Namma Kalvi 12th Economics Full Study Material em 220304

Namma Kalvi
Little Flower Matriculation Higher Secondary School

Nathakkarai, Thalaivasal – 636 112
12 - Economics
English Medium – Study Material
M.Varadarajan, M.Com., M.A., M.Ed., M.Phil.,

PG Assistant in Economics
E-mail: [email protected]
Mobile: 9786868699 & 9842868699
www.nammakalvi.in
12 - Economics
Table of Contents
S. No. Chapter Title Page No.
Chapter - 1 Introduction to Macro Economics 1
Chapter - 2 National Income 9
Chapter - 3 Theories of Employment and Income 17
Chapter - 4 Consumption and Investment Functions 26
Chapter - 5 Monetary Economics 37
Chapter - 6 Banking 49
Chapter - 7 International Economics 59
Chapter - 8 International Economic Organisations 70
Chapter - 9 Fiscal Economics 77
Chapter - 10 Environmental Economics 88
Chapter - 11 Economics of Development and Planning 96
Chapter - 12 Introduction to Statistical Methods and Econometrics 106
Thank You
M.Varadarajan, M.Com., M.A (Eco)., M.Ed., M.Phil.,

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12 – Economics
Chapter - 1
Introduction to Macro Economics

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Part - A
Multiple Choice Questions
1. The branches of the subject Economics is
(a) Wealth and welfare (b) Production and consumption
(c) Demand and supply (d) Micro and macro
2. Who coined the word „Macro‟?

(a) Adam Smith (b) J M Keynes (c) Ragnar Frisch (d) Karl Marx
3. Who is regarded as Father of Modern Macro Economics?

(a) Adam Smith (b) J M Keynes (c) Ragnar Frisch (d) Karl Marx
4. Identify the other name for Macro Economics.

(a) Price Theory (b) Income Theory (c) Market Theory (d) Micro Theory
5. Macro economics is a study of ____________.

(a) individuals (b) firms (c) a nation (d) aggregates
6. Indicate the contribution of J M Keynes to economics.

(a) Wealth of Nations (b) General Theory (c) Capital (d) Public Finance
7. A steady increase in general price level is termed as ____________.

(a) Wholesale price index (b) Business Cycle (c) Inflation (d) National Income
8. Identify the necessity of Economic policies.

(a) to solve the basic problems (b) to overcome the obstacles
(c) to achieve growth (d) all the above
9. Indicate the fundamental economic activities of an economy.

(a) Production and Distribution (b) Production and Exchange
(c) Production and Consumption (d) Production and Marketing
10. An economy consists of

(a) Consumption sector (b) Production sector (c) Government sector (d) All the above
11. Identify the economic system where only private ownership of production exists.
(a) Capitalistic Economy (b) Socialistic Economy
(c) Globalisic Economy (d) Mixed Economy
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12. Economic system representing equality in distribution is ____________.

(a) Capitalism (b) Globalism (c) Mixedism (d) Socialism
13. Who is referred as „Father of Capitalism‟?

(a) Adam Smith (b) Karl Marx (c) Thackeray (d) J M Keynes
14. The country following Capitalism is ____________.

(a) Russia (b) America (c) India (d) China
15. Identify The Father of Socialism.

(a) J M Keynes (b) Karl Marx (c) Adam Smith (d) Samuelson
16. An economic system where the economic activities of a nation are done both by the private
and public together is termed as ____________.
(a) Capitalistic Economy (b) Socialistic Economy
(c) Globalisic Economy (d) Mixed Economy
17. Quantity of a commodity accumulated at a point of time is termed as ____________.

(a) production (b) stock (c) variable (d) flow
18. Identify the flow variable.

(a) money supply (b) assests (c) income (d) foreign exchange reserves
19. Identify the sectors of a Two Sector Model.

(a) Households and Firms (b) Private and Public
(c) Internal and External (d) Firms and Government
20. The Circular Flow Model that represents an open Economy.

(a) Two Sector Model (b) Three Sector Model (c) Four Sector Model (d) All the above
Part - B
Answer the following questions in one or two sentences
21. Define Macro Economics.
(i) The word „Macro‟ is derived from the Greek word „Makros‟ meaning „large‟.
(ii) Hence, Macro Economics is the study of the economy as a whole.
(iii) It deals with aggregates such as national income, employment and output.
(iv) Macro Economics is also known as „Income Theory‟.
22. Define the term ‘Inflation’.
(i) Inflation refers to steady increase in general price level.
(ii) Estimating the general price level by constructing various price index numbers such as
Wholesale Price Index, Consumer Price Index, etc, are needed.
23. What is meant by an ‘Economy’?
A. J. Brown
 “A system by which people earn their living.”
(OR)
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J. R. Hicks
 “An economy is a cooperation of producers and workers to make goods and services that
satisfy the wants of the consumers.”
24. Classify the economies based on status of development.
(i) Developed economies (iii) Undeveloped economies
(ii) Underdeveloped economies (iv) Developing economies
25. What do you mean by Capitalism?
(i) Adam Smith is the „Father of Capitalism‟.
(ii) Capitalistic economy is also termed as a free economy or market economy where the role of
the government is minimum and market determines the economic activities.
26. Define ‘Economic Model’.
(i) A model is a simplified representation of real situation.
(ii) Economists use models to describe economic activities, their relationships and their
behaviour.
27. ‘Circular Flow of Income’ - Define.
(i) The circular flow of income is a model of an economy showing connections between
different sectors of an economy.
(ii) It shows flows of income, goods and services and factors of production between economic
agents such as firms, households, government and nations.
Part - C
Answer the following questions in about a paragraph
28. State the importance of Macro Economics.
(i) There is a need to understand the functioning of the economy at the aggregate level to
evolve suitable strategies and to solve the basic problems prevailing in an economy.
(ii) Understanding the future problems, needs and challenges of an economy as a whole is
important to evolve precautionary measures.
(iii) Macro economics provides ample opportunities to use scientific investigation to understand
the reality.
(iv) Macro economics helps to make meaningful comparison and analysis of economic
indicators.
(v) Macro economics helps for better prediction about future and to formulate suitable policies
to avoid economic crises.
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29. Describe the different types of economic systems.

I. Capitalistic Economy (Capitalism)
 Capitalistic economy is also termed as a free economy or market economy.
 Where the role of the government is minimum and market determines the economic
activities.
 The means of production in a capitalistic economy are privately owned.
II. Socialistic Economy (Socialism)
 Socialism is defined as a way of organizing a society in which major industries are owned
and controlled by the government.
III. Mixed Economy (Mixedism)
 In a mixed economy system both private and public sectors co-exist and work together
towards economic development.
30. Outline the major merits of capitalism.
(i) Automatic Working
 Without any government intervention, the economy works automatically.
(ii) Efficient Use of Resources
 All resources are put into optimum use.
(iii) Incentives for Hard work
 Hard work is encouraged and entrepreneurs get more profit for more efficiency.
(iv) Economic Progress
 Hard work is encouraged and entrepreneurs get more profit for more efficiency.
(v) Consumers Sovereignty
 All production activities are aimed at satisfying the consumers.
31. Indicate the demerits of socialism.
(i) Red Tapism and Bureaucracy
 As decision are taken by government agencies, approval of many officials and movement
of files from one table to other takes time and leads to red tapism.
(ii) Absence of Incentive
 The major limitation of socialism is that this system does not provide any incentive for
efficiency.
 Therefore, productivity also suffers.
(iii) Limited Freedom of Choice
 Consumers do not enjoy freedom of choice over the consumption of goods and services.
(iv) Concentration of Power
 The State takes all major decisions.
 The private takes no initiative in making economic decisions.
 Hence, the State is more powerful and misuse of power can also take place.
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32. Enumerate the features of mixed economy.

(i) Ownership of Property and Means of Production
 The means of production and properties are owned by both private and public.
 Public and Private have the right to purchase, use or transfer their resources.
(ii) Coexistence of Public and Private Sectors
 In mixed economies, both private and public sectors coexist.
 Private industries undertake activities primarily for profit.
 Public sector firms are owned by the government with a view to maximize social welfare.
(iii) Economic Planning
 The central planning authority prepares the economic plans.
 National plans are drawn up by the Government and both private and public sectors abide.
 In general, all sectors of the economy function according to the objectives, priorities and
targets laid down in the plan.
(iv) Solution to Economic Problems
 The basic problems of what to produce, how to produce, for whom to produce and how to
distribute are solved through the price mechanism as well as state intervention.
(v) Freedom and Control
 Though private has freedom to own resources, produce goods and services and distribute
the same, the overall control on the economic activities rests with the government.
33. Distinguish between Capitalism and Globalism.
Capitalism Globalism
1. The system where the means of production An economic system where the economic
are privately owned and market determines the activities of a nation are inter connected and
economic activities. inter dependent on each other nation.
2. The system is for national development. It aims at global development.
3. It is also called as free market economy It is also termed as extended capitalism.
34. Briefly explain the two sector circular flow model.
(i) There are only two sectors namely, household sector and
firm sector.
(ii) In a two-sector economy, production and sales are equal and
there will be a circular flow of income and goods.
(iii) The outer circle represents real flow and the inner circle
represents the monetary flow.
(iv) Real flow indicates the factor services flow from household
sector to the business sector.
(v) Goods and services flow from business sector to the
household.
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(vi) The basic identifies of the two-sector economy is as under:

Y=C+I
Y is Income C is Consumption I is investment
Part - D
Answer the following questions in one page
35. Discuss the scope of Macro Economics.
(i) National Income
 Measurement of national income and its composition by sectors are the basic aspects of
macroeconomic analysis.
 The trends in National Income and its composition provide a long term understanding of
the growth process of an economy.
(ii) Inflation
 Inflation refers to steady increase in general price level.
 Estimating the general price level by constructing various price index numbers such as
Wholesale Price Index, Consumer Price Index, etc, are needed.
(iii) Business Cycle
 Almost all economies face the problem of business fluctuations and business cycle.
 The cyclical movements (boom, recession, depression and recovery) in the economy need to
be carefully studied based on aggregate economic variables.
(iv) Poverty and Unemployment:
 The major problems of most resource - rich nations are poverty and unemployment.
 This is one of the economic paradoxes.
 A clear understanding about the magnitude of poverty and unemployment facilitates
allocation of resources and initiating corrective measures.
(v) Economic Growth
 The growth and development of an economy and the factors determining them could be
understood only through macro analysis.
(vi) Economic Policies
 Macro Economics is significant for evolving suitable economic policies.
 Economic policies are necessary to solve the basic problems, to overcome the obstacles and
to achieve growth.
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36. Illustrate the functioning of an economy based on its activities.

 The functioning of an economy by its activities is explained in flow chart.
(i) In an economy, the fundamental economic
activities are production and consumption.
(ii) The ultimate aim of these activities is to
achieve growth.
(iii) The „exchange activity‟ supports the
production and consumption activities.
(iv) The major economic activities include
transportation, banking, advertising,
planning, government policy and others.
(v) The major non-economic activities are
environment, health, education,
entertainment, governance, regulations etc.
(vi) Other economies such as import, export,
international relations, emigration,
immigration, foreign investment, foreign
exchange earnings, etc. also influence the
entire functioning of the economy.
37. Compare the features of capitalism and socialism.
S.No. Features Capitalism Socialism
1. Ownership of Means Private Ownership Public Ownership
of Production
2. Economic Motive Profit Social Welfare
3. Solution of Central Free Market System Central Planning System
Problems
4. Government Role Internal Regulation only Complete Involvement
5. Income Distribution Unequal Equal
6. Nature of Enterprise Private Enterprise Government Enterprise
7. Economic Freedom Complete Freedom Lack of Freedom
8. Major Problem Inequality Inefficiency
38. Compare the feature among Capitalism, Secularism and Mixedism.
S.
Features Capitalism Socialism Mixedism
No.
1. Ownership of Private Ownership Public Ownership Private Ownership
Means of and Public Ownership
Production
2. Economic Motive Profit Social Welfare Social Welfare and
Profit Motive
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3. Solution of Central Free Market System Central Planning Central Planning

Problems System System and Free
Market System
4. Government Role Internal Regulation Complete Limited Role
only Involvement
5. Income Unequal Equal Less unequal
Distribution
6. Nature of Private Enterprise Government Both Private and State
Enterprise Enterprise Enterprises
7. Economic Freedom Complete Freedom Lack of Freedom Limited Freedom
8. Major Problem Inequality Inefficiency Inequality and
Inefficiency
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12 – Economics
Chapter - 2
National Income

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Part - A
1. Net National product at factor cost is also known as
(a) National Income (b) Domestic Income (c) Per capita Income (d) Salary
2. Primary sector is ____________.

(a) Industry (b) Trade (c) Agriculture (d) Construction
3. National income is measured by using ____________ methods.

(a) Two (b) Three (c) Five (d) Four
4. Income method is measured by summing up of all forms of ____________.

(a) Revenue (b) Taxes (c) expenditure (d) Income
5. Which is the largest figure?

(a) Disposable income (b) Personal Income (c) NNP (d) GNP
6. Expenditure method is used to estimate national income in ____________.

(a) Construction sector (b) Agricultural Sector (c) Service sector (d) Banking sector
7. Tertiary sector is also called as ____________ sector.

(a) Service (b) Income (c) Industrial (d) Production
8. National income is a measure of the ____________ performance of an economy.

(a) Industrial (b) Agricultural (c) Economic (d) Consumption
9. Per capita income is obtained by dividing the National income by ____________.

(a) Production (b) Population of a country (c) Expenditure (d) GNP
10. GNP = ____________ + Net factor income from abroad.

(a) NNP (b) NDP (c) GDP (d) Personal income
11. NNP stands for ____________.

(a) Net National Product (b) National Net product
(c) National Net Provident (d) Net National Provident
12. ____________ is deducted from gross value to get the net value.
(a) Income (b) Depreciation (c) Expenditure (d) Value of final goods
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13. The financial year in India is ____________.

(a) April 1 to March 31 (b) March 1 to April 30
(c) March 1 to March 16 (d) January 1 to December 31
14. When net factor income from abroad is deducted from NNP, the net value is ____________.
(a) Gross National Product (b) Disposable Income
(c) Net Domestic Product (d) Personal Income
15. The value of NNP at production point is called ____________.

(a) NNP at factor cost (b) NNP at market cost (c) GNP at factor cost (d) Per capita income
16. The average income of the country is ____________.

(a) Personal Income (b) Per capita income (c) Inflation Rate (d) Disposal Income
17. The value of national income adjusted for inflation is called ____________.
(a) Inflation Rate (b) Disposal Income (c) GNP (d) Real national income
18. Which is a flow concept?

(a) Number of shirts (b) Total wealth (c) Monthly income (d) Money supply
19. PQLI is the indicator of _____________.

(a) Economic growth (b) Economic welfare
(c) Economic progress (d) Economic development
20. The largest proportion of national income comes from ____________.

(a) Private sector (b) Local sector (c) Public sector (d) None of the above
Part - B
21. Define National Income.
Alfred Marshall
 “The labour and capital of a country acting on its natural resources produce annually a
certain net aggregate of commodities, material and immaterial including services of all
kinds.
 This is the true net annual income or revenue of the country or national dividend”.
22. Write the formula for calculating GNP.
 GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad.
(C + I + G + (X-M) + (R-P))
C - Consumption
I - Investment
G - Government
X– M - Net export
R–P - net factor income from abroad
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23. What is the difference between NNP and NDP?

Basic difference NNP NDP
Meaning NNP refers to the market value of NDP is the value of net output of
output. the economy during the year.
Formula NNP = GNP - Depreciation allowance NDP = GDP - Depreciation
24. Trace the relationship between GNP and NNP.
Basic difference GNP NNP
Meaning GNP is the total measure of the flow of NNP refers to the value of the net
final goods and services at market value output of the economy during the
resulting from current production in a year.
country during a year, including net NNP is obtained by deducting the
income from abroad. value of depreciation.
Formula GNP at Market Prices = GDP at Market NNP = GNP – depreciation
Prices + Net Factor income from Abroad allowance
25. What do you mean by the term ‘Personal Income’?
(i) Personal income is the total income received by the individuals of a country from all sources
before payment of direct taxes in a year.
(ii) Personal income is never equal to the national income, because the former includes the
transfer payments whereas they are not included in national income.
26. Define GDP deflator.
(i) GDP deflator is an index of price changes of goods and services included in GDP.
Nominal GDP
(ii) GDP deflator = × 100
Real GDP
27. Why is self consumption difficult in measuring national income?
(i) Farmers keep a large portion of food and other goods produced on the farm for self
consumption.
(ii) The problem is whether that part of the produce which is not sold in the market can be
included in national income or not.
Part - C
28. Write a short note on per capita income.
(i) The average income of a person of a country in a particular year is called Per Capita Income.
(ii) Per capita income is obtained by dividing national income by population.
National Income
(iii) Per Capita income =
Population
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29. Differentiate between personal and disposable income.

Personal Income Disposable Income
1. Personal income is the total income received Disposable Income is also known as Disposable
by the individuals of a country from all sources personal income.
before payment of direct taxes in a year. It is the individual’s income after the payment
of income tax.
2. Personal income is never equal to the national This is the amount available for households for
income, because the former includes the consumption.
transfer payments whereas they are not
included in national income.
3. Personal Income = National Income – (Social Disposable Income = Personal income – Direct
Security Contribution and undistributed Tax.
corporate profits) + Transfer payments As the entire disposable income is not spent on
consumption.
Disposal income = consumption + saving
30. Explain briefly NNP at factor cost.
(i) NNP refers to the market value of output.
(ii) Whereas NNP at factor cost is the total of income payment made to factors of production.
(iii) Thus from the money value of NNP at market price, we deduct the amount of indirect taxes
and add subsidies to arrive at the net national income at factor cost.
(iv) NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies
31. Give short note on Expenditure method.
(i) The total expenditure incurred by the society in a particular year is added together.
(ii) To calculate the expenditure of a society, it includes personal consumption expenditure, net
domestic investment, government expenditure on consumption as well as capital goods and
net exports.
(iii) GNP = C + I + G + (X - M)
C - Private consumption expenditure
I - Private Investment Expenditure
G - Government expenditure
X-M - Net exports
32. What is the solution to the problem of double counting in the estimation of national
income?
(i) Double counting is to be avoided under value added method.
(ii) Any commodity which is either raw material or intermediate good for the final production
should not be included.
(iii) For example, value of cotton enters value of yarn as cost, and value of yarn in cloth and that
of cloth in garments.
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(iv) At every stage value added only should be calculated.

33. Write briefly about national income and welfare.
(i) National Income is considered as an indicator of the economic wellbeing of a country.
(ii) The economic progress of countries is measured in terms of their GDP per capita and their
annual growth rate.
(iii) A country with a higher per capita income is supposed to enjoy greater economic welfare
with a higher standard of living.
(iv) But the rise in GDP or per capita income need not always promote economic welfare.
34. List out the uses of national income.
(i) To know the relative importance of the various sectors of the economy and their
contribution towards national income.
(ii) To formulate the national policies such as monetary policy, fiscal policy and other policies.
(iii) To formulate planning and evaluate plan progress.
(iv) To build economic models both in short - run and long - run.
(v) To make international comparison, inter - regional comparison and inter - temporal
comparison of growth of the economy during different periods.
(vi) To know a country’s per capita income which reflects the economic welfare of the country.
(vii) To know the distribution of income for various factors of production in the country.
Part - D
35. Explain the importance of national income.
 Nowadays the national income is regarded as accounts of the economy, which are known
as social accounts.
(i) To know the relative importance of the various sectors of the economy and their
contribution towards national income.
(ii) To formulate the national policies such as monetary policy, fiscal policy and other policies.
(iii) To formulate planning and evaluate plan progress; it is essential that the data pertaining to
a country’s gross income.
(iv) To build economic models both in short - run and long – run.
(v) To make international comparison, inter - regional comparison and inter - temporal
comparison of growth of the economy during different periods.
(vi) To know a country’s per capita income which reflects the economic welfare of the country.
(vii) To know the distribution of income for various factors of production in the country.
(viii) To arrive at many macro economic variables namely, Tax – GDP ratio, Current Account
Deficit - GDP ratio, Fiscal Deficit - GDP ratio, Debt - GDP ratio etc.
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36. Discuss the various methods of estimating the national income of a country.
 There are three methods of measuring national income.
I. Product Method or Value added method
(i) Product method measures the output of the country.
(ii) It is also called inventory method.
(iii) The gross value of output from different sectors like agriculture, industry, trade and
commerce, etc., is obtained for the entire economy during a year.
(iv) The value obtained is actually the GNP at market prices.
(v) Care must be taken to avoid double counting.
II. Income Method or Factor Earning Method
(i) This method approaches national income from the distribution side.
(ii) Under this method, national income is calculated by adding up all the incomes generated in
the course of producing national product.
(iii) Factor incomes are grouped under labour income, capital income and mixed income.
(iv) National income is calculated as domestic factor income plus net factor incomes from
abroad.
(v) Y = w + r + i +  + (R-P)
w = wages, r = rent, i = interest,  = profits, R = Exports and P = Imports
III. The Expenditure Method or Outlay method
(i) Under this method, the total expenditure incurred by the society in a particular year is
added together.
(ii) To calculate the expenditure of a society, it includes personal consumption expenditure, net
domestic investment, government expenditure on consumption as well as capital goods and
net exports.
(iii) GNP = C + I + G + (X - M)
C - Private consumption expenditure
I - Private Investment Expenditure
G - Government expenditure
X-M - Net exports
37. What are the difficulties involved in the measurement of national income?
 In India, a special conceptual problem is posed by the existence of a large, unorganised and
non-monetised subsistence sector where the barter system still prevails for transacting
goods and services.
 Here, a proper valuation of output is very difficult.
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(a) Transfer payments

(i) Government makes payments in the form of pensions, unemployment allowance, subsidies,
etc.
(ii) These are government expenditure.
(iii) But they are not included in the national income.
(b) Difficulties in assessing depreciation allowance
(i) The deduction of depreciation allowances, accidental damages, repair and replacement
charges from the national income is not an easy task.
(ii) It requires high degree of judgment to assess the depreciation allowance and other charges.
(c) Unpaid services
(i) A housewife renders a number of useful services like preparation of meals, serving,
tailoring, mending, washing, cleaning, bringing up children, etc.
(ii) She is not paid for them and her services are not directly included in national income.
(iii) Such services performed by paid servants are included in national income.
(d) Income from illegal activities
(i) Income earned through illegal activities like gambling, smuggling, illicit extraction of
liquor, etc., is not included in national income.
(ii) Such activities have value and satisfy the wants of the people but they are not considered as
productive from the point of view of society.
(e) Production for self-consumption and changing price
(i) Farmers keep a large portion of food and other goods produced on the farm for self
consumption.
(ii) The problem is whether that part of the produce which is not sold in the market can be
included in national income or not.
(f) Capital Gains
(i) Capital gains arise when a capital asset such as a house, other property, stocks or shares, etc.
is sold at higher price than was paid for it at the time of purchase.
(ii) Capital gains are excluded from national income.
(g) Statistical problems
(i) Statistical data may not be perfectly reliable, when they are compiled from numerous
sources.
(ii) Skill and efficiency of the statistical staff and cooperation of people at large are also equally
important in estimating national income.
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38. Discuss the importance of social accounting in economic analysis.

