GD GOENKA PUBLIC SCHOOL| Sector 48,Gurugram

MACRO ECONOMICS
CBSE QUESTIONS
CLASS – XII
UNIT – NATIONAL INCOME ACCOUNTING
1. Which of the following affects national income? (Choose the correct alternative)
(a) Goods and Services tax
(b) Corporation tax
(c) Subsidies
(d) None of the above
Ans. (b) Corporation tax

2. Which among the following are final goods and which are intermediate goods? Give reasons.
(a) Milk purchased by a tea stall
(b) Bus purchased by a school
(c) Juice purchased by a student from the school canteen
Ans. (a) Milk purchased by a tea stall is an intermediate good because it is purchased by a
firm as a raw material for the process of production of other good.
(b) Bus purchased by a school is a final good as it is purchased for the consumption and
not for resealing.
(c) Juice purchased by a student from the school canteen is a final good as it is purchased
for the consumption and not for reselling.

3. Given nominal income, how can we find real income? Explain.

Ans. National Income at Constant Prices: When national product is estimated on the basis of
prices
prevailing in the base year, it is called national income at constant prices or real national income.

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4. Explain with the help of an example, the basis of classifying goods into final goods and
intermediate goods.
Ans. Classification of goods into final and intermediate goods:
Final goods are those goods which will not pass any more stages of production process and are
ready for use by their final users. Consumers and producers are the final users. On the other hand,
goods which are within the boundary line of production, still the value is yet to add to these goods
and are not available for use by their final users are called intermediate goods. These goods are
consumed by another firm and are used as intermediate goods in the production process or for
further sale. For example, papers purchased by Newspaper agency for printing news are
intermediate goods. Value of intermediate goods is merged with the value of final goods. Here the
value of intermediate good is not included in the estimation of national income.

5. Explain the precautions that should be taken while estimating national income by expenditure
method.
Ans. Precautions taken while estimating national by expenditure method
i. Expenditure on intermediate goods will not be included in the national income as it already
included in the value of final expenditure. It if it is included again by mistake, it will lead to double
counting of expenditures.
ii. Transfer payments are not included because such payments are not related with any productive
activity and there is no value addition.
iii. Purchase of second-hand goods will not be included because such expenditures has already
been included when they were originally purchased. Those goods do not affect the current flow of
goods and services. Hence any commission on those goods is included as it is a payment made
for productive service.
iv. Purchase and financial assets will not be included because those transactions do not contribute
to the current flow of goods and services.
v. Expenditure on own account production such self consumption and imputed value of owner
occupied houses will be included in the estimation of national income since these are productive
services.

6. Will the following be included in the domestic product of India? Give reasons for your answer.
(a) Profits earned by foreign companies in India.
(b) Salaries of Indians working in the Russian Embassy in India.
(c) Profits earned by a branch of State Bank of India in Japan.
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Ans. (a) Profit earned by foreign companies is included in the estimation of domestic income as
they are within the domestic territory of the country.
(b) Salaries of Indian working in Russian embassy in India are not included in the estimation of
domestic income because the Russian embassy is not part of the domestic territory of India.
(C) Profit earned by a branch of State Bank of India is not included in the estimation of domestic
income because it is located in Japan and is not part of the domestic territory of India

7. Distinguish between final goods and intermediate goods. Give an example of each.

Basis Final Goods Intermediate Goods

Meaning: Final goods refer to those Intermediate goods refer to those

goods which are used either for goods which are used either for
consumption or for investment. resale or for further production in
the same year.

Nature: They are included in both They are neither included in

national and domestic income. national income nor in domestic
income.

Demand: They have a direct demand as They have a derived demand as

they satisfy the wants directly. their demand depends on the
demand for final goods.

Value They are ready for use by their They are not ready for use, i.e.
addition: final users i.e. no value has to some value has to be added to the
be added to the final goods. intermediate goods.

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Productio They have crossed the They are still within the production
n production boundary. boundary.
Boundary

Example: Milk purchased by households Milk used in dairy shop for

for consumption, car resale, coal used in factory for
purchased as an investment. further.

