MEBE

Fiscal Policy
MCQs

One mark each

1. Fiscal policy can be explained as the

a) use of government taxes and spending to alter macroeconomic outcomes
b) use of money supply to alter macroeconomic outcomes
c) use of public policy to achieve macroeconomic objectives
d) use of foreign policy to achieve macroeconomic goals
e) cannot be explained

2. Which of the following economists argued that fiscal policies may be necessary to
bring about full employment?
a) Adam Smith
b) David Ricardo
c) J M Keynes
d) Karl Marx
e) Alfred Marshal

3. Which of the following is NOT a fiscal policy measure?

a) Government purchases
b) Transfer payments
c) Reserve ratios
d) Taxes
e) Crowding out

4. Fiscal policy is generally considered

a) The demand side economic policy

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 b) The supply-side economic policy
c) The microeconomic policy
d) The central government policy
e) The state government policy

5. Which of the following policies is related to the ‘crowding out’ effect in the economy?
a) Fiscal policy
b) Monetary policy
c) Public policy
d) Statutory policy
e) State policy

6. Expansionary fiscal policy is useful

a) to accelerate the economy when there is full employment

b) to stimulate the economy when unemployment is greater than the natural rate
c) to control inflation and decrease aggregate demand
d) to regulate the uncontrolled economic growth and reduce aggregate demand
e) to influence the money supply and decrease inflation

7. An increase in government purchases using the fiscal policy measure will lead to
a) decreasing aggregate demand
b) no change in aggregate demand
c) increasing aggregate demand
d) decreasing inflation
e) decreasing interest rates

8. Which of the following is a typical Keynesian policy during a recession?

a) To use exclusive monetary policies to stimulate economic output
b) The government should not intervene in the economy as it is not its business to do
so
c) The government should instruct the private sector to reduce inflation and create
employment
d) To use discretionary fiscal policies to stimulate the economy to a full-
employment equilibrium

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 e) The government should increase the taxes to mop up resources to distribute
among the poor

9. Contractionary fiscal policy causes the aggregate demand curve to

a) Shift towards the right side
b) Remain neutral
c) Shift towards the left side
d) Move along the curve
e) Insufficient information

10. The expansionary fiscal policy causes the aggregate demand curve to
a) Shift towards the right side
b) Remain neutral
c) Shift towards the left side
d) Move along the curve
e) Insufficient information

11. During which of the following periods is the use of an Expansionary fiscal policy
appropriate?
a) Business cycle recession
b) Business cycle peak
c) Business cycle expansion
d) Business cycle booms
e) When the economy is at the full employment level

12. Which of the following policies is related to the crowding-out effect?

a) Fiscal policy
b) Monetary policy
c) Public policy
d) Statutory policy
e) State policy

13. The use of expansionary fiscal policy leads to a rise in government spending and
lowering of taxes which can further lead to

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 a) Increase in the exchange rate
b) Decrease in inflation
c) Increase in interest rate
d) Increase in investment
e) Decrease in aggregate demand

14. The use of Contractionary fiscal policy leads to an increase in taxes and a decrease
in government spending which can further lead to
a) Decrease in the exchange rate
b) Decrease in investment
c) Increase in inflation
d) Decrease in interest rate
e) Increase in aggregate demand

15. Which of the following statements is CORRECT?

a) Contractionary fiscal policy increases aggregate demand
b) Transfer payments by the government lead to reduced consumption
c) Higher government spending creates lower aggregate demand
d) Expansionary fiscal policy increases aggregate demand
e) The rise of taxes the government leads to a rise in consumption

16. Typically, fiscal policy outcomes ……….

a) have no time lags
b) have time lags
c) not affect the economy
d) are neutral
e) are crucial for the supply side of the economy

17. When an economy is overheated, the best possible fiscal policy should be to
a) increase government spending and decrease taxes
b) increase government spending and decrease taxes
c) reduce government spending and increase taxes
d) reduce government spending and increase taxes
e) increase transfer payments and resort to crowding out of loanable funds

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18. Which of the following statements is INCORRECT about discretionary fiscal policy?
a) Governments can change tax policies
b) Governments can determine spending programs in response to fluctuations in the
business cycle
c) Taxes are linked to economic activity
d) The government can devise policies that require ongoing decisions by
policymakers
e) Discretionary policy often has limited impacts on the economy.