National Income and Social Accounting
(i) National income is also being measured by the social accounting method.
(ii) Under this method, the transactions among various sectors such as firms, households,
government, etc., are recorded and their interrelationships traced.
(iii) The social accounting framework is useful for economists as well as policy makers, because
it represents the major economic flows and statistical relationships among various sectors of
the economic system.
(iv) It becomes possible to forecast the trends of economy more accurately.
Social Accounting and Sector
(i) Under this method, the economy is divided into several sectors.
(ii) A sector is a group of individuals or institutions having common interrelated economic
transactions.
 The economy is divided into the following sectors:
(a) Firms
 Firms undertake productive activities.
 Thus, they are all organizations which employ the factors of production to produce goods
and services.
(b) Households
 Households are consuming entities and represent the factors of production, who receive
payment for services rendered by them to firms.
 Households consume the goods and services that are produced by the firms.
(c) Government sector
 The Government sector refers to the economic transactions of public bodies at all levels,
centre, state and local.
 The main function of the government is to provide social goods like defence, public health,
education, etc.
(d) Rest of the world
 Rest of the world sector relates to international economic transactions of the country.
 It contains income, export and import transactions, external loan transaction, and allied
overseas investment income and payments.
(e) Capital sector
 Capital sector refers to saving and investment activities.
 It includes the transactions of banks, insurance corporations, financial houses, and other
agencies of the money market.

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12 – Economics
Chapter - 3
Theories of Employment and Income

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Part - A
1. Every able bodied person who is willing to work at the prevailing wage rate is employed
called as ____________.
(a) Full employment (b) Under employment
(c) Unemployment (d) Employment opportunity
2. Structural unemployment is a feature in a ____________.

(a) Static society (b) Socialist society (c) Dynamic society (d) Mixed economy
3. In disguised unemployment, the marginal productivity of labour is ____________.

(a) Zero (b) One (c) Two (d) Positive
4. The main concention of the Classical Economic Theory is ____________.

(a) Under employment (b) Economy is always in the state of equilibrium
(c) Demand creates its supply (d) Imperfect competition
5. J.B. Say is a ____________.

(a) Neo Classical Economist (b) Classical Economist
(c) Modern Economist (d) New Economist
6. According to Keynes, which type of unemployment prevails in capitalist economy?

(a) Full employment (b) Voluntary unemployment
(c) Involuntary unemployment (d) Under employment
7. The core of the classical theory of employment is ____________.

(a) Law of Diminishing Return (b) Law of Demand
(c) Law of Markets (d) Law of Consumption
8. Keynes attributes unemployment to ____________.

(a) A lack of effective supply (b) A lock of effective demand
(c) A lack of both (d) None of the above
9. ____________ Flexibility brings equality between saving and investment.

(a) Demand (b) Supply (c) Capital (d) Interest
10. ____________ theory is a turning point in the development of modern economic theory.
(a) Keynes’ (b) Say’s (c) Classical (d) Employment
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11. The basic concept used in Keynes Theory of Employment and Income is ____________.
(a) Aggregate demand (b) Aggregate supply
(c) Effective demand (d) Marginal Propensity Consume
12. The component of aggregate demand is ____________.

(a) Personal demand (b) Government expenditure (c) Only export (d) Only import
13. Aggregate supply is equal to ____________.

(a) C + I + G (b) C + S + G + (x-m) (c) C + S + T + (x-m) (d) C + S + T + Rf
14. Keynes theory pursues to replace laissez faire by ____________.

(a) No government intervention (b) Maximum intervention
(c) State intervention in certain situation (d) Private sector intervention
15. In Keynes theory of employment and income, _____________ is the basic cause of economic
depression.
(a) Less production (b) More demand (c) Inelastic supply
(d) Less aggregate demand in relation to productive capacity
16. Classical theory advocates ____________.
(a) Balanced budget (b) Unbalanced budget (c) Surplus budget (d) Deficit budget
17. Keynes theory emphasized on ____________ equilibrium.

(a) Very short run (b) Short run (c) Very long run (d) Long run
18. According to classical theory, rate of interest is a reward for ____________.

(a) Investment (b) Demand (c) Capital (d) Saving
19. In Keynes theory, the demand for and supply of money are determined by ____________.
(a) Rate of interest (b) Effective demand (c) Aggregate demand (d) Aggregate supply
20. Say’s law stressed the operation of ____________ in the economy.

(a) Induced price mechanism (b) Automatic price mechanism
(c) Induced demand (d) Induced investment
Part – B
21. Define full employment.
Lerner
 Full employment as “that level of employment at which any further increase in spending
would result in an inflationary spiral of wages and prices”.
22. What is the main feature of rural unemployment?
(i) India’s rural economy has both unemployment and underemployment.
(ii) The major feature of rural unemployment is the existence of unemployment in the form of
disguised unemployment and seasonal unemployment.
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23. Give short note on Frictional or Temporary unemployment.

(i) Frictional unemployment arises due to imbalance between supply of labour and demand
for labour.
(ii) This is because of immobility of labour, lack of necessary skills, break down of machinery,
shortage of raw materials etc.
(iii) The persons who lose jobs and in search of jobs are also included under frictional
unemployment.
24. Give reasons for labour retrenchment at present situation.
(i) Modern technology being capital intensive requires less labourers and contributes to
technological unemployment.
(ii) Now a days, invention and innovations lead to the adoption of new techniques there by the
existing workers are retrenched.
(iii) Labour saving devices are responsible for technological unemployment.
25. List out the assumptions of Say’s law.
(i) No single buyer or seller of commodity or an input can affect price.
(ii) Full employment
(iii) There will be a perfect competition in labour and product market.
(iv) Money acts only as a medium of exchange.
(v) Long - run analysis.
26. What is effective demand?
(i) Effective demand denotes money actually spent by the people on products of industry.
(ii) The money which entrepreneurs receive is paid in the form of rent, wages, interest and
profit.
(iii) Therefore effective demand equals national income.
27. What are the components of aggregate supply?
(i) Aggregate (desired) consumption expenditure (C)
(ii) Aggregate (desired) private savings (S)
(iii) Net tax payments (T)
(iv) Personal (desired) transfer payments to the foreigners (Rf)
Aggregate Supply = C + S + T + Rf = Aggregate income generated in the economy
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Part – C
Answer the following questions in one Paragraph
28. Explain the following in short
(i) Seasonal unemployment (ii) Frictional unemployment (iii) Educated unemployment
I. Seasonal unemployment
(i) Seasonal unemployment occurs during certain seasons of the year.
(ii) In agriculture and agro based industries like sugar, production activities are carried out
only in some seasons.
(iii) These industries offer employment only during that season in a year.
II. Frictional unemployment
(i) Frictional unemployment arises due to imbalance between supply of labour and demand
for labour.
(ii) The persons who lose jobs and in search of jobs are also included under frictional
unemployment.
III. Educated unemployment
(i) Sometimes educated people are underemployed or unemployed when qualification does
not match the job.
(ii) Faulty education system, lack of employable skills, mass student turnout and preference for
white collar jobs are highly responsible for educated unemployment in India.
29. According to classical theory of employment, how wage reduction solve the problem of
unemployment diagrammatically explain.
(i) The classical economists believed in the existence of full employment in the economy.
(ii) According to Pigou, the tendency of the economic system is to automatically provide full
employment in the labour market when the demand and supply of labour are equal.
(iii) Assumes that full employment condition can be achieved by cutting down the wage rate.
(iv) Unemployment would be eliminated when wages are determined by the mechanism of
economy itself.
(a) When the wage rate is OW then the
E employment is ON.
and Productivity
Wages and Marginal
Revenue Productivity
W
Marginal
(b) As the wage rate is reduced to OW1 then the

1 1
W E employment has increased to ON1.
Revenue
(c) Prof. Pigou has taken this theory as base for

Wages
developing the solution of unemployment

O N N1
problem.
Employment
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30. Write short note on the implications of Say’s law.

(i) There is no possibility for over production or unemployment.
(ii) If there exist unutilized resources in the economy, it is profitable to employ them up to the
point of full employment.
(iii) As automatic price mechanism operates in the economy, there is no need for government
intervention.
(iv) Interest flexibility brings about equality between saving and investment.
(v) Money performs only the medium of exchange function in the economy, as people will not
hold idle money.
32. What do you mean by aggregate demand? Mention its components.
(i) In the Keynesian model, output is determined mainly by aggregate demand.
(ii) The aggregate demand is the amount of money which entrepreneurs expect to get by selling
the output produced by the number of labourers employed.
(iii) Therefore, it is the expected income or revenue from the sale of output at different levels of
employment.
(iv) Aggregate demand has the following four components.
(a) Consumption demand (c) Government expenditure
(b) Investment demand (d) Net Export ( export – import )
33. Explain about aggregate supply with the help of diagram.
Aggregate supply
(i) Aggregate supply function is an increasing function of the level of employment.
(ii) Aggregate supply refers to the value of total output of goods and services produced in an
economy in a year.
(iii) Aggregate Supply = C + S + T + Rf = Aggregate income generated in the economy
Diagram with Explanation
(i) Z curve is linear where money wages remains fixed; Z1 curve
is non – linear since wage rate increases with employment.
(ii) When full employment level of Nf is reached it is impossible

to increase output by employing more men.
(iii) So aggregate supply curve becomes inelastic (Vertical

straight line).
(iv) The slope of the aggregate supply curve depends on the

relation between the employment and productivity.
(v) Thus aggregate supply is an important factor in determining

the level of economic activity.
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34. Write any five differences between classism and Keynesianism.

S. No. Keynesianism Classicism
1. Short-run equilibrium Long-run equilibrium
2. Saving is a vice Saving is a social virtue
3. Macro approach to national problems Micro foundation to macro problems
4. State intervention is advocated Champions of Laissez-fair policy
5. Capitalism has inherent contradictions Capitalism is well and good
31. Explain Keynes’ theory in the form of flow chart.
Effective Demand = Output = Income = Employment
Flow Chart
Aggregate Supply Function Aggregate Demand Function
Consumption Function Investment Function
Size of Income Propensity to Marginal Efficiency Rate of Interest

Consumer (MPC) Capital (MEC)
Supply Price of Prospective yield from

Capital Capital
Liquidity preference of the Supply of Money in the

public Economy
Transaction Precautionary Speculative

Motive Motive Motive
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Part – D
Answer the following questions in about a page
35. Describe the types of unemployment.
(i) Cyclical Unemployment
 This unemployment exists during the downturn phase of
trade cycle in the economy.
 In a business cycle during the period of recession and
depression, income and output fall leading to widespread
unemployment.
 It is caused by deficiency of effective demand.
(ii) Seasonal unemployment

 This type of unemployment occurs during certain seasons
of the year.
 In agriculture and agro based industries like sugar,
production activities are carried out only in some seasons.
(iii) Frictional unemployment
 Frictional unemployment arises due to imbalance between supply of labour and demand
for labour.
 The persons who lose jobs and in search of jobs are also included under frictional
unemployment.
(iv) Educated unemployment
 Sometimes educated people are underemployed or unemployed when qualification does
not match the job.
 Faulty education system, lack of employable skills, mass student turnout and preference for
white collar jobs are highly responsible for educated unemployment in India.
(v) Technical Unemployment
 Modern technology being capital intensive requires less labourers and contributes to
technological unemployment.
 Now a days, invention and innovations lead to the adoption of new techniques there by the
existing workers are retrenched.
(vi) Structural Unemployment
 Structural unemployment is due to drastic change in the structure of the society.
 Lack of demand for the product or shift in demand to other products cause this type of
unemployment.
(vii) Disguised Unemployment
 Disguised unemployment occurs when more people are there than what is actually
required.
 This type of unemployment is found in agriculture.
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36. Critically explain Say’s law of market.

Say’s law of market
(i) According to Say, “When goods are produced by firms in
the economy, they pay reward to the factors of production.
(ii) The households after receiving rewards of the factors of
production spend the amount on the purchase of goods and
services produced by them.
(iii) Therefore, each product produced in the economy creates
demand equal to its value in the market.
Criticisms of Say’s Law

 The following are the criticisms against Say’s law:
(i) According to Keynes, supply does not create its demand. It is not applicable where demand
does not increase as much as production increases.
(ii) Automatic adjustment process will not remove unemployment. Unemployment can be
removed by increase in the rate of investment.
(iii) Money is not neutral. Individuals hold money for unforeseen contingencies while
businessmen keep cash reserve for future activities.
(iv) Say’s law is based on the proposition that supply creates its own demand and there is no
over production. Keynes said that over production is possible.
(v) Keynes regards full employment as a special case because there is under - employment in
capitalist economies.
(vi) The need for state intervention arises in the case of general over production and mass
unemployment.
37. Narrate the equilibrium between ADF and ASF with diagram.
Equilibrium between ADF and ASF
(i) Under the Keynes theory of employment, a simple two sector economy consisting of the
household sector and the business sector is taken to understand the equilibrium between
ADF and ASF.
(ii) All the decisions concerning consumption expenditure are taken by the individual
households, while the business firms take decisions concerning investment.
(iii) It is also assumed that consumption function is linear and planned investment is
autonomous.
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Level of Equilibrium Diagram

*There are two approaches to determination of the
equilibrium level of income in Keynesian theory.
(i) Aggregate demand – Aggregate supply approach
(ii) Saving – Investment approach
Diagram Explanation
(i) The aggregate demand and aggregate supply reach equilibrium at point E.
(ii) The employment level is No at that point.
(iii) At ON1 employment, the aggregate supply is N1 R1.
(iv) But they are able to produce M1 N1.
(v) The expected level of profit is M1 R1.
(vi) To attain this level of profit, entrepreneurs will employ more labourers.
(vii) The tendency to employ more labour will stop once they reach point E.
(viii) At all levels of employment beyond, ONo, the aggregate demand curve is below the
aggregate supply curve indicating loss to the producers.
(ix) Hence they will never employ more than ONo labour.
(x) Thus effective demand concept becomes a crucial point in determining the equilibrium
level of output in the capitalist economy or a free market economy in the Keynesian system.
38. Explain the differences between classical theory and Keynes theory.
S. No. Keynesianism Classicism
1. Short-run equilibrium Long-run equilibrium
2. Saving is a vice Saving is a social virtue
3. The function of money is a medium of The function of money is to act as a
exchange on the one side and a store of medium of exchange.
value on the other side.
4. Macro approach to national problems. Micro foundation to macro problems.
5. State intervention is advocated. Champions of Laissez-fair policy
6. Applicable to all situations – full Applicable only to the full employment
employment and less than full situation.
employment.
7. Capitalism has inherent contradictions. Capitalism is well and good.
8. Budgeting should be adjusted to the Balanced budget.
requirements of economy.
9. Rate of interest is a flow. Rate of interest is a stock.
10. Demand creates its own supply. Supply creates its own demand.
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12 – Economics
Chapter - 4
Consumption and Investment Functions

Mobile: 9786868699 & 9842868699
Part - A
1. The average propensity to consume is measured by
(a) C/Y (b) CxY (c) Y/C (d) C+Y
2. An increase in the marginal propensity to consume will:

(a) Lead to consumption function becoming steeper
(b) Shift the consumption function upwards
(c) Shift the consumption function downwards (d) Shift savings function upwards
3. If the Keynesian consumption function is C=10+0.8 Y then, if disposable income is Rs 1000,

what is amount of total consumption?
(a) ` 0.8 (b) ` 800 (c) ` 810 (d) ` 0.81
4. If the Keynesian consumption function is C=10+0.8Y then, when disposable income is Rs

100, what is the marginal propensity to consume?
(a) ` 0.8 (b) ` 800 (c) ` 810 (d) ` 0.81
5. If the Keynesian consumption function is C=10+0.8 Y then, and disposable income is ` 100,
what is the average propensity to consume?
(a) ` 0.8 (b) ` 800 (c) ` 810 (d) ` 0.9
6. As national income increases

(a) The APC falls and gets nearer in value to the MPC.
(b) The APC increases and diverges in value from the MPC.
(c) The APC stays constant. (d) The APC always approaches infinity.
7. As increase in consumption at any given level of income is likely to lead

(a) Higher aggregate demand (b) An increase in exports
(c) A fall in taxation revenue (d) A decrease in import spending
8. Lower interest rates are likely to:

(a) Decrease in consumption (b) Increase cost of borrowing
(c) Encourage saving (d) Increase borrowing and spending
9. The MPC is equal to:

(a) Total spending / total consumption (b) Total consumption/total income
(c) Change in consumption /change in income (d) None of the above
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10. The relationship between total spending on consumption and the total income is the ______.
(a) Consumption function (b) Savings function
(c) Investment function (d) Aggregate demand function
11. The sum of the MPC and MPS is ____________.

(a) 1 (b) 2 (c) 0.1 (d) 1.1
12. As income increases, consumption will ____________.

(a) fall (b) not change (c) fluctuate (d) increase
13. When investment is assumed autonomous the slope of the AD schedule is determined by
the ____________.
(a) marginal propensity to invest (b) disposable income
(c) marginal propensity to consume (d) average propensity to consume
14. The multiplier tells us how much ____________ changes after a shift in _____________.
(a) consumption , income (b) investment, output
(c) savings, investment (d) output, aggregate demand
15. The multiplier is calculated as

(a) 1/(1-MPC) (b) 1/MPS (c) 1/MPC (d) a and b
16. It the MPC is 0.5, the multiplier is ____________.

(a) 2 (b) 1/2 (c) 0.2 (d) 20
17. In an open economy import ____________ the value of the multiplier.

(a) Reduces (b) Increase (c) Does not change (d) Changes
18. According to Keynes, investment is a function of the MEC and ____________.

(a) Demand (b) Supply (c) Income (d) Rate of interest
19. The term super multiplier was first used by

(a) J.R.Hicks (b) R.G.D. Allen (c) Kahn (d) Keynes
20. The term MEC was introduced by

(a) Adam Smith (b) J.M. Keynes (c) Ricardo (d) Malthus
Part – B
21. What is consumption function?
(i) The consumption function or propensity to consume refers to income consumption
relationship.
(ii) It is a “functional relationship between two aggregates viz., total consumption and gross
national income.”
(iii) Symbolically, the relationship is represented as
C = f (Y)
Where, C = Consumption Y = Income f = Function
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22. What do you mean by propensity to consume?