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8. Explain ‘non-monetary exchanges’ as a limitation of using gross domestic product as an index
of welfare of a country.
Gross Domestic product (GDP) is the total value of all the final goods and services produced by
an economy within the domestic territory of a country in a particular year. It is one of the best
indicators of the economic performance of a country but not of economic welfare or economic
development because while calculating GDP, the non-monetary transactions are ignored.

Non-monetary exchanges include activities like services of family members provided to each other
etc. For example, service of a housewife while teaching her children or while cooking food in
kitchen. These activities are not included in GDP but they contribute to welfare of the people.

Thus, GDP indicates the economic growth but not the economic welfare.

9. a) State any two precautions that must be taken into consideration while estimating national
income by value added method.
b) In an economy, following transactions took place. Calculate value of output and value added
by Firm B:
i. Firm A sold to firm B goods of 80 crore; to firm C 50 crore; to household 30 crore and goods of
value 10 crore remains unsold
ii. Firm B sold to firm C goods of 70 crore; to firm D 40 crore; goods of value 30 crore were exported
and goods of value 5 crore was sold to government.

Ans. a) Precautions of value added method are:

i) Value of sale and purchase of second hand goods is not considered while estimating
value added as the value of second hand goods is already accounted during the year they were
produced.
ii) Value of intermediate goods is not included in the estimation of value added because
value of intermediate goods is reflected in the value of final goods.

b) Value of output of firm B= Sales of firm B to firm C+ Sales of firm B to firm D + Exports +Sales
of firm B to Government
= 70+40+30+5
= 145 crores
Value Added by Firm B= Value of output by Firm B – Purchases by Firm B from firm A
= 145 -80
= 65 crore

10. How will you treat the following while estimating domestic product of a country? Give reasons
for your answer :
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 (a) Profits earned by branches of country’s bank in other countries.
(b) Gifts given by an employer to his employees on Independence Day.
(c) Purchase of goods by foreign tourists.
Ans. (a) Profits earned by branches of country's bank in other countries are not included in the
estimation of national income because the branches of country's bank in other countries are
outside the domestic territory.
(b) Gifts given by an employer to his employees on Independence Day are included in the
domestic income because the gifts given by the employer are compensation in kind.
(c) Purchase of goods by foreign tourists is included in the estimation of domestic income because
they are exports and part of domestic income.

UNIT – MONEY AND BANKING

11. Define money supply.
Money supply refers to the amount of domestic currency that circulates in a national economy
during a specified period. Money supply includes cash, coins, and money held in savings and
checking accounts for short-term payments and investments.

12. The central bank can increase availability of credit by : (Choose the correct alternative)
(a) Raising repo rate
(b) Raising reverse repo rate
(c) Buying government securities
(d) Selling government securities
Ans. (c) Buying government securities
13. Explain the role of the Reserve Bank of India as the ‘‘lender of last resort’’.
When commercial banks have exhausted all resources to supplement their funds at times of
liquidity crisis, they approach central bank as a last resort. As lender of last resort, central bank
guarantees solvency and provides financial accommodation to commercial banks
(i) by rediscounting their eligible securities and bills of exchange and
(ii) by providing loans against their securities. This saves banks from possible failure and
banking system from a possible breakdown. On the other hand, central bank, by providing
temporary financial accommodation, saves the financial structure of the country from collapse.

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14. Explain ‘banker to the government’ function of the central bank.

Ans. Central bank functions as a banker to the government—both central and state governments.
It carries out all banking business of the government. Government keeps their cash balances in
the current account with the central bank. Similarly, central bank accepts receipts and makes
payment on behalf of the governments.

Also, central bank carries out exchange, remittance and other banking operations on behalf of the
government. Central bank gives loans and advances to governments for temporary periods, as
and when necessary and it also manages the public debt of the country. Remember, the central
government can borrow any amount of money from RBI by selling its rupees securities to the
latter.

