CA Foundation Economics – Fiscal Functions An Overview Centre And State Finance Multiple Choice Questions

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Fiscal Functions An Overview Centre And State Finance Introduction

Question 1. What does fiscal policy refer to? 

  1. The government’s policy on taxation and public expenditure.
  2. The policy of the central bank is to control the money supply.
  3. The policy of promoting free trade and globalization.
  4. The policy of regulating foreign direct investment.

Answer: 1. The government’s policy on taxation and public expenditure. Explanation:

Fiscal policy refers to the government’s use of taxation and public expenditure to influence the economy’s overall economic activity. It is one of the key tools used by governments to achieve economic objectives such as economic growth, price stability, and full employment.

Question 2. What is the primary objective of fiscal policy?

  1. Controlling inflation
  2. Achieving trade surplus
  3. Reducing income inequality
  4. Stabilizing financial .markets

Answer: 3. Reducing income inequality

Explanation: 

The primary objective of fiscal policy is to reduce income inequality by promoting equitable distribution of wealth and income. This is achieved through various measures, including progressive taxation and targeted social welfare programs.

Question 3. Which level of government is responsible for formulating, and implementing fiscal policy in a federal system?

  1. Local government
  2. State government
  3. Central government
  4. Municipal government

Answer: 3. Central government

Explanation:

In a federal system, the central government is responsible for formulating and implementing fiscal policy at the national level. The central government controls key macroeconomic policies, including taxation, public spending, and borrowing. – . .

Question 4. What is the role of the state government in fiscal policy?

  1. Implementing monetary policy
  2. Controlling inflation
  3. Managing the country’s foreign exchange reserves
  4. Implementing certain tax and expenditure policies within the state

Answer: 4. Implementing certain tax and expenditure policies within the state

Explanation:

The role of the state government in fiscal policy is to implement certain tax and expenditure policies within the state. State governments have the authority to levy and collect certain taxes and spend on state-specific programs and projects.

Question 5. Which of the following is an example of an expansionary fiscal policy?

  1. Increasing taxes to reduce inflation
  2. Reducing government spending to control budget deficit
  3. Increasing government spending and cutting taxes to stimulate economic growth
  4. Implementing austerity measures to address recession

Answer: 1. Increasing government spending and cutting taxes to stimulate economic growth

Explanation:

An expansionary fiscal policy involves increasing government spending and cutting taxes to boost aggregate demand and stimulate economic growth during periods of economic downturns or recession

Question 6. Fiscal functions refer to

  1. The functions performed by the central bank are to control the money supply.
  2. The functions performed by the government are related to taxation, expenditure, and borrowing.
  3. The function performed by commercial banks is to provide credit to the public.
  4. The functions performed by the stock exchange to regulate financial markets.

Answer: 2. The functions performed by the government related to taxation, expenditure, and borrowing.

Explanation:

Fiscal functions refer to the functions performed by the government in’ managing its finances, including taxation (revenue collection), government expenditure, and borrowing to meet budgetary requirements.

Question 7. Fiscal policy is primarily concerned with

  1. Controlling the money supply and interest rates in the economy.
  2. Regulating international trade and exchange rates.
  3. Achieving price stability and controlling inflation.
  4. Influencing the level of aggregate demand and economic activity.

Answer: 4. Influencing the level. of aggregate demand and economic activity.

Explanation:

Fiscal policy is. primarily concerned with influencing the level of aggregate demand and economic activity in the economy through changes in government spending and taxation.

Question 8. The central government’s main source of revenue is derived from

  1. State taxes and fees.
  2. Central excise duties and customs duties.
  3. Corporate income taxes and personal income taxes.
  4. Borrowing from international financial institutions.

Answer: 3. Corporate income taxes and personal income taxes.

Explanation:

The central government’s main source of revenue is derived from corporate income taxes and personal income taxes, along with other sources like customs duties, excise duties, and non-tax revenue.

