CHAPTER 7 - PUBLIC FINANCE

1. Redistribution policies are likely to have efficiency costs because

(a) They will reduce the efficiency of governments
(b) They may create disincentives to work and save
(c) Governments have to forego taxes
(d) They are likely to make the poor people dependent on the rich
2. Macroeconomic stabilization may be achieved through
(a) Free market economy (b) Fiscal policy
(c) Monetary policy (d) (b) and (c) above
3. Choose the correct statement
(a) Fiscal policy involves the use of changes in taxation and government spending; while monetary
policy involves the use of price and profit controls.
(b) Fiscal policy involves the use of price and profit controls; while monetary policy involves the use
of taxation and government spending.
(c) Fiscal policy involves the use of changes in taxation and government spending; while monetary
policy involves the use of changes in the supply of money and interest rates.
(d) Fiscal policy involves the use of changes in the supply of money and interest rates; while
monetary policy involves the use of changes in taxation and government spending.
4. The justification for government intervention is best described by
(a) The need to prevent recession and inflation in the economy
(b) The need to modify the outcomes of private market actions
(c) The need to bring in justice in distribution of income and wealth
(d) All the above
5. When a government offers unemployment benefits and also resorts to progressive taxation
which function does it seem to fulfill?
(a) It is trying to establish stability in an economy
(b) It is trying to redistribute income and wealth
(c) It is trying to allocate resources to their most efficient use
(d) It is creating a source of market failure
6. Government of Emeline Land decides to provide most modern road infrastructure throughout the
nation. This can be classified as
(a) Distribution function (b) Allocation function
(c) Stabilization function (d) None of the above
7. Which of the following is true in respect of centre and state government finances?
(a) The centre can tax agricultural income and mineral rights
(b) Finance commission recommends distribution of taxes between the centre and states
(c) GST subsumes majority of direct taxes and a few indirect taxes
(d) IGST is collected by the state governments
8. GST compensation is given to
(a) to the industries which have made losses due to the introduction of GST
(b) to compensate for the lower rates of GST on essential items
(c) to the states to compensate for the loss of revenue due to the introduction of GST
(d) to compensate for the loss of input tax credit in manufacturing
9. In a federal set up, the stabilization function can be effectively performed by
(a) Respective state governments
(b) Ministry of taxes
(c) The government at the centre
(d) None of the above
10. Which of the following is concerned with division of economic responsibilities between the
central and state Government of India?
(a) NITI Aayog (b) central bank
(c) Finance Commission (d) Parliament
11. Which one of the following taxes is levied by the state government only?
(a) Corporation tax (b) Wealth tax
(b) Income tax (d) None of the above
12. The percentage of share of states in central taxes for the period 2021-26 recommended by the
Fifteenth Finance Commission is
(a) 38 percent
(b) 41 percent
(c) 42 percent
(d) The commission has not submitted its report
13. As per the supreme court verdict in May 2022
(a) The union has greater powers than the states for enacting GST laws
(b) The union and state legislatures have “equal, simultaneous powers “to make lawson Goods and
Services Tax
(c) The union legislature’s enactments will prevail in case of a conflict between those of union and
states
(d) The state legislatures can make rules only with the permission of central government
14. Providing social sector services such as health and education is
(a) the responsibility of the central government
(b) the responsibility of the respective state governments
(c) the responsibility of local administrative bodies
(d) none of the above
15. Which of the following is an example of market failure?
(a) Prices of goods tend to rise because of shortages
(b) Merit goods are not sufficiently produced and supplied
(c) Prices fall leading to fall in profits and closure of firms
(d) None of the above
16. Which of the following is an outcome of market power?
(a) makes price equal to marginal cost and produce a positive external benefit on others
(b) can cause markets to be efficient due to reduction in costs
(c) makes the firms price makers and restrict output so as to make allocation inefficient
(d) (b) and(c) above
17. Which of the following is the right argument for provision of public good by government?
(a) Governments have huge resources at their disposal
(b) Public goods will never cause any type of externality
(c) Markets are unlikely to produce sufficient quantity of public goods
(d) Provision of public goods are very profitable for any government
18. Adequate amount of a pure public good will not be provided by the private market because of
