Master of Business Administration –

MBA Semester I MBA105/MB0042 –

Managerial Economics – 4 Credits (Book ID 1625) Model Question Paper

Section A Qn 1. Multiple Choice Questions (MCQs)

MB 42 IMPORTANT MCQS AND LONG QUESTIONS

Multiple Choice Questions (MCQ)

ANSWERS ARE GIVEN IN YELLOW MARKS
HIGHLIGHTED

[Please answer all the following questions]

1. The success of any business is based on proper management and adequate
capital investment. Which objective of a firm best explains this?"
a. Demand analysis and forecasting
b. Production and cost analysis
c. Pricing decisions
d. Capital management

2. “Demand is strengthened with a rise in price or weakened with a fall in price”. This is
stated by which exception to the law of demand?
a. Giffen's paradox
b. Veblen's effect
c. Fear of shortage
d. Fear of future rise in price

3. Which of the following method is used for demand forecasting for new products?
a. Economic indicators
b. Opinion survey method
c. Trend projection method
d. Substitute approach

4. is a parallel concept to consumer’s surplus. It is also known as

owner’s surplus.
a. Consumer surplus
b. Producer‟s surplus
c. Elasticity of supply
d. Manufacturer

5. Producer's equilibrium is also known as .

a. Least cost combination
b. Isoquant
c. Long run function
d. Returns to scale

6. do not take the form of cash outlays and as such do not appear in
the books of accounts.
a. Explicit cost
b. Implicit cost
c. Money cost
d. Actual cost

7. A firm selects that which helps to maximise consistent profits.

a. Goal
b. Strategy
c. Alternative course of action
d. Management process

8. Under imperfect conditions, which amongst the following is true?

a. TR will be lower when MR is zero.
b. TR falls when MR becomes negative.
c. AR and MR both decline but, fall in AR will be greater than the fall in MR.
d. The relationship between AR and MR is determined by the gradient of the curve.

9.Which one of the following is the primary characteristics of markets?

a. Existence of sellers and buyers
b. Product differentiation
c. Prevalence of a large number of buyers and sellers
d. Willingness and ability to buy and sell a commodity

10. is a market structure in which a large number of small sellers

sell differentiated products which are close, but not perfect substitutes for one
another.
a. Monopolistic Competition
b. Duopolistic Competition
c. Oligopolistic Competition
d. Bilateral monopolistic Competition
11. Managerial economics is a part of .
a. Microeconomics
b. Macroeconomics
c. Income theory
d. General

12. Expenditure on defense industries is an example of .

a. Foreign investment
b. Induced investment
c. Private investment
d. Public investment

13. Monetary policy along with fiscal policy and lumped together form
the financial policy of the country.
a. Debt management
b. Credit management
c. Administrative policies
d. Budgeting

14. is the rhythmic fluctuations in the aggregate level of economic activity

of a nation.
a. Periodic cycle
b. Business cycle
c. Periodic changes
d. Cyclical oscillations

15. Inflation is caused by a number of factors such as increase in the supply of

money, income, exports, consumption, etc., on the side.
a, Supply
b. Demand
c. Market
d. Economic

16. Which of these is a feature of managerial economics?

a. Managerial economics also gives importance to the study of non-economic
variables having implications on economic performance of the firm. For example, impact
of technology, environmental forces, socio-political and cultural factors, etc.
b. Managerial economics helps in determining the level of output at various
periods, avoiding under or over production.
c. Managerial economics helps in better material management of buying inputs
and controlling inventory level, which cuts down costs of operations.
d. Managerial economics helps the company to set realistic sales targets for
each individual salesman and for the company as a whole.

17. Which of these is a practical application of income elasticity of demand?

a. Helps in determining the rate of growth of the firm
b. Helps in declaration of public utilities
c. Helps in fixing the rate of taxes
d. Helps in determining the terms of trade
18. Which method is based on the use of time series?
a. Opinion survey method
b. Trend projection method
c. Vicarious approach
d. Delphi method

19. When supply of a commodity remains constant and does not change, whatever may be
the change in price, it is said to be absolutely or supply.
a. Relatively inelastic
b. Relatively elastic
c. Perfectly elastic
d. Perfectly inelastic

20. curve is a technique developed in recent years to show the equilibrium of

a producer with two variable factor inputs.
a. Isoquants
b. Isocosts
c. Isotopes
d. Isoproduct

21. The short run is a time period in which:

a. All resources are fixed.
b. The level of output is fixed.
c. The size of the production plant can vary.
d. Some resources are fixed and others are variable.

22. In which model of the firm, do we compare the revenue earned from one additional
unit and cost incurred to produce one additional unit of output?
a. TR and TC approach
b. MR and MC approach
c. Profit-maximisation approach
d. Economist theory

23. 1.External economy is also known as .

2. Risk-bearing capacity of a big firm will be small firm.
a. 1- Pecuniary economy, 2- Greater than
b. 1- Outside economy, 2- Less than
c. 1- Open secret economy, 2- Equal to
d. 1- Localised economy, 2- Negligible compared to

24. In microeconomics, a firm's optimal output is where its marginal revenue its
marginal cost.
a. Exceeds
b. Is less than
c. Equals
d. Unrelated to

25. What is Equilibrium Price?

a. The price at which demand and supply are equal.
b. Price which is determined by the forces of demand and supply in a short period
where demand plays a major role and supply plays a passive role. c. The price which
is determined in the long run.
d. The quantity bought and sold at the equilibrium price.

26. What makes the demand curve of the firm much more elastic?
a. Competition
b. Product differentiation
c. Product discrimination
d. Market structure

27. At which point, an economic unit is maximises its benefits or gains?

a. Ex-ante
b. Ex-post
c. Equilibrium
d. Disequilibrium

28. Which law states that ‘’Supply creates its own demand”?
a. Say‟s law of markets
b. Psychological law of consumption.
c. Fundamental law of consumption.
d. Fundamental law of Demand

29. Which frequent changes would affect the imports, exports and inflow of foreign capital?
a. Neutral money
b. Exchange rate
c. Price
d. Trade cycles

30. is a state of affairs in which the real income consumed or volume of

production per head and the rate of employment are falling.
a. Downswing
b. Contraction
c. Depression
d. Trough

31. When the satisfaction obtained by the is much more than the price he
is paying for the commodity, he will be enjoying a surplus.
a. Consumer
b. Producer
c. Seller
d. Manufacturer

32. In which case if elasticity equal to unity?

a. Relatively inelastic demand
b. Relatively elastic demand
c. Perfectly inelastic demand
d. Unitary elastic demand
33. The relation between the cost and output is technically described as the
.
a. Cost function
b. Output function
c. Cost analysis
d. Production function

34. In the profit-maximisation model, as per the assumption, the firm is managed by
.
a. Proprietor
b. Shareholders
c. Board of directors
d. Owner-entrepreneur

35. is a market with two sellers exercising control over the supply
of commodities.
a. Duopoly
b. Bilateral Monopoly
c. Oligopoly
d. Monopoly

36. Macroeconomics is also known as economics.

a. Summative
b. Income
c. General equilibrium
d. Aggregative

37. Induced investment refers to the .

a. Investment, which is independent of the level of income
b. Investment, which consists of excess of exports over the imports of a country.
c. Investment, which is undertaken by the public authorities like central, state and
local authorities.
d. Investment, which varies with the changes in the level of national income.

38. By raising the reserve requirements, trend can be kept under control. a.
Deflationary
b. Inflationary
c. Debt management
d. Liquidity ratio

39. Which characteristic of business cycle mentioned below stands true?

a. Business cycle is a random fluctuation.
b. Although it is a repetitive feature, it does not have a recognisable pattern.
c. The upward movement is more sudden and violent than the change from upward
to downward.
d. The prosperity phase takes double the time taken by the depression phase.

40. The concept of was first developed by J.M. Keynes, which means „an
excess of anticipated expenditure over available output at a base price‟.
a. Inflationary gap
b. Deflation
c. Stagflation
d. Inflation

41. Popularly, inflation is associated with , which causes a decline in the value of
money.
a. Low prices
b. Low demand
c. High supply
d. High prices

42. Economic evolution is characterised by which of the following factor?

a. Period of prosperity that lasts throughout.
b. Period of debts followed by a period of credits.
c. Period of hyperinflation followed by period of creeping inflation.
d. Period of recession followed by period of revival.

43. 1. The index can be adopted to measure the rate of inflation.

2. What do you term the inflation when the rise in prices is at a rate less than 3%?
a. 1- Consumer price, 2- Creeping inflation
b. 1- Wholesale, 2- Walking inflation
c. 1- Wage, 2- Running inflation
d. 1- Industrial, 2- Hyperinflation

44. The term implies a consciously directed activity with certain

predetermined goals and means to carry them out.
a. Planning
b. Decision
c. Forward planning
d. Decision making

45. Which stage is the law of diminishing returns, with respect to the law of
variable proportions?
a. Stage 1
b. Stage 2
c. Stage 3
d. Stage 4

46. The percentage of total deposits which the bank is required to hold in the form of
cash reserves for meeting the depositors‟ demand for cash is called .
a. Current deposit
b. Cash reserve ratio
c. Cash income ratio
d. Capital's share of income

47. The GNP Deflator acts as factor which is used to convert nominal GNP
into Real GNP.
a. An adjustment
b. A catalytic
c. An estimate
d. An economic index

ANSWER -

48. refers to the aggregate behaviour of the market rather than

mere totalling of all individual supply schedules. Which of them is true?
a. Market supply schedule
b. Supply schedule
c. Supply curve
d. Elasticity of supply

49. Salary to a divisional manager is an example of .

a. Indirect cost
b. Real cost
c. Unreal cost
d. Direct cost

50. Introduction of , leads to control the volume of credit money and

its distribution.
a. Effective central banking
b. Savings through banks
c. Investments through savings
d. Monetisation of economy

51. Consider the following statements:

1. is essentially a process of selecting the best option out of
many alternative opportunities or courses of action that are open to a manager.
2. implies planning in advance. It is associated with deciding the
future course-of-action of a firm.
a. 1-Decision-making, 2-Forward planning
b. 1- Capital management, 2-Theory of games
c. 1- Market structure, 2-Strategic planning
d. 1- Cost analysis, 2- Strategic planning

52. Consider the following statements:

1. Demand basically depends on utility of a .
2. A is a locus of points showing various alternative price-
quantity combinations.
a. 1- Resource, 2- Demand function
b. 1- Goods 2- Demand determinants
c. 1- Product, 2- Demand curve
d. 1- Service, 2- Demand analysis
53. "Consider the following statements with respect methods of demand forecasting.
1. Complete Enumeration Method comes under direct Interview Method.
2. Collective Opinion Method comes under statistical method."
State True or False:
a. 1- False, 2- True
b. 1- False, 2- False
c. 1- True, 2- True
d. 1- True, 2- False

54. The partial equilibrium approach means the of a single commodity will
be determined keeping the prices of other commodities .
a. Price, constant
b. Quantity, variable
c. Quantity, constant
d. Price, variable

55. "1. When a company grows beyond a limit, it is necessary to split it into smaller units.
This is known as .
2. Granting tax-concessions, tax-holidays, tax-exemptions, subsidies are all various
forms of
."
a. 1- Economies of government action, 2- Economies of physical factors.
b. 1- Economies of Disintegration, 2- Economies of information.
c. 1- Economies of concentration, 2- Economies of information.
d. 1- Economies of disintegration, 2- Economies of government action.

56. Identify the features of long run Average Cost (LAC) curves from the following:
1. LAC curve is L shaped.
2. LAC curve is described as the planning curve of the firm.
3. LAC curve is also known as envelope curve.
4. LAC curve should always lies above the minimum point of short run Average Cost (SAC)
curve.
a. 1 & 2
b. 1 & 3
c. 3 & 4
d. 2 & 3

57. "Consider the following statements:

1. A firm is formed, run and managed by an owner, employer or an entrepreneur who is
entitled to enjoy the residual income after making payments to all productive resources
in the form of rent, wages and salaries and interest.
2. A firm is formed, run and managed by an owner, employer or an entrepreneur who has
all the rights to make changes in his organisation which he feels the best."
State True or False:
a. 1- True, 2- True
b. 1- False, 2- False
c. 1- False, 2- True
d. 1- True, 2- False

58. 1. The is determined by the interaction between demand and supply

forces.
2. is the revenue per unit of the commodity sold.
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a. 1- Pricing, 2- Average revenue
b. 1- Demand curve 2- Marginal revenue
c. 1- Market price, 2- Average revenue
d. 1- Revenue, 2- Total revenue

59. "Consider the following statements with respect to features of perfect competition:
1. The market price is flexible over a period of time.
2. The number and size distribution of buyers."
State True or False: a. 1- True, 2- False
b. 1- False, 2- False
c. 1- True, 2- True
d. 1- False, 2- True

60. and are two extreme forms of market situations

a. Perfect competition, monopoly
b. Perfect competition, duopoly
c. Perfect competition, oligopoly
d. Perfect competition,
monopsony

61. "1. is a statistical measure by which changes in prices of the

same articles at different periods are calculated and computed.
2. Percentage of income earned by the landlord in the form of rent out of total
national income is an example of ."
a. 1- Cost analysis, 2- Capitals' share of income
b. 1- Index number, 2- Land's share of income
c. 1- Index number, 2- Capital's share of income
d. 1- Cost analysis, 2- Land's share of income

62. Consider the below mentioned statements with respect to the types of investments:
1. Autonomous investments are income-elastic.
2. Private investments are profit –
elastic. State True or False:
a. 1-True, 2-False
b. 1-True, 2-True
c. 1-False, 2-True
d. 1-False, 2-False

63. "Consider the following statements:

1. The state may have to compulsorily acquire some stocks of controlled commodities
and distribute them through “fair price shops”, known as .
2. implies printing of fresh and new currency notes by
the government by running down the cash balances with the central bank. "
a. 1-Deflation, 2-Deficit Financing
b. 1-Public revenue, 2-Credit control
c. 1-Public Distribution System (PDS), 2-Deficit Financing

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d. 1-Built in stabilisers or automatic stabilisers (BIS), 2-Public debt

64. A capitalist economy is guided by and .

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 a. Demand, pricing
b. Product, revenue
c. Supply, market
d. Competition, profit motive

65. 1. Cyclical fluctuations have become a regular feature of a capitalist system.

