Economy
1. THE ROLE OF GOVERNMENT IN AN ECONOMY – PUBLIC FINANCE
1. Which of the following is not within the scope
of public finance.
(a) Public
revenue (b) Monetary management
(c) Public
expenditure (d) Financial
administration
Ans:
The answer is (b) Monetary management. Monetary management is a part of macroeconomics and central banking, and it deals with the control and regulation of money supply, interest rates, and other monetary policies. While it can have an impact on public finance, it is not directly within the scope of public finance itself, which primarily focuses on public revenue, public expenditure, and financial administration.
2. A____budget should be followed during depression.
(a) Deficit
(b) Surplus
(c) Balanced
(d) Neutral
Ans:
The answer is (a) Deficit. During a period of economic depression, when there is a lack of private sector spending and economic activity is sluggish, a deficit budget is often followed. A deficit budget involves government spending exceeding its revenue or income. By running a deficit, the government injects additional money into the economy, stimulating demand and helping to counteract the negative effects of the depression. The deficit spending can be used to finance public works projects, provide social welfare programs, or offer tax incentives to boost consumption and investment.
3. The term functional finance was introduced by
(a) J.M.Keynes
(b) Richard Musgrave
(c) Hugh
Dalton (d) A.P.Lerner
Ans:
The term "functional finance" was introduced by (d) A.P. Lerner. Abba P. Lerner, an economist, introduced the concept of functional finance in the 1940s. Functional finance emphasizes the use of fiscal policy, specifically government spending and taxation, to achieve specific economic goals such as full employment and price stability. Lerner argued that the primary goal of fiscal policy should be to maintain a functional economy, rather than focusing solely on balancing budgets or reducing government debt. This concept has been influential in shaping the understanding and practice of fiscal policy.
4. It is difficult to access the outcome of financial activities of the Government because
(a) Social benefits and costs are subjective in nature
(b) The budgetary activities are not open to scrutiny
(c) Budgets may be surplus or deficit.
(d) All the above
Ans:
The correct answer is (d) All the above.
It is difficult to access the outcome of financial activities of the government due to various reasons, including:
(a) Social benefits and costs are subjective in nature: The evaluation of government financial activities often involves assessing the social benefits and costs associated with different policies and programs. Since social benefits and costs can be subjective and vary among individuals and groups, it becomes challenging to accurately measure and quantify the outcomes.
(b) The budgetary activities are not open to scrutiny: Government budgetary activities are often complex, and the information regarding financial transactions and allocations may not always be readily accessible or transparent. Lack of transparency and limited scrutiny can hinder the assessment of the outcomes of financial activities.
(c) Budgets may be surplus or deficit: The presence of budgetary surpluses or deficits can complicate the evaluation of financial activities. A surplus budget may indicate fiscal prudence but may not necessarily reflect the effectiveness or efficiency of government spending. Similarly, a deficit budget may be justified in certain circumstances, such as during an economic downturn, but it can make it harder to assess the overall outcomes of financial activities.
Therefore, all the reasons mentioned above contribute to the difficulty in accessing the outcome of financial activities of the government.
5. Classical economist advocated the government to involve in
(a) All the activities of the economy
(b) Only in most essential activities
(c) Selective economic and political
(d) None of these activities
Ans:
The answer is (d) None of these activities. Classical economists generally advocated for limited government intervention in the economy. They believed in the concept of laissez-faire, which suggests that the government should have minimal interference in economic activities. According to classical economists, markets are self-regulating and tend to achieve equilibrium without government intervention.
Classical economists, such as Adam Smith and David Ricardo, argued that the pursuit of self-interest by individuals and businesses in competitive markets would lead to optimal economic outcomes. They believed that free markets, driven by supply and demand, would allocate resources efficiently and promote economic growth.
Therefore, classical economists did not advocate for the government to involve in all the activities of the economy, only in most essential activities, or selective economic and political activities. Their approach emphasized a hands-off approach by the government in economic affairs.
2. THE PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE
6.
The economist associated with the principle of
Maximum Social Advantage is
(a) Seligman (b) Samuelson (c) Dalton (d) Sweezy
Ans:
The economist associated with the principle of Maximum Social Advantage is (c) Dalton.
Hugh Dalton, a British economist and politician, is often associated with the principle of Maximum Social Advantage. He developed this principle as a guiding principle for public finance. The principle states that the aim of public finance and fiscal policy should be to maximize social welfare or the overall well-being of society.
According to Dalton, the government should allocate its resources and implement policies in a way that maximizes the social benefits and minimizes the social costs. This involves considering the distributional effects of policies and striving for an equitable distribution of resources and opportunities.
While other economists like Seligman, Samuelson, and Sweezy have made significant contributions to economics, they are not specifically associated with the principle of Maximum Social Advantage.
7.
Maximum social advantage is achieved when
(a) Marginal
Social Sacrifice = Marginal Social Benefit
(b) Total
Social Sacrifice = Total Social Benefit
(c) Average
Social Sacrifice = Average Social Benefit
(d) Net
Social Sacrifice = Net Social Benefit
Ans:
The correct answer is (a) Marginal Social Sacrifice = Marginal Social Benefit.