Question 9. The division of financial powers and responsibilities between the central government and state governments is outlined in

  1. The Fiscal Responsibility and Budget Management Act.
  2. The Reserve Bank of India Act.
  3. The Finance Commission’s recommendations.
  4. The Securities and Exchange Board of India Act.

Answer: 3. The Finance Commission’s recommendations.

Explanation: 

The division of financial powers and responsibilities between the central government and state governments is outlined in the recommendations of the Finance Commission. The Finance Commission recommends the sharing of central taxes with the states and other fiscal matters.

Question 10. A budget deficit occurs when

  1. Government revenues exceed government expenditures.
  2. Government expenditures exceed government revenues.
  3. Tax revenues are equal to government expenditures.
  4. The fiscal deficit is equal to the revenue deficit,

Answer: 2. Government expenditures exceed government revenues.

Explanation:

A budget deficit occurs when government expenditures exceed government revenues (tax revenues and non-tax revenues). It results in the government needing to borrow to cover the shortfall.

Question 11. Which of the following best defines fiscal functions?

  1. The management of public debt
  2. The management of private debt
  3. The management of monetary policy
  4. The management of government finances

Answer: 4. The management of government finances

Question 12. What is the primary source of revenue for the Central Government in India

  1. State taxes
  2. Goods and Services Tax (GST)
  3. Corporate taxes
  4. Sales tax

Answer: 2. Goods and Services Tax (GST)

Question 13. Which of the following represents a capital receipt for the government?

  1. Income tax
  2. Goods and Services Tax (GST)
  3. Borrowings from the World Bank
  4. Customs duty

Answer: 3. Borrowings from the World Bank

Question 14. In India, who is responsible for the collection of most direct taxes?

  1. State Governments
  2. Local Governments (Panchayats)
  3. Central Board of Direct Taxes (CBDT)
  4. Reserve Bank of India (RBI)

Answer:  3. Central Board of Direct Taxes (CBDT)

Question 15. Which type of budget shows the receipts and expenditures of both the Central and State Governments?

  1. Consolidated Budget
  2. Annual Financial Statement
  3. Deficit Budget
  4. Revenue Budget

Answer: 1. Consolidated Budget

The Role Of Government In An Economic System

Question 1. In a market economy, the primary role of the government is to:

  1. Own and control all the means of production.
  2. Set prices and allocate resources.
  3. Provide goods and services directly to consumers.
  4. Ensure the functioning of markets and enforce property rights.

Answer: 4. Ensure the functioning of markets and enforce property rights.

Explanation:

In a market economy, the primary role of the government is to ensure the functioning of markets, promote competition, and enforce property rights. It aims to create an environment where businesses can operate freely and consumers can make informed choices.

Question 2. In a planned economy, the government

  1. Leaves all economic decisions to the private sector.
  2. Controls all aspects of the economy, including production, distribution, and pricing.
  3. Promotes international trade and exports.
  4. Focuses on providing public goods and services only.

Answer: 2. Controls all aspects of the economy, including production, distribution, and pricing.

Explanation:

In a planned economy, the government exercises extensive control over all aspects of the economy, including production, distribution, and pricing of goods and services. It is responsible for making all economic decisions.

Question 3. The concept of “market failure” refers to

  1. The government’s inability to efficiently allocate resources.
  2. The inability of markets to achieve an equitable distribution of wealth.
  3. Situations where the market does not efficiently allocate resources to produce goods and services.
  4. The government’s inability to provide public goods and services.

Answer: 3. Situations where the market does not efficiently allocate resources to produce goods and services.

Explanation:

Market failure refers to situations where the market mechanism fails to efficiently allocate resources, leading to an inefficient distribution of goods and services. It may occur due to externalities, public goods, asymmetric information, or monopolies.

Question 4. Fiscal policy is a tool used by the government to

  1. Control the money supply and interest rates in the economy.
  2. Regulate international trade and exchange rates.
  3. Influence the level of economic activity and stabilize the economy through changes in government spending and taxation.
  4. Manage the balance of payments and foreign exchange reserves.

Answer: 3. Influence the level of economic activity and stabilize the economy through changes in government spending and taxation, .