2. The economic history of several economies is essentially the history of upswings
and downswings.
State True or False:
a. 1- True, 2- True
b. 1- False, 2- False
c. 1- False, 2- True
d. 1- True, 2- False

66. "1. Which ratio shows the relationship between value of debts and total assets?
2. Stock variable has a reference."
a. 1- Leverage, 2- time
b. 1- Liquidity, 2- quantity
c. 1- Leverage, 2- quantity
d. 1- Liquidity, 2- time

67. "Consider the following statements:

1. Depression is a protracted period in which business activity is far above the
normal level and is extremely high.
2. A business cycle has only two parts - expansion and contraction or prosperity
and depression." State True or False:
a. 1- True, 2- False
b. 1- False, 2- True
c. 1- True, 2- True
d. 1- False, 2- False

DEPRESSION is the first phase of a trade cycle. It is a protracted period in which business
activity is far below the normal level and is extremely low.

68. "1. Which inflation is also known as gallopping inflation? 2.

Which inflation leads to an increase in production?"
a. 1- Demand-pull, 2- Cost-push
b. 1- Hyperinflation, 2- Demand-pull
c. 1- Running, 2- Walking
d. 1- Walking, 2- Hyperinflation

69. "1. When the output is carried beyond the plant capacity resulting in a higher per
unit cost, it leads to .
2. A mismatched demand and supply leading in falling of prices leads to
."
a. 1- Labour diseconomy, 2- Financial diseconomy
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b. 1- Technical diseconomy, 2- Marketing diseconomy
c. 1- Managerial diseconomy, 2- Financial diseconomy
d. 1- Marketing diseconomy, 2- Technical diseconomy

70. 70. "Consider the following statements:

1. Revenue is the income received by the firm.

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2. Revenue depends on the market
price." State True or False:
a. 1- True, 2- True
b. 1- False, 2- False
c. 1- False, 2- True
d. 1- True, 2- False

71. "Consider the following statements with respect to features of managerial economics:
1. It uses various macroeconomic concepts like national income, inflation, deflation,
trade cycles, etc. to understand and adjust its policies to the environment in which the
firm operates.
2. It all depends on the manager’s ability, experience, expertise and intelligence to use
different tools of economic analysis to find out the correct answers to business
problems." State True or False:
a. 1- True, 2- False
b. 1- True, 2- True
c. 1- False, 2- True
d. 1- False, 2- False

72. "Consider the following statements:

1. Recession is a period of time during which the aggregate level of economic
activity starts declining.
2. Inflation is a phase wherein there will be an artificial and temporary prosperity in
an economy."
State True or False:
a. 1- True, 2- False
b. 1- False, 2- True
c. 1- True, 2- True
d. 1- False, 2- False

73. Part A
1. Technical economy
2. Managerial economy
3. Commercial economy
4. Labour economy
Part B
A. Buying and selling of goods on large scale.
B. Impart training to raise skill, efficiency and productivity.
C. Inventory economy D. Delegation of details
a. 1A, 2B, 3C, 4D
b. 1B, 2C, 3D, 4A
c. 1C, 2D, 3A, 4B
d. 1D, 2C, 3B, 4A

74. Match the following:

Part A
1. Average revenue
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2. Marginal revenue

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 3. Revenue
4. Skimming price policy
Part B
A. The system of charging high prices for new products.
B. Revenue per unit of the commodity sold.
C. Additional revenue earned by selling an additional unit of output by the seller.
D. Amount of money which the firm receives by the sale of its output in the market. a.
1B, 2C, 3D, 4A
b. 1B, 2C, 3A, 4D
c. 1A, 2B, 3C, 4D
d. 1D, 2C, 3B, 4A

75. "Consider the following statements with respect to index numbers:

1. The purchasing power of money depends on the level of prices of goods and services to be
purchased.
2. The value of money is directly related with the price level of commodities.
3. Index number helps us to measure only the extent by which the value of money has
changed between two different periods of time and not the value money itself. 4. The cost
price index varies as tastes and preferences of consumers change."
State True or False:
b. Statements 1, 2 & 3 are true.
c. Statements 2, 3 & 4 are true.
d. Statements 1, 2 & 4 are true.
e. Statements 1, 3 & 4 are true.

Section B

Q.2. Define managerial economics and explain its main characteristics.

Answer:-

Managerial economics:-

Managerial economics is a science that deals with the application of various economic theories, principles,
concepts and techniques to business management in order to solve business and management problems. It

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 deals with the practical application of economic theory and methodology in decision-making problems
faced by private, public and non-profit making organisations.

Managerial economics characteristics:-

i. It is more realistic, pragmatic and highlights the practical application of various economic theories to
solve business and management problems.

ii. It is a science of decision-making. It focuses on decision-making process, decision models and decision
variables and their relationships.

iii. It is both conceptual and metric in nature, and it assists the decision maker through precise and evident
measurement of various economic variables and their interrelationships.

iv. It uses various macroeconomic concepts like national income, inflation, deflation, trade cycles, etc. to
understand and adjust its policies to the environment in which the firm operates.

v. It also gives importance to the study of non-economic variables having implications on economic
performance of the firm. For example, impact of technology, environmental forces, socio-political and
cultural factors, etc.

vi. It uses the services of many other related sciences like mathematics, statistics, engineering, accounting,
operation research and psychology to find solutions to business and management problems.

Q.3. Discuss the various exceptions to law of demand.

Answer:-

Exceptions to the law of demand:-

Generally speaking, customers would buy more when price falls in accordance with the law of demand.
Exceptions to law of demand states that with a fall in price, demand also falls and with a rise in price
demand also rises. This can be represented by rising demand curve. In other words, the demand curve
slopes upwards from left to right. It is known as an exceptional demand curve or unusual demand curve.

Figure depicts the exceptional demand curve. It is clear from figure that as price rises from Rs. 4.00 to Rs.
5.00, quantity demanded also expands from 10 units to 20 units.

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 Figure: Exceptional Demand Curve

Q.4. Explain in brief various methods of forecasting demand.

Answer:-

Methods of forecasting demand:-

SURVEY METHODS:-

1. Consumers interview Method: - Under this method, efforts are made to collect the relevant information
directly from the consumers with regard to their future purchase plans.

a) Survey of buyers’ intentions through questionnaire: - Under this method, consumer-buyers are
requested to indicate their preferences and willingness about particular products.

b) Direct Interview Method: - Under this method, customers are directly contacted and interviewed. Direct
and simple questions are asked to them.

i) Complete Enumeration Method: - Under this method, all potential customers are interviewed in a
particular city or a region.

ii) Sample Survey Method: - Under this method, different cross sections of customers that make up the
bulk of the market are carefully chosen.

2. Collective Opinion Method: - Under this method, sales representatives, professional experts, the
market consultants and others are asked to express their considered opinions about the volume of sales
expected in the future.

3. Expert Opinion method: - Under this method, outside experts are appointed. They are supplied with all
kinds of information and statistical data.

4. End-Use Method: - Under this method, the sale of the product under consideration is projected on the
basis of demand surveys of the industries using the given product as an intermediate product.

STATISTICAL METHODS:-

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 i. Trend projection method:- This method is not based on any particular theory, which explains the causes
for the variables to change; it merely assumes that whatever forces contributed to the change in the
recent past will continue to have the same effect. On the basis of time series, it is possible to project the
future sales of a company.
ii. Economic indicators: - Under this method, a few economic indicators become the basis for forecasting
the sales of a company.

Q.5. Explain the determinants of supply.

Answer:-

Determinants of supply:-

i. Natural factors – Favourable natural factors like good climatic conditions and timely, adequate, well
distributed rainfall results in higher production and expansion in supply.

ii. Change in techniques of production – An improvement in techniques of production and use of modern,
highly sophisticated machines and equipments will go a long way in raising the output and expansion in
supply.

iii. Cost of production – Given the market price of a product, if the cost of production rises due to higher
wages, interest and price of inputs, supply decreases.

iv. Prices of related goods – If prices of related goods fall, the seller of a given commodity offers more units
in the market even though, the price of his product has not gone up.

v. Government policy – When the government follows a positive policy, it encourages production in the
private sector. Consequently, supply expands.

vi. Monopoly power – Supply tends to be low, when the market is controlled by monopolists, or a few
sellers as in the case of oligopoly. Generally, supply would be more under competitive conditions.

vii. Number of sellers or firms – Supply would be more when there are a large number of sellers. Similarly,
production and supply tends to be more when production is organised on large scale basis.

viii. Complementary goods – In case of joint demand, the production and sale of one product may lead to
production and sale of other product also.

ix. Discovery of new source of inputs – Discovery of new sources of inputs helps the producers to supply
more at the same price and viceversa.

x. Improvements in transport and communication – This will facilitate free and quick movements of goods
and services from production centres to marketing centres.

xi. Future rise in prices – When sellers anticipate a further rise in price, current supply tends to fall. Opposite
will be the case when the seller expects a fall in price.

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 Q.6. Discuss profit maximising model.

Answer:-

Profit maximising model:-

Profit-maximisation implies earning highest possible amount of profit during a given period of time.

A firm should always give optimum productivity in order to get a huge amount of profit both in the short
run and long run depending upon various factors like internal and external. The short run and long run
objectives should always be balanced. In the short run, a firm is able to make only slight or minor
adjustments in the production process as well as in business conditions. The plant capacity in the short run
is fixed and as such, it can increase its production and sales by intensive utilisation of existing plants and
machineries, having overtime work for the existing staff, etc.

Thus, in the short run, a firm has its own technical and managerial constraints. But in the long run, as there
is plenty of time at the disposal of a firm, it can expand and add to the existing capacities; build new plants;
employ additional workers; etc. to meet the rising demand in the market. Thus, in the long run, a firm will
have adequate time and ample opportunity to make all kinds of adjustments and readjustments in
production process and in its marketing strategies.

Q.7. Explain the general objectives of monetary policy.

Answer:-

General objectives of monetary policy:-

i. Neutral money policy: This objective was in vogue during the days of gold standard. According to this
policy, money is only a technical device having no other role to play.

ii. Price stability: price stability is considered as one of the main objectives of monetary policy in recent
years. It is to be remembered that price stability does not mean that prices of all commodities are kept
constant or fixed over a period of time.

iii. Exchange rate stability: Maintenance of a stable or fixed exchange rate was one of the major objects of
monetary policy for a long time under the gold standard. The stability of national output and internal
price level was considered secondary and subservient to the former.

iv. Control of trade cycles: Operation of trade cycles has become very common in modern economies. one
of the major objectives of monetary authorities to control the operation of trade cycles and ensure
economic stability by effectively regulating total money supply.

v. Full employment: In recent years, full employment has become another major goal of monetary policy all
over the world, especially with the publication of the general theory by Lord Keynes.

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vi. Equilibrium in the balance of payments: This objective has assumed greater importance in the context of
expanding international trade and globalisation. Today, most of the countries are experiencing adverse
balance of payments on account of various reasons.

vii. Rapid economic growth: This is comparatively a recent objective of the monetary policy. Achieving a
higher rate of per capita output and income over a long period of time has become one of the supreme
goals of monetary policies in recent years.

Section C

Q.8. Explain in detail about demand forecasting for new products.

Answer:-

Demand forecasting for new products:-

Demand forecasting for new products means the demand forecasting for a different kind of product, which
is totally different established products. There is no past data or past experience available for any of the
firms.

Professor Joel Dean, however, has suggested a few guidelines for forecasting the demand of new products,
as follows:

a) Evolutionary approach – The demand for the new product may be considered as an outgrowth of an
existing product. For e.g., demand for new Tata Indica, which is a modified version of old Indica can most
effectively be projected based on the sales of the old Indica, the demand for new Pulsar can be forecasted
based on the sales of the old Pulsar.

b) Substitute approach – If the new product developed serves as a substitute for the existing product, the
demand for the new product may be worked out on the basis of ‘market share’. The growths of demand for
all the products have to be worked out on the basis of intelligent forecasts for independent variables that
influence the demand for the substitutes.

c) Opinion poll approach – Under this approach, the potential buyers are directly contacted, or through the
use of samples of the new product, their responses are found out. Finally, these are extrapolated to
forecast the demand for the new product.

