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Test your understanding of fiscal functions and Centre-State finance

This practice page covers public finance basics, fiscal functions, budget concepts, Finance Commission, GST, fiscal federalism, and Centre-State financial relations. Attempt all questions first, then review the explanations to lock the concepts properly.

Set 1 · Core Concepts

Questions 1 to 17 focus on public finance basics, fiscal functions, taxes, deficits, and budget concepts.

Question 01
Public finance deals with:
Public finance studies government revenue, public expenditure, borrowing, budgeting, and financial administration.
Question 02
Which is NOT a fiscal function?
The main fiscal functions are allocation, distribution, and stabilization. Production is not listed as a separate fiscal function.
Question 03
Allocation function deals with:
Allocation function means using public policy to direct resources toward socially desirable uses, especially public goods and services.
Question 04
Distribution function aims at:
Distribution function seeks a fairer pattern of income and wealth distribution through taxes, subsidies, and transfers.
Question 05
Stabilization function focuses on:
Stabilization function aims to reduce inflation, unemployment, and cyclical fluctuations to keep the economy stable.
Question 06
Fiscal policy includes:
Fiscal policy works mainly through government taxation, expenditure, borrowing, and budgeting decisions.
Question 07
Which level collects customs duty?
Customs duty is levied and collected by the Union Government because it relates to imports and exports.
Question 08
Income tax is levied by:
Non-agricultural income tax is a Union tax under the constitutional division of taxing powers.
Question 09
Agricultural income tax is levied by:
Agricultural income falls under the States in India’s fiscal framework.
Question 10
Finance Commission is:
The Finance Commission is a constitutional body created under Article 280 of the Constitution.
Question 11
Finance Commission is appointed every:
The President constitutes a Finance Commission normally every five years.
Question 12
Which tax is shared between Centre and States?
GST operates as a shared and coordinated tax system between the Centre and the States.
Question 13
Fiscal deficit indicates:
Fiscal deficit shows how much the government needs to borrow when total expenditure exceeds total non-borrowed receipts.
Question 14
Revenue deficit is:
Revenue deficit arises when the government’s current expenditure is more than its current receipts.
Question 15
Which is a direct tax?
Income tax is a direct tax because the burden falls on the same person on whom it is imposed.
Question 16
Which is an indirect tax?
GST is an indirect tax because its burden can be shifted to consumers through prices.
Question 17
Budget is:
A budget is the government’s financial plan for the coming period, generally one financial year.

Set 2 · Application and Structure

Questions 18 to 34 focus on public goods, fiscal imbalance, GST structure, expenditure types, deficit measures, and fiscal discipline.

Question 18
Allocation function includes:
Allocation function covers spending decisions that direct resources toward public goods, merit goods, and socially desired uses.
Question 19
Which is a merit good?
Education is a merit good because it benefits both the individual and society, so government supports its provision.
Question 20
Which is a public good?
National defence is a classic public good because it is non-rival and non-excludable.
Question 21
Vertical imbalance refers to:
Vertical imbalance means mismatch between revenue powers and expenditure responsibilities of different levels of government.
Question 22
Horizontal imbalance refers to:
Horizontal imbalance means fiscal differences among states, such as revenue capacity and expenditure needs.
Question 23
GST is:
GST in India is a dual model involving Central GST and State GST, with IGST for inter-state transactions.
Question 24
Which body recommends tax sharing?
The Finance Commission recommends how divisible tax revenues should be shared between the Centre and the States.
Question 25
Grants-in-aid are:
Grants-in-aid are transfers that do not have to be repaid and are used to support state finances or specific purposes.
Question 26
Which is a capital receipt?
Borrowings are capital receipts because they create liabilities and are not normal recurring income.
Question 27
Which is revenue expenditure?
Salaries are recurring expenditures for day-to-day administration, so they are revenue expenditure.
Question 28
Which is capital expenditure?
Capital expenditure creates assets or reduces liabilities, such as infrastructure spending.
Question 29
Primary deficit =
Primary deficit removes past debt burden by subtracting interest payments from fiscal deficit.
Question 30
Which improves income equality?
Progressive taxation places relatively higher burden on higher-income groups and supports redistribution.
Question 31
Equal distribution function uses:
Distribution function uses a combination of taxes, subsidies, and transfer payments to reduce inequality.
Question 32
Fiscal policy affects:
Fiscal policy influences demand, investment, jobs, and price conditions across the economy.
Question 33
FRBM Act aims to:
The FRBM Act promotes fiscal discipline by setting targets for deficits and debt management.
Question 34
Which tax is NOT part of GST?
Customs duty continues outside GST, whereas many indirect taxes like VAT and service tax were subsumed into GST.

Set 3 · Higher-Level Understanding

Questions 35 to 50 cover fiscal federalism, devolution, debt, borrowing restrictions, equalisation, and constitutional structure.

Question 35
Allocation function reallocates resources from:
Government uses taxes and spending to shift some resources from private use toward public purposes and collective goods.
Question 36
Stabilization policy controls:
Stabilization policy mainly targets macroeconomic balance, especially inflation and unemployment.
Question 37
Which is NOT a Finance Commission function?
The Finance Commission recommends on devolution and grants. It does not make laws.
Question 38
Which indicates fiscal stress?
A high fiscal deficit often signals pressure on government finances and rising borrowing needs.
Question 39
Fiscal federalism deals with:
Fiscal federalism studies how financial powers and responsibilities are divided across levels of government.
Question 40
Which is NOT a source of state revenue?
Customs duty belongs to the Union, not to the States.
Question 41
Devolution means:
Devolution means transfer of a share of tax revenues from the Centre to the States.
Question 42
Which body manages public debt?
The RBI manages public debt operations on behalf of the government.
Question 43
Borrowing by states is:
State borrowing is allowed, but it is subject to constitutional and fiscal restrictions.
Question 44
Which ensures fiscal discipline?
The FRBM framework is specifically meant to improve fiscal discipline and responsible budgeting.
Question 45
Equalization grants aim at:
Equalization grants help weaker states provide public services more comparably by reducing regional fiscal gaps.
Question 46
Which is NOT fiscal tool?
Interest rate is a monetary policy tool, not a fiscal policy tool.
Question 47
Which tax is progressive?
Income tax is progressive because higher income slabs generally face higher tax rates.
Question 48
Budget deficit arises when:
A deficit arises when total spending is more than available receipts or revenue.
Question 49
Centre-State financial relations are defined in:
Centre-State financial relations are rooted in the Constitution, including Article 280 and the division under Schedule VII.
Question 50
Fiscal policy multiplier works through:
The multiplier effect works when government spending increases income, demand, and further rounds of economic activity.

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Why this MCQ page matters

Fiscal Functions, Centre and State Finance MCQs with answers for sharp chapter-wise revision.

Use this page to check whether you can identify fiscal functions, understand Centre-State tax powers, read budget concepts correctly, and distinguish between revenue, capital, and deficit measures without confusion.

  • Chapter-wise MCQs aligned to Public Finance syllabus
  • Instant checking with explanations after submission
  • Useful for revision, internal tests, and self-practice
  • Best used after reading the notes for the same topic
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