Explanation:

Fiscal policy is a tool used by the government to influence the level of economic activity and stabilize the economy. It involves changes in government spending and taxation to impact aggregate demand and economic growth.

Question 5. Which of the following is an example of a government providing a public good?

  1. A private company producing smartphones for sale in the market.
  2. A government-owned airline company operating international flights.
  3. A private university offering education services to students.
  4. A government building a public park for the community.

Answer: 4. A government building a public park for the community

Explanation:

A public good is a good or service that is non-excludable and < non-rivalroUs, meaning it is available to all individuals, and one person’s use does not diminish its availability to others. Building a public park is an example of the government providing a public good accessible to the entire community.

Question 6. The primary function of the government in an economic system is to

  1. Maximize profits for businesses.
  2. Ensure price stability in the market.
  3. Allocate and manage scarce resources.
  4. Promote international trade and exports.

Answer: 3. Allocate and manage scarce resources.

Explanation:

The primary function of the government in an economic system is to allocate and manage scarce resources efficiently. It does so through various economic policies, regulations, and interventions to ensure equitable distribution and promote economic growth.

Question 7. In a market economy, the role of the government is mostly

  1. To control all aspects of production and distribution.
  2. To centralize economic decision-making in the hands of a few authorities.
  3. To provide goods and services directly to the public.
  4. To intervene selectively to correct market failures and ensure fair competition.

Answer: 4. To intervene selectively to correct market failures and ensure fair- competition.

Explanation:

In a market economy, the role of the government is mostly to intervene selectively in certain areas to correct market failures, ensure fair competition, and provide public goods and services that the private sector may not adequately provide.

Question 8. Fiscal policy refers to the government’s actions related to

  1. Controlling the money supply and interest rates.
  2. Managing taxation and government spending.
  3. Regulating international trade and exchange rates.
  4. Setting employment targets and wage rates.

Answer: 2. Managing taxation and government spending.

Explanation:

Fiscal policy refers to the government’s actions related to managing taxation and government spending to influence the level of aggregate demand and stabilize the economy.

Question 9. The concept of a “mixed economy” implies that

  1. The government owns and controls all means of production and distribution.
  2. The economy is entirely market-driven without any government intervention.
  3. The economy combines elements of both a market economy and a planned economy.
  4. The government does not . have any role in economic decision-making.

Answer: 3. The economy combines elements of both a market economy and a planned economy.

Explanation:

In a mixed economy, the economic system combines elements of both a market economy and a planned economy. It allows for private enterprise and individual initiative while also allowing the government to intervene in certain areas to achieve social objectives and correct market failures.

Question 10. An example of a government’s microeconomic role is

  1. Implementing monetary policy to control inflation.
  2. Managing the country’s balance of trade and current account.
  3. Regulating the labor market and setting minimum wages.
  4. Setting targets for economic growth and GDP expansion.

Answer: 3. Regulating the labor market and setting minimum wages.

Explanation:

Regulating the labor market and setting minimum wages are examples of the government’s microeconomic role. It involves intervening in specific markets to address issues such as labor market imbalances and income inequality.

Question 11. In a market-oriented economic system, the primary role of the government is to

  1. Own and operate key industries and businesses.
  2. Regulate and control prices of goods and services.
  3. Facilitate economic growth and stability while intervening minimally.
  4. Implement strict trade barriers and tariffs

Answer: 3. Facilitate economic growth and stability while intervening minimally.

Question 12. Which of the following is an example of a fiscal policy measure undertaken by the government during an economic downturn?

  1. Reducing interest rates to encourage borrowing and spending.
  2. Decreasing the money supply to control inflation.
  3. Implementing free trade agreements to promote international trade.
  4. Privatizing state-owned enterprises to boost competition.

Answer: 1. Reducing interest rates to encourage borrowing and spending.

Question 13. The government’s role in providing public goods and services refers to

  1. The distribution of cash transfers to low-income individuals.
  2. The provision of essential goods and services for the entire population.
  3. The implementation of tax cuts to stimulate consumer spending.
  4. The establishment of monopolies in critical industries.