15. Explain the role of reverse repo rate in controlling money supply.
Reverse Repo rate is the rate at which Central Bank borrows money funds commercial banks.
Increase in Reverse Repo Rate induces banks to transfer more funds to Central Bank and
reduces banks’ ability to create credit.

16. Demand deposits include (Choose the correct alternative)

(a) Saving account deposits and fixed deposits
(b) Saving account deposits and current account deposits
(c) Current account deposits and fixed deposits
(d) All types of deposits
Ans. (b) Saving account deposits and current account deposits

17. Explain the ‘‘bankers’ bank’’ function of the central bank.

Ans. Central bank acts as banker’s bank in three capacities:
(i) It is the custodian of their cash reserves. Banks of the country are required to keep a
certain percentage of their deposits with the central bank; and in this way the central
bank is the ultimate holder of the cash reserves of commercial banks,
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 (ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take
loans from the central bank and get their trade bills discounted. The central bank is a
source of great strength to the banking system.
(iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is
usually very effective so far as commercial banks are concerned.

18. Explain the process of credit creation by commercial banks.

Ans. The credit creation by commercial banks is determined by amount of initial deposit and the
legal reserve ratio.
Suppose customer deposits 1000 in bank. Bank has to pay interest on this amount for which
bank should lend this money to someone. A part of the amount is to be retained with bank to
meet its customer’s obligations. Say, if LRR is 20%, the banks will keep 20% of deposits as
reserves and will lend remaining 80% i.e. 800. Those who borrow will spend this money and
same 800 will come back to banks in form of deposits. This raises the total deposits to
1,800 now. Banks again keep 20% of 800 as reserve and lend 640 to those who needs. This
will further raise the deposits with banks. In this way deposits will go on increasing @ 80% of
the last deposit. The number of times the total deposit will become, is determined by money
multiplier i.e. 1/LRR = 1/0.2 = 5 times.
Total deposits will be Initial Deposits X Money Multiplier = 1000 X 5 = 5,000

19. The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is
called : (choose the correct alternative)
(a) Statutory liquidity ratio
(b) Deposit ratio
(c) Cash reserve ratio
(d) Legal reserve ratio
Ans. (c) Cash reserve ratio

20. State the meaning and components of money supply.

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It refers to the total quantity of money in circulation in the economy at a given point of time.
Components of money supply are M1,M2,M3.

21. Explain ‘controller of credit’ function of the central bank.

Ans. This is the most crucial function played by any central bank in the modern
times. Central Banks are supposed to regulate and control the volume and
direction of the credit by using the:
i) Quantitative techniques – are those techniques which influence the
quantum of credit in the economy like open market operations,
bank rate policy, repo and reverse repo rate policy etc.
ii) Qualitative techniques - or selective credit control techniques are the
ones which influence the direction of credit in the economy like
margin requirements and moral suasion.

22. Explain the role of repo rate in controlling money supply.

Repo rate is the rate of interest at central bank lends money to commercial
banks for a short term. The central bank fixes the Repo Rate and it plays the
role of an indicator of lending rate and deposit rate fixation by the banks.
Under inflationary conditions central bank increases the Repo Rate, which increases lending rates
of banks leading to less credit creation.

23. How the following tools can be used for credit control by the central bank in an economy:
a) Open Market Operations
b) Margin Requirements
Ans. a) Open Market Operations (OMO)refers to the sale and purchase of government securities
in the open market by the Central Bank (RBI). By selling such securities the Central Bank
soaks liquidity from the economy and by purchasing the government securities, Central

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Bank releases liquidity. This is an important method of regulating the money supply (liquidity) in
the market.
b) The Margin Requirement of loan refers to the difference between the current value of the
security offered and amount of loan granted.
When margin requirement is lowered by the Central Bank, the borrowers are able to
secure larger amount of funds from the banks which will increase the money supply in the
economy. Conversely, a rise in the margin requirements will contract the supply of credit in the
economy.

