Page 1 Classroom Questions Chapter 7 Unit 4 ( Fiscal Policy)

Public Finance: (Chapter 7): Unit-4

Unit: 4: Fiscal Policy
A.) Multiple Choice Questions.

1) The important tools of budgetary policy are public revenue,

public expenditure, public debt & summing up we get:
a. Monetary policy
b. Fiscal policy
c. Contractionary policy
d. All
2) When all budgetary tools are used to achieve certain goals ,
public finance is transformed into :
a. Fiscal policy
b. Automatic stabiliser
c. Monetary policy
d. None
3) Great depression in 1930s and the consequent instabilities made
policy making support a more pro- active role of Government by
adopting ………………….:
a. Trade policy c. Fiscal policy
b. External policy d. All
4) Fiscal Policy involves use of Government spending, taxation
and borrowing to influence aggregate ……and ………:
a. Supply: price
b. Demand: exports
c. Output: employment
d. All
5) Maintenance of full employment, price stability, economic
development, equitable distribution are the objectives of:
a. External sector policy
b. Commercial bank policy
c. Monetary policy
d. Fiscal policy

6) Fiscal Policy refers to:

a. Use of Government spending, taxation, borrowing to influence
the level of economic activity;
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b. Government activities related to use of Government spending

for supply of essential goods;
c. Use of Government spending, taxation and borrowings for
reducing the fiscal deficit.
d. Both a & b

7) During recession Fiscal Policy of the Government should be

directed towards:
a. Increasing the taxes and reducing the aggregate demand;
b. Decreasing taxes to ensure higher disposable income’
c. Increasing govt. expenditure and increasing taxes.
d. None

8) If Real GDP is continuously declining and the rate of

unemployment in the economy is increasing, the
appropriate policy should be to:

a. Increasing taxes and decrease Government spending’,

b. Decrease both taxes and Government spending
c. Decrease taxes and increase Government spending
d. Either a or c

9) Which of the following are likely to occur when the

economy is in the expansionary phase of the Trade cycle?
A) Rising unemployment rate: B) Falling unemployment
rate; C) Rising inflation rate D) Deflation E) Falling or
stagnant wages for workers F) Increasing tax revenue F)
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
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10) According to Keynesian economics, when you have inflation

and effective fiscal policy should not include:
a) increasing corporate tax
b) decrease in aggregate demand
c) increase in government purchases
d) none of the above

11) Equity in taxation can best be delivered by applying the

principles of:
a) Equal absolute sacrifice.
b) Equal marginal sacrifice
c) Benefit of tax
d) Equal proportional sacrifice

12) Keynesian economists believe that

a) Fiscal policy can have a very powerful effect 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 fluctuation would be
automatically adjusted.
d) a and b above

13) When government expenditure changes by fiscal policy,

apart from direct effect, there is also indirect effect in the form
of ………………… multiplier:
a) Tax d) Both b & c
b) Balanced-Budget
c) Government
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14) Consider C= 100 + 0.6Y: value of government expenditure

multiplier is:
a) 1.5 c) 2.8
b) 1.8 d) 2.5
15) Consider C=200 + 0.6Y. What would be the impact on
equilibrium GDP if government spending increases by 50 billion:
a) 120 billion c) 124 billion
b) 121 billion d) 125 billion
16) Consider C= 100 + 0.8Y. If autonomous government
expenditure changes by 100 billion, what would be the impact on
GDP:
a) 400 billion c) 600 billion
b) 500 billion d) 700 billion
17) If any country has zero MPC, what is the value of fiscal
multiplier:
a) Infinite effect c) Boom
b) No multiplier effect. d) Cannot be determined.
18) For a country average per capita Y rose from 42,300 to 50,000
& corresponding figures for per capita consumption rose from
35,400 to 42,500. Spending multiplier is:
a) 12.83
b) 11.28
c) 13.02
d) None

19) Consider C= 200 + 0.8Y. Value of tax multiplier is:

a) 2 c) 4
b) 3 d) 5
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20) What would be the impact on GDP if both government

spending & taxes are increased by 5 billion for C= 100 + 0.9 Y:
a) Net result is an increase in output by 4 billion.
b) Net result is a decrease in output by 4 billion.
c) Net result is a decrease in output by 5 billion.
d) Net result is an increase in output by 5 billion.