The principle of Maximum Social Advantage states that the maximum social welfare or social advantage is achieved when the marginal social sacrifice is equal to the marginal social benefit. This principle is often associated with the concept of efficiency in public finance and the allocation of resources.
In simple terms, it means that for any policy or decision, the additional or marginal social cost should be equal to the additional or marginal social benefit. This principle ensures that resources are allocated in a way that maximizes overall social welfare or utility.
Total social sacrifice and total social benefit (option b) refer to the overall costs and benefits of a policy or decision, but the principle of Maximum Social Advantage focuses on the marginal or additional units. Average social sacrifice and average social benefit (option c) relate to the average costs and benefits, which may not necessarily result in maximum social advantage. Net social sacrifice and net social benefit (option d) do not specifically capture the idea of comparing marginal costs and benefits.
Therefore, option (a) Marginal Social Sacrifice = Marginal Social Benefit represents the correct statement in relation to the principle of Maximum Social Advantage.
8.
Which of the following is not an assumption of
the principle of MSA?
(a) All
taxes results in sacrifice
(b) All
public expenditure lead to benefits
(c) Public
revenue consists only of taxes
(d) The
budget may be surplus or deficit
Ans:
The correct answer is (d) The budget may be surplus or deficit.
The principle of Maximum Social Advantage (MSA) does not make an assumption about whether the budget may be surplus or deficit. The MSA principle focuses on the allocation of resources and aims to achieve the maximum social welfare or social advantage.
The other options, (a) All taxes result in sacrifice, (b) All public expenditure leads to benefits, and (c) Public revenue consists only of taxes, are assumptions of the principle of MSA.
(a) All taxes result in sacrifice: The principle assumes that all taxes impose a cost or sacrifice on individuals or society. Taxes involve transferring resources from private individuals or businesses to the government to finance public expenditure.
(b) All public expenditure leads to benefits: The principle assumes that all public expenditure generates some form of benefit or utility for society. Public expenditure includes government spending on various sectors such as education, healthcare, infrastructure, and social welfare programs.
(c) Public revenue consists only of taxes: The principle assumes that public revenue, which funds public expenditure, consists solely of taxes. However, in reality, public revenue can come from various sources such as taxes, fees, fines, tariffs, and other forms of government income.
In summary, the assumption that is not associated with the principle of MSA is (d) The budget may be surplus or deficit. The principle of MSA focuses on the optimal allocation of resources and the balance between taxes and public expenditure, but it does not specifically address whether the budget is in surplus or deficit.
9.
Public expenditure is subject to
(a) Diminishing
marginal social benefit
(b) Increasing
marginal social benefit
(c) Diminishing
marginal social sacrifice
(d) Increasing
marginal social sacrifice
Ans:
The correct answer is (a) Diminishing marginal social benefit.
Public expenditure is subject to diminishing marginal social benefit. According to the principle of diminishing marginal utility, as more units of a good or service are consumed, the additional benefit or utility derived from each additional unit tends to decrease.
In the context of public expenditure, the principle of diminishing marginal social benefit suggests that as the government spends more on a particular program or project, the incremental social benefit or utility derived from each additional dollar spent decreases. This means that the initial expenditures may lead to significant improvements and benefits, but as spending continues, the additional gains become smaller.
This concept highlights the importance of evaluating the cost-effectiveness and efficiency of public expenditure. Policymakers need to carefully consider the trade-off between the benefits gained and the resources allocated to different programs to ensure that the maximum social advantage is achieved.
Options (b) Increasing marginal social benefit, (c) Diminishing marginal social sacrifice, and (d) Increasing marginal social sacrifice are not accurate descriptions of the relationship between public expenditure and its effects on social benefit or sacrifice.
10.
MSB declines with every additional unit of money
spent by the government due to
(a) Diminishing
marginal returns
(b) Diminishing
marginal utility
(c) Diminishing
marginal productivity
(d) All
of the above
Ans:
The correct answer is (b) Diminishing marginal utility.
MSB stands for Marginal Social Benefit, which refers to the additional benefit or utility derived from each additional unit of money spent by the government. Diminishing marginal utility is a fundamental concept in economics that states that as more units of a good or service are consumed, the additional utility or satisfaction derived from each additional unit tends to decrease.
In the context of government spending, as the government allocates more money to a particular program or project, the incremental social benefit derived from each additional unit of money spent diminishes. This is because the initial spending may lead to substantial improvements and benefits, but as more money is allocated, the additional gains become smaller.
Diminishing marginal returns (option a) refers to the decrease in output or benefit that occurs as additional units of input are added while holding other inputs constant. Diminishing marginal productivity (option c) is related to the decrease in output or benefit resulting from adding more units of a specific input while keeping other inputs constant.
While both diminishing marginal returns and diminishing marginal productivity are relevant concepts in economics, they do not directly explain the decline in MSB with every additional unit of money spent. The specific concept that aligns with the decline in MSB is diminishing marginal utility (option b), as explained above.
Therefore, the correct answer is (b) Diminishing marginal utility.
11.
When the size of the budget is less than
optimum, then
(a) MSS < MSB (b) MSS > MSB (c) MSS = MSB (d) NMB is zero
Ans:
When the size of the budget is less than optimum, the condition is represented by (a) MSS < MSB.