22
d) Sales experience approach – Offer the new product for sale in a sample market; say supermarkets or big
bazaars in big cities, which are also big marketing centres. The product may be offered for sale through one
super market and the estimate of sales obtained may be extrapolated to arrive at estimated demand for
the product.

e) Growth curve approach – According to this, the rate of growth and the ultimate level of demand for the
new product are estimated on the basis of the pattern of growth of established products. For e.g., an
Automobile Co., while introducing a new version of a car will study the level of demand for the existing car.

f) Vicarious approach – A firm will survey consumers’ reactions to a new product indirectly by getting in
touch with some specialised and informed dealers who have good knowledge about the market, about the
different varieties of the product already available in the market, the consumers’ preferences, etc. This
helps in making a more efficient estimation of future demand.

Q.9. Define Revenue. Explain in brief the relationship between TR, AR and MR under perfect market
conditions.

Answer:-

Relationship between TR, AR and MR under perfect market conditions:-

In order to understand the relationship between TR, AR and MR, we can prepare a hypothetical revenue
schedule. Table P. represents a hypothetical revenue schedule that shows the relationship between TR, AR
and MR.

Table P: Hypothetical Revenue Schedule

Number of Units sold TR (Rs.) AR (Rs.) MR (Rs.)

1 10 10 --

2 18 9 8

3 24 8 6

4 28 7 4

5 30 6 2

6 30 5 0

7 28 4 -2

From the table, it is clear that:

i. MR falls as more units are sold.

ii. TR increases as more units are sold but at a diminishing rate.

23
iii. TR is the highest when MR is zero.
iv. TR falls when MR becomes negative.
v. AR and MR both fall, but fall in MR is greater than AR i.e., MR falls more steeply than AR.

Under perfect competition, an individual firm by its own action cannot influence the market price. The
market price is determined by the interaction between demand and supply forces. A firm can sell any
amount of goods at the existing market prices. Hence, the TR of the firm would increase proportionately
with the output offered for sale. When the total revenue increases in direct proportion to the sale of
output, the AR would remain constant. As the good’s market price is constant without any variation due to
changes in the units sold by the individual firm, the extra output would fetch proportionate increase in the
revenue. Hence, MR and AR will be equal to each other and remain constant. This will be equal to price.

Table Q. shows revenue comparison chart under perfect market conditions. Figure P. shows a graphical
representation of the data in table P.

Table Q: Revenue Comparison Chart under Perfect Market

Number of Units sold Price per Unit Rs. 8.00

AR TR MR

1 8 8 8

2 8 16 8

3 8 24 8

4 8 32 8

5 8 40 8

6 8 48 8

Figure : Price Graph under Perfect Market

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 Under perfect market conditions, the AR curve will be a horizontal straight line and parallel to OX axis. This
is because a firm has to sell its product at the constant existing market price. The MR curve also coincides
with the AR curve. This is because additional units are sold at the same constant price in the market.

Q.10. Discuss the practical application of Price elasticity and Income elasticity of demand.

Answer:-

Practical application of Price elasticity:-

i. Production planning – It helps a producer to decide about the volume of production. If the demand for his
products is inelastic, specific quantities can be produced while he has to produce different quantities, if
the demand is elastic.

ii. Helps in fixing the prices of different goods – It helps a producer to fix the price of his product. If the
demand for his product is inelastic, he can fix a higher price and if the demand is elastic, he has to charge a
lower price.

iii. Helps in fixing the rewards for factor inputs – Factor rewards refer to the price paid for their services in
the production process. It helps the producer to determine the rewards for factors of production.

iv. Helps in determining the foreign exchange rates – Exchange rate refers to the rate at which currency of
one country is converted in to the currency of another country. It helps in the determination of the rate of
exchange between the currencies of two different nations.

v. Helps in determining the terms of trade – it is the basis for deciding the ‘terms of trade’ between two
nations. The terms of trade implies the rate at which the domestic goods are exchanged for foreign goods.

vi. Helps in fixing the rate of taxes – Taxes refer to the compulsory payment made by a citizen to the
government periodically without expecting any direct return benefit from it. It helps the Finance Minister
to formulate sound taxation policy of the country.

vii. Helps in declaration of public utilities – Public utilities are those institutions which provide certain
essential goods to the general public at economical prices. The government may declare a particular
industry as ‘public utility’ or nationalise it, if the demand for its products is inelastic.

viii. Poverty in the midst of plenty – The concept explains the paradox of poverty in the midst of plenty. A
bumper crop of rice or wheat, instead of bringing prosperity to farmers, may actually bring poverty to
them because the demand for rice and wheat is inelastic.

Practical application of Income elasticity of demand:-

i. Helps in determining the rate of growth of the firm – If the growth rate of the economy and income
growth of the people is reasonably forecasted, in that case, it is possible to predict expected increase in
the sales of a firm and vice-versa.

25
ii. Helps in the demand forecasting of a firm – It can be used in estimating future demand provided that the
rate of increase in income and the Ey for the products are known. Thus, it helps in demand forecasting
activities of a firm.

iii. Helps in production planning and marketing – The knowledge of Ey is essential for production planning,
formulating marketing strategy, deciding advertising expenditure and nature of distribution channel, etc.
in the long run.

iv. Helps in ensuring stability in production – Proper estimation of different degrees of income elasticity of
demand for different types of products helps in avoiding over-production or under production of a firm.
One should also know whether rise or fall in income is permanent or temporary.

v. Helps in estimating construction of houses – The rate of growth in incomes of the people also helps in
housing programmes in a country. Thus, it helps a lot in managerial decisions of a firm.

Q.11. Discuss any two law of returns to scale with example.

Answer:-

Constant returns to scale:-

Constant returns to scale is operating when all factor inputs [scale] are increased in a given proportion
leading to an equi-proportional increase in output. When the quantity of all inputs is increased by 10%,
and output also increases exactly by 10%, then we say that constant returns to scale are operating. Figure
a. depicts a graph for constant returns to scale. In the figure, it is clear that the successive isoquant curves
are equidistant from each other along the scale line OP. It indicates that as the producer increases the
quantity of both factors X and Y in a given proportion, output also increases in the same proportion.
Economists also describe constant returns to scale as the linear homogeneous production function. It
shows that with constant returns to scale, there will be one input proportion which does not change,
whatever be the level of output.

Figure a: Constant Returns to Scale

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 Causes for constant returns to scale: - In case of constant returns to scale, the various internal and external
economies of scale are neutralized by internal and external diseconomies. Thus, when both internal and
external economies and diseconomies are exactly balanced with each other, constant returns to scale will
operate.

Diminishing returns to scale:-

Diminishing returns to scale is operating when output increases less than proportionately when compared
to the quantity of inputs used in the production process. For example, when the quantity of all inputs are
increased by 10%, and output increases by 5%, then we say that diminishing returns to scale is operating.

Figure b. depicts the diminishing return to scales. In the figure, it is clear that the distance between each
successive isoquant curve is progressively increasing along the scale line OP. It indicates that as the
producer is increasing the quantity of both factors X and Y, in a given proportion, output increases less than
proportionately. Thus, the law of diminishing returns to scale is operating.

Figure b: Diminishing Returns to Scale

Causes for diminishing returns to scale

Diminishing Returns to Scale operate due to the following reasons:

i. Emergence of difficulties in co-ordination and control.

ii. Difficulty in effective and better supervision.
iii. Delays in management decisions.
iv. Inefficient and mismanagement due to overgrowth and expansion of the firm.
v. Productivity and efficiency declining unavoidably after a point.

Q1 “Most of the firms spend considerable amounts of money on advertisement”.

27
(Explain advertising elasticity of demand and its practical applications in this context. , Explanation of
advertising elasticity of demand , Explanation of practical applications)
Answer.

Explanation of advertising elasticity of demand

Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change
in the price or non-price determinant of a commodity. It refers to the capacity of demand either to stretch or
shrink to a given change in price or non-price determinant. Advertising or promotional elasticity of demand
Most of the firms, in the present marketing conditions, spend considerable amounts of money on advertisement
and other such sales promotional activities with the object of promoting its sales. Advertising elasticity refers
to the responsiveness of demand or sales to change in advertising or other promotional expenses. The formula
to calculate the advertising elasticity is as follows:

Original sales = 10,000 units Original advertisement expenditure = 800-00

New sales = 50,000 units New advertisement expenditure = 2000-00
In the above example, advertising elasticity of demand is 1.67. It implies that for every one time increase in
advertising expenditure, the sales would go up 1.67 times. Thus, Ea is more than one.

Practical application of advertising elasticity of demand

The study of advertising elasticity of demand is of paramount importance to a firm in recent years because of
fierce competition. Few examples on the practical application of advertising elasticity of demand are as
follows:
1. Helps in determining the level of prices – The level of prices fixed by one firm for its product would depend
on the amount of advertisement expenditure incurred by it in the market.
2. Helps in formulating appropriate sales promotional strategy – The volume of advertisement expenditure
also throw light on the sales promotional strategies adopted by a firm to increase its total sales in the market.
Thus, it helps a firm to stimulate its total sales in the market.
3. Helps in manipulating the sales – It is useful in determining the optimum level of sales in the market. This
is because the sales made by one firm would also depend on the total amount of money spent onsales promotion
of other firms in the market

Q2 Explain production function in detail.

(Explanation of production function, Types, Uses)
Answer.

The term “production” means transformation of physical “inputs” into physical “outputs”.

Production function
The entire theory of production centres revolves around the concept of production function. A “production
function” expresses the technological or engineering relationship between physical quantity of inputs
employed and physical quantity of outputs obtained by a firm. It specifies a flow of output resulting from a
flow of inputs during a specified period of time. It may be in the form of a table, a graph or an equation
specifying maximum output rate from a given amount of inputs used. As it relates inputs to outputs, it is also
called “input-output relation.” The production is purely physical in nature and is determined by the quantum
of technology, availability of equipments, labour, raw materials, etc. employed by a firm.

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A production function can be represented in the form of a mathematical model or equation as Q = f (L, N,
K….etc) where Q stands for quantity of output per unit of time and L, N, K etc are the various factor inputs
like land, capital, labour, etc which are used in the production of output. The rate of output Q is thus, a function
of the factor inputs L, N, K etc, employed by the firm per unit of time.

It is necessary to note that production function is assumed to be a continuous function, i.e. it is assumed that a
change in any of the variable factors produces corresponding changes in the output. Generally speaking, there
are two types of production functions. They are as follows:
1. Short run production function – In this case, the producer will keep all fixed factors as constant and change
only a few variable factor inputs. In the short run, we come across two kinds of production functions:
 Quantities of all inputs both fixed and variable will be kept constant and only one variable input will
be varied, for example, law of variable proportions.
 Quantities of all factor inputs are kept constant and only two variable factor inputs are varied, for
example, iso-quants and iso-cost curves.
2. Long run production function – In this case, the producer will vary the quantities of all factor inputs, both
fixed as well as variable in the same proportion, for example, the laws of returns to scale. Each firm has its
own production function which is determined by the state of technology, managerial ability, organisational
skills, etc of a firm. It may be in the following manner:
1. The quantity of inputs may be reduced while the quantity of output may remain same.
2. The quantity of inputs may be reduced while the quantity of output may increase.
3. The quantity of inputs may be kept constant while the quantity of output may increase.
If there are any improvements in the firm, the old production function is disturbed and a new one takes its
place.
Uses of production function
Though production function may appear as highly abstract and unrealistic, in reality, it is both logical and
useful. It is of immense utility to the managers and executives in the decision making process at the firm level.
There are several possible combinations of inputs and, decision makers have to choose the most appropriate
among them. The following are some of the important uses of production function:
1. It can be used to calculate or work out the least cost input combination for a given output or the maximum
output-input combination for a given cost.
2. It is useful in working out an optimal and economic combination of inputs for getting a certain level of
output. The utility of employing a unit of variable factor input in the production process can be better judged
with the help of production function. Additional employment of a variable factor input is desirable only when
the marginal revenue productivity of that variable factor input is greater than or equal to cost of employing it
in an organisation.
3. Production function also helps in making long run decisions. If returns to scale are increasing, it is wise to
employ more factor units and increase production. If returns to scale are diminishing, it is unwise to employ
more factor inputs & increase production. Managers will be indifferent whether to increase or decrease
production, if production is subject to constant returns to scale. Thus, production function helps both in the
short run and long run decision - making process.

Q3 Explain Marris’ Growth Maximisation Model in detail.

(Explanation of the model, Constraints, Demerits)
Constraints
Answer.
Marris’ Growth Maximisation Model
Marris points out that a firm has to maximise its balanced growth rate over a period of time. Marris assumes
that the ownership and control of the firm is in the hands of two groups of people, i.e., owners and managers.
He further points out that both of them have two distinctive goals. Managers have a utility function in which
the amount of salary, status, position, power, prestige, security of job, etc., are the most important variables

29
whereas, owners are more concerned about the size of output, volume of profits, market share, sales
maximisation, etc.
Utility function of the owners and that of the managers are expressed in the following manner –
Uo = f [size of output, market share, volume of profit, capital, public esteem etc.] Um = f [salaries, power,
status, prestige, job security, etc.] Where, Uo is the utility function of owner and Um is the utility function of
managers.
Marris notes that the realisation of these two functions would depend on the size of the firm. Larger the firm,
greater would be the realisation of these functions and vice-versa.
Marris identifies two constraints in the rate of growth of a firm as follows:
1. There is a limit up to which the output of a firm can be increased more economically, limit to manage the
firm efficiently, limit to employ highly qualified and experienced managers, limit to research, development
and innovation, etc.
2. The ambition of job security puts a limit to the growth rate of the firm itself, deliberately. If growth reaches
the maximum, then there would be no opportunity to expand further and then the managers may lose their
jobs. Rapid growth and financial soundness should go together. Managers hesitate to take unwanted risks and
uncertainties in the organisation at the cost of their jobs. They would like to avoid risky investment projects,
concentrate on generating more internal funds and invest more resources on only those products and services
which bring more profits. Hence, managers would like to ensure their job security through adoption of a
cautious and prudent financial policy.