(i) The consumption function or propensity to consume refers to income consumption
relationship.
(ii) When income increases consumption also increases.
23. Define average propensity to consume (APC).
(i) The average propensity to consume is the ratio of consumption expenditure to any
particular level of income.”
(ii) C
APC =
Y
Where, C = Consumption Y = Income
24. Define marginal propensity to consume (MPC).
(i) The marginal propensity to consume may be defined as the ratio of the change in the
consumption to the change in income.
(ii) ΔC
MPC =
ΔY
ΔC = Change in Consumption MPC is positive but less than unity
ΔY = Change in Income
25. What do you mean by propensity to save?
(i) Propensity to save is the proportion of total income or of an increase in income that
consumers save rather than spend on goods and services.
(ii) The propensity to save is merely the propensity not to consume.
26. Define average propensity to save (APS).
(i) The average propensity to save is the ratio of saving to income.
(ii) APS is the quotient obtained by dividing the total saving by the total income.
(iii) In other words, it is the ratio of total savings to total income.
S
(iv) APS =
Y
Where, S = Saving Y = Income
27. Define Marginal Propensity to Save (MPS).
(i) Marginal Propensity to save is the ratio of change in saving to a change in income.
(ii) MPS is obtained by dividing change in savings by change in income.
ΔS
(iii) MPS =
ΔY
ΔS = Change in Saving ΔY = Change in Income
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(iv) Since MPC + MPS = 1

MPS = 1 - MPC and MPC = 1 - MPS
28. Define Multiplier.
(i) The multiplier is defined as the ratio of the change in national income to change in
investment.
(ii) If ΔI stands for increase in investment and ΔY stands for resultant increase in income, the
multiplier K =ΔY/ΔI.
(iii) Since ΔY results from ΔI, the multiplier is called investment multiplier.
29. Define Accelerator.
(i) Accelerator is the numerical value of the relation between an increase in consumption and
the resulting increase in investment.
ΔI
(ii) Accelerator β =
ΔC
(iii) ΔI = Change in investment outlays ΔC = Change in consumption demand
Part – C
30. State the propositions of Keynes’s Psychological Law of Consumption.
(i) When income increases, consumption expenditure also increases but by a smaller amount.
 The reason is that as income increases, our wants are satisfied side by side, so that the need
to spend more on consumer goods diminishes.
(ii) The increased income will be divided in some proportion between consumption expenditure
and saving.
 This follows from the first proposition because when the whole of increased income is not
spent on consumption, the remaining is saved.
(iii) Increase in income always leads to an increase in both consumption and saving.
 This means that increased income is unlikely to lead to fall in either consumption or saving.
 Thus with increased income both consumption and saving increase.
31. Differentiate autonomous and induced investment.
S. No. Autonomous Investment Induced Investment
(i) Independent Planned
(ii) Income inelastic Income elastic
(iii) Welfare motive Profit Motive
(iv)
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32. Explain any three subjective and objective factors influencing the consumption function.
I. Subjective Factors
 Subjective factors are the internal factors related to psychological feelings.
(i) The motive of precaution
 To build up a reserve against unforeseen contingencies.
 Example: Accidents, sickness
(ii) The motive of foresight
 The desire to provide for anticipated future needs.
 Example: Old age
(iii) The motive of calculation
 The desire to enjoy interest and appreciation.
II. Objective Factors
 Objective factors are the external factors which are real and measurable.
(i) Income Distribution
 If there is large disparity between rich and poor, the consumption is low because the rich
people have low propensity to consume and high propensity to save.
(ii) Price level
 When the price falls, real income goes up; people will consume more and propensity to
save of the society increases.
(iii) Wage level
 Wage level plays an important role in determining the consumption function and there is
positive relationship between wage and consumption.
33. Mention the differences between accelerator and multiplier effect.
S.No. Accelerator Effect Multiplier Effect
1. Accelerator is the numerical value of the The multiplier is defined as the ratio of the
relation between an increase in change in national income to change in
consumption and the resulting increase in investment.
investment.
2. Accelerator Effects are Multiplier Effects are
*Increase in consumer demand. *Positive Multiplier an initial increases is an
*Films get close to fill capacity. injection leads to a greater final increase in
real GDP.
*Film invests to meet rising demand.
*Negative Multiplier an initial increases in
an injection leads to a greater final decrease
in real GDP.
ΔI ΔY
3. Accelerator β = Multiplier K =
ΔC ΔI
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34. State the concept of super multiplier.

Super Multiplier: (k and β interaction)
(i) In order to measure the total effect of initial investment on income, Hicks has combined the
k and β mathematically and given it the name of the Super Multiplier.
(ii) The super multiplier is worked out by combining both induced consumption and induced
investment.
(iii) The super multiplier is greater than simple multiplier which includes only autonomous
investment and no induced investment, while super multiplier includes induced
investment.
35. Specify the limitations of the multiplier.
(i) Payment towards past debts
 If a portion of the additional income is used for repayment of old loan, the MPC is reduced
and as a result the value of multiplier is cut.
(ii) Purchase of existing wealth
 If income is used in purchase of existing wealth such as land, building and shares money is
circulated among people and never enters into the consumption stream.
 As a result the value of multiplier is affected.
(iii) Import of goods and services
 Income spent on imports of goods or services flows out of the country and has little chance
to return to income stream in the country.
 Thus imports reduce the value of multiplier.
(iv) Non availability of consumer goods
 The multiplier theory assumes instantaneous supply of consumer goods following demand.
 But there is often a time lag.
 During this gap (D>S) inflation is likely to rise.
 This reduces the consumption expenditure and thereby multiplier value.
(v) Full employment situation
 Under conditions of full employment, resources are almost fully employed.
 So, additional investment will lead to inflation only, rather than generation of additional
real income.
Part – D
36. Explain Keynes psychological law of consumption function with diagram.
Keynes’s Psychological Law of Consumption
 Keynes propounded the fundamental Psychological Law of Consumption which forms the
basis of the consumption function.
Assumptions
(i) Ceteris paribus (constant extraneous variables).
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(ii) Existence of Normal Conditions.

(iii) Existence of a Laissez-faire Capitalist Economy.
Propositions of the Law

 This law has three propositions:
(i) When income increases, consumption expenditure also increases but by a smaller amount.
(ii) The increased income will be divided in some proportion between consumption
expenditure and saving.
(iii) Increase in income always leads to an increase in both consumption and saving.
The three propositions of the law
Income Consumption Savings
Y Y S=Y-C
120 120 0
180 170 10
240 220 20
Three Propositions Diagram Diagram Explanation
(i) Here, income is measured horizontally and consumption
and saving are measured on the vertical axis.
(ii) С is the consumption function curve and 45° line

represents income consumption equality.
Proposition (1)
 When income increases from 120 to 180 consumption also increases from 120 to 170 but the
increase in consumption is less than the increase in income, 10 is saved.
Proposition (2)
 When income increases to 180 and 240, it is divided in some proportion between
consumption by 170 and 220 and saving by 10 and 20 respectively.
Proposition (3)
 Increases in income to 180 and 240 lead to increased consumption 170 and 220 and
increased saving 20 and 10 than before.
 It is clear from the widening area below the С curve and the saving gap between 45° line
and С curve.
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37. Briefly explain the subjective and objective factors of consumption function.
 J.M Keynes has divided factors influencing the consumption function into two namely:
Subjective factors and Objective factors.
I. Subjective Factors
 Subjective factors are the internal factors related to psychological feelings.
(i) The motive of precaution
 To build up a reserve against unforeseen contingencies.
 Example: Accidents, sickness
(ii) The motive of foresight
 The desire to provide for anticipated future needs.
 Example: Old age
(iii) The motive of calculation
 The desire to enjoy interest and appreciation.
(iv) The motive of improvement
 The desire to enjoy for improving standard of living.
(v) The motive of financial independence.
(vi) The motive of enterprise
 Desire to do forward trading.
(vii) The motive of pride
 Desire to bequeath a fortune.
(viii) The motive of avarice
 Purely miserly instinct.
II. Objective Factors
 Objective factors are the external factors which are real and measurable.
(i) Income Distribution
 If there is large disparity between rich and poor, the consumption is low because the rich
people have low propensity to consume and high propensity to save.
(ii) Price level
 When the price falls, real income goes up; people will consume more and propensity to
save of the society increases.
(iii) Wage level
 Wage level plays an important role in determining the consumption function and there is
positive relationship between wage and consumption.
(iv) Interest rate
 Higher rate of interest will encourage people to save more money and reduces
consumption.
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(v) Fiscal Policy

 When government reduces the tax the disposable income rises and the propensity to
consume of community increases.
(vi) Consumer credit
 The availability of consumer credit at easy installments will encourage households to buy
consumer durables like automobiles, fridge, and computer.
 This pushes up consumption.
(vii) Demographic factors
 Ceteris paribus, the larger the size of the family, the grater is the consumption.
(viii) Duesenberry hypothesis
 Duesenberry has made two observations regarding the factors affecting consumption.
(a) The consumption expenditure depends not only on his current income but also past
income and standard of living.
(b) Consumption is influenced by demonstration effect.
The consumption standards of low income groups are influenced by the consumption
standards of high income groups.
38. Illustrate the working of Multiplier.
(i) Suppose the Government undertakes investment expenditure equal to ` 100 crore on some
public works, by way of wages, price of materials etc.
(ii) Thus income of labourers and suppliers of materials increases by ` 100 crore.
(iii) Suppose the MPC is 0.8 that is 80%.
(iv) A sum of ` 80 crores is spent on consumption (A sum of ` 20 Crores is saved).
(v) As a result, suppliers of goods get an income of ` 80 crores.
(vi) They in turn spend ` 64 crores (80% of ` 80 cr).
(vii) In this manner consumption expenditure and increase in income act in a chain like manner.
The final result is ΔY = 100 + 100 × 4/5 + 100 ×[4/5] 2 + 100 × [4/5]3 or,
ΔY = 100 + 100 x 0.8 + 100 × (0.8)2 + 100 x (0.8)3
= 100 + 80 + 64 + 51.2...
= 500
that is 100 × 1/1-4/5
100 × 1/1/5
100 × 5 = ` 500 crores
For instance if C = 100 + 0.8Y, I = 100,
Then Y = 100 + 0.8Y + 100
0.2Y = 200
Y = 200/0.2 = 1000→Point B
If I is increased to 110, then
0.2Y = 210
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Y = 210/0.2 = 1050→Point D
For ` 10 increase in I, Y has increased by ` 50.
This is due to multiplier effect.
At point A, Y = C = 500
C = 100 + 0.8 (500) = 500; S = 0
At point B, Y = 1000
C = 100 + 0.8 (1000) = 900; S = 100 = I
At point D, Y = 1050
C = 100 + 0.8 (1050) = 940; S = 110 = I
When I is increased by 10, Y increases by 50.
This is multiplier effect (K = 5)
1
K = = 5
0.2
39. Explain the operation of the Accelerator.
(i) Let us consider a simple example.
The operation of the accelerator may be illustrated as follows.
(ii) Let us suppose that in order to produce 1000 consumer goods, 100 machines are required.
(iii) Also suppose that working life of a machine is 10 years.
(iv) This means that every year 10 machines have to be replaced in order to maintain the
constant flow of 1000 consumer goods.
(v) This might be called replacement demand.
(vi) Suppose that demand for consumer goods rises by 10 percent (ie from 1000 to 1100).
(vii) This results in increase in demand for 10 more machines.
(viii) So that total demand for machines is 20.
(ix) It may be noted here a 10 percent increase in demand for consumer goods causes a 100
percent increase in demand for machines (from 10 to 20).
(x) So we can conclude even a mild change in demand for consumer goods will lead to wide
change in investment.
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Diagrammatic illustration
Operation of Accelerator
(i) SS is the saving curve.
(ii) II is the investment curve.
(iii) At point E1, the economy is in equilibrium with
OY1 income.
Saving and investment are equal at OI2.
(iv) Now, investment is increased from OI2 to OI4.
This increases income from OY1 to OY3, the
equilibrium point being E3.
(v) This diagram it is assumed that exogenous investment is only by I2 I3 and induced
investment is by I3 I4.
(vi) Therefore, increase in income by Y1 Y2 is due to the multiplier effect and the increase in
income by Y2 Y3 is due to the accelerator effect.
40. What are the differences between MEC and MEI.
S.
Marginal Efficiency of Capital (MEC) Marginal Efficiency of Investment (MEI)
No.
1. It is based on a given supply price for It is based on the induced change in the price
capital. due to change in the demand for capital.
2. It represents the rate of return on all It shows the rate of return on just those units
successive units of capital without regard to of capital over and above the existing capital
existing capital. stock.
3. The capital stock is taken on the X axis of The amount of investment is taken on the
diagram. X axis of diagram.
4. It is a “stock” concept. It is a “flow” concept.
5. It determines the optimum capital stock in It determines the net investment of the
an economy at each level of interest rate. economy at each interest rate given the
capital stock.
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12 – Economics
Chapter - 5
Monetary Economics

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Part - A
1. The RBI Headquarters is located at
(a) Delhi (b) Chennai (c) Mumbai (d) Bengaluru
2. Money is
(a) acceptable only when it has intrinsic value (b) constant in purchasing power
(c) the most liquid of all assets (d) needed for allocation of resources
3. Paper currency system is managed by the

(a) Central Monetary authority (b) State Government (c) Central Government (d) Banks
4. The basic distinction between M1 and M2 is with regard to.

(a) post office deposits (b) time deposits of banks
(c) saving deposits with post office savings banks (d) currency
5. Irving Fisher‟s Quantity Theory of Money was popularized in

(a) 1908 (b) 1910 (c) 1911 (d) 1914
6. MV stands for
(a) demand for money (b) supply of legal tender money
(c) Supply of bank money (d) Total supply of money
7. Inflation means
(a) Prices are rising (b) Prices are falling
(c) Value of money is increasing (d) Prices are remaining the same
8. _________ inflation results in a serious depreciation of the value of money.

(a) Creeping (b) Walking (c) running (d) Hyper
9. _________ inflation occurs when general prices of commodities increases due to increase in
production costs such as wages and raw materials.
(a) Cost-push (b) demand pull (c) running (d) galloping
10. During inflation, who are the gainers?

(a) Debtors (b) Creditors (c) Wage and salary earners (d) Government
11. ___________ is a decrease in the rate of inflation.
(a) Disinflation (b) Deflation (c) Stagflation (d) Depression
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12. Stagflation combines the rate of inflation with

(a) Stagnation (b) employment (c) output (d) price
13. The study of alternating fluctuations in business activity is referred to in Economics as

(a) Boom (b) Recession (c) Recovery (d) Trade cycle
14. During depression the level of economic activity becomes extremely

(a) high (b) bad (c) low (d) good
15. “Money can be anything that is generally acceptable as a means of exchange and that
thesame time acts as a measure and a store of value”, This definition was given by
(a) Crowther (b) A.C.Pigou (c) F.A.Walker (d) Francis Bacon
16. Debit card is an example of

(a) currency (b) paper currency (c) plastic money (d) money
17. Fisher‟s Quantity Theory of money is based on the essential function of money as
(a) measure of value (b) store of value
(c) medium of exchange (d) standard of deferred payment
18. V in MV = PT equation stands for

(a) Volume of trade (b) Velocity of circulation of money
(c) Volume of transaction (d) Volume of bank and credit money
19. When prices rise slowly, we call it

(a) galloping inflation (b) mild inflation (c) hyper inflation (d) deflation
20. __________ inflation is in no way dangerous to the economy.

(a) walking (b) running (c) creeping (d) galloping
Part - B
21. Define Money.
Walker
 “Money is, what money does”.
Crowther
 “Money can be anything that is generally acceptable as a means of exchange and at the
same time acts as a measure and a store of value”.
22. What is barter?
(i) Exchange of goods for goods was known as “Barter Exchange” or “Barter System”.
(ii) The commodities and services were directly exchanged for other commodities and services.
23. What is commodity money?
 Goods like furs, skins, salt, rice, wheat, utensils, weapons, etc. were commonly used as
money, which is called as commodity money.
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24. What is gold standard?

(i) Gold Standard is a system in which the value of the monetary unit or the standard currency
is directly linked with gold.
(ii) The monetary unit is defined in terms of a certain weight of gold.
25. What is plastic money? Give example.
(i) Plastic money is a term that is used predominantly in reference to the hard plastic cards
used every day in place of actual bank notes.
(ii) Plastic money can come in many different forms such as Cash cards, Credit cards, Debit
cards, Pre-paid Cash cards, Store cards, Forex cards and Smart cards.
26. Define inflation.
Coulbourn
 “Too much of Money chasing too few goods”.
Gregorye
 “A state of abnormal decrease in the quantity of purchasing power”.
27. What is Stagflation?
 Stagflation is a combination of stagnant economic growth, high unemployment and high
inflation.
Part - C
28. Write a note on metallic money.
(i) After the barter system and commodity money system, modern money systems evolved.
(ii) Among these, metallic standard is the premier one.
(iii) Under metallic standard, some kind of metal either gold or silver is used to determine the
standard value of the money and currency.
(iv) Standard coins made out of the metal are the principal coins used under the metallic
standard.
(v) These standard coins are full bodied or full weighted legal tender.
(vi) Their face value is equal to their intrinsic metal value.
29. What is money supply?
(i) Money supply means the total amount of money in an economy.
(ii) It refers to the amount of money which is in circulation in an economy at any given time.
(iii) Money supply plays a crucial role in the determination of price level and interest rates.
(iv) Money supply viewed at a given point of time is a stock and over a period of time it is a
flow.
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30. What are the determinants of money supply?

(i) Currency Deposit Ratio (CDR)
 It is the ratio of money held by the public in currency to that they hold in bank deposits.
(ii) Reserve deposit Ratio (RDR)
 Reserve Money consists of two things (a) vault cash in banks and (b) deposits of
commercial banks with RBI.
(iii) Cash Reserve Ratio (CRR)
 It is the fraction of the deposits the banks must keep with RBI.
(iv) Statutory Liquidity Ratio (SLR)
 It is the fraction of the total demand and time deposits of the commercial banks in the form
of specified liquid assets.
31. Write the types of inflation.
I. On the basis of speed
(i) Creeping inflation (ii) Walking inflation (iii) Running inflation
(iv) Galloping inflation or Hyper inflation

II. On the basis of Demand-Pull Vs Cost-Push inflation
(i) Demand-Pull Inflation (ii) Cost-Push Inflation
III. On the basis of inducement
(i) Currency inflation (iii) Deficit induced inflation (v) Scarcity induced inflation
(ii) Credit inflation (iv) Profit induced inflation (vi) Tax induced inflation
32. Explain Demand-pull and Cost push inflation.
(i) Demand-Pull Inflation
 Demand and supply play a crucial role in deciding the inflation levels in the society at all
points of time.
 For instance, if the demand is high for a product and supply is low, the price of the
products increases.
(ii) Cost-Push Inflation
 When the cost of raw materials and other inputs rises inflation results.
 Increase in wages paid to labour also leads to inflation.
33. State Cambridge equations of value of money.
I. Marshall‟s Equation
 The Marshall equation is expressed as:
M = KPY
Where,
M is the quantity of money.
Y is the aggregate real income of the community.
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P is Purchasing Power of money.

K represents the fraction of the real income which the public desires to hold in the form
of money.
M
Thus, the price level P = (𝐨𝐫)
KY
1 KY
Value of money The reciprocal of price level is =
P M
 The value of money in terms of this equation can be found out by dividing the total
quantity of goods which the public desires to holdout of the total income by the total
supply of money.
 According to Marshall‟s equation, the value of money is influenced not only by changes in
M, but also by changes in K.
II. Keynes‟ Equation
 Keynes equation is expressed as:
n
n = pk 𝐨𝐫 p =
k
Where,
n is the total supply of money.
p is the general price level of consumption goods.
k is the total quantity of consumption units the people decide to keep in the form of
cash.
 Keynes indicates that K is a real balance, because it is measured in terms of consumer
goods.
 According to Keynes, peoples‟ desire to hold money is unaltered by monetary authority.
 So, price level and value of money can be stabilized through regulating quantity of money
(n) by the monetary authority.
34. Explain disinflation.
(i) Disinflation is the slowing down the rate of inflation by controlling the amount of credit
(bank loan, hire purchase) available to consumers without causing more unemployment.
(ii) Disinflation may be defined as the process of reversing inflation without creating
unemployment or reducing output in the economy.
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Part - D
35. Illustrate Fisher’s Quantity theory of money.
Fisher‟s Quantity Theory of Money
(i) The quantity theory of money is a very old theory. It was first propounded in 1588 by an
Italian economist, Davanzatti.
(ii) But, the credit for popularizing this theory in recent years rightly belongs to the well-known
American economist, Irving Fisher who published his book, „The Purchasing Power of
Money” in 1911.
(iii) He gave it a quantitative form in terms of his famous “Equation of Exchange”.
General form of equation
 The general form of equation given by Fisher is
MV = PT
Where,
M = Money Supply/quantity of Money
V = Velocity of Money
P = Price level
T = Volume of Transaction
 Fisher points out that in a country during any given period of time, the total quantity of
money (MV) will be equal to the total value of all goods and services bought and sold (PT).
MV = PT
Supply of Money = Demand for Money
(i) This equation is referred to as “Cash Transaction Equation”.
MV
(ii) It is expressed as P =
T
Which implies that the quantity of money determines the price level and the price level in
its turn varies directly with the quantity of money, provided „V‟ and „T‟ remain constant.
(iii) The above equation considers only currency money.
(iv) But, in a modern economy, bank‟s demand deposits or credit money and its velocity play a
vital part in business.
(v) Therefore, Fisher extended his original equation of exchange to include bank deposits M1
and its velocity V1.
 The revised equation was:
PT = MV + M1V1
MV + M1 V1
P =
T
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 From the revised equation, it is evident, that the price level is determined by
(a) the quantity of money in circulation „M‟
(b) the velocity of circulation of money „V‟
(c) the volume of bank credit money M1
(d) the velocity of circulation of credit money V1 and the volume of trade (T)
Diagrammatic Illustration
Figure - A Figure - B
Diagrammatic Explanation
Figure - A
(i) Figure (A) shows the effect of changes in the quantity of money on the price level.
(ii) When the quantity of money is OM, the price level is OP.
(iii) When the quantity of money is doubled to OM2 , the price level is also doubled to OP2 .
(iv) Further, when the quantity of money is increased four-fold to OM4, the price level also
increases by four times to OP4 .
(v) This relationship is expressed by the curve OP = f (M) from the origin at 450.
Figure - B
(i) Figure (B), shows the inverse relation between the quantity of money and the value of
money, where the value of money is taken on the vertical axis.
(ii) When the quantity of money is OM, the value of money is OI / P.
(iii) But with the doubling of the quantity of money to OM2 , the value of money becomes one-
half of what it was before, (OI / P2).
(iv) But, with the quantity of money increasing by four-fold to OM4, the value of money is
reduced by OI / P4.
(v) This inverse relationship between the quantity of money and the value of money is shown
by downward sloping curve IO / P = f (M).
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36. Explain the functions of money.
I. Primary Functions
(i) Money as a medium of exchange
 This is considered as the basic function of money.
 Money has the quality of general acceptability, and all exchanges take place in terms of
money.
(ii) Money as a measure of value
 The second important function of money is that it measures the value of goods and
services.
II. Secondary Functions
(i) Money as a Store of value
 Savings done in terms of commodities were not permanent.
 But, with the invention of money, this difficulty has now disappeared and savings are now
done in terms of money.
 Money also serves as an excellent store of wealth, as it can be easily converted into other
marketable assets, such as, land, machinery, plant etc.
(ii) Money as a Standard of Deferred Payments
 Borrowing and lending were difficult problems under the barter system.
 In the absence of money, the borrowed amount could be returned only in terms of goods
and services.
 But the modern money-economy has greatly facilitated the borrowing and lending
processes.
 In other words, money now acts as the standard of deferred payments.
(iii) Money as a Means of Transferring Purchasing Power
 The field of exchange also went on extending with growing economic development.
 The exchange of goods is now extended to distant lands.
 It is therefore, felt necessary to transfer purchasing power from one place to another.
III. Contingent Functions
(i) Basis of the Credit System
 Money is the basis of the Credit System.
 Business transactions are either in cash or on credit.
(ii) Money facilitates distribution of National Income
 The invention of money has now facilitated the distribution of income as rent, wage,
interest and profit.
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(iii) Money helps to Equalize Marginal Utilities and Marginal Productivities