MSS stands for Marginal Social Sacrifice, which refers to the additional social cost or sacrifice associated with each additional unit of money collected through taxation or other means. MSB stands for Marginal Social Benefit, which represents the additional social benefit or utility derived from each additional unit of money spent by the government.
When the size of the budget is less than the optimum level, it means that the government is not allocating enough resources to achieve the maximum social advantage or welfare. In this case, MSS (the sacrifice or cost) associated with collecting additional revenue through taxes is greater than MSB (the benefit or utility) derived from spending that money on public programs or projects.
The condition MSS < MSB indicates an inefficiency in resource allocation. To maximize social welfare, the government should aim for a budget size where MSB is equal to or greater than MSS. This would ensure that the social benefits derived from public expenditure outweigh the social costs or sacrifices associated with raising revenue.
Therefore, option (a) MSS < MSB represents the condition when the size of the budget is less than optimum.
12.
The Maximum Welfare Principle of Budget
Determination is associated with
(a) Hugh Dalton (b) Paul Samuelson (c) Edwin Seligman (d) Richard Musgrave
Ans:
The Maximum Welfare Principle of Budget Determination is associated with (b) Paul Samuelson.
Paul Samuelson, an influential economist, is often associated with the development and application of the Maximum Welfare Principle of Budget Determination. This principle emphasizes the goal of maximizing social welfare or overall well-being when determining the size and allocation of the government budget.
The principle suggests that the government should allocate its resources in a way that maximizes the overall welfare of society. It involves considering the distributional effects of fiscal policies, ensuring equity, and achieving an efficient allocation of resources to promote maximum social welfare.
While economists such as Hugh Dalton, Edwin Seligman, and Richard Musgrave have made significant contributions to public finance and fiscal policy, the Maximum Welfare Principle of Budget Determination is specifically linked to Paul Samuelson.
3. EFFICIENCY – MARKET – GOVERNMENT
13.
Market failure results when it fails to
(a) earn supernormal profit
(b) equal distribution income
(c) achieve pareto optimality
(d) None of these
Ans:
The correct answer is (c) achieve pareto optimality.
Market failure occurs when the allocation of goods and services in a market is inefficient and does not lead to pareto optimality. Pareto optimality, also known as pareto efficiency, is a state where it is not possible to make one individual better off without making someone else worse off. In other words, all possible exchanges or reallocations have been exhausted, and resources are allocated in the most efficient way possible.
Market failure can take various forms, such as externalities (when the actions of one party affect the welfare of others without appropriate compensation), imperfect competition (where firms have market power and restrict output or charge excessive prices), public goods (goods that are non-excludable and non-rivalrous, leading to under-provision by the market), information asymmetry (when one party has more information than others), and so on.
Earning supernormal profit (option a) and equal income distribution (option b) are not directly related to market failure. Supernormal profit refers to profits above the normal level, which may indicate successful business performance in competitive markets. Equal income distribution is a matter of equity and fairness, but it does not necessarily imply market failure.
Therefore, the answer is (c) achieve pareto optimality. Market failure occurs when markets do not achieve pareto optimality due to various inefficiencies and imperfections.
14.
Productive efficiency is obtained when
production is
(a) on PPC (b) inside PPC (c) outside PPC (d) None of these
Ans:
The correct answer is (a) on the PPC (Production Possibility Curve).
Productive efficiency is achieved when production is on the PPC, or the Production Possibility Curve. The PPC represents the maximum possible output that an economy can produce given its available resources and technology. It shows the various combinations of two goods that can be produced efficiently.
Being on the PPC means that resources are fully utilized and allocated in the most efficient manner, with no waste or inefficiency. At this point, it is not possible to increase the production of one good without decreasing the production of another good.
Being inside the PPC (option b) represents an underutilization of resources, indicating inefficiency or a suboptimal level of production. In this case, there is potential for increasing production without sacrificing the production of other goods.
Being outside the PPC (option c) is not attainable given the current level of resources and technology. It represents a situation where production is not feasible or achievable with the available resources.
Therefore, the answer is (a) on the PPC, as productive efficiency is obtained when production is at the maximum possible level given the available resources and technology.
15.
The term market failure refers to
(a) A
market that fails to allocate resource efficiently
(b) An
unsuccessful product
(c) Cut
throat competition among firms
(d) A
firm that is forced out of business because of losses
Ans:
The correct answer is (a) A market that fails to allocate resources efficiently.
The term market failure refers to a situation in which a market fails to allocate resources efficiently. It occurs when the competitive market mechanism does not lead to an optimal allocation of goods and services in terms of economic efficiency.
Market failures can occur due to various reasons, such as externalities (when the actions of one party affect the welfare of others without appropriate compensation), market power (when a firm or group of firms can influence prices or restrict output), public goods (goods that are non-excludable and non-rivalrous, leading to under-provision by the market), information asymmetry (when one party has more information than others), and other factors.
In a market failure, the market does not achieve pareto optimality, which is a state where resources are allocated in the most efficient way possible, and it is not possible to make one individual better off without making someone else worse off.
Options (b) An unsuccessful product, (c) Cutthroat competition among firms, and (d) A firm that is forced out of business because of losses are not accurate descriptions of market failure. Market failure refers specifically to the inefficiency in resource allocation in a market, rather than the failure of a product, competition dynamics, or individual firm performance.
16.