UNIT – DETERMINATION OF INCOME AND EMPLOYMENT

24. Estimate the value of Aggregate Demand in an economy if:

a) Autonomous Investment (I) = 100 Crore.
b) Marginal Propensity to Save = 0.2
c) Level of Income (Y) = 4,000 crores.
d) Autonomous Consumption Expenditure (c) = 50 Crore
Ans. The Aggregate Demand (AD) function is given as :
AD = C +I
AD = {ć +b(Y)}+I
ć = 50 (Given)
b or MPC = 1 – MPS = 1 – 0.2 = 0.8
Substituting the values of c and b in AD function, we get :
AD = {50+ 0.8 (4000)}+100 = 3,350 crores
Aggregate Demand is 3,350 crores.

25. In an economy C= 200+ 0.5 Y is the consumption function where C is the consumption
expenditure and Y is the national income. Investment expenditure is 400 crores. Is the
economy in equilibrium at an income level 1500 crores? Justify your answer.

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Ans. No, the Economy is not in a state of equilibrium at 1500 crores
Given Consumption function, C = 200+0.5Y
Investment expenditure (I) = 400 crore
At the equilibrium level
Y= C+I
Substituting the values from the question:
Y= {200+0.5Y}+ 400
Y - 0.5Y= 600
0.5Y = 600
Y = 1200
The equilibrium level of income is 1200 crores. The given income 1500 crore is greater than
equilibrium level of income. Therefore, the economy is not in equilibrium.

26. Explain how the level of effective demand is attained in an economy if, Aggregate Demand is
more than the Aggregate Supply.
Ans. Effective demand refers to that level of output where Aggregate demand is equal to the
Aggregate supply.
If Aggregate Demand exceeds Aggregate Supply, it means buyers are planning to buy more goods
and services than producers are planning to produce. Thus, the inventories in hand with the
producers will start falling. As a result, producers will plan to raise the production. This will
increase the level of income upto the level Aggregate Demand is equal to Aggregate Supply.

27. Estimate the value of ex-ante AD, when autonomous investment and consumption expenditure
(A) is 50 crores, and MPS is 0.2 and level of income is 300 crores.
Ans. MPC = 1 – MPS
MPC = 1 – 0.2
MPC = 0.8
AD = C+I

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AD = A +bY
AD = 50 + 0.8 (300)
AD = 290 Crores

28. Calculate Multiplier when MPC is 4/5 and 1/2 . From the calculations establish the relation
between size of Multiplier and size of MPC?
Ans. Multiplier =1/1-MPC
When MPC = 4/5
K= 1/1-0.8 = 1/0.2 = 5
When MPC =1/2
K =1/1-0.5 = 1/0.5 = 2
Observing the same we may conclude that there exist positive or direct relation between MPC and
Investment Multiplier.
Investment Multiplier coefficient measures the change in final income with respect to given
change in the initial investment in the economy. It carries direct relation with rate of growth in
an economy, i.e. higher the MPC more chance of growth exists in an economy. But, it is a two
sided sword hence if investment falls in an economy the income may also fall.

29. State whether the following statements are true or false. Give valid reasons for your answers.
(i) Unplanned inventories accumulate when planned investment is less than planned saving.
(ii) Deflationary gap exists when aggregate demand is greater than aggregate supply at full
employment level.
(iii) Average propensity to save can never be negative.
Ans. i) True, as planned savings are more causing the Marginal Propensity to Consume to reduce
thus Aggregate Demand will fall and producers will have accumulation of inventory.
ii) False, Inflationary Gap exists when actual Aggregate Demand is more than Aggregate
Supply corresponding to full employment level of output in the economy.
iii) False, at income levels which are lower than break-even point, Average propensity to save

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can be negative as there will be dissaving in the economy.

30. Explain how the economy achieves equilibrium level of income using Consumption +
Investment (C+I) approach.
Ans. C+I approach
Aggregate demand, given by C+I, is the planned demand by the various
sectors of the economy. Whether this planned demand is realized or not
depends on amount of goods and services (aggregate output or Y) produced
in the economy. Thus it is only when planned expenditure is equal to the
aggregate output does the economy achieve equilibrium.
ie AD=Y
If AD>Y, inventory level with producers falls and they increase output.
This happens till AD=Y
Opposite happens if AD<Y.