 Consumer can obtain maximum utility only if he incurs expenditure on various
commodities in such a manner as to equalize marginal utilities accruing from them.
(iv) Money Increases Productivity of Capital
 Money is the most liquid form of capital. In other words, capital in the form of money can
be put to any use.
 It is on account of this liquidity of money that capital can be transferred from the less
productive to the more productive uses.
IV. Other Functions
(i) Money helps to maintain Repayment Capacity
 Money possesses the quality of general acceptability.
 To maintain its repayment capacity, every firm has to keep assets in the form of liquid cash.
(ii) Money represents Generalized Purchasing Power
 Purchasing power kept in terms of money can be put to any use.
(iii) Money gives liquidity to Capital
 Money is the most liquid form of capital.
 It can be put to any use.
37. What are the causes and effects of inflation on the economy?
I. Causes of Inflation
 The main causes of inflation in India are as follows:
(i) Increase in Money Supply
 Inflation is caused by an increase in the supply of money which leads to increase in growth
rate of the nominal money supply, the higher is the rate of inflation.
(ii) Increase in Disposable Income
 When the disposable income of the people increases, it raises their demand for goods and
services.
 Disposable income may increase with the rise in national income or reduction in taxes or
reduction in the saving of the people.
(iii) Increase in Public Expenditure
 Government activities have been expanding due to developmental activities and social
welfare programmes.
 This is also a cause for price rise.
(iv) Increase in Consumer Spending
 The demand for goods and services increases when they are given credit to buy goods on
hire-purchase and installment basis.
(v) Cheap Money Policy
 Cheap money policy or the policy of credit expansion also leads to increase in the money
supply which raises the demand for goods and services in the economy.
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II. Effects of Inflation

 The effects of inflation can be classified into two heads:
(A) Effects on Production (B) Effects on Distribution
(A) Effects on Production
 The profit due to rising prices encourages and induces business class to increase their
investments in production, leading to generation of employment and income.
(i) However, hyper-inflation results in a serious depreciation of the value of money and it
discourages savings on the part of the public.
(ii) When the value of money undergoes considerable depreciation, this may even drain out the
foreign capital already invested in the country.
(iii) With reduced capital accumulation, the investment will suffer a serious set-back which may
have an adverse effect on the volume of production in the country.
This may discourage entrepreneurs and business men from taking business risk.
(iv) Inflation also leads to hoarding of essential goods both by the traders as well as the
consumers and thus leading to still higher inflation rate.
(v) Inflation encourages investment in speculative activities rather than productive purposes.
(B) Effects on Distribution
(i) Debtors and Creditors
 During inflation, debtors are the gainers while the creditors are losers.
(ii) Fixed-income Groups
 The fixed income groups are the worst hit during inflation because their incomes being
fixed do not bear any relationship with the rising cost of living.
(iii) Entrepreneurs
 Inflation is the boon to the entrepreneurs whether they are manufacturers, traders,
merchants a tonic for business enterprise.
(iv) Investors
 The investors, who generally invest in fixed interest yielding bonds and securities have
much to lose during inflation.
38. Describe the phases of Trade cycle.
Meaning of Trade Cycle
(i) A Trade cycle refers to oscillations in aggregate economic activity particularly in
employment, output, income, etc.
(ii) It is due to the inherent contraction and expansion of the elements which energize the
economic activities of the nation.
(iii) The fluctuations are periodical, differing in intensity and changing in its coverage.
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Phases of Trade Cycle

 The four different phases of trade cycle is referred to as
(i) Boom (ii) Recession (iii) Depression (iv) Recovery
(i) Boom or Prosperity Phase

 The full employment and the movement of the economy beyond full employment is
characterized as boom period.
 During this period, there is hectic activity in economy.
 Money wages rise, profits increase and interest rates go up.
 The demand for bank credit increases and there is all-round optimism.
(ii) Recession
 The turning point from boom condition is called recession.
 This happens at higher rate, than what was earlier.
 Generally, the failure of a company or bank bursts the boom and brings a phase of
recession.
 Investments are drastically reduced, production comes down and income and profits
decline.
 There is panic in the stock market and business activities show signs of dullness.
 Liquidity preference of the people rises and money market becomes tight.
(iii) Depression
 During depression the level of economic activity becomes extremely low.
 Firms incur losses and closure of business becomes a common feature and the ultimate
result is unemployment.
 Interest prices, profits and wages are low.
 Depression is the worst phase of the business cycle.
 Extreme point of depression is called as “trough”, because it is a deep point in business
cycle.
 An economy fell down in trough could not come out from this without external help.
(iv) Recovery
 After a period of depression, recovery sets in.
 This is the turning point from depression to revival towards upswing.
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 It begins with the revival of demand for capital goods.

 Autonomous investments boost the activity.
 The demand slowly picks up and in due course the activity is directed towards the
upswing with more production, profit, income, wages and employment.
 Recovery may be initiated by innovation or investment or by government expenditure
(autonomous investment).
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12 – Economics
Chapter - 6
Banking

Mobile: 9786868699 & 9842868699
Part - A
1. A Bank is a
(a) Financial institution (b) Corporate (c) An Industry (d) Service institutions
2. A Commercial Bank is an institutions that provides services

(a) Accepting deposits (b) Providing loans (c) Both a and b (d) None of the above
3. The Functions of commercial banks are broadly classified into

(a) Primary Functions (b) Secondary functions (c) Other functions (d) a, b, and c
4. Bank credit refers to

(a) Bank Loans (b) Advances (c) Bank loans and advances (d) Borrowings
5. Credit creation means.

(a) Multiplication of loans and advances (b) Revenue (c) Expenditure (d) Debt
6. NBFI does not have.

(a) Banking license (b) Government approval
(c) Money market approval (d) Finance ministry approval
7. Central bank is ___________ authority of any country.

(a) Monetary (b) Fiscal (c) Wage (d) National Income
8. Who will act as the banker to the Government of India?

(a) SBI (b) NABARD (c) ICICI (d) RBI
9. Lender of the last resort is one of the functions of.

(a) Central Bank (b) Commercial banks
(c) Land Development Banks (d) Co-operative banks
10. Bank Rate means.

(a) Re-discounting the first class securities (b) Interest rate
(c) Exchange rate (d) Growth rate
11. Repo Rate means.

(a) Rate at which the Commercial Banks are willing to lend to RBI
(b) Rate at which the RBI is willing to lend to commercial banks
(c) Exchange rate of the foreign bank (d) Growth rate of the economy
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12. Moral suasion refers.

(a) Optimization (b) Maximization (c) Persuasion (d) Minimization
13. ARDC started functioning from
(a) June 3, 1963 (b) July 3, 1963 (c) June 1, 1963 (d) July 1, 1963
14. NABARD was set up in.

(a) July 1962 (b) July 1972 (c) July 1982 (d) July 1992
15. EXIM bank was established in.

(a) June 1982 (b) April 1982 (c) May 1982 (d) March 1982
16. The State Financial Corporation Act was passed by

(a) Government of India (b) Government of Tamilnadu
(c) Government of Union Territories (d) Local Government
17. Monetary policy his formulated by

(a) Co-operative banks (b) Commercial banks (c) Central Bank (d) Foreign banks
18. Online Banking is also known as.

(a) E-Banking (b) Internet Banking (c) RTGS (d) NEFT
19. Expansions of ATM.

(a) Automated Teller Machine (b) Adjustment Teller Machine
(c) Automatic Teller mechanism (d) Any Time Money
20. 2016 Demonetization of currency includes denominations of

(a) ` 500 and ` 1000 (b) ` 1000 and ` 2000 (c) ` 200 and ` 500 (d) All the above
Part - B
21. Define Commercial banks.
 Commercial bank refers to a bank, or a division of a large bank, which more specifically
deals with deposit and loan services provided to corporations or large/ middle-sized
business - as opposed to individual members of the public/small business.
22. What is credit creation?
(i) Credit Creation means the multiplication of loans and advances.
(ii) Commercial banks receive deposits from the public and use these deposits to give loans.
(iii) However, loans offered are many times more than the deposits received by banks.
(iv) This function of banks is known as ‘Credit Creation’.
23. Define Central bank.
(i) A central bank, reserve bank, or monetary authority is an institution that manages a state’s
currency, money supply, and interest rates.
(ii) Central banks also usually oversee the commercial banking system of their respective
countries.
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24. Distinguish between CRR and SLR.

Basis for
CRR SLR
comparison
1. Meaning CRR is the percentage of money The bank has to keep a certain
which the bank has to keep with the percentage of their Net Time and
Central Bank of India in the form of Demand Liabilities in the form of liquid
cash. assets as specified by RBI.
2. Maintained RBI Bank itself
with
25. Write the meaning of Open market operations.
(i) In narrow sense, the Central Bank starts the purchase and sale of Government securities in
the money market.
(ii) In Broad Sense, the Central Bank purchases and sells not only Government securities but
also other proper eligible securities like bills and securities of private concerns.
26. What is rationing of credit?
(i) This is the oldest method of credit control.
(ii) Rationing of credit as an instrument of credit control was first used by the Bank of England
by the end of the 18th Century.
(iii) It aims to control and regulate the purposes for which credit is granted by commercial
banks.
27. Mention the functions of agriculture credit department.
(a) To maintain an expert staff to study all questions on agricultural credit.
(b) To provide expert advice to Central and State Government, State Co-operative Banks and
other banking activities.
(c) To finance the rural sector through eligible institutions engaged in the business of
agricultural credit and to co-ordinate their activities.
Part - C
28. Write the mechanism of credit creation by commercial banks.
(i) Bank credit refers to bank loans and advances.
(ii) Money is said to be created when the banks, through their lending activities, make a net
addition to the total supply of money in the economy.
(iii) Likewise, money is said to be destroyed when the loans are repaid by the borrowers to the
banks and consequently the credit already created by the banks is wiped out in the process.
(iv) Banks have the power to expand or contract demand deposits and they exercise this power
through granting more or less loans and advances and acquiring other assets.
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(v) This power of commercial bank to create deposits through expanding their loans and
advances is known as credit creation.
29. Give a brief note on NBFI.
(i) A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a
financial institution that does not have a full banking license or is not supervised by the
central bank.
(ii) The NBFIs do not carry on pure banking business, but they will carry on other financial
transactions.
(iii) They receive deposits and give loans.
(iv) They operate in both the money and the capital markets.
(v) NBFIs can be broadly classified into two categories.
(a) Stock Exchange and (b) Other Financial institutions.
(vi) Under the latter category comes Finance Companies, Finance Corporations, Chit Funds,
Building Societies, Issue Houses, Investment Trusts and Unit Trusts and Insurance
Companies.
30. Bring out the methods of credit control.
31. What are the functions of NABARD?

 NABARD has inherited its apex role from RBI.
 It is performing all the functions performed by RBI with regard to agricultural credit.
(i) NABARD acts as a refinancing institution for all kinds of production and investment credit
to agriculture, small-scale industries, cottage and village industries, handicrafts and rural
crafts and real artisans and other allied economic activities with a view to promoting
integrated rural development.
(ii) It provides short-term, medium-term and long-term credits to state co-operative Banks
(SCBs), RRBs, LDBs and other financial institutions approved by RBI.
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(iii) NABARD gives long-term loans (upto 20 Years) to State Government to enable them to
subscribe to the share capital of co-operative credit societies.
(iv) NABARD gives long-term loans to any institution approved by the Central Government or
contribute to the share capital or invests in securities of any institution concerned with
agriculture and rural development.
(v) NABARD has the responsibility of co-ordinating the activities of Central and State
Governments, the Planning Commission (now NITI Aayog).
(vi) It has the responsibility to inspect RRBs and co-operative banks, other than primary co-
operative societies.
(vii) It maintains a Research and Development Fund to promote research in agriculture and rural
development.
32. Specify the functions of IFCI.
(i) Long-term loans; both in rupees and foreign currencies.
(ii) Underwriting of equity, preference and debenture issues.
(iii) Subscribing to equity, preference and debenture issues.
(iv) Guaranteeing the deferred payments in respect of machinery imported from abroad or
purchased in India.
(v) Guaranteeing of loans raised in foreign currency from foreign financial institutions.
33. Distinguish between money market and capital market.
Money market Capital market
1. Money market is the mechanism through Capital market where investment like bonds,
which short term funds are loaned and equities and mortgages are traded.
borrowed.
2. Money markets are highly liquid. Capital markets are comparatively less liquid.
3. Money markets have low risk. Capital markets are riskier in comparison to
money markets.
4. Money markets are informal in nature. Capital markets are formal in nature.
5. The instruments dealt in the market are bills The instruments dealt in this market are bonds,
of exchange, treasury bills, banker's acceptance, debentures, equity shares and stock.
etc.
34. Mention the objectives of demonetizations.
(i) Removing Black Money from the country (iii) Stopping Terror Funds
(ii) Stopping of Corruption. (iv) Curbing Fake Notes
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Part - D
35. Explain the role of Commercial Banks in economic development.
(i) Capital Formation
 Banks play an important role in capital formation, which is essential for the economic
development of a country.
 They mobilize the small savings of the people scattered over a wide area through their
network of branches all over the country and make it available for productive purposes.
(ii) Creation of Credit
 Banks create credit for the purpose of providing more funds for development projects.
 Credit creation leads to increased production, employment, sales and prices and thereby
they bring about faster economic development.
(iii) Channelizing the Funds towards Productive Investment
 Banks invest the savings mobilized by them for productive purposes.
 Capital formation is not the only function of commercial banks.
 Pooled savings should be allocated to various sectors of the economy with a view to
increase the productivity.
(iv) Encouraging Right Type of Industries
 Many banks help in the development of the right type of industries by extending loan to
right type of persons.
 In this way, they help not only for industrialization of the country but also for the economic
development of the country.
(v) Banks Monetize Debt
 Commercial banks transform the loan to be repaid after a certain period into cash, which
can be immediately used for business activities.
 Manufacturers and wholesale traders cannot increase their sales without selling goods on
credit basis.
(vi) Finance to Government
 Government is acting as the promoter of industries in underdeveloped countries for which
finance is needed for it.
 Banks provide long-term credit to Government by investing their funds in Government
securities and short-term finance by purchasing Treasury Bills.
(vii) Employment Generation
 After the nationalization of big banks, banking industry has grown to a great extent.
 Bank’s branches are opened frequently, which leads to the creation of new employment
opportunities.
(viii) Banks Promote Entrepreneurship
 In recent days, banks have assumed the role of developing entrepreneurship particularly in
developing countries like India by inducing new entrepreneurs to take up the well-
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formulated projects and provision of counseling services like technical and managerial
guidance.
36. Elucidate the functions of Commercial Banks.
 The functions of commercial banks are
broadly classified into primary
functions, secondary functions and
other functions.
(A). Primary Functions

I. Accepting Deposits
 It implies that commercial banks are mainly dependent on public deposits.
 There are two types of deposits, which are discussed as follows.
(i) Demand Deposits
 It refers to deposits that can be withdrawn by individuals without any prior notice to the
bank.
(ii) Time Deposits
 It refers to deposits that are made for certain committed period of time.
 Banks pay higher interest on time deposits.
II. Advancing Loans
 It refers to granting loans to individuals and businesses.
 Commercial banks grant loans in the form of overdraft, cash credit, and discounting bills of
exchange.
(B). Secondary Functions
 The secondary functions can be classified under three heads, namely, agency functions,
general utility functions, and other functions.
I. Agency Functions
 It implies that commercial banks act as agents of customers by performing various
functions.
(i) Collecting Cheques
 Banks collect cheques and bills of exchange on the behalf of their customers through
clearing house facilities provided by the central bank.
(ii) Collecting Income
 Commercial banks collect dividends, pension, salaries, rents, and interests on investments
on behalf of their customers.
(iii) Paying Expenses
 Commercial banks make the payments of various obligations of customers, such as
telephone bills, insurance premium, school fees, and rents.
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II. General Utility Functions

 It implies that commercial banks provide some utility services to customers by performing
various functions.
(i) Providing Locker Facilities
 Commercial banks provide locker facilities to its customers for safe custody of jewellery,
shares, debentures, and other valuable items.
(ii) Issuing Traveler’s Cheques
 Banks issue traveler’s cheques to individuals for traveling outside the country.
 Traveler’s cheques are the safe and easy way to protect money while traveling.
(iii) Dealing in Foreign Exchange
 Commercial banks help in providing foreign exchange to businessmen dealing in exports
and imports.
(iv)Transferring Funds
 It refers to transferring of funds from one bank to another.
 Funds are transferred by means of draft, telephonic transfer, and electronic transfer.
IV. Letter of Credit
 Commercial banks issue letters of credit to their customers to certify their creditworthiness.
(i) Underwriting Securities
 As public has full faith in the creditworthiness of banks, public do not hesitate in buying
the securities underwritten by banks.
(ii) Electronic Banking
 It includes services, such as debit cards, credit cards, and Internet banking.
(C) Other Functions
(i) Money Supply
 It refers to one of the important functions of commercial banks that help in increasing
money supply.
 Thus, without printing additional money, the supply of money is increased.
(ii) Credit Creation
 Credit Creation means the multiplication of loans and advances.
 Commercial banks receive deposits from the public and use these deposits to give loans.
(iii) Collection of Statistics
 Banks collect and publish statistics relating to trade, commerce and industry.
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37. Describe the functions of Reserve Bank of India.

(i) Monetary Authority
 It controls the supply of money in the economy to stabilize exchange rate, maintain healthy
balance of payment, attain financial stability, control inflation, strengthen banking system.
(ii) The issuer of currency
 The objective is to maintain the currency and credit system of the country.
 It is the sole authority to issue currency.
 It also takes action to control the circulation of fake currency.
(iii) The issuer of Banking License
 As per Sec 22 of Banking Regulation Act, every bank has to obtain a banking license from
RBI to conduct banking business in India.
(iv) Banker to the Government
 It acts as banker both to the central and the state governments.
(v) Banker’s Bank
 RBI is the bank of all banks in India as it provides loan to banks, accept the deposit of
banks, and rediscount the bills of banks.
(vi) Lender of last resort
 The banks can borrow from the RBI by keeping eligible securities as collateral at the time of
need or crisis, when there is no other source.
(vii) Act as clearing house
 For settlement of banking transactions, RBI manages 14 clearing houses.
 It facilitates the exchange of instruments and processing of payment instructions.
(viii) Custodian of foreign exchange reserves
 It acts as a custodian of FOREX.
 RBI buys and sells foreign currency to maintain the exchange rate of Indian rupee v/s
foreign currencies.
(ix) Regulator of Economy
 It controls the money supply in the system, monitors different key indicators like GDP,
Inflation, etc.
(x) Managing Government securities
 RBI administers investments in institutions when they invest specified minimum
proportions of their total assets/liabilities in government securities.
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38. What are the objectives of Monetary Policy? Explain.

