Public Economics Questions and Answers

Answer: B

The social sector expenditure of the State Governments covers education and sports, medical and public health, and water supply and sanitation, statements I, III and IV, option B. Statement II, energy and transport, is spending on economic services, not social services, so options A and C, which contain it, are wrong. Option D leaves out water supply and sanitation, which is a social service, so it is incomplete.

Answer: B

The matching is: law of increasing State activities with Adolph Wagner (2), displacement effect with Weisman and Peacock (3), federal finance with R. N. Bhargava (1), and functional finance with A. P. Lerner (4), giving 2 3 1 4. Wagner's law says public expenditure grows as a society develops. Peacock and Wiseman explained the jump in public expenditure after a crisis as a displacement effect. Lerner proposed functional finance, judging fiscal measures by their effects. Options A, C and D mispair at least two items.

Answer: A

The key takes both statements as correct, with the reason explaining the assertion. The Union Budget for 2010-11 started the process of fiscal consolidation by partly withdrawing the stimulus given in the previous two years, and it was able to do so because the economy was showing clear signs of recovery. So the reason is the cause of the assertion, and option A is right. Option B is wrong because R is the explanation. Options C and D are wrong because both statements are true.

Answer: B

The chronological order is IV, I, II, III, option B. The survey called Indian Tax Reform, a report of a survey, is the earliest, from the 1950s. The Committee on Taxation of Agricultural Wealth and Income was set up in the early 1970s. The Task Force on direct taxes reported in the 2000s, and the Thirteenth Finance Commission, covering 2010-15, was the latest. The other orders put these reports in the wrong sequence, for example option A places the Thirteenth Finance Commission first.

Answer: A

In a competitive market a tax on wage income falls wholly on labour if the supply of labour is inelastic, because workers cannot reduce the quantity of labour they offer in response to the lower take-home pay, so employers do not have to raise the wage to compensate. If labour supply is elastic or highly elastic, as in options B and C, workers withdraw labour and part of the burden moves to employers. Option D concerns the elasticity of product demand and is not relevant to the incidence of a tax on wages.

Answer: D

Both statements are correct and (R) is the correct explanation of (A), which is the fourth option. A public good is non-excludable, so the producer cannot keep non-payers from consuming it and so cannot charge a price, and a profit maximizing firm therefore has no incentive to supply it. This is why the state provides such goods. The first, second and third options call one or both statements wrong, so they are rejected.

Answer: B

The distribution of the burden of paying a tax is called the incidence of the tax, the third option. It looks at who finally bears the tax after it has been shifted through prices and wages. Shifting is the process by which the burden is passed on to others, which is a stage on the way to the incidence, and tax capitalization is the reduction in the price of an asset to reflect the future tax. 'Sharing of tax burden' is not a standard term.

Answer: B

A short period debt meant to meet current needs, which fills the temporary gap in the budget, is the unfunded or floating debt, the second option. Treasury bills and ways and means advances are examples, repayable within a year. Funded debt is the long term debt for which a fund is set up for repayment, and redeemable and irredeemable debt are classified by whether the state promises to repay the principal, so they are not about the period.

Answer: B

The ratio of the proportionate increase in tax revenue to the proportionate increase in the tax base, in the question's wording, is the buoyancy of a tax, the second option. Buoyancy measures the total response of revenue to the growth of income including discretionary changes in rates and coverage. Elasticity measures the response with the tax structure held constant, so it excludes the discretionary changes, and neutrality is a different principle of taxation.

Answer: C

Grants from the Centre to the States under the recommendations of the Finance Commission are known as statutory grants, because they are made under Article 275 of the Constitution on the Commission's advice.

Plan grants are given on the advice of the Planning Commission, and discretionary grants are decided by the Centre. 'Development assistance' is a general term, not the name for these grants.