21) In public debt when government issues T-bill and

government securities in debt market we get:
a) ‘Small saving’ public debt
b) External public debt
c) ‘Market Public debt
d) None

22) Which of the following may ensure decrease in aggregate

demand during inflation?
a) Decrease in all types of government spending and or an increase
in taxes;
b) Increase in government spending and / or a decrease in taxes
c) Decrease in government spending and / or a decrease in taxes.
d) All

23) A recession is characterized by:

a) Declining prices and rising employment
b) Declining unemployment and rising prices;
c) Declining real income and rising unemployment
d) Rising real income and rising prices

24) Which one of the following is the example of fiscal policy:

a) a tax cut aimed at increasing disposable income and spending
b) a reduction in government expenditure to contain inflation
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c) An increase in tax and decrease in government expenditure to

control inflation
d) All of the above

25) An expansionary fiscal policy, taking everything else

constant, would in the short-run have the effect of:
a) A relatively large increase in GDP and a smaller increase in
prices.
b) A relatively large increase in price, a relatively smaller increase
in GDP;
c) Both ‘GDP’ and ‘Price’ will be increasing in the same proportion.
d) Both ‘GDP’ and ‘Price’ will be increasing in a smaller proportion.

26) Which of the following policies is likely to shift an

economy’s aggregate demand curve to the right:
a) Increase in government spending;
b) Decrease in taxes;
c) A tax cut along with increase in public expenditure
d) All

27) Identify the incorrect statement:

a) A progressive direct tax system ensure economic growth with
stability because it distributes the burden of taxes equally
b) A carefully planned policy of public expenditure helps in
redistributing income from the rich to the poorer sections of the
society.
c) There are possible conflicts between different objectives of fiscal
policy such that a policy designed to achieve one goal may
adversely affect another.
d) An increase in the size of government spending during recession
Page 7 Classroom Questions Chapter 7 Unit 4 ( Fiscal Policy)

may possibly ‘crowd-out’ private spending in an economy

28) When leakages exceed injections, we get ……………. Budget

(a) Deficit (b) surplus (c) Balanced (d) All

29) When injections exceed leakages, we get ……………. Budget

(a) Deficit (b) Surplus (c) balanced (d) All

30) When leakages exceed injections, we observe ………… net

effect on aggregate demand.
(a) Positive (b) Negative (c) Neutral (d) All

31) Due to the deficit budget we observe …………….. net effect on

aggregate demand
(a) Positive (b) Negative (c) Neutral (d) All

32) Expansionary Fiscal Policy is applicable for bridging.

(a) Inflationary gap (b) Recessionary gap
(b) Excess demand (d) None

33) ‘Sticky’ downward wage concept is given by:

(a) Classical economists (b) Modern economists
(b) Keynes (d) None

34) To implement the proper effect of fiscal policy there should

be blending of ……………… policy.
(a) Trade (b) Foreign (c) Monetary (d) All

35) ‘Deficient demand’ is alternatively known as:

(a) Deflationary gap (b) Recessionary gap
(b) Inflationary gap (d) Both (a) and (b)

36) Which of the following would illustrate a ‘recognition’

legislation?
a) The time required to ‘identify the appropriate policy,
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b) The time required to identify to pass a legislation ;

c) The time required to identify the need for a policy change
d) The time required to establish the outcomes of fiscal policy

37) Which statement(s) is (are) correct about crowding out?

I. A decline in private spending may be partially or completely offset
the expansion of demand resulting from an increase in government
expenditure;
II. Crowding out effect is the negative effect fiscal policy may
generate when money from the private sector is ‘crowded out’ to
the public sector
III. When spending by the government in an economy increases,
government spending would be crowded out.
IV. Private investments, especially the ones which are interest
sensitive will be reduced if interest rates rise due to increased
spending by government
a) I and III only (b) I, II and III
b) I, II and IV (d) III only

38) A fall in private investment due to an increase in rate of

interest and due to deficit spending ……………………
a) Tax effect (b) Budget effect
b) Surplus effect (d) Crowding out effect

39) Which statement is correct:

a) Deficit spending with the intervention of the central bank leads to
crowding out.
b) Deficit spending without the intervention of the Central bank leads
to crowding out.
c) Deficit spending through market borrowing leads to crowding out.
d) All
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40) To know the whereabouts of macro variables before

application of fiscal policy government needs time:
a) Recognition lag
b) Decision lag
c) Implementation lag
d) Impact lag