(i) Neutrality of Money
 Neutrality holds the view that monetary authority should aim at neutrality of money in the
economy.
 Monetary changes could be the root cause of all economic fluctuations.
(ii) Exchange Rate Stability
 Exchange rate stability was the traditional objective of monetary authority.
 This was the main objective under Gold Standard among different countries.
 Instability in the exchange rates, it would result in outflow or inflow of gold resulting in
unfavorable balance of payments.
 Therefore, stable exchange rates are advocated.
(iii) Price Stability
 Price stability is considered the most genuine objective of monetary policy.
 Stable prices repose public confidence.
 It promotes business activity and ensures equitable distribution of income and wealth.
 As a consequence, there is general wave of prosperity and welfare in the community.
(iv) Full Employment
 Full employment was considered as the main goal of monetary policy.
 With the publication of Keynes’ General Theory of Employment, Interest and Money in
1936, the objective of full employment gained full support as the chief objective of
monetary policy.
(v) Economic Growth
 Economic growth is the process whereby the real per capita income of a country increases
over a long period of time.
 It implies an increase in the total physical or real output, production of goods for the
satisfaction of human wants.
(vi) Equilibrium in the Balance of Payments
 Equilibrium in the balance of payments is another objective of monetary policy which
emerged significant in the post war years.
 Monetary authority makes efforts to maintain equilibrium in the balance of payments.
Thank You

Mobile: 9786868699 & 9842868699
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12 – Economics
Chapter - 7
International Economics

Mobile: 9786868699 & 9842868699
Part - A
1. Trade between two countries is known as __________ trade.
(a) External (b) Internal (c) Inter-regional (d) Home
2. Which of the following factors influence trade?

(a) The stage of development of a product (b) The relative price of factors of productions
(c) Government (d) All of the above
3. International trade differs from domestic trade because of

(a) Trade restrictions (b) Immobility of factors
(c) Different government policies (d) All the above
4. In general, a primary reason why nations conduct international trade is because

(a) Some nations prefer to produce one thing while others produce another
(b) Resources are not equally distributed among all trading nations
(c) Trade enhances opportunities to accumulate profits
(d) Interest rates are not identical in all trading nations
5. Which of the following is a modern theory of international trade?

(a) Absolute cost (b) Comparative cost (c) Factor endowment theory (d) None of these
6. Exchange rates are determined in

(a) money market (b) foreign exchange market (c) stock market (d) capital market
7. Exchange rate for currencies is determined by supply and demand under the system of
(a) Fixed exchange rate (b) Flexible exchange rate (c) Constant (d) Government regulated
8. Net export equals __________.

(a) Export x Import (b) Export + Import (c) Export – Import (d) Exports of services only
9. Who among the following enunciated the concept of single factoral terms of trade?
(a) Jacob Viner (b) G.S.Donens (c) Taussig (d) J.S.Mill
10. Terms of Trade of a country show __________.

(a) Ratio of goods exported and imported (b) Ratio of import duties
(c) Ratio of prices of exports and imports (d) Both (a) and (c)
11. Favourable trade means value of exports are __________ than that of imports.
(a) More (b) Less (c) More or Less (d) Not more than
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12. If there is an imbalance in the trade balance (more imports than exports), it can be reduced
by
(a) decreasing customs duties (b) increasing export duties
(c) stimulating exports (d) stimulating imports
13. BOP includes
(a) visible items only (b) invisible items only
(c) both visible and invisible items (d) merchandise trade only
14. Components of balance of payments of a country includes

(a) Current account (b) Official account (c) Capital account (d) All of above
15. In the case of BOT,

(a) Transactions of goods are recorded
(b) Transactions of both goods and services are recorded
(c) Both capital and financial accounts are included (d) All of these
16. Tourism and travel are classified in which of balance of payments accounts?
(a) merchandise trade account (b) services account
(c) unilateral transfers account (d) capital account
17. Cyclical disequilibrium in BOP occurs because of

(a) Different paths of business cycle
(b) The income elasticity of demand or price elasticity of demand is different
(c) long-run changes in an economy (d) Both (a) and (b)
18. Which of the following is not an example of foreign direct investment?

(a) the construction of a new auto assembly plant overseas
(b) the acquisition of an existing steel mill overseas
(c) the purchase of bonds or stock issued by a textile company overseas
(d) the creation of a wholly owned business firm overseas
19. Foreign direct investments not permitted in India

(a) Banking (b) Automic energy (c) Pharmaceutical (d) Insurance
20. Benefits of FDI include, theoretically

(a) Boost in Economic Growth (b) Increase in the import and export of goods and services
(c) Increased employment and skill levels (d) All of these
Part - B
21. What is International Economics?
(i) International Economics is that branch of economics which is concerned with the exchange
of goods and services between two or more countries.
(ii) Hence the subject matter is mainly related to foreign trade.
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22. Define international trade.

(i) It refers to the trade or exchange of goods and services between two or more countries.
(ii) In other words, it is a trade among different countries or trade across political boundaries.
(iii) It is also called as „external trade‟ or „foreign trade‟ or „inter-regional trade‟.
23. State any two merits of trade.
(i) Trade is one of the powerful forces of economic integration.
(ii) The term „trade‟ means exchange of goods, wares or merchandise among people.
24. What is the main difference between Adam Smith and Ricardo with regard to the
emergence of foreign trade?
Adam Smith Foreign Trade Ricardo Foreign Trade
According to Adam Smith, the basis of Ricardo demonstrates that the basis of trade is
international trade was absolute cost advantage. the comparative cost difference.
Trade between two countries would be Trade can take place even if the absolute cost
mutually beneficial when one country produces difference is absent but there is comparative
a commodity at an absolute cost advantage. cost difference.
25. Define Terms of Trade.
(i) The gains from international trade depend upon the terms of trade which refers to the ratio
of export prices to import prices.
Index of Export Prices

(ii) Terms of Trade TOT = × 100
Index of Import Prices
26. What do you mean by balance of payments?

 Balance of payments is a systematic record of a country‟s economic and financial
transactions with the rest of the world over a period of time.
27. What is meant by Exchange Rate?
(i) The transactions in the exchange market are carried out at exchange rates. It is the external
value of domestic currency.
(ii) Thus, exchange rate may be defined as the price paid in the home currency (say ` 75) for a
unit of foreign currency (say 1 US $).
Part - C
28. Describe the subject matter of International Economics.
(i) Pure Theory of Trade
 This component explains the causes for foreign trade, composition, direction and volume of
trade, determination of the terms of trade and exchange rate, issues related to balance of
trade and balance of payments.
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(ii) Policy Issues

 Under this part, policy issues such as free trade vs. protection, methods of regulating trade,
capital and technology flows, use of taxation, subsidies and dumping, exchange control and
convertibility, foreign aid, external borrowings and foreign direct investment, measures of
correcting disequilibrium in the balance of payments etc are covered.
(iii) International Cartels and Trade Blocs
 This part deals with the economic integration in the form of international cartels, customs
unions, monetary unions, trade blocs, economic unions and the like.
 It also discusses the operation of Multi National Corporations (MNCs).
(iv) International Financial and Trade Regulatory Institutions
 The financial institutions like International Monetary Fund IMF, IBRD, WTO etc which
influence international economic transactions and relations shall also be the part of
international economics.
29. Compare the Classical Theory of international trade with Modern Theory of International
trade.
Classical Theory of International Trade Modern Theory of International Trade
1. The classical theory explains the phenomenon The modern theory explains the phenomenon
of international trade on the basis of labour of international trade on the basis of general
theory of value. theory of value.
2. It presents a one factor (labour) model. It presents a multi - factor (labour and capital)
model.
3. It attributes the differences in the It attributes the differences in comparative costs
comparative costs to differences in the to the differences in factor endowments in the
productive efficiency of workers in the two two countries.
countries.
30. Explain the Net Barter Terms of Trade and Gross Barter Terms of Trade.
I. Net Barter Terms of Trade
(i) This type was developed by Taussig in 1927.
(ii) The ratio between the prices of exports and of imports is called the “net barter terms of
trade”.
(iii) It is named by Viner as the „commodity terms of trade‟.
(iv) It is expressed as:
Tn = (Px / Pm) × 100
Where,
Tn = Net Barter Terms of Trade
Px = Index number of export prices
Pm = Index number of import prices
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II. Gross Barter Terms of Trade

(i) This was developed by Taussig in 1927 as an improvement over the net terms of trade.
(ii) It is an index of relationship between total physical quantity of imports and the total
physical quantity of exports.
(iii) Tg = (Qx / Qm) x 100
Where,
Qm = Index of import quantities
Qx = Index of export quantities
31. Distinguish between Balance of Trade and Balance of Payments.
Balance of Trade Balance of Payments
1. Balance of Trade (BOT) refers to the total Balance of Payments (BOP) is a systematic
value of a country‟s exports of commodities and record of a country‟s economic and financial
total value of imports of commodities. transactions with the rest of the world over a
period of time.
2. Only export and import of commodities are The principal items shown on the credit side are
included in the statement of Balance of Trade of exports of goods and services, transfer receipts
a country. in the form of gift etc.
3. There are two types of Balance of Trade they There are two types of Balance of Payments
are Favourable Balance of Trade and they are Favourable Balance of Payments and
Unfavourable Balance of Trade. Unfavourable Balance of Payments.
32. What are import quotas?
(i) An import quota is a type of trade restriction that sets a physical limit on the quantity of a
good that can be imported into a country in a given period of time.
(ii) Quotas, like other trade restrictions, are typically used to benefit the producers of a good in
that economy.
33. Write a brief note on flexible exchange rate.
 Under the flexible exchange rate (also known as floating exchange rate) system, exchange
rates are freely determined in an open market by market forces of demand and supply.
34. State the objectives of Foreign Direct Investment.
 FDI has the following objectives.
(i) Sales Expansion (iii) Diversification
(ii) Acquisition of resources (iv) Minimization of competitive risk.
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Part - D
35. Discuss the differences between Internal Trade and International Trade.
S.No. Internal Trade International Trade
1. Trade takes place between different Trade takes place between different
individuals and firms within the same individuals and firms in different countries.
nation.
2. Labour and capital move freely from one Labour and capital do not move easily from
region to another. one nation to another.
3. There will be free flow of goods and Goods and services do not easily move from
services since there are no restrictions. one country to another since there are a
number of restrictions like tariff and quota.
4. There is only one common currency. There are different currencies.
5. The physical and geographical conditions There are differences in physical and
of a country are more or less similar. geographical conditions of the two
countries.
6. Trade and financial regulations are more or Trade and financial regulations such as
less the same. interest rate, trade laws differ between
countries.
7. There is no difference in political Differences are pronounced in political
affiliations, customs and habits of the affiliations, habits and customs of the people
people and government policies. and government policies.
36. Explain briefly the Comparative Cost Theory.
Introduction
(i) David Ricardo, the British economist in his „Principles of Political Economy and Taxation‟
published in 1817, formulated a systematic theory called „Comparative Cost Theory‟.
(ii) Later it was refined by J.S Mill, Marshall, Taussig and others.
Comparative Cost
(i) Ricardo demonstrates that the basis of trade is the comparative cost difference.
(ii) In other words, trade can take place even if the absolute cost difference is absent but there is
comparative cost difference.
(iii) According to Ricardo, a country can gain from trade when it produces at relatively lower
costs.
(iv) Even when a country enjoys absolute advantage in both goods, the country would
specialize in the production and export of those goods which are relatively more
advantageous.
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Assumptions
(i) There are only two nations and two commodities (2x2 model)
(ii) Labour is the only element of cost of production.
(iii) All labourers are of equal efficiency.
(iv) Labour is perfectly mobile within the country but perfectly immobile between countries.
(v) Production is subject to the law of constant returns. (ix) Perfect competition.
(vi) Foreign trade is free from all barriers. (x) Full employment.
(vii) No change in technology. (xi) No government intervention.
(viii) No transport cost.
Illustration
 Ricardo‟s theory of comparative cost can be explained with a hypothetical example of
production costs of cloth and wheat in America and India.
Comparative Cost Advantage
(Units of labour required to produce one unit)
Country Cloth Wheat Domestic Exchange Ratios
America 100 120 1 wheat =1.2 cloth
India 90 80 1 wheat=0.88 cloth
Diagrammatic Explanation
(i) However, India should concentrate on the
production of wheat in which she enjoys a
comparative cost advantage.
(80/120 < 90/100).
(ii) For America the comparative cost
disadvantage is lesser in cloth production.
(iii) Hence America will specialize in the
production of cloth and export it to India in
Labour required for one unit of cloth exchange for wheat.
(iv) Any exchange ratio between 0.88 units and 1.2 units of cloth against one unit of wheat
represents gain for both the nations.
(v) With trade, India can get 1 unit of cloth and 1 unit of wheat by using its 160 labour units.
(vi) In the absence of trade, for getting this benefit, India will have to use 170 units of labour.
(vii) America also gains from this trade.
(viii) With trade, America can get 1 unit of cloth and one unit of wheat by using its 200 units of
labour.
(ix) Otherwise, America will have to use 220 units of labour for getting 1 unit of cloth and 1 unit
of wheat.
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37. Discuss the Modern Theory of International Trade.

Introduction
(i) The modern theory of international trade was developed by Swedish economist Eli
Heckscher and his student Bertil Ohlin in 1919.
(ii) This model was based on the Ricardian theory of international trade.
(iii) This theory says that the basis for international trade is the difference in factor endowments.
(iv) It is otherwise called as „Factor Endowment Theory‟.
The Theory
(i) The classical theory argued that the basis for foreign trade was comparative cost difference
and it considered only labour factor.
(ii) But the modern theory of international trade explains the causes for such comparative cost
difference.
Attributes
(i) Difference in the endowments of factors of production between countries.
(ii) Differences in the factor proportions required in production.
Assumptions
(i) There are two countries, two commodities and two factors. (2x2x2 model)
(ii) Countries differ in factor endowments.
(iii) Commodities are categorized in terms of factor intensity.
(iv) Countries use same production technology.
(v) Countries have identical demand conditions.
(vi) There is perfect competition in both product and factor markets in both the countries.
Explanation
 According to Heckscher - Ohlin, “a capital-abundant country will export the capital –
intensive goods, while the labour-abundant country will export the labour-intensive
goods”.
Illustration
Particulars India America
Supply of Labour 50 24
Supply of Capital 40 30
Capital-Labour Ratio 40/50 = 0.8 30/24 = 1.25
Table Explanation
 In the above example, even though India has more capital in absolute terms, America is
more richly endowed with capital because the ratio of capital in India is 0.8 which is less
than that in America where it is 1.25. The following diagram illustrates the pattern of word
trade.
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Limitations
(i) Factor endowment of a country may change over time.
(ii) The efficiency of the same factor (say labour) may differ in the two countries.
38. Explain the types of Terms of Trade given by Viner.
I. The Single Factoral Terms of Trade
(i) Viner has devised another concept called „„the single factoral terms of trade‟‟ as an
improvement upon the commodity terms of trade.
(ii) It represents the ratio of export-price index to the import-price index adjusted for changes in
the productivity of a country‟s factors in the production of exports.
(iii) Symbolically, it can be stated as
Tf = (Px / Pm) Fx
Where,
Tf - Single factoral terms of trade index
Fx - Productivity in exports
II. Double Factoral Terms of Trade
(i) Viner constructed another index called „„Double factoral terms of Trade‟‟.
(ii) It is expressed as
Tff = (Px / Pm) (Fx / Fm)
(iii) Which takes into account the productivity in country‟s exports, as well as the productivity
of foreign factors.
(iv) Here, Fm represents import index.
39. Bring out the components of balance of payments account.
 Components of balance of payments account divided into three categories.
(i) The current account
(ii) The capital account
(iii) The official settlements account or official reserve assets account.
(i) The Current Account
 It includes all international trade transactions of goods and services, international service
transactions (i.e. tourism, transportation and royalty fees) and international unilateral
transfers (i.e. gifts and foreign aid).
(ii) The Capital Account
 Financial transactions consisting of direct investment and purchases of interest- bearing
financial instruments, non- interest bearing demand deposits and gold fall under the capital
account.
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(iii) The Official Reserve Assets Account

 Official reserve transactions consist of movements of international reserves by
governments.
 Official agencies to accommodate imbalances arising from the current and capital accounts.
 The official reserve assets of a country include its gold stock, holdings of its convertible
foreign currencies and Special Drawing Rights (SDRs) and its net position in the
International Monetary Fund (IMF).
Balance of Payment (BOP) Account Chart
Credit (Receipts) – Debit (Payments) = Balance [Deficit (-), Surplus (+)]
Deficit if Debit > Credit

40. Discuss the various types of disequilibrium in the balance of payments.
 There are three main types of BOP Disequilibrium.
(i) Cyclical Disequilibrium
(ii) Secular Disequilibrium
(iii) Structural Disequilibrium
(i) Cyclical Disequilibrium
 Cyclical disequilibrium occurs because of two reasons.
 First, two countries may be passing through different phases of business cycle.
 Secondly, the elasticities of demand may differ between countries.
(ii) Secular Disequilibrium
 The secular or long-run disequilibrium in BOP occurs because of long-run and deep seated
changes in an economy as it advances from one stage of growth to another.
 In the initial stages of development, domestic investment exceeds domestic savings and
imports exceed exports, as it happens in India since 1951.
(iii) Structural Disequilibrium
 Structural changes in the economy may also cause balance of payments disequilibrium.
 Such structural changes include development of alternative sources of supply,
development of better substitutes, exhaustion of productive resources or changes in
transport routes and costs.
41. How the Rate of Exchange is determined? Illustrate.
Determination of Equilibrium Exchange Rate
(i) The equilibrium rate of exchange is determined in the foreign exchange market in
accordance with the general theory of value, i.e., by the interaction of the forces of demand
and supply.
(ii) Thus, the rate of exchange is determined at the point where demand for forex is equal to the
supply of forex.
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Diagram Explanation
(i) Y axis represents exchange rate, that is, value of
rupee in terms of dollars.
(ii) X axis represents demand and supply of forex.
(iii) E is the point of equilibrium where DD intersects
SS.
(iv) The exchange rate is P2.
Quantities of Foreign Exchange Demanded and Supplied
42. Explain the relationship between Foreign Direct Investment and economic Development.
(i) FDI is an important factor in global economy.
(ii) Foreign trade and FDI are closely related.
(iii) In developing countries like India, FDI in the natural resource sector, including plantations,
increases trade volume.
(iv) Foreign production by FDI is useful to substitute foreign trade.
(v) FDI is also influenced by the income generated from the trade and regional integration
schemes.
(vi) FDI is helpful to accelerate the economic growth by facilitating essential imports needed for
carrying out development programmes like capital goods, technical know-how, raw
materials and other inputs and even scarce consumer goods.
(vii) When the export earnings of a country are not sufficient to finance for imports, FDI may be
required to fill the trade gap.
(viii) FDI is encouraged by the factors such as foreign exchange shortage, desire to create
employment and acceleration of the pace of economic development.
(ix) Many developing countries strongly prefer foreign investment to imports.
(x) However, the real impact of FDI on different sections of an economy (say India) may differ.
(xi) Large demand for USD, generated by IMF and World Bank policies (FUND – BANK
POLICIES), help the USD to gain value continuously.
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12 – Economics
Chapter - 8
International Economic Organisations

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Part - A
1. International Monetary Fund was an outcome of
(a) Pandung Conference (b) Dunkel Draft
(c) Bretton Woods Conference (d) Doha Conference
2. International Monetary Fund is having its headquarters at

(a) Washington D.C. (b) New York (c) Vienna (d) Geneva
3. IBRD is otherwise called

(a) IMF (b) World Bank (c) ASEAN (d) International Finance Corporation
4. The other name for Special Drawing Rights is

(a) Paper gold (b) Quotas (c) Voluntary Export Restrictions (d) None of these
5. The organization which provides long term loan is

(a) World Bank (b) International Monetary Fund (c) World Trade Organisation (d) BRICS
6. Which of the following countries is not a member of SAARC?

(a) Sri Lanka (b) Japan (c) Bangladesh (d) Afghanistan
7. International Development Association is an affiliate of

(a) IMF (b) World Bank (c) SAARC (d) ASEAN
8. ___________ relates to patents, copyrights, trade secrets, etc.

(a) TRIPS (b) TRIMS (c) GATS (d) NAMA
9. The first ministerial meeting of WTO was held at

(a) Singapore (b) Geneva (c) Seattle (d) Doha
10. ASEAN meetings are held once in every __________ years

(a) 2 (b) 3 (c) 4 (d) 5
11. Which of the following is not the member of SAARC?