Answer: 2. The provision of essential goods and services for the entire population.

Question 14. Which economic system involves extensive government planning and control over resources and production?

  1. Market economy
  2. Mixed economy
  3. Command economy
  4. Traditional economy

Answer: 3. Command economy

Question 15. During times of inflation, the government might employ which monetary policy measure to reduce the money supply?

  1. Quantitative easing
  2. Open market operations
  3. Increasing government spending
  4. Lowering reserve requirements for banks

Answer:  2. Open market operations

The Allocation Function

Question 1. The allocation function in economics refers to

  1. The government’s role in distributing subsidies to various industries.
  2. The process of allocating resources among different uses to satisfy unlimited wants.
  3. The role of financial institutions in allocating credit to the public.
  4. The process of allocating goods and services among different regions of the country.

Answer: 4. The process of allocating resources among different uses to satisfy unlimited wants.

Explanation:

The allocation function in economics refers to the process of allocating scarce resources among different uses to satisfy unlimited wants most efficiently and equitably.

Question 2. In a market economy, the allocation of resources is primarily determined by

  1. Central planning by the government.
  2. Consumer preferences and demand.
  3. The availability of natural resources,
  4. The level of government spending.

Answer: 2. Consumer preferences and demand.

Explanation:

In a market economy, the allocation of resources is primarily determined by consumer preferences and demand. Producers respond to consumer demand by allocating resources to produce goods and services that are in demand.

Question 3. Which economic system relies heavily on central planning and government control to allocate resources?

  1. Market economy
  2. Mixed economy
  3. Planned economy
  4. Command economy

Answer: 4. Command economy

Explanation:

In a command economy, the allocation of resources is heavily controlled by the government through central planning. The government decides what goods and services will be produced and in what quantities.

Question 4. The price mechanism in a market economy plays a crucial role in resource allocation because it

  1. Determines the level of government spending on public goods.
  2. Regulates international trade and exchange rates.
  3. Adjusts supply and demand to reach equilibrium prices.
  4. Allocates resources based on government subsidies.

Answer: 3. Adjusts supply and demand to reach equilibrium prices.

Explanation:

The price mechanism in a market economy plays a crucial role in resource allocation by adjusting supply and demand to reach equilibrium prices. When demand is high, prices rise, signaling producers to allocate more resources to produce those goods.

Question 5. The concept of opportunity cost is related to the allocation function in economics because it

  1. Represents the value of the next best alternative foregone when a choice is made. ‘
  2. Determines the level of government spending on public goods. .
  3. Indicates the monetary cost of production for a firm.
  4. Measures the overall cost of inflation in the economy.

Answer: 1. Represents the value of the next best alternative foregone when a choice is made.

Explanation:

The concept of opportunity cost is related to the allocation function in economics because it represents the value of the next best alternative foregone when a choice is made. When resources are allocated to produce one good, the opportunity cost is the potential benefit from producing the next best alternative.

Question 6. The allocation function in an economic system refers to

  1. How the government allocates its budget for different sectors.
  2. How resources are distributed among households and firms.
  3. How the central bank allocates credit to commercial banks.
  4. How foreign trade is regulated and controlled.

Answer: 2. How resources are distributed among households and firms.

Explanation:

The allocation function in an economic system refers to how scarce resources are distributed among households and firms to produce goods and services. It involves deciding what and how much to produce, how to produce, and for whom to produce.

Question 7. In a command economy, the allocation of resources is mainly decided by

  1. Market forces and competitive forces.
  2. The interaction of buyers and sellers in the marketplace.
  3. Government authorities and central planners.
  4. The balance of trade and foreign exchange rates.

Answer: 3. Government authorities and central planners.

Explanation:

In a command economy, the allocation of resources is mainly decided by government authorities and central planners. The government controls the production and distribution of goods and services, and resources are allocated based on government decisions

Question 8. The concept of “opportunity cost” is related to

  1. The cost of producing one additional unit of a good or service.
  2. The cost of investing in capital goods.
  3. The cost of producing a good or service at the lowest possible cost.
  4. The cost of choosing one option over the next best alternative.

