Chapter MCQ Test 2 — Government Budget and the Economy
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
Total expenditure is ₹40 lakh crore and total receipts excluding borrowing are ₹31 lakh crore. The fiscal deficit is:
₹9 lakh crore
₹71 lakh crore
₹31 lakh crore
₹40 lakh crore
Explanation: Fiscal deficit = 40 − 31 = ₹9 lakh crore (the borrowing requirement).
Question 2 of 10
From the same data, if interest payments are ₹6 lakh crore, the primary deficit is:
₹3 lakh crore
₹9 lakh crore
₹15 lakh crore
₹6 lakh crore
Explanation: Primary deficit = fiscal deficit − interest = 9 − 6 = ₹3 lakh crore.
Question 3 of 10
A revenue deficit is treated as a warning sign because it means the government is borrowing to fund:
Day-to-day expenses that create no asset
New highways
Loan repayment
Capital projects
Explanation: Borrowing merely to cover running costs adds debt without creating productive assets.
Question 4 of 10
During a recession the government raises spending on rural employment and cuts income tax. This is:
Expansionary fiscal policy
Contractionary fiscal policy
Monetary policy
Trade policy
Explanation: Higher spending plus lower taxes raises AD to fight the slowdown — expansionary fiscal policy.
Question 5 of 10
Because of the multiplier, a ₹100 crore rise in government spending (MPC = 0.75) raises income by:
₹400 crore
₹100 crore
₹75 crore
₹25 crore
Explanation: k = 1 ÷ (1 − 0.75) = 4; ΔY = 4 × 100 = ₹400 crore — fiscal policy is amplified by the multiplier.
Question 6 of 10
Disinvestment (selling shares of a public-sector company) is classified as a capital receipt because it:
Reduces the government's assets
Is a tax
Creates an asset
Is recurring income
Explanation: Selling assets reduces them, so disinvestment is a capital receipt, not revenue.
Question 7 of 10
A persistently high fiscal deficit is a concern mainly because it:
Adds to public debt and future interest payments
Lowers all prices
Removes taxes
Has no effect
Explanation: Each year's borrowing accumulates as debt, raising the interest burden on future budgets.
Question 8 of 10
Using progressive income tax and welfare spending together serves the budget's:
Distribution function
Allocation function
Stabilisation function
Trade function
Explanation: Taxing the rich more and spending on the poor narrows inequality — the distribution function.
Question 9 of 10
If the primary deficit falls toward zero while the fiscal deficit stays high, it suggests the deficit is now mostly due to:
Interest payments on past debt
New spending
Tax cuts only
Capital assets
Explanation: Fiscal − primary = interest; a low primary deficit with a high fiscal deficit means interest dominates.
Question 10 of 10
Fiscal policy and monetary policy are most effective when they:
Work in the same direction (both ease, or both tighten)
Always oppose each other
Are never used
Ignore aggregate demand
Explanation: Coordinated fiscal and monetary action on aggregate demand reinforces the desired effect on the economy.