(a) the possibility of free riding
(b) the existence of very low prices and low profits
(c) governments would any way produce them, so there will be overproduction
(d) there are restrictions as well as taxes on production of public goods
19. A chemical factory has full information regarding the risks of a product, but continues to sell it.
This is possible because of
(a) asymmetric information (b) moral hazard
(c) free riding (d) (a) and (c) above
20. If an individual tends to drive his car in a dangerously high speed because he has a
comprehensive insurance cover, it is a case of
(a) free riding (b) moral hazard
(c) poor upbringing (d) Inefficiency
21. Read the following statements
I. The market-based approaches to control externalities operate through price mechanism
II. When externalities are present, the welfare loss would be eliminated
III. The key is to internalizing an externality is to ensure that those who create the externalities
include them while making decisions
Of the above statements
(a) II and III are correct (b) I only is correct
(c) II only is correct (d) I and III are correct
22. Which of the following statements is false?
(a) Tradable permits provide incentive to innovate and reduce negative externalities
(b) A subsidy on a good which has substantial positive externalities would reduce its cost and
consequently its price would be lower
(c) Substantial negative externalities are involved in the consumption of merit goods.
(d) Merit goods are likely to be under-produced and under consumed through the market mechanism
23. A Pigouvian subsidy
(a) cannot be present when externalities are present
(b) is a good solution for negative externality as prices will increase
(c) is not measurable in terms of money and therefore not practical
(d) may help production to be socially optimal when positive externalities are presen
24. If governments make it compulsory to avail insurance protection, it is because
(a) Insurance companies need to be running profitably
(b) Insurance will generate moral hazard and adverse selection
(c) Insurance is a merit good and government wants people to consume it
(d) None of the above
25. Rules regarding product labelling
(a) Seeks to correct market failure due to externalities
(b) Is a method of solving the problem of public good
(c) May help solve market failure due to information failure
(d) Reduce the problem of monopolies in the product market
26. Identify the incorrect statement
(a) A minimum support price for agricultural goods is a market intervention method to guarantee
steady and assured incomes to farmers.
(b) An externality is internalised if the ones that generated the externality incorporate them into
their private cost- benefit analysis
(c) The production and consumption of demerit goods are likely to be less than optimal under free
markets
(d) Compared to pollution taxes, the cap and trade method is administratively cheap and simple to
implement and ensures that pollution is minimised in the most cost-effective way.
27. A government subsidy
(a) is a market-based policy
(b) involves the government paying part of the cost to the firms in order to promote the production
of goods having positive externalities
(c) is generally provided for merit goods
(d) all the above
28. The production and consumption of demerit goods are
(a) likely to be more than optimal under free markets.
(b) likely to be less than optimal under free markets
(c) likely to be subjected to price intervention by government
(d) a) and c) above
29. Read the following statements
I. Social costs are the total costs incurred by the society when a good is consumed or produced.
II. The external costs are not included in firms’ income statements or consumers’ decisions
III. Each firm’s cost which is considered for determining output would be only private cost or
direct cost of production which does not include external costs
IV. Production and consumption decisions are efficient only when private costs are considered
Of the above
(a) Statements I and III are correct
(b) Statements I,II and III are correct
(c) Statement I only is correct
(d) All the above are correct
30. Government failure occurs when
(a) Government fails to implement its election promises on policies
(b) A government is unable to get reelected
(c) Government intervention is ineffective and produces fresh and more serious problems
(d) None of the above
31. The revenue deficit for country A is
(a) 5,000 (b) 24,000
(c) 4,500 (d) None of the above
32. Fiscal deficit of country A is
(a) 14,000 (b) 24,000
(c) 23,500 (d) None of the above
33. In NITI Aayog, NITI stands for
(a) National Initiative for Transforming India
(b) National Institution for Transforming India
(c) National Institute for Technology and Innovation
(d) None of the above
34. The Appropriation Bill is intended to
(a) reduce unnecessary expenditure on the part of the government
(b) give authority to government to incur expenditure from and out of the Consolidated Fund
of India
(c) give authority to government to incur expenditure from the revenue receipts only
(d) be passed before the budget is taken for discussion