Answer: 4. The cost of choosing one option over the next, best alternative.

Explanation:

The concept of “opportunity cost” refers to the cost of choosing one option over the next best alternative. It represents the value of the foregone opportunity when a decision is made.

Question 9. Economic efficiency is achieved when: 

  1. The government intervenes in resource allocation.
  2. Production is maximized, regardless of the distribution of goods.
  3. Resources are allocated to produce the highest quality goods.
  4. Resources are allocated to produce goods in a way that maximizes total welfare.

Answer: 4. Resources are allocated to produce goods in a way that maximizes. total welfare.

Explanation:

Economic efficiency is achieved when resources are allocated to produce goods and services in a way that maximizes total welfare or societal well-being. It considers
both production efficiency and distribution efficiency.

Question 10. In a market-oriented economic system, the primary role of the government is to:

  1. Own and operate key industries and businesses.
  2. Regulate and control prices of goods and services.
  3. Facilitate economic growth and stability while intervening minimally.
  4. Implement strict trade barriers and tariffs.

Answer: 3. Facilitate economic growth and stability while intervening minimally.

Question 11. Which of the following is an example of a fiscal policy measure undertaken by the government during an economic downturn?

  1. Reducing interest rates to encourage borrowing and spending.
  2. Decreasing the money supply to control inflation..
  3. Implementing free trade agreements to promote international trade.
  4. Privatizing state-owned enterprises to boost competition.

Answer: 1. Reducing interest rates to encourage borrowing and spending.

Question 12. The government’s role in providing public goods and services refers to

  1. The distribution of cash transfers to low-income individuals.
  2. The provision of essential goods and services for the entire population.
  3. The implementation of tax cuts to stimulate consumer spending.
  4. The establishment of monopolies in critical industries.

Answer: 2. The provision of essential goods and services for the entire population.

Question 13. Which economic system involves extensive government planning and control over resources and production?

  1. Market economy
  2. Mixed economy
  3. Command economy
  4. Traditional economy

Answer: 3. Command economy

Question 14. During times of inflation, the government might employ which monetary policy measure to reduce the money supply?

  1. Quantitative easing
  2. Open market operations.
  3. Increasing government spending
  4. Lowering reserve requirements for banks

Answer: 2. Open market operations.

The Redistribution Function

Question 1. The redistribution function in an economic system refers to

  1. The process of reallocating resources among different sectors of the economy. ,
  2. The role of the government in redistributing income and wealth among the population.
  3. The function of the central bank is to regulate the money supply and interest rates.
  4. The process of reallocating resources between domestic and foreign markets.

Answer: 2. The role of the government in redistributing income and wealth among the population.

Explanation:

The redistribution function in an economic system refers to the role of the government in redistributing income and wealth among the population to promote equity and reduce income inequality.

Question 2. Which of the following is an example of a redistributive policy?

  1. Providing subsidies to domestic industries to boost exports.
  2. Implementing tax cuts to stimulate economic growth.
  3. Introducing progressive income tax rates to tax higher incomes at a higher rate.
  4. Reducing government spending to control budget deficits.

Answer: 3. Introducing progressive income tax rates to tax higher incomes at a higher rate.

Explanation:

Introducing progressive income tax rates, where higher incomes are taxed at a higher rate, is an example of a redistributive policy. It aims to reduce income inequality by taxing the wealthy more than lower-income individuals.

Question 3. The objective of the redistribution function is to

  1. Maximize government revenue from taxation.
  2. Promote economic growth and increase GDP.
  3. Achieve a more equitable distribution of income and wealth.
  4. Encourage international trade and foreign investment.

Answer: 3. Achieve a more equitable distribution of income and wealth.

Explanation:

The objective of the redistribution function is to achieve a more equitable distribution of income and wealth in society. It seeks to reduce income inequality and improve the standard of living for the less privileged.

