RBI Grade B (DR) General / DEPR · India · Reserve Bank of India
Original practice questions written to the published syllabus · not past papersHow governments raise and spend money, who really bears a tax, and how budgets, fiscal policy and public debt serve development.
In the exams: agricultural economics PhD entrance and fellowship examinations, public finance (present)
How our questions for RBI Grade B General / DEPR spread across the units of Public Finance. Difficulty: 11 easy, 20 medium, 5 hard.
| Government budgets | 10 | |
| Public debt | 7 | |
| Public expenditure | 6 | |
| Fiscal policy for development | 6 | |
| Sources of public revenue | 4 | |
| Tax incidence | 3 |
Choose an answer, then open the working. Each explanation says why the right answer is right and why the others are not.
Tax revenue grows by 15 percent in a year in which nominal GDP grows by 10 percent, including the effect of new tax measures. The tax buoyancy is
B. 1.5
Buoyancy = percentage change in revenue / percentage change in GDP = 15/10 = 1.5. 0.67 inverts the ratio; 5 is the difference; 25 is the sum. Because new measures are included this is buoyancy, not elasticity.
Further reading: Government of India budget documents (definitions of deficit measures)
China's centuries-old agricultural tax was
A. abolished with effect from 1 January 2006
China abolished the agricultural tax from 1 January 2006 as part of a shift toward supporting rural incomes. The 1994 reform was the central-local tax-sharing reform, a different measure.
Further reading: OECD and World Bank reviews of Chinese agricultural policy
A small country faces a given world price of 500 per tonne for its export crop and imposes an export tax of 50 per tonne. The domestic producer price becomes
C. 450, so growers bear the whole tax
A small country cannot change the world price, so the domestic price falls by the full tax to 450 and the burden falls on growers (and factors specific to the crop). Foreign buyers bear some of the tax only if the country has market power.
Further reading: Krueger, Schiff and Valdes (1991)
Which item is revenue (current) expenditure rather than capital expenditure?
D. Interest payments on public debt
Interest is a current cost that creates no asset. Canal construction creates an asset; loans and repayment of principal are capital transactions affecting assets or liabilities.
Further reading: Government of India budget documents (definitions of deficit measures)
A government is choosing between an input subsidy on fertiliser and a decoupled cash transfer of the same fiscal cost to the same farmers. From the standpoint of efficiency, which is generally preferred and why?
B. The decoupled transfer, because it leaves relative prices unchanged and so causes no deadweight loss
A lump-sum transfer has only an income effect; a per-unit subsidy lowers the relative price of fertiliser and induces use whose value is below cost. The subsidy may be defended on other grounds (credit constraints, adoption), but not on pure efficiency. They differ in targeting and incentives.
Further reading: Rosen and Gayer, Public Finance
A government's accounts show: revenue receipts 2,000; non-debt capital receipts (recovery of loans and disinvestment) 100; revenue expenditure 2,600, which includes interest payments of 700 and grants for creation of capital assets of 200; capital expenditure 500; GDP 25,000. What is the fiscal deficit?
D. 1,000, or 4.0 percent of GDP
Total expenditure = 2,600 + 500 = 3,100. Fiscal deficit = 3,100 - (2,000 + 100) = 1,000, i.e. 1,000/25,000 = 4 percent. Forgetting the non-debt capital receipts gives 1,100; 600 is the revenue deficit; 300 is the primary deficit.
Further reading: Government of India budget documents (definitions of deficit measures)
The fiscal deficit of a government is equal to
D. its total borrowing requirement
Fiscal deficit = total expenditure minus revenue and non-debt capital receipts, which is what must be borrowed. The revenue-account gap is the revenue deficit; subtracting interest gives the primary deficit; central-bank financing is the monetised deficit. It is measured for the financial year.
Further reading: Government of India budget documents (definitions of deficit measures)
Why is a value added tax with input credit generally preferred to a cascading turnover tax?
C. It taxes only value added, so taxes paid on inputs are not taxed again and firms need not integrate
A turnover tax taxes gross sales at every stage, compounding tax on tax and rewarding vertical integration. VAT is collected at each stage but credits input tax. It need not raise less revenue, and it is not purely a retail tax.
Further reading: Musgrave and Musgrave, Public Finance in Theory and Practice
India's Goods and Services Tax was introduced from 1 July 2017. Which feature best describes its structure?
A. A dual GST levied concurrently by the Union and states, with a GST Council for joint decisions
The 101st Constitutional Amendment created a dual GST (central and state components) and the GST Council under Article 279A. It is not a single-government tax, and it does not tax agricultural income.
Further reading: Constitution (One Hundred and First Amendment) Act, 2016
Ricardian equivalence, revived by Barro, states that under certain conditions
D. a debt-financed tax cut leaves private spending unchanged, as households save for the implied future taxes
Forward-looking households linked by bequests and without borrowing constraints treat debt as deferred taxes, so private saving rises by the tax cut. Most empirical work finds only partial equivalence.
Further reading: Barro, 'Are Government Bonds Net Wealth?' (1974)
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