Government budget: Practice Questions

If a government's total tax revenue is less than its total public expenditure in a fiscal year, the government is said to have a:

Under Adam Smith's principles of taxation, the principle of convenience suggests that:

If a government increases public expenditure on infrastructure while keeping tax rates unchanged, resulting in a budget deficit, what is the most likely short-run effect on the price level and real output according to the AS-AD model?

According to Adam Smith's principles of taxation, the principle of economy states that:

Suppose an economy is currently experiencing a deflationary gap. If the government decides to increase both public expenditure and tax revenue by the same amount to maintain a balanced budget, how would this most likely affect the price level and real output in the short run?

The following table shows the estimated government revenue and expenditure of an economy for the next fiscal year:

Revenue Items:
- Salaries Tax: \( \$200 \) billion
- Profits Tax: \( \$160 \) billion
- Land Premium: \( \$90 \) billion
Expenditure Items:
- Education and Research: \( \$120 \) billion
- Social Welfare: \( \$150 \) billion
- Public Infrastructure: \( \$220 \) billion

(a) Based on the data in Table 1, calculate the estimated budget balance. State whether it is a surplus, deficit, or balanced budget. (2 points)

(b) Salaries tax is a direct tax. State ONE other direct tax and ONE indirect tax commonly found in a modern economy. Explain why land premium is typically classified as a non-tax revenue. (2 points)

(c) Explain how a progressive salaries tax system helps to reduce the Gini coefficient of the economy. (2 points)

(d) Suppose the economy is currently operating at its full-employment level. The government decides to increase its expenditure on "Education and Research" by \( \$40 \) billion to enhance human capital, financed by its accumulated fiscal reserves. With the aid of an AS-AD diagram, explain the effect of this policy on the general price level and real output in the long run. (2 points)