CONCEPTS UNITWISE

1. DIFFERENCE BETWEEN ECONOMICS & ECONOMY:

ECONOMICS:- It is a subject which deals with distribution of wealth.

ECONOMY: An economy is a system by which people get their livelihood.

2. DIFFERENCE BETWEEN ECONOMIC PROBLEM AND PROBLEMS OF ECONOMY :

ECONOMIC PROBLEM: “An economic problem is basically the problem of choice” which arises due to
scarcity of resources having alternative uses and unlimited wants”.

BASIC (CENTRAL) ECONOMIC PROBLEMS

i) Allocation of resources
a. What to produce?
b. How to produce?
c. For whom to produce
ii). Efficient Utilization of resources
iii.) Growth of resources
3. MICRO Vs MACRO:-

Micro is the study of individual problems. e.g ;- Demand of a consumer

Macro is the study of behaviour of aggregates. e.g:-Aggregate demand of employment

4. OPTIMUM UTILIZATION OF RESOURCES

PRODUCTION POSSIBILITY CURVE (PPC): PP curve shows all the possible combination of two goods that
can be produced with the help of available resources and technology.

5. OPPORTUNITY COST AND MARGINAL OPPORTUNITY COST/ MARGINAL RATE OF

TRANSFORMATION

OPPORTUNITY COST: It is the cost of next best opportunity lost.

MARGINAL OPPORTUNITY COST: It is the rate of sacrifice for one good for getting another
good .
Types of rate of sacrifice a. Increasing MOC b. Decreasing MOC c. Constant

QUESTIONS

LEVEL1 LEVEL 2 LEVEL 3

1. Define Economics? 1. What is economics
about?

2. What is an economy? 2. Give point of difference 1. Identify following :

between planned economy
and market economy. a. Support Price
 b.Price of Khadi Gramodyog.
c. Rail Fare.
d. Price of stamp.
e. Price of Coco-cola,Maggi
f. Samosa at market & Samosa at Canteen.

3. Define scarcity. * 1. Give any two features of 2. Explain how scarcity and choice go
economic resources. * together. *
3. Name the three 2. Differentiate between 1. Name any two areas where labour
central problems of labour intensive and intensive technologies are commonly
an economy. -3 capital intensive with used.
4. Explain the problem example. (3/4) 2. Which problem refers to the selection of
of how to produce - 3. Explain the problems of goods and services and production of
(3 Marks) * distribution of income given quantity?
5. Explain the problem and wealth. (3/4)
of what to produce – 4. What is the cause
(3 Marks) * behind central problems
6. Explain the problem of economy? (3/4) **
of for whom to 5. Why economic
produce? -3 problem do arises?
7. Q. No. 1, Page no-7 (3/4)
NCERT text book.

8. Q. No.-2,Page No.-7 6. What does PPC show? 1. Why PPC is concave to the origin?
9. Explain PPC with 7. Draw a table showing 2. Read the table carefully that present
the help of schedule? diminishing MOC and various production possibilities for an
(3) * state the shape of PPC. economy in imaginary units.
10. Define marginal ** Production Consumer Capital
opportunity cost? 8. Draw a production possibilities goods goods
(1) * possibility curve. What A 1 65
11. Define opportunity does a point below this B 2 50
cost? (1) * curve indicate? * C 3 30
12. Is there any 9. What is meant by D 4 5
difference between production possibility Explain the shape of PPC on the
MOC and MRT? * curve? Illustrate with basis of above table and why?
13. Q.No. – 8, Page No- the help of a table and 3. Calculate the marginal opportunity
7 NCERT Text book diagram. cost from the following example.
10. Give two examples What does increasing marginal
each for Micro variable opportunity curve show?
and macro variable.
heat Machines
(in lakh (in thousands)
quantity)
15
0 14
12
1 9
5
2 0

4
 5

THEORY OF CONSUMER BEHAVIOUR AND DEMAND

KEY CONCEPTS
1. CONSUMER AND CONSUMPTION
Consumer: Who consumes goods and services
Consumption: Satisfying human wants
2. UTILITY: Wants satisfying capacity of commodity.
A) TOTAL UTILITY :- Utility derived from total units
B) MARGINAL UTILITY :- Utility derived from additional Unit

C) LAW OF DIMINISHING MARGINAL UTILITY : - More and more units of a commodity

consumed , the marginal utility goes on diminishing.
3. BUDGET SET :- Set of bundles of two goods that a consumer can purchase with
income at given price.
4. BUDGET LINE:- It refers to all combinations of goods which a consumer can buy with his entire
income and price of two goods

Equation satisfying Budget set :- P1 X1 + P2 X2 ≤ M

Equation satisfying Budget line: - P1 X1 + P2 X2 =M

5. CONDITIONS OF CONSUMER’S EQUILIBRIUM:-
a. Consumer’s Equilibrium:- A situation when a consumer maximize his satisfaction with given
income and prices.

INDIFFERENCE CURVE ANALYSIS :- It shows different combinations of two goods which give
equal level of satisfaction to consumer.
6.MARGINAL RATE OF SUBSTITUTION:- It is the rate at which a consumer is willing to give up the
units of one good for extra unit of another good.
7. DEMINISHING MARGINAL RATE OF SUBSTITUTION: - The rate of sacrifice diminishes of good
one for another good .

8. INDIFFERENCE MAP:- Collection of indifference curves that gives different levels of satisfaction to the
consumer.
9. PROPERTIES OF IC :-
1. It slopes downwards from left to right
2. It is always convex to the origin due to falling of Marginal Rate of Substitution
(MRS)
3.Higher IC always gives higher satisfaction
4.Two IC never intersect each other.
10. DEMAND :- Quantity of the commodity that a consumer is able and willing to purchase in a given
period and at a given price.

11. DEMAND SCHEDULE:-It shows different units of commodity that consumer is ready to buy at given
prices for specific period of time.

A) INDIVIDUAL DEMAND :- Demand by an individual consumer.

B) MARKET DEMAND:- It is horizontal summation of individual demand.
C) DEMAND CURVE:- It is a graphical representation of demand schedule.

DETERMINANTS OF DEMAND:-
Factors Affecting Individual Demand For a Commodity/Determinants of Demand:-
1. Price of the commodity itself
2. Income of the consumer
3. Price of related goods
4. Taste and Preference
5. Expectations of future price change
12. MOVEMENT ALONG THE DEMAND CURVE / CHANGE IN QUANTITY DEMANDED:-I f
demand changes due to change in price of commodity only.
A) Extension :- Rise in demand due to fall in price of commodity
B) Contraction:- Fall in demand due to rise in price of commodity
13. SHIFT IN THE DEMAND CURVE/ CHANGE IN DEMAND:- If demand changes due to change in
factors other than price of commodity.
A) INCREASE IN DEMAND:-If demand rises due to change in other factors other than price.
B) DECREASE IN DEMAND:- If demand falls due to change in other factors other than price.
14. ELASTICITY:- It shows the degree of change in demand with respect to change in price.
15. MEASUREMENT OF PRICE ELASTICITY OF DEMAND:-
A) PROPORTIONATE METHOD or Percentage Method :- Percentage change in demand due to %
change in price.
B) TOTAL EXPENDITURE METHOD or Total Outlay Method :- Change in expenditure due to
change in price.
C) GEOMETRIC METHOD/ Point Method :- It measures elasticity at a point on demand curve by
dividing lower segment by upper segment
16. FACTORS AFFECTING PRICE – ELASTICITY OF DEMAND:-
Availability of substitute, Uses of commodity, Nature of commodity, Proportion of total income spent.