Demerits
There are some demerits of Marris’ growth maximisation model. They are as follows:
1. It is doubtful whether both managers and owners would maximise their utility functions simultaneously,
always.
2. The assumption of constant price and production costs are not correct.
3. It is difficult to achieve both growth maximisation and profit maximization together.
Thus, Marris’ growth maximisation model also has some drawbacks.

Q4 Explain Price –output determination under monopoly.

(Explanation, Assumptions)
Answer.
Price – output determination under monopoly
Assumptions

 The monopoly firm aims at maximising its total profit.

 It is completely free from government controls.
 It charges
 a single and uniform high price to all customers.
It is necessary to note that the price output analysis and equilibrium of the firm and industry is one and the
same under monopoly.
As output and supply are under the effective control of the monopolist, the market forces of demand and supply
do not work freely in the determination of equilibrium price and output in case of the monopoly market. While
fixing the price and output, the monopoly firm generally considers the following important aspects:
1. The monopolist can either fix the price of his/her product or its supply. The price and control of the supply
cannot be fixed simultaneously. The price of the product maybe fixed and supply can be determined by the
demand conditions, or the output maybe fixed and leaves the price to be determined by the demand conditions.
2. It would be more beneficial to the monopolist to fix the price of the product rather than fixing the supply,
because it would be difficult to estimate the accurate demand and elasticity of demand for the products.
3. While determining the price, the monopolist has to consider the conditions of demand, cost of the product,
possibility of the emergence of substitutes, potential competition, import possibilities, government control
policies, etc.

30
4. If the demand for the product is inelastic, a relatively higher price can be charged and if the demand is
elastic, a relatively lower price has to be charged.
5. Larger quantities can be sold at lower price or smaller quantities at a higher price.
6. The most reasonable price should be charged which is neither too high nor too low.
7. The most ideal price is that under which the total profit of the monopolist is the highest.

Q5 “Investment is the second important component of effective demand”. Explain investment function.
Explanation
(Types, Determinants)
Answer.

Investment is the second important component of effective demand. In Keynesian economics, the term
investment has a different meaning. In the ordinary language, it refers to financial investment. i.e. purchase of
stocks, shares, debentures, bonds, etc. In this case, there is only transfer of rights or titles from one person to
another. It is an investment by one and disinvestment by another and as such, the value transaction mutually
cancels out each other. They do not add anything to the total stock of capital of the nation.

Types of investment
Keynes speaks of 5 types of investment. They are as follows:
1. Private investment
It is made by private entrepreneurs on the purchase of different capital assets like machinery, plants,
construction of houses and factories, offices, shops, etc. It is influenced by MEC and interest rate. It is
profit – elastic. Profit motive is the basis for private investment. Private entrepreneurs would take up only
those projects which yield quick results and generally those that have a small gestation period.
2. Public investment
It is undertaken by the public authorities like central, state and local authorities. It is made on building
infrastructure of the economy, public utilities and on social goods, for example, expenditure on basic
industries, defense industries, construction of multipurpose river valley projects, etc. In this case, the basic
criterion and motto is social net gain, social welfare and not profits. The principle of maximum social
advantage would govern public expenditure. It is also influenced by social and political considerations.
3. Foreign investment
It consists of excess of exports over the imports of a country. It depends on many factors such as propensity
to export of a given country, foreigners’ capacity to import, prices of exports and imports, state trading and
other factors.
Induced investment
Induced investment is another name for private investment. Investment, which varies with the changes in the
level of national income, is called induced investment. When national income increases, the aggregate demand
and level of consumption of the community also increases. In order to meet this increased demand, investment
has to be stepped up in capital goods sector which finally leads to increase in the production of consumption
goods Therefore, we can say that induced investment is income – elastic i.e., it increases as income increases
and vice-versa.
5. Autonomous investment
Autonomous investment is another name for public investment. The investment, which is independent of
the level of income, is called as autonomous investment. Such investments do not vary with the level of
income. Therefore it is called income-inelastic. It does not depend on changes in the level of income,
consumption, rate of interest or expected profit.

Determinants of investment
Investment decisions taken by entrepreneurs depend upon a number of factors like; interest rate, level of
uncertainty, political environment, rate of growth of population, level of existing stock of capital, and the
necessity of new products. It also depends on investors’ level of income, level of inventions and innovations,
level of consumer demand, availability of capital and liquid assets of the investors, government policy, etc. It

31
is necessary to note that investment is more volatile and unpredictable. It is highly unstable in the short run
because the factors determining it are highly complex and uncertain in their nature. The above-mentioned
factors no doubt generally affect the volume of investment. However, the most important inducement to invest
is the consideration of the profit. The profitability of investment depends mainly on two factors:
 Marginal efficiency of capital (MEC)
 Interest rate (IR).
It relates to the cost-benefit analysis. The businessman while investing capital has to calculate the cost of
borrowing and the expected rate of profits from it.

Q6 Write short notes on:

a) Monetary Policy
b) Physical policy or direct controls
a) Parameters and objectives
b) Instruments and disadvantages
Answer.

a) Monetary Policy
Monetary policy is a part of the overall economic policy of a country. It is employed by the government as an
effective tool to promote economic stability and achieve certain predetermined objectives. Monetary policy
deals with the total money supply and its management in an economy. It is essentially a programme of action
undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money
with the public, and the flow of credit with a view to achieving economic stability and certain predetermined
macroeconomic goals.
Monetary policy can be explained in two different ways. In a narrow sense, t is concerned with administering
and controlling a country’s money supply including currency notes and coins, credit money, level of interest
rates and managing the exchange rates. In a broader sense, monetary policy deals with all those monetary and
non-monetary measures and decisions that affect the total money supply and its circulation in an economy.
Physical Policy or Direct Controls

Government interference with the forces of demand and supply in the market, and state regulation of prices of
commodities are common features in these days. Thus, when monetary and fiscal measures are inadequate to
control prices, government resorts to direct control. During wars, when inflationary forces are strong, price
control involves imposing ceilings in respect of certain prices and prices are to be stopped from rising too high.
In a planned economy, the objective of price control is to bring about allocation of resources in accordance
with the objects of plan. Price control normally involves some control of supply or demand or both. These are
done by control of distribution of commodities through rationing. Rationing is, therefore, an essential part of
the price control policy. In the U.S., price control takes the form of price support programme in which prices
are prevented from falling below certain levels considered fair. Under certain circumstances, government may
resort to dual pricing which is yet another form of price control by the government.

Parameters of monetary policy:

Broadly speaking, there are three parameters of monetary policy of a country. It is through these parameters
that the monetary policy has to operate. They are:
1. Total money supply available in a country.
2. Cost of borrowings or the level of interest rates.
3. The nature of credit control measures.
All the three put together determine the nature of working of monetary policy.
Objectives of monetary policy
Objectives of monetary policy must be regarded as part of the overall economic objectives of the government.
It should be designed and directed to achieve different macroeconomic goals. The objectives may be manifold
in relation to the general economic policy of a nation. The various objectives may be interrelated,

32
interdependent and mutually complementary to each other. They may also be mutually inconsistent and clash
with each other. Hence, very often, the monetary authorities are concerned with a careful choice between
alternative ends. The priorities of the objectives depend on the nature of economic problems, its magnitude
and economic policy of a nation. The various objectives also change over a time period.
Instruments of physical policy and advantages
Direct controls are imposed by government to ensure proper allocation of scarce resources like food, raw
materials, consumer goods and capital goods. Government can strictly forbid or restrict certain kinds of
investments or economic activity. During the period of inflation, government can directly exercise control over
prices and wages. During World War II, price-wage controls were employed along with consumer rationing
to curb excess demand. Monetary and fiscal controls will have a general impact on the economy while physical
controls can be employed to affect specific scarcity areas. Generally
The advantages of direct controls are:
1. They can be introduced quickly and easily, hence the effects of these can be rapid.
2. Direct controls can be more discriminatory than monetary and fiscal controls.
3. There can be variation in the intensity of the operation of controls from time to time in different sectors.

Qno 7. Inflation is a global Phenomenon which is associated with high price causes decline in the value for
money. It exists when the amount of money in the country is in excess of the physical volume of goods and
services. Explain the reasons for this monetary phenomenon.

Define Inflation 2

Causes for Inflation 8

Answer - Definition - The term inflation is used in many senses and hence it is very difficult to give a
generally accepted, universally agreeable, and precise definition to the term inflation. Inflation is commonly
understood as a situation of substantial and rapid increase in the level of prices and consequent
deterioration in the value of money over a period of time. It refers to the average rise in the general level of
prices and fall in the value of money. Most of the economists considered inflation as a purely monetary
phenomenon. According to this approach, it is the increase in the quantity of money which causes an
inflationary rise in the price level.

The Cambridge economists such as Lord Keynes and A.C Pigou viewed inflation as a
phenomenon of full employment. According to Keynes “an inflationary rise in price cannot take place before
the point of full employment”. An expansion of money supply in a situation of under employment
equilibrium, leads to increased production of goods and services and expansion in employment by using
unemployed resources.

Causes of inflation -

1. Demand side - Demand rises much faster than supply. We can enumerate the following reasons for
increase in effective demand.

33
  Increase in money supply - Supply of money in circulation increases on account of deficit financing
by the government, expansion in public expenditure, expansion in bank credit and repayment of
past debt by the government to the people, increase in legal tender money and public borrowing.
 Increase in disposable income –Aggregate effective demand rises when disposable income of the
people increases.
 Increase in private consumption expenditure and investment expenditure – An increase in private
expenditure both on consumption and on investment leads to emergence of excess demand in an
economy.
 Increase in exports – An increase in the foreign demand for a country’s exports reduces the stock of
goods available for home consumption.
 Existence of black money – The existence of black money in a country due to corruption, tax
evasion, black-marketing, etc.
 Increase in foreign exchange reserves – This may increase on the account of inflow of foreign money
into the country.
 Increase in population growth – This creates an increase in demand for many types of goods and
services in a country.
 High rates – Higher rates of indirect taxes would lead to a rise in prices.
 Reduction in the rates of direct taxes – This would leave more cash in the hands of people inducing
them to buy more goods and services leading to an increase in prices.
 Reduction in the level of savings – This creates more demand for goods and services.

Supply side

Generally, the supply of goods and services do not keep pace with the ever- increasing demand for goods
and services. Thus, supply does not match the demand. Supply falls short of demand. Increase in supply of
goods and services may be limited because of the following reasons.

 Shortage in the supply of factors of production – When there is shortage in the supply of factors of
production like raw materials, labour, capital equipment’s, etc. there will be a rise in their prices.
 Operation of law of diminishing returns – When the law of diminishing returns operates, increase
in production is possible only at a higher cost which demotivates the producers to invest in large
amounts.
 Hoardings by traders and speculators – During the period of shortage and rise in prices, hoardings
of essential commodities by traders and speculators with the objective of earning extra profits in
the future creates an artificial scarcity of commodities.
 Hoardings by consumers – Consumers may also hoard essential goods to avoid payment of higher
prices in the future. This leads to an increase in the current demand, which in turn stimulates prices.
 Role of trade unions – Trade union activities leading to industrial unrest in the form of strikes and
lockouts also reduce production. This will lead to creation of excess demand that eventually brings a
rise in the price level.
 Role of natural calamities – Natural calamities such as earthquake, floods, and drought conditions
also affect the supplies of agricultural products adversely. They also create shortage of food grains
and raw materials, which in turn creates inflationary conditions.
 War – During the period of war, shortage of essential goods creates a rise in prices.
 International factors – These factors would cause either shortage of goods and services or rise in
the prices of factor inputs leading to inflation. E.g., higher prices of imports.

34
  Increase in prices of inputs within the country

Role of expectations

Expectations also play a significant role in accentuating inflation. The following points are worth
mentioning:

 If people expect further rise in price, the current aggregate demand increases, which in turn causes
a rise in the prices.
 Expectations about higher wages and salaries affect the prices of related goods.
 Expectations of wage increase often induce some business houses to increase prices even before
upward wage revisions are actually made.

Thus there are various reasons of inflation.

QNo8.2Monopoly is the situation there exists a single control over the market producing a commodity
having no substitutes with no possibilities for anyone to enter the industry to compete. In that situation,
they will not charge a uniform price for all the customers in the market and also the pricing policy
followed in that situation.

Define Monopoly 2

Features of Monopoly 4

Kinds of Price Discrimination 4

Answer – In a simple term we can say it that monopoly is complete domination of single person or single
market. Monopoly may be defined, as a condition of production in which a single firm has the power to fix
the price of the commodity or the output of the commodity. Monopoly is that kind of market form in which
a single producer controls the whole supply of a single commodity which has no close substitutes.