19. Which of the following statements is INCORRECT about automatic fiscal stabilizers?
a) Implemented without any deliberate action by the government
b) Taxes are linked to economic activity: Automatic “tax cut” during an economic
recession; Automatic “tax hike” during the economic boom
c) Automatic fiscal stabilizers smooth out fluctuations in booms and busts
d) Automatic fiscal stabilizers often have limited impacts on the economy
e) Government spending responds to the business cycle

20. Which of the following is INCORRECT when we say that “Automatic fiscal stabilizers
lead to ‘built-in-stability’”?
a) Taxes vary directly with GDP
b) Used by the politicians to suit their short-term political goals
c) Transfers vary inversely with GDP
d) Reduces the severity of business fluctuations
e) Tax progressivity

21. Which of the following is NOT a fiscal policy Instrument?

a) Taxes
b) Subsidies
c) Government expenditure
d) Policy repo rate
e) Crowding out

22. Which of the following is NOT a benefit of Goods and Services Tax in India?
a) Reduction in Cascading of Taxes
b) Common National Market

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 c) Overall increase in Prices
d) Benefits to Small Taxpayers
e) Non-Intrusive Electronic Tax System

23. What is Laffer Curve?

a) It defines the nexus between the tax rate and the economic output
b) It explains the connection between the tax rate and the interest rate
c) It shows the association between the tax rate and the exchange rate
d) It illustrates the relationship between the tax rate and money supply
e) It describes the relationship between the tax rate and the tax revenue

24. Which of the following correctly explains fiscal deficit?

a) It is the difference between total revenue and total expenditure of the government
b) It is the difference between total revenue and borrowings of the government
c) It is the difference between total consumption and investment in the economy
d) It is the difference between the aggregate demand and aggregate supply in the
economy
e) It is the difference between total public revenue and public debt in the economy

25. Which of the following is NOT related to fiscal deficit

a) Revenue deficit
b) Gross fiscal deficit
c) Primary deficit
d) Trade deficit
e) Net fiscal deficit

26. Primary Deficit is the ………………..

a) difference between interest payment and fiscal deficit
b) difference between tax revenue and interest payments
c) difference between revenue and expenditure
d) difference between revenue and expenditure
e) difference between total revenue expenditure and total revenue receipts

27. In India, fiscal policy is decided by which of the following?

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 a) The National Institution for Transforming India (Niti) Ayog
b) The Government of India
c) The Reserve Bank of India
d) The Finance Commission
e) The National Development Council (Rashtriya Vikas Parishad)

28. The Fiscal Responsibility and Budget Management (FRBM) Act enacted in 2003 in
India sets targets
a) for the corporates to increase corporate social responsibility spending
b) for the government to reduce fiscal deficits
c) for the government to increase government spending
d) for the government to reduce external debt
e) for the government to reduce the interest rate

29. Which of the following is public debt?

a) Debt owed by corporates to the governments
b) Debt owed by a citizen to a subnational government
c) Debt owed by all households in an economy
d) Debt owed by a citizen to a Union government
e) Debt owed by a government

30. Which of the following is NOT a direct tax?

a) Income Tax
b) Corporation Tax
c) Property Tax
d) Goods and Services Tax
e) Gift Tax.

Answers:
1-a
2- c
3-c
4-b

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5-a
6-b
7-c
8-d
9-c
10-a
11-a
12-a
13-d
14-b
15-d
16-b
17-c
18-c
19-d
20-b
21-d
22-c
23-e
24-a
25-d
26-a
27-b
28-b
29-e
30-d

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Two mark each

1. Expansionary fiscal policy seeks to _______________ production (and consumption) by

_______________ government expenditure and ____________ taxes to encourage household
spending and or investment spending
a) check; reducing; increasing
b) check; increasing; increasing
c) stimulate; decreasing; increasing
d) stimulate; increasing; decreasing
e) stimulate; decreasing; increasing