QUESTIONS-

LEVEL1 LEVEL2 LEVEL3

1 What do you mean by 1. How is marginal utility 1. The amount of good x is given
utility? derived from TU? with its TU. Calculate MU of it.
2.Define following: (3/4 marks) Quan 1 2 3 4 5 6
 a. Budget set
b. Budget line
c. Marginal rate of
substitution
d. Indifference curve
e. Demand
f. Normal good
g. Complementary
good
h. Substitute good
3. Q.N.-18, P. N-85,
4.Q. N.-10,P.N-34 NCERT
5. Explain the causes behind
downward sloping of
demand curve. (6 marks)
6. Explain the factors
affecting elasticity of
demand.
7. Prepare a demand set.
8. What is the shape of
unitary elastic demand
curve?
9. Write the conditions of
consumer equilibrium
through indifference
curve approach.
(3 marks)
10. What is demand
function?
11. Explain
geometric/point method
of measuring elasticity of
demand. (6 marks)
12. Explain law of
demand with the help of
table & diagram.
(6 marks)
Production: Creation of utility.
2.What will you say about
MU when TU is
maximum?
3. Explain the
relationship between TU
and MU with diagram.
4. Distinguish between
individual demand and
market demand with the
help of schedule.
5. Give two example each for
complementary and
substitute goods.
6. When price of x raises
demand for y rises. How
these two goods are
related.
7. Distinguish between
movement along demand
curve (Change in quantity 6.
demanded) and shifting of
demand curve (Change in
demand).
8. Explain the various degree
of elasticity of demand with
the help of schedule and Q 7.Complete the following table.
diagram. (6 marks)
9. Explain the difference
between cardinal (utility) &
ordinal(indifference)
approach.
10. What happens to demand
of an inferior good if it’s
price fall?
11. What will be the elasticity
of demand when :-
Price Qty Total
Expenditure
when
5 4 20
4 5 20 9. If MRxy > Px/Py, what will be the
10. A consumer demands 40 units of
Unit-3
PRODUCER BEHAVIOUR AND SUPPLY
tity
of x
Total 8 1 18 20 20 1
Utilit 4 8
y
2. Q.N-4,7 and 8, P.No.-34 refer NCERT
3. if consumer’s preferences are
monotonic , can he be indifferent
between the combination 10, 4 and
8,2 ?
4. P.N-35,Q. N.-14,15,23 -27 refers
NCERT
5. A consumer’s budget is Rs40. He is
buying good X and good Y.price of
good X is Rs8 per unit and
good Y is Rs 10 per unit. Draw a
budget line on the basis of these
figures.
A consumer consumes only two goods
X & Y her money may income is Rs
24 and the prices of goods X & Y are
Rs 4 and Rs 2 respectively. Can the
consumer afford a bundles4X &5Y
.Explain?
combinati Good Good MRSxy
on x y
A 1 20 ---
B 15 5:1
C 3 4:1
D 8
E 5 2:1
F 6 5
8. What will happen to budget line
(a) Price of good x falls
(b) Price of good y rises
(c) Money Income falls.
response of consumer.
commodity at price 5 per unit and 50
units at price 4 per unit. Find the
degree of elasticity through
expenditure method.
Production Process: Transformation of Input into Output.

Production Function: It is the functional relationship between inputs and output in a given state of
technology. Q= f(L,K)

Q is the output, L: Labor, K: Capital

Short period /run : is that period where supply / output can be altered / changed by changing only variable
factors of production. In other words fixed factors of production remain fixed.

Long period : is that period where all factors of production are changed to bring about changes in output /
supply. No factor is fixed.

Concepts of product:
Total Product- Total quantity of goods produced by a firm / industry during a given period of time with
given number of inputs.

Average product = output per unit of variable input.

APP = TPP / units of variable factor

Average product is also known as average physical product.

Marginal product (MP): refers to addition to the total product, when one more unit of variable factor is
employed.

LAW OF VARIABLE PROPORTION OR RETURNS TO A VARIABLE FACTOR

Statement of law of variable proportion: In short period, when only one variable factor is increased,
keeping other factors constant, the marginal product (MP) initially increases, then started decreasing and
finally MP goes to negative.
Cost of production : Expenditure incurred on various inputs to produce goods and services.
Cost function : Functional relationship between cost and output.C=f(q)
Where f=functional relationship , c= cost of production, q=quantity of product
Money cost : Money expenses incurred by a firm for producing a commodity or service.
Real Cost:- Money cost + sacrifices forgone
Explicit cost : Actual payment made on hired factors of production. For example wages paid to the hired
labourers, rent paid for hired accommodation, cost of raw material etc.
Implicit cost : Cost incurred on the self - owned factors of production.For example, interest on owners
capital, rent of own building, salary for the services of entrepreneur etc.
Opportunity cost : is the cost of next best alternative foregone / sacrificed.
Fixed cost : are the cost which are incurred on the fixed factors of production. It remains same at each level
of output and even at zero level of production it is positive.
Total Variable Cost : TVC or variable cost – are those costs which vary directly with the variation in the
output. These costs are incurred on the variable factors of production.
These costs are also called “prime costs”, “Direct cost” or “avoidable cost”.
These costs are zero when output is zero.
 Total cost : is the total expenditure incurred on the factors and non-factor inputs in the production of goods
and services.
Average cost : are the “cost per unit” of output produced.
Marginal cost: refers to the addition made to total cost when an additional unit of output is produced.