(a) Pakistan (b) Sri Lanka (c) Bhutan (d) China
12. SAARC meets once in __________ years.
(a) 2 (b) 3 (c) 4 (d) 5
13. The headquarters of ASEAN is

(a) Jaharta (b) New Delhi (c) Colombo (d) Tokyo
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14. The term BRIC was coined in

(a) 2001 (b) 2005 (c) 2008 (d) 2010
15. ASEAN was created in

(a) 1965 (b) 1967 (c) 1972 (d) 1997
16. The Tenth BRICS Summit was held in July 2018 at

(a) Beijing (b) Moscow (c) Johannesburg (d) Brasilia
17. New Development Bank is associated with

(a) BRICS (b) WTO (c) SAARC (d) ASEAN
18. Which of the following does not come under ‘Six dialogue partners’ of ASEAN?
(a) China (b) Japan (c) India (d) North Korea
19. SAARC Agricultural Information Centre (SAIC) works as a central information institution
for agriculture related resources was founded on
(a) 1985 (b) 1988 (c) 1992 (d) 1998
20. BENELUX is a form of

(a) Free trade area (b) Economic Union (c) Common market (d) Customs union
Part - B
21. Write the meaning of Special Drawing rights.
(i) International monetary reserve currency created by the International Monetary Fund (IMF)
that operates as a supplement to the existing money reserves of member countries.
(ii) Special Drawing Rights is also known as paper gold.
22. Mention any two objectives of ASEAN.
(i) To accelerate the economic growth, social progress and cultural development in the region.
(ii) To promote regional peace and stability and adherence to the principles of the United
Nations Charter.
23. Point out any two ways in which IBRD lends to member countries.
(i) Loans out of its own fund (ii) Loans out of borrowed capital
24. Define Common Market.
(i) Common market is established through trade pacts.
(ii) A group formed by countries within a geographical area to promote duty free trade and
free movement of labour and capital among its members.
(iii) Example European Common Market (ECM)
25. What is Free trade area?
(i) A free trade area is the region encompassing a trade bloc whose member countries have
signed a free-trade agreement (FTA).
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(ii) Such agreements involve cooperation between at least two countries to reduce trade
barriers.
(iii) Example SAFTA, EFTA.
26. When and where was SAARC Secretariat established?
 The SAARC Secretariat was established in Kathmandu (Nepal) on 16th January 1987.
27. Specify any two affiliates of World Bank Group.
(i) International Bank for Reconstruction and Development (IBRD).
(ii) International Development Association (IDA).
(iii) International Finance Corporation (IFC).
Part - C
28. Mention the various forms of economic integration.
 Economic integration takes the form of Free Trade Area, Customs Union, Common Market
and Economic Union.
(i) Free trade area
 A free trade area is the region encompassing a trade bloc whose member countries have
signed a free-trade agreement (FTA).
 Such agreements involve cooperation between at least two countries to reduce trade
barriers.
 Examples SAFTA, EFTA.
(ii) Customs union
 A customs union is defined as a type of trade block which is composed of a free trade area
with no tariff among members and (zero tariffs among members) with a common external
tariff.
 Example BENELUX (Belgium, Netherland and Luxumbuarg).
(iii) Common market
 Common market is established through trade pacts.
 A group formed by countries within a geographical area to promote duty free trade and
free movement of labour and capital among its members.
 Example European Common Market (ECM).
(iv) Economic union
 An economic union is composed of a common market with a customs union.
 The participant countries have both common policies on product regulation, freedom of
movement of goods, services and the factors of production and a common external trade
policy.
 Example European Economic Union.
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29. What are trade blocks?

(i) Some countries create business opportunities for themselves by integrating their economies
in order to avoid unnecessary competition among them.
(ii) Trade blocks cover different kinds of arrangements between or among countries for mutual
benefit.
(iii) Economic integration takes the form of Free Trade Area, Customs Union, Common Market
and Economic Union.
30. Mention any three lending programmes of IMF.
(i) Extended Fund Facility
 Under this arrangement, the IMF provides additional borrowing facility up to 140% of the
member’s quota, over and above the basic credit facility.
 The extended facility is limited for a period up to 3 years and the rate of interest is low.
(ii) Buffer Stock Facility
 The buffer stock financing facility was started in 1969.
 The purpose of this scheme was to help the primary goods (food grains) producing
countries to finance contributions to buffer stock arrangements for the stabilisation of
primary product prices.
(iii) Supplementary Financing Facility
 Under the supplementary financing facility, the IMF makes temporary arrangements to
provide supplementary financial assistance to member countries facing payments problems
relating to their present quota sizes.
31. What is Multilateral Agreement?
(i) Multilateral trade agreements are commerce treaties between three or more nations.
(ii) The agreements reduce tariffs and make it easier for business to import and export.
(iii) Since they are among many countries, they are difficult to negotiate.
(iv) It is a multinational legal or trade agreements between countries.
(v) It is an agreement between more than two countries but not many.
32. Write the agenda of BRICS Summit, 2018.
(i) South Africa hosted the 10th BRICS summit in July 2018.
(ii) The agenda for BRICS summit 2018 includes Inclusive growth, Trade issues, Global
governance, Shared Prosperity, International peace and security.
33. State briefly the functions of SAARC.
(i) Maintenance of the co operation in the region.
(ii) Prevention of common problems associated with the member nations.
(iii) Ensuring strong relationship among the member nations.
(iv) Removal of the poverty through various packages of programmes.
(v) Prevention of terrorism in the region.
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34. List out the achievements of ASEAN.

(i) To accelerate the economic growth, social progress and cultural development in the region.
(ii) To promote regional peace and stability and adherence to the principles of the United
Nations Charter.
(iii) To promote cooperation among the members of ASEAN through the exchange of
knowledge and experience in the field of public sector auditing.
(iv) To provide a conducive environment and facilities for research, training, and education
among the members.
(v) To serve as a centre of information and as an ASEAN link with other international
organizations.
Part - D
35. Explain the objectives of IMF.
(i) To promote international monetary cooperation among the member nations.
(ii) To facilitate faster and balanced growth of international trade.
(iii) To ensure exchange rate stability by curbing competitive exchange depreciations.
(iv) To eliminate or reduce exchange controls imposed by member nations.
(v) To establish multilateral trade and payment system in respect of current transactions
instead of bilateral trade agreements.
(vi) To promote the flow of capital from developed to developing nations.
(vii) To solve the problem of international liquidity.
36. Bring out the functions of World Bank.
Introduction
(i) The World Bank performs the major role of providing loans for development works to
member countries, especially to underdeveloped countries.
(ii) The World Bank provides long-term loans for various development projects.
Functions of World Bank
(i) Investment for productive purposes
 The World Bank performs the function of assisting in the reconstruction and development
of territories of member nations through facility of investment for productive purposes.
 It also encourages the development of productive facilities and resources in less developed
countries.
(ii) Balanced growth of international trade
 Promoting the long range balanced growth of trade at international level and the
maintaining equilibrium in BOPs of member nations by encouraging international
investment.
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(iii) Provision of loans and guarantees

 Arranging the loans or providing guarantees on loans by various other channels so as to
execute important projects.
(iv) Promotion of foreign private investment
 The promotion of private foreign investment by means of guarantees on loans and other
investment made by private investors.
 The Bank supplements private investment by providing finance for productive purpose out
of its own resources or from borrowed funds.
(v) Technical services
 The World Bank facilitates different kinds of technical services to the member countries
through Staff College and experts.
37. Discuss the role of WTO in India’s socio economic development.
 India is the founding member of the WTO.
 India favours multilateral trade approach.
 It enjoys MFN status and allows the same status to all other trading partners.
 India benefited from WTO on following grounds:
(i) By reducing tariff rates on raw materials, components and capital goods, it was able to
import more for meeting her developmental requirements. India's imports go on increasing.
(ii) India gets market access in several countries without any bilateral trade agreements.
(iii) Advanced technology has been obtained at cheaper cost.
(iv) India is in a better position to get quick redressal from the trade disputes.
(v) The Indian exporters benefited from wider market information.
38. Write a note on (a) SAARC (b) BRICS
I. SAARC
(i) The South Asian Association for Regional Co-operation (SAARC) is an organisation of
South Asian nations, which was established on 8 December 1985 for the promotion of
economic and social progress, cultural development within the South Asia region.
(ii) The SAARC Group (SAARC) comprises of Bangaladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.
In April 2007, Afghanistan became its eighth member.
(iii) The basic aim of the organisation is to accelerate the process of economic and social
development of member states through joint action in the agreed areas of cooperation.
(iv) The SAARC Secretariat was established in Kathmandu (Nepal) on 16th January 1987.
(v) The first SAARC summit was held at Dhaka in the year 1985.
(vi) SAARC meets once in two years.
Recently, the 20th SAARC summit was hosted by Srilanka in 2018.
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II. BRICS
(i) BRICS is the acronym for an association of five major emerging national economies: Brazil,
Russia, India, China and South Africa.
(ii) Originally the first four were grouped as "BRIC" before the induction of South Africa in
2010.
The term ‘BRIC’ was coined in 2001.
(iii) Its headquarters is at Shanghai, China.
(iv) The first BRICS summit was held at Moscow.
(v) South Africa hosted the 10th BRICS summit in July 2018.
The agenda for BRICS summit 2018 includes Inclusive growth, Trade issues, Global
governance, Shared Prosperity, International peace and security.
(vi) The New Development Bank (NDB) formerly referred to as the BRICS Development Bank
was established by BRICS States.
(vii) India had an opportunity of hosting fourth and Eighth summits in 2012 and 2016
respectively.
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12 – Economics
Chapter - 9
Fiscal Economics

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Part - A
1. The modern state is
(a) Laissez-faire state (b) Aristocratic state (c) Welfare state (d) Police state
2. One of the following is NOT a feature of private finance

(a) Balancing of income and expenditure (b) Secrecy
(c) Saving some part of income (d) Publicity
3. The tax possesses the following characteristics

(a) Compulsory (b) No quid pro quo (c) Failure to pay is offence (d) All the above
4. Which of the following canons of taxation was not listed by Adam smith?
(a) Canon of equality (b) Canon of certainty
(c) Canon of convenience (d) Canon of simplicity
5. Consider the following statements and identify the correct ones.

i. Central government does not have exclusive power to impose tax which is not
mentioned in state or concurrent list.
ii. The Constitution also provides for transferring certain tax revenues from union list to
states.
(a) i only (b) ii only (c) both (d) none
6. GST is equivalence of
(a) Sales tax (b) Corporation tax (c) Income tax (d) Local tax
7. The direct tax has the following merits except

(a) equity (b) convenient (c) certainty (d) civic consciousness
8. Which of the following is a direct tax?

(a) Excise duty (b) Income tax (c) Customs duty (d) Service tax
9. Which of the following is not a tax under Union list?

(a) Personal Income Tax (b) Corporation Tax (c) Agricultural Income Tax (d) Excise duty
10. “Revenue Receipts” of the Government do not include

(a) Interest (b) Profits and dividends (c) Recoveries and loans (d) Rent from property
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11. The difference between revenue expenditure and revenue receipts is

(a) Revenue deficit (b) Fiscal deficit (c) Budget deficit (d) Primary deficit
12. The difference between total expenditure and total receipts including loans and other
liabilities is called
(a) Fiscal deficit (b) Budget deficit (c) Primary deficit (d) Revenue deficit
13. The primary purpose of deficit financing is

(a) Economic development (b) Economic stability
(c) Economic equality (d) Employment generation
14. Deficit budget means

(a) An excess of government‟s revenue over expenditure
(b) An excess of government‟s current expenditure over its current revenue
(c) An excess of government’s total expenditure over its total revenue
(d) None of above
15. Methods of repayment of public debt is

(a) Conversion (b) Sinking fund (c) Funded debt (d) All these
16. Conversion of public debt means exchange of

(a) New bonds for the old ones (b) Low interest bonds for higher interest bonds
(c) Long term bonds for short term bonds (d) All the above
17. The word budget has been derived from the French word “bougette” which means
(a) A small bag (b) An empty box (c) A box with papers (d) None of the above
18. Which one of the following deficits does not consider borrowing as a receipt?
(a) Revenue deficit (b) Budgetary deficit (c) Fiscal deficit (d) Primary deficit
19. Finance Commission determines

(a) The finances of Government of India (b) The resources transfer to the states
(c) The resources transfer to the various departments (d) None of the above
20. Consider the following statements and identify the right ones.
i. The finance commission is appointed by the President
ii. The tenure of Finance commission is five years
(a) i only (b) ii only (c) both (d) none
Part - B
21. Define public finance.
Huge Dalton
 “Public finance is one of those subjects that lie on the border line between Economics and
Politics.
 It is concerned with income and expenditure of public authorities and with the adjustment
of one to the other”.
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22. What is public revenue?

 Public revenue deals with the methods of raising public revenue such as tax and non-tax,
the principles of taxation, rates of taxation, impact, incidence and shifting of taxes and their
effects.
23. Differentiate tax and fee.
TAX FEE
1. A tax is a compulsory made to the Fees are another important source of revenue
government. for the government.
2. Tax revenue sources are Income tax, Fees are charged for issuing of passports,
Corporate tax, Sales tax, Surcharge and Cess. driving licenses, etc.
24. Write a short note on zero based budget.
(i) The Government of India presented Zero-Base-Budgeting (ZBB first) in 1987-88.
(ii) It involves fresh evaluation of expenditure in the Government budget, assuming it as a new
item.
(iii) The review has been made to provide justification or otherwise for the project as a whole in
the light of the socio-economic objectives which have been already set up for this project
and as well as in view of the priorities of the society.
25. Give two examples for direct tax.
(i) Income Tax (ii) Corporation Tax
26. What are the components of GST?
 The components of GST are of 3 types.
 They are: CGST, SGST & IGST.
(i) CGST
 Collected by the Central Government on an intra-state sale.
 Example: Within state/ union territory
(ii) SGST
 Collected by the State Government on an intra-state sale.
 Example: Within state/ union territory
(iii) IGST
 Collected by the Central Government for inter-state sale.
 Example: Maharashtra to Tamil Nadu
27. What do you mean by public debt?
(i) Public debt with the methods of raising loans from internal and external sources.
(ii) The burden effects and redemption of public debt fall under this head.
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Part - C
28. Describe canons of Taxation.
 According to Adam Smith, there are four canons or maxims of taxation.
 They are as follows:
(i) Canon of Ability
 The Government should impose tax in such a way that the people have to pay taxes
according to their ability.
(ii) Canon of Certainty
 The Government must ensure that there is no uncertainty regarding the rate of tax or the
time of payment.
(iii) Canon of Convenience
 The Government should make convenient arrangement for all the tax payers to pay the
taxes without difficulty.
(iv) Canon of Economy
 The Government has to spend money for collecting taxes.
 According to Smith, the Government should impose only those taxes whose collection costs
are very less and cheap.
29. Mention any three similarities between public finance and private finance.
(i) Rationality
 Both public finance and private finance are based on rationality.
 Maximization of welfare and least cost factor combination underlie both.
(ii) Limit to borrowing
 Both have to apply restraint with regard to borrowing.
 The Government also cannot live beyond its means.
 There is a limit to deficit financing by the state also.
(iii) Resource utilisation
 Both the private and public sectors have limited resources at their disposal.
 So both attempt to make optimum use of resources.
30. What are the functions of a modern state?
(i) Defence
 The primary function of the Government is to protect the people from external aggression
and internal disorder.
(ii) Judiciary
 Rendering justice and settlement of disputes are the concern of the government.
(iii) Enterprises
 The regulation and control of private enterprise fall under the purview of the modern State.
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(iv) Social Welfare

 It is the duty of the state to make provisions for education, social security, social insurance,
health and sanitation for the betterment of the people in the country.
(v) Infrastructure
 Modern States have to build the base for the economic development of the country by
creating social and economic infrastructure.
(vi) Macro-economic policy
 The Government has to administer fiscal policy and monetary policy to achieve macro-
economic goals.
(vii) Social Justice
 During the process of growth of an economy, certain sections of the society gain at the cost
of others.
(viii) Control of Monopoly
 Concentration of economic power is another evil to be corrected by the Government.
32. Point out any three differences between direct tax and indirect tax.
Basis For
Direct Tax Indirect Tax
Comparison
1. Meaning Direct tax is referred to as the tax, Indirect Tax is referred to as the tax,
levied on person‟s income and wealth levied on a person who consumes the
and is paid directly to the government. goods and services and is paid
indirectly to the government.
2. Nature Progressive Regressive
3. Incidence Falls on the same person. Falls on different persons.
and Impact
4. Tax base Income or wealth of the assessee. Purchase/sale/manufacture of goods
and provision of services.
5. Inflation Direct tax helps in controlling the Indirect taxes push up price inflation.
inflation.
6. Burden Cannot be shifted. Can be shifted.
33. What is primary deficit?
(i) Primary deficit is equal to fiscal deficit minus interest payments.
(ii) It shows the real burden of the government and it does not include the interest burden on
loans taken in the past.
(iii) Thus, primary deficit reflects borrowing requirement of the government exclusive of
interest payments.
(iv) Primary Deficit (PD) = Fiscal deficit (PD) - Interest Payment (IP)
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34. Mention any three methods of redemption of public debt.

(i) Sinking Fund
 Under this method, the Government establishes a separate fund known as “Sinking Fund”.
 The Government credits every year a fixed amount of money to this fund.
 By the time the debt matures, the fund accumulates enough amount to pay off the principal
along with interest.
 This method was first introduced in England by Walpol.
(ii) Conversion
 Conversion of loans is another method of redemption of public debt.
 It means that an old loan is converted into a new loan.
 Under this system a high interest public debt is converted into a low interest public debt.
 Dalton felt that debt conversion actually relaxes the debt burden.
(iii) Budgetary Surplus
 When the Government presents surplus budget, it can be utilised for repaying the debt.
 Surplus occurs when public revenue exceeds the public expenditure.
 However, this method is rarely possible.
Part - D
35. Explain the scope of public finance.
 In Modern times, the subject „Public Finance‟ includes five major sub-divisions.
 Public Revenue, Public Expenditure, Public Debt, Financial Administration and Fiscal
Policy.
(i) Public Revenue
 Public revenue deals with the methods of raising public revenue such as tax and non-tax,
the principles of taxation, rates of taxation, impact, incidence and shifting of taxes and their
effects.
(ii) Public Expenditure
 This part studies the fundamental principles that govern the Government expenditure,
effects of public expenditure and control of public expenditure.
(iii) Public Debt
 Public debt deals with the methods of raising loans from internal and external sources.
 The burden, effects and redemption of public debt fall under this head.
(iv) Financial Administration
 This part deals with the study of the different aspects of public budget.
 The budget is the Annual master financial plan of the Government.
 The various objectives and steps in preparing a public budget, passing or sanctioning,
allocation evaluation and auditing fall within financial administration.
(v) Fiscal Policy
 Taxes, subsidies, public debt and public expenditure are the instruments of fiscal policy.
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36. Bring out the merits of indirect taxes over direct taxes.
(i) Wider Coverage
 All the consumers, whether they are rich or poor, have to pay indirect taxes.
 For this reason, it is said that indirect taxes can cover more people than direct taxes.
 For example, in India everybody pays indirect tax as against just 2 percent paying income
tax.
(ii) Equitable
 The indirect tax satisfies the canon of equity when higher tax is imposed on luxuries used
by rich people.
(iii) Economical
 Cost of collection is less as producers and retailers collect tax and pay to the Government.
 The traders act as honorary tax collectors.
(iv) Checks harmful consumption
 The Government imposes indirect taxes on those commodities which are harmful to health
e.g. tobacco, liquor etc.
 They are known as sin taxes.
(v) Convenient
 Indirect taxes are levied on commodities and services.
 Whenever consumers make purchase, they pay tax along with the price.
 They do not feel the pinch of paying tax.
37. Explain the methods of debt redemption.
 The process of repaying a public debt is called redemption.
 The Government sells securities to the public and at the time of maturity, the person who
holds the security surrenders it to the Government.
(i) Sinking Fund
 Under this method, the Government establishes a separate fund known as “Sinking Fund”.
 The Government credits every year a fixed amount of money to this fund.
 By the time the debt matures, the fund accumulates enough amount to pay off the principal
along with interest.
(ii) Conversion
 Conversion of loans is another method of redemption of public debt.
 It means that an old loan is converted into a new loan.
 Under this system a high interest public debt is converted into a low interest public debt.
(iii) Budgetary Surplus
 When the Government presents surplus budget, it can be utilised for repaying the debt.
 Surplus occurs when public revenue exceeds the public expenditure.
(iv) Terminal Annuity
 In this method, Government pays off the public debt on the basis of terminal annuity in
equal annual instalments.
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(v) Repudiation
 The Government does not recognise its obligation to repay the loan.
 It is certainly not paying off a loan but destroying it.
(vi) Reduction in Rate of Interest
 Another method of debt redemption is the compulsory reduction in the rate of interest,
during the time of financial crisis.
(vii) Capital Levy
 When the Government imposes levy on the capital assets owned by an individual or any
institution, it is called capital levy.
 This levy is imposed on capital assets above a minimum limit on a progressive scale.
 The fund so collected can be used by the Government for paying off war time debt
obligations.
38. State and explain instruments of fiscal policy.
 Fiscal Policy is implemented through fiscal instruments also called „fiscal tools‟ or fiscal
levers: Government expenditure, taxation and borrowing are the fiscal tools.
(i) Taxation
 Taxes transfer income from the people to the Government.
 Taxes are either direct or indirect.
 An increase in tax reduces disposable income.
 So taxation should be raised to control inflation.
 During depression, taxes are to be reduced.
(ii) Public Expenditure
 Public expenditure raises wages and salaries of the employees and thereby the aggregate
demand for goods and services.
 Hence public expenditure is raised to fight recession and reduced to control inflation.
(iii) Public debt
 When Government borrows by floating a loan, there is transfer of funds from the public to
the Government.
 At the time of interest payment and repayment of public debt, funds are transferred from
Government to public.
39. Explain the principles of federal finance.
(i) Principle of Independence
 Under the system of federal finance, a Government should be autonomous and free about
the internal financial matters concerned.
 It means each Government should have separate sources of revenue, authority to levy
taxes, to borrow money and to meet the expenditure.
(ii) Principle of Equity
 From the point of view of equity, the resources should be distributed among the different
states so that each state receives a fair share of revenue.
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(iii) Principle of Uniformity