Question 4. Social welfare programs, such as unemployment benefits and food assistance, are examples of: 

  1. Regressive policies that benefit higher-income individuals.
  2. Supply-side policies aimed at stimulating production.
  3. Redistributive policies that provide support to those in need.
  4. Demand-side policies that boost consumer spending.

Answer: 3. Redistributive policies that provide support to those in need.,

Explanation:

Social welfare programs* such as unemployment benefits and food assistance are examples of redistributive policies. They aim to provide support and assistance to individuals and families in need, contributing to a more equitable distribution of resources.

Question 5. A “means-tested” welfare program refers to a program that

  1. Provides benefits to all individuals regardless of their income level.
  2. Is funded through progressive taxation.
  3. Targets benefits to individuals based on their income or financial need.
  4. Supports specific industries to boost economic growth.

Answer: 3. Targets benefits to individuals based on their income or financial need.

Explanation:

A “means-tested” welfare program targets benefits to individuals based oh their income or financial need. These programs aim to provide support to those with lower incomes or facing financial hardship. Here are some multiple-choice questions (MCQs) related to the redistribution function in an economic system, along with their answers and explanations:

Question 6. The government’s main tool for achieving redistribution is through

  1. Fiscal policy, involving taxation and government spending.
  2. Monetary policy, involves controlling the money supply and interest rates.
  3. Exchange rate policies to promote international trade.
  4. Industrial policies to support specific industries.

Answer: 1. Fiscal policy, involving taxation and government spending.

Explanation:

Fiscal policy, which involves the use of taxation and government spending, is the main tool used by the government to achieve redistribution. The government can impose progressive taxes and provide social welfare programs to redistribute income and wealth.

Question 7. Which of the following policies is an example of a redistribution function?

  1. A government policy aimed at promoting economic growth and investment.
  2. A government policy to control inflation through monetary measures.
  3. A progressive income tax system where higher-income individuals pay higher tax rates.
  4. A policy to encourage exports and boost foreign trade.

Answer: 3. A progressive income tax system where higher-income individuals pay higher tax rates.

Explanation:

A progressive income tax system where higher-income individuals pay higher tax rates is an example of the redistribution function. It aims to redistribute income by imposing higher tax rates on those with higher incomes and using the revenue to support social welfare programs.

Question 8. The objective of the redistribution function is to

  1. Maximize government revenue through taxation.
  2. Encourage individuals to save and invest more.
  3. Achieve price stability, and control inflation.
  4. Reduce income and wealth disparities among different segments of society.

Answer: 4. Reduce income and wealth disparities among different segments of society.

Explanation:

The objective of the redistribution function is to reduce income and wealth disparities among different segments of society. It seeks to promote a fairer and more equitable distribution of resources to ensure. social justice.

Question 9. Universal basic income (UBI) is an example of

  1. An anti-inflationary measure.
  2. A regressive tax policy.
  3. A redistribution policy.
  4. A trade promotion policy.

Answer: 3. A redistribution policy.

Explanation:

Universal basic income (UBI) is an example of a redistribution policy. It involves providing a regular and unconditional income to all citizens, regardless of their income level, to reduce poverty and income inequality.

Question 10. The redistribution function in economics refers to

  1. The allocation of resources among different sectors of the economy
  2. The transfer of wealth or income from one group to another
  3. The process of increasing government spending on social welfare programs
  4. The implementation of progressive taxation to fund public goods

Answer: 2. The transfer of wealth or income from one group to another

Question 12. The primary goal of the redistribution function is to

  1. Maximize profits for businesses
  2. Promote economic growth and development ‘
  3. Reduce income inequality and poverty
  4. Encourage consumer spending and investment.

Answer: 3. Reduce income inequality and poverty

Question 13. Which of the following is an example of the redistribution function in action? 

  1. A government investing in infrastructure development
  2. A government providing subsidies to farmers.
  3. A progressive income tax system.
  4. A central bank controlling the money supply

Answer: 2. A government providing subsidies to farmers.

