3 2 English B

SUPPORT STUDY
MATERIAL
XII Economics
Study Material,
HOTS and VBQ
Supporting Material
Class-XII
Economics
Supporting Material
Economics
Design of Sample Question Paper for March, 2013
Examination
Time : 3 hours Maximum Marks : 100
The weightage to marks over different dimensions of the question paper shall be
as under.
Part A : WEIGHTAGE TO CURRENT/SUBJECT UNITS
S.No. Content Unit Mark
Part A : Introductory Micro Economics

1. Introduction 4
2. Consumer Behaviour and Demand 18
3. Producer Behaviour and Supply 18
4. Forms of Market and Price Determination 10
5. Simple applications of Tools of demand and supply curves
Total 50
Part B : INTRODUCTORY MACRO ECONOMICS

1. National Income and Related Aggregates 15
2. Money and Banking 8
3. Determination of Income and Employment 12
4. Government Budget and the Economy 8
5. Balance of payments 7
Total 50
Grand Total 100
6 XII – Economics
Weightage to Forms of Questions
S. Forms of Questions Marks for each No. of Total

No. question question Mark
1. Very short answer type (VSA) 1 10 10
2. Short answer type (SAI) 3 10 30
3. Short answer type (SAII) 4 6 24
4. Long answer type (LA) 6 6 36
Total 32 100
C. No. of Sections
The questions paper will have two section A and B.
D. Scheme of Option
There will be no overall choice. However, there is internal choice in one

question of 3 marks and one question of 4 marks and one question of 6
marks in each section.
E. Weightage to forms of Questions
S.No. Estimated Difficulty Percentage

Level of Questions
1. Easy 30%
2. Average 50%
3. Difficult 20%
F. Typology of Questions
In order to asses different abilities related to the subject, the question paper
is likely to include open-ended questions and numerical questions.
7 XII – Economics
CONTENTS
S. No. Chapter Page
1. Introduction 9 – 12
2. Consumer’s Behaviour & Theory of Demand 13 – 25
3. Production Behaviour and Supply 26 – 40
4. Forms of Market and Price Determination 41 – 47
5. Simple Application of Toos of Demand and Supply Curve 48 – 49
6. National Income 50 – 71
7. Money and Banking 72 – 77
8. Determinations of Income & Employment 78 – 90
9. Government Budget and the Economy 91 – 96
10. Balance of Payment 97 – 1105
Question Papers 106 – 116
Exam. Oriented Questions with Answers 117 – 154
8 XII – Economics
UNIT 1
INTRODUCTION
POINTS TO REMEMBER
❑ Study of Economics is divided into two branches
(a) Micro economics (b) Macro economics
❑ Micro economics studies the behaviour of individual economic units.
❑ Macro economics studies the behaviour of the economy as a whole.
❑ Economy is an Economic Organisation which provides sources to earn
livelihood.
❑ Economic problem is the problem of allocation of limited resources available
in the economy.
❑ Cause of economic problems are :
(a) Unlimited Human Wants (b) Limited Economic Resources
(c) Alternative uses of Resources.
❑ Central Problems of an Economy
Allocation of Resources
What to produce? How to produce? For whom to produce?

❑ For the selection of an opportunity, the sacrifice of next best alternative use
is called opportunity cost.
❑ Production possibility frontier (PPF) shows different combinations of a set
of two goods which can be produced with given resources and production
technology.
9 XII – Economics
❑ Production possibility curve PPC
(a) Slopes downward from left to right because if production of one good
is to increase then production of other good has to be sacrificed.
(b) Concave to the origin because of increasing marginal opportunity cost
or (MRT)
❑ Rightward shift of PPC indicates increase in resources and improvement in
technology.
❑ Leftward shift of PPC indicats decrease in resources and degradation in
technology.
❑ Marginal Rate of Transformation (MRT) is the ratio of number of units of a
good sacrificed to increase one more unit of the other good.
❑ MRT can also called Marginal opportunity cost. It is defined as the additional
cost in terms of number of units of a good sacrificed to increase an additional
unit of the other good.
VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

1. With the help of an example, define micro economics.
2. Define macro economics with the help of an example.
3. Define opportunity cost.
4. Why does an economic problem arise?
5. Write two characteristics of resources.
6. What do you mean by scarcity?
7. What do you mean by marginal opportunity cost?
8. What do you mean by an economy?
HOTS
9. What is meant by economising the use of resources?
10. What do you mean by alternative uses of resources?
11. What will be the shape of PPF when MRT is constant?
12. Unemployment in India is a subject matter of Microeconomics or
Marcoeconomics, give reason.
10 XII – Economics
SHORT ANSWER TYPE QUESTIONS (3/4 MARKS)
1. Distinguish between microeconomics and macroeconomics. Give example.
2. Why does an economic problem arise? Explain the problem of 'How to
Produce'?
3. Explain the problem of 'What to Produce' with the help of an example.
4. ‘For whom to produce’ is a central problem of an economy. Explain.
5. Why is a production possibility curve concave? Explain.
6. Define opportunity cost with the help of an example, how does it differ from
marginal opportunity cost?
7. What is ‘Marginal Rate of Transformation’? Explain with the help of an
example.
HOTS
8. What is PP Frontier? Explain it with the help of an imaginary schedule and
diagram.
9. Show the following situation with PPF
(a) Fuller utilisation of resources (b) Growth of resources.
(c) Under utilisation of resources.
10. “An economy always produces on, but not inside a PPC”. Defend or refute.
11. A lot of people die and many factories were destroyed because of a severe
earthquake in a country. How will it affect the country’s PPC?
12. Calculate MOC from the following table. What will be the shape of PPC and
why.
Combinations Green Chilly (Units) Sugar (Units)
A 100 0
B 95 1
C 85 2
D 70 3
E 50 4
F 25 5
ANSWER OF VERY SHORT TYPE QUESTIONS
1. Micro Economics is that branch of economics in which economic problems
are studied at individual level e.g. the behaviour of consumer, firms, etc.
2. Macro economics is that branch of economics which studies the economy
as a whole and its aggregates e.g. National income, the level of employment.
3. For the selection of an opportunity, the sacrifice of next best alternative use
is called opportunity cost.
4. An economic problem arises due to scarcity of resources having alternative
uses in relation to unlimited wants.
5. Resources are scarce (limited) and they have alternative uses.
6. Scarcity refers to a situation in which demand is more than supply.
7. Marginal rate of transformation (MRT) is the ratio of one good sacrificed to
increase one more unit of the other good.
8. An economy is an economic organisation which provides sources to earn
livelihood.
9. Economising the resources means that resources are to be used in a
manner such that maximum output is realised per unit of output. It also
means optimum utilisation of resources.
10. Alternate use of resources mean, more than one uses to which a resource
can be put.
11. Shape of PPF will be a straight line sloping down ward.
12. Unemployment in India is a subject matter of macroeconomics because it
relates to economy as whole.
HINTS [3 MARKS QUESTIONS]

12. Combinations MOC
A –
B 5
C 10
D 15
E 20
F 25
UNIT 2
CONSUMER'S BEHAVIOUR &

THEORY OF DEMAND
POINTS TO REMEMBER
❑ Consumer : is an economic agent who consumes final goods and services.
❑ Total utility : It is the sum of satisfaction from consumption of all the units
of a commodity at a given time.
❑ Marginal Utility : It is a net increase in total utility by consuming an
additional unit of a commodity.
❑ Law of Diminishing Marginal Utility : As consumer consumes more and
more units of commodity. The Marginal utility derived from the last each
successive units goes on declining.
❑ Consumer’s Bundle : It is a quantitative combination of two goods which
can be purchased by a consumer from his given income.
❑ Budget set : It is a quantitative combination of those bundles which a
consumer can purchase from his given income at prevailing market prices.
❑ Consumer Budget : It states the real income or purchasing power of the
consumer from which he can purchase the certain quantitative bundles of
two goods at given price.
❑ Budget Line : Shows those combinations of two goods which a consumer
can buy from limited income on same curve.
❑ Monotonic Preferences : Consumer’s preferences are called monotonic
when between any two bundles, one bundle has more of one good and no
less of other good.
❑ Change in Budget Line : There can be parallel shift (leftwards or
rightwards) due to change in income of the consumer.
❑ Marginal Rate of Substitution (MRS) : It is the rate at which a consumer
is willing to substitute good X for good y.
Good x
MRS =
Good y
❑ Indifference Curve : is a curve showing different combination of two
goods, each combinations offering the same level of satisfaction to the
consumer.
❑ Properties of Indifference curve :
1. Indifference curves are negatively sloped.
2. Indifference curves are convex to the point of origin.
3. Indifference curves never touch or interesect each other.
4. Higher Indifference curve represents higher level of satisfaction.
❑ Consumer’s Equilibrium : Consumer is in equilibrium when he gets
maximum satisfaction from his limited income.
Condition of Consumer’s Equilibrium
(a) In terms of utility :
MU MUy
(i) In case of one good → MUx x==Px = MUm
Px Py
where MUx → Marginal utility of good X
Px → Price of Good X
(ii) In case of two goods
(b) In terms of Indifference curve : There should be

(i) Decreasing MRS (Marginal Rate of substitution).
Px
(ii) MRS xy =
Py
Px → Price of good x
Py → Price of good y
(iii) Budget line should be tangent to indifference curve.
❑ Demand : It is that quantity which a consumer purchases or is willing to buy
at given price.
❑ Market Demand : It is the sum of total quantity purchased by all the
consumers at given price in the market.
❑ Demand Function : It is the functional relationship between the demand
of a good and factors affecting demand.
❑ Change in Demand : When demand changes due to change in any one
of its determinants other than the price.
❑ Change in Quantity Demanded : When demand changes due to change
in its own price.
❑ Price Elasticity of Demand : It measure the degree of responsiveness of

demand to change in price of the commodity.
Percentage Method
Ed → Elasticity of Demand
∆Q → Change in quantity
❑ Total Expenditure Method : It measures price elasticity of demand on the

basis of change in total expenditure incurred on the commodity by a
household as a result of change in its price.
∆P →∆QChange
P in Price Q − Q0 P0
Ed = × or Ed = (− ) 1 ×
❑ There are three conditions : P →∆PIntitial
Q Price P1 − P0 Q0
1. If the Total Expenditure on theQcommodity
→ Initialchanges
Quantityinversely with the
price change, the demand is relatively elastic (ed > 1)
Or
2. If the total expenditure on the commodity remains the same as before
Percentage Change in Quantity
and after change in price, then Eddemand
= is said to be unitary elastic
(ed = 1) Percentage Change in Price
3. It the total expenditure on the commodity increases with an increase
in its price and decreases with a decrease in the price, then demand
is relatively inelastic (ed < 1)
❑ Geometric Method : Elasticity of demand at any point is measured by
dividing the length of lower segment of the demand curve with the length
of upper segment of demand curve at that point.
Lower segment of the demand curve

Ed =
Upper segment of the demand curve
Diagram to show Geometric or point method :
Elasticity of demand at given point
D is mid point of the demand curve
Lower part of the demand curve

Ed =
Upper part of the demand curve
Degree of Price Elasticity of Demand
❑ Factors affecting Price elasticity of Demand
(a) Behaviour of the consumer
(b) Nature of the commodity
(c) Possibility of postponement of consumption.
(d) Proportion of income to be spent on the commodity
(e) Number of close substitutes
(f) Alternative uses of commodity
(g) Income of the consumer

1. What is meant by utility?
2. How is Total utility derived from marginal utilities?
3. What is Law of Diminishing Marginal Utility?
4. What will be the behaviour of total utility when marginal utility is zero?
5. State condition of consumer's equilibrium in respect of one good.
6. Define consumers equilibrium.
7. What is meant by Marginal Rate of Substitution (MRS).
8. What is meant by budget set.
9. Define Indifference curve Map.
10. How is budget line defined?
11. Why does higher indifference curve give more satisfaction?
12. What is the impact of diminishing marginal rate of substitution on the slope
of indifference curve?
13. Define monotonic preference.
14. How is market demand schedule derived with the help of individual demand
schedules?
15. Define normal good.
16. How does availability of substitute good affect the elasticity of demand?
17. Demand of good ‘X’ falls due to increase in the income of the consumer
what type of good ‘X’ is?
18. What will be the impact on demand of the good due to increase in price of
the substitute good?
19. A rise in price of a good results in a decrease in expenditure of it. Is its
demand elastic or inelastic?
20. What is meant by market demand?
21. Define demand schedule.
22. What cause an upward movement along a demand curve?
23. If the number of consumers increase, in which direction will the demand
curve shift?
24. A straight line demand curve is given. What will be elasticity of demand on
the mid point of this curve.
25. If the slope of a demand curve is parallel to X-axis, what will be the elasticity
of demand?
26. Why is demand of water inelastic?
27. Define price elasticity of demand.
H.O.T.S.
28. Why does total utility increases at diminishing rate due to continuous increase
in consumption?
29. Due to decrease in price of pen why does the demand of ink increase?
30. What will be the behaviour of total utility when marginal utility curve lies
below X-axis?
31. When is demand inelastic?
32. Give two examples of normal goods & inferior goods.
SHORT ANSWER TYPE QUESTIONS (3-4 MARKS)

1. Explain the law of diminishing marginal utility with the help of a utility schedule.
2. Explain consumers equilibrium with utility approach in case of single good.
3. What do you mean by budget line? What are the reasons of change in
budget line?
4. Explain the relationship between total utility and marginal utility with the help
of schedule.
Or
What changes will take place in total utility when –
(a) Marginal utility curve remains above X–axis
(b) Marginal utility curve touches X–axis
(c) Marginal utility curve lies below X–axis.
5. State three features of indifference curve.
6. Why does two indifference curves not intersect each other?
7. Under what situations there will be parallel shift in budget line?
8. Explain the effect of a rise in the prices of ‘related goods’ on the demand
for a good X.
9. Why does demand of a normal good increases due to increase in consumer’s
income?
10. State elasticity of demand of followings :
(a) Luxurious goods
(b) Goods of alternate use
(c) Necessity goods.
11. Distinguish between expansion of demand and increase in demand with the
help of diagram.
12. Measure Price Elasticity of Demand on the following points of a straight line
demand curve :
(a) Centre point of the demand curve.
(b) Demand curve intercepting y-axis
(c) Demand curve intercepting x-axis.
13. Distinguish between change in demand and change in quantity demanded.
14. What will be the effect of following on elasticity of demand.
(a) time factor (b) nature of the product.
15. What will be the slope of demand curve under following situations.
(a) Perfectly elastic demand
(b) Perfectly inelastic demand
(c) Unit elastic demand.
16. State the factors of rightward shift of demand curve. Explain any one.
17. State the factors of leftward shift of demand curve. Explain any one.
18. How does ‘a proportion of income spent on a good’ affect elasticity of
demand.
19. What will be elasticity of demand if
(a) Total expenditure increases due to increase in price.
(b) Total expenditure increases due to fall in price.
20. When price of a good is Rs. 7 per unit a consumer buys 12 units. When
price falls to Rs. 6 per unit he spends Rs. 72 on the good. Calculate price
elasticity of demand by using the percentage method. comment on the
likely shape of demand curve based on this measure of elasticity.
21. A consumer buys 10 units of a good at a price of Rs. 9 per unit. At price
of Rs. 10 per unit he buys 9 units. What is price elasticity of demand? Use
expenditure approach Comment on the likely shape of demand curve on
the basis of this measure of elasticity.
22. A consumer buys 20 units of a good at a price of Rs. 5 per unit. He in
incurs an expenditure of Rs. 120 when he buys 24 units. Calculate price
elasticity of demand of the percentage method. Comment on the likely
shape of demand curve based on this information.
23. When the price of a commodity falls MU nΣ=
?by=Rs. ∆∆
MU
2 ?per
TUq nunit,
–P?its quantity demanded
MU
eD ==of∆Qdemand
increases by 10 units. Its price elasticity × is (–) 1. Calculate its
quantity demanded at the price before change ? whichQ was Rs. 10 per unit.
24. The price elasticity of demand of a commodity is –0.5. At a price of Rs. 20
per unit, total expenditure on it is Rs. 2,000. Its price is reduced by 10
percent. Calculate its demand at the reduced price.
H.O.T.S.
25. State four determinants of price elasticity of demand.
26. Fill in the gaps in the following equations :
(i)
(ii)
(iii)
(iv)
27. Differentiate between :
(i) Normal goods and Inferior goods
(ii) Complementary goods and substitute goods.
28. Why should the budget line be tangent to the indifference curve at the
point of consumer’s equilibrium.
29. Why does consumer stop consumption in case where marginal utility is less
than price of a good?
30. What is budget line? Why is it negatively stoped?
31. A consumer consumes only two goods x & y. state & explain the conditions
of consumer’s equiiprium with the help of utility analysis.
32. Explain the conditions determining how many units of a good the consumer
will buy at a given price.
33. Difine marginal rate of substitution. Explain why is an indifference curve
convex?
LONG QUESTIONS (6 MARKS)

1. Explain the conditions of consumer’s equilibrium with the help of the
indifference curve analysis. Represent the same in a diagram.
2. Explain the determination of consumers equilibrium with the help of a
schedule in case of two commodities by using utility approach.
3. Why does demand curve slope downward?
4. Explain the determinants of price elasticity of demand.
5. With the help of diagrams, explain the effect of following changes on the
demand of a commodity.
(a) A fall in the income of its buyer.
(b) A rise in price of complementary good.
6. What are the conditions of consumer’s equilibrium under the indifference
curve approach? What changes will take place if the conditions are not
fulfilled to reach equilibrium?
7. Explain the three properties of indifference curve.
H.O.T.S.
8. With the help of numerical example measure price elasticity of demand in
the following conditions by total expenditure method :
(i) Demand falls when price is constant.
(ii) Price falls while demand is constant.
9. Whether the following statements are true or false? Give reasons.
(i) Two indifference curves never intersects each other.
(ii) Income effect of inferior good is positive.
(iii) Change in quantity demanded is the explanations of law of demand.
10. Explain the concept of marginal rate of substitution (MRS) by giving an
example. What happens to MRS when consumer moves downwards along
the indifference curve? Give reasons for your answer.
11. Following statements are true or false give reasons :
(i) Increase in number of consumers shifts the demand curve rightward.
(ii) The demand of a commodity becomes elastic if its substitute good is
available in the market.
(iii) The price elasticity of demand is equal to unity at a point situated in
the middle of a straight line demand curve.
ANSWERS
VERY SHORT ANSWER TYPE QUESTIONS

1. Utility is the power of goods to satisfy human wants.
2. Total utility is derived by summing up the marginal utilities TU = ΣMU.
3. Law of diminishing marginal utility states that as more and more units of a
commodity are consumed marginal utility derived from every additional unit
must decline.
4. Total utility will be maximum.
5. MUX = Px
6. Consumers equilibrium refers to a situations in which a consumer gets
maximum satisfaction from his given income and market price.
7. MRS is the rate of sacrifice of one good to get an additional unit of other
good.
8. The set of bundles available to the consumer with his given income at
prevailing market price is called the budget set.
9. A family of indifference curve indicating different levels of satisfaction called
indifference map.
10. Budget line is a line showing all different possible combinations of two
goods which a consumer can buy with his given income and the price of
both goods.
11. Higher difference curve shows a higher level of satisfactions. It shows the
various combinations of excess quantity of both goods than lower indifference
curve.
12. Indifference curve become convex towards the origin.
13. Consumer’s preferences are called monotonic when between any two
bundles, one bundle has more of one good and no less of other good.
14. By summations of individual schedules.
15. Normal goods are those goods, the demand for which increases as income
of the buyer rise. There in positive relation between income and demand
of these goods.
16. The demand of a good becomes elastic if its substitute good is available
in the market.
17. Good ‘X’ is an inferior good.
18. The demand of the good will increase.
19. Elastic.
20. Market demand is the sum of total demand of all the consumers in the
market at a particular time and at a given price.
21. Demand schedule is a tabular representation which represent different
quantities of the commodity demanded at different prices.
22. Increase in price while other factors are constant.
23. Rightward.
24. Equal to unit.
25. Perfectly elastic.
26. Because water is a necessity good.
27. The price elasticity of demand is the degree of responsiveness of quantity
demanded of a commodity to the change in its price.
H.O.T.S. (ANSWERS)
28. As more and more units of commodity are consumed, marginal utility derived
from each successive unit tends to diminish so total utility increases at
diminishing rate up.
29. These are complementary goods.
30. Total utility start to decline.
31. When percentage change in quantity demanded is less than percentage
change in price, the demand is said to be inelastic.
32. Normal goods – Rice, Wheat
Inferior goods – coarse grain, coarse cloth.
UNIT 3
PRODUCTION BEHAVIOUR AND

SUPPLY
POINTS TO REMEMBER
❑ Total production refers to the sum total of production done by using all units
of variable factors over a given period of time.
❑ Average production is the per unit output of variable factor (labour) employed.
AP =
❑ Marginal product is addition to total product resulting from employing one

additional unit of variable input. TP
❑ variable
Returns to a factor : In a short period inputadditional units of variable
when
factors are employed with given fixed factors, then returns to a factor
operates. Returns to a factor shows the changes in total products, marginal
product which arises due to change in ratio between fixed and variable
factor. They are as follows :
(A) Increasing returns to a factor : In the initial stage as more and
more units of variable factor are employed with fixed factor total physical
production increases at increasing rate.
(B) Diminishing returns to a factor : As more and more units of variable
factors are employed with fixed factors, then total product increases at
diminishing rate.
(C) Negative returns to a factor : This is the last stage of returns to a
factor. As more and more units of variable factors are employed with
given fixed factors, total production starts decreasing and marginal
product becomes negative.
Relation between Total, Average and Marginal Product
1. So long as marginal product rises, total product increases at increasing
rate.
2. Marginal product starts falling but remains positive, total product rises
at diminishing rate in this stage.
3. When marginal product becomes negative, then total product starts
falling in this stage.
4. So long as average production is less than marginal product, average
production increases Marginal product intersects average product at
the point where average product is maximum. After this average product
starts falling and is more than marginal product in this stage.
❑ Cost : Cost is the sum of direct (explicit cost) and indirect cost (implicit
cost).
❑ Those monetary payments, which are incurred by producers for payment
those of factor and non-factor inputs which are not owned by produces are
called Direct Cost.
❑ Implicit cost is the cost of self owned resources of the production used in
production process.
TC
Q
❑ Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC or TC = AC X Q
❑ Total fixed cost remains constant at all levels of output. It is not zero even
at zero output level. Therefore, TFC curve is parallel to OX-axis.
TFC = TC – TVC or TFC = AFC × Q
❑ Total variable cost is the cost which vary with the quantity of output produced.
It is zero at zero level of output. TVC curve is parallel to TC curve.
TVC = TC – TFC or TVC = AVC × Q
❑ Average cost is per unit of total cost. It is the sum of average fixed cost and
average variable cost.
AC = or AC = AFC + AVC
❑ Average fixed cost is per unit of total fixed cost.
AFC = or AFC = AC – AVC
❑ Per unit of total variable cost is called average variable cost.
AVC = or AVC = AC – AFC
❑ Net increase in cost for producing one additional unit is called marginal
cost.
MCn = TVCn – TVCn–1 or MC =
Relation Between Short-Term Costs

❑ Total cost curve and total variable cost curve remains parallel to each
other. The vertical distance between these two curves is equal to total fixed
cost.
❑ TFC curve remains parallel to X aixs and TVC curve remains parallel to TC
curve.
∆TVC
TFC
TVC
❑ With increase in level of output, the Q
∆vertical
Q distance between AFC curve
and AC curve goes on increasing. On contrary the vertical distance between
AC curve and AVC curve goes on decreasing but these two curves never
intersect because average fixed cost is never zero.
❑ Marginal cost curve intersects average cost curve and average variable
cost curve at their minimum point. After the point of intersection with increase
in output, AC curve and AVC curve starts rising.
❑ MC curve remains under the AC and AVC curve before inter section point
but after inter section point AC and AVC curve remains under the MC curve.
❑ Average cost and average variable cost falls till they are more than marginal
cost. When these two costs are less than marginal cost, in that situation
both (AC and AVC) rise.
❑ Money received from the sale of product is called revenue.
❑ Total revenue is the amount received from the sale of given units of a
commodity over a particular period of time.
TR = AR × Q or TR= ΣMR
❑ Per unit revenue received from the sale of given units of a commodity is
called average revenue. Average revenue is equal to price.
TR
AR = or = P = Price.
Q
❑ Marginal revenue is net addition to total revenue when one additional unit
of output is sold.
∆TR
MR =
∆Q
❑ Behaviour of TR, AR and MR when per unit price remains constant or firm
can sell additional quantity of a good at same price
(a) Average revenue and marginal revenue remains constant at all levels
of output and AR and MR curves are parallel to ox-axis.
(b) Total revenue increases at constant rate and TR curve is positively
sloped straight line passing through the origin.
❑ Behaviour of TR, AR and MR when price falls with additional unit of output
sold or there is monopoly or monopolistic competition in the market
×Q
(a) Average revenue and marginalPrevenue curves have negative slope.
MR curve lies below AR curve. Q
(b) Marginal revenue falls, twice the rate of average revenue.
(c) So long as marginal revenue is positive, total revenue increases. When
marginal revenue is zero, total revenue is maximum and when marginal
revenue becomes negative, TR starts falling.
❑ Concept of Producer’s Equilibrium : If refers the stage where producer
getting maximum profit.
(A) MR and MC Approach : Conditions of producers equilibrium according to
this approach are :
(a) Equality between MR and MC
(b) MC curve should cut the MR curve from below at the point of equilibrium.
Or
MC should be more than MR after the equilibrium point, with increase in
output.
❑ Supply : Refers to the amount of the commodity that a firm or seller is
willing to offer or to sell in a given period of time at various prices.
❑ Individual Supply : Refers to quantity of a commodity that an individual
firm is willing and able to offer for sale at each possible price during a given
period of time.
❑ Stock : Refers to the total quantity of a particular commodity available with
the firm at a particular point of time.
❑ Supply Schedule : Refers to a tabular presentation which shows various
quantities of a commodity that a producer is willing to supply at different
prices, during a given period of time.
Supply curve : Refers to the graphical representation of supply schedule
which represents various quantities of a commodity that a producer is
willing to supply at different prices during given period of time.
❑ Law of Supply : States the direct relationship between price and quantity
supplied, keeping other factors constant.
Exceptions to Law of Supply
1. Future Expectation
2. Agricultural goods
3. Perishable goods
4. Rare goods
5. Backward countries.
❑ Price Elasticity of Supply : Refer to the degree of responsiveness of
supply of a commodity with reference to a change in price of such commodity.
It is always positive due to direct relationship between price and quantity
supplied.
Percentage change in quantity supplied

Price Elasticity of Supply (Es) =
Percentage change in price
❑ Methods for measuring price elasticity of supply :

1. Percentage Method 2. Geometric Method
❑ Degrees of Elasticity of Supply :
(a) If the tangent to the supply curve passes through the point of origin,
Es at that point is equal to unity.
(b) If the tangent intersects the x-axis, Es at that point is less than unity
(c) if tangent intersects the y-axis Es at that point will be greater than
unity.
Very Short Answer Type Questions (1 Mark)
1. Define production function.
2. Define marginal product.
3. What will be the behavior of total product when marginal product of variable
input is falling but is positive?
4. What is the relation between average and marginal product when average
product is falling?
5. Define average production.
6. What do you mean by fixed factors of production? Give example.
7. By which behaviour of marginal product will total product be maximum
8. How does fall in total product affects marginal product?
9. What do you mean by cost?
10. Define explicit costs.
11. Which cost curve is parallel to ox-axis? Why?
12. What do you mean by implicit costs?
13. Define marginal cost.
14. Why does the difference between average total cost and average variable
cost falls with increase in output?
15. Define Revenue.
16. At what rate average and marginal revenue falls, with fall in per unit price
of a good?
17. What will be the behaviour of Average revenue when total revenue increases
at constant rate?
18. What do you mean by marginal revenue?
19. What will be the behaviour of total revenue when marginal revenue is zero?
20. Why does average cost curve and averages variable cost curve never
intersect each other?
21. What do you mean by producer’s equilibrium?
22. State any two conditions of producers equilibrium according to marginal
revenue and marginal cost approach.
23. Define supply.
24. What do you mean by individual supply schedule?
25. Define Market Supply
26. Name two determinants of supply.
27. What is meant by change in supply?
28. What type of change in price is the cause of upward movement along a
supply curve?
29. What effect does an increase is tax rates have on supply of a commodity?
30. What causes a downward movement along a supply curve?
31. What is meant by leftward shift of supply curve?
32. How does a decrease in price of input effect supply curve of the commodity?
33. Why does a supply curve have a positive slope?
34. What is meant by elasticity of supply?
35. What is the price elasticity of supply, if supply curve is parallel to y-axis.
36. When does the elasticity of supply of commodity called equal to unity?
37. When does the producer increase the supply of a good at given price, give
two reasons.
38. What causes an extension in supply?
39. If the price of a commodity falls by 10% and, consequently, the quantity
supplied decreases by 20%. What will be its price elasticity of supply?
H.O.T.S.
40. Why is total variable cost curve parallel to total cost curve?
41. Why does average fixed cost fall with increase in output?
42. Why is total fixed cost curve parallel to ox-axis.
43. Under which situation will MR fall when an additional quantity of a good is
sold?
44. What behaviour of per unit price will cause the equality of average and
marginal revenue.
45. Give one differences between law of supply and price elasticity of supply.
46. What is the price elasticity of supply associated when the supply curve
passing through to intersect to x-axis?
47. Why does a producer moves downward along a supply curve due to
decrease in price of commodity?
48. What is the price elasticity of supply associated with when a supply curve
passes through the origin at 40° angle?
49. When does the supply curve shift rightward while price remains constant.
50. What effect does an increase in price of competitive good have on the
supply of a commodity?
51. How does the imposition of a tax affect the supply curve of a firm?
1. Why does the law of diminishing returns apply?
2. How does total product behave with change in marginal product?
3. Briefly explain the causes of increasing returns to a factor with the help of
marginal product.
4. Explain the likely behaviour of total product. When only the unit of a variable
factor is increased to increase the output. Use numeric example.
5. Distinguish between total fixed cost and total variable cost.
6. Explain with the help of a diagram the relationship between Average cost,
Average variable cost and Marginal cost.
7. Why is short run average cost curve ‘U’ shaped?
8. Explain diagrammatically the relationship between Average cost, Average
variable cost and Average fixed cost.
9. What changes will take place in total revenue when
(a) Marginal revenue is falling but remains positive.
(b) Marginal revenue is zero.
(c) Marginal revenue is negative.
10. Define marginal revenue. Explain the relationship between average and
marginal revenue when price is constant at all levels of output.
11. How does marginal revenue effect total revenue when price decreases to
increase sale. Use Schedule.
12. What do you mean by producers equilibrium? State the conditions of
producer’s equilibrium with Marginal Revenue and Marginal Cost Curves.
13. Explain producer’s equilibrium with the help of a numerical example using
marginal revenue and marginal cost approach.
14. Draw in a single diagram the average revenue and marginal revenue curves
of a firm which can sell any quantity of the good at a given price. Explain.
15. Complete the following table :
Output Total Cost Average Variable Cost Marginal Cost
(Units) (Rs.) (Rs.) (Rs.)
1 90 – 30
2 – 27 27
3 – – –
4 180 30 –
16. Given below is the cost schedule of a firm. Its average fixed cost is Rs. 20
when it produces 3 units.
Output (units) 1 2 3
Average variable cost (Rs.) 30 28 32
Calculate its marginal cost and average total cost at each given level of
output.
Output Average Variable Cost Total Cost Marginal Cost
(Units) (Rs.) (Rs.) (Rs.)
1 – 60 20
2 18 – –
3 – – 18
4 20 120 –
5 22 – –
18. Define market supply. Explain its two determinants.
19. Distinguish between ‘Change in Supply’ and change in quantity supplied.
20. Explain briefly two causes of a rightward shift of supply curve.
21. Differentiate between contraction in supply and decrease in supply.
22. How does change in price of inputs affect the supply of a good.
23. What is meant by elasticity of supply? What will be the price elasticity under
following conditions :
(a) Percentage change in quantity is greater than percentage change in
price.
(b) Supply remain constant due to increase or decrease in price of the
good.
24. A seller of potatoes sells 80 quintals a day when the price of potatoes is
Rs. 4 per kg. The price elasticity of supply of potatoes is known to be 2.
How much quantity of potatoes will the seller supply when the price rises
to Rs. 5 per kg.
25. The coefficient of elasticity of supply of a commodity is 3. A seller supplies
20 units of the commodity. How much quantity of this commodity will the
seller supply. When price rises by Rs. 2 per unit?
26. The ratio of elasticity of supply of commodities A and B is 1 : 1.5. 20
percent fall in price of A results in a 40 percent fall in its supply. Calculate
the percentage increase in supply of B if its price rises from Rs. 10 per unit
to Rs. 11 per unit.
27. How does change in price of related goods affect the supply of given good.
H.O.T.S.
1. State the causes by which marginal product of a variable factor change
from increasing return to diminishing return.
2. What would be the shape of average revenue curve when total revenue is
positively sloped straight line passing through origin. Explain with the help
of schedule and diagram.
3. What is a supply schedule? Explain how does change in technology of
producing a good affect the supply of that good.
4. Following statements are true or false. Give reasons :
(a) At the stage of producer’s equilibrium, marginal cost will be decreasing.
(b) AR curve always remain above MR curve.
5. Whether following statements are true or false. Give reasons.
(a) Marginal revenue falls twice the rate at which average revenue falls.
(b) Average cost starts increasing when rising portion of marginal cost
intersects.
6. Following statements are true or false. Give reasons :
(a) Diminishing returns to a factor is applicable only when average product
starts falling.
(b) AC and AVC curves do not intersect each other
7. Distinguish between leftward shift to supply curve and downward movement
along a supply curve.
8. “The change in quantity supplied is explanation of law of supply”. Explain.
9. Either following statements are true or false. Give reasons.
(a) There is inverse impact of change in tax rates on the supply of given
good.
(b) Future expectation to increase in price increases the market supply of
a commodity.
10. Explain the geometric method of measuring price elasticity of supply with
the help of diagram.
LONG ANSWER TYPE QUESTIONS (6 MARKS)
1. Explain diagrammatically the effect on total output when units of one factor
is increased and all other inputs are held constant.
2. Complete the following table
Output Total Cost Average Fired Average Variable Marginal
(Units) (Rs.) Cost Cost Cost
0 36
1 – – – 18
2 – – – 14
3 – – 16 –
4 – – – 24
3. What is producer’s equilibrium? Explain the conditions of producer’s
equilibrium through the ‘marginal cost and marginal revenue’ approach.
Use diagram.
4. State whether true or false. Give reasons.
(a) Total product is the area under the marginal product curve.
(b) When marginal product falls, average product always falls.
(c) For the first unit of output MC = AVC.
5. State whether True or False. Give reasons.
(a) When marginal revenue is constant and not equal to zero, then total
revenue will also be constant.
(b) As soon as marginal cost rises, average variable cost also starts rising.
(c) Total product always increases whether there is increasing returns or
Diminishing return to a factor.
6. State whether the following statements are true or false. Give reasons for
your answer.
(a) When total revenue is constant average revenue will also be constant.
(b) Average variable cost can fall even when marginal cost is rising.
(c) When marginal product falls, average product will also fall.
ANSWERS
1 MARK QUESTIONS
1. Diminishing return to a facter
2. Marginal product is net addition to total product when one additional unit
of variable factor is used.
3. Total product increases at diminishing rate.
4. MP falls but it falls at faster rate than AP
5. AP is a per unit output of a variable factor.
6. These factors of production which cannot be varied in short period e.g.
machine, land.
7. When marginal product of a factor is zero, then total product will be maximum.
8. When total product falls, marginal product becomes negative.
9. Cost is the sum of explicit and implicit cost.
10. Those monetary payments by producer on factor and non factor payments
is called explicit cost. Which are not owned by himself.
11. Total fixed cost because TFC remain constant at all level of output.
12. Implicit cost is the cost of self owned resources of producer.
13. Marginal cost is the net addition to total cost when one additional unit of
output is produced.
14. It is because average fixed cost goes on falling with increase in output.
15. Revenue is the amount received from sale of output.
16. Marginal revenue falls twice the rate of average revenue.
17. Average revenue remains constant.
18. Marginal revenue is net additions to total revenue by sale of one additional
unit of output.
19. Total revenue will be maximum.
20. Because AFC can never be zero at any level of output.
21. Producer’s equilibrium is a situation where he gets maximum profit.
22. 1. MR = MC
2. Rising portion of Marginal cost curve intersects marginal revenue curve.
25. Supply refers to the amount of the commodity that a firm or seller is willing
to offer for sale in a given period of time at various prices.
26. Individual supply schedule is a tabular representation showing various
quantities of a commodity which a firm is ready to sell at different prices
during a given period of time.
27. It referes the sum of tatal quantity supplied by all the firms in a market.
28. 1. Number of firms
2. Change in technology
29. Change in supply refers to increase or decrease in supply of a commodity
due to change in factors other than price like technology, price of inputs,
Goal of producer, Number of firms etc.
30. Due to increase in price.
31. As a result of increase in tax rates production cost increase, so the profit
margin of producer will fall and producer will decrease the supply.
32. Decrease in price.
33. Due to change in other factors the supply of a commodity falls at same
price than supply curve shifted to leftward.
34. As a result of decrease in price of input production cost falls then producers
profit margin will increase so producer will increase the supply of commodity.
35. Because of positive relation between price and supply.
36. Price Elasticity of Supply (Es) is a measure of degree of response of supply
for a good to change in its price.
37. Perfectly elastic.
38. When percentage change in price is equal to percentage change in supply.
39. Due to change in other factor like improvement in technology, decrease in
price of inputs.
40. Increase in price of a commodity.
% change in quantity 20%