2. In India, the union government has taken several measures against the backdrop of a
pandemic. Which of the following is NOT a fiscal policy measure during the COVID 19
pandemic economic revival?
a) Government spending of 4.5 trillion rupees ($60 billion)
b) A total stimulus (‘Atmanirbhar Bharat’) to the extent of 15% of the gross domestic
product including that by the central bank.
c) Production Linked Incentive (PLI) of INR 1.46 lakh crores to boost the
manufacturing sector
d) Atmanirbhar Bharat Rozgar Yojana to encourage new jobs
e) Liquidity measures amounting to INR 8.01 lakh crore announced by the RBI

3. The Crisis-hit Venezuela is experiencing a very high level of consumer price inflation.
Which of the following measures is INAPPROPRIATE?
a) Inflation can be reduced by policies that slow down the growth of Aggregate
Demand (AD) and/or boost the rate of growth of Aggregate Supply (AS).
b) Inflation can be reduced by using ‘contractionary fiscal policy’ by reducing
government spending on public and merit goods.
c) Inflation can be reduced by increasing the money supply
d) Inflation can be reduced by hiking the direct taxes, leading to a reduction in real
disposable income
e) Inflation can be reduced by using ‘contractionary fiscal policy’ by reducing
government spending on welfare payments

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4. Japan is experiencing protracted deflation. In this context, which of the following
measures is INAPPROPRIATE?
a) The Japanese government should reduce spending and increase the taxes
b) The Japanese government should increase spending
c) The Japanese government should cut taxes
d) The Japanese government should encourage consumers spending
e) The Japanese government should roll out more direct transfer payments to needy
people

5. In India, every year the union government presents its budget in the parliament. When
a deficit budget is presented, which of the following is the largest?
a) Primary deficit
b) Fiscal deficit
c) Revenue deficit
d) Monetized deficit
e) Effective Revenue Deficit

6. Public finances have worsened considerably in many countries. Hence, such countries
that need to restore public finances from dire positions should set fiscal deficit or public
debt targets. In this context, Fiscal consolidation means ………..
a) A process where the government’s fiscal health is getting improved and is
indicated by a rising fiscal deficit.
b) A process where the government’s fiscal health is getting improved and is
indicated by a stagnant fiscal deficit.
c) A process where the government’s fiscal health is getting improved and is
indicated by a reduced fiscal deficit.
d) A process where the government’s fiscal health is getting worse and is indicated
by a reduced fiscal deficit.
e) A process where the government’s fiscal health is getting improved and is
indicated by a growing fiscal deficit.

7. The Government of India has announced several transfer payments schemes like
National Rural Employment Guarantee Act (MGNREGA), Pradhan Mantri Garib Kalyan
Yojana (PMGKY), Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) yojana, and others.
At a given price level, these schemes are most likely to reduce which of the following?
a) The real GDP

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 b) The unemployment level
c) The real interest rate
d) The size of the Union Budget
e) The money supply

8. Which of the following is not manipulated to directly affect the fiscal policy?
a) Personal income tax
b) Government expenditure
c) Government subsidies
d) Interest rate
e) Corporate income tax

9. The large stimulus package announced by the Modi Government in India to counter the
COVID pandemic crisis is an example of
a) Monetary policy
b) Public debt policy
c) Employment policy
d) Fiscal policy
e) Tariff policy

10. A neighboring country is in a deep economic crisis and liquidity trap. To revive such
an economy which of the following is more appropriate?
a) Monetary policy
b) Public debt policy
c) Public policy
d) Market policy
e) Fiscal policy

11. Assume that an economy is overheated and is at full employment. Given this context,
which of the following is the best possible policy reaction?
a) A rise in transfer payments
b) A rise in subsidies
c) A rise in government spending
d) A rise in taxes
e) A rise in the money supply

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12. It is said “If a country records slow growth, it has only immediate policy failures to
blame”. In this context, when a country is experiencing very sluggish economic growth,
which of the following is the most preferred policy response?
a) A tax cut
b) A rise in government spending
c) A tax hike
d) A decrease in government spending
e) Layoffs

