Choose the correct answer (each question carries 1 mark)

1. The scarce resources of an economy have

(a) Competing usages (b) Single usages
(c) Unlimited usages (d) none of the above
2. Which of the following is an example of micro economic study?
(a) National Income (b) Consumer behaviour
(c) Unemployment (d) foreign trade
3. Central problems of an economy includes
(a) What to produce (b) How to produce
(c) For whom to produce (d) All of the above
4. Traditionally, the subject matter of economics has been studied under the following broad branches.
(a) Micro & Macro Economics (b) Positive& Normative
(c) Deductive & inductive (d) None of the above
……………………………………………………………………………………………………….
5. Utility is
(a) Objective (b) Subjective
(c) Both a & b (c) None of the above
6. The shape of an indifference curve is normally
(a)Convex to the origin (b) Concave to the origin
(c) Horizontal (d) Vertical
7. The consumption bundles that are variable to the consumer depend on
(a) Colour & Shape (b) Price & Income
(c) Income & Quality (d) None of the above
8. The equation of budget line is
(a) 𝑃𝑥 + 𝑃1 𝑋1 = 𝑀 (b) M=𝑃0 𝑋0 + 𝑃𝑥
(c) 𝑷𝟏 𝑿𝟏+𝑷𝟐 𝑿𝟐=M (d) Y= 𝑀𝑥 +C
9. The demand for these goods increases as income increases
(a) Inferior goods (b) Giffen goods
(c) Normal goods (d) none of the above
10. A vertical demand curve is
(a) Perfectly Elastic (b) Perfectly inelastic
(b) Unitary Elastic (d) None of the above

11. Ordinal Utility analysis expresses utility in

 (a) Numbers (b) Returns
(c) Ranks (d) Awards
………………………………………………………………………………………………..
12. The Formula of production function is
(a) q = f (L, K) (b) q = d (p)
(c) Y = f (x) (d) None of the above
13. In the short run, a firm
(a) Can change all the inputs (b) Cannot vary all the inputs
(c) Can keep the inputs fixed (d) none of the above
14. The change in output per unit of change in the input is called.
(a) Marginal product (b) Average product
(c) Total product (d) Product
15. Cobb – Douglas production function is
(a) q = (x, x) (b) q = (x1, x2)
𝜷
(c) q = (𝑿𝜶𝟏 ,𝑿𝟐 ) (d) q = (0)
16. TC =
(a) TVC (b) TFC
(c) TFC + TVC (d) AC + MC
………………………………………………………………………………………….
17. The product in a perfect competition are
(a) Heterogeneous products (b) Homogeneous Products
(c) Luxury goods (d) Necessary goods
18. The increase in total revenue for a unit increase in the output is
(a) Marginal revenue (b) Average Revenue
(c) Total Revenue (d) Fixed Revenue
19. The firm’s profit is denoted by
(a)∑ (b) Δ (c) Ø (d) π
20. When the supply curve is vertical the elasticity of supply is
(a) es = 1 (b) es> 1 (c) es = 0 (d) es = ∞
21. The revenue per unit of output of a firm is called as
(a) TR (b) MR (c) AR (d) None of the above
………………………………………………………………………………..

22. In perfect competition, buyers & sellers are

(a) Price makers (b) Price takers
 (c) Price analysts (d) none of the above
23. A situation where the plans of all consumers and firms in the market match.
(a) In equilibrium situation (b) Equilibrium situation
(c) Maximisation situation (d) Partial Equilibrium situation
24. As a result of increase in the number of firms there is an increase in supply, then supply curve
(a) Shifts towards left (b) Shifts towards Right
(c) Shifts towards Both sides (d) none of the above
25. The firms earn super normal profit as long as the price is greater than the minimum of
(a) Marginal cost (b) Total cost
(c) Average cost (d) fixed cost
26. The government imposing upper limit on the price of goods and services is called
(a) Price ceiling (b) Selling price
(c) Price floor (d) none of the above
27. The government imposed lower limit on the price of goods and service is called
(a) Goods floor (b) Service floor
(c) Price floor (d) none of the above
…………………………………………………………………………………………..
28. A Market structure which produces heterogeneous products is called
(a) Monopoly (b) Monopolistic competition
(b) Perfect competition (d) none of the above
29. The change in TR due to the sale of an additional unit is called
(a) Total Revenue (b) Average Revenue
(c) Marginal Revenue (d) Revenue

30. When the price elasticity of demand is more than one, MR has a
(a) Negative value (b) Decreasing value
(c) Constant value (d) Positive value
31. Profit =
(a) P x Q (b) TR – TC
(c) TFC + TVC (d) TR/Q

…………………………………………………………………………..
…………………Introductory Macroeconomics……………………………………………………
32. The individuals or institutions which take economic decisions are
(a) Economic variables (b) Economists
(c) Economic Agents (d) none of the above
33. In 1936 British economist J.M. Keynes published his celebrated book
(a) Wealth of nations (b) General theory of employment interest and Money.
(c) Theory of Interest (d) Theory of Employment
34. All the labourers who are ready to work will find employment and all the factories will be working at their
full capacity, this school of thought is known as
(a) Modern thought (b) Contemporary thought
(c) Classical thought (d) none of the above
35. The year of Great Depression.
(a) 1920 (b) 1889 (c)1929 (d) 2018
36. In a capitalist country production activities are mainly carried out by
(a) Private enterprises (b) Government authority
(c) Planning authority (d) none of the above
…………………………………………………………………………………….
37. The study of National Income is related to
(a) Micro economics (b) Macro Economics
(c) Both Micro & Macro (d) None of the above
38. NNP = GNP –
(a) Deduction (b) Depreciation
(c) Investment (d) None of the above
39. The value of GDP at the current prevailing prices is
(a) Real GDP (b) GDP at Factor cost
(c) Nominal GDP (d) NDP
40. By deducting undistributed profit from national income, we get
(a) Personal Disposable Income (b) Personal Income
(c) Private Income (d) Subsidies
41. Measuring undistributed the sum total of all factor payments will be called
(a) Product method (b) Expenditure method
(c) Income method (d) none of the above
.................................................................................................................................
42. The main function of Money is
(a) Saving (b) Expenditure
(c) Medium of exchange (d) Investment
43. The Bank which act as monetary authority of India.
(a) RBI (b) NABARD
(c) RRB (d) IDBI
44. The Banks which are part of the money creating system of the economy are
 (a) Bankers (b) Commercial Banks
(c) RBI (d) None of the above
45. The rate at which the RBI lends money to commercial banks against securities
(a) Bank rate (b) Repo rate
(c) RBI (d) None of the above
46. The important tool by which RBI influences money supply is
(a) Open market operation (b) Closed market operation
(c) Money operation (d) none of the above
…………………………………………………………………………………………
47. Consumption which is independent of income is called
(a) Induced consumption (b) autonomous consumption
(c) Wasteful consumption (d) past consumption
48. Value of MPC lies between
(a) 1 and 2 (b) 0 and 1 (c) 2 and 4 (d) 0 and 0.5
49. The point where ex-ante aggregate demand is equal to ex-ante aggregate supply will be
(a) Equilibrium (b) Disequilibrium
(c) Excess demand (d) Excess Supply
50. Easy availability of credit encourages
(a) Saving (b) investment
(c) Rate of interest (d) none of the above
51. In the situation of excess demand
(a) Demand is less than the level of output
(b) Demand is more than the level of output
(c) Supply is less than the level of output
(d) Supply is more than the level of output
……………………………………………………………………………………….
52. The Taxes on Individual and firms are
(a) Direct Taxes (b) Indirect Taxes
(c) Fixed Taxes (d) Non Tax Revenues
53. Duties Levied on goods produced with in the country
(a) Service Tax (b) Estate Duties
(b) Excise Duties (Taxes) (d) Customs duties
54. The Tax which acts as an automatic stabiliser
(a) Qualitative Income Tax (b) Income Tax
(c) Quantitative Tax (d) Proportional Income Tax
55. Which of the following is an example for ‘Paper Taxes’?
 (a) Income tax (b) Excise taxes
(c) Wealth tax (d) Customs taxes
56. When Demand exceeds the available output under conditions of high level of employment, this may give
rise to
(a) Inflation (b) Deflation
(c) Stabilisation (d) None of the above
………………………………………………………………………………………………………..
57. The consumers and producers can choose between domestic and foreign goods, this market linkage is called
(a) Financial Market linkage (b) Output Market linkage
(c) Labour Market linkage (d) None of the above