Productive efficiency occurs when
(a) Average
cost is declining
(b) Marginal
cost is negative
(c) Maximum number of goods is produced with given amount of inputs
(d) None
of these
Ans:
The correct answer is (c) Maximum number of goods is produced with a given amount of inputs.
Productive efficiency occurs when the maximum output of goods or services is produced with a given amount of inputs. It means that resources are utilized in the most efficient way possible, and there is no wastage or inefficiency in the production process.
Option (a) Average cost is declining is not necessarily indicative of productive efficiency. Declining average cost can result from economies of scale or other cost-saving measures, but it does not guarantee that the maximum output is being achieved with a given amount of inputs.
Option (b) Marginal cost is negative is not possible in a typical production scenario. Marginal cost represents the cost of producing one additional unit of output, and it is generally positive. Negative marginal cost would imply that producing additional units of output generates income rather than incurring costs, which is unlikely in practice.
Therefore, the correct answer is (c) Maximum number of goods is produced with a given amount of inputs, as it represents the essence of productive efficiency. It signifies that resources are utilized optimally to achieve the highest possible output level given the available inputs.
17.
An example of an externality is the impact of
(a) Bad
crops on the income of farmers
(b) A
tax rate hike on a person’s ability to purchase goods and services
(c) Pollution
from a factory on the health of people in the area
(d) Increase
in the number of health care centers
18.
Which of the followings is not a feature of
public goods?
(a) Non-rival
in consumption
(b) Non-excludability
(c) Free-rider
problem
(d) Consumers
voluntarily pay for such goods
Ans:
The correct answer is (c) Pollution from a factory on the health of people in the area.
An externality refers to the impact or effect of an economic activity that spills over to third parties who are not directly involved in the activity and who did not consent to it. It can be positive or negative.
In the given options, pollution from a factory on the health of people in the area is an example of a negative externality. When a factory emits pollutants into the environment, such as air or water pollution, it can have harmful effects on the health of individuals living in the vicinity of the factory. These individuals may experience respiratory problems, allergies, or other health issues due to the pollution, even though they are not involved in the factory's production process.
Option (a) Bad crops on the income of farmers could be considered an example of a direct economic impact rather than an externality. It involves the direct effect of poor crop yield on the income of farmers who are engaged in agricultural activities.
Option (b) A tax rate hike on a person's ability to purchase goods and services is also not an example of an externality. It relates to the direct impact of increased taxes on an individual's purchasing power and ability to buy goods and services.
Option (d) Increase in the number of health care centers is not an example of an externality either. It represents a deliberate intervention or action to address a specific need, rather than an unintended spillover effect on third parties.
Therefore, the example that best represents an externality is (c) Pollution from a factory on the health of people in the area.
19.
In economics, a difference in access to access
to relevant knowledge is called
(a) An
information gap
(b) A
frontier gap
(c) Information
asymmetry
(d) Access
imperfection
20.
When asymmetric information affects a
relationship between two parties, it is always the case that
(a) Neither
party is well informed
(b) One
party is better informed than the other party
(c) Both
parties are equally well informed
(d) The
government is better informed than either of the two parties
Ans:
The correct answer is (d) Consumers voluntarily pay for such goods.
One of the key features of public goods is that consumers cannot be excluded from consuming them once they are provided. This is known as non-excludability (option b). Public goods are available to all individuals, regardless of whether they contribute to their provision or not.
Another feature of public goods is non-rivalry in consumption (option a), which means that one person's consumption of the good does not diminish or reduce the availability of the good for others. In other words, the consumption of a public good by one individual does not prevent others from consuming it as well.
The free-rider problem (option c) is also associated with public goods. It refers to the issue where individuals have an incentive to "free-ride" on the contributions of others and enjoy the benefits of a public good without paying for it themselves. This arises because individuals cannot be excluded from consuming the good, even if they do not contribute to its provision.
Option (d) Consumers voluntarily pay for such goods is not a feature of public goods. Public goods are typically not funded through voluntary consumer payments alone because of the free-rider problem. Due to the non-excludability and non-rivalry characteristics of public goods, there is often a need for government intervention or other mechanisms to provide and finance them.
Therefore, the correct answer is (d) Consumers voluntarily pay for such goods.
21.
_____ is a concept in economic theory which
describe the allocation of good and services by a free market is not efficient.
(a) Market failure (b) PPC (c) Allocative efficiency (d) Public good
Ans:
The correct answer is (b) One party is better informed than the other party.
Asymmetric information refers to a situation where one party in a transaction or relationship has more or superior information compared to the other party. This imbalance in information can create challenges and distortions in the relationship between the parties involved.
In the case of asymmetric information, one party possesses more knowledge, data, or insights about the relevant factors or characteristics of the transaction. This can give them an advantage in decision-making and potentially exploit the less-informed party.
Options (a) Neither party is well informed and (c) Both parties are equally well informed do not accurately represent the concept of asymmetric information. Asymmetric information specifically refers to a situation where one party has an informational advantage over the other, which means that both parties are not equally well informed.
Option (d) The government is better informed than either of the two parties is not necessarily true in all cases. While the government can have access to certain information through regulations, monitoring, or data collection, it does not imply that the government is always better informed than either party involved in a transaction or relationship affected by asymmetric information.