41) After recognition government delays to take a possible steps:

a) Recognition lag
b) Decision lag
c) Implementation lag
d) Impact lag

42) After decision delay takes place in legislation:

a) Recognition lag
b) Decision lag
c) Implementation lag
d) Impact lag

43) When result or outcome of policy are not visible:

a) Recognition lag
b) Decision lag
c) Implementation lag
d) Impact lag

44) Read the following statements

I. Fiscal policy is said to be contractionary when revenue is higher
than spending
II. Other things constant, a fiscal expansion will raise interest rates
and “crowd out” same private investment
III. During inflation new taxes can be levied and the rates of existing
taxes are raise to disposable incomes
IV. Classical economists advocated contractionary fiscal policy to
solve the problem of inflation
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of the above statements

a) I and II are correct
b) I,II and III are correct
c) Only III is correct
d) All are correct.

45) While resorting to expansionary fiscal policy

a) the government may possibly have a budget surplus as increased
expenditure will bring more output and more tax revenue
b) the government may run into budget deficits because tax cuts
reduce government income and the government expenditure
exceed tax revenue in a given year
c) it is important to have a balanced budget to avoid inflation and
bring in stability
d) None of the above will happen

46) Contractionary fiscal policy:

a.is resorted to when government expenditure is greater than tax
revenues of particular year
b.increase the aggregate demand to sustain the economy
c.to increase the disposable income of people through tax cuts
and to enable greater demand
d.is designed to restrain the levels of economic activity of the
economy during the inflationary phase

47) When government spending is deliberately reduced to bring

in stability:
a) the government is resorting to contractionary fiscal policy
b) the government is resorting to expansionary fiscal policy
c) Trying to limit aggregate demand to sustainable levels
d) a and c above

48) An increase in personal income taxes

a) reduces disposable incomes leading to fall in consumption
spending and aggregate demand
b) is desirable during inflation or when there is excessive levels of
aggregate demand
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c) is to compensate the deficiency in effective demand by boosting

aggregate spending
d) both a and b are correct

49) While the government resorts to deliberate fiscal policy it may

not attempt to manipulate:
a) Government expenditure on public works
b) The rates of personal income taxes and corporate taxes
c) Government expenditure on goods and services purchased by
government
d) The rate of interest prevailing in the economy

50) Which of the following fiscal remedy would you advice when
an economy is facing recession:
a) the government may cut interest rates to encourage consumption
and investment
b) .the government may cut taxes to increase aggregate demand
c) the government may follow a policy of balanced the budget
d) None of the above will work.

51) While if government compete with the private sector to

borrow money for securing resources for expansionary fiscal
policy:
a. it is likely that interest rates will go up and firms may not be
willing to invest
b. it is likely that interest rates will go up and the individuals too
may be reluctant to borrow and spend
c. it is likely that interest rates will go up and the desired increase
in aggregate demand may not be realised
d. All the above are possible.

B) SHORT ANSWER TYPE QUESTIONS(Marks 2)

1. Define fiscal policy.

2. What are the objectives of fiscal policy?
Page 12 Classroom Questions Chapter 7 Unit 4 ( Fiscal Policy)

3. What are the symptoms of the beginning of a recession?

4. Explain the term recessionary gap.
5. What should be the tax policy during recession and depression?
6. What is the consequence excessive taxation will have on
business?
7. Describe the term expansionary fiscal policy.
8. What is meant by crowding out?
9. Explain the use of fiscal policy for economic growth.
10. What types of fiscal policy measures are useful for redistribution
of income in an economy?
11. What are the measures undertaken in a contractionary fiscal
policy?
12. Find out the limitations fiscal policy.
13. Explain the objectives of Fiscal Policy. (Marks-3) Nov;2018.
14. Describe the limitations of Fiscal Policy. (Marks-3) May; 2019.
15. What do you mean by “Crowding Out” in relation to fiscal policy?
(Nov:2020 held on 7thJan, 21)
16. Explain the significance of public debt as an instrument of fiscal
policy. (Nov:2020 held on 7thJan, 21)
17. How does the fiscal policy redress the inequalities of income and
wealth of a country? (December 2021)
18. Comment on the role of Government intervention for equitable
distribution. (Marks 2 May 2022)
19. What are the common objectives of fiscal policy?

(Marks 3 May 2022)

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