[Mission 2022] QUIZ – 2022: INSIGHTS STATIC QUIZ, 16 March 2022 – Economy

Solution: d)

Importance of Fiscal Policy in India:

• In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.
• Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its numerous projects.
• Fiscal policy also helps in providing stimulus to elevate the savings rate.
• The fiscal policy gives adequate incentives to the private sector to expand its activities.
• Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.

Solution: a)

While counter-cyclical fiscal policy is necessary to smooth out economic cycles, it becomes critical during an economic crisis.

Relevance of Counter-cyclical Fiscal Policy:

Indian Kings used to build palaces during famines and droughts to provide employment and improve the economic fortunes of the private sector. Economic theory, in effect, makes the same recommendation: in a recessionary year, Government must spend more than during expansionary times. Such counter-cyclical fiscal policy stabilizes the business cycle by being contractionary (reduce spending/increase taxes) in good times and expansionary (increase spending/reduce taxes) in bad times. On the other hand, a pro-cyclical fiscal policy is the one wherein fiscal policy reinforces the business cycle by being expansionary during good times and contractionary during recessions.

Solution: d)

Main objectives of Fiscal Policy in India:

• Economic growth:Fiscal policy helps maintain the economy’s growth rate so that certain economic goals can be achieved.
• Price stability:It controls the price level of the country so that when the inflation is too high, prices can be regulated.
• Full employment:It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.

Solution: b)

Fresh loans given by Government forms the part of Capital expenditure.

Capital Receipts: The government also receives money by way of loans or from the sale of its assets. Loans will have to be returned to the agencies from which they have been borrowed. Thus they create liability. Sale of government assets, like sale of shares in Public Sector Undertakings (PSUs) which is referred to as PSU disinvestment, reduce the total amount of financial assets of the government. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. When government takes fresh loans, it will mean that in future these loans will have to be returned and interest will have to be paid on these loans.

Solution: b)

Expansionary fiscal policy is a form of fiscal policy that involves decreasing taxes, increasing government expenditures or both, in order to fight recessionary pressures.

Increasing the subsidies decreases the out of pocket expenditure. Thus, increases the spending capacity.

Tax rebate to companies increase the profit to companies. This further helps in reducing the prices of goods and services. Thus, increase the demand in the economy.

Providing loans at higher interest rate decreases the demand for the loans. Thus, it decreases the liquidity in the market and leads to decreases the spending capacity.