Therefore, the correct answer is (b) One party is better informed than the other party.
22.
The ____ involves production of goods and
services by using non- optimal combination of input.
(a) Productive efficiency (b) Productive inefficiency
(c) Allocative efficiency (d) Allocative inefficiency
Ans:
The correct answer is (b) Productive inefficiency.
Productive inefficiency refers to a situation in which goods and services are produced using a non-optimal combination of inputs. It means that resources are not utilized efficiently, resulting in waste, inefficiency, or suboptimal production levels.
When an economy or firm is productively inefficient, it is not achieving the maximum possible output given the available inputs. This can happen due to various reasons, such as using outdated technology, inadequate training of workers, poor resource allocation, or inefficient production processes.
On the other hand, productive efficiency (option a) refers to the state in which goods and services are produced at the maximum possible output level given the available inputs. It represents the optimal utilization of resources and achieving the highest level of production efficiency.
Allocative efficiency (option c) refers to the optimal allocation of resources among different goods and services to maximize social welfare. It focuses on the distribution of resources based on consumer preferences and demand.
Allocative inefficiency (option d) refers to a situation in which the allocation of resources does not align with consumer preferences or fails to maximize social welfare.
Therefore, the correct answer is (b) Productive inefficiency, which represents the production of goods and services using a non-optimal combination of input.
23.
The point inside the PPC are inefficient because
we could produce more goods and services with no _____
(a) opportunity cost (b) additional cost (c) cost of the economy (d) none of the above
Ans:
The correct answer is (a) opportunity cost.
The points inside the Production Possibility Curve (PPC) are considered inefficient because they represent a situation where the economy is not utilizing its resources effectively. At these points, it is possible to produce more goods and services without incurring any opportunity cost.
Opportunity cost refers to the cost of forgoing the next best alternative when making a choice. Along the PPC, resources are fully utilized and allocated efficiently, and any increase in the production of one good requires sacrificing the production of another good. Therefore, moving from a point inside the PPC to a point on the PPC involves an opportunity cost, as more of one good can only be obtained by giving up some quantity of another good.
In contrast, points inside the PPC represent underutilization or inefficiency because resources are not fully employed, and the economy is not producing at its maximum potential. At these points, there is an unused capacity to produce more goods and services without sacrificing the production of other goods.
Option (b) additional cost and (c) cost of the economy do not accurately describe the concept of inefficiency related to points inside the PPC. It is not about incurring additional costs or the overall cost of the economy but rather about the opportunity to produce more without giving up anything in return.
Therefore, the correct answer is (a) opportunity cost, as points inside the PPC represent inefficiency where more goods and services could be produced without any opportunity cost.
24.
_____ goods are characterised by two important
features, i.e. non-rival in consumption and non-excludability.
(a) Public goods (b) Private goods (c) Merits goods (d) Agricultural goods
Ans:
The correct answer is (a) Public goods.
Public goods are characterized by two important features: non-rivalry in consumption and non-excludability.
Non-rivalry in consumption means that the consumption of a public good by one individual does not reduce its availability or consumption by others. In other words, one person's use or enjoyment of a public good does not diminish its availability for others to use or enjoy. For example, when one person listens to a public radio broadcast, it does not prevent others from also listening to the same broadcast.
Non-excludability means that individuals cannot be effectively excluded from using or benefiting from a public good, regardless of whether they contribute to its provision or not. Once a public good is provided, it is difficult or costly to prevent anyone from accessing or enjoying its benefits. For instance, a public park is open to everyone to use and enjoy, and it is challenging to exclude individuals from accessing it.
Private goods (option b) are goods that are rival in consumption and excludable. The consumption of a private good by one individual reduces its availability for others, and individuals can be excluded from accessing the good if they do not pay for it.
Merit goods (option c) are goods that are considered to have a positive impact on individuals and society. They are often subsidized or provided by the government because it is believed that individuals may underconsume these goods due to informational or behavioral reasons.
Agricultural goods (option d) refer to goods that are produced in the agricultural sector, such as crops, livestock, and agricultural products. They can be either private goods or public goods depending on their characteristics, but the term itself does not specifically imply non-rivalry or non-excludability.
Therefore, the correct answer is (a) Public goods, which are characterized by non-rivalry in consumption and non-excludability.
25.
Left to themselves, markets
(a) Will
always produce socially acceptable outcome
(b) Will
always fail to allocate efficiently
(c) May
produce socially unacceptable outcomes
(d) Will
always corrects socially unacceptable outcomes by themselves
Ans:
The correct answer is (c) May produce socially unacceptable outcomes.
Left to themselves, markets can produce a wide range of outcomes, and whether these outcomes are socially acceptable or not depends on various factors. While markets generally have the potential to efficiently allocate resources and generate desirable outcomes, they are not immune to potential shortcomings or failures.
Option (a) Will always produce socially acceptable outcomes is not accurate because markets can sometimes lead to socially unacceptable outcomes. For example, unregulated markets can result in monopolies, income inequality, environmental degradation, or the production of harmful goods.
Option (b) Will always fail to allocate efficiently is also not accurate. Markets have the potential to efficiently allocate resources through price signals and competition, but there can be instances where market failures occur, such as externalities, public goods, imperfect information, or natural monopolies.