Question 14. In a progressive income tax system: 

  1. The tax rate decreases as income increases
  2. The tax rate remains constant regardless of income levels
  3. The tax rate increases as income increases
  4. There are no taxes imposed on personal income

Answer: 3. The tax rate increases as income increases

Question 15. The redistribution function aims to achieve

  1. Economic efficiency and market equilibrium
  2. A balanced budget for the government
  3. An equitable distribution of wealth and income.
  4. Increased consumer spending and investment

Answer: 3. An equitable distribution of wealth and income.

Question 16. Social welfare programs, such as unemployment benefits and food assistance, are examples of

  1. Progressive taxation
  2. Redistribution of income
  3. Government subsidies to businesses
  4. Expansionary fiscal policies

Answer: 2. Redistribution of income

Question 17. One of the challenges in implementing the redistribution function is

  1. Balancing the budget and avoiding deficits
  2. Ensuring that all individuals have equal incomes
  3. Overreliance on government intervention in the economy
  4. Ensuring that the redistribution does not discourage work and productivity

Answer: 4. Ensuring that the redistribution does not discourage work and productivity

Question 18. The redistribution function is often a subject of debate due to

  1. Its potential impact on economic growth and investment
  2. Its positive impact on reducing inflation and unemployment
  3. The ease of implementing progressive taxation
  4. Its association with increased government spending on public goods

Answer: 1. Its potential impact on economic growth and investment

Stabilization Function

Question 1. The stabilization function in an economic system refers to

  1. The government’s role in stabilizing prices of essential goods and services.
  2. The process of stabilizing the stock market and financial markets.
  3. The government’s efforts to stabilize the overall economy and counter-economic fluctuations.
  4. The stabilization of exchange rates in international trade.

Answer: 3. The government’s efforts to stabilize the overall economy and counter economic fluctuations.

Explanation:

The- stabilization function in an economic system refers to the efforts to stabilize the overall economy and counter-economic fluctuations. It involves using fiscal and monetary policies to address issues like inflation, unemployment, and economic recessions.

Question 2. During periods of high inflation, the government’s main focus in terms of stabilization function is usually on

  1. Increasing government spending to boost aggregate demand.
  2. Implementing contractionary monetary policies to reduce money supply and control inflation.
  3. Reducing taxes to increase disposable income and boost consumer 4 spending.
  4. Encouraging foreign trade to improve the trade balance.

Answer: 2. Implementing contractionary monetary policies to reduce money supply and control inflation.

Explanation:

During periods of high inflation, the government’s main focus in terms of stabilization function is usually on implementing contractionary monetary policies. These policies aim to reduce the money supply, increase interest rates, and control inflationary pressures in the economy.

Question 3. In response to an economic recession, the government can use fiscal. policy to stimulate the economy by

  1. Decreasing government spending and increasing taxes. .
  2. Decreasing taxes and increasing government spending.
  3. Increasing interest rates and reducing government spending.
  4. Decreasing interest rates and reducing government spending.

Answer: 4. Decreasing taxes and increasing government spending.

Explanation:

In response to an economic recession, the government can use expansionary fiscal policy by decreasing taxes and increasing government spending. This approach helps boost aggregate demand and stimulate economic growth during a downturn.

Question 4. The primary goal of the stabilization function is to achieve

  1. A balanced budget for the government.
  2. Maximum economic growth and expansion.
  3. Full employment and price stability.
  4. Increased international trade and exports.

Answer: 3. Full employment and price stability

Explanation:

The primary goal of the stabilization function is to achieve full employment and price stability. This means keeping unemployment levels low while ensuring that inflation and deflation rates are moderate and controlled.

Question 5. Automatic stabilizers in the economy refer to

  1. Government policies that automatically stabilize the stock market during downturns.
  2. Economic factors that automatically offset economic fluctuations without government intervention. (
  3. Government agencies are responsible for regulating prices and wages.
  4. The stabilization of foreign exchange rates in international trade.

Answer: 2. Economic factors that automatically offset economic fluctuations without government intervention.