QUESTIONS;
LEVEL1 LEVEL2 LEVEL3
1. What is production 1. Distinguish between 1. Q. N.-22-25,P.N-50 NCERT (4
function? Marks)
Unit of TC
2.What do you mean by 2. With the help of following
Output
production? schedule identify the different stages
3.Define law of variable of law of variable proportion.
proportion. Fixed Variable Total Marginal
4.Define the following: factor factor product product
a. Total Product Land
b.Marginal Product in Labour Units Units
c. Average Product acres
5.Define the following: 1 0 0 -
a. Cost of Production 1 1 5 5
B. Fixed cost change in quantity 1 2 15 10
C. Variable cost supplied and change in 1 3 30 15
d. Total cost supply. 1 4 40 10
d. Average cost 2. How does increase in 1 5 45 5
e. Marginal cost input prices affect 1 6 45 0
f. Explicit cost supply of commodity? 1 7 40 -5
g. Implicit cost 3.Rising portion of 3. Why do LMC intersect LAC at its
h. Real cost marginal cost curve is lowest point? Explain. (3 marks)
i. Money cost supply. Explain 4. Q.N-26-20, P.N.-50 NCERT (4
j. Opportunity cost 4.Why is marginal cost Marks).
curve U-shaped? 5. Complete the table :-
6. Give the meaning of 5.Can Total cost curve Unit of TVC AVC MC
following: starts from origin? Output
a. Total revenue 6. Can Total cost curve & 1 10 - -
b. Average revenue total variable curve meet
c. Marginal Revenue at any point? Give
d. Supply of - - 8 6
reason.
commodity 7.Can average fixed cost
e. Supply schedule 3 27 - -
curve touch the output-
f. Supply curve axis?
g. Market supply - - 10 13
8. Q. No.-5, P.No-
h. Price elasticity of 49,NCERT
supply 6. Complete the table:-
9. Briefly explain the
7. State and explain the concept of cost function.
relationship between total 10. Q. N.-17-19 P. N-49
product and marginal Unit Of TP AP MP
NCERT (3 Marks)
product. Variabl
11. From the following
8. Explain the relationship e input
cost schedule find out
between marginal product 1 - - 12
the equilibrium level of
& average product. 2 14 -
output where each and
9. Give the meaning of every unit of 3 36 - -
returns to factor. commodity is sold at 4 - - 4
10. What is producer’s cost and price at Rs. 10
equilibrium? State and per unit: 7. Draw total cost, total variable cost
explain conditions of curve and total fixed curve in a single
 producer’s equilibrium by 1 15
marginal curves approach.
2 20
11. State and explain the
law of supply with the help 3 24
of table and diagram. 4 34
12. Explain the factors
affecting supply of a 5 50
commodity. 6 70
13. Distinguish between fixed
cost & variable cost
giving example.
14. Briefly explain the
geometric method of 12. The co-efficient of
measuring price elasticity elasticity of supply of x = 10. Whether the following statements
of supply of commodity. the price elasticity of y.
15. State & explain the law of A supplier gets total
revenue of rupees 400
variable proportion. Also
at price 5 per unit and
mention its limitations.
Rs. 576 when price rises
16. Q. N-7,P. N-49 NCERT
to 6. A supplier supplies
17. Q. N-12, P. No-
40 units of y at price 10
50,NCERT
per unit. How much
quantity will he supply
at price 12 per unit?
13. What is the supply curve
of a firm in a short run.
14. What is the supply curve
of a firm in a long run.
15. What does technological
progress affects the
supply curve of a firm?
16. Q. N.-12 -17, P.N- 67
NCERT text book.
diagram and also comment on the
nature of these curves.
8. Why does marginal cost curve
intersect average variable cost before
the minimum average cost?
9. What will be the elasticity of supply
in the following situations
a. Supply curve makes an angle of
60 degree at origin
b. Supply curve intersect x-axis at a
positive point
c. Supply curve makes an angle at
price axis.
are true or false? Give reasons
a. Total Product increases only
when marginal product
increases.
b. Average product is at its
minimum when marginal
product is minimum.
c. Average variable cost & average
cost curve can’t intersect to
each-other.
d. Total product is at its maximum
when marginal product is
maximum.
11. Q. No-22 – 27, P.N- 68 , NCERT
text book.

UNIT – IV: FORMS OF MARKET AND PRICE DETERMINATION

Market : Market is a system which facilitates buyers and sellers for the purchase of goods and
services through any means of communications i.e. Internet, Mobile, Telephone etc.
Equilibrium: It means a position of rest, there is no tendency to change.
Market equilibrium: It is a situation in which there is no access demand and no access supply.

Equilibrium price: The price at which market demand of a commodity is exactly equal to the
market supply.
Market demand: It refers to the sum total demand for a commodity by all buyers in the market.
Market supply: It refers to supply of a commodity by all the firms in the market.
Types of market
a) Perfect competition: refers to a market situation in which there are large number of buyers and sellers.
Firms sell homogeneous products at a uniform price.
Features of perfect competition:
1. Very large number of buyers and sellers.
2. Homogeneous product.
3. Free entry and exit of firms.
4. Perfect knowledge.
5. Firm is a price taker and industry is price maker.
6. Perfectly elastic demand curve (AR=MR)
7. Perfect mobility of factors of production.
8. Absence of transportation cost.
9. Absence of selling cost.
b) Monopoly market: Monopoly is a market situation dominated by a single seller who has full control
over the price.
Features of monopoly:
1. Single seller of a commodity.
2. Absence of close substitute of the product.
3. Difficulty of entry of a new firm.
4. Negatively sloped demand curve(AR>MR)
5. Full control over price.
6. Price discrimination exists
7. Existence of abnormal profit

c) Monopolistic competition: It refers to a market situation in which there are many firms who sell closely
related but differentiated products.
Features of monopolistic competition
1. Large number of buyers and sellers but less than perfect competition.
2. Product differentiation.
3. Freedom of entry and exit.
4. Selling cost.
5. Lack of perfect knowledge.
6. High transportation cost.
7. Partial control over price.
d) Oligopoly: is a market structure in which there are few large sellers of a commodity and large number of
buyers.
Main features of Oligopoly.
1. Few dominant firms who are large in size
2. Mutual interdependence.
3. Barrier to entry.
4. Homogeneous or differentiated product.
5. Price rigidity.
Features of pure competition
1. Large number of buyers and sellers.
2. Homogeneous products.
6. Free entry and exit of firm
Market structure: refers to number of firms operating in an industry, nature of competition between them
and the nature of product
Excess Demand:- Market demand >market supply
Excess supply:- Market supply > Market demand
Collusive Oligopoly:-It is a market in which the firms co-operate with each-other.
Non Collusive Oligopoly:-It is a market in which the firms compete with each-other.

QUESTIONS
LEVEL 1 LEVEL2 LEVEL3
1. Define the following: 1. QN4,5,8,9 Page no 84 1. Q.No 11-15 Page No 85
a. Market NCERT NCERT .
b. Market equilibrium 2. In which market form is 2. Show the chain effect on
c. Equilibrium Price there product differentiation? demand and supply when :
d. Perfect competition 3. In which market form, a firm a. Prevailing price is
e. Monopoly is price taker and why? above the market
f. Monopolistic 4. Differentiate between the equilibrium price
competition following: b. Prevailing price is
g. Oligopoly a. monopoly & monopolistic below the market
h. Selling price competition equilibrium price
2. State the features of b. Collusive & non- 3. Show the chain effect of
Perfect competition? Collusive Oligopoly following change on
3. State the features of c. Perfect competition & equilibrium price with the
monopoly. monopolistic competition use diagram:
4. State the feature of d. Monopoly & Perfect a. Increase in income of
monopolistic competition. households
competition. 5. Explain the implication of the b. Fall in input prices.
5. Q.N-2, 3 , P.N-84 following: c. Increase in government
NCERT a. Homogeneous tax
6. Explain the features of product 4. Equilibrium price of an
Oligopoly. b. Large no. of buyers essential commodity is
7. How is the price & sellers too high. What possible
determined under c. Free entry and exit of steps can be taken to
perfect competition? the firm down the equilibrium
8. What is the meaning of d. Differentiated price but only through
price rigidity? product the market process.
9. Give two examples of 6. What are the causes of 5. Market for a good is
Oligopoly. emerging monopoly? equilibrium, there is
10. What is patent right? 7. In which market individual simultaneous decrease
11. Explain two example of firm can’t affect the market both in demand and
monopolistic price? supply but there is no
competition. 8. Q. No-9& 10 P. N-100, change in market price.
Refers NCERT text book. Explain with the help of
9. If income of a buyer increases schedule, how it is
he consumes an inferior possible?
goods how it affects the 6. Explain how firms are
equilibrium price and interdependent in
quantity? oligopoly?
10. Show with the help of 7. Why is the number of
diagram the effect on firms small in
equilibrium price and oligopoly?
quantity when market 8. Demand curve under
demand and market supply monopolistic
of the good increase in competition is more
same proportion. elastic than monopoly.
Why?
9. State the condition of
 perfect competition.
Why the demand curve
facing a firm under
perfect competition is
perfectly elastic?

INTRODUCTORY MACRO ECONOMICS

Unit V: NATIONAL INCOME AND RELATED AGGREGATES

BASIC CONCEPTS

Macro Economics: - Macroeconomics studies the behaviour of aggregates or economy as a whole.

Consumption goods:- Are those which satisfy human wants directly.Eg: Durable goods car, Non-durable
Milk.
Capital goods – capital goods are durable goods, which are man made and used in the production of other
goods.e.g. Plant, Machinery
Final goods: Are those goods, which are used either for consumption or for investment. It is not meant for
re-sale.
Intermediate goods intermediate goods are those goods, which are meant for resale or used in further
production process.
Stock: - It is the variable which is measured at a point of time.
Flow:- It is the variable which is measured over a period of time.
Gross Investment :- It is total addition in the stock of capital goods of the economy during a period of time.
Net Investment: It is net addition in the stock of capital goods of an economy during a year.
Depreciation:- Fall in the value of fixed assets due to normal wear & tear, passage of time and
expected obsolescence.
GDP Deflator: - it is the ratio of nominal GDP and real GDP.
Domestic territory:- It is an economic territory which refers to geographical territory administered by the
government within which person, goods & capital move freely.
Normal Residents Of a Country:- It refers to an individual or institutions who resides ordinarily in a country
and whose economic interest lies with that country.
Net Factor income from abroad:- It is the difference between factor income from abroad and factor income
to abroad.
Net indirect tax:- It is the difference between indirect tax and subsidy.
Subsidy:-It is the financial assistance given by the government to an enterprise on production of goods and
services.
Circular flow of income:- Cycle of generation of income in production process and distribution among the
factors of production and finally circulation from household to firm in the form of consumption expenditure
on goods and services produces by them.
Real flow:- It is the flow of factor services from household to firm and flow of goods from firm to
households.
Money Flow:- It is the flow of factor payments from firm to household and flow of consumption
expenditure from household to firm.
Real GDP:- Production of goods and services valued at constant price.
Nominal GDP:- Production of goods and services valued at current price.
Intermediate Consumption:- It refers to value of non-factor inputs which are used in production process.
Domestic income:- It is the sum of factor income generated by all the production unit within domestic
territory of a country.
National Income:- It is the sum of factor income earned by the normal resident of a country.
Factor income:- Income received by the factors of production for rendering factor services.
Transfer Income:- Income received without rendering any factor services .
GDPMP-It Is the sum of market value of all produces final goods and services within domestic territory of a
country during an accounting year.
GDPFC:- It is the sum of money value of all produces final goods and services within domestic territory of a
country during an accounting year.
NDPMP:-It is net market value of all produces final goods and services within domestic territory of a
country during an accounting year.
NDPFC:- It is net money value of all produces final goods and services within domestic territory of a
country during an accounting year.
Private Income:- Income occurs through private sector from all sources within and outside the country.
Personal Income:- Income occurs to household from all sources within and outside the countries.
Personal Disposable Income:- That part of personal income which is available at disposal of household.
National Disposable Income:- Income which is available to the whole county for disposal.

Questions:-
LEVEL1 LEVEL2 LEVEL3
1. Define the following: 1. Distinguish between 1. Calculate domestic
a. Domestic Income following:
b. National income a. National Income & Rs. In
c. Final goods Domestic income Crores
d. Intermediate goods b. Private Income &Personal NDPMP 25000
e. Gross investment Income
f. GDP Deflector c. Factor payment &
g. Intermediate transfer payment
consumption d. Real Flow & money flow
h. Private Income 2. Complete the equation:-
i. Personal Income a. GDPFC=GDPMP-
j. Real GDP ……..
k. Nominal GDP b. NNPFC=GDPMP-
2. What is meant by …..+……-…….
circular flow of income? c. National income=value
3. Explain the concept of of output -…. - …. - ….
domestic territory? +…
4. Explain the concept of 3. Machine purchased is income
normal resident of a always a final good. Rs. In
country. Explain Crores
5. What is the problem of 4. Bread is always a GDPMP 5000
double counting? How it consumer good. Explain Indirect Tax 200
is avoided 5. When GDP of an Subsidy 100
6. GDP is not always true economy will is equal to Depriciation 150
indicator of welfare. GNP. NFIA -100
Explain 6. Q.No- 2, 3 & 12 P. No- 2. Calculate GNPFC:-
7. Write the steps involved 30, 31 Refers to Rs. In
in national income by NCERT. Crores
expenditure method 7. Show the circular flow
NDPMP 15000
8. Write the steps involve of income through flow
NFIA -100
in calculating national chart.
Depriciation 50
income by income 8. Show the relationship
Subsidy 40
method. between four domestic
9. State the precautions of aggregate with flow Indirect Tax 100
value added method. chart. 3. Calculate Private
9. Write the formula of the Income:-
following:-
A) Domestic Income
B) Private Income
 C) National income Income from 300
D) Personal Income property &
E) Personal Disposable enterprenurship
income accuring to
10. Are the following govt sector
included in domestic NIT 100
income of india? Give NFIA 40
reason Net current 200
a. Payment of fees to a transfer from
lawyer engaged by a abroad
firm Interest on 100
b. Profit earned by national debt
foreign banks from
their branches in 4. Calculate personal & personal
india disposable income.
c. Income from sale of Rs. In
shares Crores
d. Rent received by an Private 6000
Indian resident from income
Russian Embassy in Personal Tax 500
India. Saving of 500
11. Are the following private co-
included in India? Give operate
reason sector
a. Payment of interest Co-operate 300
on a loan taken by tax
en employee from Misc. receipt 200
employers of govt.
b. Profit earned by
foreign company in
5. Calculate Net national
india
Disposable income
c. School fees paid by
Rs. In
the students
Crores
d. Salary received by
Consumption of 20
American working
fixed capital
in Indian embassy in
America. NNPMP 300
NIT 50
Net current -20
transfer paid to
the rest of the
world
Net factor -10
income from
abroad
6. Calculate NVAFC:-
Rs. In
Crores
Sales 1000
Closing Stock 100
Opening stock 150
Depreciation 50
Intermediate 50
consumption
Purchase of raw 40
 material
Subsidy 50
7. Calculate:
a. GDPFC &
b. Factor income from
abroad
Rs. In
crores
Compensation of 800
employee
Profit 200
Dividends 50
GDPMP 1400
Rent 150
Interest 100
Gross Domestic 300
capital formation

Change in stock 200

Factor income to 50
abroad
NIT 60

UNIT – VI: MONEY AND BANKING

MEANING OF MONEY: Money is anything which is generally accepted as medium of exchange, measure
of value, store of value and as means of standard of deferred payment.
BARTER SYSTEM: - It is a system in which goods are exchanged through goods. It is also known as C-C
economy.
MONEY SUPPLY: refers to total volume of money held by public at a particular point of time in an
economy.
HIGH POWERED MONEY:Refers to, currency with the public (notes +coins) and cash reserve of banks.
MONEY MULTIPLIER:- It is the ratio of total money supply to the stock of high powered money in an
economy.
Narrow Money:- Currency, Notes, Coins and demand deposit held by the public in commercial banks.
Fiat Money:- Money with no intrinsic value.
Legal Tender Money:- Money issued by the monetary authority or the government which can not be
refused by anyone.
Broad Money:- Narrow money+time deposit held by commercial banks and post office saving
organizations.
CENTRAL BANK :-An apex body that controls, operates, regulates and directs the entire banking and
monetary structure of the country.
Commercial Bank:- It is a financial institution which accepts deposit of the public and advances loan to
borrowers as per requirement.
Bank Rate:- The rate at which RBI gives loan to commercial bank against approved security.
CRR:- It is certain % of the total deposits of commercial bank which is retained with RBI as cash reserve.
SLR:- it is a certain % of the deposits of commercial banks which is retained with itself in the cash form and
as for investment in approved security.
Repo Rate:- The rate at which RBI gives loans to commercial bank for short period.
Reverse repo rate:- The rate at which commercial bank park their surplus fund with the RBI.
Questions:-
Level1 Level2 Level3
1. Define the following: 1. Explain the narrow definition 1. How does the use of money
a. Money of money. overcome the drawbacks of
b. Legal Tender 2. Q. N-8,9, P. No. -46, NCERT barter system?
c. Bank rate 3. Define money supply. 2. What are margin
d. Money supply Explain various requirements of loan? How
e. CRR instruments to measure does lowering or rising of
2. What is Barter system? What money supply used by margin requirement affect
are its drawbacks? RBI. availability of credit?
3. Explain the primary 4. What is current deposit 3. Explain the process of
functions of money. account? credit creation by
4. Explain the functions of RBI. 5. How does a central bank commercial bank.
5. State the four function of control the availability 4. Distinguish between
money . of credit by open market commercial bank & central
6. Define bank. operation? bank.
7.Define open market operation. 6. Mention two essential 5. Calculate the value money
8.Explain the acceptance of functions that make a multiplier and the total
deposit function of financial institution to a deposit created if initial
commercial bank. bank. deposit is of Rs. 500 crores
9. Explain the Banker’s bank & 7. Why only a fraction of and LRR is 10%.
supervisor function of central deposits is kept as Cash 6. If total deposits created by
bank. Reserves? commercial banks are
10. Explain the banker’s to Rs.12000, LRR is 25%
govt function o-f central bank. calculate initial deposit.
11. Write any one of the 7. Calculate LRR, if initial
function of central bank. deposit of Rs. 200 cores
12. Q. No-10,P. N.-46,Refers lead to creation of total
NCERT text book deposits of Rs. 1600 cores.
13. What is central bank?

UNIT VII- DETERMINATION OF INCOME & EMPLOYMENT

Aggregate Demand- It is the sum total of demand for all goods and services in the economy during the
period of an accounting year.
Aggregate Supply-It is the sum total of supply for all goods and services in the econom during the period
of an accounting year.
Consumption Function:- It is relationship between consumption & income.
Saving Function :- It is the relationship between saving & income.
Average Propensity to consume:- It is the ratio between consumption and income. APC= C/Y
Marginal Propensity to consume:- It is the ratio of change in consumption and change in income. MPC=
▲C/▲Y.
Average Propensity to save:- It is the ratio between Saving and income. APS= S/Y
Marginal Propensity to Save:- It is the ratio of change in saving and change in income. MPS= ▲S/▲Y.
Equilibrium Output: - It imploys equilibrium income as well as equilibrium employment.
Investment Multiplier:- It is the ratio between change in income and change in investment= ▲Y/▲I.
Excess Demand:- Is a situation when aggregate demand is greater than aggregate supply corresponding to
full employment in the economy.
Deficient demand:- Is a situation when aggregate demand is shortfall of aggregate supply corresponding to
full employment in the economy.
Involuntary unemployment:- It is a situation in which people are willing to work at the current wage rate
but work is not available.
Full Employment Equilibrium:- is a situation in the economy when AS=AD or S= I.
QUESTIONS:-
LEVEL 1 LEVEL2 LEVEL3
1. What is meant by 1. Define effective demand. 1. If If MPC =0.75, what
investment? 2. What are the main components of will be MPS?
2. What is meant by aggregate aggregate demand in an open 1. Can the value of APS be
demand? economy? negative? If yes then when?
3. What is meant by aggregate 3. Explain the concept and principle 2. Distinguish between APC &
supply? of effective demand. MPC. The value of which of
4. State any three components 4. What is aggregate supply and these two can be greater than
aggregate demand? Explain what are their components? one and when?
any one of them 5. If there is difference between ex- 3. Complete the following
5. What is consumption ante demand and ex-ante supply, table:-
function? what does it imply? Income MPC Saving APS
6. Define average propensity 6. What is the relationship between 0 - -90
to save? MPC and MPS. 100 .6 - -
7. Define average propensity 7. Distinguish between APS & 200 .6 - -
to consume? MPS. Draw a hypothetical 300 .6 - -
8. What is equilibrium output? propensity to save a curve and 4. Derive the saving function
9. State two methods of from it draw the propensity of from the consumption
determining equilibrium consume curve. function C=a+by
level of income. 8. What is under employment 5. What happen to the level of
10. Give the meaning of equilibrium? national income if aggregate
involuntary unemployment 9. What is full employment demand is greater than
, Full employment and equilibrium? aggregate supply.
under employment 10. In an economy, planned 6. In two sector economy the
equilibrium savings exceeds planned consumption and investment
11. Define investment investment. How will an equity functions are as follows: Y=
multiplier. between the two is achievd? C+I, C=50+.8Y, I=50.Find
12. What is deficient demand? Explain. a. The equilibrium level of
13. When does inflationary gap 11. Explain the equilibrium level of income
arise? income with the help of C+I b. The level of consumption
14. When does deflationary gap curve. at equilibrium &
arise? 12. State the relationship between c. Level of saving at
15. What is monetary policy? MPC & Multiplier.
13. Give the formula of investment
multiplier in terms of MPS.
14. Explain the meaning of
investment multiplier. What can
be its minimum value & why?
15. What happens to the price level
when there is excess demand?
16. Explain the concept of
deflationary gap. Explain two
measures by which a central
bank can attempt to reduce this
gap.
17. Distinguish between
inflationary & deflationary gap
.Show deflationary gap on a
diagram.
equilibrium
7. Q. No-3,4,5 & 6 Page no. 59
refers to NCERT text book .
8. In an economy investment
increases by Rs. 120 crores.
The value of multiplier is
4,calculate the MPC.
9. It is planned to make a new
investment of Rs. 1000 crores
in the economy, how much
will be the increase in national
income if MPS=.4.
10. Explain the working of
investment multiplier with the
help of a numerical example.
11. In an economy MPC is .75
investments is increase by Rs.
200crores, calculate total
increase in income &
consumption.
12. Briefly explain how a central
bank can control credit
creation by commercial bank.
13. Explain the problem of excess
demand in an economy with
the help of a diagram. Explain
the role of bank rate in
correcting it.