Option (d) Will always correct socially unacceptable outcomes by themselves is not accurate either. While markets can self-correct to some extent through competitive forces, there are situations where intervention or regulation is necessary to address market failures or ensure socially desirable outcomes.
Therefore, the most accurate statement is (c) May produce socially unacceptable outcomes, as markets are not guaranteed to always generate outcomes that are socially acceptable.
4. PUBLIC REVENUE
26.
Which of the following is not the
characteristics of a tax?
(a) Compulsory payment (b) There is quid-pro-quo
(c) Involves some sacrifice (d) None of the above
Ans:
The correct answer is (b) There is quid-pro-quo.
The characteristics of a tax are as follows:
(a) Compulsory payment: Taxes are mandatory payments imposed by the government on individuals and entities. Taxpayers are legally obligated to pay taxes based on the tax laws and regulations.
(c) Involves some sacrifice: Taxes involve a financial sacrifice on the part of taxpayers. Taxpayers must give up a portion of their income or wealth to fulfill their tax obligations.
Option (b) There is quid-pro-quo is not a characteristic of a tax. The term "quid-pro-quo" refers to a situation where something is given or received in return for something else. In the case of taxes, there is no direct quid-pro-quo relationship between the taxpayer's payment and the benefits or services they receive from the government. Taxes are generally used to fund public goods, services, and government expenditures, but the specific benefits received by individual taxpayers may vary and are not directly proportional to the amount of tax they pay.
Therefore, the correct answer is (b) There is quid-pro-quo, as it does not accurately represent a characteristic of a tax.
27.
Which of the following is not a non-tax revenue?
(a) Fees (b) Penalties (c) Custom duty (d) Borrowing
Ans:
The correct answer is (d) Borrowing.
Non-tax revenue refers to the income or revenue generated by the government through means other than taxes. It includes various sources of income that do not involve imposing taxes on individuals or entities. Examples of non-tax revenue include fees, penalties, and customs duties.
Option (d) Borrowing does not fall under the category of non-tax revenue because borrowing refers to the act of obtaining funds or loans from external sources such as individuals, institutions, or other governments. Borrowing involves taking on debt that needs to be repaid with interest over a specified period. It is not considered a revenue source for the government, but rather a liability that requires repayment.
Therefore, the correct answer is (d) Borrowing, as it does not belong to the category of non-tax revenue.
28.
Which of the following is not canons of
taxation?
(a) Canon of equity (b) Canon of certainty (c) Canon of benefit (d) Canon of elasticity
Ans:
The correct answer is (c) Canon of benefit.
The canons of taxation are a set of principles or guidelines that are often used to evaluate and design tax systems. They aim to ensure that taxes are fair, efficient, and effective in achieving their intended purposes. The commonly recognized canons of taxation include the following:
(a) Canon of equity or fairness: This canon suggests that taxes should be distributed fairly based on taxpayers' ability to pay. It emphasizes the principle of horizontal and vertical equity, meaning that individuals in similar situations should be treated similarly, and those with higher incomes or wealth should bear a proportionately higher tax burden.
(b) Canon of certainty: This canon states that taxes should be clear, certain, and predictable, both in terms of their imposition and the amount to be paid. Taxpayers should have a clear understanding of their tax obligations to promote compliance and reduce uncertainty.
(d) Canon of elasticity or flexibility: This canon suggests that taxes should be capable of being adjusted or modified to accommodate changes in economic conditions or taxpayer circumstances. Elasticity allows tax systems to respond to changes in the economy, taxpayer behavior, or government objectives.
Option (c) Canon of benefit is not a recognized canon of taxation. While the principle of benefit can be relevant in some discussions on tax policy, it is not typically considered as one of the canons of taxation.
Therefore, the correct answer is (c) Canon of benefit, as it is not one of the canons of taxation.
29.
Which of the following is the tax rates?
(a) Proportional taxation (b) Progressive taxation (c) Regressive Taxation (d) All the above
Ans:
The correct answer is (d) All the above.
The options provided represent different types of tax systems based on the progression of tax rates:
(a) Proportional taxation: In a proportional tax system, also known as a flat tax, the tax rate remains constant regardless of the taxpayer's income or wealth. Everyone pays the same proportion or percentage of their income in taxes.
(b) Progressive taxation: In a progressive tax system, the tax rate increases as the taxpayer's income or wealth increases. This means that individuals with higher incomes are subject to higher tax rates, resulting in a higher proportion of their income being paid in taxes. Progressive taxation aims to achieve greater fairness and redistribution of wealth.
(c) Regressive taxation: In a regressive tax system, the tax rate decreases as the taxpayer's income or wealth increases. This means that individuals with lower incomes pay a higher proportion of their income in taxes compared to those with higher incomes. Regressive taxation often places a relatively higher burden on lower-income individuals, potentially exacerbating income inequality.
Therefore, the correct answer is (d) All the above, as each option represents a different type of tax system characterized by specific tax rate progressions.
5. SHIFTING OF TAX BURDEN
30.
Incidence of tax refers to which of the
following?
(a) Final
money burden of a tax
(b) Initial
money burden of a tax
(c) Indirect
money burden
(d) Real
burden of tax
31.
In the case of perfectly elastic demand the
money burden of tax is
(a) Entirely on the seller (b) Partially on the seller
(c) Entirely on the buyer (d) Shifted partially to the buyers
32.