31.If in an economy:
a) Consumption function is given by C = 100 + 0.75 Y, and
b) Autonomous investment is 150 crores.
Estimate (i) Equilibrium level of income and (ii) Consumption and Savings at the equilibrium level
of income.
Ans. Given, C= 100+0.75Y
I = 150
(i) At equilibrium level of income:
Y=C+I
Y=100+0.75Y + 150
Y - 0.75Y = 250
Y = 250/0.25 = 1,000(in crores)

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(ii) C =100+0.75Y = 100+0.75(1000) = 100 + 750 = 850 (in crores)
Y = C + S or S= Y-C = 1,000-850 = 150 (in crores)

32. `GDP as an index of welfare may understate or overstate welfare.` Explain the statement using
examples of a positive and a negative externality .
Ans. GDP doesn’t account for externalities
Positive Externality: eg: saving commuting time due to construction of a
fly-over , increases welfare, GDP as an index understates welfare
Negative Externalities: eg: Pollution from factories, decreases welfare,GDP overstates welfare.

33. If in an economy Saving function is given by S = (-) 50 + 0.2 Y and Y = 2000 crores;
consumption expenditure for the economy would be 1,650 crores and the autonomous
investment is 50 crores and the marginal propensity to consume is 0.8. True or False?
Justify your answer with proper calculations.
Ans. Yes all the given values are correct
S= -50+0.2Y
S= -50+.02(2000)
= -50 +400
= 350 crores
At equilibrium level of income:
Y=C+S
2,000 = C + 350
C = 2000 – 350 = 1,650(in crores)
MPC + MPS = 1
MPC + 0.2 = 1
MPC = 1-0.2 = 0.8
UNIT – GOVERNMENT BUDGET AND THE ECONOMY
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34. a) “Fiscal deficit is necessarily inflationary in nature”. Do you agree? Support your answer with
valid reasons.
b) Elaborate ‘Economic Growth’ as an objective of government budget.
Ans. (a) The term fiscal deficit is the difference between the government's total
expenditure and its total receipts (excluding borrowing). Such borrowings are generally financed
by issuing new currency which
may lead to inflation. However, if the borrowings are for infrastructural development this may lead
to capacity building and may not be inflationary.
(b) The term ‘Economic Growth’ refers to a sustained increase in the real GDP of the economy
OR an absolute/net increase in the total volume of
goods and services produced by an economy. This is an essential objective of the government
budget as the budget can be a very effective instrument
for targeting the economic growth. Can be achieved by providing tax rebates, infrastructural
stimulation etc.

35. Explain the meaning of the following :

(a) Revenue deficit
(b) Fiscal deficit
(c) Primary deficit
Ans. (a) Revenue Deficit refers to the excess of total revenue expenditure over total
revenue receipts. It means that govt. will not be able to meet its revenue
expenditure from its revenue receipts
Revenue Deficit = Revenue Expenditure – Revenue Receipts
(b) Fiscal Deficit refers to the excess of total expenditure over total receipts excluding
borrowings. It indicates borrowing requirements of the government.
Fiscal Deficit = Total Budget Expenditure – Total Budget Receipts (Excluding Borrowing)
(c) Primary Deficit is defined as fiscal deficit less interest payments. It indicates borrowing
requirements of the govt. to meet fiscal deficit net of interest payments.
Primary Deficit = Fiscal Deficit – Interest Payments.
36. Explain the following objectives of government budget :

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 (a) Allocation of resources
(b) Reducing income inequalities

Ans. Allocation of Resources:

Through the budgetary policy, Government aims to reallocate resources in accordance with the

economic (profit maximisation) and social (public welfare) priorities of the country. Government
can influence allocation of resources through:

(i) Tax concessions or subsidies: To encourage investment, government can give tax

concession, subsidies etc. to the producers. For example, Government discourages the
production of harmful consumption goods (like liquor, cigarettes etc.) through heavy taxes and
encourages the use of ‘Khaki products’ by providing subsidies.