35. The railway budget is
(a) Part of the general budget, but is presented by the railway minister
(b) Part of the general budget from the budget for financial year 2017 -18.
(c) Part of the general budget from the budget for financial year 2021 -22
(d) Part of the general budget but presented on the next day of the general budget
36. Outcome budgeting
(a) shares information about the money allocated for various purposes in a budget
(b) establishes a direct link between budgetary allocations and performance targets measured
through output and outcome indicators
(c) establishes a direct link between budgetary performance targets and public account disbursals
(d) shares information about public policies and programmes under the budget
37. Government borrowings from foreign governments and institutions
(a) Capital receipt
(b) Revenue receipt
(c) Accounts for fiscal deficit
(d) Any of the above depending on the purpose of borrowing
The following table relates to the revenue and expenditure figures of a hypothetical economy
In ` lakh Crores
(a) Recovery of loans 5.1
(b) Salaries of govt. servants 41.1
(c) Capital Expenditure 45.0
(d) Interest payments 1.3
(e) Payments towards subsidies 3.2
(f) Other receipts (mainly from disinvestment) 11.6
(g) Tax revenue (net of states’ share) 26.3
(h) Non-tax revenue 12.3
(i) Borrowings and other liabilities 6.8
(j) States’ share in tax revenue 11.9
38. The capital receipts are
(a) 23.5 (b) 19.7
(c) 11.3 (d) None of the above
39. The non–debt capital receipts of this country is
(a) 45.1 (b) 16.7
(c) 15.8 (d) None of the above
40. A budget is said to be unbalanced when
(a) when government’s revenue exceeds government’s expenditure
(b) when government’s expenditure exceeds government’s revenue
(c) either budget surplus of budget deficit occurs
(d) All the above
41. Budget of the government generally impacts
(a) the resource allocation in the economy
(b) redistribution of income and enhance equity
(c) stability in the economy by measures to control price fluctuations
(d) all the above
42. Which of the following is a statement submitted along with the budget as a requirement of
FRBM Act
(a) Annual Financial Statement
(b) Macro -Economic Framework Statement
(c) Medium-Term Fiscal Policy cum Fiscal Policy Strategy Statement
(d) (b) and (c) above
43. ‘Retail Direct ‘scheme is
(a) Initiated by the Reserve Bank of India
(b) facilitate investment in government securities by individual investors.
(c) Direct sale of goods and services by government departments
(d) Both (a) and (b) are correct
44. Non-debt capital receipts
(a) do not add to the assets of the government and therefore not treated as capital receipts
(b) are those that do not create any future repayment burden for the government
(c) are those that create future liabilities for the government
(d) facilitate capital investments at low cost
45. Grants given by the central government to state governments is
(a) A revenue expenditure as it is meant to meet the current expenditure of the states
(b) A revenue expenditure as it does neither creates any asset, nor reduces any liability of the
government
(c) A capital expenditure because it increase the capital base of the states
(d) It is a grant and so does not come under revenue expenditure or capital expenditure.
46. Short-term credit from the Reserve Bank to state governments to bridge temporary mismatches
in cash flows is known as
(a) RBI credit to states
(b) Commercial credit of RBI
(c) Ways and Means Advances (WMA)
(d) Short term facility
47. If real GDP is continuously declining and the rate of unemployment in the economy is increasing,
the appropriate policy should be to
(a) Increase taxes and decrease government spending
(b) Decrease both taxes and government spending
(c) Decrease taxes and increase government spending
(d) Either (a) or (c)
48. Which of the following are likely to occur when an economy is in an expansionary phase of a
business cycle?
I. Rising unemployment rate
II. Falling unemployment rate
III. Rising inflation rate
IV. Deflation
V. Falling or stagnant wage for workers
VI. Increasing tax revenue
VII. Falling tax revenue
(a) A, B and F are most likely to occur
(b) B, C and F are most likely to occur
(c) D, E and F are most likely to occur
(d) A, E and G are most likely to occur
49. According to Keynesian economics, when we have inflation an effective fiscal policy should not
include
(a) increase corporate taxes.
(b) decrease aggregate demand.
(c) Increase government purchases.
(d) None of the above is correct
50. Keynesian economists believe that
(a) fiscal policy can have very powerful effects in altering aggregate demand, employment and
output in an economy
(b) when the economy is operating at less than full employment levels and when there is a need to
offer stimulus to demand fiscal policy is of great use
(c) Wages are flexible and therefore business fluctuations would be automatically adjusted
(d) (a) and (b) above
51. Which of the following fiscal policy measures would be suitable for addressinga deflationary
gap or deficient demand?
(a) Reduction in Taxes