41. Es = = =2
% change in price 10%
H.O.T.S.
42. Total cost is the sum of total fixed cost and total variable cost. TFC remains
constant at all levels of output.
42. AFC can be calculated from TFC. Which remains constant at all level of
output.
43. TFC remains constant at all levels of output.
44. When per unit price falls by selling an additional unit of a good.
45. Per unit price remains constant.
46. Law of supply reflects the direction of change in supply where as price
elasticity of supply measures the magnitude of change in supply.
47. Inelastic.
48. Because profit margin of firm (producer) decreases.
49. Equal to unity elastic.
50. When the supply of commodity increases due to change in other factors.
51. Supply of the commodity will fall.
52. The supply curve will shift to the left side.
UNIT 4
FORMS OF MARKET & PRICE

DETERMINATION
POINTS TO REMEMBER
❑ Market implies a system with the help of which the buyers and seller of a
commodity or service come to contact with each other and complete the act
of sale and purchase.
❑ Perfect competition is that type of market in which there are very large
number of sellers, sell homogenous goods at constant price without any
competition to consumer who have perfect knowledge about the market.
❑ Under perfect competition, price remains constant therefore, average and
marginal revenue curves also remain constant and parallel to ox-axis.
❑ Under perfect competition price is determined by an industry (a group of
producers and consumers) with the forces of demand and supply. No
individual firm or buyer can influence the price or supply of the product. So
industry is price maker and firm is price taker.
MONOPOLY MARKET
❑ Monopoly is that type of market where there is a single seller, selling a
product which does not have close substitutes.
❑ Under monopoly, due to absence of free entry and exit, firm earn abnormal
profit in the long run.
❑ Under monopoly, monopolist himself determines price of the product
according to the elasticity of demand as he has full control over the supply
of the product.
❑ Under monopoly elasticity of demand for the good is less than one, therefore,
demand curve has steeper slope. (Ed < 1).
❑ Under monopoly, average revenue and marginal revenue has negative
slope, as per unit price falls with increase in output sold.
❑ A monopolist may charge different price from different buyers for the same
good it is called price discrimination.
MONOPOLISTIC COMPETITION
❑ Monopolistic competition is that type of market in which there are large
number of firms, sell differentiated product to the consumers who have
imperfect knowledge about the product and there is tough competition
between firms.
❑ Under monopolistic competition due to lack of control over supply each firm
determines the price of their product, keeping in view the price level set by
other firms.
❑ Under monopolistic competition elasticity of demand for the product is greater
than one therefore demand curve (AR curve) has flatter slope.
❑ Each firm has to incur selling costs (expanditure on advertisement etc.) to
promote its sales. This is because, there is a large number of close substitute
available in the market.
OLIGOPOLY
❑ Oligopoly is the form of market in which there are few sellers. All the firms
produce a certain amount of output of total market supply.
❑ All the firms under oligopoly produce homogenous or differentiated product.
❑ Under oligopoly entry of firms is not restricted but difficult.
❑ Under oligopoly demand curve is undefined.
❑ All the firms are interdependent in respect of price determination under
oligopoly market.
❑ On the basis of production, oligopoly can be categorised in two categories.
(i) Collusive oligopoly is that form of oligopoly in which all the firms
determine price and quantity of output on the basis of cooperative
behaviour.
(ii) Non-collusive oligopoly is that form of oligopoly is which all the firms
determine the price and quantity of output according to the action and
reaction of the firms.
❑ Equilibrium Price : Which corresponds to the equality between market
demand and market supply of a commodity.
❑ Equilibraium quantity which corresponds to the equilibrium price in the
market.
❑ Market equilibrium is a state in which market demand is equal to market
supply. There is no excess demand and excess supply in the market.

1. Define market.
2. What do you mean by homogenous product?
3. How is price determined under perfect competition?
4. What is the common feature shared by perfect and monopolistic competition?
5. If the firms are earning abnormal profits, how will the number of firms in the
industry change?
6. Define the monopoly market.
7. Under which market there is no difference between firm and industry?
8. What is normal profit?
9. Under which form of market the firm is price taker.
10. What is cartel?
11. What is the relationship between AR curve and demand curve in a monopoly
market?
12. What do you mean by price discrimination?
13. Define oligopoly.
14. Define equilibrium price.
15. When does the situation of excess supply arise?
16. What will be the effect on equilibrium price when increase in demand is
more than increase in supply?
17. Under what situation does the equilibrium price remains unaffected when
there is simultaneous increase in demand and supply.
H.O.T.S.
18. What is the relation between average revenue curve and demand curve
under monopolistic competition?
1. Why is firm under perfect competition a price taker and under monopolistic
competition is price maker. Explain?
2. How is the demand curve under monopolistic competition different from
demand curve of a firm under perfect competition?
3. Why is a firm under perfect competition a price taker? Explain.
4. Explain three features of perfect competition.
5. Explain the implication of large number of seller feature of perfect
competition.
6. What will happen if the price prevailing in the market is above the equilibrium
price.
7. Distinguish between monopoly and oligopoly.
8. Explain the concept of excess demand with the help of diagram.
9. Differentiate between ‘Collusive and non-collusive oligopoly.
10. Explain the determination of equilibrium price under perfect competition with
the help of schedule.
11. Explain why is the equitibrium price determined only at the output level at
which market demand and market supply are equal.
H.O.T.S.
12. MR = AR in perfect competition but MR < AR in monopoly and monopolistic
competition why?
13. In which condition decrease in demand can not change the price of
commodity?
14. Explain how firms are interdependent in an oligopoly market.
15. In which competition the availability of close substitutes is present? How
does it effect the price?
16. Explain the implication of ‘freedom of entry and exit to the firms’ under
perfect competition.
1. Explain the characteristics of monopolistic competition.
2. Market for a good is in equilibrium. There is simultaneous increase both in
demand and supply of the good. Explain its effect on market price.
3. Explain the term market equilibrium. Explain the series of changes that will
take place if market price is higher than the equilibrium price.
4. How will a fall in the price of tea affect the equilibrium price of coffee.
Explain the chain of effects.
5. Explain the following features of perfect competition.
(i) Large number of firms or Sellers and Buyers
(ii) Homogeneous Product.
6. Explain features of Oligopoly.
7. Explain how change in price of a substitute commodity would affect market
equilibrium of the commodity X.
8. With the help of a diagram explain the effect of “decrease” in demand of
a commodity on its equilibrium price and quantity.
9. There is simultaneous decrease in demand and supply of a commodity,
when it result in
(i) no change in equilibrium price
(ii) a fall in equilibrium price.
ANSWERS
1 MARK QUESTIONS
1. Market is a system with the help of it the buyers and seller of a commodity
or service come to contact with each other.
2. It means product produced by different firms is identical in all respect like
quality, colour, size, weight etc. such products are perfect substitutes.
3. Price is determined by an industry by the forces of demand and supply.
4. (i) Free entry and exit of firms
(ii) Perfect mobility of factors.
5. The number of firms in the industry will increase.
6. It is a form of market under which there is a single seller, selling a product
which does not have close substitutes.
7. Monopoly.
8. It is the minimum profit which a firm must get to stay in business.
9. Perfect competition.
10. A cartel is a group of firms which jointly set ‘output and price’ policy of its
product in such a way so as to reap benefits of monopoly.
11. Both AR curve and demand curve are the same in a monopoly market.
12. Price discrimination is a policy under which a seller sells a similar product
at different prices to different buyers.
13. Oligopoly is a market structure where there are few firms competing for
their homogenous or differentiated products.
14. It is the price at which demand = supply.
15. When market price is more than equilibrium price and market supply is
more than market demand.
16. When increase in demand is more than increase in supply, equilibrium price
will increase.
17. When increase demand is equal to increase in supply the equilibrium price
will remain same.
H.O.T.S.
18. Both AR and MR curves have negative slope
UNIT 5
SIMPLE APPLICATION OF TOOLS

OF DEMAND AND SUPPLY CURVE
POINTS TO REMEMBER
❑ With the help of curves, these variables can be studied, which represent
positive or negative relation.
❑ Variables are of two types (i) dependent variables (ii) independent variables.
Generally independent variables are represented on OY-axis, where as
dependent variables are represented on OX-axis.
❑ While plotting curves, value on OX-axis or OY-axis should be according to
reasonable proportion.
❑ Relationship between variables can be understood easily through curves
because their effect is long lasting on our minds.
❑ In Economics demand and supply curves are used to express following :
1. Data relating to demand and supply.
2. To determine equilibrium in various economic activities.
3. To show the effect of change in demand and supply on equilibrium and
market price.
4. For graphic representation of different categories of elasticity of demand
and supply.
5. Determination of floor price and price ceiling in situation of excess
demand and excess supply.
❑ Govt. determines maximum and minimum price ceiling with the help of
demand and supply.
❑ Govt. determines tax rate in accordance with elasticity of demand and
supply.
❑ Demand and supply curve explain equilibrium under following situations :
1. Rate of interest (Demand for money and supply for money)
2. Wage rate
3. Price determination of factors of production.
4. Determination of foreign exchange rate.
5. Determination of tax.
6. Saving of consumer.
UNIT 6
NATIONAL INCOME
POINTS TO REMEMBER
❑ Good : In economics a good is defined as any physical object, natural or
man-made, that could command a price in the market.
❑ Consumption Goods : Those goods which satisfy human wants directly.
❑ Capital Goods : Those final goods which help in production. These goods
are used for generating income.
❑ Final Goods are those goods which are used either for final consumption
or for investment.
❑ Intermediate Goods refers to those goods and services which are used
for further production or for resale. These goods do not fulfil needs of
mankind directly.
❑ Investment : Addition made to the stock of capital during a period is called

investment. It is also called capital formation.
❑ Depreciation : is expected fall in value of fixed capital goods due to

normal wear and tear and obsolescence.
❑ Gross Investment : Total addition of capital goods to the existing stock of

capital during a time period at market price.
❑ Net Investment : is a measure of net availability of new capital or new

addition to capital stock in an economy.
Net Investment = Gross investment – Depreciation.
❑ Stocks : Variables whose magnitude is measured at a particular point of

time are called stock variables.
❑ Flows : Variables whose magnitude is measured over a period of time are

called flow variable.
❑ Economic Territory : Economic (or domestic) Territory is the geographical
territory administrated by a Government within which persons, goods, and
capital circulate freely.
❑ Scope of Economic Territory :
(a) Political frontiers including territorial waters and airspace.
(b) Embassies, consulates, military bases etc. located abroad.
(c) Ships and aircraft operated by the residents between two or more
countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the
international waters.
❑ Normal Resident of a country : is a person or an institution who ordinarily

resides in a country and whose centre of economic interest lies in that
country.
NATIONAL INCOME AGGREGATES

Domestic Aggregates
❑ Gross domestic Product at Market Price (GDPMP) is the market value

of all the final goods and services produced by all producing units located
in the domestic territory of a country during a financial year.
❑ Net Domestic Product at Market Price (NDPMP) : NDPMP = GDPMP –

Depreciation (consumption of Fixed capital)
❑ Domestic Income : (NDPFC) : It is the factor income accruing to owners

of factors of production for suppling factor services with in domestic territory
during an accounting year.
NATIONAL AGGREGATES
❑ Gross National Product at Market Price (GNPMP) is the market value of
all the final goods and services produced by all producing units (in the
domestic territory and abroad) of a country during a financial year. GDPMP
+ NFIA = GNPMP
❑ National Income (NNPFC) : is a measure of factor earnings of the residents

of a country both from economic (Domestic) territory and from abroad
during an accounting year.
NNPFC = NDPFC + NFIA = National Income.
❑ National Income at Current Prices (Nominal National Income) : It is

the money value of all final goods and services valued at current prices
produced by normal residents of a country over a particular period of time.
❑ Real National Income or National Income at Constant Prices : It is

also called as real income. It is the money value of all final goods and
services valued at constant prices produced by normal residents of a country.
❑ Value of Output : Market value of all goods and services produced by an

enterprise during an accounting year.
❑ Value added : It is the difference between value of output of a firm and

value of inputs bought from the other firms during a particular period of
time.
❑ Double Counting : Counting the value of a commodity more than once

while estimating national income is called double counting.
❑ Ways to solve the problem of double counting.
(a) By taking the value of only final goods.
(b) By taking value added.
❑ National Disposable Income (NDI) : It is defined as net national product

at Market price (NNPMP) plus net current transfer from rest of the world. NDI
= NNPMP + Net current transfers from rest of the world.
OR
= National income + net indirect tax + net current transfers from the rest of
the world.
❑ Gross National Disposable Income (Gross NDI)
= GNPMP + Net current Transfers from rest of the world.
❑ Net National Disposable Income (Net NDI)
= NNPMP + Net current Transfers from rest of the world.
OR
= Gross NDI – Depreciation.
❑ Concept of Value Added of One Sector or One Firm
1. Value output = Sales + Net Stock.
2. Gross Value added at market prices (GVAMP) = Value of output –

Intermediate consumption
3. Net value added at market price (NVAMP) = GVAMP – Depreciation.
4. Net value added at factor cost (NVAFC) = NVAMP – Net indirect tax.
Note: By adding up NVAFC of all the sectors, we get NDPFC or Domestic Income.
5. When will be NDPMP be less than NDPFC?
6. State the meaning of consumption of fixed capital?
7. State the meaning of injection in income flow, with the help of an example.
8. What do you mean by leakage in income flow?
9. State whether the following are stock or flow :

(i) Losses (ii) Capital
(iii) Production (iv) Wealth
10. Define ‘Nominal GNP’
11. What do you mean by ‘Real GNP’?
12. Define stock variable.
13. Define capital goods.
H.O.T.S.
1. Which of the two NVAFC and NVAMP is equal to sum of factor income.
2. Why is money received from sale of shares is not included in domestic

factor income.
3. What aggregate do we get, when we add up the net value added of all
producing sectors of an economy?
4. How value added method solve the problem of double counting?
5. What is per capita real GDP.
6. Complete the following aggregates.
(i) National Income = Domestic income .......................
(ii) Personal Income = Private income .......................
(iii) Net value added at FC = Gross output .......................
SHORT ANSWER TYPE QUESTIONS (3 MARKS)

1. Distinguish between real and nominal gross domestic product.
2. Explain the basis of classifying goods into intermediate and final goods.
Give suitable examples.
3. Distinguish between consumer goods and capital goods. Which of these
are final goods?
4. Explain how distribution of G.D.P. is its limitation as a measure of economic
welfare.
5. Explain the meaning of “Domestic Territory of a country”.
6. Distinguish between ‘factor income’ and ‘transfer income’.
7. Classify the following into stock and flow :
(i) Population of India (ii) Exports
(iii) Investment (iv) Expenditure on food by household.
(v) National Capital (vi) Deposits in saving account of bank.
8. Explain how distribution of Gross domestic product is a limitation in taking
domestic product as an Index of welfare.
9. How can externalities be a limitation of using gross domestic product as an
index of welfare.
10. Giving reasons, classify the following into intermediate and final goods :
(i) Machines purchased by a dealer of machines.
(ii) A car purchased by a house hold.
11. Distinguish between stock and flows. Give an example of each.
12. What is meant by a normal resident? State which of the followings are
treated as normal resident of India.
(i) An American working in the office of WHO located in India.
(ii) Indian working in U.S.A. embassy located in India.
13. Which of the following is factor income from abroad for an Indian resident
and why?
(a) Interest income received by Indian resident on the bonds of companies
operating in USA.
(b) Remittances by Indians settled abroad to their families in India.
❑ Giving reason explain how should the following be treated in estimating
national income:
(i) Expenditure on fertilizers by a farmer
(ii) Purchase of tractor by a farmer.
H.O.T.S.
14. Explain why subsidies are added to and indirect taxes deducted from
domestic product at market price to arrive at domestic product at factor
cost.
15. Giving reasons, explain how are the following treated in estimating national
Income by the income method.
(a) Interest on a car loan paid by an individual
(b) Interest on a car loan paid by a Govt. owned company.
16. Why do we include the imputed value of goods but not services while
estimating production for self consumption?
17. Define operating surplus, write its components.
18. Distinguish between domestic product and national product. When can
domestic product be more than National Product.
LONG ANSWER QUESTIONS (6 MARKS)

1. How will you treat the following while estimating national income of India.
(a) Dividend received by an Indian from his investment in shares of a

foreign company.
(b) Money received by a family in India from relatives working abroad.
(c) Interest received on loan given to a friend for purchasing a car.
2. How will you treat the following while estimating national income of India?
Give reason for your answer?
(a) Dividend received by a foreigner from investment in shares of an

Indian Company.
(c) Interest received on loan given to a Friend for purchasing a car.
3. Explain the problem of double counting in estimating national income, with

the help of an example. Also explain two alternative ways of avoiding the
problem.
4. Distinguish between real gross domestic product and nominal gross domestic
product. Can gross domestic product be used as an index of welfare of the
people? Give two reasons.
5. How will you treat the following in estimating national income of India? Give
reasons for your answer.
(a) Value of bonus shares received by share holders of a company.
(b) Fees received from students.
(c) Interest received on loan given to a foreign company in India.
6. Explain the steps of measuring national income by income method.
7. Giving reasons, categories following into transfer payment or factor payments.
(a) Financial help gives to flood victims
(b) Old age pension.
(c) Imputed rent.
8. Calculate private income :
Rs. (Crore)
(i) National interest 10
(ii) Personal disposable income 150
(iii) Corporate Profit Tax 25
(iv) Personal Taxes 50
(v) Retained earnings of private corporations 05
[Ans. : Rs. 230 crores]
10. Giving reasons explain whether the following are included in domestic product
of India.
(i) Profit earned by a branch of foreign bank in India.
(ii) Payment of salaries to its staff by an embassy located in New Delhi.
(iii) Interest received by an Indian resident from firms abroad.
11. How will you treat the following while estimating national income. Give reasons
for your answer.
(i) Capital gain on sale of house.
(ii) Prize won is lottery.
(iii) Interest on public debt.
12. While estimating national income. How will you treat the following. Give
reason for your answer.
(i) Imputed rent of occupied house.
(ii) Interest received on debentures.
(iii) Financial help received by Flood victims.
NUMERICALS FOR PRACTICE

1. Calculate (i) gross domestic product at factor cost and (ii) net national
disposable income : 6
Rs. (in Crores)
(i) Net indirect tax 130
(ii) Government final consumption expenditure 100
(iii) Profit 90
(iv) Net domestic capital formation 120
(v) Change in stocks (–) 10
(vi) Private final consumption expenditure 500
(vii) Net imports 20
(viii) Net current transfers to abroad 10
(ix) Net factor income to abroad 30
(x) Gross domestic capital formation 160
2. From the following data calculate GNP at FC by (a) Income method
(b) Expenditure method.
Rs. (Crore)
(i) Net domestic capital formation 500
(ii) Compensation of employees 1850
(iii) Consumption of fixed capital 100
(iv) Govt. final consumption expenditure 1100
(v) PVT. final consumption expenditure 2600
(vi) Rent400
(vii) Dividend 200
(viii) Interest 500
(ix) Net Exports (—) 100
(x) Profits 1100
(xi) NFIA (—) 50
(xi) Net Indirect taxes 250
[Ans. : Rs. 3900 Crore]
3. There are only two producing sectors A and B in an economy. Calculate:

(a) Gross value added at market price by each sector
(b) National income.
Rs. (Crore)
(i) Net factor income from Abroad. 20
(ii) Sales by A 1000
(iii) Sales by B 2000
(iv) Change in stock of B (–) 200
(v) Closing stock of A 50
(vi) Opening stock of A 100
(vii) Consumption of fixed capital by A and B 180
(viii) Indirect taxes paid by A and B 120
(ix) Purchase of raw material by A 500
(x) Purchase of raw material by B 600
(xi) Exports by B 70
[Ans. : Rs. 1370 Crore]
4. From the following data, calculate
(a) Gross Domestic Product at Factor Cost (GDPFC) and
(b) Factor income to abroad.
Rs. (Crore)
(i) Gross Domestic Capital formation 600
(ii) Interest 200
(iii) Gross national product at market price 2800
(iv) Rent300
(v) Compensation of employees 1600
(vi) Profit 400
(vii) Dividends 150
(viii) Factor income from abroad. 50
(ix) Change in stock 100
(x) Net indirect taxes 240
(xi) Net fixed capital formation 400
(xii) Net Export (–) 30
[Ans. : (a) GDPFC = 2600 Crores (b) FIPA = 90 Crores]
5. Calculate net national product at factor cost and gross national disposable
income from the following :
Rs. (Crore)
(i) Net current transfers to Row 10
(ii) Savings of non-departmental enterprises 60
(iii) Net indirect tax. 90
(iv) Income from property and entrepreneurship to the Govt.
administrative departments 80
(v) Consumption of fixed capital 70
(vi) Personal Tax 100
(vii) Corporation tax 40
(viii) National debt interest 30
(ix) Current transfer payments by Govt. 50
(x) Retained Earnings of PVT. Corporate 10
(xi) Personal disposable income. 1100
[Ans. : (a) NNPFC = Rs. 1320 Crores (b) GNDI = 1470 Crores]
6. Calculate (a) Gross domestic product at market price (GDPMP) (b) Factor
income from abroad.
Rs. (Crore)
(i) Profit 500
(ii) Export 40
(iii) Compensation of Employees 1500
(iv) Net current transfer from Row 2800
(v) Rent90
(vi) Interest 300
(vii) Factor income to abroad 400
(viii) Net indirect tax 120
(ix) Gross fixed capital formation 250
(x) Net domestic capital formation 650
(xi) Gross fixed capital formation 700
(xii) Change in stock 50
[Ans. : GDPMP = 3050 Crores (b) FIRA = 120 Crores]
7. From the following data calculate (a) GDPMP and (b) Factor income from
abroad.
Rs. (Crore)
(i) Gross national product at factor cost 6150
(ii) Net export (–) 50
(iii) Compensation of Employees 3000
(iv) Rent800
(v) Interest 900
(vi) Profit 1300
(vii) Net Indirect tax 300
(viii) Net domestic capital formation 800
(ix) Gross fixed capital formation 850
(x) Change in stock 50
(xi) Dividend 300
(xi) Factor income to abroad. 80
[Ans. : GDPMP = 6400 Crores; FIFA = 130 Crores]
8. Calculate ‘Net National Disposable Income’ and ‘Personal Income’ from the
following data.
Rs. (Crore)
(i) Personal tax 212

(ii) Net national product at factor cost 2500
(iii) Net indirect tax 180
(iv) Domestic product accruing to Govt. 500
(v) Retained earnings of PVT. Corporations 80
(vi) NFIA23
(vii) National debt interest 100
(viii) Net current transfer from abroad 20
(ix) Corporation tax 70
(x) Current transfer from Government 30
[Ans. : NNDI = 2700 Crore; P.I. = 2000 Crore]
9. Find out (a) national income and (b) net national disposable income :
Rs. (Crore)
(i) Factor income from abroad 15

(ii) Private final consumption expenditure 600
(iii) Consumption of Fixed capital 50
(iv) Government final consumption expenditure 200
(v) Net current transfers to abroad (–) 5
(vi) Net domestic fixed capital formation 110
(vii) Net factor income to abroad 10
(viii) Net imports (–) 20
(ix) Net indirect tax 70
(x) Change in stocks (–) 10
[Ans. : N.I. - 840 Crore NNDI - 915 Crore]
10. From the following data show that net value added at factor cost (NVAFC)
is equal to the sum of factor incomes.
Rs. (Crore)
(i) Purchase of raw material and other input from
the domestic market 600
(ii) Increase in stock 200
(iii) Domestic sales 1800
(iv) Import of raw material 100
(v) Exports 200
(vi) Depreciation of fixed capital 75
(vii) Salaries and wages 600
(viii) Interest payments 450
(ix) Rent75
(x) Dividends 150
(xi) Undistributed profits. 80
(xi) Corporate profit tax 20
(xii) Indirect tax 50
[Ans. : 1375 Crores]
11. From the following data calculate (a) Private income (b) Personal income
(c) Personal disposable income.
Rs. (Crore)
(i) Income from property and entrepreneurship accruing
to the Govt. administrative Dept. 100
(ii) Saving of non-departmental enterprises 80
(iii) Factor income from NDP occurring to Private sector 500
(iv) Corporation tax 30
(v) Saving of Pvt. corporate sector 65
(vi) Direct taxes paid by house hold 20
(vii) Current transfers from Govt. Administrative departments 10
(viii) Current transfer from Row 20
(ix) Factor income from abroad 5
(x) Operating surplus 150
(xi) Factor income to abroad 15
[Ans. : (a) 520 Crore (b) 425 Crore (c) 405 Crore]
ANSWERS
1 Mark Questions
1. Net Export means the difference between export and imports.
Net export = Export – Imports
2. Current transfers are those transfers which are paid from current income
and are added in current income of recipient.
3. Normal resident of a country is that person or institution whose centre of

economic interest lies in that country.
4. Economic territory means that geographical territory administrated by a

Govt. within which persons, goods and capital circulates freely.
5. When subsidies are more than indirect taxes.
6. It decreases in the value of fixed capital due to normal wear and tear and
foreseen obsolescence.
7. ‘Injection’ is that economic concept, which add to flow of income and goods
e.g., investment, Exports.
8. “Leakage” is that economic concept, which has negative impact on flow of

income.
9. (i) Flow (ii) Stock (iii) Flow (iv) Stock
10. It is the gross money value of National Product of current year valued at
current prices.
11. It is the gross money value of National product of current year valued at
base year price.
12. A variable whose value is measured at a point of time.
13. Goods used is producing other goods are called capital goods.
H.O.T.S.
1. NVAFC
2. It is the financial transactions and does not have any impact on production.
3. NDP.
4. By deducting intermediate consumption from value of output, the problem
of double counting can be solved.
5. When per capita income is measured from real GDP (measured at constant
price) is called per capita real GDP.
6. (i) National income = Domestic Income + Net factor income from abroad.
(ii) Personal income = Private income – Corporate tax – Undistributed

profit.
(iii) Net value added at FC = Gross Output – Intermediate Consumption –

Depreciation – Net Indirect Tax
HINTS
3-4 Marks Questions

7. (a) Stock (b) Flow
(c) Flow (d) Stock
(e) Stock (f) Stock
10. (a) Intermediate good because it is for resale
(b) final good because purchased by ultimate consumer.
15. (a) Not include as paid for consumption expd.
(b) Included as paid for production expd.
NUMERICAL QUESTIONS (6 MARKS)