(ii) Directly producing goods and services:

If private sector does not take interest, government can directly undertake the production.

(b) Reducing inequalities in income and wealth:

Economic inequality is an inherent part of every economic system. Government aims to reduce

such inequalities of income and wealth, through its budgetary policy. Government aims to

influence distribution of income by imposing taxes on the rich and spending more on the welfare

of the poor. It will reduce income of the rich and raise standard of living of the poor, thus reducing
inequalities in the distribution of income.

37. Define Government budget.

Ans. A government budget is an annual financial statement showing item wise estimates of
expected revenue and anticipated expenditure during a fiscal year.

38. Distinguish between direct taxes and indirect taxes. Give an example of each.
Ans.

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 Nature Direct Tax Indirect Tax

Incidence Falls on the same person. Falls on different person.

and Impact

Evasion Tax evasion is possible. Tax evasion is hardly possible

because it is included in the price of
the goods and services.

Inflation Direct tax helps in reducing the Indirect taxes promotes the inflation.
inflation.

Burden Cannot be shifted. Can be shifted

Event Taxable income or wealth of the Purchase/sale/manufacture of goods

person and provision of services

Types Wealth Tax, Income Tax, Central Sales tax, VAT (Value Added
Property Tax, Corporate Tax, Tax), Service Tax, Excise Duty,
Import and Export Duties. Custom Duty.

39. Explain how government budget can be helpful in bringing economic stabilization in the
economy.
Ans. The main objective of government budget is to promote rapid and balanced economic growth.
Taxes and government expenditure help in bringing economic stabilisation in the economy in
following manner –

The government controls the fluctuation in the prices and brings price stability through taxes,
subsidies and expenditure. This is the method through which government can bring price
stabilisation. In case of inflation, government reduces its expenditures and in case of deflation or
depression government reduces the taxes. The government provides subsidies for producing
necessary goods like wheat, rice and sugar which results in the shift of resources from the
production of luxury goods to the production of necessary goods. This brings economic
stabilisation in the economy.

40. Elaborate ‘economic growth’ as objective of government budget.

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Ans. Economic Growth implies a sustainable increase in real GDP of an economy, i.e. an increase
in

volume of goods and services produced in an economy. Budget can be an effective tool to ensure
the economic growth in a country.

i) If the government provides tax rebates and other incentives for productive activities, it can
stimulate savings and investments in the economy.

ii) Spending on infrastructure in the economy promotes the production activities across different
sectors. Government expenditure is a major factor that generates demand

for different types of goods and services, which induces economic growth in the economy.

41. What is primary deficit?

Ans. Primary Deficit is defined as fiscal deficit less interest payments. It indicates borrowing
requirements of the govt. to meet fiscal deficit net of interest payments.
Primary Deficit = Fiscal Deficit – Interest Payments.

42. Identify which of the following statements is true?

a) Fiscal deficit is difference between planned revenue expenditure and planned revenue
receipts
b) Fiscal deficit is difference between total planned expenditure and total planned receipts
c) Primary deficit is the difference between total planned receipt and interest payments.
d) Fiscal deficit is the sum of primary deficit and interest payment.
Ans. d) Fiscal deficit is the sum of primary deficit and interest payment.

43. “Governments across nations are too much worried about the term fiscal deficit”. Do you think
that fiscal deficit is necessarily inflationary in nature?
Support your answer with valid reasons.
Ans. The term fiscal deficit is the difference between the government's total expenditure and its
total receipts (excluding borrowing).
Such borrowings are generally financed by issuing new currency which may lead to inflation,
however, if the borrowings are for the infrastructural
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developmental purposes this may lead to capacity building and may not be inflationary.

44. Explain the concept of ‘deficit’ in balance of payments.

Ans. Deficit in BOP refers to a situation when receipts of the country arising out of autonomous
transactions are less than the corresponding payments to the rest of the world during the period
of an accounting year. It highlights our net liabilities towards rest of the world.