58. The exchange rate is determined by the market forces of demand and supply is called as
(a) Fixed exchange rate (b) Dirty floating exchange rate
(c) Flexible exchange rate (d) none of the above
59. The balance of payments (BOP) record these transactions between residents and with the rest of the world
(a) Goods (b) Services (c) Assets (d) All of the above
60. The rate at which the price of one currency in terms of Foreign Currency is called
(a) Exchange Control (b) Interest Rate
(c) Foreign Exchange Rate (d) None of the above
61. In this standard all currencies were defined in terms of gold
(a) Metal standard (b) Silver standard
(c) Gold standard (d) none of the above

Fill in the blanks (each question carries 1 mark)

1. Scarcity of resources gives raise to ______________(Problem of Choice)
2. In a centrally planned economy all important decisions are made by ___________(Government/Central
authority)
3. In reality, all economies are ____________(Mixed economy)
4. ------- is a set of arrangements where economic agents can freely exchange their endowments or products
with each other.(Market)
......................................................................................................................................
5. Want satisfying capacity of a commodity is ____________(Utility)
6. Two indifference curves never _____________ each other(Intersect)
7. As income increases, the demand curve for normal goods shifts towards _____________(Rightwards)
8. The demand for a good moves in the ______________ direction of its price.(opposite)
9. Method of adding two individual demand curve is called _____________(Horizontal summation)
 ……………………………………………………………………………………
10. In the long run,, all inputs are _____________(variable)
11. ______________ is defined as the output per unit of variable input.(Average product)
12. Marginal product and Average product curves are ___________ in shape.(Inverse “U” shape)
13. SMC curve cuts the AVC curve at the ____________ point of AVC curve from below(Minimum)
14. ______________ is the set of all possible combinations of the two inputs that yield the same maximum
possible level of output (Isoquant Curve).
………………………………………………………………………………………………….
15. Price taking behaviour is the single most distinguishing characteristic of _____________ market.(Perfect
competition)
16. ______________ is a tax that the government imposes per unit sale of output(Unit Tax)
17. For a price taking firm marginal revenue is equal to __________________( The Market Price)
18. The point of minimum AVC where the SMC curves cut the AVC curves is called ______(Shutdown point)
19. _____________ cost of some activity is the gain forgone from the second best activity.(opportunity)
...........................................................................................................................................................................
20. In a perfectly competitive market, equilibrium occurs when market demand _______________ market
supply (Equal to)
21. If the supply curve shifts rightward and demand curve shifts leftward equilibrium price will be
______________(Decreases/lower equilibrium price)
22. _______________ is determined at the point where the demand for labour and supply of labour curves
intersect.( The wage rate)
23. The labour market,__________________ are the suppliers of labour.(Households)
24. Due to rightward shifts in both demand and supply curves the equilibrium price remains_____(unchanged)
25. It is assumed that, in a perfectly competitive market an _____ is at play.(Invisible Hand)
……………………………………………………………………………………………………….
26. The monopoly firm’s decision to sell a larger quantity is possible only at _______________(lower price)
27. Competitive behaviour and competitive market structure are in general ________related.(inversely related)
28. In monopoly market, the goods which are sold have no ________________(Substitutes)
29. TR = ______________(PxQ)
30. The Revenue received by the firm per unit of commodity sold is called ____________(Average Revenue)
31. With the zero production cost, when the total revenue of monopoly firm is maximum, the profit is
_____(Maximum)
…………………………………………………………………………………………………………
…………………..Introductory Macroeconomics……………………………………..
32. ________ tries to address situation facing the economy as a whole.(Macroeconomics)
33. Sale of goods by the domestic country to the rest of world is called_______.(Export trade)

34. The domestic country may sell goods to the rest of the world.
These are called _____________.(Export trade)
35. ________________ will be called as firms(Production units)
36. _____policies are pursued by the state itself or statutory bodies like the RBI, SEBI etc. (Macroeconomic).
………………………………………………………………………………………………..
37. ________________ are defined at a particular point of time.(Stocks)
38. ________________ goods will not pass through any more stages of production.(Final)
39. ________________ is an annual allowance for wear and tear of a capital good.(Depreciation costs)
40. ________________ is a stock variable.(Inventory)
41. Pollution is an example for _____________ externalities.(negative)
42. The net contribution made by a firm is called its ______________(Value added)
…………………………………………………………………………………………………….
43. Economic exchanges without the use of money are referred to as _____________(barter exchange)
44. _____________ is the only institution which can issue currency in India.(RBI)
45. _____________ Issues coins in India.(Government of India)
46. The principal motive for holding money is to carry out ______________(transactions.)
47. M1 and M2 are known as ______________(narrow money)
……………………………………………………………………………………….
48. cY shows the dependence of consumption on ________________(income)
49. Savings is that part of income that is ______________(not consumed)
50. Average propensity to consume (APC) is the consumption per unit of _____________(income)
51. _______________ is defined as addition to the stock of physical capital.(investment)
52. Size of the multiplier depends on the value of _____________(consumption)
53. 𝑰̅is a positive constant which represents the ____________ investment in the economy.(autonomous)
……………………………………………………………………………………………………………………………..
54. Non-paying users of public goods are known as _____________(free-riders)
55. Financial year runs from _________ to _________ in India.(1st April to 31 March)
56. Taxes imposed on goods imported into and exported out of India are called ____________(customs duties)
57. The Government may spend an amount equal to the revenue it collects.
This is known as ______________ (balanced)
58. Revenue deficit = Revenue expenditure - _________________(Revenue receipts)
…………………………………………………………………………………………………..
59. _____________ is the record of trade in goods and services and transfer payments.(Current Account )
60. _______is the records of trade in goods and services and transfer payments (Current Account)
61. ________________ account records all international transactions of assets.(Capital Account)
62. The price of foreign currency in terms of Domestic currency has increased and this is called
_________________ of domestic currency.(Depreciation)
63. ________________ is a mixture of a flexible and fixed exchange rate system.(managed floating)
64. The Bretton woods conference held in the year _________________(1944)

