Government Budget and the Economy (Test Questions)

Read this article to learn about the top three frequently asked questions on Government Budget and the Economy.

Q.1. Explain why public goods must be provided by the government.

Ans. i. Public goods are those goods and services for which consumption by a few people does not reduce the quantity available for others.

ii. For example, parks, roads, bridges etc.

iii. People derive advantages from goods but don’t have to pay for same.

iv. Thus these goods are required to be produced only by the government as no private enterprise would like to produce them in the absence of any profit.

Q.2. Does public debt imposes a burden? Explain.

Ans. Well, in a way it does. It should not be treated as an easy way of financing deficit. Excessive use of public debt can lead to crisis in the economy.

Some damages of public debt are as follows:

(i) Hampers Economic Development:

Raising loan may be very easy, but repaying the debt is quite difficult. In case of excessive borrowings from the public, the government imposes more taxes this creates instability in the economy and becomes an obstacle in the economic development of the country.

(ii) Poses threat to political system:

Foreign loans may lead to even conflicts between the nations. Such economic friction among countries is a threat to even the political freedom & stability

(iii) Proves a burden on common man:

When loans are taken for unproductive purposes like war, they prove to be a burden on common man in the form of increased taxes. That “Poor citizen” becomes poorer by getting sandwiched between decreasing income and rising prices.

(iv) Results in drain of national wealth:

Repayment of foreign loans means outflow of wealth from the concerned country, something that no nation can afford.

(v) Leads to Extravagant spending:

Public debt is considered as easy money and is generally used for unplanned purposes. The government feels tempted to implement such schemes as require excessive expenditure.

Q.3. Are fiscal deficits necessarily inflationary?

Ans. i. Fiscal deficit is not always inflationary.

ii. If there are unutilized resources in the country and output is restricted because of deficient demand, a high fiscal deficit will be accompanied by higher demand leading to higher output and therefore will not be inflationary.

iii. Fiscal deficit will be inflationary if as a result of increase in demand, because of cut in taxes and increase in government spending, firms are not able to supply more goods at the prevailing prices.

iv. In such a situation rise in demand will result in higher prices also.