UNIT – BALANCE OF PAYMENTS

45. Explain the impact of rise in exchange rate on national income.
Ans. The rise in the exchange rate implies a reduction in the value of the domestic currency. Thus,
more units of domestic currency would be required to be paid for obtaining one unit of foreign
currency. In this situation, the domestic currency is said to be depreciated. Depreciation is the
reduction in the value of the domestic currency due to the actions of the forces of demand and
supply. This raises the exchange rate and can affect the national income. This can influence the
national income by increased export receipts.
Exports can be promoted by the fall in the value of the currency. When the devaluation takes
place, the domestic currency becomes cheaper in the international market compared other
countries currency. This will lead to the purchase of the country’s exported good from other
countries. Hence the devaluation by the country will increase the exports of the country and
increase the national income in the short-run. But the strategy becomes ineffective in the long-
run. A country having a depreciated currency will have huge deficits in their BOP in the long-run
because of the increasing import bills.

46. What is meant by depreciation of domestic currency?

Ans. Depreciation of domestic currency refers to decrease in the value of domestic currency in
terms of foreign currency due to market forces. For example, if the price of $1 increases from Rs
55 to Rs 59 due to demand and supply forces.

47. Distinguish (a) between current account and capital account, and
(b) between autonomous transactions and accommodating transactions
of balance of payments account.
Ans. (a) Difference between current account and capital account

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The current account records a nation's transactions with the rest of the world – specifically its net
trade in goods and services, its net earnings on cross-border investments, and its net transfer
payments – over a defined period of time, such as a year.
The capital account, in economics, is the part of the balance of payments which records net
changes in a country’s financial assets and liabilities.
(b) Difference between autonomous transactions and accommodating transactions
Autonomous transactions are done for some economic consideration such as profit, such
transactions are independent of the state of B.O.P.
Accommodating transactions are under taken to cover the deficit/surplus in balance of payments.

48. Give the meaning of balance of payments.

Ans. Balance of payments is defined as the statement of accounts of a country’s inflows and
outflows of foreign exchange in a fiscal year.

49. Why does the demand for foreign currency fall and supply rises when its price rises? Explain.
Ans. The demand for foreign currency fall and supply rises when its price rises because domestic
goods become cheaper. It induces the foreign currency to increase their imports from the domestic
country. Hence, supply of foreign currency rises. For example, if price of 1US dollar rises from Rs
53 to Rs 59, it implies that exports to US will increase as Indian goods will become relatively
cheaper. It will raise the supply of US dollars.
50. a) ‘Devaluation and Depreciation of currency is one and the same thing’. Do you agree? How
do they affect the exports of a country?
b) What is meant by ‘official reserve transactions’? Discuss their importance in Balance of
Payments.
Ans. a) Depreciation and Devaluation both imply a fall in external value of a currency; however
the term depreciation is used under the floating exchange rate system that is when the exchange
rate system is determined by the combined market forces of demand and supply. A currency loses
or gains value because of fluctuations in demand and supply.
The term devaluation is used in a system of fixed exchange rates. In this system, the exchange
value of a currency is decided by the government. Devaluation of currency is the deliberate action
of the government.
Depreciation and devaluation of a currency normally encourages exports from a country, as
exports become cheaper for the foreign nationals and foreign currency can now buy more of

DISCUPLI
Session With Experts For Commerce
domestic goods, i.e. the international competitiveness of the goods and services of such a nation
gets better.
b) The transactions carried on by monetary authorities of a country, which causes changes in
official reserves are termed as official reserve transactions.
Autonomous receipts and autonomous payments give rise to either deficit or surplus on balance
of payments. The central bank may finance a deficit by :
i. reducing reserves of foreign currency.
ii. by borrowing from the IMF or monetary authorities
This will be shown as decrease in reserves.The central bank may use surplus to purchase foreign
securities, foreign currency, gold etc. which may result in increase in reserves of the nation.

DISCUPLI
Session With Experts For Commerce