Match the following (each question carries 1 mark)

1. Market economy a. Government (3)

2. Service of a Teacher b. Private (1)
3. Centrally planned economy c. Skill (2)
4. Positive economics d. Evaluate the Mechanism (5)
5. Normative economics e. Functioning of Mechanism (4)

1. Demand curve a. d (P) = a – bp(2)

2. Linear demand curve b. Down ward sloping (1)
3. Unitary elasticity of demand c. Pen & ink (4)
4. Complementary goods d. A family of indifference curve (5)
5. Indifference Map e. ‫׀‬ed‫ = ׀‬1(3)

1. CRS a. ΔTC/ΔC (5)

2. SAC b. Long Run Average Cost (3)
3. LRAC c. Short Run Average Cost (2)
4. TFC + TVC = d. Constant Returns to scale (1)
5. SMC e. TC (4)

1. TR = a. Perfect information (5)

2. π = b. Zero profit(4)
3. AR = c. P x Q (1)
4. Normal Profit d. TR – TC (2)
5. Perfect competition e. TR/Q (3)

1. Adam smith a. Attraction of new firms (4)

2. Price ceiling b. Operation of invisible hand (1)
3. Market equilibrium c. Lower limit on price (5)
4. Possibility of supernormal profit d. Upper limit on price (2)
5. Price floor e. QD = QS (3)

1. Labour a. Non – Monetary exchange (5)

2. GDP b. Personal Disposable Income (4)
3. Inventory c. Gross Domestic Product (2)
4. PDI d. Stock variable (3)
5. Domestic service e. Wages (1)

1. SLR a. Government of India (2)

2. Circulation of coin b. Statutory Liquidity Ratio (1)
3. Money c. Broad money (4)
4. M3 and M4 d. Repo (5)
5. Repurchase agreement e. Medium of Exchange (3)

1. Savings a. APC (Average Propensity to consume) (3)

2. Raw Material b. 𝐶̅ + 𝐼 ̅ + c. Y (4)
3. Consumption per unit of income c. Intermediate good (2)
4. Aggregate demand for final goods d. Leads to rise in the prices in long run (5)
5. Excess demand e. Y – C (1)

1. SDR a. Dirty floating (5)

2. Balance of payment b. Flexible exchange rate (4)
3. Balance of trade c. Paper gold (1)
4. Floating exchange rate d. Trade in goods (3)
5. Managed floating e. Trade in goods and service (2)

Assignment and Project oriented Questions. (each question carries 5 marks)

1. A Consumer wants to consume two goods. The price of Bananas is Rs. 5 and the price of
Mangoes is Rs. 10. The consumer income is Rs. 40
(a) How much Bananas can she consumes if she spends her entire income on that good?
Ans. 1 Banana=Rs.5 and total income is Rs 40
40/5=8
Thus a consumer cans buy8banana if she spends entire income on Bananas.
 (b) How much Mangoes can she consumes if she spends her entire income on that good?
Ans. 1 Mango=Rs.10 and total income is Rs.40
40/10=4
Thus a consumer cans buy 4 Mangoes if she spends entire income on mangoes.
(c) Is the slope of budget line downward or upward?
Ans. the budget line slopes downwards
(d) Are the bundles on the budget line equal to the consumer’s income or not?
Ans. yes, the bundles on the budget line are equal to the consumer’s income.
(e) If you want to have more of Bananas you have to give up Mangoes. Is it true?
Ans. Yes true, if we want to have more Bananas we have to give up mangoes
2. Compute the total revenue, marginal revenue and average revenue schedules in the
Following table when market price of each unit of goods is Rs. 10.
Quantity sold TR MR AR
0
1
2
3
4
5
6

Quantity sold TR(pxq) MR AR

(n-1) TR/q
0 - - -
1 1x10=10 10 10
2 2x10=20 10 10
3 3x10=30 10 10
4 4x10=40 10 10
5 5x10=50 10 10
6 6x10=60 10 10

3. Find the Missing products in the following table.

Factor 1 TP MP1 AP1
0 0 0 0
1 10 - 10
2 24 - 12
3 40 16 13.33
4 - 10 -
5 - 6 11.2
6 57 1 9.5

Factor 1 TP MP1 AP1

0 0 0 0
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5

4. Write a note on Demonetisation

Ans. Demonetisation is an act of cancelling the legal tender status of a currency unit in
circulation.
Anticipating positive changes on the liquidity structure as whole, nations often adopt
demonetisation policy as a measure to counterbalance the current economic condition. (Inflation
and to boost economy)
On the 8th November 2016, the Government of India announced the demonetisation. This was an
initiative taken to tackle the problems of corruption, circulation of fake currency etc. the
Denominations of all 500 and 1000 bank notes (legal tender) were removed from circulation and
they were launched new notes of 500 and 2000.
The public were deposit old currency notes (crunch notes exchange up to 4000) to their bank
account till 31st December 2016.
Old currency notes were acceptable as legal tender at petrol pumps, government hospitals and
payment of taxes, electric bills etc. Till 12th December2016
The new system was subjected to both appreciation and criticisms.
Appreciation: it brings more tax revenue to the government and controlling black money,
Increase in bank transactions, shift from cash transaction to electronic payments
 Criticisms: non availability of lower denominations of currencies, shortage of currency notes etc.
which made difficult in daily financial transactions of the people,
5. Prepare a budget on monthly income and expenditure of your family.
Ans.
Category Income (in Rs) Expenses (in Rs)
1. Actual Income 50,000
2. House maintenance 15,000
3. House rent 20,000
4. Grocery/fruits 1,500
5. Clothing 2,000
6. Electricity 1,500
bill/water 3,000
7. Others 7,000
8. Cash in hand

Total 50,000 50,000

6. Name the currencies of any five countries of the following.

Countries Currency
1. USA Dollar
2. UK Pound
3. Germany Euro
4. Japan Yen
5. China Yuan
6. Argentina Argentine peso
7. UAE Dirham
8. Russia Rubel

Answer the following questions in a sentence/word. (each question carries 1 mark)

1. Why does the problem of choice arise?

Ans. The problem of choice arises due to scarcity of resources and its alternative uses
2. What is market economy?
Ans. All economic activities are organised through the market (controlled by the private individuals)
3. What do you mean by centrally planned economy?
Ans. The government plans all important economic activities is known as centrally planned economy.
4. Give the meaning of micro economics.
Ans. Micro economics is a branch of economics, which study the behaviour of individual economic
agents in the market/economy.
5. What do you mean by positive economics?
Ans. In positive economic analysis, we study how the different mechanisms function and it study
‘what is’ and ‘what was’
6. What is normative economics?
Ans. In normative economic analysis, we try to understand whether these mechanisms are desirable or
not. And ‘what should be or what ought to be’
…………………………………………………………………………………………………………….
7. What is budget line?
Ans. the budget line consists two goods of all possible bundles which cost exactly equal to consumer
income (M). 𝑷𝟏 𝑿𝟏 +𝑷𝟐 𝑿𝟐 =M
8. What do you mean by cardinal utility Analysis?
Ans. Cardinal utility analysis expressed or it can be measured in cardinal numbers. Like 1, 2, 3… it
can added, subtracted or multiplied.
9. Give the meaning of marginal utility.
Ans. Marginal utility is the change in total utility due to consumption of one additional unit of a
commodity. 𝑴𝑼𝒏 =𝑻𝑼𝒏 -𝑻𝑼𝒏−𝟏
10. What is Utility?
Ans. Utility means the want-satisfying power/capacity of a good or a service.
11. Expand MRS.
Ans. Marginal Rate of Substitution
12. What do you mean by Indifference curve?
Ans. The graphical representation of various combinations of two goods which provide the same
level of satisfaction to the consumer is called indifference curve.
13. What is demand?
Ans. Demand refers to the quantity of a good that a consumer willing to buy in a market at a
particular price at a particular time.
.........................................................................................................................................................................
14. What do you meant by Total product?
 Ans. Total product is the total output produced when a change in quantity of one variable input
alone is effected while all other inputs remain constant.
15. What is Average product?
𝑇𝑃𝐿
Ans. It is defined as the output per unit of variable input. 𝐴𝑃𝐿 = 𝐿

16. Give the meaning of Marginal product.

Ans. It is defined as the change in output per unit of change in the input when all other inputs are held
∆𝑻𝑷𝑳 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑢𝑡𝑝𝑢𝑡
constant. 𝑴𝑷𝑳 = or 𝑀𝑃𝐿 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑝𝑢𝑡
∆𝑳

17. Write the meaning of cost function of the firm.

Ans. The cost function of the firm, describes the least cost of producing each level of output given
prices of factors of production and technology.
18. What is total fixed cost?
Ans. In short run, some of the factors of production cannot be varied or fixed input is called total
fixed cost.
19. What is average fixed cost?
𝑇𝐹𝐶
Ans. Average fixed cost, dividing the total fixed cost value by the output value or AFC= 𝑞

……………………………………………………………………………………………………………
20. Define marginal revenue.
Ans. Marginal Revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
the firm’s output. MR= 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦

21. To which side does supply curve shift due to the technological progress?
Ans. Technological progress shifts the supply curve of the firm to the right side
22. Write the formula to calculate average revenue.
𝑻𝑹 𝑷∗𝒒
Ans.AR= 𝒒 = 𝒒

23. What is normal profit?

Ans. The minimum level of profit that is needed to keep a firm (profit is just enough to cover the
explicit costs and opportunity costs) in the existing business is defined as normal profit.
24. Give the meaning of super normal profit.
Ans. Profit of the firm (more than explicit and opportunity) earns over and above the normal profit.
…………………………………………………………………………………………..
25. Define market equilibrium.
26. Ans. Market equilibrium is a situation where market demand (aggregate) is equal to market supply
(aggregate).
27. What is equilibrium price?
Ans. The price at which Market is in equilibrium (Demand and Supply) is called equilibrium price.
28. What is price ceiling?
Ans. The government imposed upper limit on the price of a good or service is called price ceiling.
29. What is price floor?
Ans. The government imposed lower limit on the price of a good or service is called price floor.
30. Through which legislation, the government ensures that the wage rate of the labourers does not fall
below a particular level?
Ans. Through the minimum wage legislation, the government ensures that the wage rate of the labours
does not fall below a particular level.
………………………………………………………………………………….
31. What is monopoly?
Ans. A market structure, where there is one firm (single seller) and many buyers is called a
monopoly.
32. Give the meaning monopolistic competition.
Ans. A market structure, where the number of firms is large, there is free entry and exit of firms,
but the goods produced by them are not homogeneous. Such a market structure is called monopolistic
competition.
33. Give the meaning of oligopoly market.
Ans. If the market of a particular commodity consists of more than two sellers but the number of
sellers is few, example Automobile Industry.
34. What is duopoly?
Ans. The special case of oligopoly where there are exactly two sellers in termed duopoly.
…………………………………………………………………………….
………………………Introductory Macroeconomics………………………
35. Who are economic agents?
Ans. Decision making units/economic agents of the economy like Consumer, Producer, Government,
Corporation, banks.
36. What does classical school of thought say?
Ans. All the labourers who are ready to work will find employment and all the factories will be
working at their full capacity is known as classical school of thought.
37. Give the meaning of imports.
Ans. The economy may buy goods from the rest of the world is called imports.
38. Name the well-known work of Adam Smith.
Ans. An Enquiry into the Nature and Cause of the Wealth of Nations (1776)
39. What do you mean by wage rate?
Ans. The price at which labour services is sale and purchase is called wage rate.
…………………………………………………………………………………………………….
40. What do you mean by final goods?
Ans. Which goods are ready for sold to the consumers for final use. And will not pass through any
more stages of production or transformations is called a final good.
41. Expand CPI.
Ans. Consumer Price Index.
42. Expand 𝐺𝑁𝑃𝑀𝑃
Ans. Gross National Product at Market Price.
43. How do you get net value added?
Ans. If we deduct the value of depreciation from gross value added, we obtain net value added
44. Give the meaning of GDP.
Ans. GDP is the market value of all final goods and services produced within a domestic territory of
a country measured in a year.
45. Give the meaning of Intermediate goods.
Ans. Which products don’t end up in final consumption and are not capital goods either. (Material
inputs like steel sheets, copper)
46. What is Depreciation?
Ans. The regular wear and tear of capital goods is called Depreciation.
47. How do we get personal Disposable income?
Ans. If we deduct the personal tax payments and non-tax payments form personal income, we obtain
personal disposable income.
48. Write the equation of GVA at market prices.(Gross value added)
Ans. GAV at market prices=GAV at basic price +Net product taxes
49. What is GDP deflator?
Ans. The ratio of nominal to real GDP is a well-known index of prices. This is called GDP deflator.
𝐺𝐷𝑃
GDP deflator= 𝑔𝑑𝑝

……………………………………………………………………………………………………….
50. What do you mean by barter system?
Ans. Economic exchanges without the mediation of money are referred to as batter system.
51. Give the meaning of money.
Ans. Anything that is commonly accepted as a medium of exchange for good and services and also acts
as measure of value is called money.
52. What is time deposit?
Ans. Fixed deposits, have a fixed period to maturity are referred to as time deposits.
53. What is Fiat Money?
 Ans. The currency notes and coins are called fiat money. They do not have intrinsic value like a
gold or silver coin. It is only promise from the governor of RBI
54. Write the meaning of ‘High Powered Money’.
Ans. The currency issued by the central bank (RBI) coins issued by government can be held by the
public or by the commercial banks.
55. Expand CRR.
Ans. Cash Reserve Ratio.
56. What is Bank Rate?
Ans. It refers to the rate of interest charged by RBI for providing loans to the commercial banks.
……………………………………………………………………………………………………………
57. Write the meaning of autonomous consumption.
Ans. If income is zero, some consumption still takes place. Since this level of consumption is
independent of income is called autonomous consumption.
58. Give the meaning of Marginal propensity to save (MPS)
Ans. It is the change in savings per unit change in income. It is denoted by‘s’
59. Define Average Propensity to save (APS).
𝑺
Ans. It is the saving per unit of income i.e.𝒀.

60. Write the meaning of full employment level of income.

Ans. Full employment level of income is that level of income where all the factors of production are
fully employed in the production process.
61. Mention two fiscal variables which influence aggregate demand.
Ans. The factors which cause change in aggregate demand are (a) Change in consumption, (b) change
in investment.
62. Write the formula of MPC.
∆𝐶
Ans. . MPC=∆𝑌=c

…………………………………………………………………………………………………………
63. What are public goods?
Ans. The Government provides certain goods and services which cannot be provided by the market
mechanism i.e. national defence, roads, government administration
64. Who are ‘free-riders’?
Ans. Non-paying users of public goods and services are known as free riders.
65. What do you meant by public provision?
Ans. Public provision means that they are financed through the budget and can be used without any direct
payment.
66. Give the meaning of progressive Tax.
 Ans. In which higher the income or profit, the higher the tax rate is called progressive tax.
67. What are Revenue receipts?
Ans. All those receipts of the government which are non-redeemable, that is, they cannot be reclaimed
form the government. Example: tax and non-tax revenues.
68. Write the meaning of capital receipts.
Ans. All those receipts of the government which create liability or reduce financial assets are termed
as capital receipts. For example: borrowings, (internal and external) sale of government assets.
69. Give the meaning of Revenue Expenditure.
Ans. It is expenditure incurred for purposes other than the creation of physical or financial assets of
the central government. Example: normal function of the government, various services, interest
payments, grants etc.
70. Give the meaning of Capital Expenditure.
Ans. There are expenditures of the government which result in creation of physical or financial assets
of reduction in financial liabilities. Example: land, building, machinery etc.
71. Expand FRBMA.
Ans. Fiscal Responsibility and Budget management act,2003
72. What is primary deficit?
Ans. It refers to the excess of fiscal deficit over interest payments.
Primary deficit= fiscal deficit –net interest liabilities.
………………………………………………………………………………………………..
73. What do you mean by open economy?
Ans. It is one which interacts with other countries through various channels.
74. What is Balance of payment?
Ans. It is record, the transactions in goods and services and assets between residents of a country with
the rest of the world for a specified period typically one year.
75. What is balance of trade?
Ans. It is the difference between the value of exports and value of imports of goods of country a
given period of time.
76. What do you mean by fixed exchange rate?
Ans. This exchange system, the government fixes the exchange rate at particular level and time.
77. Give the meaning of official reserve sale.
Ans. The RBI sells foreign exchange when there is deficit in foreign exchange market is called official
reserve sale.
78. Give the meaning of managed floating.
Ans. Managed floating exchange rate is a mixture of a flexible and fixed exchange rate system.
 Answer the following questions in 4 sentences. (Each question carries 2 marks)
1. Mention the central problems of an economy.
Ans.
• What to produce It is to decide what goods and services are to be produced and in what quantities in
the economy
• How to produce: It is decision on allocation of resources relates to labour intensive technique and
by using capital intensive technique
• For whom to produce: It is the problem of distributing the goods and services, among the different
section of the people in the society.

2. Distinguish between Micro and Macroeconomics.

Ans.
Microeconomics Macroeconomics
• We study the behaviour of individual • We study the economy as a whole by
economic agents in the markets for focusing on aggregate measures such
different goods and services and as total output, employment and
• Microeconomics tries to figure out how aggregate price level.
prices and quantities of goods and services • We study the levels of aggregate
are determined through the interaction of measures are determined and how the
individuals in these economies. levels of these aggregate measures
• Measures particular time change over time.
• What do price in particular market • What is the level of output?
• Why do prices rise?

3. Distinguish between positive and normative economics.

Ans.
Positive economics Normative economics
• It deals with things as they are. • It deals with things what they should
• It study how the different mechanisms be.
function • It study to understand whether these
• It is a study of cause and effect of a mechanisms are desirable or not
problem. • It is study of rightness or wrongness
• It is based on facts and figures it refuses to of things
pass value judgments. • It is passes value judgments.

4. What do you mean by production possibility set?

Ans.
• The collection of all possible combinations of the goods and services that can be produced from a given
amount of resources and given stock of technological knowledge is called the production possibility set of
the economy.
• For example an economy which can produce corn or cotton by suing its resources.
Possibilities Corn Cotton
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0

5. What is opportunity cost?

Ans.
• The concept of opportunity cost is applicable to the individual as well as the society. It is also called the
economic cost.
• The cost of next best alternative scarified in order to produce that good.
• If we want to have more of one of the goods, we will have less of the other good. Thus, there is always a
cost of having a little more of one good terms of the amount of the other good that has to be forgone.

6. What is production possibility frontier?

Ans.
• The PPF can be defined as a graph plotted by joining various combinations of two goods that can be
produced by an economy fully utilizing available resources and technology.

7. What are the difference between budget line & budget set?
Ans.
Budget line Budget set
 • A budget line The alternative • A budget set is a collection of
combinations of two different all bundles available to a
goods that can be purchased consumer at the prevailing
with a given income and given market price at a given level
prices of the two goods of income.
• 𝑷𝟏 𝒙𝟏 + 𝑷𝟐 𝒙𝟐=M • 𝑷𝟏 𝒙𝟏 + 𝑷𝟐 𝒙𝟐≤M
• The budget line consists of all • All bundles in the positive
bundles which cost exactly to quadrant which are on or
M(income of consumer) on the below the line are included in
line budget set.

8. What do you mean by inferior goods? Give example?

Ans.
• Inferior goods are the part of normal goods
• There are some goods the demands for which move in the opposite direction of the income
consumer. Such goods are called inferior goods.
• As the income of the consumer increases, the demand for an inferior goods falls.
• Example low quality food like coarse cereals Ragi, Sajje, Araka Nillet

9. What is monotonic preference?

Ans.
• The consumer prefers the bundle which as more of at least one of the goods and no less of the other
goods as compared to the other bundle.
• Consumer’s preferences are assumed to be two bundles(𝑿𝟏 𝑿𝟐 𝒂𝒏𝒅 𝒀𝟏 𝒀𝟐 )
• If (𝑿𝟏 𝑿𝟐 ) has more of at least one of the goods and no less of the other goods compared to (
𝒀𝟏 𝒀𝟐 ).
• Consumer prefers (𝑿𝟏 𝑿𝟐 ) 𝒕𝒐 (𝒀𝟏 𝒀𝟐 )

10. State the law of demand.

Ans.
 • The law of demand states that all other tings remaining constant(Price of other goods, consumer
income, his tastes and preferences)
• The relation between the consumer’s demand for a goods and the price of the goods is to be
negative in general.
• The amount of a good that a consumer would choose is likely to increase when the price of the
good falls and it is likely to decrease with a rise in the price of the good.

11. Mention two different approaches which explain consumer behaviour.

Ans.
• The two different approaches that explain consumer behaviour
• A. Cardinal Utility Analysis:-Utility expressed in numbers. For example, we can measure the utility
derived from a commodity and say, this commodity gives me 50units of utility.
• B. Ordinal Utility Analysis: - Utility expressed in rank. The consumer does not measure utility in
numbers, though he often ranks various consumption bundles. For example consumer prefers apple or
banana

12. What do you mean by price elasticity of demand?

Ans.
• Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its
price.
• It defined as the percentage change in demand for the goods divided by the percentage change in its price.
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒅𝒆𝒎𝒂𝒏𝒅 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒈𝒐𝒐𝒅
• 𝒆𝑫 =𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒕𝒉𝒆 𝒑𝒓𝒊𝒄𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒈𝒐𝒐𝒅

13. What is Isoquant?

Ans.
• It is alternative way of representing the production function.
• An isoquant is the set of all possible combinations of the two inputs (labour and capital) that yield the
same maximum possible level of output. Each isoquant represents particular level of output and is
labelled with that amount of output.
• When marginal products are positive, with greater amount of one input, the same level of output can be
produced only using lesser amount of the other. Therefore isoquants are negatively sloped.

14. Give the meaning of the concepts of short run and long run.
Ans.
 • In the short run, some of the factors of production cannot be varied (Remain fixed). Building,
Machine etc.
• In the short run, can adjust only variable inputs.(labour or capital)
• In order to increase the production of output by increasing variable inputs. (adding the fixed and variable
costs) TC=TVC+TFC
• In long run all inputs are variable. (No fixed).
• The Total cost is variable costs in the long run
• If increase output in the long run by increase long run marginal cost.

15. Mention the types of Returns to scale.

Ans.
• Increasing returns to scale-(IRS)
• Constant returns to scale-(CRS)
• Diminishing returns to scale-(DRS)

16. Name the short run costs.

Ans.
• Total fixed costs, Total variable costs, Total costs
• Average fixed costs, Average variable costs,
• Short run average costs, Short run Marginal costs.

17. What are long run costs?

Ans.
• Long run average costs (LRAC)
• Long run Marginal costs (LRAC)

18. Mention the conditions needed for profit by a firm under perfect competition.
Ans.
• The price “P” Must equal to MC
• Marginal cost must be non-decreasing at 𝑞0
• For the firm to continue to produce, in the short run price must be
greater than the average variable costs (p> 𝑨𝑽𝑪)
In the long run, price must be greater than the average cost(P> 𝑨𝑪)

19. Give the meaning of shut down point.

 Ans.
• The firm produces positive output is the point of minimum AVC
where the SMC curve cuts the AVC curve. Below this, there will be
no production. This point is called short run shut down point of the
firm
• In long run, the shutdown point is the minimum of LRAC curve.

20. Write the meaning of opportunity cost with an example.

Ans.
• Opportunity cost of some activity is the gain foregone from the
second best activity.
• If a person is having 1 acre of land he can cultivate paddy or wheat.
By cultivating paddy; earns 40,000. If he cultivates wheat, he may
earn 30,000. In this process of cultivating paddy he has to sacrifice
30,000. So the opportunity cost of cultivating of paddy is 30,000

21. Mention the two determinants of a firm’s supply curve.

Ans.
• Determinants of a firm’s supply curve are two factors.
• Technological progress:-an organisational innovation by the firm, the
same levels of capital and labour now produce more units of
output and shifts the supply curve of the firm to the right at any
given market price. (firm now supply more units of output)
• Input price: - If the price of an input (the wage rate of labour)
increase, the cost of production rises. Consequent increase in the
firm’s average cost and MC at any level of output is usually; there
is a leftward shift. At any given market price.

22. Give the meaning of price elasticity of supply and write its formula.
Ans.
• The price elasticity of a good measures the responsiveness of
quantity supplied to changes in the price of the good. More
specifically, the price elasticity of supply, denoted by 𝒆𝒔
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒔𝒖𝒑𝒑𝒍𝒊𝒆𝒅
• at 𝒆𝒔 = 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

23. Define equilibrium price and Quantity.

Ans.
• Equilibrium is defined as a situation where the plans of all consumers and firms are the market
match and the market clears.
• The price at which equilibrium (consumer and firms) is reached is called equilibrium price. It is
denoted by (𝑷∗ )
• The quantity bought and sold at particular price is called equilibrium quantity. (𝒒𝑫 (𝑷∗ ) = 𝒒𝑺 (𝑷∗)

24. How price is determined, when fixed number of firms exist in perfect competition.
Ans.
• The price is determined by the market forces, in fixed number of
firms exist in perfect competition.
• An equilibrium is a point where the market supply curve
interactions the market demand and supply till demand equals
market supply.
• (𝒒𝑫 (𝑷∗ ) = 𝒒𝑺 (𝑷∗)

25. Write any two possible ways in which simultaneous shift of both demand and supply curves.
Ans.
• Both supply and demand curve shift rightwards.
• Both supply and demand curve shift leftwards.
• Supply curve shift leftward and demand curve shifts rightwards.
• Supply curve shift rightward and demand curve shifts leftwards

26. What is marginal Revenue product of labour (𝑴𝑹𝑷𝑳 )

Ans.
• Each extra units of labour, she gets an additional benefit equal to
marginal revenue times marginal product which is called marginal
revenue product of labour (𝑴𝑹𝑷𝑳 ) the firm employs labour up to the
point W= 𝑴𝑹𝑷𝑳 and 𝑴𝑹𝑷𝑳 = MRX𝑴𝑷𝑳

27. Distinguish between excess demand and excess supply.

Ans.
• Excess supply: - If at a particular price, market supply is greater
than market demand, we say that there is an excess supply in the
market at that price. qs(p)>qd (P)
 • Excess demand: -If market demand exceeds market supply at a
price, it is said that excess demand exists in the market at that price.
qs(p)< qd (P)

28. How wage is determined in the labour market?

Ans.
• The wage rate is determined at the intersection of the demand and
supply of labour where the demand and supply of labour balance.
• with upward sloping supply of labour curve and downward sloping
labour demand curve
• Wage rate is determined at the point where these two curves
intersect.

29. State the meaning of average revenue and marginal revenue.

Ans.
• Average revenue is the revenue received by the firm per unit of
𝑻𝑹
commodity sold .AR= 𝑸

• Marginal revenue refers to the additional revenue received by selling

one more unit of a commodity. MR=𝑻𝑹𝒏 -𝑻𝑹𝒏−𝟏

30. State the relationship between marginal revenue and price elasticity of demand.
Ans.
• When MR is positive , Price elasticity of demand will be more
than 1
• When MR is negative, Price elasticity of demand will be less
than 1.
• When MR is zero, Price elasticity of demand would be 1.
• When the quantity of production increases, both MR and Price
elasticity of demand deceases.

31. Write the meaning of monopolistic competition and give an example.

Ans.
 • Where the number of firms is large, there is free entry and exit of
firms. But the goods produced by them are not homogeneous is called
monopolistic competition.
• For example soaps, biscuits, (daily using products)

32. Write the features of monopoly.

Ans.
• There is single seller is called monopoly. He is price maker
• High barriers to entry new firms
• There is no different between firm and industry
• No close substitutes,

33. What are the features of capitalistic economy?

Ans.
• Production activities are mainly carried out by capitalist enterprises.
• A typical capitalist enterprise has one or several entrepreneurs
• Private ownership of means of production.
• Selling out put in the market.
• More Profit is the objective of the capitalist

34. Name and write the meaning of two kinds of trade in external sector.
Ans.
• All the countries of the world are also engaged in external trade with
the external sector can be of two kinds
• Exports:- The domestic country may sell goods to the rest of the
world
• Imports: - The economy may also buy goods from the rest of the
world.
• Inflow of capital:- Capital from foreign countries
• Outflow of capital: - The domestic country may be exporting capital
to foreign countries.

35. Who are the macroeconomic decision makers (Players)?

Ans.
 • Macro-economic Policies are pursued by the state itself
or statutory bodies like RBI, Securities and Exchange
Board of India (SEBI), and Similar institutions.

36. What are the four factors of production? Mention their rewards.
Ans.
• Rent for Land
• Wages for Labour
• Interest for Capital
• Profit for Organization

37. Distinguish between stock and flow. Give example.

Ans.
• Flows are defined over a period of time. Capital goods or consumer durables once produced do not
wear to serve us through different cycles of production. The buildings or machines a factory is there
irrespective of the specific time period. (There can be added or deduction )
• Stock are defined at a particular point of time:- we can measure a changes a change in stock over a
specific period of time like how many machines were added this year
• Example: -Suppose a tank is being filled with water coming from a tap per minute is a flow. How
much water there is in the tank at a particular point of time is a stock

38. What is the difference between consumer goods and capital goods?
Ans.
• Consumption goods: - goods like food and clothing and services are consumed when purchased their
ultimate consumers are called consumption goods or consumer goods.
• Capital goods: - where are some goods that are of durable character which are used in the production
process. Like Tools, implements and machines. While they make production of other commodities (they
themselves don’t get transformed in the production process. They are also final goods yet they are not final
goods to be ultimately consumed.)

39. Mention 3 Methods of measuring GDP (National Income).

Ans.
• The product or value added method: - The national income is estimated by aggregating the value of all
final goods and services produced in a country during a year.
• Expenditure Method: - The total final expenditure incurred on goods and services is added up.
 (consumers, investors and governments purchase goods and services in a year)
• Income Method:- The sum of final expenditures in the economy must be equal to the incomes received
by all the factors of production taken together .it is simple idea that the revenues earned by all the firms
put together must be distributed among the factors of production as rent, wages, interest, profits

40. What do mean by externalities? Mention its two types.

Ans.
• Externalities:-It refer to the benefits (or harms)a firm or an individual causes to another for which
they are not paid (or penalised).Externalities do not have any market in which they can be bought and
sold. There are two types of externalities. They are –positive and negative externalities Construction of
rods is positive externalities for economic activity but it creates the problem of pollution.

41. Write the equation of 𝐺𝐷𝑃𝑀𝑃 and 𝐺𝐷𝑃𝐹𝐶 .

Ans.
• 𝑮𝑫𝑷𝑴𝑷 =C+I+G+X-M
• 𝑮𝑫𝑷𝑭𝑪 =𝑮𝑫𝑷𝑴𝑷 –NIT net indirect taxes

42. Write the difference between nominal and real GDP.

Ans.
Nominal GDP Real GDP
• It is simply the value of GDP at the current • It is the value of GDP at the base year
prevailing prices. price index
• The total money value of goods and services • The total money value of goods and
produced in a country during a year expressed at services produce in a county during a year,
the current price evaluated at some constant set of
• It dos to give clear pictures of the economy. prices(base year/constant pries)
• It gives clear picture of the economic
conditions.

43. Mention any two functions of money.

Ans.
• Primary functions ,Secondary functions, contingent functions
• Medium of exchange: - It solved the problem of double coincidence of wants under barter system; it is
generally accepted through medium of exchange.
• Measure of value or unit of value account: - It is overcome the lack of common measure of value problem
of barter system. As due to the presence of money, any goods and services can change with easy without any
loss of value.
 44. Give the meaning of CRR and SLR.
Ans.
• CRR:-It refers to the fractions of total deposits that each commercial bank
must keep with the central bank as reserve. (No interest is paid on these
reserves.)
• SLR:-It refers to the fraction of total deposits (demand and time deposits) that
each commercial bank keeps with themselves in liquid assets as reserve.

