economics class 12 lesson 5
Answers
Answer:
1. Explain why public goods must be provided by the government.
Public goods are those goods where there is no competition and the use of good is not restricted to only one individual. These goods are for use by all individuals of the society. Such goods are used for welfare of the society.
Therefore, government should provide public goods for the following reasons:
1. So that benefits of the public goods can be enjoyed by all members of the society.
2. So that the consumption of these goods will not impact consumption of any other individual.
2. Distinguish between revenue expenditure and capital expenditure.
Basis of Comparison Capital Expenditure Revenue Expenditure
Definition Expenditure incurred for acquiring assets, to enhance the capacity of an existing asset that results in increasing its lifespan The expense incurred for maintaining the day to day activities of a business
Term Long Term Short Term
Value addition Enhances the value of an existing asset Does not enhance the value of an existing asset
Physical Existence Have a physical presence except for intangible assets Do not have a physical presence
Occurrence Non-recurring in nature Recurring in nature
Capitalisation Yes No
Impact on Revenue Do not reduce business revenue Reduces business revenue
Benefits Long-term benefits for business Short-term benefits for business
Examples Highway, tunnel, metro projects Pension, Salary etc.
3. ‘The fiscal deficit gives the borrowing requirement of the government’. Elucidate.
Fiscal deficit is referred to as the shortfall in government’s income as compared to its spending. A high fiscal deficit means that the government is borrowing more money than that it is earning. A higher fiscal deficit creates a burden of loan and interest payment for future generation.
Fiscal deficit is determined by
Total Expenditure – Total Receipts excluding borrowings
4. Give the relationship between the revenue deficit and the fiscal deficit.
Revenue deficit is referred to as an excess of revenue expenditure as compared to earnings by revenue receipts of the government. Fiscal deficit is a bigger phenomenon where the difference is between the total expenditure and total receipts obtained by government. When revenue deficit increases correspondingly the fiscal deficit also increases.
5. Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.
6. Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100 (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model. (b) If government expenditure increases by 30, what is the impact on equilibrium income? (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
7. In the above question, calculate the effect on output of a 10 per cent increase in transfers, and a 10 per cent increase in lump-sum taxes. Compare the effects of the two.
8. We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find the equilibrium income. (b) What are tax revenues at equilibrium Income? Does the government have a balanced budget?
9. Suppose marginal propensity to consume is 0.75 and there is a 20 per cent proportional income tax. Find the change in equilibrium income for the following (a) Government purchases increase by 20 (b) Transfers decrease by 20.
Therefore the change in equilibrium income is 20.
Explanation: