public finance fiscal & monetary policy section 7 MCQ Questions & Answers Detailed Explanation

Answer: (c)

In economics, tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare.

Tax incidence is said to “fall” upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected but on the price elasticity of demand and price elasticity of supply.

A tax on the sale of goods (sales tax, excise tax) will ultimately be paid by either the consumer or the firm based on elasticities, regardless of who the government actually levies the tax on. If the consumer ultimately pays the tax, it means that the tax incidence falls on the consumer.

If the firm ultimately pays the tax, it means that the tax incidence ultimately falls on the firm.

Answer: (b)

In economics, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure.

Answer: (b)

Bank rate is an instrument of monetary policy which is the rate at which RBI lends to commercial banks

Answer: (c)

The New Economics Policy was introduced by Vladimir Ilyich Lenin (1870-1924). He was the founder of modern communist Russia. He was the leader of the Soviet Revolution of October 1917.

He liberated the country from the Czars and became Head of its first Communist Government (1917-1924). He dedicated himself to the cause of the workers’ revolution.

Answer: (d)

Objectives of Monetary Policy are:

Stability of external value: Fluctuation in the exchange rate of a currency affects foreign trade and investment.

It is, therefore, important that the rate of exchange is maintained without violent fluctuations. Maintenance of domestic price level: Fluctuation in prices affects investment decisions.

It also leads to increasing income disparities. However, monetary policy alone cannot ensure the maintenance of domestic prices, as several other factors such as erratic monsoons, changes in tastes, fluctuation in world prices etc., affect domestic prices.

Reducing the impact of business cycles (slumps and booms) by manipulation of credit and interest policy. However, economists are not of the same opinion on whether business cycles are primarily caused by monetary factors.

Answer: (b)

An indirect tax is one in which the burden can be shifted to others. The taxpayer is not the tax bearer. The impact and incidence of indirect taxes are on different persons.

Since most of the indirect taxes are not progressive in nature, individuals may not mind paying them. In other words, indirect taxes are generally regressive in nature.

Therefore, individuals would not be de-motivated to work and to save, which may increase investment.