Explanation:

Automatic stabilizers in the economy refer to economic factors that automatically offset economic fluctuations without the need for government intervention. Examples include progressive taxation and unemployment benefits, which tend to stabilize the economy during economic downturns. ,

Question 6. During periods of economic recession, the government can use fiscal policy to

  1. Increase taxes and reduce government spending to boost private investment.
  2. Increase government spending and reduce taxes to stimulate aggregate demand.
  3. Implement a contractionary monetary policy to control inflation.
  4. Increase interest rates to encourage savings.

Answer: 2. Increase government spending and reduce taxes to stimulate aggregate demand.

Explanation:

The primary goal of the stabilization function is to achieve full employment and price stability. This means keeping unemployment levels low while ensuring that inflation and deflation rates are moderate and controlled.

Question 7. Automatic stabilizers in the economy refer to

  1. Government policies that automatically stabilize the stock market ‘ during downturns.
  2. Economic factors that automatically offset economic fluctuations without government intervention.
  3. Government agencies are responsible for regulating prices and wages.
  4. The stabilization of foreign exchange rates in international trade.

Answer: 2. Economic factors that automatically offset economic fluctuations without government intervention.

Explanation:

Automatic stabilizers in the economy refer to economic factors that automatically offset economic fluctuations without the need for government intervention. Examples include progressive taxation and unemployment benefits, which tend to stabilize the economy during economic downturns.

Question 8. During periods of economic recession, the government can use fiscal policy to

  1. Increase taxes and reduce government spending to boost private investment.
  2. Increase government spending and reduce taxes to stimulate aggregate demand.
  3. Implement a contractionary monetary policy to control inflation.
  4. Increase interest rates to encourage savings.

Answer: 2. Increase government spending and reduce taxes to stimulate aggregate demand.

Question 9. The stabilization function in economics refers to

  1. The government’s role in redistributing wealth and income
  2. The process of controlling inflation and unemployment in the economy
  3. The allocation of resources among different sectors of the economy
  4. The promotion of international trade and exports

Answer: 2. The process of controlling inflation and unemployment in the economy

Question 10. The primary goal of the stabilization function is to

  1. Maximize profits for businesses
  2. Achieve long-term economic growth and development
  3. Maintain price stability and full employment
  4. Increase government revenue through taxation

Answer: 3. Maintain price stability and full employment

Question 11. Which of the following is an example of the stabilization function in action?

  1. The government implementing progressive taxation to reduce income inequality
  2. A central bank adjusting interest rates to control inflation
  3. A government investing in infrastructure development
  4. The implementation of tariffs to protect domestic industries

Answer: 2. A central bank adjusting interest rates to control inflation

Question 12. In the context of the stabilization function, “price stability” refers to

  1. The constant level of prices for goods and services
  2. A situation where prices are increasing moderately over time
  3. The absence of inflation or deflation in the economy
  4. A situation where prices are determined by market forces without government intervention

Answer:  3. The absence of inflation or deflation in the economy

Question 13. The stabilization function aims to achieve

  1. A balanced budget for the government
  2. Full employment and stable economic growth
  3. An equitable distribution of wealth and income
  4. Increased consumer spending and investment

Answer:  2. Full employment and stable economic growth

Question 14. Monetary policy, such as changes in interest rates and open market operations, is an example of

  1. Fiscal policy to stabilize the economy
  2. Redistribution of income to reduce poverty
  3. The stabilization function in action
  4. Supply-side policies to boost economic growth

Answer: 3. The stabilization function in action

Question 15. One of the challenges in implementing the stabilization function is

  1. Achieving a balance between inflation and unemployment
  2. Ensuring that all individuals have equal access to economic opportunities
  3. Overreliance on government intervention in the economy
  4. Managing fluctuations in the exchange rate

Answer: 1. Achieving a balance between inflation and unemployment

Question 16. The stabilization function is often a subject of debate due to

  1. Its potential impact on income distribution and wealth inequality
  2. The complexity of implementing monetary and fiscal policies
  3. The conflict between short-term stabilization goals and long-term economic growth
  4. The association with reduced government spending on public goods

Answer: 3. The conflict between short-term stabilization goals and long-term economic growth

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