1. (i) GDPFC :
VI + II – VII + X – I
500 + 100 – 20 + 160 – 130
760 – 150 = 610
(ii) NNDI
610 – (160 – 120) – 30 + 130 – 10
740 – 80 = 660
2. GNPFC
(a) Income Method :
= (ii) + (vi) + (viii) + (x) + (xi)
NNPFC = 1850 + 400 + 500 + 1100 + (– 50)
= 3800
GNPFC = 3800 + 100 = 3900 Crores
(b) Expd. Method = (i) + (iii) + (iv) + (v) + (ix) + (xi) – (xii)
500 + 100 + 1100 + 2600 + (– 100) + (– 50) – 250
= 3900 Crore
3. GVAMP of Sector A
1000 – 50 – 500 = 450
GVAMP of Sector B
2000 – 200 – 600 = 1200
Total 450 + 1200 = 1650
NNPFC = 1650 – 150 – 120 + 20 = 1370 Crores
4. GDPFC :
NDPFC = (v) + (ii) + (iv) + (vi)
= 1600 + 200 + 300 + 400
= 2500
GDPFC = NDPFC +CFC
CFC = GDCF – NDCF (NFCF + ∆S)
= 600 – (400 + 100) = 100
GDPFC = 2500 + 100 = 2600 Crore.
FIPA
GNPMP = GDPFC + NFIA + NIT
2800 = 2600 + NFIA + 240
NFIA = – 40
NFIA = FIFA – FIPA
– 40 = 50 – FIPA
FIPA = 50 + 40 = 90 Crores
5. NNPFC = (xi) + (vi) + (vii) + (x) – (viii) – (ix) + (i) + (ii) + (iv)
= 1100 +100 + 40 + 10 – 30 – 50 + 10 + 60 + 80
= 1320 Crores
GNDI = NNPFC + (iii) + (v) – (i)
= 1320 + 90 +70 – 10
= 1470 Crores
6. (a) GDPMP :
NDPFC = (iii) + (v) + (vi) + (vii)
= 1500 + 500 + 300 + 400
= 2700 Crores
GDPMP = NDPFC + CFC + NIT
CFC = (GFCF + S) – 650
= (700 + 50) – 650
= 100
NIT = 250
GDPMP = 2700 + 100 + 250
= 3050
(b) FIFA
GNPFC = GDPMP + NFIA – NIT
2800 = 3050 + NFIA – 250
NFIA = 0
0 = FIFA – 120
FIFA = 120 Crores
7. GDPMP :
NDPFC = (iii) + (iv) + (v) + (vi)
= 3000 + 800 +900 + 1300 = 6000
GDPMP = NDPFC + CFC + NIT
CFC = GDCF – NDCF
= (GFCF + s) – NDCF
= (850 + 50) – 800
= 100
NIT = 300
GDPMP = 6000 + 100 + 300 = 6400 Crores
FIFA :
GNPFC = GDPMP + NFIA – NIT
6150 = 6400 + NFIA – 300
NFIA = 50
50 = FIFA – 80
FIFA = 130
8. NNDI = (ii) + (iii) + (viii)
= 2500+ 180 + 20
= 2700
Pr. I = (ii) – (iv) + (vii) + (viii) + (x) – (ix) – (v)
= 2500 – 500 + 100 + 20 + 30 – 70 – 80
= 2000 Crores
9. N.I. = (ii) + (iv) + (vi + x) – (viii) – (ix) – (vii)
= 600 + 200 + 110 + (– 10) – (–20) – 70 – 10
= 930 – 90
= 840 Crores
NNDI = N.I + ix – v
= 840 + 70 – (–5)
= 915 Crore
10. NVAFC = (ii) + (iii) + (v) – (i) – (iv) – (vi) – (xiii)
= 200 +1800 + 200 – 600 – 100 – 75 – 50
= 1375 Crores
Sum of factor income = (vii) + (viii) + (ix) + (x) + (xi) + (xii)
= 600 + 450 + 75 + 150 + 80 + 20
= 1375
11. (a) PVT Income – Rs. 520 Crore
(b) P.I. – Rs. 425 Crore
(c) P.D.I. = Rs. 405 Crore
UNIT 7
MONEY AND BANKING

POINTS TO REMEMBER
❑ Money : Money may be defined as anything which is generally acceptable
as a medium of exchange and does the function of ‘unit of account’ and
measures of value.
❑ Barter Exchange : It is a system of exchange in which transactions are

made by exchange of goods.
❑ Difficulties involved in the Barter Exchange
1. Absence of a common unit.
2. The lack of double coincidence of wants
3. Lacks of any satisfactory units to engage in contracts involving future

payments.
4. Does not provide for any method of storing generalised purchasing

power.
5. Lack of divisibility.
❑ Supply of Money : Total stock of money with the public at a given point
of time.
❑ Commercial Banks : Commercial Banks is a financial institution who accepts

deposits from the general public and provide loans facilities.
❑ Central Banks : The central Bank is the apex institution of monetary and
banking system of country.
5. Custodian of foreign exchange.
6. Controller of money supply and credit.
MONEY CREATION CREDIT CREATION BY

COMMERCIAL BANKS
K =
K = Credit Multiplier
R = Cash reserve ratio

1. Define money.
2. What is meant by M.
3. What is meant by the term money supply?
4. What is bank rate? 1

5. State two primary functions of money.
6. What is meant by credit creation?
7. What is credit multiplier?
8. Write two functions of central banks.
9. What is cash reserve ratio (CRR)?
10. What is statutory liquidity ratio (SLR)?
11. What is demand deposits by banks?
12. State two monetary measures of credit control by central bank.
13. What are various money stock measures?
H.O.T.S.
14. What is margin requirement of loans.
1. Explain the function of money as ‘Unit of value’.
2. How does money solve the problem of double coincidence of wants?
3. Explain ‘ Store of value’ function of money.
4. What are open market operations? What is their effect on availability of

credit?
5. Explain the ‘lender of last resort’ function of central bank.
6. Distinguish between SLR and CRR. Explain the Role of SLR and CRR in
credit control.
7. How does changes in Bank rate affect money creation by commercial Bank?
Explain.
8. State the role of central Bank as a banker of the Government.
9. State any four functions of money.
10. Explain the ‘Standard of deferred payment’.
11. How central bank is controller of credit?
12. Explain how does followings helps to control the credit creation.
(i) Open market operation
(ii) Margin requirement of loans
H.O.T.S.
13. What is meant by statutory liquidity ratio (SLR). State the effect of rise in
rate of SLR on creation of credit.
14. Explain ‘currency authority’ and ‘controller of credit’ functions of central

bank.
15. Explain effect of increase in bank rate on credit creation by commercial

banks.
1. Define Central Bank. What are the functions of Central Bank?
2. Explain any four functions of money.
3. How does a central bank influence credit creation by commercial banks

through ‘open market operation’ explain.
4. Explain the process of credit creation or money creation by commercial

banks with the help of numerical example.
ANSWERS
1 MARK QUESTIONS
1. Any thing which is generally acceptable by the people as medium of exchange,
measure of value, standard of deferred payment and performs the function
of store of value.
2. M1 = currency held with public + demand deposit in banks + other deposit

in RBI.
1
3. Total stock of money which are held by the public at a particular point of
time in an Economy. LRR
4. Rate at which central bank lends to the commercial bank.
5. 1. Medium of Exchange
2. Measure of value
6. Credit creation means power to expand demand deposits of Commercial

Banks.
7. Credit multiplier measures, number of times deposits are multiplied as credit.
Credit multiplier =
8. (i) Currency Authority
(ii) Controller of money and credit
9. Commercial Banks are required under law to keep a certain percentage of
their total deposit in the central banks in the form of cash reserves. This
is called CRR.
10. Every Commercial Bank is required to keep a fixed percentage (ratio) of its
assets in liquid form, called SLR.
11. Demand deposits are deposits which can be withdrawn from bank at any
time by the account holder.
12. (i) Bank Rate policy.
(ii) Open market operation
13. Following four measures of money stock are used.
M1 = C + DD + OD
M2 = M1 + Saving deposit in Post Office Saving banks.
M3 = M1 + Net time deposit of banks
M4 = M3 + Total deposits with post office saving organisation (except NSC).
HOTS
14. Marginal requirement of loan means the difference in percentage between
the amount of the loan and market value of the security offered by the
borrower against the loan.
HINTS
3-4 MARKS QUESTIONS

11. Quantitative measures and qualitative measures of monetary policy.
13. Increase in SLR reduces credit availability.
UNIT 8
DETERMINATIONS OF INCOME &

EMPLOYMENT
POINTS TO REMEMBER
❑ Aggregate demand refers to total demand for goods and services in the
economy. AD represents the total expenditure on goods and services in an
economy.
❑ Main components of Aggregate demand are :
(i) Household consumption expenditure (C).
(ii) Investment expenditure (I).
(iii) Govt. consumption expenditure (G).
(iv) Net export (X – M).
In two sector economy AD = C + I.
❑ Aggregate supply is the total supply of goods and services in the economy.
It is also the value of total output available is an economy during a given
period of time.
AS = C + S
❑ Aggregate supply represents the national income of the country.
AS = Y (National Income)
❑ Consumption function shows functional relationship between consumption
and Income.
C = F(Y)
where C = Consumption
Y = National Income
F = Functional relationship.
❑ Consumption function (propensity to consume) is of two types.
(a) Average propensity to consume (APC)
(b) Marginal propensity to consume (MPC)
❑ Average propensity to Consume (APC) : Average propensity to consume
refers to the ratio of consumption expenditure to the corresponding level of
income.
APC =
Important Points about APC

(i) APC is more than 1 : as long as consumption is more than national
income before the break-even point, APC > 1.
(ii) APC = 1, at the break-even point, consumption is equal to national
income.
(iii) APC is less than 1 : beyond the break-even point. Consumption is
less than national income.
(iv) APC falls with increase in income.
Consumption(C)
(v) APC can never be zero : because even at zero level of national
income, there is autonomous consumption.
Income(Y)
❑ Marginal Propensity to Consume (MPC) : Marginal propensity to consume

refers to the ratio of change in consumption expenditure to change in total
income.
Change in consumption C
MPC = Change in Income Y
Important Points about MPC

(1) Value of MPC varies between O and 1 : If the entire additional income is
consumed, then ∆C = ∆Y, making MPC = 1. However, if entire additional
income is saved, then ∆C = 0, making MPC = 0
❑ Saving function refers to the functional relationship between saving and
national income.
S = f (y)
where S = saving
Y = National Income
F = Functional relationship.
❑ Saving function (Propensity to Save) is of two types.
(i) Average Propensity to Save (APS)
(ii) Marginal propensity to Save (MPS)
❑ Average Propensity to Save (APS) : Average propensity to save refers to
the ratio of savings to the corresponding level of income.
Savings(S)
APS = Income(Y)
❑ Important Point about APS

(1) APS can never be 1 or more than 1 : As saving can never be equal
to or more than income.
(2) APS can be zero : At break even point C = Y, hence S = 0
(3) APS can be negative or less than 1 : At income levels which are
lower than the break-even point, APS can be negative as there will be
dissavings in the economy.
(4) APS rises with increase in income.
❑ Marginal Propensity to Save (MPS) : Marginal propensity to save refers
Y C in Savings
Change S C
= = in total income.
to the ratio of change in savings to change
Change
Y Y in Income
Y Y
MPS =
❑ MPS varies between 0 and 1

(i) MPS = 1 if the entire additional income is saved. In such a case,
∆S = ∆Y.
(ii) MPS = 0 If the entire additional income is consumed. In such a case,
∆S = 0
❑ Relationship between APC and APS
The sum of APC and APS is equal to one. It can be proved as under we
know :
Y = C + S
Dividing both sides by Y, we get
APC + APS = 1
because income is either used for consumption or for saving.
❑ Relationship between MPC and MPS
The sum of MPC and MPS is equal to one. It can be proved as under :
We know
∆Y = ∆C + ∆S
Dividing both sides by ∆Y, we get
∆Y ∆C ∆S
= +
∆Y ∆Y ∆Y
1 = MPC + MPS ∆C ∆S C
= MPC, = MPS
APC =
∆Y ∆Y Y
1 = APC +in
MPC + MPS = 1 because total increment APS
income is either
S used for
consumption or for saving. APS =
Y
❑ Investment refers to the expenditure incurred on creation of new capital
assets.
❑ The investment expenditure is classified under two heads :
(i) Induced investment (ii) Autonomous investment.
❑ Induced Investment : Induced investment refers to the investment which
depends on the profit expectations and is directly influenced by income
level.
❑ Autonomous Investment : Autonomous investment refers to the investment
which is not affected by changes in the Level of income and is not induced
solely by profit motive.
❑ Marginal Efficiency of Investment (MEI) : MEI refers to the expected
rate of return from an additional investment.
❑ Ex-Ante Savings : Ex-ante saving refers to amount of savings which
household intended to save at different levels of income in the economy.
❑ Ex-Ante Investment : Ex-ante investments refers to amount of investment
which firm plan to invest at different level of income in the economy.
❑ Ex-Post Saving : Ex-post savings refer to the actual or realised savings
in an economy during a financial year.
❑ Ex-Post Investment : Ex-post investment refers to the actual or realised
investment in an economy during a financial year.
❑ Equilibrium level of income is determined only at the point where AD = AS
or S = I. But it cannot always be at full employment level also as it can be
at less than full employment.
❑ Full employment is a situation when all those who are able and willing to
work at prevailing wage rate, get the opportunity to work.
❑ Voluntary unemployment is a situation where person is able to work but not
willing to work at prevailing wage rate.
❑ Involuntary unemployment is a situation where worker is able to willing to
work at current wage rate but does not get work.
❑ Under employment is a situation where AD is less than required AS at full
employment level.
❑ Investment multiplier (K) is the ratio of increase in income (∆Y) due to

change in investment ∆I.
∆Y
K=
∆I
1 1
K= or K =
1–MPC MPS
❑ Excess demand refers to the situations when aggregate demand is in excess

of aggregate supply corresponding to full employment.
❑ Deficient demand refers to a situation when aggregate demand is short of
aggregate supply corresponding to full employment.
❑ Inflationary gap is the gap by which actual aggregate demand exceeds the
level of aggregate demand required to establish full employment. It measures
the amount of excess of aggregate demand.
❑ Deflationary gap is the gap by which actual aggregate demand is less than
the level of aggregate demand required to establish full employment. It
measures the amount of deficiency of aggregate demand.
1 MARK QUESTIONS
1. Define aggregate demand.
2. Define aggregate supply.
3. What is meant by Ex-Post investment?
4. What is meant by average propensity to consume?
5. Define marginal propensity to consume.
6. What is autonomous consumption?
7. What is Ex-ante aggregate demand?
8. Can the value of APC be greater than one?
9. Can APC be ever zero?
10. What is the relationship between APC and APS?
11. If APS is 0.6, how much will be the APC?
12. What is meant by Ex-ante saving?
13. If MPC and MPS are equal, what is the value of the multiplier?
14. What can be the minimum value of investment multiplier?
15. What can be the maximum value of multiplier?
16. Can average propensity to consume be negative?
17. What do you mean by investment multiplier?
18. What will be the impact of increase in cash reserve ratio on the aggregate
demand?
19. What is investment?
20. Why can the value of marginal propensity to consume not be greater than
one?
H.O.T.S.
21. What is the impact of deficient demand on production and employment?
22. Define inflationary gap.
23. Under which situation is consumption function represented by a straight
line.
24. What is the impact of continuous increase in income on average propensity
to consume?
25. How much additional income will be generated in an economy with additional
investment of Rs. 100 crore, when MPC = 1/2?

1. Define aggregate demand. State its components.
2. Distinguish between average propensity to consume and marginal propensity
to consume with the help of numerical examples.
3. Savings and investment are always equal discuss.
4. What is meant by investment multiplier? Explain the relationship between
MPC and K?
5. State briefly the effect of excess demand on output, employment and price.
6. Explain the concept of inflationary gap with the help of a diagram?
7. Explain the situation of deficient demand in an economy with the help of a
diagram.
8. State briefly any three measures to control excess demand in an economy.
❑ Find consumption expenditure if – autonomous consumption = Rs. 100
marginal propensity to consume = 0.70 national income = Rs. 1000
9. What is monetary policy? Explain the role of (i) Bank rate and (ii) Margin
requirements in influencing the availability of credit in an economy.
10. Give the meaning of excess demand? Explain any two fiscal measures to
current excess demand.
11. What is fiscal policy? What possible fiscal measures can be taken with
respect to deficient demand in an economy?
12. What do you mean by full employment equilibrium? Explain with the help of
diagram.
13. Explain with the help of diagram the concept of under-employment
equilibrium.
14. Distinguish between induced investment and autonomous investment?
15. Explain the concept of consumption function.
16. Briefly explain the relationship between MPC and MPS.
17. Giving reasons, state whether the following statements are true or false :
(i) When marginal propensity to consume is zero, the value of investment
multiplier will also be zero.
(ii) Value of average propensity to save can never be less than zero.
18. If national income is 50 crore and saving Rs. 5 crore, find out APC. When
income rises to Rs. 60 crore and saving to Rs. 9 crore. What will be the
APC and MPS.
19. An economy is in equilibrium. Its national income is Rs. 5000 and autonomous
consumption expenditure is Rs. 500. What is the total consumption
expenditure if MPC is 0.7?
Level of Income Savings MPC APC APS

0 – (80) – – –
100 – 0.7 – –
200 – 0.7 – –
300 – 0.7 – –
400 – 0.7 – –
21. Given marginal propensity to save equal to 0.25, what will be the increase
in national income if investment increases by Rs. 125 crore. Calculate
multiplier.
22. Find out equilibrium level of income, when S = –40 + 0.25 Y and investment
is Rs. 60.
23. Can an economy be is equilibrium when there is unemployment in the
economy? Explain.
24. How does change in bank rate controls the situations of excess and deficient
demand?
25. Briefly explain with the help of diagram the relationship between savings
and income?
H.O.T.S.
26. Does an excess of AD over AS always imply a situation of inflationary gap?
Explain.
27. What happens if AD > AS prior to the full employment level of output?
28. Find saving function when consumption function is given as :
C = 100 + 0.6Y.
29. In a two sector economy, the saving function is given as :
S = –10 + 0.2Y
and investment function is expressed as
I = –3 + 0.1Y.
Calculate the equilibrium level of income?
30. State whether the following statement are true or false. Give reasons for
your answer
(a) When investment multiplier is 1, the value of MPC is zero.
(b) The value of average propensity to save can never be greater than 1.
31. Giving reasons, state whether the following statements are true or false :
(i) When marginal propensity to consume is zero, the value of investment
multiplier will also be zero.
(ii) Value of average propensity to save can never be less than zero.
32. Find national income from the following : autonomous consumption = Rs.
100 marginal propensity to consume = 0.80 investment = Rs. 50

1. Why must aggregate demand be equal to aggregate supply at the equilibrium
level of income and output? Explain with the help of a diagram?
2. Explain the equilibrium level of income with the help of saving and investment
curves. If saving exceed planned investment, what changes will bring about
the equality between them?
3. Explain the working of multiplier with the help of a numerical example.
4. When planned investment is more than planned savings, what will be its
impact on income and employment. Explain with the help of diagram.
5. What do you mean by Fiscal Policy? How it helps in controlling excess
demand?
6. Can there be equilibrium in case of underemployment. Explain with the help
of a diagram?
7. How quantitative and qualitative instruments of Govt. monetary policy controls
deficient demand?
8. Distinguish between inflationary gap and deflationary gap. Show deflationary
gap on a diagram. Can this gap exist at equilibrium level of income? Explain.
9. In an economy S = –50 + 0.5Y is the saving function (where S = saving and
Y = national income) and investment expenditure is 7000. Calculate.
(i) Equilibrium level of national income
(ii) Consumption expenditure at equilibrium level of national income.
10. C = 100 + 0.75y is a consumption function where C = consumption
expenditure and Y = national income and investment expenditure is 800.
On the basis of this information calculate.
(i) Equilibrium level of national income.
(ii) Saving at equilibrium level of national income.
11. Given below is the consumption function in an economy.
C = 100 + 0.5Y
with the help of a numerical example show that in this economy, as income
increase APC will decrease.
HOTS (6 MARKS QUESTIONS)

12. Draw on a diagram a straight line saving line curve for an economy. From
it derive the consumption curve, explaining the method of derivation. Show
a point on the consumption curve at which APC is equal to 1.
13. How increase in investment will effect income level of an economy? Explain
with the help of an example and diagram.
14. Briefly explain the concept of under employment equilibrium with the help
of diagram. How increase in investment helps in achieving, full employment
equilibrium?
15. What is ‘deficient demand’ in macroeconomics? Explain the role of open
market operations in correcting it.
16. Explain the step taken in derivation of the saving curve from the consumption
curve use. Use diagram.
ANSWERS
1 MARK QUESTIONS
1. Aggregate demand refers to total demand for goods & services in an
economy, measured in terms of total expenditure.
2. Aggregate supply is the money value of the final goods and services or
national product produced in an economy during one year.
3. Ex-post investment refers to the actual or realised investment in an economy
during a financial year.
4. Average propensity to consume is the ratios of consumption expenditure to
income.
C
APC =
Y
5. Marginal propensity to consume is ∆the

C ratio of change in consumption to
change in income. ∆Y
MPS =
6. Autonomous consumption refers to minimum level of consumption, even

when income is zero.
7. Estimated demand of goods and service in an economy during a financial
year.
8. Yes, the value of APC > 1 before the break-even point is attained.
9. APC can never be equal to zero as consumption can never be zero at any
level of income.
10. The sum of APC and APS is equal to one.
APC + APS = 1
11. APC = 1 – APS = 1 – 0.6 = 0.4
12. Exante-saving refers to amount of saving which household intended to
save at different level of income in an economy.
13. We know that
MPS + MPC = 1
MPS + MPC = 1 Give that MPS = MPC
MPS =
K= 2
14. The minimum value of K = 1, when MPC = O
15. The maximum value of k = ∞ when MPC = 1
16. No, because consumption can never be zero even at zero level of income.
17. Investment multiplier measures the ratio of change in investment and change
in income.
18. Aggregate demand will fall.
19. Investment is an addition to capital stock. It is also called capital formation.
20. It is because change in consumption cannot be greater than change in
income.
1 11 1 1 1
K=
21. Production and employment will decrease = =to shortage
due = of= aggregate
2
2 1 – MPC 1/2 1
MPS 0.5
demand. 1–
2
22. Inflationary gap refers the situation under which AD is excess than required
AS at full employment equilibrium.
23. When marginal propensity to consume remains constant.
24. APC falls with continuous increase in income.
25.
and ∆Y = K . ∆I
= 2 x 100
= 200 Crore.
HINTS
3-4 MARKS QUESTIONS

18. (i) 200 Crore (ii) 400 Crore
19. (i) ∆I = 7000 Crore. (ii) ∆C = 6300 Crore.

20. APC = –, 1.5, 1.1, 0.96, 0.9
APS = –, (–), .5, (–) 0.1, .033, .1
S = –80, –50, –20, 10, 40
21. K = 4
∆Y = 4 x 125
= 500 Crore.
22. Rs. 400
29. Rs. 70
6 MARKS QUESTIONS
9. (i) National income (Y) = 14100
(ii) Consumption expenditure (C) = 7100
10. (i) Equilibrium National Income (Y) = 3600
(ii) Saving = 800
UNIT 9
GOVERNMENT BUDGET AND THE

ECONOMY
POINTS TO REMEMBER
❑ Budget is a financial statement showing the expected receipt and expenditure
of Govt. for the coming fiscal or financial year.
❑ Main objectives of budget are :
(i) Reallocation of resources. (ii) Redistribution of income and wealth
(iii) Economic stability (iv) Management of public enterprises.
❑ There are two components of budget :
(a) Revenue budget (b) Capital budget
❑ Revenue Budget consists of revenue receipts of Govt. and expenditure met
from such revenue.
❑ Capital budget consists of capital receipts and capital expenditure.
❑ Revenue Receipts :
(i) Neither creates liabilities for Govt.
(ii) Nor causes any reduction in assets.
❑ Capital Receipts :
(i) It creates liabilities or (ii) It reduces assets.
❑ Revenue Expenditure :
(i) Neither creates assets (ii) Nor reduces liabilities
❑ Capital Expenditure :
(i) It creates assets (ii) It reduces liabilities.
❑ Revenue Deficit : Total revenue expenditure > Total revenue receipts
❑ Revenue deficit when total revenue expenditure excess total revenue
receipts.
❑ Implications of Revenue Deficit are :
(i) It leads to repayment burden in future without investment.
(ii) It shows wasteful expenditures of Govt. on administration.
(iii) It increase the burden of taxes.
❑ Fiscal Deficit : Total expenditures > Total Receipts excluding borrowing.
❑ Fiscal deficit : When total expenditure exceeds total receipts excluding
borrowing.
❑ Implications of Fiscal Deficits are :
(i) It leads to inflationary pressure.
(ii) A country has to face debt trap.
(iii) It reduces future growth and development.
❑ Primary Deficit : Fiscal deficit – Interest payments.
❑ Primary Deficit : By deducting Interest payment from fiscal deficit we get
primary deficit.
❑ Budgetary Deficit : Total Expenditure > Total Receipts.
❑ Budgetary Deficit : Total expenditure exceeds total receipts.

1. Define Budget.
2. What is meant by non-tax receipts?
3. What are revenue receipts?
4. What are capital receipts?
5. Give two examples of non-tax revenue receipts.
6. What are the two sources of capital receipts?
7. Define revenue deficit.
8. Define fiscal deficit.
9. Why is repayment of loan a capital expenditure?
10. Why is recovery of loan treated a capital receipt?
11. What is a balanced budget.
12. Define capital expenditure.
13. In a Govt. Budget primary deficit is Rs. 25,000 Cr. and interest payments
are Rs. 15,000 Cr. How much is the fiscal deficit?
14. Define a Tax.
15. What is Direct Tax
16. Define Primary Deficity
H.O.T.S.
17. What are Budget Receipts?
18. In a Govt. Budget, revenue deficit is Rs. 8,00,000 Cr. and borrowings are
Rs. 50,000 Cr. How much is the fiscal deficit?
19. What is disinvestment?
20. What does zero primary deficit mean?
1. Explain the allocation of resources objective of Govt. budget.
2. What is the difference between revenue budget and capital budget?
3. What is meant by revenue receipts? Explain the components of revenue

receipts of the Govt.
4. Distinguish between direct tax and indirect tax.
5. What do you mean by capital receipts? What are the main components of
the capital receipts?
6. Give the meaning of revenue deficit and fiscal deficit. What problems can
the fiscal deficit create?
7. What is fiscal deficit? What are its implications?
8. Distinguish between revenue expenditure and capital expenditure with an

example of each.
9. Explain the “redistribution of income” objective of Govt. budget.
10. Explain the ‘Economic stability’ objective of Govt. budget.
HOTS (3-4 MARKS)

11. Under which situations deficit budget is beneficial for the economy.
12. Are fiscal deficits necessarily inflationary? Give reasons in support of your
view.
13. Discuss the issue of deficit reduction.
14. How can surplus budget be used during inflation.
15. Giving reasons, classify the following as direct and indirect taxes.
(i) Entertainment tax (ii) Corporation tax
(iii) Excise tax (iv) Capital gains tax.
16. From the following data about a government budget find (a) revenue deficit,
(b) fiscal deficit and (c) primary deficit.
(Rs. arab)
(i) Plan capital expenditure 120

(ii) Revenue expenditure 100
(iii) Non-plan capital expenditure 80
(iv) Revenue receipts 70
(v) Capital receipts net of borrowing 140
(vi) Interest payments 30
17. Distinguish between :
(i) Capital expenditure and Revenue expenditure
(ii) Fiscal deficit and Primary deficit.
18. Why the fiscal Deficit equal to borrowings.
ANSWERS
1 MARK QUESTIONS
1. Budget is a financial statement showing the estimated receipts and estimated
expenditure of the Govt. for coming fiscal year.
2. All the revenue receipt of Govt. other than tax receipts.
3. Revenue receipts are those receipts which neither creates liabilities for
Govt. nor cause any reduction in assets.
4. Capital receipts are those receipts which either creates a liability or leads
to reduction in assets.
5. Interest, Fee.
6. Borrowings, Recovery of loans.
7. When total revenue expenditure exceeds total revenue receipts.
8. When total expenditure exceeds total receipts excluding borrowing.
9. As it leads to reduction in liability.
10. As it leads to reduction in assets.
11. Balanced budget is that when estimated receipts are equal to estimated
expenditure.
12. Capital expenditure is that which creates assets and which reduces liabilities.
13. Fiscal Deficit = Primary Deficit + Interest Payment
= 25,000 + 15,000
= 40,000 Crore.
14. Tax is a legally compulsory payment imposed by Govt.
15. It refer the tax whose primary and final burdon borne by the person on
whom it is imposed.
16. It is the difference of fiscal deficit and interest paid.
17. Estimated money receipt received by the Govt. from different sources in
fiscal year are called budgetary receipts.
18. Rs. 50,000 Crore.
19. Disinvestment refers to withdrawal of existing investment.
20. Zero primary deficit means that interest commitment on earlier loans have
compelled the Govt. to borrow.
HINTS
3-4 MARKS QUESTIONS

15. (i) Indirect tax
(ii) Direct tax
(iii) Indirect tax
(iv) Direct tax
UNIT 10
BALANCE OF PAYMENT
POINTS TO REMEMBER
❑ Balance of trade is the net difference of Import and export of all visible
items between the normal residents of a country and rest of the world.
❑ Autonomous items are those items of balance of payment which are related
to such transaction as are determined by the motive of profit maximisation
and not to maintain equilibrium in balance of payments. These items are
generally called ‘Above the Line items’ in balance of payment.
❑ Accommodating item refers to transactions that take place because of other
activity in Balance of Payment. These transactions are meant to restore the
Balance of Payment identity. These items are generally called ‘Below the
Line items’.
❑ Foreign exchange rate refers to the rate at which one unit of currency of
a country can be exchanged for the number of units of currency of another
country.
SYSTEM OF EXCHANGE RATE
Fixed exchange rate Flexible exchange rate.

❑ The epitome of the fixed exchange rate system was the gold standard in
which each participant country committed itself to convert freely its currency
into gold at a Fixed Price.
❑ Merit of Fixed Exchange Rate
(i) Stability in exchange rate
(ii) Promotes capital movement and international trade.
(iii) No scope for speculation.
❑ Demerits of Fixed Exchange Rate
(i) Need to hold foreign exchange reserves.
(ii) No automatic adjustment in the ‘Balance of payments.’
(iii) Enhance dependence on external sources.
❑ In a system of flexible exchange rate (also known as floating exchange
rates), the exchange rate is determined by the forces of market demand
and supply of foreign exchange.
❑ The demand of foreign exchange have inverse relation with flexible exchange
rate. If flexible exchange rate rise the demand of foreign exchange falls.
Vice versa.
❑ Sources of Demand for Foreign Exchange
(a) To purchase goods and services from the rest of world.
(b) To purchase financial assets (i.e., to invest in bonds and equity shares)
in a foreign country.
(c) To invest directly in shops, factories, buildings in foreign countries.
(d) To send gifts and grants to abroad.
(e) To speculate on the value of foreign currency.
(f) To undertake foreign tours.
❑ The supply of foreign exchange have positive relation with foreign exchange
rate. If foreign exchange rate rise the supply of foreign exchange rate also
rise and vice versa.
❑ Sources of Supply of Foreign Exchange
(i) Direct purchase by foreigners in domestic market.
(ii) Direct investment by foreigners in domestic market.
(iii) Remittances by non-residents living abroad.
(iv) Flow of foreign exchange due to speculative purchases by N.R.I.
(v) Exports of goods and services.
❑ Merits of Flexible Exchange Rate
(i) No need to hold foreign exchange reserves
(ii) Leads to automatic adjustment in the ‘balance of payments’.
(iii) To increase the efficiency in the economy by achieving optimum
resources allocation.
(iv) To remove obstacles in the transfer of capital and trade.
❑ Demerits of Flexible Exchange Rate
(i) Fluctuations in foreign exchange rate.
(ii) Encourages speculation.
(iii) Discourages international trade and investment.
❑ In currency depreciation, there is a fall in the value of domestic currency
in term of foreign currency. In currency appreciation, there is a rise in the
value of domestic currency in term of foreign currency.
❑ In currency appreciation, there is a rise in the value of domestic currency
in terms of foreign currency.
❑ Equilibrium flexible exchange rate is determined at a level where demand
for and supply of foreign exchange are equal to each other.
❑ Managed floating system is a system in which the central bank allows the
exchange rate to be determined by market forces but intervenes at times
to influence the rate.

1. What is meant by balance of trade?
2. Define balance of payment.
3. When is there a deficit in the balance of trade.
4. The balance of trade shows a deficit of Rs. 300 crs. and the value of
exports is Rs. 500 crs. What is the value of imports?
5. List two items included in the balance of trade account.
6. List two items of the capital accounts of balance of payment.
7. Give meaning of managed floating exchange rate.
8. What is meant by invisible items?
9. What is meant by unilateral transfer?
10. What is meant by Autonomous transactions?
11. Write the name of those economic transactions which are made by the
government to make equilibrium in balance of payment.
12. What do you mean by Fixed Exchange Rate?
13. Define Flexible Exchange rate?
14. State two merits of Flexible Exchange Rate.
15. State two demerits of Flexible Exchange Rate.
16. State two merits of fixed exchange rate.

17. State two demerits of fixed exchange rate.
18. What is the slope of demand curve of foreign exchange?
19. What is the slope of supply curve of Foreign Exchange?
20. What will be the effect on exports, if foreign exchange rate increases?
21. What will be the effect on imports if foreign exchange rate increases.
22. Define Devaluation of Domestic Currency.
23. What is meant by Depreciation of Domestic Currency?
24. What is meant by Appreciation of Domestic Currency?
HOTS (1 MARK)
26. In which circumstances, the devaluation of currency will be in favour of
economy?
27. In which circumstances the appreciation of currency will be non favourable
for the economy?
28. Under which circumstances, the purchasing power of foreign currency
increases in comparison to domestic currency?
29. With the help of which item BOP gets balanced?
30. Does BOP always remain balanced?

1. Write any three points of difference between BOT and BOP.
2. Distinguish between current account and capital account of BOP.
3. How can deficit in BOP be financed?
4. What are the components of the current account of the balance of payment
account.
5. Give difference between the autonomous and accommodating items included
in BOP.
6. Distinguish between autonomous and accommodating transaction in the
balance of payment account. Give an example each.

7. Give three reasons why people desire to have foreign exchange.
8. Give any three/four sources of supply of foreign exchange.
9. Explain the relationship between foreign exchange rate and demand for it.
10. Explain the relationship between foreign exchange rate and supply of foreign
exchange.
11. Explain the terms ‘appreciation and depreciation of currency.’
12. Explain the merit and demerits of fixed exchange rate.
13. Explain the merits and demerits of flexible exchange rate.
14. How is flexible exchange rate determined in a free market economy? Explain
with the help of diagram.
15. Higher the foreign exchange rate, lower the demand fore foreign exchange.
Explain why?
16. Lower the foreign exchange rate, higher the demand for foreign exchange.
Explain why?
17. Explain the impact of Devaluation of domestic currency on the export and
imports of an economy.
18. Give the meaning of fixed flexible and managed floating exchange rate.
19. Why the demand for foreign exchange falls when the foreign exchange rate
rise explain with the help of an example.
6 MARKS QUESTIONS
1. Explain the distinction between Autonomous and Accommodating transactions
in balance of payments. Also explain the concept of balance of payments
‘defict’ in this context.
2. What is balance of payments accounts? Name three components each of
its current account and capital account.
3. How is balance of trade different from balance of payments? State the items
not included in balance of trade.

HOTS
20. What is the impact of appreciation of currency on the demand for foreign
exchange?
21. What is the impact of appreciation of currency on the supply of foreign
exchange?
22. What is the impact of depreciation of currency on the demand for foreign
exchange?
23. What is the impact of depreciation of currency on the supply of foreign
exchange?
24. Distinguish between devaluation and depreciation of domestic currency.
25. Giving reasons state whether the following statements are true or false :
(i) Excess of foreign exchange receipts over foreign exchange payments
on account of accommodating transactions equals deficit in the balance
of payments.
(ii) Export and import of machines are recorded in capital account of the
balance of payments account.
ANSWERS
1 MARK QUESTIONS
1. It is the difference between monetary value of exports and imports of material
goods or visible items.
2. A balance of payment is a statement of double entry system of all economic
transactions between residents of a country and the residents of foreign
countries during a given period of time.
3. When the value of imports is more than value of exports.
4. 800 Crores.
5. Visible items Watch, Petrol, Electronic item.
6. (i) Direct Foreign Investment
(ii) Loans

7. Exchange rate influenced by the intervention of the central bank in the
foreign exchange market.
8. Invisible items are all those type of services which are exported and imported.
9. These refers to one sided transfers from one country to other. These are
not trading transactions.
10. Autonomous transactions refer to international economic transactions in
the current and capital account that are undertaken for profit.
11. Accommodating items.
12. Fixed exchange rate is the rate which is officially fixed in terms of Gold or
any other currency by the govt. or adjusted only frequently.
13. Flexible exchange rate is determined by demand for and supply of a given
currency in foreign exchange market.
14. (i) No need to hold foreign exchange reserve.
(ii) Optimum resource allocation.
15. (i) Fluctuations in foreign exchange rate.
(ii) Encourages speculation.
16. (i) Stability in Exchange rate.
(ii) No scope for speculation.
17. (i) Need to hold foreign exchange reserves.
(ii) No automatic adjustment in the ‘Balance of Payments.’
18. Negative slope.
19. Positive slope.
20. Exports will increase because Indian goods have become cheaper for
foreigners.
22. Import will decrease because foreign goods have become costlier for Indians.
23. Devaluations means to reduce parity rate of its currency with respect of
gold or any other currency by the Government.
24. When the value of domestic currency reduce with respect to other currency
by the demand and supply forces of foreign exchange in a free exchange
market.

25. Appreciation of currency refer when the value of foreign currency reduce
with respect to domestic currency. It occurs in a free exchange market by
the forces of demand and supply of currency.
1 MARK HOTS QUESTIONS

26. When economy adopt the policy of Export Promotions.
27. When we adopt the policy of Import Substitution.
28. Capital account records capital transfer such as loans and investment
between one country and the rest of the world which causes a change in
the asset or liability status of the residents of a country or its government.
29. With the help of international loans.
30. Always in equilibruim in the sense of accounting.

SAMPLE QUESTION PAPER – SET I
ECONOMICS
Time : 3 Hours Maximum Marks : 100
General Instructions :
(i) All questions in both the sections are compulsory.
(ii) Marks for questions are indicated against each.
(iii) Question Nos. 1–5 and 17–21 are very short-answer questions carrying 1
mark each. They are required to be answered in one sentence each.
(iv) Question Nos. 6-10 and 22-26 are short-answer questions carrying 3 marks
each.
(v) Question Nos. 11-13 and 27-29 are also short-answer questions carrying
4 marks each. Answer to them should not normally exceed 70 words each.
(vi) Question Nos. 14-16 and 30-32 are long-answer questions carrying 6 marks
each. Answer to them should not normally exceed 100 words each.
(vii) Answer should be brief and to the point and the above word limit be
adhered to as far as possible.
SECTION – A
1. Give one example each of microeconomics and macroeconomics.
2. When is the demand of a commodity said to be inelastic?
3. Define production function.
4. What causes a downward movement along a supply curve?
5. Define monopoly.
6. Why does an economic problem arise? Explain.
OR
Explain the problem of ‘What to produce’.
7. Distinguish between a normal good and an inferior good. Give example in
each case.

8. How is the price elasticity of demand of a commodity affected by the number
of its substitutes? Explain.
9. Explain the effect of rise in input prices on supply of a commodity.
10. Why is a firm under perfect compititon a price-taker? Explain.
11. Define marginal cost. State the relation between marginal cost and average
cost.
OR
Define revenue. State the relation between marginal revenue and average
revenue.
12. Commodities X and Y have equal price elasticity of supply. The supply of
X rises from 400 units to 500 units due to a 20 percent rise in its price.
Calculate the percentage fall in supply of Y if its price falls by 8 percent.
13. Explain the meaning and the conditions of producer’s equilibrium (under
marginal revenue & marginal cost approach)
14. Explain the conditions of consumer’s equilibrium in case of (i) single
commodity and (ii) two commodities. Use utility approach.
15. Giving reasons, state whether the following statement are true or false:
(i) When there are diminishing returns to a factor, total product always
decreases.
(ii) Total product will increase only when marginal product increases.
(iii) When marginal revenue is zero, average revenue will be constant.
16. Explain the implications of the following features of perfect competition.
(i) Homogeneous products
(ii) Freedom of entry and exit to firms.
OR
Market for a good is in equilibrium. Suppose supply decreases. Giving
reasons,explain its effect on equilibrium price and quantity. Use diagram.

SECTION – B
17. Why is repayment of loan a capital expenditure?
18. Define bank rate.
19. Give meaning of foreign exchange.
20. Define involuntary unemployment.
22. State three objectives of a governement budget.
OR
Give meanings of revenue deficit, fiscal deficit and primary deficit.
23. Explain the circular flow of income.
24. Where is inverse relation between foreign exchange rate and demand for
foreign exchange. Why? Explain.
25. List the items of the current amount of balance of payments account. Also
define ‘balance of trade’.
26. Explain “bankers’ bank and supervisor” function of central bank.
27. Distinguish between.
(i) Revenue receipts and capital receipts
(ii) Direct tax and indirect tax
28. There is increase in investment of Rs. 100 Crore in an economy. Marginal
propensity to consume is 1. What can you say about total increase in
income? Calculate.
29. Explain process of credit creation by commercial bank.
OR
State the four function of money. Explain anyone of them.
30. Explain the concept of ‘excess demand’ in macroeconomics. Also explain
the role of open market operation in correcting it.
OR
Explain the concept of ‘deficient demand’ in macroeconomics. Also explain
the role of Bank Rate in correcting it.

31. How will you treat the following while estimating domestic factor income of
India? Give reasons for your answer.
(i) Remittances from non-resident Indians to their families in India.
(ii) Rent paid by the embassy of Japan in India to a resident Indian.
(iii) Profits earned by branches of foreign bank in India.
32. There are only two producing sectors A and B in on economy. Calculate :
(I) Gross value added at market price by each sector.
(II) National Income (Rs. Crore)
(i) Net factor income from abroad 20
(ii) Sales by A 1000
(iii) Sales by B 2000
(iv) Change in stock of B (–) 200
(v) Closing stock of A 50
(vi) Opening stock of A 100
(vii) Consumption of fixed capital by A & B 180
(viii) Indirect taxes paid by A & B 120
(ix) Purchases of raw materials etc. by A 500
(x) Purchases of raw materials etc. by B 600
(xi) Exports by B 70

SET – II SECTION – A
1. How does change in technology affect the possibilities of production.
2. Give meaning of change in quantity supplied.
3. Define implicit cost.
4. Why the demand of the commodity which have alternative uses, is more
elastic?
5. What is meant by market equilibrium?
6. Giving example distinguish between total fixced cost and total variable cost.
OR
Explain the relation between average fixed cost, average variable cost and
average total cost.
7. When the price of a commodity falls by Rs. 4 per unit its quantity demanded
rise by 20 units. Its price elasticity of demand is (–1). Calculate. its quantity
demanded at the price before change which was Rs. 20 per unit.
8. Why is the demand curve of a firm indeterminate in a oligopoly market?
9. How is a production possibility curve affected when resaurces are inefficiently
employed in an economy? Explain.
10. Explain the relation of total revenue and marginal revenue, when a firm can
sold more units of a good by lowering the price.
11. Explain the geometric method of measuring price elasticity of demand.
12. Explain how a fall in price of the related good affects the demand for the
given good. Give example.
13. Explain any two causes of rightward shift of supply curve.
OR
What is a supply schedule? Explain how does change in technology of
producing a good affect the supply of that good.
14. Giving reason, explain the behaviour of total product under the law of
variable proporation. Use numerical example.

15. Explain the conditions of consumers equilibrium in case of two goods. Use
indifference curve approach.
16. Market for a good is in equilibrium. Explain the chain effects of increase in
supply of the good on the equilibrium us diagram.
OR
Distinguish between monopoly and monoplistic competition on the basis of
following features.
(i) Price determination
(ii) Entry and exit of a firm in the market
(iii) Elasticity of demand of the good.
Section – B
17. Define demand deposits.
18. What is meant by autonomous transactions in the balance of payments?
19. What is capital goods?
20. Define nominal GDP.
21. What is statutory liquidity ratio?
22. Define the capital account of balance of payment.
23. Explain the relation of marginal propensity to consume and multiplier.
24. An economy is in equilibrium its national income is Rs. 10,000 and
autonomous consumption expenditure is Rs. 1,000. What is the total
consumption expenditure if marginal propensity to consume is 0.7?
25. Why does the supply fo foreign currency fall when its price falls? Explain.
OR
Why does the demand of foreign currency fall when its price rises? Explain.
26. Explain how is the unequal distribution a limitation of taking gross domestic
product as an index of welfare.
27. What is meant by fiscal deficit in goverernment budget. State the implications
of fiscal deficit.
OR
Explain the “price stability” objective of a government budget.

28. Giving reason categorise the following as revenue expenditure and capital
expenditure.
(i) Free supply of book by the government to students studying in schools.
(ii) Expenditure by the government for the establishment of printing press.
29. Giving reason explain the treatment assigned to the following while estimating
national income.
(i) Contribution by employers to provident fund.
(ii) Petrol expenditure provided by the company to employee.
30. Explain the role of the following in correcting excess demand in an economy
(i) Government Tax
(ii) Cash Reserve Ratio
OR
Explain the role of the following in correcting deficient demand in an economy.
(i) Open market operations.
(ii) Margin requirement
31. How do commercial bank creats money? Explain with the help of numeric
example.
32. From the following information calculate.
(A) Gross domestic product at factor cost
(B) Net National disposable income (Rs. Crore)
(i) Net indirect tax 260
(ii) Government final consumption expenditure 200
(iii) Profits 180
(iv) Net domestic capital formation 240
(v) Change in stocks (–) 20
(vi) Private final consumption expenditure 1,000
(vii) Net imports 40
(viii) Net current transfer to abroad 20
(ix) Net factor income to abroad 60
(x) Gross domestic capital formation 320

SET-III
SECTION – A
1. Define microeconomics. 1
2. What is the behaviour of average fixed cost as output increases 1
3. What is Individual demand ? 1
4. What is a price maker firm? 1
5. What is the behaviour of average revenue in perfect competition
market? 1
6. Explain the properties of production possibility curve.
7. Give the relation between marginal cost and average variable cost with the
help of diagram.
8. Explain the implication of large number of sellers in a perfectly competitive
market.
OR
Explain the features of an oligopoly market. 3
9. What are implicit and explicit cost exlain with the help of examples.
10. Explain condition of consumer’s equilibrium in case of single good.
11. Define an indifference map. Explain why an indifference curve to the right
shows higher utility level. 4
12. When price of a good is Rs. 7 per unit, a consumer buys 12 units. When
price falls to Rs. 6 per unit he spends Rs. 72 on the good. Calculate price
elasticity of demand by using the percentage method. Comment on the
likely shape of demand curve based on this measure of elasticity. 4
13. Explain how changes in prices of other products influence the supply of a
given product
OR
What does the law of variable proportions show ? State the behaviour of
total product according to this law. When more of variable inputs are
employed. 4
14. Explain the conditions of producer’s equilibrium in terms of marginal cost
and marginal revenue? Use a schedule. 6

15. Explain how do the following influence demand for a good.
(i) Rise in prices of the related goods
(ii) Fall in income of the consumer. 6
16. Define equilibrium price. Show the effect of an increase in supply of a
commodity on its equilibrium price, demand remaining unchanged. 6
OR
Market for a good is in equilibrium. There is simultaneous ‘decrease’ both
in demand and supply of the good. Explain its effect on market price.

SECTION – B
17. Define ‘flow’ variable. 1
18. What are intermediate goods? 1
19. What are demand deposits? 1
20. Define indirect tax. 1
21. Give the meaning of managed floating exchange rate. 1
22. Calculate net value added at factor cost :
(i) Output sold (units) = 200
(ii) Price per unit of output (Rs.) = 10
(iii) Closing stock (Rs.) = 100
(iv) Opening stock (Rs.) = 150
(v) Consumption of fixed capital (Rs.) = 600
(vi) Import duty (Rs.) = 400
(vii) Intermediate cost (Rs.) = 10,000
(viii) Subsidy (Rs.) = 500
(Ans : Rs. 9450)
23. Distinguish between revenue expenditure and capital expenditure in a
government budget. Give examples. 3
OR
Explain the ‘Price Stability” objective of a government budget. 3
24. Explain the ‘Banker to the Government’ function of the Central Bank. 3
25. Distinguish between consumption function equation and saving function
equation. 3
26. Find ‘investment’ from the following auto nomous consumption = Rs. 100
National Income = Rs. 500
Marginal propensity to consume = 0.75
(Ans. Rs. 25)

27. Giving reason explain how should the following be treated in estimating
national income:
(i) Interest paid by banks on deposits by individuals.
(ii) National debt interest. 4
28. Explain any two functions of money. 4
OR
Explain the components of legal reserve ratio. 4
29. Explain ‘revenue deficit’ in a Government budget. What does it indicate? 4
30. Explain the concept of “excess demand” in macroeconomics. Also explain
the role of Bank Rate in correcting it. 6
OR
Explain the concept of “deficient demand” in macroeconomics. Also explain
the role of “open market operation” in correcting it. 6
31. What is balance of payments account? name three components each of its
current account and capital account. 6
32. Find out (a) Gross national product at market price and (b) Net current
transfers from abroad. (4+2) = 6
(Rs. Crore)
(i) Net Indirect Tax 35
(iii) Net national disposable income 750
(iv) Closing stock 10
(v) Govt. final consumption expenditure 150
(vi) Net domestic fixed capital formation 100
(vii) Net factor income to abroad (–) 15
(viii) Net imports 20
(ix) Opening stock 10
(x) Consumption of fixed capital 50
(a) 795 crore (b) Rs. 5 crore
EXAM. ORIENTED QUESTIONS WITH ANSWERS
UNIT 1
INTRODUCTION
3 -4 MARKS QUESTIONS
Q.1 Why is a production possibilities curve concave? Explain.
Ans. The production possibility curve being concave means that MRT
increases as we move downward along the curve. MRT increases
because it is assumed that no resource is equally efficient in production
of all goods. As resources are transferred from one good to another,
less & less efficient resources have to be employed. This raises cost
and raises MRT.
Q. 2 Explain properties of a production possibilities curve.
Ans. There are two properties of a production possibilities curve.
1 Downward sloping : It is because as more quantity of one good
is produced some quantity of the other good must be sacrificed.
2. Concave to the origin : It is because the marginal rate of
transformation increases as more of one good is produced.
Q. 3 Explain the problem of ‘what to produce’.
Ans. An economy can produce different possible combinations of goods &
services with given reasources. The problem is that, out of these
different combinations, which combination is produced. If production of
one good increases then less resources will be available for other
goods.
Q. 4 What is ‘Merginal Rate of transformation’? Explain with the help of an
example.
Ans. MRT is the rate at which the units of one good have to be sacrificed
to produce one more unit of the other good in a two goods economy.

Suppose an economy produces only two goods X and Y. Further
suppose that by employing these resources fully and officiently, the
economy produces 1X + 10Y. If the economy decides to produce 2X,
it has to cut down production of Y by 2 units. Then 2Y is the opportunity
cost of producing 1X. Then 2Y:1X is the MRT.
Q. 5 Explain the problem ‘How to produce’.
Ans. Broadly, there are two techniques of production.
(i) Labour intensive Technique : Under this technique, production
depends more on the use of labour.
(ii) Capital Intensive Technique : Under this technique, production
depends more on the use of machines (called capital) efficient
technique of production is that which uses minimum possible
inputs for a given amount of output. So that, cost per unit of
output is minimised.

CONSUMER BEHAVIOUR AND DEMAND
UNIT 2
3 - 4 MARKS QUESTIONS
Q.1 Distinguish between ‘increase in demand’ and ‘increase in quantity
demanded’ of a commodity.
Ans. When demand increases at given price then it is called ‘increase in
demand’. On the other hand, when demand increases by decrease in
the price of a commodity then it is called increase in quantity demand.
Q. 2 Given price of a good, how does a consumer decide as to how much
of that good to buy?
Ans. Consumer purchases upto the point where marginal utility is equal to
the price (MU=P). So long as marginal utility is greater than price, he
keeps on purchasing. As he makesMU
MUXX MU PXY
P =purchases
P
MU falls and at a
MU
particular quantity of the good MU Y P
X becomes
Y
Y
equal to price. Consumer
purchases upto this point.
Q. 3 A consumer consumers only two goods X and Y. State & explain the
conditions of consumer’s equilibrium with the help of utility analysis.
Ans. There are two conditions of consumer equilibrium :
MUX MUY
(i) =
PX PY
OR
Explanation :
If, the consumer is not in equilibrium because he
can raise his total utility by buying less of Y and more of X.

MUX MUY
Similarly if the consumer is not in equilibrium as
PX PY
he can raise his total utility by buying less of X and more of Y.
(ii) MU falls as consumption increases : If MU does not fall as
consumption increases the consumer will end up buying only
good which is unrealistic or consumer will never reach the
equilibrium position.
Q. 4 Explain how the demand for a good is affected by the price of its related
goods. Give examples.
Ans. Related goods are either substitutes or complementary
Substitutes Goods : When price of a substitude falls, it becomes
cheaper than the given good. So the consumer substitutes it for given
good will decrease.
Similarly, a rise in the price of substitute will result in increase in the
demand for given good.
For example Tea and Coffee.
Complementary Goods : When the price of a complementary good
falls its demand rises and the demand for the given good will increase.
Similarly when price of complementary good increases, then demand
for given good decreases.
For example : – Car & Petrol.
Q. 5 Distinguish between normal goods and inferior goods. Give example
also.
Ans. Normal Goods : These are the goods the demand for which increases
as income of the buyer rises. There is a positive relationship between
income and demand or income effect is positive.
Example ; Rice, Wheat
Inferior Goods : These are the goods the demand for which
decreases as income of buyer rises. Thus, there is negative
relationship between income and demand or income effect is negative.
Example : coarse grain, coarse cloth.

Q. 6 Explain any four factors that affect price elasticity of demand.
Ans. 1. Nature of Commodity : Necessories like Salt, Kerosene oil etc.
have inelastic demand and luxuries have elastic demand.
2. Availability of substitutes : Demand for goods which have close
substitudes is relatively more elastic and goods without close
substitutes have less elastic demand.
3. Different uses : Commodities that can be put to different uses
have elastic demand for instance electricity has different uses.
4. Habit of the consumer : Goods to which consumers become
habitual will have inelastic demand.
Examples – Liquor and Cigarette.
Q. 7 Explain relationship between total utility and marginal utility with the help
of a schedule.
Ans. Quantity (Units) Total utility Marginal utility
0 0 –
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 – 2
(1) As long as MU is positive, TU increases.
(2) When marginal utility is equal to zero then total utility is maximum.
(3) When marginal util[ity is negative; Total utility starts diminishing.
Q. 8 Define marginal utility. State the law of diminishing merginal utility.
Ans. Marginal Utility : It is addition more to the total utility as consumption
is increased by one more unit of the commodity.
Law of Diminishing Merginal utility : It states that as consumer
consumes more and more units of a commodity, the utility derived from
each successive unit goes on decreasing. According to this law TU
increases at decreasing rate and MU decreases.

6 MARKS QUESTIONS
Q.1 Explain the three properties of indifference curves.
Ans. Three properties of indifference curves are as follow.
1. Slopes downward from left to right : To consume more of one
good the consumer must give up some quantity of the other good
so that total utility remains the same.
2. Convex towards the origin : MRS declines continuously due
to the operation of the law of diminishing marginal utility.
3. Higher indifference curves represents higher utility :
Higher indifference curve represent large bundle of goods. Which
means more utility because of monotoric preference.
Q. 2 Explain the conditions of consumer’s equilibrium using indifference
curve analysis. Use diagram.
Ans. There are two conditions for consumer’s equilibrium.
PX
(i) MRS =
PY PXPX
PYPY
(ii) MRS is continuously falling.
Explanation
Suppose there are two goods X and Y. the first condition of
consumer’s equilibrium is MRS =
If MRS . It means consumer values X more than what market
values & willing to give more price than market price he will
purchase more of X this cause fall in MRS and it will continue
PX
upto that when MRS =
PY
If MRS . It means consumer values X less than what market
values. Consumer is willing to give less price as market price &

he will purchase less of X, by this MRS will increase and it will
PX
continue till MRS =
PY
(ii) Unless the MRS is continuously falling the equality between the
MRS and will not be achieved.
PX
PY
Consumer is in equilibrium at point E.

PRODUCER BEHAVOUR AND SUPPLY
UNIT III
Q. 1 Explain the likely behaviour of total product under the stage of
increasing return to a factor with the help of numerical example.
Ans. Increasing return to a factor is the first phase of the Law of return to
a factor. When more and more units of a variable factor is combined
with fixed factor up to a certain level total physical product increases
with increasing rate.
Machine Units of labour Total physical product
1 1 10
1 2 24
1 3 42
Q. 2 With the help of example distinguish between total fixed cost and total
variable cost.
Ans. Total fixed cost Total variable cost
1. Fixed cost remains constant 1. variable cost changes with the

at each level of output ie change in quantity. It increase
it do not change with or decrease as the output
change in quantity. change.
2. It can not be zero when 2. it is zero when output is zero

output is zero.
3. Its curve is parallel to 3. Its curve is parallel to the

X-aixs curve of total cost.
4. Example :- Rent, wages 4. Example :- cost of raw material,

of permanent staff. wages of casual labour.

Q. 3 Draw average cost, average variable cost and marginal cost curves on
a single diagram and explain their relations.
Ans.
Relation of AC, AVC and MC

1. MC interects to AC and AVC at their minimum level
2. AC and AVC decreases before the interection by MC, but remain
greater than MC.
3. AC and AVC starts to increase after the itersection by MC, and
becomes less than MC.
4. As output increases, AC and AVC tends to be closer but the
difference between AC and AVC can naver be zero.
Q. 4 Draw average cost, average variable cost and average fixed cost
curves on a single diagram and explain their relation.
1. AC is the vertical summation of AVC and AFC

2. The difference between AC and AVC falls as output increases but

the difference of AC and AFC increases.
3. As output increases AC and AVC tends to be closer but their
curves do not interect each other because AFC always remains
more than zero.
Q.5 Explain the relation between average revenue and marginal revenue
when a firm can sell an additional unit or a good by lowering the price.
Ans. 1. AR and MR both decreases.
2. MR decrease at the rate of twice than AR.
3. MR become zero and negative but AR can never be zero.
Q. 6 Distingush between change in quantity supplied and change in supply.
Ans. Change in quantity supplied change in supply
1. It refers the change in 1. It refer’s the change in supply
supply due to change in due to the change in the
price of the good determinents of supply other
than price
2. Determinents of supply 2. Price of the good remains
other than price remains unchanged.
unchanged
3. Law of supply apply 3. Law of supply does not apply.
4. There is upward and 4. supply curve shifted to leftward
downward movement along or rightward under this
with supply curve in this condition.
situation.
Q. 7 Explain how does change in price of input affect the supply of a good.
Ans. Increase in price of input :
increase in price of input is cause of a decrease in the supply of a
good because the production cost of a good will increase due to
increase in price of input. It will reduced the profit. So producer will
decrease the supply of the good.
Decrease in price of Input :
Decrease in price of input is a cause of increase in supply because
when the price of input decrease the production cost of a good also
also decreases. Decrease in cost increases the profit margin. It
motivate to producer to increase the supply of the good.

Q. 8 Explain how changes in prices of other products influence the supply
of a given product.
Ans. The supply of a good is inversly influenced with the change in price
of other product which can explain as fallows.
A. Rise in price of other product :–
When there is rise in the price of other product the production
of these product become more profitable due to unchanged cost
in comparison of the production of given produce. As a result the
producer will produce more quantity of other product so the
supply of given good will decrease.
B. Fall in the price of other product :–
When there is fall in the price of other product the production
of these product become less profitable due to unchanged cost
in comparison of the production of given product. As a result
producer will produce less quantity of other product so the factors
of production shifted for the production of given good. It cause
an increase in supply of given good.
Q. 9 Explain how technological advancement influence the supply of a given
product.
Ans. Technological advancement brings a positive impact in the supply of
a given product. It reduces per unit cost and increase the productivity
of given factors of production. Due to these reasons production of
given product becomes more profitable.
Q. 1 Explain the law of variable proporation with the help of diagram/
schedule.
OR
What is the likely behaviour of total product/marginal product when only
one input is increased for increasing production? Use diagram/
schedule.
Ans. Law of variable proportion state the inpact of change in unit of a
variable factor on the physical output. When more and more unit of
a variable factor combined with fixed factor physical product passes
though following phases.
Behaviour of TP
(i) TP increases at an increasing rate
(ii) TP increases at diminishing rate
(iii) TP falls

Behaviour of MP
(i) MP increases and becomes maximum.
(ii) MP decreases and becomes zero.
(iii) MP becomes negative.
Machine unit of labour TPP MPP
1 1 3 3
1 2 7 4
1 3 12 5
1 4 16 4
1 5 19 3
1 6 21 2
1 7 22 1
1 8 22 0
1 9 21 – 1

First Phase :–
TPP increases with increasing rate upto A point. MPP also increase and
becomes maximum of point C.
Second Phase :–
TPP increases with diminishing rate and it is maximum on point B. MPP
start to decline and becomes zero at D point.
Third Phase :–
TPP starts to decline and MPP becomes negative.
– Important instruction for giving the answer of above question.
– Do not use diagram for the explaination of this question if it is
instructed to use schedule and do not use schedule if the
explaination of this question asked with the help of diagram.
– Do not explain the behaviour of marginal product with the help
of schedule and diagram. If there is instruction to explain only the
behaviour of total product.
– Do not explain the behaviour of total product with help of
schedule and diagram if there is instruction to explain only the
behaviour of marginal product.
Q. 2 What is producer’s equilibrium? Explain the conditions of produce’s
equilibrium through the ‘marginal cast and marginal revenue’ approach.
use diagram/schedule.
Ans. Producer’s equilibrium refer’s the stage under which with the help of
given factor’s of production producer attain that level of production of
which he is getting maximum profit. The conditions of producer’s
equilibrium through the marginal cost and marginal revenue approach
are as follows.
1. Marginal cost should be equal to marginal revenue.
2. With the increase in output after equilibrium marginal cost should
be greater than marginal revenue.

Output MR MC
1 4 5
2 4 4
3 4 3
4 4 4
5 4 5
OR
Output MR MC
1 10 5
2 8 4
3 6 3
4 4 4
5 2 5

Explanation of conditions :–
(i) So long as MC is less than MR, it is profitable for the producer
to go on producing more because it adds to its profits. He stops
producing more when MC becomes equal to MR.
(ii) When MC is greater than MR after equilibrium if means the profit
will decline if producer will produce more units of the good.
Important instruction for giving the answer of the above question
– Use only one schedule/diagram given as above for the
explaination.
– Do not use diagram for the explaination of this question if it is
instructed to use schedule and do not use schedule if the
explaination of this question is asked with the help of diagram.

FORMS OF MARKET AND PRICE DETERMINATION
UNIT IV
Q.1 Explain the implication of large number of buyers in a perfectly
competetive market.
Ans. The implication is that no single buyer is in a position to influence the
market price on its own because an individual buyer’s purchase forms
a negligible proportion of the total purchase of the good in the market.
Q. 2 Explain why are firms mutually interdependent in an oligopoly market.
Ans. Firms are mutually interdependent because an individual firms takes
decision about price and output after considering the possible reactions
by the rival firms.
Q. 3 Explain the inplication of ‘freedom of entry and exit to the firms’ under
Ans. The firms enter the industry when they firnd that the existing firms are
earning super normal profits. Their entry raises output of the industry,
brings down the market price and thus reduce profits. The entry
continues till profits are reduced to normal (or zero) The firms start
leaving the industry when they are facing losses. This reduces output
of the industry, raises market price and reduces losses. The exit
continues till the losses are wiped out.
Q. 4 Explain the implication of ‘perfect knowledge about market’ under
Ans. Perfect knowledge means that both buyers and sellers are fully
informed about the market price. Therefore no firm is in a position to
charge a different price and no buyer will pay a higher price. As a result
a uniform price prevails in the market.
Q. 5 Why is the demand curve more elastic under monopolistic competition
than under monopoly.

Ans. The elasticity of demand is high when the product has close substitutes
and that elasticity of demand tends to be low when the product does
not have close substitutes as we know in monopolistic competition there
is large number of close substitutes while in monopoly there is no close
substitutes hence the demand curve under monopolistic competition is
more elastic than under monopoly.
Q. 6 Why is a firm under perfect competition a price taken while under
monopoly a price maker? Explain in brief.
Ans. A firm under perfect competition a price taker by the following reasons:
1. Number of firms : The number of firms under perfect
competition is so large that no individual firm by changing sale,
can cause any meaningful change in the total market supply.
Hence, market price remains unaffected.
2. Homogenuous product : All firms in a perfectly competitive
industry produce homogeneous product. Hence, price remains
same.
3. Perfect knwledge : All the buyers and sellers have perfect
knowledge about market price so no firm charge a different price
than market price. Hence a uniform price prevails in the market.
A firm under monopoly a price maker by the following reasons :
1. A monopolist is a single seller of the product in the market. Hence
it has full control over supply
2. There are no close substitutes of the monopoly product, hence
the demand is less elastic or ‘inelastic.
3. There are legal, technical and natural barriers to the entry of new
firms so that there is no fear of increase in market supply.
Q. 7 Differentiate between price discrimination and product differentiation.
Ans. Price discrimination : Price discrimination is a situation when a
monopolist charges different price from different buyers of the same
product. This is generally done to maximise profits.
Product Differentiation : Product differentitation is a situation when
different producers under monopolistic competition, try to differentiate
their product in terms of its shape, size, packaging, trade mark or brand
name. This is done to attract buyers from the rival firms in the market.

Q. 8 Distinguish between perfect competition and monopoly.
Ans. Perfect competition Monopoly
1. Large numer of buyers 1. One seller & large
and sellers no. of buyers.
2. Products are 2. There is no close substitutes
homogeneous of goods.
3. Free entry & exit 3. Barriers to entry
4. There is no control 4. There is full control over
over price market price.
Q. 9 Differentiate between monopoly & monopolistic competition.
Ans. Monopoly Monopolistic competition
1. Single seller & large 1. Large number of buyers
no. of buyers. and sellers.
2. No. close substitutes 2. There is product
of products. differentiation.
3. Barriers to entry 3. Free entry and exit.
4. Selling cost is zero. 4. Heavy selling costs are
incurred.
Q. 10 What is oligopoly? State its main properties/features.
Ans. Oligopoly : It is a form of the market in which there are a few big sellers
of a commodity and a large number of buyers. There is a high degree
of interdependence among the sellers regarding their price & output
policy.
Following are some principal features of oligopoly :
1. A few firms
2. High degree of interdependence.
3. Non-price competition.
4. Entry barriers.
5. Formation of cartels.

6 MARKS QUESTIONS
Q.1 Distinguish between collusive and non-collusive oligopoly. Explain how
the oligopoly firms are interdependent in taking price and output
decisions.
Ans. Collusive oligopoly is one in which the firms cooperate with each other
in deciding price and output where as, non-collusive oligopoly is one
in which the firms compete with each other.
The firms are interdependent because each firm takes into
consideration the likely reactions of its rival firms when deciding its
output and price policy.
It makes a firm dependent on other firms. The firm may have to
reconsider the change in the light of the likely reactions.
Q. 2 Market for a good is in equilibrium. There is an ‘increase’ in demand
for this good. Explain the chain of effects of this change. Use diagram.
– Increase in demand shifts the demand curve from D1 to D2 to

the right leading to excess demand E1 F at the given price OP1.
– Since the consumers will not be able to buy all they want to buy
at this price, there will be competition among buyers leading rise

in price.
– As price rises, demand starts falling (along D2) and supply starts
rising (along S) as shows by arrows in the diagram.
– This change continue till D and S are equal at E2.
– The quantity rises to OQ and price to OP2.
Q. 3 Market for a good is in equilibrium. There is simultaneous ‘decrease’
both in demand and supply of the good. Explain its effect on market
price.
Ans. There are three possibilities :
1. If the relative (percentage) decrease in demand is greater than
the decrease in supply, price will fall. The price will fall because
of excess supply in the market.
2. If the relative (percentage) decrease in demand is less than the
decrease in supply price will rise.
The price will rise because of excess demand in the market.
3. If the relative (percentage) decrease in demand is equal to the
decrease in supply price will remain unchanged
The price will remain unchanged because there is neither excess
demand nor excess supply in the market.
Q.4 Explain why the equilibrium price of commodity is determined at that
level of output at which its demand equals its supply.
Ans. Suppose demand is greater than supply. Since the buyers will not be
able to buy all what they want, there will be competition among the
buyers. It will have on upward influence on the price. As a reasult
demand will start falling and supply rising. It will go on till demand is
equal to supply again.
It demand is less than supply. Since the sellers will not able to sell all
what they want, there will be competition among the sellers. It will have
a downward influence on the price. As a reasult demand will start rising
and supply falling. It will go on till demand is equal to supply again.
Hence, the equilibrium price of a commodity is determined at that level
of output at which its demand equals its supply.

UNIT VI
NATIONAL INCOME AND RELATED AGGREGATES
1 Mark Questions with Answer

1. Define stock variable.
Ans. A variable whose value is measured at a point of time.
2. Define capital goods.
Ans. Goods used is producing other goods are called capital goods.
3. What is nominal gross domestic product ?
Ans. When GDP of a given year is estimated on the basis of price of the
same year, it is called nominal GDP.
4. Define flow variables.
Ans. Any variable whose magnitude is measured over a period of time is
called a glow variable.
5. Define ‘real’ gross domestic product.
Ans. When GDP of a given year is estimated on the basis of base year
prices it is called real gross domestic product.
6. Define capital formation.
Ans. Increase in the stock of capital in the given period is called capital
formation

3/4 Marks Questions with Answers
1. Calculate gross value added of factor cost :
(i) Units of output gold (units) 1000
(ii) Price per unit of output (Rs.) 30
(iii) Depreciation (Rs.) 1000
(iv) Intermediate cost (Rs.) 12000
(v) Closing stock (Rs.) 3000
(vi) Opening stockf (Rs.) 2000
(vii) Exise (Rs.) 2500
(viii) Sales Tax 3500
Ans. GVAFC = (ixii) + v – vi – iv – vii – viii
= (1000X30) + 3000 – 2000 – 12000 – 2500 – 35000 = Rs. 13000
2. Calculate Net Value added at factor cost :
(i) Consumption of Fixed capital (Rs.) 600
(ii) Import duty (Rs.) 400
(iii) Output sold (units) 2000
(iv) Price per unit of output (Rs.) 10
(v) Net change in stock (Rs.) (–) 50
(vi) Intermediate cost (Rs.) 10000
(vii) Subsidy (Rs.) 500
Ans. NVA FC = (iii x iv) + v – vi – ii + vii – i
= (2000x10) + (–50) – 10000 – 400 + 500 – 600
= Rs. 9450
3. Find Net Value added at market price :
(i) Output sold (units) 800
(ii) Price per unit of output (Rs.) 20
(iii) Excise (Rs.) 1600

(iv) Import duty (Rs.) 400
(v) Net change in stock (Rs.) (–) 500
(vi) Defniciation (Rs.) 1000
(vii) Intermediate cost (Rs.) 8000
Ans. NVAmp = (i x ii) + v – vii – vi
= (800x20) + (–500) – 8000 – 1000
= Rs. 6500
4. Giving reasons classify the following into intermediate products and
final products
(i) Furniture purchased by a school.
(ii) Chalk, duster, etc, purchsed by a school.
Ans. (i) It is final product because it is purchased for final investment.
(ii) These are intermediate products because these are taken to be
used up completely during the same year.
5. Giving reasons, explain the treatment assigned to the following which
estimating national income.
(i) Family members working free on the farm owned by the family.
(ii) Payment of interest on borrowings by general government.
Ans. (i) Imputed salaries of these members will be included in national
income.
(ii) It will not be included in national income because it is non-factor
payment as general government borrows only for consumption
purpose.
6. Giving reasons, explain the treatment assigned to the following which
estimating national income.
(i) Payment of income tax by a firm
(ii) Festival gifts to employes.
Ans. (i) Not included, as it is transfer payment from firm to government.
(ii) Not included, as it is transfer payment.

7. Explain the basis of classifying goods into intermediate and final goods.
Give suitable examples.
Ans. Goods which are purchased by a production unit from other production
units and meant for resale or for usingup completely during the same
year are called intermediate goods for example : raw material.
Goods which are purchased for consumption and investment are called
final goods for example : Purchase of machinery for instalation in
factory.
8. Giving reason classify the following into intermediate and final goods.
(i) Machine purchased by a dealer of machine.
(ii) A car purchased by a house hold.
Ans. (i) It is an intermediate good because it is meant for resale in the
market.
(ii) It is a final good because it is meant for final consumption.
9. How will you treat the following in estimating rational income of India?
Give reasons for your answer.
(i) Value of bonus shares received by shareholders of a company.
(ii) Interest received on loan given to a foreign company in India.
Ans. (i) It is not included in national income because it is the return of
financial capital and not of the goods & services.
(ii) It is included in the national income as interest is a factor income
and a part of domestic income.
6 Mark Questions
1. How will you treat the following which estimating national income of
India? Give reasons.
(a) Divident received by an Indian from his investment in shares of
a foreign company.
(c) Interest received on loans given to a friend for purchasing a car.
(d) Dividend received by a foreigner from investment in shares of an
Indian company.
(e) Profit earned by a branch of an Indian bank in Canada.

(f) Scholarship given to Indian students studying in India by a foreign
company.
(g) Fees received from students.
(h) Profits earned by branch of a foreign bank.
(i) Interest paid by an individual on a loan taken to buy a car.
(j) Expenditure on machines for installation in a factory.
(k) Profit earned by a branch of foreign bank in India.
(l) Payment of salaries to its staff by an embassy located in New
Delhi.
(m) Interest received by an Indian resident from firms abroad.
(n) Salaries received by Indians working in branches of foreign banks
in India
(o) Profits earned by an Indian bank from its branches abroad.
(p) Rent paid by embassy of Japan in India to an Indian resident.
(q) Imputed rent of self occupied house
(r) Interest received on debentures
(s) Financial help received for flood victims.
2. How will you treat the following which estimating domestic factor income
of India? Give reasons.
(i) Remittances from non-resident Indian to their families in India
(ii) Rent paid by the embassy of Japan in India to a resident Indian.
(iii) Profit earned by branches of foreign bank in India.
(iv) Payment of salaries to its staff by embassay located in India.
(v) Interest received by an Indian resident from firms abroad.
3. Are the following part of a country’s net domestic product at market
price? Explain
(a) Net indirect tax
(b) Net export
(c) NFIA
(d) Consumption of fixed capital

Ans. (a) It is factor income from abroad so will be included in national
income.
(b) It is transfer receipts, so it is not included in national income.
(c) Not included in national income, because it is a non-factor receipt
as loan is not used for production for consumption
(d) Included as it is a factor income to abroad.
(e) It is a part of NFIA and will be included in national income.
(f) It is transfer receipts, so it is not included in national income.
(g) It is included in national income becuase it is a part of the private
final consumption expenditure of the house hold.
(h) Included in national income because it is part of domestic factor
income of India.
(i) Not included because it is a non-factor income as loan is not used
for production but for onsumption.
(j) Included because it results in flow of income throught productive
activities
(k) Included, because it is a part of domestic product of India.
(l) Not included because it is not a part of domestic product of India
(m) Included as it is the part of NFIA.
(n) Included because it is earned in domestic territory of India.
(o) Included because it is aprt of NFIA
(p) Included as it is paid to an Indian resident out side the domestic
territory of a country. It will be included in NFIA.
(q) Included as a part of rent as it is payment to self for housing
services.
(r) Included because it is a factor earning
(s) Not included as it is a transfer payment.
Ans. 2 (i) Not included as it is a transfer payment
(ii) Not included because Japanese embassy in India does not fall
with in the domestic territory of India.

(iii) Included because it falls with in the domestic territory of India
(iv) Not included as an embassy located in India is not fall with in the
domestic territory of India
(v) Not included in domestic product but it is the part of NFIA.
Ans. 3 (a) Yes, because market price = factor cost + Net Indirect tax
(b) Yes, because NDPMP includes net exports
(c) No, because domestic means it excludes NFIA
(d) No, net means consumption of fixed capital is excluded.

MONEY AND BANKING
UNIT VII
Q.1 Explain the significance of the ‘Store of Value’ function of money.
OR
State the importance of the ‘Store of Value function of money.
Ans. People save a part of their earnings for use in future. But in what form?
Money fulfills this need of the people. Money as a store of value means
that money is an asset and can be stored for use in future one can
hold one’s earnings until the time one wants to spend it. This is the
store of value function of Money.
Q.2 Explain the ‘Unit of Account’ function of money?
Ans. The ‘Unit of Account’ function of money is also called the ‘measure of
value’ function. Money as a unit of account means a standard unit for
quoting prices. It makes money a powerful medium of comparing prices
of goods and serives.
Q.3 Explain the ‘Medium of Exchange’ function of money?
Ans. Money as a medium of exchange means money as a means of payment
for exchange of goods and services. Goods and services are
exchanged for money when people sell things. Money is exchanged for
goods and services when people buy things. The medium of exchange
function of money solves the problem of double coincidence of wants
inherent in the barter system of trade.
Q.4 Explain the “Lender of Last Resort’ function of the central bank.
Ans. Central bank also lends money directly to commercial banks. Instead
of rediscounting, central bank given loans against the bill of exchange
promissory notes, treasury bills, government securities, etc. The direct
lending to commercial bank is referred to as the ‘lender of the last
resort’ function of central bank.

Q.5 Explain the “Government’s Bank” function of a central bank.
Ans. A central bank conducts the banking account of government
departments. It performs the same banking functions for the
government as commercial bank performs for its customers. It accepts
their deposits and undertakes inter-bank transfers. It also gives loans
to the government. A central bank also provides various services as
agent of the government. It manages public debt. It also gives advice
to the government regarding money market, capital market, government
loans and economic policy matters.
6 - Marks Questions with Answers

Q.1 What do you mean by credit/money creation? Explain the process of
moeny creation by the commercial banks with the help of a numerical
example.
Ans. Money creation is a process in which a commercial bank creates total
deposits many times the initial deposits.
The capacity of commercial bank to create depends on two factors:
1. Amount of initial fresh deposit
1
2. Legal reserve ratio LRR
LRR
0 .2
Money multiplier =
Money Creation = Initial Deposit ×

Money multiplier
The Working :
Suppose (i) Initial Deposit = Rs. 1000 (ii) LRR = 20%
As required, the bank keeps 20% ie Rs. 200 as cash reserve and lend
the remaining Rs. 800. Those who borrow use the money for making
payments. As assumed those who receive these payments put the
money back into their bank accounts. This creates a fresh deposit of
Rs. 800. The bank again keep 20% ie Rs. 160 and lend Rs. 640. In
this way the money goes on multiplying leading to total money creation
of Rs. 5000.
Money creation = Initial Deposit ×
= 1000 ×

UNIT VIII
DETERMINATION OF INCOME
AND EMPLOYMENT
1 - Mark Questions with Answers

1. Give the meaning of ex-ante savings.
Ans. : Ex-ante savings are the planned savings or expected savings
2. Give the meaning of deflationary Gap.
Ans. It is the gap between excess of aggregate supply over aggregate demand
at full employment level.
3. What is Ex-ante aggregate demand?
Ans. It is planned or desired aggregate demand.
4. Give the meaning of Inflationary Gap.
Ans. It refers to the amount by which the actual aggregate demand exceeds
the level of aggregate demand required to establish the full employment
equilibruim.
5. What is meant by ex-ante investment?
Ans. : It is planned or desired investment during a particular period.
Ans. Aggregte demand is defined as the money value of total goods and
services demanded by an economy during a given period.
7. What is propensity to consume?
Ans. Which shows the level of consumption at different levels of income in
an economy.
8. Define marginal propensity to consume.

Ans. It is defined as measure of the rate at which aggregate consumption
expenditure Changes as national income changes.
MPC= C/Y
9. What is involuntry unemployment?
Ans . When people who are willing to work at the giving wage rate do not get
work.
10. What is meant by excess demand in macro economics?
Ans. In macro economics, when aggregate demand is more than aggregate
supply at full employment level, then there is excess demand.
11. What can be the minimum value of investment multiplier?
Ans. Investment multiplier K=1/1-mpc
if mpc = 0 than K=1/1-0 = 1 which is minimum value of investment
multiplier
12. Give the meaning of aggregate supply?
Ans. Aggregate supply is the money value of total supply of goods and services
available for purchase by an economy during a given period.
13. Can the value of APS be negative?
Ans. Yes, when there are dissavings.
14. Write the relation ship between MPS and multiplier?
Ans. K=1/1-MPC = 1/MPS or inverse relationship between MPS and the size
of the mulitiplier
3/4 - Marks Questions with Answers

1. In an economy the MPC is 0.75. Investment expenditure in the economy
increase by Rs.75 crore. Calculate total increase in national income.
Ans. : K=∆Y/∆I = 1/1-MPC
∆Y= ∆Ix1/1-MPC
= 75x1/1-0.75
= 300 Crore
2. An economy is in equilibrium. Its consumption function is C=300 +0.8Y.
and investment is 700 find national income.

Ans. : C= 300+0.8 Y
Y = C+I
Y = 300+0.8Y+700
=1250
3. Giving reasons, state whether the following statements are true or false.
(1) When MPC is zero, the value of investment multiplier will also be
zero.
(2) Value of APS can never be less than zero
(3) When MPC>MPS, the value of investment multiplier will be greater
than 5.
(4) The value of MPS can never be negative
(5) When investment multiplier is 1, the value of MPC is zero.
(6) The value of APS can never be qreater than 1.
Ans. (1) False because when MPC = 0
Value of investment multiplier is one K=1/1-MPC = 1/1-0 = 1
(2) False because APS is negative when there are dissavings
(3) True, if MPC is greater than 0.8 or false if MPC > 0.5 but not greater
than 0.8
or
(4) True, since MPS = ∆S/∆Y if ∆S = 0 than MPS can at the most be
zero.
(5) True because K = 1/1-MPC = 1/1-0=1
(6) True, because APC + APS = 1
4. Explain the distinction between voluntary and involuntry employment.
Ans. Voluntary unemployment is that part of the working force not willing to
engage itself is gainful occupation. Involuntary unemployment is that
part of labour force which is willing and able to work at the prevailing
wage rate but is out of work.
5. Explain the relationship between investment multiplier and MPC?
Ans. K=1/1-MPC, It shows direct relationship between MPC and the value of

Multiplier. Higher the proportion of increased income spend on
consumption, higher will be value of investment multiplier. Higher the
proportion of increased income spend on consumption, higher will be
value of investment multipler.
6 - Marks Questions
1. Explain the role of the following in correcting deficient demand in an
Economy.
(1) Open market operation
(2) Bank rate
Ans : (1) Open market operation refer to the sale and purchase of securities
by the Central Bank incase of deficient demand when AD falling
short of AS at full employment, the Central Bank buys securities
in the open market and makes payment to the sellers. The money
flows out of the central bank and reaches the commercial bank
as deposits. This raises the lending capacity of the banks, people
can borrow more. This will raise AD.
(2) Incase of deficient demand central bank decrease the bank rate
which the central bank charges on the loan given to commercial
bank. This forces the commercial banks to reduce lending rate.
Since borrowing become cheaper and people borrow more.
Arises.
2. Explain the role of the following in correcting 'Excess demand in an
Economy'
(1) Bank Rate
(2) Open market
Ans : (1) To Correct excess demand central bank can rise the bank rate.
This forces commercial bank to increase lending rates. This
reduces demand for borrowing by the public for investment and
consumption. Aggregate demand falls.
(2) When there is excess demand Central Bank sells securities. This
leads to flow of money out of the commerical banks to the central
bank when people make payment by cheques. This reduces
deposits with the banks leading to decline in their lending capacity.
Borrowing decline. AD declines.

3. Explain the role of following in correcting the deflationary gap in an
economy.
1) Govt. Expenditure
2) Legal Reserve Ratio
Ans. 1) In a situation of deflationary gap or deficient demand. The Govt.
should raise its expenditure i.e. there will be more economic
activities in the economy like, building of roads, bridges, canal etc.
This will raise the level of exployment. It will in turn increase the
income and the purchasing power. Thus aggregate demand will
rise.
2) During deficient demand, central bank reduces the CRR. The result
of reducing CRR will be seen in the surplus cash reserves with
the banks which can be offered for credit. The bank’s credit bank
reduces SLR, this will have expansionary effect on the credit
position of the banks leading to increase in thier leading capacity
borrowing increases & AD increases.
4. Explain the role of margin requirements for correcting the deflationary
gap.
Ans. : Deflationary gap refers to a situation when at full employment level of
income AD falls short of AS. It is called deficient demand.
Margin requirements refers to the margin on the security provided by
the borrower. When margin is lower, the borrowing capacity of the barrover
is higher. When central bank lowers the margin the borrowing capacity
of the borrowers increase. This raise AD.
5. In an economy 75% of the increase in income is spent on consumption.
Investment increased by Rs.1000 Crore. Calculate
(1) Total increase in income
(2) Total increase in consumption expd.
Ans. : MPC = 75% = 75/100 =3/4
MPS = 1-3/4 = 1/4 K=4
(1) ∆Y = ∆I x K
= 1000 x 4
= 4000 Crore

(2) ∆Y = ∆C + ∆I
∆C = ∆Y - ∆I
= 4000-1000
= Rs. 3000 Crore
6. In an economy the equilibruim level of income is Rs.1200 Crore.
MPC : MPS = 3:1
∆I = ?
Ans. New equilibruim income = Rs. 20000 Crore
=20000-12000=8000 Crore
K= 1/MPS = 1/0.25 = 4
∆I = ∆Y/K = 8000/4
= Rs.2000 Crore

GOVT. BUDGET AND THE ECONOMY
UNIT IX
Q.1 Explain the ‘redistribution of income’ objective of a government budget.
OR
Explain how the government budget can help in a fair distribution of
income in the economy.
Ans. Budgetary policies are useful medium to reduce inequalities of income
for the fair distribution of income. government can use tax policy and
public expenditure as a tool. govt can reduce the disposable income
and wealth of Rich by imposing heavy tax and can spend more on
providing free services to the poor. It raise the disposable income
welfare of the poor.
Q. 2 Explain the “Reallocation of resources” objective of a government
budget.
Ans. Through its Budgetary policy the government directs the allocation of
resources in a manner such that there is a balance between the goal
or of profit maximisation and social welfare. Government can provide
subsidy and reduction in tax rate to motivate investment into areas
where private sector initiative is not coming. Production of goods which
are injurious to social life is discouraged through heavy taxation.
Q. 3 Distingush between revenue receipts and capital receipts with the help
of example.
Ans. Revenue receipts Capital Receipts
1. These receipts do not 1. These receipts create liability
create any liability for for the govt.
the govt.
2. These receipts do not 2. These receipts cause a
cause any reduction in reduction in assets of the govt.
assets
3. Example :– Tax receipts 3. Example:– Loan by govt.
disinvestment.

Q. 4 Distingush between revenue expenditure and capital expenditure
with the help of example.
Ans. Revenue Expenditure Capital Expenditure
1. These expenditure do 1. These expenditure are causes
not cause increase in increase in govt. assets
govt. assets
2. These expenditure do not 2. These expenditure are causes
cause any reduction in reduction in govt. liability
govt. liability
3. Example:– transfer payment 3. Example:– Repayment of loan
by govt. by govt.
Q. 5 Distingush between direct and indirect tax
Ans. Direct Tax Indirect Tax
1. Direct tax is a tax whose 1. The liability to pay and
liability to pay and incidence incidence of indirect tax do
lie on the same person not lie on the same person
2. Its incidence can not be 2. Its incidence can be shifted
shifted to some other to some other person
person
3. Example :– income tax 3. Production tax
Q. 6 What is meant by fiscal deficit. Write its implications.
Ans. Fiscal deficit is equal to excess of total expenditure over the sum of
revenue receipts and capital receipts excluding borrowings. ie. Fiscal
deficit means borrowing of the government.
Fiscal Deficit :– Total expenditure – Total receipts net of borrowings
Implication of Fiscal deficit
1. It increase the supply of money in the economy
2. it increase financial burden for future generation.
3. it is cause of inflation.

UNIT X
BALANCE OF PAYMENT
1. Define foreign exchange rate.
Ans. : Foreign exchange rate is the price of a foreign currency in terms of
demestic currency
2. What is foreign exchange?
Ans. Any currency other than the domestic currency.
3. What is balance of payment Accounts?
Ans. : It is a systematic record of all economic transactions between the
residents of a country and the rest of the world in a given period (one
year) of time
4. State two sources of supply of foreign exchange.
Ans. : Exports and foreign tourism.
5. State two sources of demand of foreign exchange.
Ans. : Import of goods & services and to get education in abroad.
6. What does a deficit in balance of trade indicate.
Ans. Deficit in balance of trade indicates that the imports of good are qreater
than the exports.
7. What is fixed exchange rate?
Ans. When rate of exchange is fixed by the Government in an economy.
8. Define flexible exchange rate
Ans. : The rate of exchange in terms of other currencies are determind by
market forces of demand and supply.
9. Define managed floating exchange rate.

Ans. It is a system in which the central bank or Government allow the
exchange rate to determined by market forces but they take decisions
to intervene whenever they feel it appropriate.
10. State the components of capital account of balance of payment.
Ans. 1. Borrowing and lending to and from abroad.
2. Investment to and from abroad.
3. Change in foreign exchange reserves
11. Which transactions determine the balance of trade? When is balance
of trade in surplus?
Ans. : Exports of goods and imports of goods determines BOT. When the value
of exports of goods is greater than the value of imports of goods.
12. What are the components of current account of the BOP account?
Ans. (1) Exports and imports of goods
(2) Exports and imports of services
(3) Unilateral transfers
13. Explain the meaning of deficit in BOP
Ans. When autonomous foreign exchange payments exceeds autonomous
foreign exchange receipts, the difference is called balance of payments
deficit.
14. Distinguish between devaluation and depriciation of domestic currency
Ans. When Government or authorities reduce the price of domestic currency
in terms of all foreign currencies is called devaluation.
The fall in market price of domestic currency (due to demand supply in
the market) in terms of a foreign currency is called depreciation.
15. When price of a foreign currency rises its supply also rises. explain
why?
Ans. If exchange rate increases, this will make domestic country's goods
cheaper to foreigners. The demand for our exports will rise. It implies
more supply of foreign exchange.

HOTS (Higher Order Thinking skills)
1. An agriculturist increased his capital and labour put range 0 to q0). Therefore LAC falls in the initial
by 20% in the cultivation of his land. But he found stage of production. In other words, the downward
that the amount of production raised increased by sloping portion of LAC curve represents increasing
15% only. (He had actually not employed any im- returns to scale. LAC remains constant at output level
proved technology.) Point out which law does ac- q0. LAC increases at output levels higher than q0. So
count for the phenomenon? we can say that the upward sloping portion of LAC
The Law of Diminishing Returns curve shows decreasing returns to scale.
2. Increasing and decreasing returns to scale respec- 3. In the year 2006, all major domestic airlines in
tively imply downward and upward sloping por- India reduced their air fares for certain sectors.
tion of the long run average cost curve. Defend Because they wanted to attract luxury class train
or refute. passengers and to fill their vacancies. Most air-
lines have an occupancy rate of between 50 to 60%.
Like the short run average cost curve, the long run
Discuss how marginal cost and average cost play
average cost curve (LAC) and marginal cost curves
an important role in the cost function of these air-
(LMC) are U shaped. The LMC curve cuts the LAC
lines.
curve at its minimum point. The reason behind the
U shape of LAC is the pattern of the returns to scale. Marginal cost can be defined as the extra or addi-
tional cost of producing one extra unit of output. Av-
Increasing returns to scale means that if output is in-
erage cost is the total cost divided by the total num-
creased at a given rate (say 10%), inputs need to be
ber of units produced. Normally the occupancy rate
increased only by less than proportionately (say 7%).
in the airline industry is only 50 to 60 percent. When
This implies that average cost must fall as output ex-
we divide the total cost by the number of passengers
pands. Similarly decreasing returns to scale imply that
travelling, we can arrive at the average cost of flying
the average cost must rise with output. Finally, if re-
a plane. Here it includes the capital investment (fixed
turns to scale are constant, the average cost is con-
cost) as well as the salary, fuel, etc. (variable cost)
stant independent of output.
involved in flying a plane. So the average cost is very
Increasing returns to scale Þ LAC decreases with
high since the occupancy rate is low.
(IRS) output
With the addition of more passengers, the marginal
Constant returns to scale Þ LAC does not change cost does not increase but the average cost comes
(CRS) with output down. When the occupancy rate is low, discounts on
air fares increase the occupancy rate, without adding
Decreasing returns to scale Þ LAC increases with any further cost of flying. As the occupancy rate in-
(DRS) output creases, the average cost per passenger comes down.
So even if the airlines give discounts, it does not in-
crease the marginal cost.
LMC
4 Considering the rising demand for natural rub-
Cost
LAC
ber, the Rubber Board encouraged farmers to use
more fertilizer for increasing rubber production.
But the Farmers Forum warned the farmers
q0 about the consequence of heavy doze fertiliza-
0
IRS DRS
tion. Make your stand in the context of the Law
CRS
Quantity of output
of Diminishing Returns.
The Rubber Board encouraged farmers to use more
In the diagram, LAC curve is U shaped. This means fertilizer to increase rubber production in tune with
that as output is increased starting from a small the rising demand for the natural rubber. But the
level,there are increasing returns to scale (in the out- farmers forum warned the farmers about the use of
heavy doze of fertilizers. The reason behind the warn-
1
Economics
ing is nothing but the Law of Diminishing Returns. Ans. Money supply increases.
Any production unit has a maximum capacity, which 4. The Reserve Bank of India lends funds as a
can be reached by changing the variable factors of Lender of last resort to a commercial bank, at a
production. Thus an optimum combination will be particular interest rate. What this rate is known
reached. Beyond such combination returns will be- as?
come constant and then gradually, start declining. Ans. Bank rate
Farmers should keep this in mind while using more
5. The government adopted the most effective quan-
fertilizer for increasing rubber production. If they go
titative method to control inflation in our economy.
on increasing one factor of production and keep oth-
Which method?
ers constant, finally the rubber production will end
Ans. Cash Reserve Ratio
up with losses.
6. The Reserve Bank of India decides to print cur-
1. Definition is the accurate description of an idea
rency notes worth Rs. 500 crore, additionally. Does
or an object. Collect some important definitions
it require to increase its reserves in this respect? If
of the term Money.
not, why?
¨ Money is what money does - Walker
Ans.The Reserve Bank of India can print and issue
¨ Anything which is commonly used and generally
any amount of notes by keeping a statutory minimum
accepted as a medium of exchange or as a standard
reserve, which is Rs. 200 crore. Therefore the reserves
of value. Kent
need not be increased to print notes worth Rs. 500
¨ Money is the pivot around which economic science crore.
clusters... the major part of the subject matter of eco-
1. Price of a commodity under perfect competition
nomics is concerned with the functioning and mal-
is determined by one of the following: Which?
functioning of money. Alfred Marshall.
(a) Market forces (b) Firm (c) Buyer
¨ Money is anything that is habitually and widely used
Ans: Market forces
as a means of payments and is generally acceptable
in the settlement of debts G.D.H. Cole 2. Point out which type of market structure is the
exact opposite of perfect competition.
2. Without money no nation can go ahead towards
economic development. Discuss the role of money Ans: Monopoly
in economic development. 3. Examine the main features of perfect competition.
The role of money in promoting economic develop- Perfect competition is an extreme form of market
ment is discussed below: which rarely exists in practice. It is a market situation
1. Money stimulates productivity and economic in which there are a large number of buyers and sell-
growth. ers dealing with homogeneous products. The follow-
ing are the features of perfect competition:
2. Money promotes investments.
(1) Existence of large number of buyers and sellers:
3. Money facilitates investments in high yielding as-
sets. Under perfect competition, the number of buyers and
sellers will be large. Each seller sells a very small pro-
4. Creation of new credit or bank money exploits
portion of the total quantity sold in the market. Be-
idle resouces and unemployed human resources that 1
cause of this reason, a single buyer or seller cannot

exists in developing economies.
influence the price of the commodity.
5. Funding on new investment or capital accumula-
(2) Homogeneous product: The commodity bought and
tion by creating more mony, causes rise to price in a
sold must be homogeneous or identical in all respects
developing economy. This increase in prices will
ie, in size, colour, shape, smell, packing, etc.
force people to reduce their present level of consump-
tion. This leads to more savings. (3) Perfect mobility of goods and factors of produc-
tion:
3. The buying of securities by the Central Bank will
have an effect on the money supply. What hap- Under perfect competition, there will be freedom of
pens to the money supply?
2
movement for goods and factors of production. Goods In the diagram, equilibrium price determined by the
can be taken from one place to another and factors of forces of demand and supply is OP. A particular firm
production can freely move between firms and indus- only takes the price prevailing in the market. At the
tries. equilibrium price, a firm can sell any quantity of the
(4) Freedom of entry and exit: Freedom of entry and commodity. He has to only decide how much of the
exit means that new firms can enter the industry and commodity he should sell at the market price.
existing firms can leave the industry freely. 1. Find the odd one out and justify your answer.
(5) Perfect knowledge of market conditions: Under Bank rate/Open market operation/ Cash Reserve
perfect competition, buyers and sellers will have com- Ratio/ Taxation
plete knowledge about the availability of goods, their Taxation : Except this, all others in the group are
costs, prices etc. monetary measures.
(6) Absence of transport cost: Absence of transport 2. During inflation government should raise taxes.
costs is an important assumption of perfect competi- (True or false, justify your answer)
tion. If prices are to be uniform, we have to assume True. To cut personal consumption expenditure the
that transport costs do not enter the price. rates of personal corporate and commodity taxes
should be raised.
4. Under perfect competition, the seller is a price-
taker. Explain. 3. Deficient demand leads to deflationery gap. (Say
whether True or False, justify your answer)
Since there are large number of buyers and sellers
Ans: True: Deficient demand gives rise to deflation-
under perfect competition, a single seller or buyer can-
ary gap which causes the economys income, output
not influence the price. The price is determined by
and employment to decline, thus pushing the economy
the market forces of demand and supply. The total
into an under employment equilibrium.
demand for the product and the total supply of the
4. Mr. Tom found his salary doubled in the last two
product together determine the price. The implica-
years. However he could purchase the very same
tion of product being homogeneous is that all firms
quantity of goods evenafter his increased income.
have to charge the same price for the product. If any
How will you explain this situation?
one producer happens to charge a price higher than
the prevailing price, no one will demand from him. When Mr. Toms salary doubled he could purchase
Product homogeneity and the existence of a large num- only very same basket of goods. This shows that he
ber of firms together imply that each firm is very small has not consumed anything additionally. Therefore,
compared to the whole market and no single firm can he might have saved the increased portion of the sal-
influence the market price. Each seller accepts the ary. Saving is what is left over after consumption ex-
prevailing market price as determined by market de- penditure. Here, the ratio of change in consumption
mand and supply. Therefore, a firm under perfect com- to change in income is MPC (DC/DY)
petition is called a price-taker. It is illustrated in the 1. Examine how an increase in input price affect
following diagram. the equilibrium quantity exchanged in the prod-
uct market?
Prices of factors of production influence the supply
of commodities. If price of an input increases, the
cost of production of a commodity using more of that
D S
input increases. Therefore the supply of the commod-
Price
P E P D
ity will decrease. When the input price rises, the sup-
S D ply curve shifts to the left. An increase in input price,
therefore increases the equilibrium price and the equi-
O Q O M M1 M2 librium quantity falls. It is illustrated in the given fig-
Output Output ure.
3
Economics
D S1 rice etc. were left to the play of free market entirely,
Y
poor people would not be able to afford them at the
S market-clearing price. Hence, for a long time, the gov-
P1
ernment has adopted a system of price control through
P
ration shops for such commodities. In terms of demand
S1 and supply curves, price control means fixing price
D below the equilibrium price. This may lead to ration-
Price
S ing system or blackmarketing.

Inorder to protect the interest of farmers the govern-
ment fixes minimum price or support price for com-
O Quantity Q1 Q X modities. It is fixed above the equilibrium price to in-
sulate farmers from income fluctuations resulting from
2. Show the determination of market equilibrium
price variation in the free market.
with the help of demand and supply schedules and
a diagram.
Equilibrium price is determined by the intersection
of demand and supply curves. The point at which
demand curve and supply curve intersect with each
other is called equilibrium point. The following mar-
ket demand and supply schedules illustrate the deter-
mination of equilibrium price in a market.
Price of Quantity Quantity
Bananas (in Rs.) demanded supplied 4. Equilibrium price may or may not change with
shifts in both demand and supply curves. Com-
18 10,000 1,000
ment.
19 8,000 2,000 The equilibrium price and quantity will change if there
20 7,000 4,000 are changes in demand and supply conditions. It is
21 6,000 6,000 possible that both demand and supply shifts occur
22 5,000 7,500 simultaneously. It may be noted that when both de-
23 4,500 8,500 mand and supply increase, the equilibrium quantity
will increase, and when they decrease, the equilib-
rium quantity will decrease. But in both cases, the
3. Give one example of direct intervention and indi-
new equilibrium price may rise, fall or remain at the
rect intervention in the market mechanism.
same level depending upon the relative change in de-
In a free enterprise economy, price of a commodity is mand and supply. The effect of change in both de-
determined by the forces of demand and supply. But mand and supply is shown in the following diagram.
in certain situations the government may interfere in
D1
>
price fixation. There are some policies, eg. different S

D S1
kinds of taxes and subsidies, that change the market
price indirectly via shifting the demand and supply P1
curves. Sales taxes and excise taxes are common ex- P
amples. These are called indirect interventions.
D1
Price
There are other policies by which prices are fixed di- S

S1 D
rectly by the government; these are called direct inter-
ventions. Examples of direct intervention are price O Q Q1
>
control on products and support price for commodi- Quantity demanded
ties. It is thought that if necessary items like sugar,
4
In the diagram, the rate of increase in demand is greater Equilibrium price P is therefore called market clear-
than the rate of increase in supply. Therefore, the new ing price.
equilibrium quantity and equilibrium price will in- Here, price is an outside factor. So, when it changes,
crease. The change in the equilibrium price depends
upon the relative changes in demand and supply. A equilibrium is disturbed. This leads to equilibrium
few instances are given below. situations.
(1) When increase in supply is equal to increase in When price moves up to P1, there is lesser demand
demand, the equilibrium price will remain unaffected,
and more supply. This leads to excess supply. When
while equilibrium quantity will increase.
(2) When increase in supply is greater than increase price moves down to P2, demand is more than sup-
in demand, the equilibrium price will fall while equi- ply. This creates excess demand. These two condi-
librium quantity will increase. tions are called disequlibrium states.
(3) When increase in supply is less than increase in
demand, equilibrium price will rise, and quantity will Marshall likened the forces of demand and supply to
rise. the two blades of a scissors, moving in opposite di-
5. Analyse the determination of equilibrium price rections. Just as both the blades moves in the oppo-
with a diagram.
site directions to cut a piece of paper, demand and
In the market, there are two forces, viz. supply and
demand. Equilibrium refers to a market where quan- supply moving in opposite ways together and at the
tity demanded is equal to quantity supplied. The equal- same time, determine the equilibrium price.
ity of demand and supply determines the equilibrium
6. Give one example of direct intervention and indi-
price. Equilibrium price is the amount at which buy-
ers want to buy and sellers want to sell. The amount rect intervention in the market mechanism.
is equal. Only at the equilibrium price, wishes of both In a free enterprise economy, price of a commodity is
the buyers and sellers are satisfied.
determined by the forces of demand and supply. But
\ Equilibrium D = S
in certain situations the government may interfere in
price fixation. There are some policies, eg. different
Surplus kinds of taxes and subsidies, that change the market
S > D Excess Supply price indirectly via shifting the demand and supply
E
D = S Equilibrium curves. Sales taxes and excise taxes are common ex-
Price
D > S Excess Demand amples. These are called indirect interventions.

Shortage
There are other policies by which prices are fixed di-
rectly by the government; these are called direct in-
terventions. Examples of direct intervention are price
Quantity Demanded
control on products and support price for commodi-
Diagrammatic Explanation: When price is P, demand ties. It is thought that if necessary items like sugar,
is equal to supply at point E. At this point E, both the rice etc. were left to the play of free market entirely,
quantity demanded and quantity supplied are equal, poor people would not be able to afford them at the
at Q. ie., Demand = Supply. This is the point of equi- market-clearing price. Hence, for a long time, the gov-
librium, E. At this point, there is no excess supply (D ernment has adopted a system of price control through
< S) or excess demand (D > S) for the commodity. ration shops for such commodities. In terms of de-
5
Economics
mand and supply curves, price control means fixing (ii) Borrowing by the government from the RBI
price below the equilibrium price. This may lead to through sale of treasury bills.
rationing system or blackmarketing. (iii) Loans raised from foreign governments.
In order to protect the interest of farmers the govern- (iv) Recoveries of loans granted to State and Union
ment fixes minimum price or support price for com- territory governments.
modities. It is fixed above the equilibrium price to (v) Small savings and deposits in the public provi-
insulate farmers from income fluctuations resulting dent fund, etc.
from price variation in the free market. 2. The budget is a tool for the government to imple-
ment its various policies. Do you agree with this
7. Examine how an increase in the price of a substi-
statement? Explain.
tute good in consumption affect the equilibrium
The budget is an annual statement of the estimated
price?
receipts and expenditures of the government over the
Equilibrium price is the price at which quantity de-
fiscal year which runs from April 1 to March 31. The
manded and supplied are exactly equal. When there
government has several policies it wishes to imple-
is a change in demand or supply condition, the equi-
ment in the overall task of performing its functions.
librium price also will be changed. For eg. tea and
Implementation of these policies requires expenditure
coffee are substitute goods. Suppose the price of cof-
by the government and some source of funding for
fee rises for some reason. The demand curve for tea
that expenditure. The budget is a tool for the govern-
will shift to the right due to increase in the price of
ment to implement its various policies. The objec-
coffee. Thus, as the price of a substitute good in con-
tives pursued by the government through the budget
sumption rises, the price of a given product rises and
are the following.
its quantity exchanged increases.
1) Activities to secure a reallocation of resources:
1. Budget receipts can be classified into two. Men- The government has to reallocate resources in line
tion those two components and expalin them. with social and economic considerations in case the
Budget receipts may be classified as revenue receipts market fails to do so or does so inefficiently.
and capital receipts. 2) Redistributive Activities: The government redis-
(a) Revenue receipts: Revenue receipts may be di- tributes income and wealth to reduce inequalities by
vided into tax revenue and non-tax revenue. A tax is a expenditures on social security, subsidies, public
compulsory contribution from a person to the gov- works etc.
ernment to meet the expenses incurred in the com- 3) Stabilising Activities: The government tries to pre-
mon interest of all. Non-tax revenue consists of all vent business fluctuation and maintain economic sta-
other revenue receipts such as commercial revenue bility ie, high level of employment and price stability.
and administrative revenue. 4) Management of public enterprises.
(b) Capital Receipts: Capital receipts refer to all Government undertakes commercial activities
money mobilised by the government that either cre- through its public enterprises. The commercial activi-
ates a liability of repayment or involves a sale of an ties are of the nature of natural monopolies, heavy
asset. The main items of capital receipts are: manufacturing etc. A natural monopoly is a situation
(i) Loans raised by the government for the public.
6
where there are economies of scale over a large range can explain this market situation?
of output; then one firm can produce at a lower aver- The concept of monopolistic competition was intro-
age cost than more than one firm could. Eg. railway, duced by Prof. Chamberlin. Monopolistic competi-
electricity etc. These usually come under state regu- tion is a market situation in which both the monopoly
lation because if left unregulated, there will be a ten- element and competitive element are present. In this
dency of the monopolist to curtail output in pursuit market situation, many producers produce goods
of profit, thereby lowering social welfare. which are close substitutes and engage in acute com-
1. A monopoly market structure may arise in vari- petition among themselves. The following are the fea-
ous ways. How will you justify this statement with tures of monopolistic competition:
the help of examples? (1) Large number of buyers and sellers: The number
In monopoly market structure there is only one seller. of firms is fairly large though not very large as in per-
This is defined in the context of a given geographi- fect competition. For example, there is large number
cal location or space. For example in India before of firms in the market for products like tooth pastes,
liberalisation in the power sector, the generation and soaps, etc. The number of firms may vary from indus-
distribution of electricity were in the hands of State try to industry.
Electricity Boards (SEBs). A monopoly market struc- (2) Product differentiation: An important characteris-
ture emerges because of any of the following reasons: tic of monopolistic competition is product differen-
(a) The government gives licence to only one company tiation. Each firm produces a product which is differ-
for producing a product or providing a service in a entiated from the products of rival firms. Product dif-
given locality or space. For instance, till 2002, VSNL ferentiation means differentiation of the product in
had monopoly in India in providing international tele- terms of colour, shape, sme[ll, packing, taste, brand
phone service. name etc. For example, toilet soaps like Pears, Rexona,
(b) Big private companies engage in research and come Hamam, Lifebuoy etc.
up with new products or new technology in produc- 1. Disequilibrium in the BoP results in favourable
ing an existing product. As a reward for their risk and (Surplus) or unfavourable (Deficit) BoP. Examine
investment in research the government grants patent the causes responsible for unfavourable BoP and
rights. In other words, monopoly arises because of mention the measures used to correct BoP deficit?
granting patent certificate or what is called patent Causes responsible for unfavourable BoPs are mainly
rights. the following.
(c) Sometimes, firms retain their individual identity but 1. More demand for consumption goods
they co-ordinate their outputs and pricing policy so During post-war period demand for goods increased
as to act as if it is a monopoly. This is called a cartel. considerably. Due to demand of tea, oil seeds, and iron
The OPEC (Organisation of Petroleum Exporting ore within the country the exports of these goods went
Countries) in the 1970s is an example of a cartel that down. Consequently unfavourable balance of trade
led to virtual monopoly in the world market for oil. increased.
2. The concept of monopolistic competition was in- 2. Imports of machinery and equipments
troduced by Prof.Chamberlin. In what way you Since independence heavy import of machinery was
7
Economics
made for the replacement of obsolete machines. We USSR. Disintegration fatally affected our foreign
also had to import more machines to satisfy our de- trade.
sire for rapid industrialisation. The imports of ma- 9. Payment of interest on foreign trade
chines made our balance of payment unfavourable. We had borrowed substantial loan from abroad. Its
3. Imports of war equipments repayment together with interest thereon mounted very
The Indo-China and Indo-Pak war forced us to im- fast. Interest on these loans approximated to Rs.
port war equipments to defend our country. 70,970 crores in 1997-98. It has also resulted in the
4. Setting up of embassies balance of payment deficit.
After independence we had to incur heavy expendi- 10. Slow growth of exports
ture in setting up embassies and high commissions Our exports has not been increasing as fast as the im-
abroad. It also contributed to our unfavourable bal- ports are increasing. The trade deficit is still widen-
ance of payments. ing. This has also resulted in the balance of payment
5. Increase in foreign competition deficit.
Our major exports were jute, tea and textiles. But The measures used to correct BoP deficit are:
these days we have tough competition from 1. Increase in production
Bangladesh in exports of jute. Sri Lanka and Indone- 2. Promotion of exports
sia are our rivals in the exports of tea. We have also 3. Favourable bilateral trade agreements
tough competition from Korea and China in the ex- 4. Reduction in imports
ports of cloth. All these competitions have reduced 5. Deflation
our exports in these commodities leading to balance 6. Encouragement to foreign investment
of payment deficit.
7. Devaluation of Indian currency
6. Hike in the petrol prices
8. Foreign assistance
The price of petrol which was 2 dollar per barrel in
9. Import substitution
1973 has now increased to 36 dollar per barrel. The
2. The term trade is commonly understood to mean
continuous rise in the consumption of petrol and its
exchange of goods wares or mechandise among
regular hike in price has increased balance of pay-
people. How will you distinguish between inter-
ment deficit.
nal trade and international trade?
7. Eruption of gulf war
Trade implies an exchange of goods and services be-
In 1990-91 there was a Gulf war between Iraq and
tween two individuals or groups of individuals. An
several Western Countries. It increased the price of
exchange of goods and services between two indi-
petrol, on one hand and on the other hand stopped
viduals living in the same locality or in two different
the remittances by Indians working in Gulf area like
regions of the same country is internal trade. It is trade
Kuwait, Iraq etc. This worsend the situation further
with in the same country. International trade is an
and increased our balance of payment deficit.
exchange of goods and services between two indi-
8. Disintegration of USSR.
viduals or groups of individuals living in two differ-
We have very large amount of foreign trade with ent countries. It is trade between two nations.
8
UNIT I
INTRODUCTION
QUESTIONS BASED ON HOTS WITH MODEL ANSWERS
VERY SHORT ANSWER TYPE QUESTIONS: - (1 Mark Each)
Q.1. Why is there a need for economizing of resources?

Ans. Because resources are limited.
Q.2. Why does economic problem arise?
Ans. It arises mainly because of scarcity of resources.
Q.3. Why is PPC downward sloping from left to right?
Ans. Because in situation of full employment of resources, production of one good
can be increased only with less of other good.
Q.4. What does a rightward shift of PPC indicate?
Ans. The rightward shift of PPC indicates growth of resources or technological
progress.
Q.5. What does a point below PPC indicate?
Ans. It shows inefficient/under-utilization of resources.
Q.6. What does slope of PPC show?
Ans. Negative slope of PPC shows that in order to produce more units of one good,
some units of the other good must be sacrificed.
Q.7. When allocation of resources is considered as inefficient?
Ans. Allocation of resources is considered as inefficient when economy performs
below the PPC curve.
SHORT ANSWER TYPE QUESTIONS: (3/4 Marks Each)
Q.1. Does production take place only on the PP curve?

Ans. Yes and no, both. Yes, if the given resources are fully and efficiently utilized.
No, if the resources are underutilized or inefficiently utilized or both.
Refer to the above figure; on a point anywhere on the PPC the resources are fully
and efficiently employed. On point U, below the PPC or any other point but below
the PPC, the resources are either underutilized or inefficiently utilised or both. Any
point below the PP curve thus highlights the problem of unemployment and
inefficiency in the economy.
1
Y
A
B PPC
Cloth
.U
D
X
O Wheat
Q.-3 Massive unemployment will shift the PPC to the left. Defend or refute.
Ans.- Production is drawn on the basis that the given resources are fully as well
as efficiently utilized. Massive unemployment is a situation when resources are
not fully utilized. Or it is a situation of under employment. It would only mean
that the economy is not operating on the PPC but some-what inside the PPC.
Therefore PPC will not shift to leftward.
UNIT- II
CONSUMER‟S CHOICE AND DEMAND ANALYSIS

Q.-1 All points below the budget line shows the various possible bundles which
cost exactly equal to consumer‟s income. Is it right or wrong?
Ans.- Wrong.
Q.-2 If Ram is offered Ice Cream free of cost. How much Ice Cream will he
consume?
Ans.- Ram should consume Ice-Cream to that extent to which the marginal utility of
Ice-Cream becomes equal to zero
2
Q.-3 What happens to the budget set if both the prices as well as the income
doubled?
Ans.- The budget set remains same.

Q.-4 A consumer consumes only two goods X and Y. At a consumption level of
these two goods, he finds that the ratio of marginal utility of price in case
of X is higher than in case of Y. Explain the reaction of the consumer.
Ans.- The consumer will increase the consumption of good-X and will decrease
the consumption of good-Y.
Q.-5 Does a fall in income have the same effect on the demand for the given
commodity?
Ans.- No, it will depend upon the nature of the good. If good is normal then its
demand will increase and if the good is inferior then its demand will decrease
Q.-6 There is train and bus service between New Delhi and Jaipur. Suppose
that the train fare between the two cities comes down. How will this affect
demand curve for bus travel between the two cities?
Ans.- As train and bus service are substitute to each-other, the demand curve for
bus service between the two cities will shift leftward to the initial demand curve
of bus service
Q.-7 Determine how the following changes (or shifts) will affect market
demand curve for a product.
(a) A new steel plant comes up in Jharkhand people who were previously
unemployed in the area are now employed. How will this affect the demand
for colour T.V. and Black and White T.V. in the region?
(b) In order to encourage tourism in Goa. The Government of India suggests
Indian Airlines to reduce air fare to Goa from the four major cities of
Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces
the fare to Goa, How will this affect the market demand curve for air
travel to Goa?
(c) There are train and bus services between New Delhi and Jaipur. Suppose
that the train fare between the two cities comes down. How will this affect
demand curve for bus travel between the two cities?
Ans: (a) There will be rightward shift in market demand curve for colour and Black
and White T.V. This is because of increase of income of the people due to
employment in the new steel plant.
3
(b) The demand for travel to Goa will expand in response to reduction in the air fare.
However, this will be reflected by a movement along the demand curve. There
will be no shifts in the demand curve.
(c) As train fare comes down the demand for bus travel will reduce. Demand curve
for the bus travel will shift to the left showing less demand at the same price.
Q 8. If a good can be used for many purposes, the demand for it will be elastic.
Why?
Ans: If a good can be used for many purposes , the demand for it will be more
elastic because with a decrease in its price it is put to several uses and with a
rise in its price it is withdrawn from its many existing uses. So that, there is a
considerable change in demand in response to some change in price.
Q 9. “If a product price increases, a family‟s spending on the product has to
increase.” Defend or refute.
Ans: When product price increases, expenditure on the commodity will not increase
in the situation when Ed>1 (elasticity of demand is greater than unity). It will
increase only in situation when Ed<1. In a situation when Ed=1. Expenditure
will remain constant, even when prices rise.
Q 10. Suppose there are 30 consumers for a good, having identical demand
function: d(p) =10-3P for any price less than or equal to 10/3 and d(p)=0
for any price greater than 10/3. Write the market demand function.
Ans: Market demand function is simply a horizontal summation of individual

demand functions. Since demand function for all the 30 consumers is identical,
we can write market demand simply as „individual demand function
multiplying by a factor of 30‟. Thus:
Individual demand function :
D(p)= 10-3P
Market demand function:
Md(p)=10 x 30 – 3 (30)P
= 300-90 P.
Q.11 How would you comment on the elasticity of demand when 8% decrease
in price of a commodity causes 2% increase in expenditure of the
commodity?
Ans: Elasticity of demand must be greater than unity (implying a situation of elastic
demand) when expenditure on the commodity responds inversely to any change
in price of the commodity.
4
Q12. A dentist was charging Rs.300 For a standard cleaning job and per
month it used to generate TR is equal to Rs. 30,000. She has since last month
increased the price of dental cleaning to Rs.350. As a result fewer customers are
now coming for dental cleaning, but the TR is now Rs. 33,250 .From this, what
can we conclude about the elasticity of demand for such a dental service?
Ans. PRICE TOTAL EXPENDITURE (Rs.)
300 30,000
350 33,250
When price increases, total expenditure also increases. So elasticity is less than 1.
Q. 13. The elasticity of demand for X is twice the elasticity of demand for Y.
Price of X falls by 5% and Price of Y rises by 5% . What will be the % change
in the quantity demanded of X and Y?
Ans. Suppose elasticity of demand for Y = 1 , and
elasticity of demand for X will be = 2
So, % decrease in qt. demanded of Y will be 5% , because price rises by
5%, and
% increase in qt. demanded of X will be 10% , because price falls by 5% .
Q.14 If prices of salt and cigarettes, both rises by 10% , will the qt. demanded
of both goods affected in an equal manner?
Ans. No, because the nature of the two goods is different. Salt , a necessary good,
will have constant consumption and marginal consumers will reduce the
consumption of cigarettes , which is non-essential.
Q 15. Given eD = - 0.02, and percentage increase in price = 20%, find change in
expenditure on the commodity.
5
Implying that expenditure on the commodity increses by 15.2% owing to increase
the commodity by 20% . Which is why ed is less than 1.
.
MUX MUY
Q. 16 If , then the consumer should buy more of commodity Y and
PX PY
less of commodity X to reach the equilibrium position. Is it right or
wrong?
6
Ans.- Wrong. Because in that situation consumer should increase consumption of
good-X so that the ration of MUX to its price may become equal to the ratio of
MUY to its price.
Q. 17 Law of diminishing marginal utility will operate even if consumption
takes place in intervals. Defend or refute.
Ans.- No, the of diminishing marginal utility will operate even if consumption takes
place in intervals. Because it is based on the assumption that consumption is
taking place in continuation
Q. 18 What changes will take place in TU, when: (i) MU curv remain above the
X-axis, (ii) MU curve touches the X-axis, (iii) MU curve lies below the X-
axis.
Ans.- (i) TU increases at decreasing rate. (ii) TU becomes maximum. And (iii) TU
starts to decline
Q. 19 A good may be an inferior good for one consumer and normal for another
consumer. Defend or refute.
Ans.- Yes it is right. A good may be inferior for a higher income person and the
same good may be a superior good for a low income person
UNIT – III
PRODUCER BEHAVIOUR AND SUPPLY

Q.1. What happens to MPP when TPP increases at decreasing rate?
Ans. MPP falls but remains positive.
Q.2. As the variable input is increased by one unit, total output falls. What
would you say about of marginal productivity labour?
Ans. Marginal productivity of labour is negative.
Q.3. Why is MC curve in short run U-shaped?
Ans. MC Curve in short run is U-shaped due to operation of the law of returns to a
factor.
Q.4. Why does fixed cost not influence marginal cost?
Ans. Because marginal cost do not include fixed cost.
Q.5. When a seller sells his entire output at a fixed price, what will be the
shape of AR & MR curves?
Ans. Both AR & MR are equal and coincide with each other on a horizontal line.
7
Q.6. Show that average revenue equals price.
TR PXQ
AR = = = P = Pr ice
Ans. Q Q
Q.7. What effect does a cost saving technical progress have on the supply
curve?
Ans. Supply curve will shift to the right.
Q.8. What effect does an increase in excise tax have on the supply curve?
Ans. Supply curve will shift to the left.
Q.9. What happens to TPP when marginal productivity of variable input is
negative?
Ans. TPP falls.
Q.10. When is TPP maximum in relation to MPP?
Ans. When MPP is zero.
Q.11. What happens to MPP when TPP is declining?
Ans. MPP declines and remains negative.
Q.12. How does fall in MPP affect TPP?
Ans. TPP increases at decreasing rate.
Q.13. What effect does an increase in input price have on the supply curve?
Ans. The supply curve will shift towards left-hand side.
Q.14. Why does average cost fall as output rises?
Ans. AC falls due to operation of the law of increasing returns to a factor as output
rises.
Q15. Does fixed cost affect marginal cost? Give the answer with reason.
Ans. No, because fixed cost is not subject to change and it is not considered while
calculating MC.
Q.16. What would be the effect of increase in the output on the TFC?
Ans. There would not be any effect of increase in the output on the TFC, It will be
constant at different levels of production.
Q.17. If marginal revenue falls, will total revenue fall?
Ans. It may fall when MR falls and becomes negative. If MR falls but remains
positive then TR may increase with diminishing rate.
Q.18. What is the price elasticity of supply of a commodity whose straight line
supply curve passes through the origin forming an angle of 25º?
Ans. Price elasticity of supply will be equal to one when a straight line supply
curve passes through the origin; angle does not matter anything.
Q. 19. Can MC be equal to TVC?
Ans.- Yes MC may be equal to TVC at output level one.
8
Q. 20 Why does the minimum point of AC curve fall towards right of AVC
curve?
Ans.- Because AC is sum total of AVC and AFC.

Q.21. The two inversely S-shaped short run cost curves are parallel to each
other and maintain a constant distance of Rs. 50. What is indicated by Rs.
50? Also identify the two inversely S-shaped short run cost curves.
Ans.- Rs. 50 is TFC. And two inversely S-shaped cost curves are TVC and TC
respectively.
Q. 22. The equality of MC and MR is a condition necessary for equilibrium, but
it is not by itself sufficient to ensure the attainment of producer‟s
equilibrium. Comment.
Ans.- Yes. For consumers equilibrium it is also essential that after the equilibrium
level of production MC should be greater than MR. Other-wise there will be
an incentive to increase the output in order to maximize the profit.
Q. 23. Ram produces both Jeans and Shirts. How will an increase in the price of
Jeans affect the supply curve of Shirts?
Ans.- An increase in the price of Jeans will decrease the supply of Shirts, because
now it will be profitable to the producer to produce and sell more of Jeans
instead of Shirts, as it has become expensive.
Q. 24. Will a firm stop production at break-even point in short run? Why?
Ans.- No, firm will not stop the production at break-even point because that firm has
given best employment to its factors of production.
Q.1. Why is more of a commodity supplied only at a higher price?
Ans.- Because increase in production leads to decrease in returns to a factor. That in

turn leads to increase in cost. That is why more of a commodity supplied only
at a higher price
Q. 2. Suppose the functions of demand and supply curves of a commodity are

given by: qD = 100-p
qS = 60 + p for p≥ 15
= 0 for 0≤p<15
9
(i) What does p =15 indicate?
(ii) Find the equilibrium price and equilibrium quantity.
(iii) Whether the given commodity comes under the category of viable
industry.
(iv) Calculate market demand and supply at price of Rs. 25 and Rs. 10.
Show that at price of Rs. 25, there is excess supply and at price of Rs.
10, there is excess demand.
Ans.-
(i) P=15 indicates that the minimum average cost of the firm is Rs. 15 and
firm will not supply the commodity for any price less than Rs. 15
(ii) Equilibrium Price = Rs. 20 and equilibrium quantity = 80 units
(iii) Yes, the given commodity comes under the category of viable industry as
there is some price, at which supply and demand happens to coincide.
(iv) At price Rs. 25 market demand = 75 units and market supply = 85 units.
Therefore there will be excess supply of 10 units
And at price of Rs. 10 market demand = 90 units and market supply = 70

units. Therefore there will be excess demand of 20 units.
Q. 3. There are three different supply curves passing through the origin. A
curve makes an angel of 60o. Curve B makes an angel of 45o and curve C
makes an angel of 30o. What will be the price elasticity of curve A, B and
C?
Ans.- Price elasticity of supply of good will be equal to one if supply curve is
passing through the origin point, irrespective of the angel made by it with the
origin.
Q. 4. Why should MC curve cut MR curve from below to achieve producer‟s

equilibrium?
Ans.- Because after equilibrium level of output, marginal cost should become
greater than the marginal revenue. Other-wise there will be an incentive to
increase the output in order to maximize the profit.
10
Q. 5. The gap between AC and AVC keeps on decreasing with rise in output,
but they never meet each other. Comment.
Ans.- Yes it is right statement. Because the gap between AC and AVC is equal to
AFC which goes on diminish as output increases. Since TFC is fixed at all
levels of output, AFC goes on diminish as output increases
Q. 6. If TVC=0, TC is also zero. Is it true or falls? Give reason for your answer.
Ans.- It is falls. Because in short TC = TFC + TVC. Therefore in short run TC will
be some-thing positive even if TVC=0. But in long run TC = TVC. Therefore
in long run TC will be zero if TVC=0.
Q. 7. Why increasing MP not sustainable?

Ans. Decrasing MP set in due to following reasons:-
1. Fixity of the factor: As more and more units of the variable factor continue
to be combined with the fixed factor, the later gets over-utilized.
2. Imperfect Substitution among Factor: Beyond a certain limit, factors of
production cannot be substitute for one another e.g. more and more of
labour cannot be continuously used in place of additional capital.
Q. 8. Why MC cuts AC at its minimum?

Ans. because (i) When MC < AC, AC falls.
(ii) When MC = AC, AC is minimum.
(iii) When MC > AC, AC rises.
(iv) MC falls & rises faster than AC.
(v) Both are obtained from TC.
TC TC
AC = , MC =
Q Q
11
Q. 9. How do changes in MR affect TR?
Ans. i) If MR increases, TR increases at increasing rate.
ii) If MR is constant, TR increases at constant rate.
ii) IF MR falls, TR increases at diminishing rate.
Q.10. What is MR? How is it related to AR?

Ans. MR refers to the change in TR due to sale of an additional unit.
Relation –
(i) If AR (Price) is constant, MR = AR
(ii) If AR (Price) falls, MR < AR.
(iii) If AR (Price) rises, MR > AR.
Q. 11. What will be the price elasticity of supply if the supply curve is a
positively sloped straight line?
Ans. Es = 1 if the curve starts from the origin point.
Es> 1 if the curve starts from the y-axis and
E<1 if the curve starts from the x-axis.
Q. 12. State the relation between marginal revenue and average revenue when a
firm:
(i) is able to sell more quantity of output at the same price.
(ii) is able to sell more quantity of output only by lowering the price.
Ans. Marginal revenue is the addition to total revenue from producing one more
unit of output.
12
(i) MR = AR at all levels of the output. (In case of perfect completion market)
(ii) MR will be less than AR at all levels of the output. (In case of monopoly
and monopolistic market)
LONG ANSWER TYPE QUESTIONS: (6 Marks Each)
Q. 1. In the following table, identify the different phases of the law of variable
proportions and explain them with the help of the table and a diagram.
Variable input
1 2 3 4 5 6 7 8
(units)
Total product
2 5 9 12 14 15 15 14
(units)
Ans. Law of Variable Proportion states that if we go on using more and more units
of a variable factor along with a fixed factor, the total output initially increases
at an increasing rate, after that it increases at diminishing rate and finally it
declines.
It can be explained through the following three stages:
Units of TPP MPP Stages of

labour Production
1 2 2
2 5 3 Stage I
3 9 4
4 12 3
5 14 2 Stage II
6 15 1
7 15 0
Stage III
8 14 –1
13
Stage II
Y Stage III
Stage I
TPP
&
MPP
TPP
X
Labour
MPP
Y
‟
Stage 1:
• TPP increases at an increasing rate.
• MP increases and reaches at its maximum at the end of the stage.
• This is also called stage of increasing returns.
Stage 2:
• TPP increase but at diminishing rate.
• MPP starts decline but remains positive.
• This stage comes to an end when TPP is maximum and MPP is zero.
Stage 3:
• TP starts decline.
• MP becomes negative.
• This is also called stage of decreasing/negative returns.
14
NUMERICAL PROBLEMS WITH SOLUTIONS:
PRODUCTION:
Q. 1. Find out APP and MPP.
Labour 1 2 3 4 5 6 7
TPP 40 80 110 130 140 140 130
Ans. APP 40 40 36.67 32.5 28 23.33 18.57

MPP 40 40 30 20 10 0 -10
Q. 2. Find out the TPP and APP.

Labour 1 2 3 4 5 6 7
MPP 24 20 16 12 8 0 -8
Ans. TPP 24 44 60 72 80 80 72
APP 24 22 20 18 16 13.33 10.28
Q. 3. Calculate the APP and MPP.

Labour 0 1 2 3 4 5 6 7
TPP 0 5 12 20 30 35 40 42
Ans. APP 0 5 6 6.66 7.5 7 6.66 6

MPP - 5 7 8 10 5 5 2
Q. 4. The following table gives APP of a factor. It is also known

that (TPP) total product at O level of employment is O.
Determine its total product and marginal product.
Labour 1 2 3 4 5 6
APP 50 48 45 42 39 35
Ans. TPP 0 50 96 135 168 195 210

MPP - 50 46 39 33 27 15
15
COST:
Q. 1. Calculate the TVC, AFC,AVC, and MC.
Output 0 1 2 3 4 5 6
TC 60 80 100 111 116 130 150
Ans. TFC 60 60 60 60 60 60 60
TVC 0 20 40 51 56 70 90
AFC - 60 30 20 15 12 10
AVC - 20 20 17 14 14 15
MC - 20 20 11 5 14 20
Q. 2. Calculate TC and AVC.

Output 1 2 3 4 5 6
AFC 60 30 20 15 12 10
MC 32 30 28 30 35 43
Ans. TC 92 122 150 180 215 258

TFC 60 60 60 60 60 60
TVC 32 62 90 120 155 198
AVC 32 31 30 30 31 33
Q. 3 . Calculate MC and AC if fixed cost is 40.

Output 1 2 3 4 5 6
TVC 60 80 90 110 150 216
Ans. MC 60 20 10 20 40 66
TC 100 120 130 150 190 256
AC 100 60 43.33 37.5 38 42.67
Q.4
OUTPUT 1 2 3 4
AC 54 ------ ----- 33
AVC 30 24 ----- -----
MC 30 ----- 24 -----
ANS.
OUTPUT 1 2 3 4
AC 54 36 32 33
AVC 30 24 24 27
16
MC 30 18 24 36
REVENUE:
Q. 1. Find AR and MR.

Output 1 2 3 4 5 6 7
TR 10 24 33 40 40 36 28
Ans. AR 10 12 11 10 8 6 4
MR 10 14 9 7 0 -4 -8
Q. 2. Find out TR and MR.

Output 10 9 8
AR 6 7 8
Ans. TR 60 63 64
MR - 3 1
Q. 3. Complete the following table:

Output 1 2 3 4
Price - 9 - -
MR 10 - - 4
TR - - 24 -
Ans. Output 1 2 3 4
Price 10 9 8 7
MR 10 8 6 4
TR 10 18 24 28
Q. 4. Calculate TR and AR
Output 1 2 3 4
MR 10 8 0 -2
Ans. TR 10 18 18 16
AR 10 9 6 4
17
ELASTICITY OF SUPPLY:
Q.1. If price elasticity of supply of a commodity is 5. A producer

supplies 500 units of this product at a price of Rs. 5 per unit.
How much quantity of this product will be supplied, at the price
of Rs. 6 per unit?
Ans. es = 5
P Q
5 500 ∆q = x – 500
6 x ∆p = 1
p = 5
q = 500
q p
e= x
p q
x - 500
5=
100
5 × 100 = x – 500
500 = x – 500
500 + 500 = x
x = 1000 (units)
Q.2. Due to a 10 per cent rise in the price of a commodity, its quantity
supplied rises from 400 units to 450 units. Calculate its price
elasticity of supply. Is the supply elastic?
Ans. P = 10% Change in quantity

% Change in quantity supplied = x 100
Original quantity
50
x 100
= 400
= 12.5%
12.5
es =
10
125
es =
100
18
es = 1.25 (Yes, its supply is elastic.)
Q.3. The quantity supplied of a commodity at a price of Rs. 8 per unit
is 400 units. Its price elasticity of supply is 2. Calculate the new
price at which its quantity supplied will be 600 units?
Ans. es = 2
p q ∆q = 200
8 400 ∆p = x-8
x 600 p = 8
q = 400
q p
e= x
p q
200 8
e2 = x
x - 8 400
4
2 =
x -8
2 (X - 8) = 4
2 x - 16 = 4
2 x = 4+16
2 x = 20
x = 10
Hence the new price is Rs. 10.
Q.4. When the price of a commodity rises from Rs.10 to Rs.12 per
unit, its quantity supplied rises by 100 units. If es = 2, Calculate
its quantity supplied at increased price.
Ans. es = 2
∆q = 100
∆p = 2
p = 10
q p
e = x
p q
100 10
____ ____
2 = x
2 q
4q = 1000
q = 250 (original quantity)
19
Quantity supplied at increased price = 250 + 100 = 350 units
Q.5. If es = 3, A seller supplies 20 units of the commodity at a price of
Rs.8 per unit. How much quantity of the commodity will the
seller supply when price rises by Rs.2 per unit?
Ans. es = 3
q = 20
p = 8
∆p = 2
q p
e = x
p q
∆q 8
____ ____
3 = x
2 20
8 ∆q = 120
∆q = 15
(change in quantity)
Quantity supplied at increased price = 20 + 15 = 35 units
UNIT-IV
FORMS OF MARKET AND PRICE DETERMINATION
Q. 1. What is the value of MR when demand curve is elastic?

Ans. MR is positive.
Q. 2. In which market DD curve is indeterminate?
Ans.- Oligopoly Market.
Q 2. Who determines price under perfect competition?
Ans: Price under perfect competition is determined by the forces of market demand
and market supply in industry.
Q 3. How much loss can a firm bear?
Ans: A firm can bear losses upto its total fixed costs in short run.
Q 4. Explain the motivation behind granting patent rights.
Ans: Motivation behind granting patent rights are:
(A) To encourage research and development; and
(B) To encourage new discoveries and innovations.
20
SHORT ANSWER TYPE QUESTIONS: - (3 /4 Marks Each)
Q 1. Explain how the efficiency may increase if two firms merge?

Ans: When the two firms merge, their combined efficiency is expected to improve
owing to:
(A) Increase in the scale of output and the consequent economies of scale.
(B) Better division of labour and specialization; and
(C) Use of better technology, saving the cost of production.
Q 2. Why is the demand curve facing a monopolistically competitive firm likely

to be very elastic?
Ans: It is because the products produced by the monopolistically competitive firms
are close substitutes to each other. If products are close substitutes to each
other the elasticity of demand is high, which is what makes the firm‟s demand
curve(under monopolistic competition) very elastic.
Q 3. Why is the demand curve facing a firm perfectly elastic under perfect
competition but less than perfectly elastic under monopolistic
competition?
Ans. The demand curve under perfect competition is perfectly elastic. Perfectly
elastic demand curve means any quantity can be sold only at a given price.
Under perfect competition, the price of the product is determined by the
industry by the forces of demand and supply and the firm has no option but to
accept it. Uniform price prevails because all firms are selling a homogeneous
product. A firm cannot influence or alter the price. Implying that a firm can
sell any quantity at the given price. Therefore, the demand curve will be a
straight line parallel to the X-axis as shown in Fig. ; which is perfectly elastic,
showing Ed=infinity
The demand curve under monopolistic competition is less than perfectly
elastic. It means more can be sold only at lower price. Under monopolistic
competition, the seller sells a differentiated product, so he exercises partial
control over price. But he can sell more only by lowering the price; certainly
not at the existing price.
This is what makes the demand curve less than perfectly elastic.
Q 4. Which features of monopolistic competition are monopolist in nature?

Ans. (i) Product differentiation
(ii) Control over price
(iii) Downward sloping demand curve
21
Q 5. How does an increase in the price of a substitute good in consumption
affect the equilibrium price?
Ans: With increase in the price of the substitute good, the equilibrium price of the
concerned good will increase owing to shift in demand curve to the right.
Q 6. „Changes in both demand any supply of a commodity may or may not

affect its equilibrium price.‟ Explain.
Ans: If the demand and supply of a commodity change equally, and in the same
direction there will be no effect on its price. On the other hand, an unequal
change in demand and supply will affect equilibrium price. When demand
increases more than supply, equilibrium price will rise. On the other hand,
when supply increases more than demand, equilibrium price will fall.
Q 7. When will the equilibrium price of a commodity not change even if its
demand and supply both increase? Explain with the help of a diagram.
Ans. If both increases equally.
Q 8. A severe drought results in a drastic fall in the output of wheat. Analyze

how will it affect the market price of wheat?
Ans: As a result of severe drought, the output of wheat is reduced. It means the
supply of wheat in the market will reduce, causing a shift of supply curve to
the left. Accordingly, market price of wheat will increase.
22
Q 9. Suppose the demand for jeans increases. At the same time, because of an
increase in price of cotton, the supply of jeans decreases. How will it
affect the price and quantity sold of jeans?
Ans: Increase in market demand for jeans along with a decrease in the supply of
jeans should raise the price of jeans and the quantity sold will decline.
Q 10. China is a big manufacturer of technology of telephone instruments. It

has recently become a member of W.T.O., which means it can sell its
products in other member countries like India. Suppose that it does
export a large number of telephone instruments to India:
(A) How will it affect the price and quantity sold of telephone instruments
in India?
(B) Suppose that the demand for telephone instruments is relatively
elastic. How will it affect India‟s total expenditure on telephone
instruments?
Ans: (A) As a result of large export of telephone instruments by Chine to India, the
market supply of telephone instruments increases. It reduces the price of
telephone instruments while the quantity sold will increase.
(B) If the demand for telephone instruments is relatively elastic, reduction in
price should increase total expenditure on telephone instruments in India.
Q 11. Mrs. Ramgopal says that economists say inconsistent things: as price
falls, demand rises, but as demand rises, price rises. Defend or refute.
Ans: The statement of Mrs. Ramgopal that “as price falls, demand rises, but as
demand rises, price rises”, can be defended. The first part of the statement i.e.
as price falls demand rises is the general behavior of the consumer in the
market. This is simply a forward movement along a demand curve. Demand
changes due to change in the price of the commodity. But, there may also be
situation when increase in demand leads to increase in price. When the supply
of the commodity remains unchanged. And demand increases (due to factors
other than price such as increase in income of the consumer or change in taste
preference of the consumer.) The demand curve shifts upward and it raises the
market price. Fig. illustrates the two situations:
23
Q 12. Answer all the questions in terms of shifts in or movements along the
demand and supply curves.
(A) In 2001, the Supreme Court of India banned smoking in public
places. How is this likely to affect the average price of cigarettes and the
quantity sold?
(B) New discoveries of oil reduce the price of petrol and diesel. Consider
their effects on the market for new cars.
(C) New environmental regulations require the drug industry to use a
more environment friendly technology whose running cost are higher but
which discharges less chemicals than before. How would it affect the price
of drug?
Ans: (A) A ban on cigarette smoking in public places should cause a backward shift
in demand curve. Consequently average price of cigarettes should fall. Fall in
average price of cigarette should cause a fall in quantity sold.
(B) New discoveries of oil reducing the price of petrol/diesel should imply
increase in demand for cars (in terms of shift in demand curve to the right), as
cars and petrol/diesel are complementary goods.
(C) Due to the use of costlier (environment friendly) technology, supply curve
of drug will shift to the left, causing a rise in the price of drug.
Q 13. In a state of equilibrium, price greater than MC is ruled out for a

perfectly competitive firm. Show diagrammatically.
Ans: Fig illustrates how prices greater than MC is ruled out for a perfectly
competitive firm in a state of equilibrium. Equality between price (AR) and
MC is struck at point Q where all the conditions of equilibrium are satisfied.
OL is the equilibrium level of output. Suppose the firm decides to produce
24
OL1 output where AR(=L1Q1)>MC(=L1T1). As a consequence of shifting
from Q to Q1; loss of TR=Q1L1LQ, while the TC is saved to the tune of Q1TQ.
Evidently, reduction in TC (=Q1TQ) is only a part of reduction in
TR(=Q1L1LQ). Implying that the differential between TR and TC(= profit)
would reduce in case the firm shifts from Q to Q1 Profit is maximized only at
point Q where price = MC.
Q 14. In a state of equilibrium, price lesser than MC is ruled out for a perfectly
competitive firm. Show diagrammatically.(Question for practice)
Q 15. What is firm‟s supply curve in the short run, operating under perfect
competition?
Ans: It is MC curve of the firm starting from a point where MC=AVC (minimum).
In Figure, short period supply curve of the firm is MC curve starting from point Q
where AR= AVC (minimum).
Q.16 In which market situation, the influence of an individual seller is zero?
25
Ans. In the Perfectly Competitive market situation.
Q.17 How is a single buyer a price taker in perfect competition?
Ans. A single buyer‟s share in total market demand is so significant that the buyer
cannot influence the market price on his own by changing his demand.
Q.18 Normal profit means zero economic profit. Why?
Ans. Suppose the existing firms are earning above normal profits. Attracted by the
positive profits, the new firms enter the industry .The market supply increases
and the price comes down. New firms continue to enter and the price
continues to fall till economic profits are reduced to zero.
In case of losses, firms start leaving the industry, supply falls and prices
starts going up and all this continues till losses are wiped out. Remaining
firms in the industry then once again earn just normal profits / zero profit.
Q. 19. Why does there are few firms in oligopoly market?
Ans.- There are only few firms in oligopoly market because there are some
restrictions on the entry of firms in the market. Which are inter-dependence of
firms, big requirements of funds, great competition among the firms. The only
firms which can break these restrictions are able to enter the market.
Q. 20. Does a monopolist has full control over the price?
Ans. No, because price is determined by the forces of demand and supply . a
monopolist controls only the supply side and demand side remain
uncontrolled.
26
UNIT VI
NATIONAL INCOME AND RELATED AGGREGATES
Q.1. When is the national income less than domestic income?

Ans. When NFIA is negative.
Q.2. When is the national income larger than domestic factor income?
Ans. When NFIA is positive.
Q.3. What is the effect of an indirect tax and a subsidy, on the price of the
commodity?
Ans. The effect of an indirect tax on a commodity is to increase the price and the
effect of subsidy is to reduce the price in the market.
Q.4. Are the wages and salaries received by Indians working in American
Embassy in India a part of Domestic Product of India?
Ans. No, because American embassy is not a part of domestic territory of India.
Q.5. Why is the study of the problem of unemployment in India considered a
macro economic study?
Ans. The problem of unemployment in India is an economic issue at level of
economy as a whole, hence considered as macroeconomic study.
Q.6. When is gross domestic product of an economy equal to gross national
product?
Ans. When NFIA is zero.
Q.7 Name a product whose value is included in GDP but its consumption
reduce welfare?
Ans. Liquor.
Q.8 Why is interest paid by consumers not a factor payment?
Ans. Because consumer borrow money for consumption purpose.
Q.9 If compensation of employees in a firm constitutes 55 % of net value added
at factor cost of the firm , find the proportion of operating surplus.
Ans. 100 % - 55 % = 45 % ( assuming mixed income is Zero)
Q.1. Will the following be included in gross domestic product / Domestic

Income of India? Give reasons for each answer.
(i) Consultation fee received by a doctor.
27
(ii) Purchase of new shares of a domestic firm.
(iii) Services charges paid to a dealer (broker) in exchange of second hand

goods.
Ans. (i) Yes, It is a factor income. It is his salary.
(ii) No, It is not included in GDP, because it is a merely financial transaction which
does not help directly in production.
(iii) It is included because it is his factor income (salary).
Q.2. State whether the following is a stock or flow:

(a) Wealth, (b) Cement production, (c) Saving of a household, and (d) Income of
household.(e)profit
Ans. Stock – (a) & (b), since these are variables measurable at a point of time.
Flow – (c) , (d)& (e), since these are variables measurable over period of time.
Q.3. State whether the following is a stock or flow:
(a) National capital, (b) Exports, (c) Capital formation, and (d) Expenditure on
food by households.
Ans. Stock – (a), since national capital is a variable measurable at a point of time.
Flow – (b), (c) & (d), since these are variables measurable over period of time.
Q.4. Are the following included in the estimation of National Income a
country? Give reasons.
(i) Bonus received by employees.
(ii) Government expenditure on defence.
(iii) Money sent by a worker working abroad to his family.
(iv) Profit earned by a branch of Indian Bank in London.
(V) Expenditure by government in providing free education.
Ans. (i) It should be included in NI because it is a part of the compensation of

employees (salary in cash).
(ii) It should be included in NI because defence service is considered final
service so far as it provides peaceful and secure environment to the citizens.
(iii) It is included in NI because it is a part of NFIA.
(iv) It is included in NI of India because it is a part of NFIA.
(v) yes , it is a part of government final consumption expenditure.
(i) Rent free house to an employee by an employer.
(ii) Purchases by foreign tourists.
(iii) Purchase of a truck to carry goods by a production unit.
(iv) Payment of wealth tax by a household.
28
Ans. (i) It should be included in NI because it is a part of the compensation of
employees (salary in kind).
(ii) It is included in NI because it is a part of the final consumption expenditure
on domestic product.
(iii) It should be included in NI because it is an addition to the capital stock of
the production unit.
(iv) It should not be included in NI because it is a compulsory transfer
payment and paid from past savings of the tax payers.
Q.6. Is net export a part of NFIA? Explain.
Ans. No, it is not.Net export, the difference between export and import (X- M), is
a part of expenditure on domestic product. While NFIA is the difference
between income earned from abroad by the normal residents of a country and
income earned by non-residents in the domestic territory of that country. It is
not included in the domestic product rather it is a component of NI. Therefore
both are different concepts.
Q.7 Should we treat subsidy as transfer payment?
Ans. No, value addition has already accrued. In fact, subsidies tend to lower the
market value of the good produced .Accordingly, these are added to the
market price to make it equal to the factor cost . Subsidies are a part of NNP
FC which is why these are deducted from factor cost to equate it with market
price.
LONG ANSWER TYPE QUESTIONS: (6 Marks Each)
Q. 1. Will the following be included in gross domestic product / Domestic

Factor Income of India? Give reasons for each answer.
(i) interest free loan to bank employees from bank
(ii) Factor income from abroad.
(iii) Compensation of employees given to residents of china working in
Indian embassy in China.
(iv) Profit earned by a company in India, which is owned by a non-
resident.
Ans. (i) no, it is to be repayed.
(ii) No, because factor income is earned not within the domestic territory of a
country but from abroad.
(iii) Yes, because Indian embassy in China is a part of domestic territory of
India.
(iv) Yes, because the company within India‟s domestic territory earns profit.
29
Q.2. Why are exports included in the estimation of domestic product by the
expenditure method? Can gross domestic product be greater than gross
national product? Explain.(4+2)
Ans. Expenditure method estimates expenditure on domestic product, i.e.
expenditure on final goods and services produced within the economic
territory of the country. It includes expenditure by residents and non- residents
both. Exports, though purchased by non- residents, are produced within the
economic territory, and therefore, a part of domestic product.
Domestic product can be greater than national product if factor income
paid to the rest of the world is greater than the factor income received from
the rest of the world is i.e. when net-factor income received from abroad is
negative.
Q.3. Are the following included in the estimation of National Income of India?
Give reasons for each answer.
(i) profits earned by Dabur India in U.K.
(ii) Money received from sale of shares.
(iii) Salary paid to Americans working in Indian embassy in America.
(iv) payment of electricity bill by a factory
(v) direct purchases of government in a foreign country.
(vi) Remittances from aboard.
Ans. (i) Yes , it is a part of factor income earned from abroad.
(ii) No, it is only a transfer of paper claims.
(iii) No, this factor income belongs to non-residents.
(iv) No. it is intermediate consumption.
(v) Yes , it is government final consumption expenditure.
(vi) No, it is only a transfer payment. No commodity is sent or services
rendered return for this.
Q.4. Will the following be included National Income? Give reasons for each
answer.
(i) Services of owner occupied houses.
(ii) Purchase of new shares of a domestic firm.
(iii) Purchase of second-hand machine from a domestic firm.
(iv) Consultancy fee paid to a foreign expert.
(v) Commission paid to agent for the sale and purchase of shares.
(vi) Dividend received on shares.
Ans. (i) Yes, Imputed rent of owner occupied houses will be included in NI.
(ii) No, because it is a financial transaction which does not help directly in
production.
(iii) No, because it is not related with current flow of goods and services.
(iv) No, as it is a factor income paid abroad (it is earned by non-residents).
(v) Yes, It is included in NI since it is paid for rendering productive services.
30
(vi) Yes, dividends are a part of corporate profit and therefore, include in NI.
Q.5. Will the following be included National Income? Give reasons for each
answer.
(i) Free Medical facility to employees by the employer.
(ii) Money received from sale of old house.
(iii) Government expenditure on street lighting.
(iv) Interest received by a household from a commercial bank.
(v) Receipts from sale of land.
(vi) Interest on public debt.
Ans. (i) Yes, as it is a supplementary income paid in kind and hence a part of
compensation of employees.
(ii) No, as it has already been taken into account when the house was
constructed.
(iii) Yes, It is a part of Government final consumption expenditure and it adds
to flow of services.
(iv) Yes, as it is payment for use of capital.
(v) No, as it does not add to flow of goods & services.
(vi) It should not be included in NI because public debt is a loan taken on to
meet consumption expenditure by the government.

(i) Services rendered by family members to each other.
(ii) Wheat grown by a farmer but used entirely for family‟s consumption.
(iii) Expenditure government on providing free education.
(iv) Payment of fees to a lawyer engaged by a firm.
(v) Man of the match award to a player of the Indian cricket team.
(vi) Payment of the match fee to players of Indian cricket team.
Ans. (i) Services rendered by family members to each other should not be included
in NI because these are not rendered for the purpose of earning income.
(ii) Imputed value of self-consumed wheat grown by a farmer must be
included in NI, because it adds in the flow of goods.
(iii) It should be included in NI because the government expenditure on the
free services is considered as a part of government final consumption
expenditure.
(iv) Yes, as it is factor income against the service of lawyer.
(v) It should not be included in NI because it is a windfall gain and it does not
add in the flow of goods and services.
(vi) It should be included in NI of India because they render productive
services as professionals.
31
(i) Unemployment allowance under NREGA.
(ii) Indirect tax (Sale tax/excise duty).
(iii) Salary received by the workers under NREGA.
(iv) Income tax.
(v) Corporation tax.
(vi) Travelling expenses paid to salesman by the employer.
Ans. (i) It is transfer payment received by those persons who are not employed;
therefore it should not be included in NI.
(ii) It is not included in NI because it does not add in the flow of goods and
services.
(iii) It is included in NI because it is a factor income.
(iv) It is a part of compensation of an employee (income). While calculating
NI by income method, compensation of employees is to be included while
doing so, income tax to be paid by them should not be included separately.
(v) It is a part of profit of corporate sector. While calculating NI by income
method, profit is to be included while doing so, Corporation tax should not be
included separately.
(vi) Travel expenses incurred by employees for business purpose which are
reimbursed by the employers are excluded because these are a part of
intermediate consumption of the employers
NUMERICAL PROBLEMS WITH SOLUTIONS:
Q.1. Calculate private income, personal income, personal disposable income and
National disposable income from the following data:
(Rs. in Crores)
(i) National income 3000
(ii) Savings of private corporate sector 30
(iii) Corporate tax 80
(iv) Current transfer from government 60
(v) Income from property and entrepreneurship to government 150
(vi) Current transfers from rest of the world 50
(vii) Savings of non-departmental government sector 40
(Viii) Net indirect taxes 250
(ix) Direct taxes paid by household 100
(x) Net factor income from abroad (-) 10
32
Solution: -
Private income = (i) - (iv + vii) + (iv + vi)
= 3000 - (150 + 40) + (60 + 50)
= 2920 Crores.
Personal income = 2920 - (ii) - (iii)
= 2920-30-80
= Rs 2810 Crores.
Personal Disposable Income = 2810- (ix)
= 2810-100
= Rs 2710 Crores.
National Disposable Income = (i) + (vi) + (viii)
= 3000 + 50 + 250
=Rs 3300 Crores.
Q2. Calculate NI by income and expenditure method:

(Rs. in Crores)
(i) Subsidies 5
(iii) NFIA (-) 10
(iv) Indirect Tax 25
(v) Rent 5
(vi) Government final consumption expenditure 20
(vii) Net domestic fixed capital formation 30
(viii) Operating surplus 20
(ix) Wages 50
(x) Net export (-) 5
(xi) Addition to stock (-) 5
(xii) Social security contribution by employers 10
(xiii) Mixed income 40
Solution: -
Income method
NI= (ix) + (xii) + (viii) + (xiii) – (iii)
= 50 +10 + 20 + 40 -10
=Rs 110 Crores.
Expenditure method
NI = (ii) + (vi) + (vii) + (xi) + (x) - (iv) + (i) + (iii)
=100 + 20 + 30 + (-) 5 + (-) 5 – 25 + 5 +10
33
=Rs 110 Crores.
Q.3. Calculate the value added by Firm A and Firm B from the following data: -
(Rs. in Lakhs)
(i) Purchase by Firm A from the rest of the world 40
(ii) Sales by Firm B 100
(iii) Purchases by Firm A from Firm B 60
(iv) Sales by Firm A 120
(v) Exports by Firm A 40
(vi) Opening stock of Firm A 45
(vii) Closing stock of Firm A 30
(viii) Opening stock of Firm B 40
(ix) Closing stock of Firm B 30
(x) Purchases by Firm B from Firm A 60
Solution: -
Value Added by Firm A = (iv) + [(vii) – (vi)] – (i) – (iii)
= 120 + [30 – 45] – 40 – 60
= Rs 5 Lakhs.
Value Added by Firm B = (ii) + [(ix) – (viii)] - (x)

= 100 + [30 – 40] - 60
= Rs 30 Lakhs.
Q.4. Estimate (i) Personal Income, (ii) Private Income and (iii) Personal
Disposable Income with the help of the following data.
(Rs. in Crores)
(i) National income 1300
(ii) Corporate tax 15
(iii) Direct personal taxes 40
(iv) Savings of private corporate sector 25
(v) Income from property and entrepreneurship accruing to Government
Administrative Departments 35
(vi) Current transfer from government administrative departments 30
(vii) National Debt Interest 10
(viii) Savings of non departmental government enterprises 5
(ix) Current transfers from rest of the world 15
Solution: -
Private Income = (i) - (v) – (viii) + (vii) + (vi) + (ix)
= 1300 – 35 – 5 +10 + 30 + 15
= Rs. 1315 crores.
34
Personal Income = Private Income – (ii) – (iv)
= 1315 -15 -25
= Rs 1275 crores.
Personal Disposable Income = Personal Income – (iii)
= 1275 – 40
= Rs 1235 Crores.
Q.5. Estimate (i) Personal Disposable Income, (ii) Private Income and (iii)
National Income from the following data:
(Rs. in Crores)
(i) Personal income 1225
(ii) Saving of private corporate sector 12
(iii) Corporate tax 23
(iv) Current transfer from government administrative departments 30
(v) Current transfer from rest of the world 25
(vi) Income from property and entrepreneurship accruing to Government
Administrative Departments 25
(vii) Savings of non departmental government enterprises 20
(viii) Net indirect tax 195
(ix) Direct tax paid by the households 25
Solution: -
Personal Disposable Income = Personal income - Direct tax
= 1225 - 25
= 1200 Crores
Private Income = Personal income + Saving of private corporate sector + Corporate
tax
= 1225 +12 + 23
= 1260 Crores
National Income = Private Income – (iv) – (v) + (vi) + (vii)
= 1260 – 30 - 25 + 25 + 20
= 1260 Crores
35
Q.6. Estimate the following with the help of given data:
(i) GDPMP ,
(ii) Net Value Added at factor cost; and (iii) prove that it is equal to the income
generated.
(Rs. in Crores)
(i) Increase in the stock of unsold goods 1000
(ii) Sales 10,000
(iii) Net indirect tax 800
(iv) Purchase of raw materials from other firms 1650
(v) Purchase of fuel and power 850
(vi) Consumption of fixed capital 500
(vii) Rent 700
(viii) Wages and salaries 3500
(ix) Interest payment 1000
(x) Dividend 1500
(xi) Corporate gain tax 300
(xii) Undistributed profit 200
Solution: -
GDPMP = Sales + Increase in the stock - Purchase of raw materials - Purchase of fuel
and power.
= 10,000 + 1000 -1650 -850
= 11,000 -2500
= 8500 Crores.
Net Value Added at factor cost = Sales + Increase in the stock - Purchase of raw
materials –
Purchase of fuel and power - Consumption of fixed capital - Net
indirect tax.
= 10,000 + 1000 - 1650 - 850 - 500 – 800
= 11,000 – 3800
= 7200 Crores.
Income generated = Rent + Wages and salaries + Interest + Dividend + Corporate
gain tax + Undistributed profit.
= 700 + 3500 + 1000 + 1500 + 300 + 200
= 7200 Crores.
Hence it is proved that Net Value Added at factor cost = Income Generated
36
UNIT VII
DETERMINATION OF INCOME AND EMPLOYMENT
Q. 1 Can consumption exceed income? If yes, what is the saving then?

Ans. Yes, when income is zero or less than subsistence level of
consumption . Saving is –ve.
Q.2 How much new income will be generated in an economy with an
increase in investment by Rs. 200 and when two-third of rise in
income spent on consumption.
Ans. 600 Rs .
Q.3 Why can the value of MPC be not greater than 1?
Ans. It is because change in consumption can never be greater than change in
income.
Q.4 Does an excess of AD over AS always imply a situation of inflationary gap?
Ans. No. Inflationary gap occurs only when AD>AS corresponding to full
employment level of employment.
Q.5 What happens in an economy, when credit availability is restricted and
credit is made costlier?
Ans. Aggregate demands falls
Q.1 What happens if AD>AS prior to full employment level of employment?

Ans. It is a state of disequilibrium in economics. When AD>AS , producers have to
cater to demand out of their existing stock of goods , implying that the desired level
37
of stocks will decrease. It implies greater production & therefore there is increase in
AS .This process continues till equilibrium is struck between AD and AS.
Q.2 In poor countries like India , people spend a high percentage of their
income so that APC and MPC are high . Yet , value of multiplier is low . Why?
Ans. Working of the multiplier process is based on one fundamental assumption:
that there exists, excess capacity in the economy , so that whenever consumption
expenditure rises (implying increase in demand ) there is a corresponding increase in
production (implying increase in income ) . But poor countries like India, lack in
production capacity. Accordingly, whenever demand increases (in terms of increase
in consumption expenditure), there is increasing pressure of demand on the existing
output (implying inflation or rise in prices) rather than the increase in output or
income.
Q.3 Show a point on the consumption curve at which APC= 1.
Ans. APC = C/Y =1 is possible if C=Y, i.e. Consumption is equal to Income.
Q.4 In what respect foreign trade will be useful in removing the adverse
economic effects of deficient demand?
Ans. Export increases the demand for goods and services produced in the domestic
territory and is helpful to reduce deficient demand.
38
.
Q.5 Calculate consumption expenditure at the income level of Rs.1000 crores,
if autonomous consumption is Rs. 80 crores. And 20% of additional income is
saved.
Ans. MPS = 0.2
SO , MPC =0.8
C=c + bY (c = autonomous consumption)
C= 80+ 0.8 * 1000=Rs. 880 crores.
Q.6 Find national income from the following:

Autonomous consumption : Rs. 100
MPC : 0.8
Investment : Rs. 50
Ans. Y = c + b Y+ I
= 100+0.8 Y +50
Y= Rs. 750
39
UNIT – VIII
MONEY AND BANKING
Q.1 Money acts as a yardstick of standard measure of value to which all other
things can be compared. Discuss it.
Ans. Money serves as a measure of value in terms of unit of account. Measurement
of value was the main difficulty of the barter system. Introduction of money has
removed this difficulty. It acts as a yardstick of standard measure of value to which
all other things can be compared.” Money measures the value of everything or the
prices of all goods and services can be expressed in terms of money. This function of
money also enables the trading firms to ascertain their costs, revenues, profits and
losses.
Q 2. The central bank acts as lender of last resort. How?

Ans. The central bank also acts as lender of last resort for the other banks of the
country. It means that if a commercial bank fails to get financial accommodation
from anywhere, it approaches the central bank as a last resort. Central bank advances
loan to such a bank against approved securities. As a lender of the last resort, central
bank exercises control over the entire banking system of the country.
Q 3. Central bank performs the function of a clearing house. How?