(b) Increase in Govt. Expenditure
(c) Reduction in Public Debt
(d) All of these
52. The Government adopting Progressive taxation system to tax people on thelevel of their
income is an example of which function of public finance?
(a) Redistribution Function
(b) Allocation Function
(c) Normative Function
(d) Stabilization
53. The increase in cost of food, fuel and fertilizers in countries due to production of weapons in
the war between Russia & Ukraine results in which type of externality?
(a) Positive Production Externality
(b) Negative Production Externality
(c) Positive Consumption Externality
(d) Negative Consumption Externality
54. Mr. Amit, a stock market trader through inside information, comes to know that share price of
X Ltd is likely to go up in future, so he purchases the shares to make a gain by selling them later
at higher price. It is a case of:
(a) Moral Hazard
(b) Asymmetric Information
(c) Free Riding
(d) None of the above
55. Which of the following is not true regarding The Minimum Support Price (MSP)mechanism in
India?
(a) MSP works on the principle of Price Ceiling
(b) MSP works on the principle of Price Flooring
(c) At the price fixed, there exists excess supply
(d) Govt. procures the excess supply of farmers.
56. Which concept involves a one-shot injection of government expenditure into a depressed
economy with the aim of boosting business confidence and encouraging larger private investment?
(a) Pump Priming
(b) Deficit Financing
(c) Compensatory Spending
(d) Public Spending
57. Which of the following is used to counter recession as part of ExpansionaryFiscal Policy?
(a) Increase in interest rate.
(b) Decrease in Taxes
(c) Deficit Financing
(d) Both b & c
58. The share of concessional debt in total external debt of India has:
(a) remained the same (b) doubled
(c) Reduced (d) Increased
59. Budgetary deficit can be expressed as:
(a) the excess of public expenditure over public revenue
(b) the sum of deficit on revenue account and deficit on capital account
(c) that portion of government expenditure which is financed through thesale of 91 days
Treasury Bills and drawing down of cash balances
(d) all the above
60. Are fiscal & monetary policies opposite of each other?
(a) Yes, they are opposite to each other
(b) Fiscal policy is superior to monetary policy.
(c) No, these policies are complementary to each other.
(d) None of these
61. The Government accounts are maintained namely in :
(a) Consolidated fund of India
(b) Contingency fund of India
(c) Public Account
(d) All of these
62. By convention in an election year the budget may be presented:
(a) Twice (b) Once
(c) Thrice (d) Quarterly
63. Primary deficit means:
(a) Fiscal deficit -- interest payment
(b) Fiscal deficit + revenue deficit
(c) Budgetary deficit
(d) Revenue deficit -- interest payments
64. The most important aim of fiscal policy in a developing country is :
(a) economic stability (b) economic development
(c) regional balance (D) None of these
65. What was the main objective of the Fiscal Responsibility and BudgetManagement Act, of
2003?
(a) Achieve Fiscal Surplus
(b) Stop Money Laundering
(c) Eliminate Fiscal Deficit
(d) Eliminate Revenue deficit
66. Contractionary fiscal policy can involve:
(a) Increasing consumption and investment and taxes.
(b) Decreasing government spending and increasing taxes.
(c) Increasing government spending and increasing taxes.
(d) None of the above.
67. ‘Who gave ‘The Theory of Public Finance (1959)?
(a) Adam Smith (b) Richard Musgrave
(c) A.C. Pigou (d) Alfred Marshall
68. The stabilization function is concerned with the performance of the aggregateeconomy in the
term of-
(a) Overall output & income
(b) General price level
(c) Balance of international payments
(d) All of these
69. Which of the following is an example of market failure?
(a) Externalities
(b) Low prices
(c) Excess supply
(d) Excludable and rival goods
70. Which of the following is NOT a conclusion about market allocations ofcommodities causing
pollution externalities?
(a) The prices of products responsible for pollution are too high.
(b) The output of the commodity is too large.
(c) Recycling and reuse of the polluting substances are discouraged sincerelease into the
environment is so inefficiently cheap.
(d) Too much pollution is produced.
71. Which of the following is not an example of a policy designed to encouragecompetition?
(a) Deregulation
(b) Trade liberalisation
(c) Reducing income tax
(d) Anti-monopoly regulations
72. Which of the following is an example of an automatic stabilizer in the budget?
(a) Discretionary spending
(b) Progressive taxation
(c) Infrastructure investment
(d) Unemployment benefits
73. Which of the following is an example of an automatic stabilizer in the budget?
(a) Discretionary spending
(b) Progressive taxation
(c) Infrastructure investment
(d) Unemployment benefits
74. Public goods are characterized by:
(a) Excludability and rivalry
(b) Excludability and non-rivalry
(c ) Non-excludability and rivalry
(d ) Non-excludability and non-rivalry
75. Which of the following is a common solution to the problem of commonresources being
