Question 1

Q1: Explain why public goods must be provided by the government.

Accepted Answer

Public goods must be provided by the government because the private sector is generally unwilling or unable to supply them due to their unique characteristics. These characteristics create a market failure that necessitates government intervention. The two main features of public goods are: 1.  Non-...

Question 2

Q2: Distinguish between revenue expenditure and capital expenditure.

Accepted Answer

Revenue expenditure and capital expenditure are two components of the government's total expenditure, distinguished by their impact on the government's assets and liabilities. Revenue Expenditure    Definition: It is expenditure that neither creates any physical or financial assets nor causes a redu...

Question 3

Q3: 'The fiscal deficit gives the borrowing requirement of the government'. Elucidate.

Accepted Answer

The statement 'The fiscal deficit gives the borrowing requirement of the government' is correct. The fiscal deficit is a measure of the shortfall in the government's total receipts compared to its total expenditure in a financial year. The formula for fiscal deficit is: Gross Fiscal Deficit = Total...

Question 4

Q4: Give the relationship between the revenue deficit and the fiscal deficit.

Accepted Answer

The revenue deficit and the fiscal deficit are two important measures of government deficit, and they are closely related. The revenue deficit is a component of the fiscal deficit. The relationship can be derived from their definitions: 1.  Revenue Deficit = Revenue Expenditure – Revenue Receipts...

Question 5

Q5: Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is...

Accepted Answer

Given the information for the economy:    Investment (I) = 200    Government Purchases (G) = 150    Net Taxes (T) = 100    Consumption Function (C) = 100 + 0.75YD (Assuming Y in the question refers to disposable income YD, as is standard)    Disposable Income (YD) = Y - T a) Level of equilibrium inc...

Question 6

Q6: Consider an economy described by the following functions: $C=20+ 0.80 \mathrm{Y}, I=30, G=50, T R=100$ (a) Find the equilibrium level of income and th...

Accepted Answer

Given the functions for the economy:    Consumption (C) = 20 + 0.80YD (Assuming Y in the question refers to disposable income YD)    Investment (I) = 30    Government Purchases (G) = 50    Transfers (TR) = 100    Lump-sum Tax (T) = 0 (initially)    Disposable Income (YD) = Y - T + TR a) Equilibrium...

Question 7

Q7: In the above question, calculate the effect on output of a 10 per cent increase in transfers, and a 10 per cent increase in lump-sum taxes. Compare th...

Accepted Answer

Using the initial conditions from question 6:    Marginal propensity to consume (c) = 0.80    Initial Transfers (TR) = 100    Initial Lump-sum Tax (T) = 0 1. Effect of a 10 per cent increase in transfers    Increase in transfers (ΔTR) = 10% of 100 = 10.    The transfer payment multiplier is calculat...

Question 8

Q8: We suppose that $C=70+0.70 YD, I=90, G=100, T=0.10 Y$ (a) Find the equilibrium income. (b) What are tax revenues at equilibrium income? Does the gover...

Accepted Answer

Given the information for the economy:    Consumption (C) = 70 + 0.70YD    Investment (I) = 90    Government Purchases (G) = 100    Proportional Tax (T) = 0.10Y    Disposable Income (YD) = Y - T a) Find the equilibrium income (Y) First, express YD and C in terms of Y: YD = Y - T = Y - 0.10Y = (1 - 0...

Question 9

Q9: Suppose marginal propensity to consume is 0.75 and there is a 20 per cent proportional income tax. Find the change in equilibrium income for the follo...

Accepted Answer

Given the information:    Marginal propensity to consume (c) = 0.75    Proportional income tax rate (t) = 20% = 0.20 First, we need to calculate the value of the relevant multipliers for an economy with a proportional income tax. The multiplier for autonomous expenditure (like government purchases)...

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