45. State the credit control instruments of RBI.

Ans.
• The central bank controls the money supply in the economy in various ways. It can be
broadly classified in to two types a. Quantitative Methods b. Qualitative Methods
• Reserve Rations (SLR and CRR),Open market operation, Bank rate policy are the
quantitative methods
• Margin requirements, Discourage or encourage lending which is done through moral
suasion.

46. Mention the two motives of demand for money.

Ans.
• The two motives of demand for money, The transaction motive and The
speculative motive
• People holding money is to carry out transactions motives (day to day
expenditure )
• People holding their wealth in the form of bonds, (future stream of
monetary returns over a certain period of time) for market benefit.

47. How does bank rate influence money supply?

Ans.
• The RBI can influence money supply by changing the rate at which it
gives loans to the commercial banks is called Bank Rate. By increasing
the bank rate, loans taken by commercial banks become more expensive;
this reduces the reserves held by the commercial bank and hence
decreases money supply.
• A fall in the bank rate, loans taken by commercial banks become cheaper;
 this increase the reserves held by the commercial bank and hence
increase the money supply.

48. What role of RBI is known as ‘Lender of Last Resort’?

Ans.
• RBI accepts deposits, grant loans in various forms to the commercial banks. It is for
this reason, central bank is considered as a “Lender of last resort”, as it gives loans
to the bank when they fail to raise funds from any other sources.

49. Write the meaning of excess demand and deficient demand.

Ans.
• The situation when aggregate demand is more than the aggregate supply
corresponding to full employment level of output in the economy is called excess
demand. It leads to rise in prices in the long run.
• The situation when aggregate demand is less than the aggregate supply
corresponding to the full employment level of output in the economy is called
deficit demand.

50. Give the meaning of investment multiplier. Write its formula.

Ans.
• The ratio of the total increment in equilibrium value of final goods output to the
initial increment in autonomous expenditure is called the investment multiplier of
the economy.
∆𝑌 𝐼 1
• The investment multiplier =∆𝐴̅=1−𝑐=𝑆

51. Give the meaning of Paradox of thrift.

Ans.
• If all the people of the economy increase the proportion of income they save (i.e. if
the MPS of the economy increases) the total value of savings in the economy will not
increase-it will either decline or remain unchanged is called paradox of thrift

52. Write the difference between Public provision and Public production.
Ans.
Public provision Public production
 • It means that they are • Public goods/production is
financed through the budget produced by the government
and can be used without any or the private sector. (for the
direct payment. people)
• For Example, NH Roads, • When goods are produced
dams, irrigation directly by the government it
is called public production.
• For example, Primary health
care centres, government
schools hospital,(paid
service)

53. Who are ‘Free riders’? Why are they called so?
Ans.
• Some users do not pay for the public goods and it is difficult and sometimes
impossible to collect fees for the public goods. These non-paying users are known as
free-riders.

54. Distinguish between surplus budget and deficit budget.

Ans.
• It is annual financial statement constitutes the budget document of the government.
• When tax collection exceeds the required expenditure, the budget is said to be
surplus.
• The most common feature of all most all countries is the situation when expenditure
exceeds its revenue, the budget is said to be deficit

55. Why public goods must be provided by the Government?

Ans.
• Government provides some goods and services like defence, roads, defence etc.
because the benefits of public goods are available to all (no restricted to any one)
• In case of public goods, there is no feasible way of excluding anyone form enjoying
the benefits of the goods. That is why public goods are called non excludable.
 56. Mention the non-tax revenues of the Central Government?
Ans.
• Non- tax revenue of the central government mainly consists of interest receipts on
account of loans by the central government.
• Dividends and profits on investment made by the government,
• Fees and other receipts for services rendered by the government
• Cash grants in- aid from foreign countries and international organisations.

57. Why the proportional income tax acts as automatic stabiliser?

Ans.
• The proportional income tax, acts as an automatic stabiliser- a shock absorber
because
• It makes disposable income and consumer spending less sensitive to fluctuations
in GDP;
• when GDP rises, disposable income also rise but by less than the rise in GDP
(because a part of it is siphoned off as taxes)
• During a recession when GDP falls, disposable income falls less
sharply,(consummation does not drop as much as it otherwise would have fallen had
the tax liability been fixed. )
• This reduces the fall in aggregate demand and stabilises the economy.

58. Mention the three linkages of open economy.

Ans.
• Output market linkage: - An economy can trade in goods and services with other
countries.
• Financial market linkage:-An economy can buy financial assets from other countries
and this gives investors the opportunity to choose between domestic and foreign assets.
• Labour market linkage: - firms can choose where to locate production and workers
to choose where to work. There are various immigration laws which restrict the
movement of labour between the countries.

59. What is the difference between current account and capital account?
Ans.
Current account Capital account
 • Current account is the record • Capital account is the record
of trade in goods and of all international
services and transfer transactions of assets.
payments It includes, • Investment(Direct
• Trade in goods,(Exports investment and portfolio
and import goods) investment)
• Trade in Service (Factors • External
income and non-factors borrowings(external
income) commercial borrowings short
• Transfer payments(consists term debt)
of gifts, remittances, and • External
grants) assistance(Government aid,
inter-governmental
multilateral and bilateral
loans)

60. When do surplus and deficit arises in Capital Account?

Ans.
• Surplus in Capital account arises when capital inflows (like receipt of loans from
abroad, sale of assets or shares in foreign companies) are greater the capital
outflows, whereas
• Deficit in capital account arises when capital inflows are lesser than capital
outflows.

61. What are the types of balance of trade?

Ans.
• Balance of Trade is the difference between the value of export and value of imports
of goods of a country in a given period of time.
• BOT is said to be in balance when exports of goods are equal to the imports of
goods.
• BOT is said to be in surplus it will arise if country exports more goods than what it
imports.
• BOT is said to be in deficit it will arise if country imports more goods than what it
exports.

62. Why do people demand foreign exchange?

Ans.
• People demand foreign because: they want to purchase goods and services from other
countries, send gifts to abroad, and purchase financial assets of a other country.
 • A arise in price of foreign exchange will increase the cost of purchasing (Indian
rupee)
• Other things remaining constant.

63. What is foreign exchange rate (forex rate)?

Ans.
• It is the price of one currency in terms of another. It links the currencies of different
countries and enables comparison of international costs and prices.
• For example, if we have to pay Rs 70 for $1 then the exchange rate is Rs 70 per
dollar.