Consider the following statements regarding the "Fiscal Deficit" and "Government Debt": 1. Fiscal deficits have no impact on the stock of government debt. 2. Fiscal deficit is a flow variable, while government debt is a stock variable. 3. Interest payments on accumulated debt are excluded from the current fiscal deficit. Which of the statements given above is/are correct?

The correct option is 2 only Explanation In macroeconomics, variables are classified as either flow or stock based on the dimension of time. A flow variable is measured over an interval of time, whereas a stock variable is measured at a specific point in time. Public finance distinguishes between the annual borrowing requirement (deficit) and the total accumulated liability (debt). Statement-wise Analysis - Statement 1 is Incorrect: Fiscal deficit represents the total borrowing requirement of the government during a specific financial year. Since it is measured over a period (one year), it is a flow variable. Government debt (or public debt) represents the total outstanding liabilities of the government at a specific date. Since it is measured at a particular point in time, it is a stock variable. - Statement 2 is Correct: There is a direct relationship between fiscal deficit and government debt. The fiscal deficit of a current year represents the addition to the government's total debt. Persistent fiscal deficits lead to an accumulation of debt, thereby increasing the stock of government debt over time. - Statement 3 is Incorrect: Fiscal deficit is calculated as Total Expenditure minus Total Receipts (excluding borrowings). Interest payments are a component of Revenue Expenditure; therefore, they are included in the fiscal deficit. It is the Primary Deficit that is defined as Fiscal Deficit minus Interest Payments. Key Takeaway Fiscal Deficit includes interest payments on past debt, whereas Primary Deficit excludes them to indicate the borrowing requirement needed solely for current year expenditures and revenues.

NCERT Class 12 Economics — Chapter 7: Government Budget and the Economy

mcqmedium

Consider the following statements regarding the "Fiscal Deficit" and "Government Debt":

Fiscal deficits have no impact on the stock of government debt.
Fiscal deficit is a flow variable, while government debt is a stock variable.
Interest payments on accumulated debt are excluded from the current fiscal deficit.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 3 only
B1, 2 and 3
C2 only
D1 only

Did you get this right?

Solution

The correct option is

2 only

Explanation

In macroeconomics, variables are classified as either flow or stock based on the dimension of time. A flow variable is measured over an interval of time, whereas a stock variable is measured at a specific point in time. Public finance distinguishes between the annual borrowing requirement (deficit) and the total accumulated liability (debt).

Statement-wise Analysis

Statement 1 is Incorrect: Fiscal deficit represents the total borrowing requirement of the government during a specific financial year. Since it is measured over a period (one year), it is a flow variable. Government debt (or public debt) represents the total outstanding liabilities of the government at a specific date. Since it is measured at a particular point in time, it is a stock variable.
Statement 2 is Correct: There is a direct relationship between fiscal deficit and government debt. The fiscal deficit of a current year represents the addition to the government's total debt. Persistent fiscal deficits lead to an accumulation of debt, thereby increasing the stock of government debt over time.
Statement 3 is Incorrect: Fiscal deficit is calculated as Total Expenditure minus Total Receipts (excluding borrowings). Interest payments are a component of Revenue Expenditure; therefore, they are included in the fiscal deficit. It is the Primary Deficit that is defined as Fiscal Deficit minus Interest Payments.

Key Takeaway
Fiscal Deficit includes interest payments on past debt, whereas Primary Deficit excludes them to indicate the borrowing requirement needed solely for current year expenditures and revenues.

Your note

More from Chapter 7: Government Budget and the Economy

Consider the following statements regarding the "Annual Financial Statement" in India: 1. It is a statutory requirement under the Fiscal Responsibility and Budget Management Act, not the Constitution. 2. It includes estimates for the coming financial year. 3. It distinguishes between the revenue account and the capital account. Which of the statements given above is/are correct?

medium

With reference to the "Allocation Function" of the government budget, consider the following statements: 1. It addresses the provision of public goods that cannot be provided effectively by the market mechanism. 2. Public goods are characterized by being rivalrous in consumption and excludable in nature. 3. The "free-rider" problem is easily solved by charging a user fee for public goods. Which of the statements given above is/are correct?

medium

Consider the following statements regarding "Public Provision" and "Public Production": 1. Public provision implies that goods are financed through the budget and used without direct payment. 2. Goods provided by the government must necessarily be produced directly by the government. 3. Public goods may be produced by the private sector. Which of the statements given above is/are correct?

medium

Consider the following statements regarding "Capital Receipts": 1. Recovery of loans is considered a revenue receipt. 2. Capital receipts either create a liability or reduce the financial assets of the government. 3. Market borrowings are considered non-debt creating capital receipts. Which of the statements given above is/are correct?

hard

Consider the following statements regarding "Revenue Expenditure": 1. It includes expenditure that does not result in the creation of assets. 2. Interest payments on debt are classified as capital expenditure. 3. Grants given to state governments are treated as revenue expenditure even if they are meant for the creation of assets. Which of the statements given above is/are correct?

medium

Keep practising Chapter 7: Government Budget and the Economy

Work through every question from this NCERT chapter.

Browse all NCERT Class 12 Economics chapters

The correct option is

2 only

Explanation

Statement-wise Analysis

Statement 1 is Incorrect: Fiscal deficit represents the total borrowing requirement of the government during a specific financial year. Since it is measured over a period (one year), it is a flow variable. Government debt (or public debt) represents the total outstanding liabilities of the government at a specific date. Since it is measured at a particular point in time, it is a stock variable.
Statement 2 is Correct: There is a direct relationship between fiscal deficit and government debt. The fiscal deficit of a current year represents the addition to the government's total debt. Persistent fiscal deficits lead to an accumulation of debt, thereby increasing the stock of government debt over time.
Statement 3 is Incorrect: Fiscal deficit is calculated as Total Expenditure minus Total Receipts (excluding borrowings). Interest payments are a component of Revenue Expenditure; therefore, they are included in the fiscal deficit. It is the Primary Deficit that is defined as Fiscal Deficit minus Interest Payments.