discretionary fiscal policy - 1 markIn the passage, disposable income fell less than GDP because of
(A) the proportional income tax, an automatic stabiliser(B) a lump-sum tax(C) the balanced budget multiplier(D) the free-rider problem
9 True / False
True / False
- 1 markConsider the statements.
(i) In Table 5.1 the fiscal deficit is 5.6 per cent of GDP.
(ii) In Table 5.1 the primary deficit is larger than the revenue deficit.
(iii) In Table 5.1 the fiscal deficit equals borrowings and other liabilities.
(A) Only (ii) is true(B) Only (i) and (iii) are true(C) (i), (ii) and (iii) are all true(D) Only (i) and (ii) are true
Answer Key and Explanations
Direct Questions
- (b) The book: there is a constitutional requirement in India (Article 112) to present the statement of estimated receipts and expenditures. Article 246A relates to GST.
- (d) Providing goods the market cannot provide (public goods) is the allocation function.
- (c) The primary deficit removes interest on accumulated debt and shows the present fiscal imbalance.
- (c) A proportional income tax makes disposable income less sensitive to GDP with no decision needed. A deliberate decision is discretionary policy.
- (a) RD = 1,200 − (800 + 150) = ₹250 crore. ₹400 comes from forgetting non-tax revenue; ₹220 from also subtracting recovery of loans (a capital receipt).
- (b) PD = FD − interest = 600 − 300 = ₹300 crore. ₹900 comes from adding interest.
- (d) 1 ÷ [1 − 0.8 × 0.75] = 1 ÷ 0.4 = 2.5 (the book’s Example 5.2). 5 comes from ignoring the tax.
- (d) Only G has changed to G′ and the lines are parallel: this is the book’s Fig. 5.1. A change in the tax rate would change the slope.
Assertion-Reason
- (a) Both true and R explains A: fees cannot be collected, the payment link breaks, so private enterprise does not provide them.
- (b) Both true, but the book gives R as the meaning of A in the same sentence; R restates what dissaving is rather than giving a separate cause, so (b).
- (c) A is true. R is false: a tax cut raises spending by only cΔT in the first round, part is saved; that is why the multiplier is smaller.
Match the Following
- (b) Park = public good (allocation); progressive tax = redistribution; spending in a recession = stabilisation; interest = revenue expenditure.
- (c) Revenue deficit (3), fiscal deficit (4), primary deficit (1), budget deficit = total expenditure − total receipts (2).
Statement-Based Questions
- (d) (i) is the book’s definition. (ii) is false: public goods may be produced by the government or the private sector; production by the government is public production.
Arrange in the Correct Order
- (c) G rises → AD shifts up (2) → excess demand at the old output (1) → output expands (3) → new equilibrium E′ (4).
Fill in the Blanks
- (b) The book: GST was rolled out on the midnight of 30 June/1 July 2017; the amendment received assent in 2016.
Odd One Out
- (d) Corporation tax is a direct tax; GST subsumed indirect taxes such as service tax, octroi and entertainment tax.
Passage-Based Questions
- (d) Deliberately raising G when investment falls is discretionary fiscal policy.
- (a) A tax that depends on income falls automatically in a recession, so disposable income falls less; this is an automatic stabiliser.
True / False
- (b) (i) true; (ii) false: primary 2.0, revenue 2.6; (iii) true: both 5.6.
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