Features of Monopoly –

 Anti-thesis of competition – Absence of competition in the market creates a situation of monopoly

and hence, the seller faces no threat of competition.
 Existence of a single seller – There will be only one seller in the market who exercises single control
over the market.
 Absence of substitutes – There are no close substitutes for the seller’s product with a strong cross
elasticity of demand. Hence, buyers have no alternatives.
 Control over supply – Seller will have complete control over output and supply of the commodity.
 Price maker – The monopolist is the price maker and in taking decisions on price fixation, he or she
is independent. He or she can set the price to the best of his or her advantage.
 Entry barriers – Entry of new firms is difficult. Hence, monopolist will not have direct competitors in
the market.
 Firm and industry is same – There will be no difference between the firm and an industry.
 Nature of firm – The monopoly firm may be a proprietary concern, partnership concern, Joint Stock
Company or a public utility which pursues an independent price-output policy.

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  Existence of super normal profits – There will be opportunities for supernormal profits under
monopoly, because market price is greater than the cost of production.

Kinds of Price Discrimination – The policy of price discrimination refers to, the practice of a seller to charge
different prices for different customers for the same commodity, produced under a single control without
corresponding differences in cost. Three kinds of price discrimination are commonly seen as follows –

Discrimination of the first degree – Under price discrimination of the first degree, the producer exploits the
consumers to the maximum possible extent, by asking to pay the maximum he/she is prepared to pay rather
than go without the commodity. In this case, the monopolist will not allow any consumer’s surplus to the
consumer. This type of price discrimination is called perfect discrimination.

Discrimination of the second degree – In case of discrimination of the second degree, the monopolist
charges different prices for markets of the same commodity, but not at a maximum possible rate but at a
lower rate. The monopolist will leave a certain amount of consumer’s surplus with the consumers. This is
done to keep the consumers satisfied and prevent the entry of potential rivals.

Discrimination of the third degree – In case of discrimination of the third degree, the markets are divided
into many sub-markets or sub- groups. The price charged in each case roughly depends on the ability to pay
of different subgroups in the market.

9. Define Fiscal Policy and the instruments of Fiscal policy.

Definition of Fiscal policy 2

Explanation of Instruments of Fiscal Policy 8

Answer - Fiscal policy is an important part of the overall economic policy of a nation. Lord Keynes, for the
first time, emphasised the significance of fiscal policy as an instrument of economic control. The term “fisc”
in English language means “treasury”, and the policy related to treasury or government exchequer is known
as fiscal policy.

Fiscal policy is concerned with the manner in which all the different elements of public finance,
while still primarily concerned with carrying out their own duties (as the first duty of a tax is to raise
revenue), may collectively be geared to forward the aims of economic policy.” It involves alterations in
government expenditures for goods and services or the level of tax rates.

Instruments of fiscal policy

1. Public revenue: It refers to the income or receipts of public authorities. It is classified into two parts - tax-
revenue and non-tax revenue. Taxes are the main source of revenue to a government. There are two types
of taxes. They are direct taxes such as personal and corporate income tax, property tax, expenditure tax,
and indirect taxes such as customs duties, excise duties, sales tax (now called VAT).

36
2. Public expenditure policy: It refers to the expenditure incurred by the public authorities like central, state
and local governments. It is of two kinds: development or plan expenditure and non-development or non-
plan expenditure.

3. Public debt or public borrowing policy: All loans taken by the government constitutes public debt.

4. Deficit financing: It is an extraordinary technique of financing the deficits in the budgets. It implies
printing of fresh and new currency notes by the government by running down the cash balances with the
central bank.

5. Built in stabilisers or automatic stabilisers (BIS): The automatic or built-in stabilisers imply automatic
changes in tax collections and transfer payments or public expenditure programmes so that it may reduce
the destabilising effect on aggregate effective demand.

Qno10.Describe Cost-Output Relationship in brief. It is of two types, internal borrowings and external
borrowings.

Definition of cost-output relationship 3

Explanation of Cost-output relationship in short run and long run in brief 7

Answer - Cost-output relations play an important role in almost all business decisions. It throws light on cost
minimisation or profit maximisation and optimisation of output. The relation between the cost and output is
technically described as the “cost function”. are kept constant. Mathematically speaking TC = f (Q) where TC
= Total cost and Q stands for output produced.

Cost-Output Relationships in the Short Run – It is interesting to note that the relationship between the cost
and output is different at two different periods of time i.e. short-run and long run. Generally speaking, cost
of production will be relatively higher in the short- run when compared to the long run. This is because a
producer will get enough time to make all kinds of adjustments in the productive process in the long run
than in the short run.

Meaning of short run

Short-run is a period of time in which only the variable factors can be varied while fixed factors like plant,
machinery, etc. remain constant. Hence, the plant capacity is fixed in the short run.

The short run cost function relates to the short run production function. It implies two sets of input
components:

(a) Fixed inputs and - Fixed inputs are unalterable. They remain unchanged over a period of time.

37
 (b) Variable inputs.- On the other hand, variable factors are changed to vary the output in the short
run.

Fixed costs

These costs are incurred on fixed factors like land, buildings, equipments, plants, superior type of labour,
top management, etc. Fixed costs in the short run remain constant because the firm does not change the
size of plant and the amount of fixed factors employed. Fixed costs do not vary with either expansion or
contraction in output. These costs are to be incurred by a firm even if output is zero.

Prof. Marshall called fixed costs as supplementary costs. They include items such as contractual rent
payment, interest on capital borrowed, insurance premiums, depreciation and maintenance allowances,
administrative expenses like manager’s salary or salary of the permanent staff, property and business taxes,
license fees, etc.

Variable costs - The costs corresponding to variable factors are discussed as variable costs. These costs are
incurred on raw materials, ordinary labour, transport, power, fuel, water, etc, which directly vary in the
short run. Variable costs are incurred only when some amount of output is produced.

Total Fixed Cost Curve

Total Variable Cost Curve

38
It is clear from the above description that production costs consist of both fixed as well as variable costs.
The difference between the two is meaningful and relevant only in the short run. However, the distinction
between fixed and variable costs is very significant in the short run because it influences the average cost
behaviour of the firm.

Cost-Output Relationship in the Long Run -

Long run is defined as a period of time where adjustments to changed conditions are complete. It is actually
a period during which the quantities of all factors, variable as well as fixed factors, can be adjusted. Hence,
there are no fixed costs in the long run. In the short run, a firm has to carry on its production within the
existing plant capacity, but in the long run, it is not tied up to a particular plant capacity. If demand for the
product increases, it can expand output by enlarging its plant capacity. It can construct new buildings or
hire them, install new machines, employ administrative and other permanent staff.

As all costs are variable in the long run, the total of these costs is the total cost of production.
Hence, the distinction between fixed and variables costs in the total cost of production will disappear in the
long run. Long run average cost is the long run total cost divided by the level of output. In brief, it is the per-
unit cost of production of different levels of output by changing the size of the plant or scale of production.

The long run cost–output relationship is explained by drawing a long run cost curve through short–
run curves as the long period is made up of many short–periods just as the day is made up of 24 hours and a
week is made out of 7 days. This curve explains how costs will change when the scale of production is
varied.

Changes in Cost with Variations on Scale of Production

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 The long run-cost curves are influenced by the law of returns to scale as against the short run cost
curves which are subject to the working of law of variable proportions.

Conclusion - Short run cost function gives information about the nature and behaviour of various
cost curves. Long run cost function tells us how it is possible to obtain more output at lower costs in the long
run

Qno11. Discuss the practical application of Price elasticity and Income elasticity of demand.

Practical application of price elasticity

Practical application of Income elasticity

Answer - Practical application of price elasticity of demand –

According Prof. Stonier and Hague, price elasticity of demand is a technical term used by economists to
explain the degree of responsiveness of the demand for a product to a change in its price.

We can give some examples practical application of price elasticity of demand are as follows:

1.Production planning – It helps a producer to decide about the volume of production. If the demand for his
products is inelastic, specific quantities can be produced while he has to produce different quantities, if the
demand is elastic.

2.Helps in fixing the prices of different goods – It helps a producer to fix the price of his product. If the
demand for his product is inelastic, he can fix a higher price and if the demand is elastic, he has to charge a
lower price. Thus, price-increase policy is to be followed if the demand is inelastic in the market and price-
decrease policy is to be followed if the demand is elastic.

Similarly, it helps a monopolist to practise price discrimination on the basis of elasticity of

demand.

3.Helps in fixing the rewards for factor inputs – Factor rewards refer to the price paid for their services in
the production process. It helps the producer to determine the rewards for factors of production. If the
demand for any factor unit is inelastic, the producer has to pay higher reward for it and vice-versa.

4.Helps in determining the foreign exchange rates – Exchange rate refers to the rate at which currency of
one country is converted in to the currency of another country. It helps in the determination of the rate of
exchange between the currencies of two different nations. For e.g. if the demand for US dollar to an Indian

40
rupee is inelastic, in that case, an Indian has to pay more Indian currency to get one unit of US dollar and
vice-versa.

5.Helps in determining the terms of trade – it is the basis for deciding the ‘terms of trade’ between two
nations. The terms of trade implies the rate at which the domestic goods are exchanged for foreign goods.

6.Helps in declaration of public utilities – Public utilities are those institutions which provide certain
essential goods to the general public at economical prices.

7.Helps in fixing the rate of taxes – Taxes refer to the compulsory payment made by a citizen to the
government periodically without expecting any direct return benefit from it.

8.Poverty in the midst of plenty – The concept explains the paradox of poverty in the midst of plenty.

Thus, the concept of price elasticity of demand has great practical application in
economic theory.

Practical application of income elasticity of demand - Income elasticity of demand may be defined as the
ratio or percentage change in the quantity demanded of a commodity to a given percentage change in the
income. Few examples on the practical application of income elasticity of demand are as follows:

1. Helps in determining the rate of growth of the firm – If the growth rate of the economy and income
growth of the people is reasonably forecasted, in that case, it is possible to predict expected increase in the
sales of a firm and vice-versa.

2. Helps in the demand forecasting of a firm – It can be used in estimating future demand provided that the
rate of increase in income and the Ey for the products are known. Thus, it helps in demand forecasting
activities of a firm.

3. Helps in production planning and marketing – The knowledge of Ey is essential for production planning,
formulating marketing strategy, deciding advertising expenditure and nature of distribution channel, etc. in
the long run.

4. Helps in ensuring stability in production – Proper estimation of different degrees of income elasticity of
demand for different types of products helps in avoiding over-production or under production of a firm.

5. Helps in estimating construction of houses – The rate of growth in incomes of the people also helps in
housing programmes in a country. Thus, it helps a lot in managerial decisions of a firm.

Qno 12.Discuss the scope of managerial economics.

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Definition of Managerial Economics 2

Scope of Managerial Economics 8

Answer - Managerial economics is a science that deals with the application of various economic theories,
principles, concepts and techniques to business management in order to solve business and management
problems.

In Spencer and Siegelman, in the following words: “Managerial economics is the integration of
economic theory with business practice for the purpose of facilitating decision making and forward planning
by the management”1.

Mc Nair and Meriam say, “Managerial economics is the use of economic modes of thought to
analyse business situation”.

Scope of Managerial Economics - There is no unanimity among different economists with respect to the
exact scope of business economics.Yet we can discuss the following scope in this context -

 Objectives of a firm –

Historically, profit maximisation has been considered as the main objective of a business unit. All business
organisations have multiple objectives which are multidimensional out of which some are supplementary
and some are competitive. Few others are inter-connected and few others are opposing.

Demand analysis and forecasting - Mostly, a firm use to produces different kinds of goods and services. It
has to meet the requirements of consumers in the market. The basic problems like: what to produce; where
to produce; for whom to produce; how to produce; how much to produce and how to distribute them in the
market, are to be answered by a firm. Hence, the firm has to study in detail about the various determinants
of demand, nature, composition and characteristics of demand, elasticity of demand, demand distinctions,
demand forecasting, etc.

Production and cost analysis

Production means conversion of inputs into the final output. It may be either in physical or in monetary
terms. Physical production deals with the production of outputs by a firm, by employing different factor
inputs in proper proportions. Always, the most basic goal of any firm is to increase the output.

Pricing decisions, policies and practices

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Pricing decisions means to fix the prices for all the goods and services of any firm. This is based on the
pricing policy and practices of that particular firm. Amongst all the policies the most important policy of any
firm would be the price setting policy.

Profit management

Basically, a firm can be a commercial or a business unit. Consequently, its success or failure is measured in
terms of the amount of profit it is able to earn in a competitive market. The management gives top most
priority to this aspect.

Capital management

This is one of the essential areas of business unit. The success of any business is based on proper
management and adequate capital investment. Under capital management, managers should assess
capital requirement, methods of capital mobilisation, capital budgeting, optimal allocation of capital,
selection of highly profitable projects, cost of capital, return on capital, planning and control of capital
expenditure, etc.

Linear programming and theory of games –

The term linear means that the relationships handled can be represented by straight lines and the term
programming implies systematic planning or decision-making. It implies maximisation or minimisation of a
linear function of variables subject to a constraint of linear inequalities.

Market structure and conditions

The information on market structure and conditions of various markets is the most important part of the
business.

Strategic planning

It provides long term decisions, which will have a huge impact on the behaviour of the firm. The firm fixes up
some long-term goals and objectives and selects a different strategy to achieve them. This framework is a
recent addition to the scope of business economics with the emergence of MNCs.

External environment

The external environment has a significant role in managerial economics. Few examples of external
environment impacting managerial economics are as follows:

 Macroeconomic management of the country relating to economic system, national income, trade
cycles, savings and investments and its impact on the working of a firm.