UNIT VIII: GOVERNMENT BUDGET AND THE ECONOMY

Budget : It is an annual statement of the estimated Receipts and Expenditures of the Government over the
fiscal year which runs from April –I to March 31.
Objectives of the budget:

i. Redistribution of income and wealth

j. Reallocation of resources
k. Economic stability
l. To speed up the process of growth through public enterprises.

Revenue receipt:- Which do not cause any reduction in assets and do not create any liability for
government .e.g:- Tax receipts

Capital receipts:- Which creates liability for the government and causes reduction in assets of a
government.eg. Disinvestments

Revenue Expenditure:- Which does not causes increase in government and does not causes any reduction
in government liability .e.g:- expenditure on old-age pension

Capital expenditure:- which causes increase in government assets & causes reduction in government
liability.e.g.-Payment of loan

Revenue Deficit:- Revenue receipt < revenue expenditure

Fiscal Deficit:- Revenue expenditure+ capital expenditure- revenue receipt- capital receipt( other than govt.
borrowing)
Primary deficit:- Fiscal deficit- Interest payment
Two ways of containing budgetary deficit:- Reduction in govt. expenditure and increase in government
revenue.
LEVEL1
1. Define a government
budget.
2. Name the two parts of
government budget.
3. Define balance budget
4. Define deficit budget
5. Define surplus budget
6. Explain the main objective
of budget.
7. Define Revenue deficit,
fiscal deficit and primary
deficit
8. Define tax.
9. Distinguish between direct
tax and indirect tax.
10. Give two example of non-
tax revenue.
11. State the components of
capital assets
12. Classify public expenditure.
13. Explain allocation of
resources objective of
government budget.
14. What do you understand by
budget receipt?
15. Classify the following into
direct and indirect tax. Give
reason
i. Wealth tax
j. Entertainment tax
k. Income tax
LEVEL2
1. Why is tax not a capital
receipt?
2. Why is recovery of loan
treated as capital assets?
3. Distinguish between revenue
receipt and capital receipt. 2. 2. Calculate budgetary deficit
4. Giving reasons categorise the
following into revenue
receipt and capital receipt
a. Recovery of loans
b. Corporation tax
c. Dividends on investment
made by government
d. Sale of public sector
undertaking
e. Entertainment tax
f. Borrowing by the
government
5. Distinguish between revenue
expenditure and capital
expenditure.
6. Classify the following
between revenue
expenditure and capital
expenditure:
a. Interest payment by govt.
b. Payment of loan by govt.
c. Purchase share by govt.
d. Expenditure on defence
by govt.
e. Construction of school
buildings
f. Subsidies
g. Grants given to state
governments
7. Is deficit budget a sign of
government inefficiency?
8. What is the basis of
classifying government
expenditure in to plan
expenditure and non plan
expenditure?
9. What is the basis of
classifying government
expenditure in to
development expenditure and
LEVEL3
1. Primary deficit of
government is rs. 200 crore
and interest payment is Rs.
250 crore. Calculate fiscal
deficit
from the following data:
Rs. Crores
Revenue 60000
expenditure
Capital 30,000
Expenditure
Revenue 50,000
Receipt
Capital 25,000
receipt
3. A government budget shows
a primary deficit of 4,400
crores, expenditure on
interest payment is Rs. 400
crores. How much is the
fiscal deficit?
4. In an economy where
additional tax revenue of the
government is equal to
additional expenditure by the
government, would there be
any impact on national
income?
5. Q. no.- 6,7,8 ,11 & 13 P. No-
75 Refers NCERT text book.
 non development
expenditure?
10. Q. No-3, 4,5 ,P. No- 74
refers NCERT text book,

UNIT X: BALANCE OF PAYMENTS AND FOREIGN EXCHANGE RATE

FOREIGN EXCHANGE refers to all currencies other than the domestic currency of a given country.

FOREIGN EXCHANGE RATE is the rate at which currency of one country can be exchanged for currency
of another country.

FOREIGN EXCHANGE MARKET: The Foreign Exchange market is the market where the national
currencies are traded for one another.

FUNCTIONS OF FOREIGN EXCHANGE MARKET:

1. Transfer function: It transfers the purchasing power between countries.

2. Credit function: It provides credit channels for foreign trade

3. Hedging function: It protects against foreign exchange risks.

FIXED EXCHANGE RATE SYSTEM: Fixed exchange rate is the rate which is officially fixed by the
government, monetary authority and not determined by market forces.

FLEXIBLE EXCHANGE RATE: Flexible exchange rate is the rate which is determined by forces of
supply and demand in the foreign exchange market.
DEMAND FOR AND SUPPLY OF FOR FOREIGN EXCHANGE

Demand for foreign exchange:

1. To purchase goods and services from other countries

2. To send gifts abroad

3. To purchase financial assets (shares and bonds)

4. To speculate on the value of foreign currencies

5. To undertake foreign tours

6. To invest directly in shops, factories, buildings

7. To make payments of international trade.

SUPPLY OF FOREIGN EXCHANGE:

Foreign currencies flow into the domestic economy due to the following reason.
1. When foreigners purchase home countries goods and services through exports
2. When foreigners invest in bonds and equity shares of the home country.
3. Foreign currencies flow into the economy due to currency dealers and speculators.
4. When foreign tourists come to India
5. When Indian workers working abroad send their saving to families in India.
EQUILIBRIUM IN THE FOREIGN EXCHANGE MARKET

The equilibrium exchange rate is determined at a point where demand for and supply of foreign exchange
are equal. Graphically interaction of demand and supply curve determines the equilibrium exchange rate of
foreign currency.