13. There has been a debate about government spending and its effectiveness. Some
economists argue that government spending is good and some view it as inefficient.
Which of the following is a result of the “crowding-out effect” of the government spending
in the economy?
a) Decline in interest rate
b) Decline in private investment
c) Increase in private consumption
d) Decline in savings
e) Decline in inflation

14. “…..This freedom of interior commerce, the effect of the uniformity of the system of
taxation, is perhaps one of the principal causes of the prosperity of Great Britain…….” said
Adam Smith in ‘Wealth of Nations’ commenting about the uniform system of taxation
similar to the goods and services tax (GST) in India. The GST is a …………………
a) Single point tax
b) Consumption-based tax
c) Supply based tax
d) Regressive tax
e) Direct tax

15. When the fiscal policy is used to boost the level of economic activity if there is a
shortage of demand which is causing a deflationary gap, it is called
a) Reflationary policy
b) Deflationary policy
c) Supply-side policy
d) Stabilization policy

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 e) Borrowing policy

16. Which of the following is NOT a fiscal policy lag effect?

a) Recognition lag
b) Impact lag
c) Decision lag
d) Action lag
e) Effect Time lag

17. Which of the following is NOT an effect of fiscal policy on businesses?

a) Investment opportunities for firms
b) Inflation control boosts sales of the firms
c) Reduced taxes will influence the firms to expand their business
d) Reduced government spending boosts the demand for goods
e) Increased subsidies can stimulate production and transfer payments can cause
increased demand.

Answers:
1-d
2-e
3-c
4-a
5-b
6-c
7-b
8-d
9-d
10-e
11-d
12-b

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13-b
14-b
15-a
16-b
17-d

Three marks each

1. Here below are FOUR statements.

1. Expansionary fiscal policy is used during a recession to Increase government
spending
2. Expansionary fiscal policy is used during a recession to decrease taxes
3. Expansionary fiscal policy is used during a recession to create a deficit.
Which of the above is/are CORRECT?
a) Only statement 1 is correct
b) Only statement 3 is correct
c) Only statement 2 is correct
d) All three statements are correct
e) All three statements are incorrect

2. Assume that the Indian Finance Minister has presented a budget leaning towards
increased government borrowing. In that context how do you analyze the behavior of IS
curve in the IS-LM and AS-AD frameworks respectively due to the ‘crowding out’ effect?
a) IS curve shifts towards left; AD curve shifts towards right
b) IS curve shifts towards the right; AD curve shifts towards right

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 c) IS curve shifts towards the right; AD curve shifts towards left
d) IS curve shifts towards left; AD curve shifts towards left
e) Neither IS curve shifts, nor AD curve shifts

3. Here is a statement: “A zero-tax rate would produce zero-revenue and a 100% tax rate
would also generate zero-revenue, as there would be no incentive to work”. This principle
is behind which of the economic theories?
a) Lindahl curve theory
b) Bowen curve theory
c) Kaldor theory
d) Laffer Curve theory
e) Von Hock theory

4. The advent of fiscal rules emphasizes the role of sound fiscal policy to overall
macroeconomic stability and the accountability of the governments in the context of
rules vs. discretion. The Fiscal Responsibility and Budget Management (FRBM) Act
emphasizes the need for fiscal prudence and transparency. In this context, which of the
following is INCORRECT about the FRBM Act?
a) The FRBM Act sets targets for the government to achieve GDP growth.
b) In May 2016, the government set up a committee under NK Singh to review the
FRBM Act
c) The FRBM Act aims to introduce transparency in India's fiscal management
systems
d) The long-term objective of the FRBM Act is to achieve fiscal stability
e) To ensure equitable distribution of debt over the years

5. Post-World War experiences showed that government stimulus packages can work. To
revive the economy from the devastating effects of the COVID pandemic, governments
across the world are proposing several economic packages. In India, the government has
introduced the ‘Atmanirbhar Bharat Abhiyan’ under which several stimulus packages are
introduced. The eventual effects of these fiscal policy measures will depend on more
importantly on:
a) The “optimal” tax rate and Tax base
b) The Subsidies and Transfer payments
c) The Multiplier effect and Crowding-out effect
d) Automatic stabilizers
e) Tax elasticity of investment and Tax progressivity

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Answers:
1-d
2-b
3-d
4-a
5-c

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