 Budgetary operations of the government and its implications on the firm

43
  Impact of liberalisation, globalisation, privatisation and marketisation on the operations of a firm
 Improvements in the field of science and technology and its impact on a firm, etc
 Socio-political, cultural and other external forces and their influence of business operations

Conclusion -

It is clear that the scope of managerial economics is expanding with the growth of modern business and
business environment.

Q13. Economic stability implies avoiding fluctuations in economic activities. It is

important to avoid the economic and financial crisis. The challenge is to minimize
the instability without affecting productivity, efficiency, employment. Find out the
instruments to face the challenges and to maintain an economic stability.
(Explanation of economic stability, Instruments) 2, 8

Answer:-
Economic Stability-------

Economic stability - promotion is partly a matter of avoiding economic and financial crisis. A dynamic market
economy necessarily involves some degree of instability, as well as gradual structural change. The challenge
for policy makers is to minimize this instability without reducing the ability of the economic system to raise
living standards through increasing productivity, efficiency and employment. Economic stability is fostered
by robust economic and financial institutions and regulatory frameworks.

Economic stability implies avoiding fluctuations in the level of economic activities as 100% stability is neither
possible nor desirable. It implies only relative stability in the overall level of economic activities. A
stabilization policy is a set of measures introduced to stabilize a financial system or economy. It can refer to
correcting the normal behavior of business cycles. In this case, the term generally refers to demand
management by monetary and fiscal policy to reduce normal fluctuations in output, sometimes referred to as
“keeping the economy on an even keel.” The policy changes in these circumstances are usually countercyclical,
compensating for the predicted changes in employment and output to increase short run and medium run
welfare. It can also refer to measures taken to resolve a specific economic crisis, for instance, an exchange rate
crisis or stock market crash, in order to prevent the economy developing recession or inflation. The initiative
is taken by the government or the central bank or both. Depending on the goal to be achieved, it involves some
combination of restrictive fiscal measures and monetary tightening. Such stabilization policies can be painful,
in the short run, for the economy because of lower output and higher unemployment. They are designed to be
a platform for successful long run growth and reform.

Instruments of Economic Stability:

Following are the instruments of economic stability:

1. Monetary Policy. 2. Fiscal Policy 3. Physical policy or Direct Controls.
The central bank and the government have developed these instruments to correct the discrepancies that occur
in the process of economic growth.

Monetary Policy

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Monetary policy is a part of the overall economic policy of a country. It is employed by the government as an
effective tool to promote economic stability and achieve certain predetermined objectives.

Meaning and definition:

Monetary policy deals with the total money supply and its management in an economy. It is essentially a
programme of action undertaken by the monetary authorities, generally the central bank, to control and regulate
the supply of money with the public, and the flow of credit with a view to achieving economic stability and
certain predetermined macroeconomic goals. Monetary policy can be explained in two different ways. In a
narrow sense, it is concerned with administering and controlling a country’s money supply including currency
notes and coins, credit money, level of interest rates and managing the exchange rates. In a broader sense,
monetary policy deals with all those monetary and non-monetary measures and decisions that affect the total
money supply and its circulation in an economy. It also includes several non-monetary measures like wages
and price control, income policy, budgetary operations taken by the Government which indirectly influence
the monetary situations in an economy.

Fiscal Policy

Fiscal policy is an important part of the overall economic policy of a nation. It is being increasingly used in
modern times to achieve economic stability and growth throughout the world. Lord Keynes, for the first time,
emphasised the significance of fiscal policy as an instrument of economic control. It exerts deep impact on the
level of economic activity of a nation.

Meaning

The term “fisc” in English language means “treasury”, and the policy related to treasury or government
exchequer is known as fiscal policy. Fiscal policy is a package of economic measures of the Government
regarding public expenditure, public revenue, public debt or public borrowings. It concerns itself with the
aggregate effects of government expenditure and taxation on income, production and employment. In short, it
refers to the budgetary policy of the government. Fiscal policy is concerned with the manner in which all the
different elements of public finance, while still primarily concerned with carrying out their own duties (as the
first duty of a tax is to raise revenue), may collectively be geared to forward the aims of economic policy.” It
involves alterations in government expenditures for goods and services or the level of tax rates. Unlike
monetary policy, these measures involve direct government interference in the market for goods and services
(in case of public expenditure) and direct impact on private demand (in case of taxes).

Physical Policy or Direct Controls

Government interference with the forces of demand and supply in the market, and state regulation of prices of
commodities are common features in these days. Thus, when monetary and fiscal measures are inadequate to
control prices, government resorts to direct control. During wars, when inflationary forces are strong, price
control involves imposing ceilings in respect of certain prices and prices are to be stopped from rising too high.
In a planned economy, the objective of price control is to bring about allocation of resources in accordance
with the objects of plan. Price control normally involves some control of supply or demand or both. These are
done by control of distribution of commodities through rationing. Rationing is, therefore, an essential part of
the price control policy. In the U.S., price control takes the form of price support programme in which prices
are prevented from falling below certain levels considered fair. Under certain circumstances, government may
resort to dual pricing which is yet another form of price control by the government.

45
14. Explain any eight macroeconomic ratios. (Definition of Macroeconomics, Macroeconomics ratios) 2, 8

Answer: -

Definition of Macroeconomics

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a
whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic
product and inflation.

Macroeconomic Ratios

There are several macroeconomic ratios and an attempt is made to explain eight such macroeconomic ratios.
For a business firm, the knowledge of these macroeconomic ratios is indispensable for taking microeconomic
decisions.

1. In other words, it tells us about the percentage of consumption out of a given level of income.
This can be expressed as C = f [Y] where C = consumption, Y = income and f = function. Consumption is an
increasing function of income. Higher the income, higher would be the consumption and vice-versa. There is
a direct relationship between the two. For example, out of Rs. 100, a person can consume Rs. 80, and save Rs
20. In this case, the consumption income ratio is 1:0.8. This ratio helps business personnel to forecast his/her
sales in the market.

2. Saving income ratio

Excess of income over expenditure is saving. The saving function can be easily derived by subtracting
spending from income. Hence, S = Y – C where S = saving, Y = income and C = consumption. It is a function
of income. S = f [Y]. It implies that there is a direct relationship between the two. Higher the income, higher
would be the savings and vice-versa. The saving-income ratio indicates the amount of savings made out of a
given level of income. In the above example, saving income ratio is 1:0.2. The consumption income ratio and
saving income ratio enable a business to plan its production schedule and derive sales forecasts.

3. Capital output ratio

There is a close relationship between capital investment and income-growth in any economy. Capital is
regarded as the lifeblood of all economic activities and as such, it constitutes a major determinant of economic
growth rate in an economy. The volume of investment generally determines the rate of growth in the real
income of the people in an economy.

4. Capital labour ratio

This ratio indicates the proportion of two factor inputs. It tells us the ratio between the numbers of labourers
required for a given amount of capital invested in any business. This ratio is useful to work out the least
cost combination by substituting one factor input to another. This ratio can be expressed as K/L

5. Output-labour ratio

The term productivity in general is defined as a ratio of what comes out of a business to what goes in to the
business, i.e., it is the ratio of ‘outcome’ to the ‘efforts’ of the business. Hence, productivity would mean the
value of output divided by the value of inputs employed. There are different kinds of productivity ratios.

6. Input- output ratio

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This ratio explains the relationship between two variables of inputs and outputs. Input-output ratio indicates
the quantity of inputs employed and the quantity of outputs obtained. It is also called as production function
in economics. Production is purely physical in nature and as such, the ratio between inputs and outputs is
determined by technology, availability of equipments, labour, materials, etc. It can be expressed in the form
of a mathematical equation.

7. Value added output ratio

Value added output is the difference between the value of output produced and the value of inputs employed.
In other words, it is a ratio of increase in the quantity of inputs employed and the corresponding increase in
the output obtained. It is very much necessary to find out the difference between the value of inputs used and
the output obtained. This will help in deciding whether to increase the employment of additional factor input
units in the production process.

8. Cash reserve ratio

A commercial bank mobilises deposits from the general public and the entire amount of deposits is not kept in
the form of cash. An experienced banker knows that all depositors will not withdraw their entire deposits on
the same day at the same time. Hence, only a fraction of total deposits is kept in the form of liquid cash to
honour the cheques drawn on demand deposit by the customers. The remaining excess deposits are used for
lending and investment purposes by the bank.

Q15. Define Inflation and explain the types of inflation. (Definition of Inflation, types of inflation) 3, 7

Answer:-

Inflation
Inflation has become a global phenomenon in recent years. Development economics is very much associated
with inflation. An in-depth study of inflation is of paramount importance to a student of managerial economics.
The term inflation is used in many senses and hence it is very difficult to give a generally accepted, universally
agreeable, and precise definition to the term inflation. Popularly, inflation is associated with high prices, which
causes a decline in the value of money. Inflation is commonly understood as a situation of substantial and
rapid increase in the level of prices and consequent deterioration in the value of money over a period of time.
It refers to the average rise in the general level of prices and fall in the value of money. Inflation is an upward
movement in the average level of prices. The opposite of inflation is deflation, a downward movement in the
average level of prices. The common feature of inflation is rise in prices and the degree of inflation may be
measured by price indices.

Types of inflation

Depending upon the rate of rise in prices and the prevailing situation, inflation has been classified into the
following six types:

Creeping inflation – When the rise in prices is very slow (less than 3%) like that of a snail or creeper it is
called creeping inflation.

Walking inflation – When the rise in prices is moderate (in the range of 3 to 7%) and the annual inflation rate
is of single digit it is called walking inflation. It is a warning signal for the government to control it before it
turns into running inflation.

47
Running inflation – When the prices rise rapidly at a rate of 10 to 20% per annum it is called running inflation.
Such inflation affects the poor and middle classes adversely. Its control requires strong monetary and fiscal
measures; otherwise, it can lead to hyperinflation.

Hyperinflation – Hyperinflation is also called by various names like jumping, runaway, or galloping inflation.
During this period, prices rise very fast (double or triple digit rates) at a rate of more than 20 to 100% per
annum and become absolutely uncontrollable. Such a situation brings a total collapse of the monetary system
because of the continuous fall in the purchasing power of money.

Demand-pull Inflation – The total monetary demand persistently exceeds the total supply of goods and
services at current prices so that prices are pulled upwards by the continuous upward shift of the aggregate
demand function. It arises as a result of an excessive aggregate effective demand over aggregate supply of
goods and services in a slowly growing economy. Supply of goods and services will not match the rising
demand. The productive ability of the economy is so poor that it is difficult to increase the supply at a quicker
rate to match the increase in demand for goods and services. When exports increase, the money income of
people rises. With excess money income, purchasing power, demand, and prices move in the upward direction.

Cost-push inflation – Prices rise on account of increasing cost of production. Thus, in this case, rise in price
is initiated by growing factor costs. Hence, such a price rise is termed as ‘cost-push’ inflation as prices are
being pushed up by rising factor costs. A number of factors contribute to the increase in cost of production.
They are:
 Demand for higher wages by the labour class.
 Fixing of higher profit margins by the manufacturers.
 Introduction of new taxes and raising the level of old taxes.

Q16. Define Fiscal Policy and the instruments of Fiscal policy. (Explanation of Fiscal Policy,
Instruments) 2, 8

Answer:-

Fiscal Policy

Fiscal policy is an important part of the overall economic policy of a nation. It is being increasingly used in
modern times to achieve economic stability and growth throughout the world. Lord Keynes, for the first time,
emphasised the significance of fiscal policy as an instrument of economic control. It exerts deep impact on the
level of economic activity of a nation.

Instruments of fiscal policy

The instruments of fiscal policy include:

1. Public revenue: It refers to the income or receipts of public authorities. It is classified into two parts - tax-
revenue and non-tax revenue. Taxes are the main source of revenue to a government. There are two types of
taxes. They are direct taxes such as personal and corporate income tax, property tax, expenditure tax, and
indirect taxes such as customs duties, excise duties, sales tax (now called VAT). Administrative revenues are
the bi-products of administrate functions of the government. They include fees, licence fees, price of public
goods and services, fines, escheats and special assessment.

2. Public expenditure policy: It refers to the expenditure incurred by the public authorities like central, state
and local governments. It is of two kinds: development or plan expenditure and non-development or nonplan

48
expenditure. Plan expenditure includes income-generating projects like development of basic industries,
generation of electricity, development of transport and communications and construction of dams. Non-plan
expenditure includes defence expenditure, subsidies, interest payments and debt servicing changes.

3. Public debt or public borrowing policy: All loans taken by the government constitutes public debt. It
refers to the borrowings made by the government to meet the ever-rising expenditure. It is of two types, internal
borrowings and external borrowings.

4. Deficit financing: It is an extraordinary technique of financing the deficits in the budgets. It implies printing
of fresh and new currency notes by the government by running down the cash balances with the central bank.
The amount of new money printed by the government depends on the absorption capacity of the economy.

5. Built in stabilizers or automatic stabilizers (BIS): The automatic or built-in stabilizers imply automatic
changes in tax collections and transfer payments or public expenditure programmes so that it may reduce the
destabilizing effect on aggregate effective demand. When income expands, automatic increase in taxes or
reduction in transfer payments or government expenditures will tend to moderate the rise in income. On the
contrary, when the income declines, tax falls automatically and transfers and government expenditure will rise
and thus built-in stabilizers cushion the fall in income.