In the case of perfectly inelastic demand, the
money burden is
(a) Entirely
on the seller
(b) Fully
borne by the buyer
(c) Shifted
partially to the buyer
(d) None
of the above
33.
In the case of perfectly elastic supply the
incidence of tax is
(a) Entirely on the buyer (b) Shifted partially to the buyer
(c) Borne fully by the seller (d) None of the above
34.
When the supply is more elastic the burden of
tax is
(a) More on the buyer (b) More on the seller
(c) Borne fully by the buyer (d) Borne fully by the seller
35.
Under constant cost condition, the burden of tax
is
(a) Shifted
fully to the buyers
(b) Borne
fully by the sellers
(c) Shifted
partially to the buyers
(d) More
than the amount of tax
36.
Under monopoly the incidence of lumpsum tax is
(a) On the sellers (b) On the buyers (c) Partially on the sellers (d) Partially on the buyers
6. ECONOMIC EFFECTS OF TAXATION
37.
Sleep tax-rate will reduce the willingness to
(a) Work (b) Invest (c) Both the above (d) None of the these
38.
Increase in tax will
(a) Divert
the investment (b) Reduce
the investment to zero
(c) Increase
the investment (d) None
of the above
39.
Tax on rich and luxury goods will
(a) Increase the investment (b) Check inflation
(c) Check deflation (d) None of the above
7. PUBLIC EXPENDITURE: CANONS, CLASSIFICATION AND EFFECTS
40. Which of the following canons of public
expenditure is very to implement in developing countries?
(a) Canon of elasticity (b) Canon of sanction
(c) Canon of surplus (d) Canon of productivity
41.
Which of the following type of public
expenditure is characterised by quid-proquo?
(a) Grant (b) Subsidy (c) Interest (d) Purchase price
42.
Which of the following is not a characteristic
of capital expenditure?
(a) Is
in the form of consumption
(b) Gives
right to capital assets
(c) Usually
funded through public debt
(d) Is
in the form of investment
43.
Public expenditure on education and health will
have a ______ effect on people’s ability to work.
(a) Negative (b) Neutral (c) Positive (d) Stagnating
44.
During recession
(a) Public
expenditure should be increased
(b) Public
expenditure should be reduced
(c) Taxation
should be increased
(d) Public
debt should be incurred
8. GROWTH OF PUBLIC EXPENDITURE
45.
The Law of Increasing Public Activity was
developed by
(a) Richard Musgrave (b) Hugh Dalton (c) Adolt Wagner (d) Alan T. Peacock
46.
According to Wiseman-Peacock Hypothesis, public
expenditure increase in
(a) Step-like
manner
(b) A
smooth and continuous manner
(c) a cyclical manner
(d) all
of the above
47.
During the time of war, the government enlarges
the tax structure to generates more funds to meets the increase in the defence
expenditure this is known as
(a) Tax tolerance (b) Inspection effect (c) Displacement effect (d) Concentration effect
48.
After war, people’s tax tolerance level
(a) Reduces (b) Remains the same (c) Becomes zero (d) increases
49.
Concentration effect refers to the increasing
activities of which of the following?
(a) Central government (b) State government (c) Local Government (d) All the above
50.
Which of the following is the cause of growth of
public expenditure?
(a) Rising
population
(b) Democratic
form of government
(c) Urbanisation
(d) All of the above
9. PUBLIC EXPENDITURE AND SOCIAL WEALFARE
51.
Goods that are provided by both the public and
the private sectors are known as
(a) Public goods (b) Merit goods (c) Social goods (d) Demerit goods
52.
The protection by the state of the individual
against economic hazards is referred to as
(a) Social insurance (b) Private insurance
(c) General insurance (d) Special insurance
53.
Which of the following is not a characteristic
of social insurance?
(a) Compulsory
participation
(b) Government
sponsorship
(c) Benefits
prescribed in law
(d) Provided
and initiated by the private sector
54.
Which of the following programmes protect the
people’s right to work
(a) Public
provident fund
(b) Atal
Pension Yojana
(c) MNREGA
(d) Pradhan
Mantri Jan Dhan Yojana
55.
Which of the following programme aims at
financial inclusion?
(a) Public
Provident fund
(b) Atal
Pension Yojana
(c) Mahatma
Gandhi National Rural Employment Guarantee Act
(d) Pradhan
Mantri Jan Dhan Yojana
56.
In which of the following programme is life
insurance linked was savings bank account?
(a) Pradhan
Mantri Jan Dhan Yojana
(b) Atal
Pension Yojana
(c) Public
Provident Fund
(d) Pradhan
Mantri Jeevan Jyoti Bima Yojanan
10. PUBLIC DEBT
57.
Public debt includes:
(a) Currency
and money deposits
(b) Internal
loans and government securities
(c) External
loans incurred by the government
(d) All
the above
58.
A dead weight debt is (a) Self liquidating
(b) Unproductive
(c) Increases
productive efficiency
(d) Not
burdensome to the economy
59.
Loss of welfare suffered by people of debtor
country is referred to as
(a) Direct
real burden
(b) Sum
of money payment for principal and interest
(c) Effect
on production and resource allocation
(d) Foreign
currency burden
60.
