Government Revenue and Economic Policies

What distinguishes direct taxes from indirect taxes?

• Direct taxes are paid by individuals on income, while indirect taxes are applied to goods and services.

• Direct taxes can be shifted to others, while indirect taxes cannot.

• Direct taxes are voluntary contributions, while indirect taxes are mandatory.

• Direct taxes are used for financing public services, while indirect taxes are used for defence expenditure.

In a country experiencing a recession with rising unemployment and falling income, the government decides to adopt an expansionary fiscal policy. Which of the following actions would the government most likely take to address the economic downturn?

• Increase taxes and reduce public spending to decrease government debt

• Decrease taxes and increase public spending on infrastructure projects

• Cut interest rates to encourage saving and investment

• Reduce subsidies on essential goods to control inflation

A government allocates funds to two types of expenditure like operating expenditure and development expenditure. In a scenario where the government is focusing on long-term economic growth, which of the following activities would most likely be funded under development expenditure?

• Payment of salaries for civil servants and government employees

• Acquisition of new office equipment for government departments

• Construction of new roads and public infrastructure to improve transport

• Payment of pensions to retired government workers

How can a surplus budget impact the economy during a period of economic growth?

• It can reduce inflation by decreasing government spending

• It can stimulate the economy by increasing government debt

• It can slow down economic growth by cutting taxes and increasing spending

• It can contribute to reducing government debt and stabilizing the economy

The government has noticed that inflation is rising rapidly in the economy, leading to an increase in prices for goods and services. To tackle this problem, the central bank decides to adopt a contractionary monetary policy. Which of the following actions is most likely to be taken by the central bank under this policy?

• Lowering interest rates to encourage borrowing and spending

• Increasing the money supply to stimulate investment

• Raising interest rates to reduce borrowing and decrease demand by consumers.

• Increasing government spending to boost economic demand

The central bank decides to implement a contractionary monetary policy to decrease the money supply in the economy to combat rising inflation. Which of the following tools is the central bank most likely to use to implement this policy?

• Lowering the reserve requirement to increase the amount of money banks can lend

• Selling government bonds to reduce the amount of money in circulation

• Reducing the discount rate to encourage borrowing by commercial banks

• Increasing government spending to boost aggregate demand

A contractionary fiscal policy involves the government increasing its spending to stimulate economic growth.

• True

• False

A budget deficit occurs when government expenditure exceeds government revenue.

• True

• False

Expansionary monetary policy involves increasing the reserve requirement and raising interest rates to reduce inflation.

• True

• False

Commercial banks provide loan overdrafts, which allow individuals to withdraw more money than they have in their accounts, to encourage saving.

• True

• False