 In a federal system, each state should contribute equal tax payments for federal finance.
(iv) Principle of Adequacy of Resources
 The principle of adequacy means that the resources of each Government.
 That is Central and State should be adequate to carry out its functions effectively.
 Here adequacy must be decided with reference to both current as well as future needs.
 Besides, the resources should be elastic in order to meet the growing needs and unforeseen
expenditure like war, floods etc.
(v) Principle of Fiscal Access
 In a federal system, there should be possibility for the Central and State Governments to
develop new source of revenue within their prescribed fields to meet the growing financial
needs.
(vi) Principle of Integration and coordination
 The financial system as a whole should be well integrated.
 There should be perfect coordination among different layers of the financial system of the
country.
 Then only the federal system will survive.
(vii) Principle of Efficiency
 The financial system should be well organized and efficiently administered.
 There should be no scope for evasion and fraud.
 No one should be taxed more than once in a year.
 Double taxation should be avoided.
(viii) Principle of Administrative Economy
 Economy is the important criterion of any federal financial system.
 That is, the cost of collection should be at the minimum level and the major portion of
revenue should be made available for the other expenditure outlays of the Governments.
(ix) Principle of Accountability
 Each Government should be accountable to its own legislature for its financial decisions.
 That is the Central to the Parliament and the State to the Assembly.
40. Describe the various types of deficit in budget.
 Budget deficit is a situation where budget receipts are less than budget expenditures.
 This situation is also known as government deficit.
 In reference to the Indian Government budget, budget deficit is of four major types.
(i) Revenue Deficit (iii) Fiscal Deficit
(ii) Budget Deficit (iv) Primary Deficit
(i) Revenue Deficit
 It refers to the excess of the government revenue expenditure over revenue receipts.
 It does not consider capital receipts and capital expenditure.
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 Revenue deficit implies that the government is living beyond its means to conduct day-to-
day operations.
Revenue Deficit (RD) = Total Revenue Expenditure (RE) - Total Revenue Receipts (RR)
When RE - RR > 0
(ii) Budget Deficit
 Budget deficit is the difference between total receipts and total expenditure (both revenue
and capital).
Budget Deficit = Total Expenditure – Total Revenue
(iii) Fiscal Deficit
Fiscal deficit (FD) = Budget deficit + Government‟s market borrowings and liabilities
(iv) Primary Deficit
 Primary deficit is equal to fiscal deficit minus interest payments.
 It shows the real burden of the government and it does not include the interest burden on
loans taken in the past.
 Thus, primary deficit reflects borrowing requirement of the government exclusive of
interest payments.
Primary Deficit (PD) = Fiscal deficit (PD) - Interest Payment (IP)
41. What are the reasons for the recent growth in public expenditure?
 The modern state is a welfare state.
 In a welfare state, the government has to perform several functions viz Social, economic
and political.
 These activities are the cause for increasing public expenditure.
(i) Population Growth
 During the past 67 years of planning, the population of India has increased from 36.1 crore
in 1951, to 121 crore in 2011.
 The growth in population requires massive investment in health and education, law and
order, etc.
(ii) Defence Expenditure
 The defence expenditure has been increasing tremendously due to modernisation of
defence equipment.
 The defence expenditure of the government was ` 10,874 crores in 1990-91 which increased
significantly to ` 2,95,511crores in 2018-19.
(iii) Government Subsidies
 The Government of India has been providing subsidies on a number of items such as food,
fertilizers, interest on priority sector lending, exports, education, etc.
 Because of the massive amounts of subsidies, the public expenditure has increased
manifold.
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(iv) Debt Servicing

 The government has been borrowing heavily both from the internal and external sources.
 As a result, the government has to make huge amounts of repayment towards debt
servicing.
(v) Development Projects
 The government has been undertaking various development projects such as irrigation,
iron and steel, heavy machinery, power, telecommunications, etc.
 The development projects involve huge investment.
(vi) Urbanisation
 There has been an increase in urbanization.
 The increase in urbanization requires heavy expenditure on law and order, education and
civic amenities.
(vii) Industrialisation
 Setting up of basic and heavy industries involves a huge capital and long gestation period.
 It is the government which starts such industries in a planned economy.
(viii) Increase in grants in aid to state and union territories
 There has been tremendous increase in grant-in-aid to state and union territories to meet
natural disasters.
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12 – Economics
Chapter - 10
Environmental Economics

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Part - A
1. The term environment has been derived from a French word __________.
(a) Environ (b) Environs (c) Environia (d) Envir
2. The word biotic means environment

(a) living (b) non-living (c) physical (d) None of the above
3. Ecosystem is smallest unit of

(a) Ionosphere (b) Lithosphere (c) Biosphere (d) Mesosphere
4. Who developed Material Balance Models?

(a) Thomas and Picardy (b) Alen Kneese and R.V. Ayres
(c) Joan Robinson and J.M. Keynes (d) Joseph Stiglitz and Edward Chamberlin
5. Environmental goods are __________.

(a) Market goods (b) Non-market goods (c) Both (d) None of the above
6. In a pure public good, consumption is __________.

(a) Rival (b) Non-rival (c) Both (d) None of the above
7. One of the most important market failures is caused by __________.

(a) Positive externalities (b) Negative externalities (c) Both (d) None of the above
8. The common source of outdoor air pollution is caused by combustion processes from the
following ___________.
(a) Heating and cooking (b) Traditional stoves (c) Motor vehicles (d) All the above
9. The major contributor of Carbon monoxide is
(a) Automobiles (b) Industrial process (c) Stationary fuel combustion (d) None of the above
10. Which one of the following causes of global warming?

(a) Earth gravitation force (b) Oxygen (c) Centripetal force (d) Increasing temperature
11. Which of the following is responsible for protecting humans from harmful ultraviolet rays?
(a) UV-A (b) UV-C (c) Ozone layer (d) None of the above
12. Global warming also refers to as
(a) Ecological change (b) Climate Change (c) Atmosphere change (d) None of the above
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13. Which of the following is the anticipated effect of Global warming?

(a) Rising sea levels (b) Changing precipitation (c) Expansion of deserts (d) All of the above
14. The process of nutrient enrichment is termed as
(a) Eutrophication (b) Limiting nutrients (c) Enrichment (d) Schistosomiasis
15. Primary cause of Soil pollution is __________.

(a) Pest control measures (b) Land reclamation
(c) Agricultural runoff (d) Chemical fertilizer
16. Which of the following is main cause for deforestation?

(a) Timber harvesting industry (b) Natural afforestation
(c) Soil stabilization (d) Climate stabilization
17. Electronic waste is commonly referred as __________.

(a) solid waste (b) composite waste (c) e-waste (d) hospital waste
18. Acid rain is one of the consequences of ___________.

(a) Water Pollution (b) Land pollution (c) Noise pollution (d) None of these
19. Sustainable Development Goals and targets are to be achieved by ___________.

(a) 2020 (b) 2025 (c) 2030 (d) 2050
20. Alkali soils are predominantly located in the ___________ plains?

(a) Indus-Ganga (b) North-Indian (c) Gangetic plains (d) All the above
Part - B
21. State the meaning of environment.
(i) The term environment has been derived from a French word “Environia” means to
surround.
(ii) Environment means “all the conditions, circumstances, and influences surrounding and
affecting the development of an organism or group of organisms”.
22. What do you mean by ecosystem?
(i) An ecosystem includes all living things (plants, animals and organisms) in a given area,
interacting with each other, and also with their non-living environments (weather, earth,
sun, soil, climate, atmosphere).
(ii) Ecosystems are the foundations of the Biosphere and they determine the health of the entire
earth system.
23. Mention the countries where per capita carbondioxide emission is the highest in the world.
(i) United States of America (iii) Canada (v) Europian Union
(ii) Japan (iv) Netherlands (vi) Russian Federation
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24. What are environmental goods? Give examples.

 Environmental goods are typically non-market goods, including clear air, clean water,
landscape, green transport infrastructure (footpaths, cycle ways, greenways, etc.), public
parks, urban parks, rivers, mountains, forests, and beaches.
25. What are the remedial measures to control noise pollution?
(i) Use of noise barriers (iv) Regulating times for heavy vehicles
(ii) Newer roadway for surface transport (v) Installations of noise barriers in the work place
(iii) Traffic control (vi) Regulation of Loudspeakers
26. Define Global warming.
 Global warming is the current increase in temperature of the Earth‟s surface (both land and
water) as well as its atmosphere.
27. Specify the meaning of seed ball.
 A seed ball (or seed bomb) is a seed that has been wrapped in soil materials, usually a
mixture of clay and compost, and then dried.
Part - C
29. Specify the meaning of material balance principle.
(i) The first law of thermodynamics, i.e. the law of
conservation of matter and energy, emphasizes that in any
production system “what goes in must come out”.
(ii) This is known as the Material Balance Approach or

Material Balance Principle.
(iii) The material flow diagram implies that mass inputs must
equal mass outputs for every process.
(iv) Moreover, all resources extracted from the environment

eventually become unwanted wastes and pollutants.
(v) Production of output by firms from inputs resulting in

discharge of solid, liquid and gaseous wastes.
(vi) Similarly, waste results from consumption activities by

households.
(vii) In short, material and energy are drawn from

environment, used for production and consumption
W1 & W2 = Waste from Prod and
Household Sector, F=Final Product activities and returned back to the environment as wastes.
 In its simple form the Material Balance Approach can be put in form equation.
M = G – (Rc – RP) + (Rrp + Rrc) = Rdp + Rdc
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28. Brief the linkage between economy and environment.

(i) Man‟s life is interconnected with various other living and non-living things.
(ii) The life also depends on social, political, ethical, philosophical and other aspects of
economic system.
(iii) In fact, the life of human beings is shaped by his living environment.
(iv) The relationship between the economy and the environment is generally explained in the
form of a “Material Balance Model‟‟ developed by Alen Kneese and R.V. Ayres.
(v) The model considers the total economic process as a physically balanced flow between
inputs and outputs.
(vi) Inputs are bestowed with physical property of energy which is received from the
environment.
30. Explain different types of air pollution.
I. Indoor Air Pollution
(i) It refers to toxic contaminants that we encounter in our daily lives in our homes, schools
and workplaces.
(ii) For example, cooking and heating with solid fuels on open fires or traditional stoves results
in high levels of indoor air pollution.
II. Outdoor Air Pollution
(i) It refers to ambient air.
(ii) The common sources of outdoor air pollution are caused by combustion processes from
motor vehicles, solid fuel burning and industry.
31. What are the causes of water pollution?
(i) Discharge of sewage and waste water
 Sewage, garbage and liquid waste of households, agricultural runoff and effluents from
factories are discharged into lakes and rivers.
(ii) Dumping of solid wastes
 The dumping of solid wastes and litters in water bodies cause huge problems.
(iii) Discharge of industrial wastage
 Industrial waste contains pollutants like asbestos, lead, mercury, grease oil and
petrochemicals, which are extremely harmful to both people and environment.
(iv) Oil Spill
 Sea water gets polluted due to oil spilled from ships and tankers while travelling.
 The spilled oil does not dissolve in water and forms a thick sludge polluting the water.
(v) Acid rain
 Acid rain is pollution of water caused by air pollution.
 When the acidic particles caused by air pollution in the atmosphere mix with water vapor,
it results in acid rain.
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(vi) Global warming

 Due to global warming, there is an increase in water temperature as a result aquatic plants
and animals are affected.
32. State the meaning of e-waste.
(i) Electronic waste which is commonly referred as “e-waste” is the new by product of the Info
Tech society.
(ii) It is a physical waste in the form of old discarded, end of life electronics.
(iii) It includes a broad and growing range of electronic devices from large household
appliances such as refrigerators, air conditioners, cellular phones, computers and other
electronic goods".
(iv) Similarly, e-waste can be defined as the result when consumer, business and household
devices are disposed or sent for re-cycling.
(v) Examples: Television, Computers, Audio-equipments, VCR, DVD, Telephone, Fax, Xerox
machines, Wireless devices, Video games, Other household electronic equipments.
33. What is land pollution? Mention the causes of land pollution.
Meaning of Land pollution
(i) The land pollution is defined as, “the degradation of land because of the disposal of waste
on the land”.
(ii) Any substance (solid, liquid or gaseous) that is discharged, emitted or deposited in the
environment in such a way that it alters the environment causes land pollution.
Causes of Land Pollution
(i) Deforestation and soil erosion
 Deforestation carried out to create dry lands is one of the major concerns.
(ii) Agricultural activities
 With growing human and pet animal population, demand for food has increased
considerably.
 Farmers often use highly toxic fertilizers and pesticides to get rid off insects, fungi and
bacteria from their crops.
(iii) Mining activities
 During extraction and mining activities, several land spaces are created beneath the surface.
(iv) Landfills
 Each household produces tones of garbage each year due to changing economic lifestyle of
the people.
 Garbage like plastic, paper, cloth, wood and hospital waste get accumulated.
(v) Industrialization
 Due to increasing consumerism more industries were developed which led to
deforestation.
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34. Write a note on (a) Climate change and (b) Acid rain
(a) Climate change
(i) The climate change refers to seasonal changes over a long period with respect to the
growing accumulation of greenhouse gases in the atmosphere.
(ii) Several parts of the world have already experienced the warming of coastal waters, high
temperatures, a marked change in rainfall patterns, and an increased intensity and
frequency of storms.
(iii) Sea levels and temperatures are expected to be rising.
(b) Acid rain
(i) Acid rain is one of the consequences of air pollution.
(ii) It occurs when emissions from factories, cars or heating boilers contact with the water in the
atmosphere.
(iii) These emissions contain nitrogen oxides, sulphur dioxide and sulphur trioxide which when
mixed with water becomes sulfurous acid, nitric acid and sulfuric acid.
(iv) This process also occurs by nature through volcanic eruptions. It can have harmful effects
on plants, aquatic animals and infrastructure.
Part - D
35. Briefly explain the relationship between GDP growth and the quality of environment.
(i) Environmental quality is a set of properties and characteristics of the environment either
generalized or local, as they impinge on human beings and other organisms.
(ii) It is a measure of the condition of an environment relative to the requirements of one or
more species and to any human need.
(iii) Environmental quality has been continuously declining due to capitalistic mode of
functioning.
(iv) Environment is a pure public good that can be consumed simultaneously by everyone and
from which no one can be excluded.
(v) A pure public good is one for which consumption is non-revival and from which it is
impossible to exclude a consumer.
(vi) Pure public goods pose a free-rider problem.
(vii) As a result, resources are depleted.
(viii) The contribution of the nature to GDP as well as depletion of natural resources are not
accounted in the present system of National Income Enumeration.
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36. Explain the concepts of externality and its classification.

Meaning of Externality
(i) Externalities refer to external effects or spillover effects resulting from the act of production
or consumption on the third parties.
(ii) Externalities arise due to interdependence between economic units.
Classification of Externalities
 The externalities arise from both production and consumption activities and their impact
could be beneficial or adverse.
 Beneficial externalities are called “positive externalities” and adverse ones are called
“negative externalities”.
(i) Positive Consumption Externality
 When some residents of a locality hire a private security agency to patrol their area, the
other residents of the area also benefit from better security without bearing cost.
(ii) Negative Consumption Externality
 A person smoking cigarette gets may gives satisfaction to that person, but this act causes
hardship (dissatisfaction) to the non-smokers who are driven to passive smoking.
(iii) Positive Production Externality
 The ideal location for beehives is orchards (first growing fields).
 While bees make honey, they also help in the pollination of apple blossoms.
 The benefits accrue to both producers (honey as well as apple).
 This is called „reciprocal untraded interdependency.
(iv) Negative Production Externality
 Negative production externalities include pollution generated by a factory that imposes
costs on others.
 The emissions and effluents of a factory cause air and water pollution.
 Water becomes contaminated and unfit for drinking e.g. Tanneries.
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37. Explain the importance of sustainable development and its goals.

Meaning of Sustainable development
(i) Sustainable development is concerned with the welfare of not only present generation but
also future generation.
(ii) It aims at not only satisfying the luxury wants of the upper class i.e. rich but also the basic
necessities of the poor like food, sanitation, health care, education etc.
Sustainable Development Goals (SDGs)
 It is crucial to harmonize three core elements such as economic growth, social inclusion and
environmental protection.
(1) End Poverty in all its forms everywhere.
(2) End hunger, achieve food security and improved nutrition and promote sustainable
agriculture.
(3) Ensure healthy lives and promote well-being for all at all ages.
(4) Ensure inclusive and quality education for all and promote lifelong learning.
(5) Achieve gender equality and empower women and girls.
(6) Ensure access to water and sanitation for all.
(7) Ensure access to affordable, reliable, sustainable and modern energy for all.
(8) Promote inclusive and sustainable economic growth, employment and decent work for all.
(9) Build resilient infrastructure, promote sustainable industrialization and foster innovation.
(10) Reduce inequality within and among countries.
(11) Make cities inclusive, safe, resilient and sustainable.
(12) Ensure sustainable consumption and production pattern.
(13) Take urgent action to combat climate change and its impacts.
(14) Conserve and sustainably use the oceans, seas and marine resources.
(15) Sustainably manage forests, combat desertification, halt and reverse land degradation, halt
biodiversity loss.
(16) Promote just, peaceful and inclusive societies.
(17) Revitalize the global partnership for sustainable development.
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12 – Economics
Chapter - 11
Economics of Development and Planning

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Part - A
1. "Redistribution with Growth" became popular slogajer which approach?
(a) Traditional approach (b) New welfare oriented approach
(c) Industrial approach (d) None of the above
2. Which is not the feature of economic growth?

(a) Concerned with developed nations (b) Gradual change
(c) Concerned with quantitative aspect (d) Wider concept
3. Which among the following is a characteristic of underdevelopment?

(a) Vicious circle of poverty (b) Rising mass consumption
(c) Growth of Industries (d) High rate of urbanization
4. The non-economic determinant of economic development

(a) Natural resources (b) Human resource (c) Capital formation (d) Foreign trade
5. Economic growth measures the __________.

(a) Growth of productivity (b) Increase in nominal income
(c) Increase in output (d) None of the above
6. The supply side vicious circle of poverty suggests that poor nations remain poor because
(a) Saving remains low (b) Investment remains low
(c) There is a lack of effective government (d) a and b above
7. Which of the following plan has focused on the agriculture and rural economy?
(a) People‟s Plan (b) Bombay Plan (c) Gandhian Plan (d) Vishveshwarya Plan
8. Arrange following plans in correct chronological order

(a) People‟s Plan (b) Bombay Plan (c) Jawaharlal Nehru Plan (d) Vishveshwarya Plan
Answer choices
(a) (i) (ii) (iii) (iv)
(b) (iv) (iii) (ii) (i)
(c) (i) (ii) (iv) (iii)
(d) (ii) (i) (iv) (iii)
9. M.N. Roy was associated with __________.
(a) Congress Plan (b) People’s Plan (c) Bombay Plan (d) None of the above
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10. Which of the following country adopts indicative planning?

(a) France (b) Germany (c) Italy (d) Russia
11. Short-term plan is also known as __________.

(a) Controlling Plans (b) De-controlling Plans (c) Rolling Plans (d) De-rolling Plans
12. Long-term plan is also known as __________.

(a) Progressive Plans (b) Non-progressive Plans
(c) Perspective Plans (d) Non-perspective Plans
13. The basic philosophy behind long-term planning is to bring __________ changes in the
economy?
(a) Financial (b) Agricultural (c) Industrial (d) Structural
14. Sarvodaya Plan was advocated by ___________.

(a) Mahatma Gandhi (b) J.P. Narayan (c) S. N Agarwal (d) M.N. Roy
15. Planning Commission was set up in the year ___________.

(a) 1950 (b) 1951 (c) 1947 (d) 1948 (e) Gandhian Plan
16. Who wrote the book „The Road to Serfdom‟?

(a) Friedrich Hayek (b) H.R. Hicks (c) David Ricardo (d) Thomas Robert Malthus
17. Perspective plan is also known as ___________.

(a) Short-term plan (b) Medium-term plan (c) Long-term plan (d) None of the above
18. NITI Aayog is formed through __________.
(a) Presidential Ordinance (b) Allocation of business rules by President of India
(c) Cabinet resolution (d) None of the above
19. Expansion of NITI Aayog?

(a) National Institute to Transform India (b) National Institute for Transforming India
(c) National Institution to Transform India (d) National Institution for Transforming India
20. The Chair Person of NITI Aayog is

(a) Prime Minister (b) President (c) Vice – President (d) Finance Minister
Part - B
21. Define economic development.
(i) Economic development refers to the systematic use of scientific and technical knowledge to
meet specific objectives and requirements.
(ii) It deals with the problem of under developed countries.
22. Mention the indicators of development.
(i) Gross National Product (GNP) (iii) Welfare
(ii) GNP per capita (iv) Social Indicators
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23. Distinguish between economic growth and development.

