Question

Long answer type questions:
What is government budget? Explain how taxes and subsidies can be used to influence allocation of resources.

Answer 1

Government budget is a statement of the estimates of the government receipts and government expenditure during the period of the financial year. It reveals fiscal policy of the government, focusing on growth and stability of the economy.

One of the objectives of a government is to maintain the optimum allocation of resources. Inflationary gap or excess demand is corrected by reducing subsidies and increasing the taxes. Whereas, deflationary gap or deficient gap is corrected by increasing the subsidies and reducing the taxes.