overused?
(a) Government regulation (b) Privatization
(c) Subsidies (d) Free-market competition
76. Which of the following policy measures is typically used by central banks tomanage the
business cycle?
(a) Fiscal policy (b) Monetary policy
(c) Trade policy (d) Industrial policy
77. Fiscal deficit can be remedied by:
(a) Borrowing money (b) Printing Currency
(c) Both (a) and (b) (d) Neither (a) nor (b)
78. Which of the following is not the mandatory Statement under FRBM Act 2003?
(a) Macro Economic Framework Statement
(b) Medium Term Fiscal Policy Statement
(c) Debt Statement
(d) None of these
79. Which one is not a tool of Fiscal Policy:
(a) Taxation (b) Public Expenditure
(c) Interest Rate (d) Public Debt
80. Statutory Grants in aid form the Union to certain states is based on theconstitutional
provisions as:
(a) Article 275 (b) Article 282
(c) Article 293 (d) Article 270
81. Government failure occurs when -
(a) Government intervention is ineffective and produces fresh and moreserious problem
(b) A government is unable to get re-elated
(c) Both (a) and (b)
(d) None of these
82. What is ‘price ceiling?
(a) Minimum price that can be charged for a good
(b) Maximum price that can be charged for a good
(c) Minimum support price
(d) Both (a) and (b)
83. A chemical factory has full information regarding the risks of a product butcontinues to
sell it. This is possible because of:
(a) moral hazard (b) Free riding
(b) asymmetric information (d) None of these
84. When rent control is imposed above the current market price it will:
(a) increase the quantity of rental housing demanded.
(b) reduce the quality of rental housing.
(c) create a shortage of rental housing.
(d) create no impact on the market.
85. The government makes the provision of which goods those cannot beprovided through the
market:
(a) private and public goods
(b) public and merit goods
(c) public and necessary goods
(d) Giffen and merit goods
86. A good taxation system should be used to:
(a) finance public services
(b) follow higher taxation
(c) no taxation
(d) finance private services
87. Primary deficit is obtained by deducting interest payments from the:
(a) Fiscal deficit (b) Revenue deficit
(c) Budgetary deficit (d) Monetized deficit
88. Which of the following represents the total amount of money the government owes to
external creditors and domestic lenders?
(a) National debt (b) Budget surplus
(c) Fiscal deficit (d) None of these
89. What is the primary goal of countercyclical fiscal policy in budgeting?
(a) Maximizing government revenue.
(b) Stabilizing the economy during economic downturns.
(c) Minimizing government intervention.
(d) None of these
90. Mr Amit, a stock market trader through inside information, comes to know that share price of
X Ltd is likely to go up in future, so he purchases the shares to make a gain by selling them later at
higher price. It is a case of:
(a) Moral Hazard
(b) Asymmetric Information
(c) Free Riding
(d) None of the above
91. First mover advantage theory is related to:
(a) Absolute advantage theory
(b) Comparative cost advantage theory.
(c) New trade theory
(d) None of these
92. A firm makes an investment in unrelated business then it is called:
(a) Horizonal investment (b) Vertical investment
(c) Conglomerate (d) None of these
93. Deficient demand leads to:
(a) inflationary gap (b) deflationary gap
(c) both (a) and (b) (d) None of these
94. Which of the following are capital receipts of the government?
(a) Recovery of loans (b) Disinvestment
(c) Borrowing (d) All of the above
95. Among the following canons of taxation which one has been given by Adam Smith?
(a) Canon of Uniformity (b) Canon of productivity
(c) canon of diversity (d) canon of equity
96. The Government offer minimum assured price to the farmers to purchase their output is called:
(a) market Price (b) support Price
(c) equilibrium Price (d) ceiling Price
97. Under which system Freedom of choice is an advantage:
(a) Capitalism (b) Mixed economy
(c) Socialism (d) None of these
98. Which of the following is/are the components of the Fiscal Deficit?
1. Budgetary Deficit
2. Market Borrowings
3. Expenditure made from Pradhan Mantri Rahat Kosh
(a) Only 1 (b) Only 2
(c ) Only 3 (d) All 1, 2 and 3
99. Which of the following is key operational target in a Budget?
(a) Fiscal Deficit
(b) Revenue Deficit
(c) The General Government Debt
(d) The Central Government Debt
100. If a Ministry falls short of approved budget in a scheme, what is the process to get
additional budget through Parliament?
(a) Supplementary (b) Re-appropriation
(c) Transfer of balances (d) Vote on account
Solution:-
1 2 3 4 5 6 7 8 9 10

B D C D B B B C C C

11 12 13 14 15 16 17 18 19 20

D B B B B C C A A B

21 22 23 24 25 26 27 28 29 30

D C D C C C D D B C

31 32 33 34 35 36 37 38 39 40

C B B B B B A A B D

41 42 43 44 45 46 47 48 49 50

D D D B B C C B C D

51 52 53 54 55 56 57 58 59 60

D A B B A A D C D C

61 62 63 64 65 66 67 68 69 70
D A A B C B B D A A

71 72 73 74 75 76 77 78 79 80

C D D D A B C D C A

81 82 83 84 85 86 87 88 89 90

A B C C B A A A B B

91 92 93 94 95 96 97 98 99 100

C C B D D B A D A A