MANAGED FLOATING: This is the combination of fixed and flexible exchange rate. Under this, country
manipulates the exchange rate to adjust the deficit in the B.O.P by following certain guidelines issued by
I.M.F.

DIRTY FLOATING: If the countries manipulate the exchange rate without following the guidelines issued
by the I.M.F is called as dirty floating.

Questions

LEVEL1 LEVEL2 LEVEL3

1. Define foreign exchange
rate.
2. What do you mean by
Foreign Exchange Market?
3. What is meant by Fixed
Exchange Rate?
4. What is equilibrium rate of
exchange?
5. Define flexible exchange
rate.
6. Define flexible exchange
rate.
7. Define Spot exchange rate.
8. Define forward market.
9. What is meant by balance of
payments?
10. What do you mean by
balance of trade?
11. What do you mean by
disequilibrium in BOP?
12. What is meant by managed
floating?
13. What is meant by dirty
floating?
1. What does balance of
payment account
record?
2. When will BOP show a
surplus?
3. When is there deficit is
BOP?
4. Explain relation between
foreign exchange rate
and demand for foreign
exchange.
5. Explain the effect of fall in
price of foreign currency of
export.
6. Explain relation between
fall in price of foreign
exchange and its supply by
giving two examples.
7. Distinguish between BOT &
balance on current account?
8. What does a deficit in
current account of BOP
indicates?
9. Define flexible & fixed
foreign exchange rate
system.
10. Sate any two merits and two
demerits of flexible
exchange rate system.
11. Q. N. -!,7 P.N-96 of
NCERT text book
1.What is meant by visible &
invisible items of BOP account.
2. When exchange rate of
foreign currency falls its
demand rises how?
3.When price of foreign
currency falls supply of
foreign currency also falls,
why?
4. How is foreign exchange rate
determined? Explain with the
help of a diagram.
5. Distinction between
depreciation & devaluation.
6. Q. No.-2, 6, P. N.- 96 refers
NCERT text book
7. Explain the component of
Current account & capital
account?
8. What are spot and forward
markets in foreign exchange?
9. Mention four sources each of
demand and supply of foreign
exchange.

Sl No. Unit Marks No. of Key No. of Q. No. of No. Of * Q

Allotted concepts no. solved Q. No.
 No.

NUMERICALS
KEY CONCEPTS

MICRO MACRO

Elasticity of Demand Domestic .Income,Value of output

Elasticity of Supply Value Addition
Cost Personal Income
Revenue Private Income
Product Personal Disposable Income
Producer Equilibrium National Income
Consumer Equilibrium National Disposable Income
 Multiplier
ConsumptionFunction

1. From the following PP schedule calculate MRT/MOC of good x.

Production possibilities A B C D E
Production of good x units 0 1 2 3 4
Production of good y units 14 13 11 8 4

Production of good X units Production of good MRT = ∆y / ∆x

Y units
0 14 -
1 13 1:1
2 11 2:1
3 8 3:1
4 4 4:1
2. Complete the following table.

combination Good x Good y MRSxy

A 1 20 ---
B 15 5:1
C 3 4:1
D 8
 E 5 2:1
F 6 5
ANS-

combination Good x Good y MRSxy

A 1 20 ---
B 2 15 5:1
C 3 11 4:1
D 4 8 3:1
E 5 6 2:1
F 6 5 1:1
3. Due to 20 % change in price, quantity demanded rises from 60 units to 90 units. Find out the price
elasticity of demand.
Ans:- Given, Q=60 Q1=90
Ed= % change in quantity demanded/% change in quantity price
= ((90-60)/60 X 100)/20 %
= 0.5/20
=1/4
=0.25

4. The Price of ice cream is Rs.20 per cup and demand is for 200 cup. If the price of ice cream falls to Rs.15
demand increases to 300 cups. Calculate elasticity of demand.

Sol.: P = 20; P1 = 15 ;  P = 5
Q= 200; Q1 = 300; Q = 100
Ed = 100 x 20 = 2
5 200
4. The co-efficient of elasticity of demand for ‘X’ is equal to the elasticity of y. A consumer spends Rs. 400
at price 4 per unit and Rs. 375 when prise rises to Rs. 5 per unit. A buyer buys 60 units of y at price 8 per
unit. How much quantity will he buy when price rises to Rs. 10 per unit.
Solution:-
Px T.E. Dx
4 400 100
5 375 75
Edx= (-) ΔQ/ΔP X (P/Q)
= (-)25/1 X 4/100
= (-1)
According to problem Edx=Edy=(-)1
Again
Py Dy
8 60
10 x
Edy=(-)1
Now Edy= ΔQ/ΔP X (P/Q)
-1= (X-60)/(10-8) X 8/60
-1= (x-60)/2 X(2/15)
So, x-60 = -15
So x= 45
5. Complete the following:
 Output Unit Total Cost Average Fixed Average Cost Variable cost
cost
1 20 6
2 26 3
3 39 2
Sol:-
Output Unit Total Cost Average Fixed Average Cost Variable cost
cost
1 20 6 20 14
2 26 3 13 20
3 39 2 13 33

6. Given below is the cost schedule of a firm. Its average fixed cost is Rs. 20 when it produces 3
units.

Output units Average Variable Cost

1 30
2 28
3 32
Calculate its marginal cost and average total cost at each given level of output.
Sol:-
Outputs Avg Total fixed Avg fixed Total Marginal Avg. Total
variable cost cost variable cost cost(AFC+AVC)
Cost cost
1 30 60 60 30 30 90
2 28 60 30 56 26 58
3 32 60 20 96 40 52

When output=3 units;

AFC=Rs. 20
TFC=AFC X Q
= Rs. 20 X 3 = Rs. 60
7. Complete the following table:
Output Unit AFC TFC TVC MC
0 - 50 - -
1 - - - 10
2 - - 18 -
3 - - - 6
4 - - 20 -

Sol:-
Output Unit AFC TFC TVC MC
0 ∞ 50 - -
1 50 50 10 10
2 25 50 18 8
3 16.66 50 24 6
4 12.5 50 20 4
8. Find out the average revenue and marginal revenue on the basis of the following data:
Units of Production Total Revenue Average Revenue Marginal Revenue
 1 20
2 36
3 48
4 56
5 60
6 60
7 56
Sol:-
Units of Total Revenue Average Revenue Marginal Revenue
Production
1 20 20 20
2 36 18 16
3 48 16 12
4 56 14 8
5 60 12 4
6 60 10 0
7 56 8 -4
9. Complete the following table:
Output unit Avg. Revenue Marginal Revenue Total Revenue
1 15 15 -
2 13 - 26
3 11 - -
4 9 3 -
Sol :-
Output unit Avg. Revenue Marginal Revenue Total Revenue
1 15 15 15
2 13 11 26
3 11 7 33
4 9 3 36

