What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

Why must public goods be provided by the government?

Because they are non-rival and non-excludable, so free-riders cannot be excluded and private firms have no incentive to supply them.

What are the three functions of the government budget?

Allocation (providing public goods), redistribution (taxes and transfers), and stabilisation (correcting fluctuations in the economy).

Distinguish between revenue expenditure and capital expenditure.

Revenue expenditure does not create assets or reduce liabilities; capital expenditure creates physical or financial assets or reduces liabilities.

What is the revenue deficit?

The excess of the government’s revenue expenditure over its revenue receipts.

What does the fiscal deficit indicate?

It is total expenditure minus receipts excluding borrowing, and indicates the total borrowing requirement of the government.

What is the primary deficit?

The fiscal deficit minus net interest payments, showing the borrowing needed for current expenditure excluding past interest obligations.

Distinguish between direct and indirect taxes.

A direct tax (like income tax) is borne by the person on whom it is levied; an indirect tax (like GST) can be shifted to others.

What is the balanced-budget multiplier?

It equals one — a rise in government spending matched by an equal rise in taxes raises income by exactly the amount of the spending increase.

What is an automatic stabiliser?

A built-in feature, like proportional income tax, that automatically dampens fluctuations in income without deliberate government action.

Does public debt impose a burden?

Internal debt is owed to ourselves, but it can burden future generations if it reduces growth; external debt is a genuine burden as goods must be sent abroad to pay interest.

Government Budget and the Economy

Class 12 Economics · Introductory Macroeconomics · Chapter 5

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Summary

The government budget is the annual financial statement of estimated receipts and expenditures, presented to Parliament under Article 112 of the Constitution. Through the budget the government performs three functions: allocation (providing public goods such as defence and roads, which are non-rival and non-excludable and so cannot be supplied by the market), redistribution (changing the distribution of income through taxes and transfers to make it fairer), and stabilisation (correcting fluctuations in output, employment and prices). The budget has two parts. The revenue budget covers revenue receipts (tax revenue from direct and indirect taxes, and non-tax revenue) and revenue expenditure. The capital budget covers capital receipts (borrowings, recovery of loans, disinvestment) and capital expenditure, which create or reduce assets and liabilities. The chapter defines several deficit measures: the revenue deficit (revenue expenditure minus revenue receipts), the fiscal deficit (total expenditure minus receipts excluding borrowing, which shows the government’s total borrowing requirement), and the primary deficit (fiscal deficit minus interest payments). It also covers fiscal policy and the multipliers — government-expenditure, tax, balanced-budget and transfer multipliers — automatic stabilisers, the issue of government debt and its burden, the Ricardian equivalence idea, the FRBM Act and the GST.

Key terms

Government budget

The annual statement of the government’s estimated receipts and expenditures.

Public goods

Goods that are non-rival and non-excludable, which the market fails to provide and the government supplies.

Revenue deficit

The excess of revenue expenditure over revenue receipts.

Fiscal deficit

Total expenditure minus receipts other than borrowing — the government’s borrowing requirement.

Primary deficit

The fiscal deficit minus net interest payments.

Fiscal policy

The use of government spending and taxation to influence output, employment and prices.

Extra questions & answers

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Public goods must be provided by the government because they are:

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