Burden of external debt affecting production and
resource allocation is termed as
(a) Directed
money burden
(b) Directed
real burden
(c) Indirect
money and real burden
(d) All
the above
61.
The ability of a government to sustain its
current spending, tax and other policies is termed as
(a) Economic sustainability (b) Growth sustainability
(c) Fiscal sustainability (d) All the above
11. FISCAL POLICY
62.
Fiscal policy does not directly deal with
(a) Taxation (b) Public debt (c) Money supply d) Public expenditure
63.
Aggregate demand is comprised of
(a) Consumption expenditure (b) Investment expenditure
(c) Government purchases (d) All the above
64.
Disposable income is
(a) Income
before tax
(b) Income
before transfer payment are added
(c) Gross
income of firms
(d) Income
households after deduction of direct taxes and addition of transfer payment
65.
Which of the following is not a characteristic
of a tax
(a) Has
quid-pro-quo
(b) Is
a compulsory
(c) Is
not imposed as penalty
(d) Involves
sacrifice on part of the payer
12. TYPE OF FISCAL POLICY
66.
Which of the following does not form the basis
of sound finance?
(a) Say’s
Law
(b) Assumption of full employment
(c) Ricardian equivalence Theorem
(d) Unbalanced Budget
67.
According to Say’s Law,
(a) Budget
deficits do not stimulate the economy
(b) Supply
creates its own demand
(c) The government shall maintain a reasonable level of demand at all time
(d) The
capitalist system will collapse due to inherent crises
68.
Which of the following statement explains the
classical view on taxation?
(a) All
taxes are anti-inflationary
(b) All
taxes are not be anti-Inflationary
(c) Taxation
can be used for redistribution of income
(d) Taxation
can influence aggregate demand
69.
The classical advocacy or balanced budget is
based on which of the following belief?
(a) Possibility
of market failture
(b) Laissez
faire capitalism
(c) Redistribution
of income
(d) Social
justice objective of fiscal policy
70.
The origin of the following statement applies to
the principle
(a) J.M.Keynes (b) A.C. Pigou (c) A.P.Lerner (d) Richard Musgrave
71.
Which of the following statement applies to the
principle of functional finance?
(a) Budget
deficit are uneconomical at all times and should be avoided
(b) Social
objective should be the primary focus of fiscal policy
(c) Government
spending should be restricted to traditional functions
(d) Every
public expenditure is inflationary
72. Automatic stabilities will be ineffective in case of which of the following situations?
(a) recession (b) Cost-push inflation (c) Demand-push inflation (d) All the above
73.
What is the appropriate budget policy during
recession?
(a) Balanced budget (b) Neutral budget (c) Surplus budget (d) Deficit budget
74.
Which of the following statement in incorrect?
(a) Contra-cyclical
fiscal policy aims at economic stability
(b) Public
expenditure should be increased during inflation
(c) During
recession, direct taxes are lowered
(d) Pump
priming is done to stimulate private investment
75.
Which of the following is true of compensatory
spending
(a) It
necessary during recession
(b) It
is necessary during inflation
(c) It
is a built-in stabilizer
(d) None
of the above
13. TYPES OF BUDGET AND CONCEPTS OF DEFICIT
76.
Which of the following refer to the excess of
revenue expenditure over revenue receipts?
(a) Revenue deficit (b) Budgetary deficit (c) Fiscal deficit (d) Primary deficit
77.
Which of the following deficit is a more
comprehensive measure of budgetary imbalances
(a) Revenue deficit (b) Budgetary deficit (c) Fiscal deficit (d) Primary deficit
78.
Primary deficit is obtained by deducting
interest payment from the
(a) Fiscal deficit (b) Revenue deficit (c) Budgetary deficit (d) Monetized deficit
79.
Which of the following serves as a tool for
fiscal management and accountability?
(a) Monetary policy (b) Budget (c) Foreign policy (d) Industrial policy
80.
In which of the following is not an objective of
the budget
(a) Zero based budget (b) Traditional budget
(c) Executive budget (d) Programmed budget
81.
Which of the following is not an objective of
the budget
(a) Generation
of employment
(b) Reduction
of poverty
(c) Manipulating
the rate of interest
(d) Economic
growth
14. INTERGOVERMENTAL FISCAL RELATIONS
82.
Which of the following is concerned with
division of economic responsibilities between the Central State Commission
(a) Finance Commission (b) Planning Commission (c) NiTI Aayog (d) RBI
83.
The affairs of the country are conducted by the
authorities of different levels of government in which of the following system
(a) Unitary system (b) Dictatorship (c) Federal system (d) None of the above
84.
The transfer of taxing and expenditure power from
the control of central government to state and local government is known as
(a) Administrative
decentralization
(b) Fiscal
decentralization
(c) Political
decentralization
(d) Social
decentralization
85.
Under the GST system, the tax levied on all
inter-state supplies of goods and services is known as
(a) CGST (b) SGST (c) VAT (d) IGST
86.
Finance commission is appointed every _____
years.
(a) Five (b) Ten (c) Two (d) Seven
87.
The Chairman of the 14th Finance
Commission was
(a) Dr.Raghuram Rajan (b) Dr.C. Rangarajan
(c) Dr.Y.V.Reddy (d) Dr.Bimal Jalan
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