NCERT Solutions for Class 12 Macro Economics Chapter 5 Government Budget and the Economy

Q. Explain the relation between government deficit and government debt.

Ans. A government in order to adjust the government deficit which is created due to borrowings by the government seeks more borrowings. These borrowings create further debt for the government in the form of interest payment. Therefore, increase in deficit will lead to increase in debt.

Q. The fiscal deficit gives the borrowing requirement of the government. Elucidate.

Ans. Fiscal deficit is referred to as the shortfall in governments income as compared to its spending. A high fiscal deficit means that the government is borrowing more money than that it is earning. A higher fiscal deficit creates a burden of loan and interest payment for furture generation.
Fiscal deficit is determined by:
Total Expenditure โ€“ Total Receipts excluding borrowings

Q. Should a current account deficit be a cause for alarm? Explain.

Ans. No, if deficit in current account is offset by the capital account, otherwise such deficit has to be met by following which is a cause for alarm.

(a) Depleting foreign Exchange reserves.
(b) Taking foreign loans
Value: Analytic.

Q. How is a deficit or a surplus on the current account restored?

Ans. Deficit on the current account is restored through the surplus on capital account and surplus on the current account is restored through the deficit on capital account.