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Questions and Answers
What is likely a consequence of high tax rates on the wealthy?
What is likely a consequence of high tax rates on the wealthy?
What does an optimal budgetary policy aim to achieve?
What does an optimal budgetary policy aim to achieve?
Which of the following is NOT a condition of macroeconomic stability?
Which of the following is NOT a condition of macroeconomic stability?
What is a major reason behind the need for government intervention in the economy?
What is a major reason behind the need for government intervention in the economy?
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Which economic theory supports the need for deliberate stabilization policies?
Which economic theory supports the need for deliberate stabilization policies?
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What could be a negative impact of government redistribution policies?
What could be a negative impact of government redistribution policies?
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What is an inherent characteristic of a market economy regarding employment?
What is an inherent characteristic of a market economy regarding employment?
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How does the government generally promote price stability?
How does the government generally promote price stability?
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What is stagflation?
What is stagflation?
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Which of the following factors is NOT part of the stabilization function's performance metrics?
Which of the following factors is NOT part of the stabilization function's performance metrics?
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How does monetary policy primarily work?
How does monetary policy primarily work?
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In the context of maintaining economic stability during a recession, which action is typical for the government?
In the context of maintaining economic stability during a recession, which action is typical for the government?
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What does countercyclical fiscal policy aim to address?
What does countercyclical fiscal policy aim to address?
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What typically happens to effective demand if taxes are increased?
What typically happens to effective demand if taxes are increased?
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What is the role of government intervention during periods of high inflation?
What is the role of government intervention during periods of high inflation?
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What is a consequence of the contagion effect in stabilization?
What is a consequence of the contagion effect in stabilization?
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What is the primary role of the Finance Commission in India?
What is the primary role of the Finance Commission in India?
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Which of the following articles facilitates the transfer of resources from the union to states?
Which of the following articles facilitates the transfer of resources from the union to states?
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What does vertical equity refer to in the context of the Finance Commission's recommendations?
What does vertical equity refer to in the context of the Finance Commission's recommendations?
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Which article provides for the establishment of the Finance Commission?
Which article provides for the establishment of the Finance Commission?
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What is one of the functions of the Finance Commission related to grants-in-aid?
What is one of the functions of the Finance Commission related to grants-in-aid?
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What is the significance of the phrase 'any other matter referred to the Commission by the President'?
What is the significance of the phrase 'any other matter referred to the Commission by the President'?
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The concept of horizontal equity in the Finance Commission's work primarily addresses what?
The concept of horizontal equity in the Finance Commission's work primarily addresses what?
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Which of the following is NOT a function performed by the Finance Commission?
Which of the following is NOT a function performed by the Finance Commission?
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What is the primary purpose of IGST?
What is the primary purpose of IGST?
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What percentage of the gross tax revenue of the union does GST account for?
What percentage of the gross tax revenue of the union does GST account for?
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Which of the following statements about the GST Council's recommendations is correct?
Which of the following statements about the GST Council's recommendations is correct?
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For how long was compensation provided to states for revenue loss due to GST implementation?
For how long was compensation provided to states for revenue loss due to GST implementation?
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Which of the following states received the most GST compensation during the transition period?
Which of the following states received the most GST compensation during the transition period?
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What is levied to provide compensation to states for GST-related revenue losses?
What is levied to provide compensation to states for GST-related revenue losses?
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Which area is the central government responsible for in terms of expenditure decentralization?
Which area is the central government responsible for in terms of expenditure decentralization?
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During the year 2022-23, what was the total amount of GST compensation released to states and union territories?
During the year 2022-23, what was the total amount of GST compensation released to states and union territories?
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What primarily causes market failures in an economy?
What primarily causes market failures in an economy?
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What is one responsibility of the government in terms of market failures?
What is one responsibility of the government in terms of market failures?
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Which of the following is NOT an instrument by which governments can influence resource allocation?
Which of the following is NOT an instrument by which governments can influence resource allocation?
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What is the main goal of the distributive function of the budget?
What is the main goal of the distributive function of the budget?
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What do redistribution policies often incur as a cost?
What do redistribution policies often incur as a cost?
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How does a market economy ensure full employment and price stability?
How does a market economy ensure full employment and price stability?
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Which function of fiscal policy is aimed at reducing macroeconomic fluctuations?
Which function of fiscal policy is aimed at reducing macroeconomic fluctuations?
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What does monetary policy primarily control to stabilize the economy?
What does monetary policy primarily control to stabilize the economy?
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What is the primary focus of the resource allocation role of government policy?
What is the primary focus of the resource allocation role of government policy?
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Which of the following best defines the allocative function in budgeting?
Which of the following best defines the allocative function in budgeting?
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Which method can the government use to influence private resource allocation effectively?
Which method can the government use to influence private resource allocation effectively?
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What role does legislation play in resource allocation by the government?
What role does legislation play in resource allocation by the government?
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Which of the following is a tool for the government to influence resource allocation involving economic goods?
Which of the following is a tool for the government to influence resource allocation involving economic goods?
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How can government competition policies affect resource allocation?
How can government competition policies affect resource allocation?
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What is a potential consequence of government regulatory activities on resource allocation?
What is a potential consequence of government regulatory activities on resource allocation?
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Which of the following best describes the reallocation of society's resources by the government?
Which of the following best describes the reallocation of society's resources by the government?
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Study Notes
Public Finance Overview
- Public finance encompasses the economic functions of government, covering allocation, redistribution, and stabilization.
- Government intervention is crucial in market economies to improve general welfare and economic performance.
- The government's role includes resource allocation, income redistribution, and macroeconomic stabilization.
Learning Outcomes
- Students will be able to explain the three-branch taxonomy of the government's role in a market economy.
- Analyse governmental economic actions and classify them based on economic functions.
- Elucidate the nature of finances and responsibilities of the central and state governments in India.
- Describe the mode of resource division between the union and states.
Functions of Government in an Economic System
- The basic economic problem is scarcity, arising from unlimited wants and limited resources.
- An economic system dictates resource allocation for production and distribution.
- There are three economic systems: market, government, and mixed—each with varying degrees of state intervention.
- Adam Smith advocated for minimal government intervention in a market economy.
Allocation Function
- Resource allocation involves an efficient and optimal use of resources.
- The private sector allocates resources using supply and demand, while the government uses fiscal mechanisms like subsidies and taxation.
- Market failures occur in various scenarios, including monopoly power, and collective public goods.
- A perfectly competitive market ensures efficient resource allocation.
Redistribution Function
- The government aims to ensure an equitable distribution of income and wealth.
- Redistribution occurs through tax policies, public expenditure, and social welfare programs.
- Market failures lead to unequal resource distribution, and government intervention is needed to correct them.
Stabilization Function
- Government interventions are needed to create economic stability.
- A stable economy has full employment, low inflation, and balanced trade.
- The government employs monetary and fiscal policies to maintain macroeconomic stability.
Centre and State Finance
- Fiscal federalism describes the sharing of tax powers and responsibilities between states and the central government in India.
- The Indian constitution designates three lists of powers to define the division of powers between the central government and states.
- The Finance Commission recommends the distribution of central government taxes to the states.
Introduction of GST
- GST (Goods and Services Tax) significantly changed tax relations between the centre and state governments.
- GST assesses a variety of taxes on goods and services, shifting from a production-based to a consumption-based system.
- The GST system provides compensation to states experiencing revenue loss after its implementation.
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Description
This quiz covers the essential functions of government in a market economy with a focus on public finance. It aims to enhance understanding of how government actions impact resource allocation, income redistribution, and macroeconomic stabilization in India. Students will explore the relationship between central and state finances.