Ans. Every bank keeps cash reserves with the central bank. The claims of banks
against one another can be easily and conveniently settled by simple transfers from
and to their account. Supposing, Bank A receives a cheque of Rs 10,000 drawn on
Bank B and Bank B receives a cheque of Rs. 15000 drawn on Bank A. The most
convenient method of settling or clearing their mutual claims is that Bank A should
issue a cheque amounting to Rs 5000 in favour of Bank B, drawn on central Bank.
As a result of this transference, a sum of Rs 5000 will be debited to the account of
Bank A and credited to the account of B. There is not need of cash transactions
between the banks concerned. It facilitates cash transaction across the entire banking
system, it also reduces requirement of cash reserves of the commercial banks.
40
UNIT – IX
GOVT BUDGET AND THE ECONOMY
Q.1 What does low primary deficit indicate?

Ans. It implies that the government is borrowing largely to make interest payment
on previous loans.
Q.2. Why is sales tax treated as revenue receipt?

Ans. Because sales tax neither create a liability for the govt nor reduces assets of the
govt.
Q.3 Find out the value of total receipts of govt. Budget if budget deficit is Rs
2,000 crores and the total expenditure is Rs 3,000 crores.
Ans:- Budget deficit =Total Expenditure- Total receipts
Total receipts= Total Expenditure- Budget deficit
= 3,000-2,000
= 1,000
Ans. Rs. 1,000 crores
Q.4. What will be the value of fiscal deficit if primary deficit is 53,000 crores
and interest on borrowings is Rs 5,000 crores?
Ans: - Fiscal deficit=Primary deficit + Interest Payment
= 53,000+5,000
= 58,000
Ans. Rs. 58,000 crores
41
Q.1 How government reallocates the resources and redistributes the income
through Budget?
Ans. 1. Reallocation of resources:-
In case, the market economy fails or does not achieve the desired social
objectives, the government has to interfere through budget and reallocate resources
accordingly. Through its budgetary policy, the government of a country directs the
allocation of resources in a manner such that there is a balance between the goals of
profit maximization and social welfare. Production of goods which are injurious to
health is discouraged through heavy taxation. On the other hand, production of
„socially useful goods‟ is encouraged through subsidies.
2. Redistribution of Income: -
Every economy strives to attain a society, where inequality of income and
wealth should be minimum. In order to achieve this objective through govt. budget
the government spends sufficient money on social security schemes, economic
subsidies and public works etc.
Q.2 What are the basis of classifying receipts into revenue receipts and capital
receipts?
Ans. Revenue receipts are those which neither create a liability for the govt nor
reduce the assets of govt such as income tax, sales tax, fees, profits etc. Capital
receipts are those which either create a liability for the govt or reduce assets such as
borrowings, disinvestment, recovery of loans etc.
42
Q.3 Identify the following as revenue receipts and capital receipts.
Give reason .
(i) Financial help from microsoft for the victims of flood affected
areas.
(ii) Sale of 40 % shares of publicc sector undertaking to a private
enterprise
(iii) Profits of LIC
Ans. (i) & (iii) are revenue receipts because they neither create liability
nor reduce assets of the government..
(ii) is capital receipts as it reduce assets of the government.
Q.4 Identify the following as revenue expenditure and capital
expenditure. Give reason .
(i) grants given by central government to state government
(ii) 10% share purchase by the government in a private company.
(iii) Pension paid to retired government employees.
Ans. (i) & (iii) are revenue expenditure as it neither create assets
nor reduce liability of the government.
(ii) is capital expenditure as it increase assets of the government.
Q.5 How can surplus budget be used during inflation?

Ans. In case of surplus budget, government is taking more money from
the economy than injecting into it. It results in a fall in aggregate demand
which is considered good to check inflation.
Q.6 Give the relationship between revenue deficit and fiscal deficit.
Ans. Revenue deficit = revenue expenditure – revenue receipts
Fiscal deficit = revenue deficit + ( capital expenditure – non-debt
creating capital receipts)
So , revenue deficit is a part of fiscal deficit
43
UNIT – X
BALANCE OF PAYMENT
VERY SHORT ANSWER TYPE QUESTIONS: - (1 Marks Each)

Q.1 What is foreign exchange?
Ans. It is the amount of currency reserves of all countries other than the
domestic currency .
Q.2 What does a change from Rs. 52 = $ 1 to Rs. 56 = $ 1 indicate?
Ans. Indian rupee depreciate in terms of $.
Q.3 Why are autonomous items called „above the line ` items?
Ans. Because autonomous items are recorded in BOP as first items before
calculating surplus or deficit.
Q.4 Is import of machinery recorded in current account or capital
account?
Ans. Since import of machinery is import item , it is recorded in current
account.
Q.1 Why foreign currency/exchange is needed?

Ans. i) To purchase of goods and services from other countries.
ii) To send a gift abroad.
iii) To purchase financial assets in a particular country and
iv) To speculate on the value of foreign currencies.
Q.2. What are the factors responsible for inflow of foreign currency?
Ans. i) foreigners purchasing home country goods and services through exports.
ii) Foreigners investment in home country through joint ventures and through
financial market operation.
iii) Foreign currencies flow into the economy due to currency dealers and
speculators
Q.3 When exchange rate of foreign currency falls it‟s supply also falls. Explain
how?
44
Ans. When exchange rate falls, experts become less profitable hence supply of
foreign currency through exports falls.
Q.4 When exchange rate of foreign currency falls, its demand rises. Explain
how?
Ans. When exchange rate falls, imports become cheaper, demand for imports rises
and so rises the demand of foreign exchange to purchase more imports.
Q.5 What will be the value of imports, if the net imports are Rs 160 crores and
the value of exports are Rs 400 crores.
Ans. Balance of Trade = Exports- Imports
Imports= Exports – Balance of trade= 400-(-160)=560
Or Imports= Exports + net imports
= 400+160=560 Ans Rs 560 crores
Q.6. If Balance of payment of a country is Rs (-) 100 crores and total payment
are Rs 500 crores. Find out its total receipts.
Ans. Balance of Payment = Total receipts- Total payments
Total receipts= Total Payment +BOP
=500 + (-100)
=500-100=400 Ans Rs 400 crores
Q.7. Find the primary deficit if fiscal deficit is Rs 15,000 crores and interest
payment is Rs 4,000 crores
Ans:- Primary deficit= Fiscal deficit- Interest Payment
=15,000-4,000
= 11,000 Ans. Rs. 11,000 crores
Q.8 Balance of payments always balances. Discuss it.

Ans. Balance of payments is always balanced. A negative balance on the current
account is equated with positive balance in the capital account. The monetary
authorities may finance a deficit by depleting their reserves of foreign currencies or
by borrowing from the IMF etc. Hence BOP is always in balance.
45
Q .9 Should a current account deficit be always a cause for alarm? Explain.
Ans. If the increase in current account deficit indicates rise in investment , then it
will increase future output , so it is not a cause of alarm but it is a cause of worry if
the increase in current account deficit reflects smaller savings or large budget deficit
because it indicates higher government or private consumption.
46
PART-I
MICRO ECONOMICS
Note:- Q1 to Q7 carry the weightage of 1 marks each and from Q8 to Q20 carry the weightage of 3/4
marks each
Ques1. In an underdeveloped economy why there is the need of efficient utilization of resources?
Ques 2. A farmer is getting more profit in producing opium than in production of wheat. In the situation
of famine which crop should be produced?
Ques3. Why has the power crisis increased in India?
Ques 4. According to law of demand by increasing the price of a good its demand decreases but in the
case of petrol, its demand is increasing with increase in price why? Explain.
Ques5. Inspite of having monopoly, Why the Indian Railway has not increased the fare for many years?
Ques 6. The market price of sugar rises when its demand increases. How the supply of sugar can be
changed so that price of sugar remain constant?
Ques7. Although there are few (more than one) firms in oligopoly. Even these firms can enjoy monopoly
power. How?
Ques 8. How can the productivity of Human resources be increased?
Ques 9. What efforts should be made in an economy for the continuous use of exhaustible natural
resources in production?
Ques 10. There are various sources of income a teacher has such as
1. He can earn Rs 40000 from teaching in school.
2. He can earn Rs 50000 by tuition/coaching
3. He earns Rs 60000 by writing help book guides.
What is the opportunity cost of teaching in school? Why should he choose teaching profession?
Ques 11- How is the law of diminishing marginal utility applied with regard to education/ knowledge?
Ques12- The demand of electricity is increasing but due to scarcity of resources its supply cannot be
increased. Give any two measures how the demand of electricity can be decreased?
Ques13. Even the price of petrol is very high but still its demand is very high. How can the demand of
petrol be decreased?
Ques 14. A manager of zoo wants to increase the revenue, which measure is more appropriate
i. Increase the entry fee
ii. Decrease the entry fee. Explain?
Ques15. Even the contribution of plastic industry in GDP is more then why it is not considered an Index
of social welfare?
Ques16. Explain the effects on the market equilibrium by imposing ban on the sale of GUTKA in Delhi?
Ques17. How can the tax policy of Govt be effective in controlling the supply of LIQUOR like harmful
product?
Ques 18. In a situation of fall in the sale of Ice-Cream, the Ice-Cream producer would like to reduce the
production. What factors of production fixed or variable will be reduced by him? Explain with reasons.
Ques 19. Availability of agricultural land (fixed factor) is limited in the world, but demand of food grain in
continuously increasing, is it possible to increase the supply of food grains by continuously increasing
variable factors like seeds, fertilizers etc. explain?
Ques 20. The demand for cooking gas is not falling inspite of regular hike in the price of cooking gas.
What will be the elasticity of demand for cooking gas. Explain giving suitable reasons in support of your
answer.
PART-II
MACRO ECONOMICS
Note:- Q1 to Q6 carry the weightage of 1 marks each and from Q7 to Q25 carry the weightage of 3/4
marks each
Ques1. Why comparing the GDP of various nations might not tell you which nation is better off?
Ques 2. Compensation to flood victims is a good social security measure by the Govt. But why it is not
included in the estimation of national income?
Ques3. GDP Calculation do not directly include the social costs of environmental damages for example
global warming, acid rain. Do you think these costs should be included in GDP? Why or Why not?
Ques4. Why did India devalue its currency in 1991?
Ques5. Do you think that a rise in BPO services a good source of supply of foreign currency?
Ques6. Suppose the present foreign exchange rate is 1$= Rs50 and if it falls to 1$=Rs60 should central
bank intervene in the foreign exchange rate?
Ques7. Why do non market economic activities like

1. Services of housewives
2. Voluntary services
3. Leisure time activities
help in the flow of goods and services of a country. But why these are not included in the estimation of
national income?
Ques 8. GDP growth rate in India for the last few years is more than 6% but still more than 28% of
population is lying below poverty line. Explain any two factors responsible for it.
Ques9. In the situation of inflation credit creation by commercial bank is beneficial for the bank but it
explain its negative impact on economy?
Ques10. In Indian market, money supply is the reason of rising price level. Explain any one measure of
central bank to control money supply?
Ques11. Why is the use of money more convenient for exchange than barter system. Explain?
Ques 12. Suppose all the customers of a commercial bank demand for their deposits at the same time
then how does central bank help to commercial bank in this situation.
Ques 13. Why do all the compensation in form of money than toys more convenient to an employee
working in toy manufacturing factory?
Ques14. Excess money supply is necessary for rapid economic development but it creates inflationary
situation. Write any two fiscal measures to control inflationary situation.
Ques15. Saving provides economics security in future but why it is not good from the viewpoint of
investment multiplier?
Ques 16. Why do the consumption expenditure of involuntary unemployed worker not zero, even at
zero level of income?
Ques17. What impacts will be on economy when there is planned investment is less than planned
saving? What steps should be taken by the govt to maintain equilibrium in the economy.
Ques 18. Increase in money supply is an effective measure to control economic depression but it creates
the burden of borrowing on economy. Explain any two measures by which economic depression can be
controlled even in the situation of increase in money supply.
Ques 19. In India unemployment is a major problem, if aggregate demand is equal to aggregate supply,
can it be called a situation of equilibrium?
Ques20. In India a majority of population is lying below poverty line due to inequality of ‘Income and
Wealth’ . How can budget be helpful in solving this problem?
Ques21. There has been consistent rise in prices of fruits and vegetables in Delhi for sometimes. Which
measures of budget will you support to reduce the prices of these commodities?
Ques22. Budget deficit creates disequilibrium in every economy but in developing countries like India,
why does Govt depend on it?
Ques23. Classify following items into Revenue Expenditure and capital expenditure. Give reason for your
answer.
1. Free Supply of Stationary to the students by the Govt.
2. Economic assistance given according to Ladli Scheme.
3. Expenditure on the construction of computer lab in school.
4. Expenditure on Mid Day Meal given to students by the Govt.
Ques24. Should a current account deficit be a cause for alarm? Explain.
Ques25. What impact will fall on the expenditure of an American citizen who comes to India for Medical
treatment if foreign rate is increased?
SUGGESTED ANSWERS
PART-I
MICRO ECONOMICS
Ans1- Developmental needs are more in under developed economy and these are fulfilled with our
limited resources.
Value- Critical Thinking
Ans2- Production of Wheat because in the situation of famine, food grain like wheat is required more
than opium
Value- Social Welfare
Ans3- Because its demand is greater than supply
Value- Awareness about efficient use of power
Ans4- Now a days petrol has become a necessary good and its supply is limited.
Value- - Critical Thinking
Ans5- Indian Railway is a major public sector undertaking and its main motive is social welfare not the
profit.
Ans6- The price of sugar remains constant when demand and supply increase in the same proportion.
Value- problem Solving
Ans7- Firms in oligopoly form cartel and in this way these firm can control over prices.
Ans8 – The Productivity of Human Resource can be increased with the help of human capital formation
by providing training and skill to available labour force.
Value-creative Thinking
Ans9 – There are the various efforts-

1. To increase use of renewable resources
2. To explore the substitutes of resources
3. To reduce the wastage of resources.
4. To spread awareness about the effectively and optimum use of natural resources.
Value -Environmental Conservation
Ans-10 - Opportunity cost of teaching is writing books. He should choose teaching profession because it
provides maximum social welfare
Ans11- In this case the law of diminishing marginal utility will not apply because every effort to get
education/ knowledge increases the utility.
Value Analytic
Ans 12- 1. Use the energy/ electricity saving devices.
2. Use alternative sources of electricity such as solar energy, wind energy etc
Value -Environmental Conservation
Ans13 - 1. By car pooling

2. By using public transport system
3. By using alternative and renewable resources of petrol such as solar energy.
Value- Awareness for efficient use of resources
Ans 14- By reducing the entry fee the number of visitors will increase and total revenue will increase,
but if the entry fee is increased then number of visitors will decrease and total revenue will fall.
Value- Problem solving
Ans 15- Because in the production of plastic product, a lot of harmful gases are released in the
atmosphere.
Value-Environment Conservation
Ans 16- Due to the ban on the sale of GUTKA in Delhi, the supply of GUTKA will be reduced and the firms
producing GUTKA will shift their factors of production in the production of other related goods.
Consumer demand of GUTKA will reduce and hence in this way both the demand and supply of GUTKA
will reduce
Value-Social Health Conciousness
Ans 17- The production of LIQUOR like harmful product will be less profitable to the producer due to
increasing tax rate because the difference between the revenue and cost decreases and hence
producer’s profit will decrease and the supply of liquid will be decreased.
Value- Social Health Conciousness
Ans 18- when sale of ice-cream decreases then profit of producer will fall by which he will try to control
his cost of production but in short run he cannot change the cost of fixed factors therefore he will
reduce the cost of variable factors.
Value- Analytic
Ans 19 -Availability of agricultural land is limited in the world, production of food grains may be
increased by continuous increase in variable factors only upto a optimum combination with fixed factor.
After that law of negative returns is applied.
Ans 20 - The elasticity of demand for cooking gas will be inelastic because there will be no change in
demand for cooking gas inspite of rise in price of cooking gas.
PART-II
MACRO ECONOMICS
Ans 1- The well being of nation or standard of living of people is measured by per capita income
(GDP/ Total Population) and distribution pattern of income not only by GDP
Ans 2- Because this is a transfer payment

Value- Implement of Knowledge
Ans 3- Yes because people’s well being is affected by these environmental damages.
No, it is very difficult to assess real damages in monetary terms.
Value- Awareness about social cost of GDP
Ans 4-India devalued its currency in 1991 to increase the flow of foreign exchange reserve.
Value- Analytic
Ans 5- Yes, because it is a export of services and good source of foreign currency.
Ans 6- Yes, Central Bank should intervene in order to safeguard the interest of the importers.
Value- Creative Thinking
Ans 7- They are not included in national income, because of non-availability of data and problem in
measuring the proper monetary values of these services.
Value- Implication of Knowledge
Ans 8- There are two factors

1. Unequal distribution of GDP
2. Rise in price level
Value- Social Awareness
Ans 9- Money creation by commercial bank in the condition of rising prices increases money supply it
creates the situation of excess demand and consequently again increases the price level.
Ans 10- explain any one reason
1. Bank Rate
2. Cash Reserve Ratio (CRR)
3. Statutory Liquidity Ratio (SLR)
Value- Thinking
Ans 11- 1. Medium of Exchange

2. Store of Value
3. Standard of deferred payment
Value- Empathy
Ans 12- Explain the function of central bank as lender of the last resort.
Value- Analytic
Ans 13- There is lack of general acceptability in case of toys, while in the case of money there is general
acceptability so he can purchase any goods and services with the help of money at any point of time and
he does not face any problem of lack of double coincidence of wants.
Value- Empathy
Ans 14- Fiscal Measures

1. Increase in Tax rates
2. Reduce Public expenditure
Value- Critical Thin king
Ans 15- Money supply is reduced by increase in savings, which creates the situation of deficient demand
in economy, consequently it reduces the functioning of investment multiplier.
Value- Analytic
Ans 16- A worker has to incur some expenditure to fulfill his basic needs even at zero level of income.
Value- Empathy
Ans 17- If there is planned investment is less than planned saving this will create the situation of
deficient demand in the economy and it will result increase in the inventory stock of unsold goods. In
this situation of Govt. should take fiscal & monetary measures to increase aggregate demand.
Value- Analytic
Ans 18-1 . Decrease in Bank Rate

2. Decrease in statutory Liquidity Ratio (SLR)
3. Purchasing of Govt. Securities by the central bank
Ans 19- No, because it is the situation of under-employment equilibrium.

Value- Problem Solving
Ans 20- In Indian budget progressive tax system can be a good measure to remove the inequality of
‘income and wealth’ and govt should provide social facilities like education, health & food grain to the
poor at subsidized rate.
Ans 21- Prices of fruits and vegetables can be reduced by providing subsidies to the producer of fruits &
Vegetables and govt. should also provide fruits and vegetables at subsidised rates to the consumers
through public distribution system.
Ans 22- Per capita income in developing countries like India is comparatively low so the tax receipts of
the Govt are not sufficient, but on the other hand govt has to incur heavy public expenditure for the
development of economy so Govt is compelled on budget deficit.
Value- Economic Awareness
Ans23 - 1,2 &4 are revenue expenditure because it neither create assets nor cause reduction in assets.
3 is capital expenditure because it increase assets of the Govt.
Value - Analytic
Ans 24- No, if deficit in current account is offset by the capital account otherwise such deficit has to be
met by following which is a cause for alarm.
1. Depleting Foreign Exchange reserves
2. Taking foreign Loans.
Value- Analytic
Ans 25- Expenditure on treatment will reduce because by the increasing foreign exchange rate, his
purchasing power will increase.
Value- Empathy
VALUE BASED QUESTION AND ANSWER
OF
ECONOMICS
FOR
CLASS XII
NOTE:-FROM THE ACADEMIC SESSION 2012-13 THE CBSE IS

INTRODUCING VALUE BASED QUESTION IN THE QUESTION
PAPER. ACCORDINGLY IN 2013 BOARD EXAMINATION 05(FIVE)
MARKS WILL BE VALUE BASED QUESTION.ONE OR TWO
QUESTIONS WILL BE OF ONE MARK AND ONE THREE MARK OR
ONE FOUR MARK QUESTION WILL BE ASKED IN THE QUESTION
PAPER.
SOME SAMPLE QUESTION IS GIVEN IN THE CBSE WEB

SITE.KEEPING THAT IN MIND SOME VALUE BASED QUESTIONS
HAS BEEN PREPARED FROM MICRO AND MACRO ECONOMICS.
THE SOURCE FOR THE SAME IS CBSE SITE, SOME REFERENCE

MATERIAL AND OWN EXPERIENCE IN THE FIELD OF ECONOMICS.
MACRO ECONOMICS
Q1. Ms. Nidhi is interested in knowing the change in quantity produced by a farmer with
a fall in the price of the product. Which branch of economics would she study to
ascertain the change?
1
Ans .Micro Economics
Q2. Give an example to show that an item which is kept constant in micro economics is
considered a variable in macro economics. 1
Ans. National Income is kept constant in micro economics, but in macro economics, it is
considered as an important variable.
Q3. What is the rationale for not taking into account the value of intermediate goods in
the measure of Gross Domestic Product? 1
Ans. To avoid the problem of double counting.
Q4.Will the commission given to a broker for sale of an old house be included in national
income? 1
Ans. Yes, it will be included in national income as it is a payment for productive service
received.
Q5.Why leisure is not included in Gross National Product? 1

Ans. It is very difficult to measure the value of leisure.
Q6.State whether money supply is a stock variable or flow variable? 1

Ans. Money supply is a stock variable because it is expressed at particular point of time.
Q7.What will be the effect of a rise in the bank rate on money supply? 1
Ans. Money supply will reduce.
Q8.Can the value of Average Propensity to Consume be greater than one?

1
Ans. Yes, the value of APC can be more than 1.At low levels of income; consumption
tends to be more than income. So ,APC >1 before the break- even point is attained.
1
Q9.Can Average Propensity to Consume be ever zero?
1
Ans. APC can never be equal to zero as consumption can never be zero at any level of
income.
Q10.What happens when the credit availability is restricted and credit made costlier?
1
Ans. Limited and costly credit leads to contraction of credit and it has a deflationary
impact on the economy.
Q11.Why is an entertainment tax, an indirect tax ? 1

Ans. The burden of entertainment tax can be shifted to other persons(ultimate 1
consumers).
Q12.The price of 1 US Dollar has fallen from Rs 50 to Rs48.Has the Indian currency
appreciated or depreciated? 1
Ans. Indian currency has appreciated.
Q13.Why are exports entered as positive items in the balance of payments accounts?
1
Ans. Exports lead to an inflow of foreign exchange in the country. Thus they are recorded
as positive (credit) items.
Q14.How is purchase of an asset in another country treated in the capital account?

1
Ans .Purchase of an asset in a foreign country appears as a negative (debit) item in the
capital account (as there is an outflow of foreign exchange).
Q15.Should a current account deficit be a cause for alarm? Explain.

1
Ans. Since deficit in current account is met by the surplus of capital account, it is not taken
as a cause for alarm.
Q16.How does real flow consist of factor flow and product flow? 3
Ans .Real flow consists of two kinds of flows:
(i)Factor flow :It is the flow of factor services from households to firms.
(ii)Product flow :It is the flow of goods and services from firm to households.
Q17. “All producer goods are not capital goods.”Comment.

3
2
33 3
Ans. It must be noted that all goods used by producer (known as producer goods) are
not capital goods. Producer goods include ( i)Raw material;(ii)Fixed assets like plant
and machinery .The first type of producer goods (i.e. raw material, like
coal,wood,etc.),are not capital goods as they lose their identity in the production
process. They are single- use producer goods and cannot be repeatedly used in the
production process..So, it can be said that all capital goods are producer goods, but
all producer goods are not capital goods.
Q18.Why do we have different methods to measure the national income ?Why all the
methods lead to same estimate ?
3
Ans. We have three different methods to measure the national income(value added
method, income method and expenditure method )because production, income
and expenditure are three different phases of circular flow of income. Use of
particular method depends on the availability of reliable data.
All the three methods lead to same estimate because they are used to measure the
same physical output at three different phases.
Q19.The Reserve Bank of India aims to make the credit costly for the general public in
order to reduce the availability of credit. What should be done ? 3
3
Ans. The Reserve Bank of India should increase the bank rate. An increase in the bank rate
increases the costs of borrowing from the central bank.It forces the commercial
banks to increase their lending rates, which discourages the borrowers from taking
loans.It makes the credit costly for the general public and reduces the availability of
credit.
Q20.If inflation is higher in country A than country B ,and the exchange rate between the
countries is fixed .What is likely to happen to the trade balance between the two
countries ?
3
Ans. In this situation, the exports from country B to country A will rise and it will lead3 to
surplus trade balance for country B.However , due to higher prices in country A ,its
imports will increase from country B and it will lead to deficit in trade balance for
country A.
MICRO ECONOMICS
Q1.Massive unemployment will shift the PPF to the left. Defend or refute. 1
3
Ans. The given statement is refuted .Massive unemployment does not decrease
the capacity of economy to produce. So, there will be no shift of PPF.
However, economy will operate at some point inside the PPF, due to
unutilisation of human resources.
Q2.What is the opportunity cost of an input which has no alternative use? 1
Ans. The opportunity cost of such input is zero.
Q3.Utility is directly linked with the usefulness of a commodity. Is it true or

false?Give reason.
1
11
Ans. False. A commodity may not be useful, yet it may have utility for a particular
person. For example, chewing tobacco is harmful for health ,yet many
people derive high degree of utility from it.
Q4.In order to encourage tourism in Goa, Indian Airlines reduces the air fare to
Goa.How will it affect market demand curve for air travel to Goa ?
Ans. There will be a downward movement along the same market demand curve 1
for air travel to Goa. It happens because of decrease in the air fare. 111
Q5. At certain level of output ,the marginal cost of a firm is above its marginal
revenue .Can this be its equilibrium output ? 1
1
Ans.No,it can not be its equilibrium output because the marginal cost exceeds the 1
marginal revenue. The firm is running at a loss. 11
Q6. Trendz produces both jeans and shirts .How will an increase in the price of
jeans affect the supply curve of shirts ? 1
Ans. An increase in the price of jeans will make the production of jeans more 1 1
11
attractive . As a result ,Trendz will shift its resources from shirts to jeans.It
will shift the supply curve of shirts towards left.
Q7. A severe drought results in a drastic fall in the output of wheat. Analyze how
it will affect the market price of wheat. 1
Ans. Market price of wheat will increase(due to decrease in supply). 1 1
11
4
Q8.What will be the effect on equilibrium price and equilibrium quantity of
telephone instruments ,if China exports a large number of telephone
instruments to India.
1
Ans. Equilibrium price will fall and equilibrium quantity will rise(due to increase
1 in 1
supply).
111
Q9. ‘Both , microeconomics and macroeconomics have same degree of
aggregation’.Defend or refute. 3
Ans. The given statement is refuted. 31 1
111
●Micro economics involves limited degree of aggregation.For example,
market demand (micro concept)is derived by aggregating individual
demands of all the buyers in particular market.
●On the other hand , macro economics involves the highest degree of
aggregation. For example,aggregate demand(macro concept)is derived for
the entire economy. It means ,micro economics and macro economics
differ in degree of aggregation.
Q10.”Law of demand is a quantitative statement”. Comment. 3

Ans. Law of demand is only an indicative and not a quantitative statement. 3 1It 1
111
indicates only the direction, in which the demand will change with a change
in price. It says nothing about the magnitude of such a change. For example
price of Pepsi rises from Rs 10 to Rs 12 per bottle,then,as per law of
demand, we can say that the demand for Pepsi will fall. But the law does not
give the actual amount by which the demand for Pepsi will decline.
Q11. “MC can be calculated both from total cost and total variable cost and is not
affected by total fixed cost.”Discuss.
3
Ans. The given statement is correct.MC is not at all affected by total fixed 3cost
1 1
(TFC). MC is addition to TC or TVC when one more unit of output 1 1is1
produced. As TFC remains same with increase in output ,MC is independent
of fixed cost and is affected just by change in variable costs.
Q12.Why AR curve under monopolistic competition is more elastic than AR curve

under monopoly? 3
5 31 1
111
Ans. The AR curve under monopolistic competition is more elastic because there
exists close substitutes of the product sold by the monopolistic firm where
as under monopoly the AR curve is less elastic because there is non
availability of close substitutes of the product sold by the monopoly firm.
Q13.How does a firm under monopolistic competition exercise partial control

over price? 3
3 31
Ans. A monopolistic competitive firm enjoys partial control over price. It happens
because by incurring heavy selling costs, the firm is able to create1 a 1
differentiated image of its product in the minds of consumers. Products are11
differentiated on the basis of brand ,size, color, shape,etc.Buyers are
attracted to buy a particular product even at a relatively higher price.
Q14.Why is number of firms small in an oligopoly market ? 3

3
Ans. The main reason for small number of firms under Oligopoly is the Barriers to
31
entry, which prevent entry of new firms into the industry. Patents, 1 1
requirement of large capital,control over crucial raw materials,etc,are 1 1
some
some of the other reasons,which prevent new firms from entering into
industry.As a result ,there are few firms in an Oligopoly market.
Q15.”Demand and supply are like two blades of a pair of scissors”.Comment.
Ans. The given statement is correct.Both the blades of pair of scissors are equally 3
important to cut a piece of cloth.Similarly ,both demand and supply3are 3 1
neede for determining price in the market.There is no use for demand for 1 a 1
product if there is no supply for the product and supply is not needed 1 1if
there is no demand for the product. One of the two may play more active
role in price determination in the short run.But,,both are needed to
determine the price in the long run.

3 2 English B

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

3 2 English B

Caricato da

Copyright:

Formati disponibili

SUPPORT STUDY

Part A : WEIGHTAGE TO CURRENT/SUBJECT UNITS

S.No. Content Unit Mark

Part A : Introductory Micro Economics

Part B : INTRODUCTORY MACRO ECONOMICS

S. Forms of Questions Marks for each No. of Total

1. Very short answer type (VSA) 1 10 10

2. Short answer type (SAI) 3 10 30

3. Short answer type (SAII) 4 6 24

4. Long answer type (LA) 6 6 36

There will be no overall choice. However, there is internal choice in one

E. Weightage to forms of Questions

S.No. Estimated Difficulty Percentage

S. No. Chapter Page

2. Consumer’s Behaviour & Theory of Demand 13 – 25

3. Production Behaviour and Supply 26 – 40

4. Forms of Market and Price Determination 41 – 47

5. Simple Application of Toos of Demand and Supply Curve 48 – 49

7. Money and Banking 72 – 77

8. Determinations of Income & Employment 78 – 90

9. Government Budget and the Economy 91 – 96

10. Balance of Payment 97 – 1105

Question Papers 106 – 116

Exam. Oriented Questions with Answers 117 – 154

What to produce? How to produce? For whom to produce?

VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

HINTS [3 MARKS QUESTIONS]

CONSUMER'S BEHAVIOUR &

(ii) In case of two goods

(b) In terms of Indifference curve : There should be

(iii) Budget line should be tangent to indifference curve.

❑ Price Elasticity of Demand : It measure the degree of responsiveness of

❑ Total Expenditure Method : It measures price elasticity of demand on the

Lower segment of the demand curve

D is mid point of the demand curve

Lower part of the demand curve

Degree of Price Elasticity of Demand

VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

SHORT ANSWER TYPE QUESTIONS (3-4 MARKS)

LONG QUESTIONS (6 MARKS)

VERY SHORT ANSWER TYPE QUESTIONS

PRODUCTION BEHAVIOUR AND

❑ Marginal product is addition to total product resulting from employing one

AFC = or AFC = AC – AVC

❑ Per unit of total variable cost is called average variable cost.

AVC = or AVC = AC – AFC

MCn = TVCn – TVCn–1 or MC =

Relation Between Short-Term Costs

Percentage change in quantity supplied

❑ Methods for measuring price elasticity of supply :

% change in quantity 20%

FORMS OF MARKET & PRICE

VERY SHORT ANSWER TYPE QUESTIONS (1 MARK)

SIMPLE APPLICATION OF TOOLS

❑ Consumption Goods : Those goods which satisfy human wants directly.

❑ Investment : Addition made to the stock of capital during a period is called

❑ Depreciation : is expected fall in value of fixed capital goods due to

❑ Gross Investment : Total addition of capital goods to the existing stock of

❑ Net Investment : is a measure of net availability of new capital or new

Net Investment = Gross investment – Depreciation.

❑ Stocks : Variables whose magnitude is measured at a particular point of

❑ Flows : Variables whose magnitude is measured over a period of time are

❑ Scope of Economic Territory :