Q17. Investment is a part of income which can be used for various purposes. It is necessary to create
employment in an economy and to increase national income. To understand the benefits of income, study
the various types of investment. (Explanation of investment, types of investment) 2, 8

Answer:-

Investment Function
Investment is the second important component of effective demand. In Keynesian economics, the term
investment has a different meaning. In the ordinary language, it refers to financial investment. i.e. purchase of
stocks, shares, debentures, bonds, etc. In this case, there is only transfer of rights or titles from one person to
another. It is an investment by one and disinvestment by another and as such, the value transaction mutually
cancels out each other. They do not add anything to the total stock of capital of the nation. Investment,
according to Keynes, refers to real investment. It implies creation of new capital assets or additions to the
existing stock of productive assets. It refers to that part of the aggregate income, which is used for the creation
of new structures, new capital equipments, machines, etc that help in the production of final goods and services
in an economy. Creation of income – earning assets is called investment. Thus, investment must generate
income in the economy. Investment also refers to an addition to capital with such investment occurring when
a new house is built or a new factory is built. Investment means making an addition to the stock of goods in
existence. These activities necessitate the employment of more labour and thus result in an increase in national
income and employment.

Types of investment
Keynes speaks of 5 types of investment. They are as follows:

1. Private investment
It is made by private entrepreneurs on the purchase of different capital assets like machinery, plants,
construction of houses and factories, offices, shops, etc. It is influenced by MEC and interest rate. It is
profit – elastic. Profit motive is the basis for private investment. Private entrepreneurs would take up only
those projects which yield quick results and generally those that have a small gestation period.

2. Public investment

49
It is undertaken by the public authorities like central, state and local authorities. It is made on building
infrastructure of the economy, public utilities and on social goods, for example, expenditure on basic
industries, defense industries, construction of multipurpose river valley projects, etc. In this case, the basic
criterion and motto is social net gain, social welfare and not profits. The principle of maximum social
advantage would govern public expenditure. It is also influenced by social and political considerations.

3. Foreign investment
It consists of excess of exports over the imports of a country. It depends on many factors such as propensity
to export of a given country, foreigners’ capacity to import, prices of exports and imports, state trading and
other factors.

4. Induced investment

Induced investment is another name for private investment. Investment, which varies with the changes in the
level of national income, is called induced investment. When national income increases, the aggregate demand
and level of consumption of the community also increases. In order to meet this increased demand, investment
has to be stepped up in capital goods sector which finally leads to increase in the production of consumption
goods Therefore, we can say that induced investment is income – elastic i.e., it increases as income increases
and vice-versa.

5. Autonomous investment
Autonomous investment is another name for public investment. The investment, which is independent of
the level of income, is called as autonomous investment. Such investments do not vary with the level of
income. Therefore it is called income-inelastic. It does not depend on changes in the level of income,
consumption, rate of interest or expected profit.

Q18. Discuss any two law of returns to scale with example. (Law of returns to scale, examples) 8, 2

Answer:

Laws of returns to scale

The concept of returns to scale is a long run phenomenon. In this case, we study the change in output when all
factor inputs are changed or made available in required quantity. An increase in scale means that all factor
inputs are increased in the same proportion. In returns to scale, all the necessary factor inputs are increased or
decreased to the same extent so that whatever the scale of production, the proportion among the factors remains
the same.

Three phases of returns to scale

Generally speaking, we study the behaviour pattern of output when all factor inputs are increased in the same
proportion under returns to scale. Many economists have questioned the validity of returns to scale on the
ground that all factor inputs cannot be increased in the same proportion and the proportion between the factor
inputs cannot be kept uniform. But in some cases, it is possible that all factor inputs can be changed in the
same proportion and the output is studied when the input is doubled or tripled or increased five-fold or ten-
fold. An ordinary person may think that when the quantity of inputs is increased 10 times, output will also go
up by 10 times. But it may or may not happen as expected. It may be noted that when the quantity of inputs
are increased in the same proportion, the scale of output or returns to scale may be either more than equal,
equal or less than equal. Thus, when the scale of output is increased, we may get increasing returns, constant
returns or diminishing returns. When the quantity of all factor inputs are increased in a given proportion and
output increases more than proportionately, then the returns to scale are said to be increasing; when the output

50
increases in the same proportion, then the returns to scale are said to be constant; when the output increases
less than proportionately, then the returns to scale are said to be diminishing.

Increasing returns to scale

Increasing returns to scale is said to operate when the producer is increasing the quantity of all factors [scale]
in a given proportion leading to a more than proportionate increase in output.

For example, when the quantity of all inputs are increased by 10%, and output increases by 15%, then we
say that increasing returns to scale is operating. In order to explain the operation of this law, an equal product
map has been drawn with the assumption that only two factors X and Y are required. Figure 5.9 depicts the
operation of the law of increasing returns to scale. In the figure, Factor X is represented along OX axis and
factor Y is represented along OY axis. The scale line OP is a straight line passing through the origin on the
isoquant map indicating the increase in scale as we move upward. The scale line OP represent different
quantities of inputs where the proportion between factor X and factor Y is remains constant. When the scale
is increased from A to B, the return increases the output from 100 units to 200 units. The scale line OP passing
through origin is called as the “expansion path”. Any line passing through the origin will indicate the path of
expansion or increase in scale with definite proportion between the two factors. It is very clear that the increase
in the quantities of factor X and Y [scale] is small as we go up the scale and the output is larger. The distance
between each isoquant curve is progressively diminishing. It implies that in order to get an increase in output
by another 100 units, a producer is employing lesser quantities of inputs and his production cost is declining.
Thus, the law of increasing returns to scale is operating.

Q1. Managerial economics is the integration of ________ with ____ for solving business and management
problems.

ANS – Economic theory, Business Practice

Q. 2. Managerial economics fills up the gap between _______ and _______.

ANS - Economic theory Practice

Q3. Managerial economics is mainly a _______________ science.

ANS - Prescriptive

Q4. Basic objective of a firm today is _______________________.

ANS - Profit optimisation

Q5. Managerial economics is basically a branch of __________ economics.

ANS - Micro

Q6.Two major functions of a managerial economist are ____ and ______.

51
ANS - Decision-making Forward Planning

Q7. This method was originally developed at Rand Corporation in the late ______ by Olaf Helmer, Dalkey
and Gordon.

Ans - 1940’s

Q8. Demand = Desire to buy + Ability to pay + _____________.

Ans - Willingness to pay

Q9. The term elasticity is borrowed from ________.

ANS - Physics

Q10. 1. In a typical demand schedule quantity demanded varies ___________ with price.

ANS - Inversely

Q11.2. In case of Giffen’s goods, price and demand go in the ______ directions.

ANS - Same / upward

Q13. If demand changes as a result of price changes, then it is a case of _____ and ____ in demand.

ANS - Expansion, contraction

Q14.Law of demand is a _________ statement.

ANS - Qualitative

Q15 Demand function is much more _______ than law of demand.

ANS - Qualitative

Q16. In case of Veblen goods, a fall in price leads to a _______ in demand.

52
ANS - Fall

Q17. Law of demand explains the ______________change in demand and elasticity of demand explains
______ change in demand.

ANS - Direction ,percentage

Q18.According to Marshall, _________ is the degree of responsiveness of demand to the change in price of
that commodity.

ANS - Price Elasticity of Demand

Q19. The relatively elastic demand curve is ______.

ANS - Flatter

Q20. When the quantity demanded increases with the increase in income, we say that income elasticity of
demand will be ____. When quantity demanded decreases with increase in income, we say that the income
elasticity of demand is ____.

ANS - Advertisement Elasticity of Demand

Q21. _______ helps the manager to decide the advertisement expense.

ANS - Advertisement Elasticity of Demand

Q22. Point method helps to measure _________ quantity of change in demand and arc methods helps to
measure ____ changes in demand.

ANS - Small, large

Q23. Consumer surplus is excess of what a consumer is willing to pay over what he______.

Ans - Actually does pay

Q24. Demand forecasting refers to an estimate of __________________ for the product under given
condition.

Ans - Most likely future demand

53
Q25. The heart of the survey method is ___________________.

Ans - Questionnaire

Q26. Collective opinion method is also known as ___________________.

Ans - Sales-force polling

Q27. Sample survey method of Demand forecasting is also called _________.

Ans - Consumer panel

Q28. An economic indicator indicates changes in the magnitude of an

Ans - Economic variable

Q29. On the basis of___________________ it is possible of project future sales of a company.

Ans - Time series

30. Stock is _______________________.

Ans - Potential supply

31. Supply curve generally slopes _________________.

Ans - Upwards

32.___________ shows the relationship between price and quantity supplied of a particular product.

Ans - Law of supply

33. The supply curve shifts when there is a change in quantity supplied due to the factors other than
_______________.

Ans - Price

54
34. When the supply increase the supply curve shifts to the ____________.

Ans - Right

35. Supply tends to be _______________ in short run.

Ans - Inelastic

36. Tabular representation of different quantities of commodities supplied at varying price is called
___________________.

Ans – Supply schedule

37. Absence of change in movement in economics is called ___________.

Ans - Equilibrium

38. The quantity bought and sold at the equilibrium is called ___________.

Ans - Equilibrium quantity

39. There will be change in ______________ when there is a shift in either demand curve or supply curve
or both.

Ans - Equilibrium Price

40. If the price increases there will be ____ in consumer surplus.

Ans – Decrease

41. _____ is used to judge the desirability of public investment of any public projects or investment.

Ans - Cost Benefit Analysis

42. The term “inputs” or “____________” includes all items or those things which are required by the firm
to produce a particular product.

Ans - Factors of production

43. A “production function” expresses the technological or engineering relationship between physical
quantity of inputs employed and__________.

55
Ans - physical quantity of outputs obtained by a firm

44. Factor inputs are of two types as follows:

1.______________,

2. Variable inputs

Ans - Fixed inputs

45. Production creates ___________ or ___________ of value.

Ans - New utilities, addition

46. Production function explains _____________ or ________________ relationship between inputs and
outputs.

Ans - Technological, engineering

47.In the short period only ___________ factor inputs are changed.

Ans - Variable

48.When marginal product is zero total product will be _________.

Ans - Highest

49.An iso-quant curve shows different alternative combinations of inputs which helps to produce same
level of output where as an iso-cost curve shows ____________ combination of two inputs that can be
purchased with a given amount of investment expenditure while prices of two factor inputs remain
constant.

Ans – Various alternative, particular

50.When all inputs are increased by 8% and output increases by 13% then it is a case of law of
____________________.

Ans - Diminishing returns

51. Internal economies depend on the growth of a ___________ and external economies depend on the
growth of the ____________.

56
Ans - Firms industry

52. Economies of scope refer to the benefits which arise to a firm when it produces more than
_________________ rather than producing ________ separately by two firms.

Ans - One product jointly

53. A short-run production function assumes that the level of output is fixed. (True/False)

Ans - False

54. When average product is increasing, then marginal product is greater than average product.
(True/False)

Ans - True

55.All inputs are fixed in the short run. (True/False)

Ans - False

56. If a firm is producing a given level of output in a technically efficient manner, that level of output is the
most that can be produced with the given levels of inputs. (True/False)

Ans - True

57. Diminishing returns refer to the decrease in marginal product, which results from increases in the
variable input. (True/False)

Ans - True

58. Economies of scale is ___________that accrue to a firm as a result of increase in its scale of production.

Ans - Advantages or benefits

59. Isocost line indicates the _________which the firm can purchase at given prices with a given outlay.

Ans - Different combinations of the two inputs

60. Opportunity cost of anything is the alternative that has been _____.

Ans - foregone

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61. Marginal cost deals with changes in cost of ______ unit where as incremental cost deals with changes in
cost of ________.

Ans - One, a group of units

62. Incremental cost deals with changes in cost of ________.

Ans – AFC

63. Total cost includes ___________ profits.

Ans - Normal

64. Marginal cost is associated with _________ costs.

Ans - Variable

68. Marginal cost measures how total cost changes when input prices change. (True/False)

Ans - False

69. Marginal cost measures how total cost changes when input prices change. (True/False)

Ans - True

70. A short-run cost function assumes that all inputs are fixed in supply (True/False)

Ans – False

71. In _____________ model, the important assumption is that the entrepreneur aims at maximising his
profits.

Ans - Profit Maximisation Model

72. 2. _________ is the point where the firm has stopped incurring losses but is yet to start gaining profit.

Ans - Break Even point

73. 3. The full form of TR is ___________.

Ans - Total Revenue

74. Profit maximisation is the most common and basic objective of business firms. (True/False)

58
Ans - True

75. Sales maximisation automatically leads to profit maximisation. (True/False)

Ans - False

76. According to the economist theory of the firm, a firm is a ____ unit, which converts input into output
and while doing so, tries to create surplus value.

Ans - Profit maximising output

77. The firm aiming for profit maximisation reaches its equilibrium only when it produces _________.

Ans - Profit maximising output

78. Business decisions are made to cope with _____.

Ans - Changes

79. An entrepreneur is an individual who primarily bears the risk of the enterprise. (True/False)

Ans - True

80. The level of output where MC = MR is the point where profits are maximum. (True/False)

Ans - Market share goal

81. 11. _______ is related to demand of sales management and sales decision

Ans - Market share goal

82. _______ is related to price and resource allocation decisions.

Ans - Profit goal

83. . _______ works as a shock absorber.