10. Find producer’s equilibrium, from the following. Give logical reson
Quantity sold Total revenue Total cost
5 15 18
6 20 22
7 25 26
8 30 27
9 35 30
10 40 38
Sol:-
Quantity sold Total revenue Total cost Profit=TR-TC
5 15 18 -3
6 20 22 -2
7 25 26 -1
8 30 27 3
9 35 30 5
10 40 38 2
Profit is maximum at output level of 9 units. At this level, the difference between TR and TC is maximum,
i.e. 5. Therefore, producer’s equilibrium is at 9th unit.
11. From the following schedule find out the level of output at which the producer is in equilibrium. Give
reason for your answer.
1 24 26
2 24 50
3 24 72
 4 24 92
5 24 115
6 24 139
7 24 165
Sol:-
Output units Price Total Cost Total Profit Marginal MarginalCost
Revenue Revenue
1 24 26 24 -2 24 26
2 24 50 48 -2 24 24
3 24 72 72 0 24 22
4 24 92 96 4 24 20
5 24 115 120 5 24 23
6 24 139 144 5 24 24
7 24 165 168 3 24 26
12. Calculate ‘Sales’ from the following data:
Items (Rs. In lakh)
(i) Net value added at factor cost 300
(ii) Intermediate consumption 200
(iii) Indirect Tax 20
(iv) Depreciation 30
(v) Change in Stocks (-) 50

Sol:- Sales= NVAfc-Change in stocks + intermediate consumption+Depreciation+net indirect taxes

=300 lakh-(-50 lakh)+200 lakh+ 30 lakh+(20 lakh -0 lakh)

=600 lakh

13. Calculate ‘ Vaule of output’ from the following data:

Items (Rs. In lakh)
i) Net value added at factor cost 100
ii) Intermediate Consumption 75
ii) Excise duty 20
iii) Subsidy 5
iv) Depreciation 10
Sol:- Value of output
= NVAfc+ Intermediate consumption +excise duty-subsidy +depreciation
= 100 lakh +75 lakh +20 lakh- 5 lakh+10 lakh
=200 lakh
14. Calculate the ‘ Net domestic product at factor cost’ and ‘Gross National Disposable Income’ from the
following data:
Items (Rs. In crore)
i)Net current transfers from abroad (-)5
ii)Private final consumption expenditure 250
iii) Net factor income from abroad 15
iv)Government final consumption expenditure 50
v)Consumption of fixed capital 25
vi) Net exports (-)10
15. From the following information, calculate gross national income by (a) Income Method, and (b)
Expenditure Method:
Items (Rs. In crore)
i)Factor income from abroad 10
 ii)Compensation of employees 150
iii)Net domestic capital information 50
iv)Private final consumption expenditure 220
v)Factor income to abroad 15
vi) Change in stock 15
vii)Employer’s contribution to social security schemes 10
viii)Consumption of fixed capital 15
ix)Interest 40
x)Exports 20
xi)Imports 25
xii) Indirect taxes 30
xiii)Subsidies 10
xiv)Rent 40
xv)Government final consumption expenditure 85
xvi)Profit 100

Sol:-
Income Method
GNPfc=Factor income from abroad +compensation of employees-factor income to abroad+consumption
of fixed capital+interest+rent+profit
=10+50+ 220-15+15+20-25-30-30+10+85
=340 crore
Expenditure Method
GNPfc=Factor income from abroad +net domestic capital information +private final consumption
expenditure-factor income to abroad+consumption of fixed capital+exports – imports – indirect
taxes+subsidies+government final consumption expenditure
=10+50+220-15+15+20-25-30+10+85
=340 Crore
14. Calculate Gross National Disposable Income and Personal Income from the following data:
Items (Rs. In crore)
i)Personal Tax 120
ii)Net direct tax 100
iii)Corporation tax 90
iv)National Income 1000
v)Net factor income from abroad 5
vi)Consumption of fixed capital 50
vii)National debt interest 70
viii) Retained earnings of private corporate sector 40
ix)Net current transfers to the rest of the world (-)20
x)Current transfers from government 30
xi)Share of government in national income 80
Sol:- Gross National Disposable Income= National income+ consumption of fixed capital+ net direct tax-net
current transfers to the rest of the world
=1,000 cr+50 cr+100 cr-(-20 cr)
=1,170 cr.
Private income
= National income-share of govt in national income+national debt interest+ current transfers
from govt- net current transfers to the rest of the world
=1000 cr-80 cr+70 cr+30 cr-(-20 cr)
 =1,120cr-80 cr
=1,040 cr
Personal Income
=Private income-corporation tax-retained earnings of private corporate sector
= Rs 1,040 cr-90 cr-40 cr
=910 cr.
15. Will the following be a part of domestic factor income of India? Give reasons for your answer.
i)Old age pension given by the government
ii)Factor income from abroad
iii)Slaries to India residents working in Russian Embassy in India.
iv)Profits earned by a company in India, which is owned by a non-resident.
Sol:-
i)Old age Pension given by the government: It is not a part of domestic factor income of India because it is a
transfer payment.
ii) Factor Income from abroad: It is not a part of domestic factor income of India because it is not generated
within the domestic territory of India.
iii) Salaries to Indian residents working in Russian Embassy in India:-It is not a part of domestic factor
income of India because the Russian embassy in India is not a part of domestic territory of India.
iv)Profits earned by a company in India which is owned by a non- resident:- It is a part of domestic factor
income in India because the company is within the domestic territory of India.
16. Income generated in the economy is twice the increase in autonomous investment. Find the values of MPC
& MPS
Sol :-
We know that,
Multiplier(k)= ΔY/ΔI
Let the increase in investment = 100
So, Increase in income=2 X 100 =Rs. 200
K= 200/100=2
K= 1/ (1-MPC)=1/MPS
MPS=1/k
MPS=1/2=0.5
Or,
MPC+MPS=1
MPC =1-MPS
=1-0.5
17. Find saving function when consumption function is given as: C= 500+0.5Y
Sol:- S= -S’ +sY
Where, -S’= Savings when Y=0
And s (= MPS)=1-MPC
So,
S=-500 + (1-0.5)Y
S=-500+0.5Y
18. Complete the following table:
Income Marginal Propensity to Saving Average Propensity to
Consume consume
0 - -30 -
100 0.75 - -
200 0.75 - -
300 0.75 - -
 Sol :-
Income(Y) Marginal Saving(s)= Y-C Consumption(c) Avg. Propensity to
Propensity to consume APC=C/Y
consume(MPC)
0 - -30 30 -
100 0.75 -5 105 1.05
200 0.75 20 180 0.90
300 0.75 45 255 0.85

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