Fiscal Policy & Budget MCQs for UPSC Prelims

85 practice questions on Fiscal Policy & Budget from the Economy section of the UPSC Prelims syllabus. 85 come with a written explanation and 23 are actual previous year questions. Try the sample set below - the answer stays hidden until you ask for it.

16 Easy 46 Medium 23 Hard 23 from past papers

Sample questions

Q1
Previous year question hard

What is the difference between "vote-on-account" and "interim budget"? 1. The provision of a "vote-on-account" is used by a regular Government while an "interim budget" is a provision used by a caretaker Government. 2. A "vote-on-account" only deals with the expenditure in Government's budget, while an "interim budget" includes both expenditure and receipts. Which of the statements given above is/are correct?

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: B - 2 only

Correct answer (b) 2 only. A vote-on-account is simply parliamentary approval to draw funds to meet expenditure for a part of the year and can be used by any government, regular or caretaker, so statement 1, which restricts it to a regular government, is wrong. The key distinction is in scope: a vote-on-account deals only with the expenditure side, while an interim budget is a complete set of accounts presenting both expenditure and receipts, making statement 2 correct. Options (a), (c) and (d) are therefore wrong.

Q2
Previous year question medium

With reference to Union Budget, which of the following is/are covered under Non-Plan expenditure? 1. Defence expenditure 2. Interest payments 3. Salaries and pensions 4. Subsidies Select the correct answer using the code given below.

  1. A 1 only
  2. B 2 and 3 only
  3. C 1, 2, 3 and 4
  4. D None
Show answer and explanation

Correct answer: C - 1, 2, 3 and 4

Under the now-discontinued Plan/Non-Plan classification of the Union Budget, Non-Plan expenditure covered routine and committed spending: defence expenditure, interest payments on borrowings, salaries and pensions, and subsidies all fell under it. Since statements 1, 2, 3 and 4 are all Non-Plan items, the answer is 1, 2, 3 and 4.

Q3
Previous year question medium

Which one of the following is likely to be the most inflationary in its effects?

  1. A Repayment of public debt
  2. B Borrowing from the public to finance a budget deficit
  3. C Borrowing from the banks to finance a budget deficit
  4. D Creation of new money to finance a budget deficit
Show answer and explanation

Correct answer: D - Creation of new money to finance a budget deficit

Printing or creating fresh money to finance a deficit directly expands the money supply without a matching rise in output, making it the most inflationary option. Repaying public debt actually returns money to lenders and is not inflationary in the same way. Borrowing from the public transfers existing purchasing power rather than creating new money. Borrowing from banks can be mildly expansionary but is less inflationary than monetisation. Hence creation of new money is the most inflationary.

Q4
Previous year question medium

Suppose the revenue expenditure is Rs. 80,000 crores and the revenue receipts of the Government are Rs. 60,000 crores. The Government budget also shows borrowings of Rs. 10,000 crores and interest payments of Rs. 6,000 crores. Which of the following statements are correct? I. Revenue deficit is Rs. 20,000 crores. II. Fiscal deficit is Rs. 10,000 crores. III. Primary deficit is Rs. 4,000 crores. Select the correct answer using the code given below.

  1. A I and II only
  2. B II and III only
  3. C I and III only
  4. D I, II and III
Show answer and explanation

Correct answer: D - I, II and III

Revenue deficit is revenue expenditure minus revenue receipts, that is 80,000 minus 60,000 equals 20,000 crores, so statement I is correct. Fiscal deficit equals total borrowings, which is given as 10,000 crores, so statement II is correct. Primary deficit equals fiscal deficit minus interest payments, that is 10,000 minus 6,000 equals 4,000 crores, so statement III is correct, making all three right.

Q5
Previous year question medium

Consider the following statements : I. Capital receipts create a liability or cause a reduction in the assets of the Government. II. Borrowings and disinvestment are capital receipts. III. Interest received on loans creates a liability of the Government. Which of the statements given above are correct?

  1. A I and II only
  2. B II and III only
  3. C I and III only
  4. D I, II and III
Show answer and explanation

Correct answer: A - I and II only

Capital receipts by definition either create a liability (borrowings) or reduce assets (disinvestment, recovery of loans), so statement I is correct and the examples in statement II fit perfectly. Interest received on loans is a revenue receipt that adds to government income and creates no liability, so statement III is wrong. Therefore only I and II are correct.

Q6
Previous year question medium

With reference to the Indian economy, consider the following statements: 1. A share of the household financial savings goes towards government borrowings. 2. Dated securities issued at market-related rates in auctions form a large component of internal debt. Which of the above statements is/are correct?

  1. A 1 only
  2. B 2 only
  3. C Both 1 and 2
  4. D Neither 1 nor 2
Show answer and explanation

Correct answer: C - Both 1 and 2

Households park savings in instruments like bank deposits, small savings and government bonds, a part of which finances the government's borrowing programme, so statement 1 is correct. Dated government securities sold through RBI auctions at market-determined yields indeed make up the largest chunk of the Centre's internal debt, so statement 2 is correct. Both statements are accurate.

Q7
Previous year question medium

There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit? 1. Reducing revenue expenditure 2. Introducing new welfare schemes 3. Rationalizing subsidies 4. Expanding industries Select the correct answer using the code given below.

  1. A 1 and 3 only
  2. B 2 and 3 only
  3. C 1 only
  4. D 1, 2, 3 and 4
Show answer and explanation

Correct answer: A - 1 and 3 only

To reduce a persistent budget deficit the government can cut wasteful revenue expenditure (1) and rationalise subsidies (3), both of which lower spending. Introducing new welfare schemes (2) would increase spending and widen the deficit, and expanding industries (4) requires more outlay in the short run, so they do not reduce the deficit. Hence the answer is 1 and 3 only.

Q8
Previous year question hard

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? I. It has recommended grants of Rs. 4,800 crores from the year 2022-23 to the year 2025-26 for incentivizing States to enhance educational outcomes. II. 45% of the net proceeds of Union taxes are to be shared with States. III. Rs. 45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms. IV. It reintroduced tax effort criteria to reward fiscal performance. Select the correct answer using the code given below.

  1. A I, II and III
  2. B I, II and IV
  3. C I, III and IV
  4. D II, III and IV
Show answer and explanation

Correct answer: C - I, III and IV

The 15th Finance Commission recommended Rs. 4,800 crores for educational outcomes, Rs. 45,000 crores as performance-based incentive for agricultural reforms, and reintroduced a tax-effort criterion to reward fiscal performance, making statements I, III and IV correct. Statement II is wrong because the Commission recommended a vertical devolution of 41% of net Union tax proceeds, not 45%. Hence I, III and IV are correct.

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