Ans - Sequential hearing of demand and Decentralisation of decision making

Ans - Slack payment

84. . _______ works as a shock absorber.

59
Ans - Conflicting and opposite

85. Cyert and March point out that the coalition group has multiple, _____ and ________ goals.

Ans - Robin Marris

86. According to ________ modern firms are managed by both the manager and the shareholders
(owners).

Ans - Marris Growth Maximisation Model

87, In _______, the objective of the firm is balanced growth.

Ans - Growth rate of the firm

88. In Marris’ growth maximisation model, the manager tries to maximise his satisfaction and his
satisfaction lies in the ______.

Ans - Differentiated diversification

89. In ______ relationship, growth determines profit.

Ans - Profit maximisation

90. The static model is based on the following assumptions:

1. The model is applicable to a particular time period

2. The firm aims at maximising its sales revenue subject to a minimum profit constraint.

3. The demand curve of the firm slopes downwards from left to right.

4. _________________________.

Ans - The average cost curve of the firm is U-shaped.

91. Sales maximisation model is an alternative for ____ model.

Ans - Profit maximisation

92. Baumol thinks managers are more interested in maximising ___ rather than profit.

60
Ans - Sales

93. In oligopoly market structure, the firms compete more in terms of advertisement, product variations,
etc. rather than ____.

Ans - Price

94. The expenditure which is incurred by the Manager’s indulgence in a company car is termed by
Williamson as _____.

Ans - Management slack

95. In the equation ) ,( D SfU , S stands for ____ and D stands for ____.

Ans - Staff expenditure and discretionary profit

96. Anti-thesis of competition means ____________.

Ans - Absence of competition

97. _________ seller is the price maker and can restrict the output to increase the price.

Ans - Monopoly

98. ___________ monopoly is a situation in which a single seller faces a single buyer.

Ans - Bilateral

99. Under __________ there are only two large buyers for a specific product or service.

Ans - Duopsony

100. ______ is the market situation where there is a monopoly element in case of the buyer.

Ans - Monopsony

101. ______________ is a situation in which there are a few large buyers.

Ans – Oligopsony

102.______________ costs are very important in monopolistic market.

Ans - Selling

103. A monopolist who suffers losses in the short run; will exit in the long run if there is no plant size that
will result in economic profit, that is greater than or equal to zero. (True/False)

Ans - True

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104. If a monopolist is producing a level of output at which demand is inelastic, then the firm is not
maximising profit. (True/False)

Ans - True

105. If a monopolistically competitive market is in long-run equilibrium, each firm earns economic profits.
(True/False)

Ans - False

106. Oligopolists face interdependent profits because industry sales are large. (True/False)

Ans - False

107, _________is a market structure in which a large number of small sellers sell differentiated products
which are close, but not perfect substitutes for one another.

Ans - Monopolistic competition

108. ______ is a market with a single buyer who buys the entire amount produced.

Ans - Monopsony

109. _____ is a few producers specialising in the production of identical goods or differentiated goods
competing with one another.

Ans - Oligopoly

110. 1. Inventory, Capital stock are Macro _________ variables.

Ans - Stock

111. 2. National Income and output are Macro _________ variables.

Ans – Flow

113. Investment is the _________ in the capital stock over a period of time.

Ans - Change

114. _______ means planned and desired whereas _________means actual or realised value.

Ans - Ex-ante; Ex-post

115.. A variable is __________, if its value varies as a result of variations in the value of some other
independent variable.

62
Ans - Dependent

116. . ________ is a statistical measure, which indicates relative changes of a variable over a period of time.

Ans - Point of time

117. A flow variable is a quantity which can be measured in terms of a specific period of time and not at a
__________.

Ans - Wholesale price index

118. ________ is an index of prices paid by producers for their inputs.

Ans - Consumption income ratio

119. ________ tells us the percentage of consumption out of a given level of income.

Ans - Index number

120. When a number of commodities and their prices at two different periods are arranged in a tabular
form, it is called as _____________.

Ans - Index number

121. Macroeconomics is the study of economy-wide phenomena. (True/False)

Ans - True

122. Microeconomics and macroeconomics are two distinct but closely intertwined fields of economics.
(True/False)

Ans - False

123. An increase in the overall level of prices in an economy is referred to as Economic Growth.
(True/False)

Ans - False

124. Wholesale price index measures the prices paid by consumers for all goods and services they
consume. (True/False)

125. GDP Deflator measures the increase in quantity of goods produced in an economy. (True/False)

Ans - False

125. The relationship between consumption and income is called _____________.

ANS - Consumption function

126. __________ is the ratio of change in total consumption to change in total income.

63
ANS - Marginal propensity to consume

127. Two groups of factors that affect consumption function are ________ and ______.

ANS - Subjective and objective factors

128. For the economy as a whole, consumption must equal saving. (True/False)

ANS - False

129. When a country saves a large portion of its income, it will have more capital and more productivity.
(True/False)

ANS - True

130. Consumption, in economics, refers to household spending on durable and nondurable goods as well as
household spending on services. (True/False)

ANS – True

131. Investment made by government and departmental undertakings is called ______ investment.

ANS - Public

132. Depreciation is part of ____________________.

ANS - Gross investment

133. ________ investment does not depend on the changes in the national income.

ANS - Autonomous

134. ________ varies with the changes in the level of national income.

ANS - Induced investment

135. In macroeconomics, investment refers to purchase of mutual funds, stocks, or bonds. (True/False)

ANS - False

136. If the government encourages savings, it would lead to lower interest rates and higher investments.
(True/False)

ANS - True

64
137. When the government has a deficit, it leads to lower investment and higher interest rates.
(True/False)

ANS - True

138. The ratio of change in national income resulting from a change in autonomous investment is called
_________________.

ANS - Multiplier

139. When MPC = 1, multiplier will be ___________.

ANS - Infinite

140. __________ shows the effects of consumption on investment; whereas __________ shows the effect
of investment on consumption.

ANS - Multiplier; accelerator

141. Accelerator is called ____________________.

ANS - Magnification of derived demand

142. As the cash reserve ratio increases, the money multiplier increases. (True/False)

ANS - False

143. The amount of money in the economy partly depends on the behaviour of banks. (True/False)

ANS - True

144. If the reserve ratio is 20%, Rs. 500 can be created from Rs. 100 of reserves. (True/False)

65
ANS - True

145. Stable economic conditions are a prerequisite for a systematic and smooth___________..

ANS - economic growth

146. Monetary policy is the policy of the____________.

ANS - central bank

147. Stabilisation policy is a set of measures introduced to stabilise a _______-or economy.

Ans - financial system

148. ________ means constant price, over a period of time.

Ans - Price stability

149. _____, by regulating its credit policy, can control the credit as per the requirement of the economy.

Ans - Central bank

150. The two instruments of monetary policy are ____ and _____.

Ans = Quantitative and Qualitative techniques

151. The oldest method of controlling credit is _____________.

Ans - Bank Rate or Discount Rate

152. Cash reserves maintained by commercial bank is called ___________.

Ans - Statutory reserve

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153. Reserve over and above the Statutory Reserve is called _______.

Ans - Excess reserve

154. ________ are also known as selective instruments of credit control.

Ans - Qualitative instruments of monetary

155. Liquidity refers to the ease with which an asset is converted to the medium of exchange. (True/False)

Ans - True

156. When the Federal Reserve conducts open-market operations to increase the money supply, it buys
government bonds from the public. (True/False)

Ans - True

157. Under a fractional reserve banking system, banks generally lend out a majority of the funds deposited.
(True/False)

Ans - True

158. If the Federal bank wanted to increase the money supply, it would make open market purchases and
lower the discount rate. (True/False)

Ans - False

159. Increasing the deficit is a tool of monetary policy. (True/False)

Ans - False

160. The importance of fiscal policy as an economic tool was realised only after _____ in 1930s.

Ans - Great Depression

161. ______ are called built-in-stabilisers to correct and, thus restore economic stability.

Ans - Automatic stabilisers

162. Tax on individual is called ___ and tax on commodity is called ___.

67
Ans - Direct tax and indirect tax or commodity tax

163. ______ leads to a reduction in the unequal distribution of income.

Ans - Regressive tax

164. Taxes determined on the basis of the value of a particular product are called ____.

Ans - Ad valorem tax

165. Fiscal policy affects the economy in both the short and long run. (True/False)

Ans - True

166. Fiscal policy refers to the idea that aggregate demand is changed by changes in government spending
and taxes. (True/False)

Ans - True

167. In the short run an increase in government expenditures raises real GDP and the price level.
(True/False)

Ans – True

168. An increase in government purchases is likely to crowd out investment spending by business.
(True/False)

Ans - True

169 Automatic stabilisers are changes in taxes or government spending that increase aggregate demand
without requiring policy makers to act when the economy goes into recession. (True/False)

Ans – True

170. Distribution of essential commodities through fair price shops is known as ___________.

Ans - Public distribution system

171.Import controls are executed through a system of _________ and _________.

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Ans - Quotas and licences

172.Existence of two prices for the same commodity at the same time one controlled price another free
market price is called _____________________.

Ans - Dual pricing

173. Organisations are obliged to provide employees with a ___ and ____ environment.

Ans - Safe, healthy

174. Main purpose of health and safety _______ is the protection of people and the work environment.

Ans – Policies

175. The objective of labour welfare is to make people _____ and _______.

Ans - Happy, satisfied

176.The purpose of labour welfare is to bring about the development of the whole personality of the
workers to make a _______.

Ans – Better workforce

177.Employee welfare measures increase the _______ of an organization .

Ans - Productivity

178. Facilities such as housing schemes, medical benefits, and education and recreation facilities for
workers’ families help in raising their ________.

Ans - Standards of living

179. Two types of welfare measures are ________ and ___________.

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Ans - Statutory, non-statutory

180. _______ offered by the organisations in compliance with the central and state government
regulations.

Ans - Statutory welfare

181.________ are to be provided by the employer so as to provide hygienic and nutritious food to the
employees.

Ans – Canteens

182. Proper and sufficient _____ are to be provided for employees so that they can work safely during the
night shifts.

Ans - Lights

183. ______ have the direct responsibility to provide welfare facilities to the employees.

Ans - Employers

184.The ___________ is empowered to make rules to protect the health, safety and welfare of the
employees working in factory premises.

Ans - Central government

185. ________ takes an active role in offering welfare facilities to the employees in order to improve their
well-being.

Ans - Trade union

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186. ________ takes an active role in offering welfare facilities to the employees in order to improve their
well-being.

Ans - Goodwill and loyalty

187. An organisation is made up of its ________.

Ans - People

188. Profitability of an organisation has a direct relationship with the employees’ ____________.

Ans - Productivity

189. ___________ of the employee affects the business as a whole.

Ans - Welfare benefits

190. The term talent management is usually associated ________HRM practices.

Ans - with competency-based

191. Matching the right person to the right job is an acknowledged need in___________.

Ans - Organizations

192. A competency matrix is a tool by which a person’s___________-.

Ans - competencies are assessed

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193. Talent management refers to the process of____________, developing and retaining current workers,
and attracting highly skilled workers to work for a company.

Ans - Developing and integrating new workers

194. __________ is a process that identifies key competencies for an organization and/or a job and
incorporating those competencies of the organization.

Ans – Competency Mapping

195. To conduct a __________ by asking incumbents to complete a position information questionnaire

(PIQ) is the first step in competency mapping.

Ans - Job analysis

196. _______ is contracting with another company or person to do a particular function.

Ans – Outsourcing

197. Business process outsourcing is the assignment of one or more important business processes to
___________.

Ans - External providers

198. The outside firms that are providing the outsourcing services are _______.

Ans - Third-party providers

199. _________ refers to employing and maintaining exact number of employees with required skills,
abilities and knowledge to perform the existing number of jobs in an organization.

Ans - Right sizing of workforce

200. ___________ results in high labour cost, high cost of production in addition in organizational policies.

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Ans - Overstaffing

201. Indian organizations retrench the employees through various schemes like___________ and
______________.

Ans - Voluntary retirement schemes, golden handshakes

202. ________ is a scheme where an organization gives its employees the opportunity of a flexible working
hour’s arrangement.

Ans - Flexi time

203. Flexi time increases employee ____________ and ______________.

Ans – Satisfaction, production

204. Flexi time benefits employees to avoid the _______of commuting at peak times if their start and finish
times are staggered.

Ans - Stress

205. __________ refers to a multi-disciplined approach to achieving organizational objectives by making

the best use of knowledge.

Ans - Knowledge Management

206. Knowledge management focuses on processes such as ________, _____________ and _____________
knowledge and the cultural and technical foundations that support them.

Ans - Acquiring, creating, sharing

207. _______ needs to be chosen only after all the requirements of a knowledge management initiative
have been established

Ans - Technology

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208. ___________ term is usually associated with competency-based HRM practices.

Ans - Talent management

209. Matching the __________ to the right job is an acknowledged need in organizations.

Ans - Right person

210. People are not _________; they cannot be owned or controlled.

Ans - Organisational asset

211. __________ is the level of commitment and involvement an employee has towards their organization
and its values.

Ans - Employee engagement

212. The ______ has gained a lot of importance in employee engagement and it seems to fit into the Indian
scenario very well

Ans - Hewitt model

213. Organizations can introduce _______ for the employees who outdo themselves for the sake of the
business organization.

Ans - Spotlight awards

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