Economic Growth Economic Development
1. Deals with the problems of Developed Deals with the problems of UDCs.
countries.
2. Change is gradual and steady. Change is discontinuous and spontaneous.
3. Means more output Means not only more output but also its
composition.
24. What is GNP?
 GNP is the total market value of all final goods and services produced within a nation in a
particular year, plus income earned by its citizens (including income of those located
abroad), minus income of non-residents located in that country.
25. Define economic planning.
Robbins
 Economic Planning is “collective control or suppression of private activities of production
and exchange”.
26. What are the social indicators of economic development?
(i) Social indicators are normally referred to as basic and collective needs of the people.
(ii) The direct provision of basic needs such as health, education, food, water, sanitation and
housing facilities check social backwardness.
27. Write a short note on NITI Aayog.
(i) NITI Aayog (National Institution for Transforming India) was formed on January 1, 2015
through a Union Cabinet resolution.
(ii) NITI Aayog is a policy think-tank of the Government of India.
(iii) It replaced the Planning Commission from 13th August, 2014.
(iv) The Prime Minister is the Chairperson of NITI Aayog.
(v) Union Ministers will be Ex-officio members.
(vi) The Vice- Chairman of the NITI Aayog is the functional head.
Part - C
28. Elucidate major causes of vicious circle of poverty with diagram
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The Vicious Circle of Poverty

(i) There are circular relationships known as the
„vicious circles of poverty‟ that tend to
perpetuate the low level of development in Less
Developed Countries (LDCs).
(ii) The vicious circle of poverty operates both on the

demand side and the supply side.
(iii) On the supply side, the low level of real income

means low savings.
The low level of saving leads to low investment
and to deficiency of capital.
The deficiency of capital, in turn, leads to low
levels of productivity and back to low income.
(iv) The demand-side of the vicious circle is that the low level of real income leads to a low level
of demand which, in turn, leads to a low rate of investment and hence back to deficiency of
capital, low productivity and low income.
29. What are the non-economic factors determining development?
(i) Human Resource (vi) Desire for Development
(ii) Technical Know-how (vii) Moral, ethical and social values
(iii) Political Freedom (viii) Casino Capitalism
(iv) Social Organization (ix) Patrimonial Capitalism
(v) Corruption free administration
30. How would you break the vicious circle of poverty?
(i) The vicious circle of poverty is associated with low rate of saving and investment on the
supply side.
(ii) In UDCs the rate of investment and capital formation can be stepped up without reduction
in consumption.
(iii) For this, the marginal rate of savings is to be greater than average rate of savings.
(iv) To break the vicious circle on the demand side, Nurkse suggested the strategy of balanced
growth.
(v) If investment is made in several industries simultaneously the workers employed in various
industries will become consumers of each other‟s products and will create demand for one
another.
(vi) The balanced growth i.e. simultaneous investment in large number of industries creates
mutual demand.
(vii) Thus, through the strategy of balanced growth, vicious circle of poverty operating on the
demand side of capital formation can be broken.
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31. Trace the evolution of economic planning in India.

(i) Sir M. Vishveshwarya (1934)
 A prominent engineer and politician made his first attempt in laying foundation for
economic planning in India in 1934 through his book, “Planned Economy of India”.
 It was a 10 year plan.
(ii) Jawaharlal Nehru (1938)
 Set-up “National Planning Commission” by a committee but due to the changes in the
political era and second World War, it did not materialize.
(iii) Bombay Plan (1940)
 The 8 leading industrialists of Bombay presented “Bombay Plan”.
 It was a 15 Year Investment Plan.
(iv) S. N Agarwal (1944)
 Gave the “Gandhian Plan” focusing on the agricultural and rural economy.
(v) M.N. Roy (1945)
 Drafted People‟s Plan.
 It was aiming at mechanization of agricultural production and distribution by the state
only.
(vi) J.P. Narayan (1950)
 Advocated, “Sarvodaya Plan” which was inspired by Gandhian Plan and with the idea of
Vinoba Bhave.
 It gave importance not only for agriculture, but encouraged small and cottage industries in
the plan.
32. Describe the case for planning.
 The economic planning is justified on the following grounds.
(i) To accelerate and strengthen market mechanism
 The market mechanism works imperfectly in underdeveloped countries because of the
ignorance and unfamiliarity with it.
(ii) To remove unemployment
 Capital being scarce and labour being abundant, the problem of providing gainful
employment opportunities to an ever-increasing labour force is a difficult task.
(iii) To achieve balanced development
 In the absence of sufficient enterprise and initiative, the planning authority is the only
institution for planning the balanced development of the economy.
(a) Development of Agriculture and Industrial Sectors.
(b) Development of Infrastructure.
(c) Development of Money and Capital Markets.
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(iv) To remove poverty and inequalities

 Planning is the only path open to underdeveloped countries, for raising national and per
capita income, reducing inequalities and poverty and increasing employment
opportunities.
33. Distinguish between functional and structural planning.
Functional planning Structural planning
Functional planning refers to that planning The structural planning refers to a good deal of
which seeks to remove economic difficulties by changes in the socio-economic framework of the
directing all the planning activities within the country. This type of planning is adopted
existing economic and social structure. mostly in under developed countries.
34. What are the functions of NITI Aayog?
(i) Cooperative and Competitive Federalism (vii) Conflict Resolution
(ii) Shared National Agenda (viii) Coordinating Interface with the World
(iii) Decentralized Planning (ix) Internal Consultancy
(iv) Vision and Scenario Planning (x) Capacity Building
(v) Network of Expertise (xi) Monitoring and Evaluation
(vi) Harmonization
Part - D
35. Discuss the economic determinants of economic development.
(i) Natural Resource
 The existence of natural resources in abundance is essential for development.
 A country deficient in natural resources may not be in a position to develop rapidly.
(ii) Capital Formation
 Capital formation refers to the net addition to the existing stock of capital goods which are
either tangible like plants and machinery or intangible like health, education and research.
 Capital formation helps to increase productivity of labour and thereby production and
income.
(iii) Size of the Market
 Large size of the market would stimulate production, increase employment and raise the
National per capita income.
(iv) Structural Change
 Structural change refers to change in the occupational structure of the economy.
 Any economy of the country is generally divided into three basic sectors: Primary sector,
Secondary sector and Tertiary sector.
(v) Financial System
 Financial system implies the existence of an efficient and organized banking system in the
country.
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 There should be an organized money market to facilitate easy availability of capital.

(vi) Marketable Surplus
 Marketable surplus refers to the total amount of farm output cultivated by farmers over
and above their family consumption needs.
 This is a surplus that can be sold in the market for earning income.
(vii) Foreign Trade
 The country which enjoys favorable balance of trade and terms of trade is always
developed.
 It has huge forex reserves and stable exchange rate.
(viii) Economic System
 The countries which adopt free market mechanism (laissez faire) enjoy better growth rate
compared to controlled economies.
36. Describe different types of Planning.
(i) Democratic Vs Totalitarian

Democratic planning
 Democratic planning implies planning within democracy.
 People are associated at every step in the formulation and implementation of the plan.
Totalitarian planning
 Under totalitarian planning, there is central control and direction of all economic activities
in accordance with a single plan.
 In authoritarian planning, the planning authority is the supreme body.
(ii) Centralized Vs Decentralized
Centralized planning
 Under centralized planning, the entire planning process in a country is under a central
planning authority.
 In other words, it is called „planning from above‟.
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Decentralized planning
 Under decentralized planning local organizations and institutions formulate, adopt,
execute and supervise the plan without interference by the central authorities.
 In other words, it is called „planning from below‟.
(iii) Planning by Direction Vs Inducement
Planning by Direction
 Under planning by direction, there is a central authority which plans, directs and orders the
execution of the plan in accordance with pre-determined targets and priorities.
Planning by Inducement
 Under planning by inducement, the people are induced to act in a certain way through
various monetary and fiscal measures.
(iv) Indicative Vs Imperative Planning
 Indicative planning is peculiar to the mixed economies.
 In a mixed economy, the private sector and the public sector work together.
 Under this plan, the outline of plan is prepared by the Government.
 Then it is discussed with the representatives of private management, trade unions,
consumer groups, finance institutions and other experts.
Imperative Planning
 Under imperative planning, the state is all powerful in preparation and implementation of
the plan.
 Once a plan is drawn up, its implementation is a matter of enforcement.
(v) Short, Medium and Long term Planning
Short term Planning
 Short-term plans are also known as „controlling plans‟.
 They encompass the period of one year, therefore, they are also known as „annual plans‟.
Medium term Planning
 The medium-term plans last for the period of 3 to 7 years.
 But normally, the medium term plan is made for the period of five years.
 The medium-term planning is not only related to allocation of financial resources but also
physical resources.
Long term Planning
 Long-term plans last for the period of 10 to 30 years.
 They are also known as „perspective plans‟.
 The basic philosophy behind long-term planning is to bring structural changes in the
economy.
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(vi) Financial Vs Physical Planning

Financial Planning
 Financial planning refers to the technique of planning in which resources are allocated in
terms of money.
Physical Planning
 Physical planning pertains to the allocation of resources in terms of men, materials and
machinery.
(vii) Functional Vs Structural Planning
 Functional planning refers to that planning which seeks to remove economic difficulties.
Structural Planning
 The structural planning refers to a good deal of changes in the socio-economic framework
of the country.
(viii) Comprehensive Vs Partial Planning
Comprehensive Planning
 General planning which concerns itself with the major issues for the whole economy is
known as comprehensive planning.
Partial Planning
 Partial planning is to consider only the few important sectors of the economy.
37. Bring out the arguments against planning.
 The prime goals of economic planning are stabilization in developed countries and growth
in LDCs.
 But the economic planning also is not free from limitations.
 The arguments against planning are discussed below.
(i) Loss of freedom
 The absence of freedom in decision making may act as an obstacle for economic growth.
 Regulations and restrictions are the backbone of a planned economy.
 Under planning, the crucial decisions are made by the Central Planning Authority.
 The consumers, producers and the workers enjoy no freedom of choice.
 The decisions by the Government are not always rational.
 But, freedom to private producers will be misused; profit will be given top priority, welfare
will be relegated.
(ii) Elimination of Initiative
 Under centralized planning, there will be no incentive for initiatives and innovations.
 Planning follows routine procedure and may cause stagnation in growth.
(a) The absence of private ownership and profit motive discourages entrepreneurs from
taking bold decisions and risk taking.
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(b) As all enjoy equal reward under planned economy irrespective of their effort,
efficiency and productivity.
(c) The bureaucracy and red tapism which are the features of planned economy.
(iii) High cost of Management
 Cost of management of the economic affairs outweighs the benefits of planning.
 Inadequate data, faulty estimations and improper implementation of plans result in
wastage of resources and cause either surplus or shortages.
(iv) Difficulty in advance calculations
 Advance calculations in a precise manner are impossible to make decisions regarding the
consumption and production.
 It is also very difficult to put the calculations into practice under planning.
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12 – Economics
Chapter - 12
Introduction to Statistical Methods
and Econometrics

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Part - A
1. The word „statistics‟ is used as __________.
(a) Singular (b) Plural (c) Singular and Plural (d) None of above
2. Who stated that statistics as a science of estimates and probabilities.

(a) Horace Secrist (b) R.A Fisher (c) Ya-Lun-Chou (d) Boddington
3. Sources of secondary data are ___________.

(a) Published sources (b) Unpublished sources
(c) neither published nor unpublished sources (d) Both (A) and (B)
4. The data collected by questionnaires are_____________.

(a) Primary data (b) Secondary data (c) Published data (d) Grouped data
5. A measure of the strength of the linear relationship that exists between two variables is
called:
(a) Slope (b) Intercept (c) Correlation coefficient (d) Regression equation
6. If both variables X and Y increase or decrease simultaneously, then the coefficient of

correlation will be:
(a) Positive (b) Negative (c) Zero (d) One
7. If the points on the scatter diagram indicate that as one variable increases the other variable
tends to decrease the value of r will be:
(a) Perfect positive (b) Perfect negative (c) Negative (d) Zero
8. The value of the coefficient of correlation r lies between:

(a) 0 and 1 (b) -1 and 0 (c) -1 and +1 (d) -0.5 and +0.5
9. The term regression was used by:
(a) Newton (b) Pearson (c) Spearman (d) Galton
10. The purpose of simple linear regression analysis is to:
(a) Predict one variable from another variable
(b) Replace points on a scatter diagram by a straight-line
(c) Measure the degree to which two variables are linearly associated
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(d) Obtain the expected value of the independent random variable for a given value of the
dependent variable
11. A process by which we estimate the value of dependent variable on the basis of one or more
independent variables is called:
(a) Correlation (b) Regression (c) Residual (d) Slope
12. If Y = 2 - 0.2X, then the value of Y intercept is equal to

(a) -0.2 (b) 2 (c) 0.2X (d) All of the above
13. In the regression equation Y = β0+β1X, the Y is called:

(a) Independent variable (b) Dependent variable
(c) Continuous variable (d) None of the above
14. In the regression equation Y = β0+β1X, the X is called:

(a) Independent variable (b) Dependent variable
(c) Continuous variable (d) none of the above
15. Econometrics is the integration of

(a)Economics and Statistics (b) Economics and Mathematics
(c) Economics, Mathematics and Statistics (d) None of the above
16. Econometric is the word coined by

(a) Francis Galton (b) Ragnar Frish (c) Karl Person (d) Spearsman
17. The raw materials of Econometrics are:

(a) Data (b) Goods (c) Statistics (d) Mathematics
18. The term Uiin regression equation is

(a) Residuals (b) Standard error (c) Stochastic error term (d) None
19. The term Uiis introduced for the representation of
(a) Omitted Variable (b) Standard error (c) Bias (d) Discrete Variable
20. Econometrics is the amalgamation of

(a) 3 subjects (b) 4 subjects (c) 2 subjects (d) 5 subjects
Part - B
21. What is Statistics?
 Statistics may be defined as the collection, organisation, presentation, analysis and
interpretation of numerical data.
22. What are the kinds of Statistics?
 There are two major types of statistics.
(i) Descriptive Statistics (ii) Inferential Statistics
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23. What do you mean by Inferential Statistics?

 The branch of statistics concerned with using sample data to make an inference about a
population of data is called Inferential Statistics.
24. What are the kinds of data?
25. Define Correlation.

(i) Correlation is a statistical device that helps to analyse the covariation of two or more
variables.
(ii) Sir Francis Galton, is responsible for the calculation of correlation coefficient.
26. Define Regression.
 Regression means going back and it is a mathematical measure showing the average
relationship between two variables.
27. What is Econometrics?
(i) Econometrics means economic measurement.
(ii) Econometrics deals with the measurement of economic relationships.
(iii) {Economics + Statistics + Mathematics} + Empirical Data = Econometrics
Part - C
28. What are the functions of Statistics?
(i) Statistics presents facts in a definite form.
(ii) It simplifies mass of figures.
(iii) It facilitates comparison.
(iv) It helps in formulating and testing.
(v) It helps in prediction.
(vi) It helps in the formulation of suitable policies.
29. Find the Standard Deviation of the following data:
14, 22, 9, 15, 20, 17, 12, 11 (Answer: = 4.18)
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30. State and explain the different kinds of Correlation.
Type I: Based on the direction of change of variables

 Correlation is classified into two types as Positive correlation and Negative Correlation
based on the direction of change of the variables.
(i) Positive Correlation
 The correlation is said to be positive if the values of two variables move in the same
direction.
Example:
 If income and Expenditure of a Household may be increasing or decreasing
simultaneously.
 If so, there is positive correlation.
Y= a + bx
(ii) Negative Correlation
 The Correlation is said to be negative when the values of variables move in the opposite
directions.
Example:
 Price and demand for a commodity move in the opposite direction.
Y = a – bx
Type II: Based upon the number of variables studied
 There are three types based upon the number of variables.
(i) Simple Correlation
 If only two variables are taken for study then it is said to be simple correlation.
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(ii) Multiple Correlations

 If three or more than three variables are studied simultaneously, then it is termed as
multiple correlation.
Example:
 Determinants of Quantity demanded
Qd = f (P, Pc, Ps, t, y)
(iii) Partial Correlation
 If there are more than two variables but only two variables are considered keeping the
other variables constant, then the correlation is said to be Partial Correlation.
Type III: Based upon the constancy of the ratio of change between the variables
 Correlation is divided into two types as linear correlation and Non-Linear correlation based
upon the Constancy of the ratio of change between the variables.
(i) Linear Correlation
 Correlation is said to be linear when the amount of change in one variable tends to bear a
constant ratio to the amount of change in the other.
Example:
Y = a + bx
(ii) Non Linear
 The correlation would be non-linear if the amount of change in one variable does not bear a
constant ratio to the amount of change in the other variables.
Example:
Y = a + bx2
31. Mention the uses of Regression Analysis.
(i) It indicates the cause and effect relationship between the variables and establishes
functional relationship.
(ii) Besides verification it is used for the prediction of one value, in relation to the other given
value.
(iii) Regression coefficient is also relative measure.
If we know the value of the independent variable, we can find the value of the dependent
variable.
(iv) In regression there is no such spurious regression.
(v) It has wider application, as it studies linear and nonlinear relationship between the
variables.
(vi) It is widely used for further mathematical treatment.
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32. Specify the objectives of econometrics.

(i) It helps to explain the behaviour of a forthcoming period that is forecasting economic
phenomena.
(ii) It helps to prove the old and established relationships among the variables or between the
variables.
(iii) It helps to establish new theories and new relationships.
(iv) It helps to test the hypotheses and estimation of the parameter.
33. Differentiate the economic model with econometric model.
Economic Model Econometric Model
1. Economic model is the theoretical construct Econometric model is the statistical concept that
that represents the complex economic process. represents the numerical estimate of the
variables involved in economic process.
2. Economic model is based on mathematical Econometric model is based on statistical
modeling. modeling.
3. Economic model is focused on establishing Econometric model is focused on estimating the
the logical relationships between the variables magnitude and direction of relationship
in the model. between the variables.
4. Economic model is applied in stating the Econometric model is applied in stating the
theoretical relationship into mathematical empirical extent of the economic model.
equations.
5. Economic model is deterministic in nature. Econometric model is stochastic in nature.
34. Discuss the important statistical organizations (offices) in India.
 The Ministry has two wings, Statistics and Programme Implementation.
I. Statistics (NSO)
 The Statistics Wing called the National Statistical Office (NSO) consists of the Central
Statistical Office (CSO), the Computer Centre and the National Sample Survey Office
(NSSO).
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(i) Central Statistical Office (CSO)

 The Central Statistical Office is one of the two wings of the National Statistical Organisation
(NSO).
 It is responsible for co-ordination of statistical activities in the country and for evolving and
maintaining statistical standards.
(ii) National Sample Survey Organisation (NSSO)
 The National Sample Survey Organisation, now known as National Sample Survey Office,
is an organization under the Ministry of Statistic of the Government of India.
 NSSO has four divisions:
(a) Survey Design and Research Division (SDRD)
(b) Field Operations Division (FOD)
(c) Data Processing Division (DPD)
(d) Co-ordination and Publication Division (CPD)
II. Programme Implementation
 The Programme Implementation Wing has three Divisions, namely,
(a) Twenty Point Programme.
(b) Infrastructure Monitoring and Project Monitoring.
(c) Member of Parliament Local Area Development Scheme.
Part - D
35. Elucidate the nature and scope of Statistics.
Nature of Statistics
(i) Different Statisticians and Economists differ in views about the nature of statistics, some call
it a science and some say it is an art.
(ii) Tipett on the other hand considers Statistics both as a science as well as an art.
Scope of Statistics
 Statistics is applied in every sphere of human activity – social as well as physical.
 Like Biology, Commerce, Education, Planning, Business Management, Information
Technology, etc.
(i) Statistics and Economics
 Statistical data and techniques are immensely useful in solving many economic problems.
 Such as fluctuation in wages, prices, production, distribution of income and wealth and so
on.
(ii) Statistics and Firms
 Statistics is widely used in many firms to find whether the product is conforming to
specifications or not.
(iii) Statistics and Commerce
 Statistics are life blood of successful commerce.
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 Market survey plays an important role to exhibit the present conditions and to forecast the
likely changes in future.
(iv) Statistics and Education
 Statistics is necessary for the formulation of policies to start new course, according to the
changing environment.
(v) Statistics and Planning
 Statistics is indispensable in planning.
 The government are seeking the help of planning for efficient working, for the formulation
of policy decisions and execution of the same.
 In order to achieve the goals, various advanced statistical techniques are used for
processing, analyzing and interpreting data.
(vi) Statistics and Medicine
 In Medical sciences, statistical tools are widely used.
 In order to test the efficiency of a new drug or to compare the efficiency of two drugs or
two medicines, t - test for the two samples is used.
 More and more applications of statistics are at present used in clinical investigation.
(vii) Statistics and Modern applications
 Recent developments in the fields of computer and information technology have enabled
statistics to integrate their models and thus make statistics a part of decision making
procedures of many organisations.
36. Calculate the Karl Pearson Correlation Co-efficient for the following data
Demand of Product X: 23 27 28 29 30 31 33 35 36 39
Sale of Product Y: 18 22 23 24 25 26 28 29 30 32
Answer: r = 0.9955
37. Find the regression equation Y on X and X on Y for the following data:
Y: 45 48 50 55 65 70 75 72 80 85
X: 25 30 35 30 40 50 45 55 60 65
(Answer: Y = 0.787X + 7.26, and X = 0.87Y + 26.65)
38. Describe the application of Econometrics in Economics.
 Gerhard Tinbergen points out that “Econometrics, as a result of certain outlook on the role
of economics, consists of application of mathematical statistics to economic data to lend
empirical support to the models constructed by mathematical economics and to obtain
numerical results”.
Objectives of Econometrics
(i) It helps to explain the behaviour of a forthcoming period that is forecasting economic
phenomena.
(ii) It helps to prove the old and established relationships among the variables or between the
variables.
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(iii) It helps to establish new theories and new relationships.

(iv) It helps to test the hypotheses and estimation of the parameter.
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Namma Kalvi

Little Flower Matriculation Higher Secondary School

M.Varadarajan, M.Com., M.A., M.Ed., M.Phil.,

S. No. Chapter Title Page No.

Chapter - 1 Introduction to Macro Economics 1

Chapter - 2 National Income 9

Chapter - 3 Theories of Employment and Income 17

Chapter - 4 Consumption and Investment Functions 26

Chapter - 5 Monetary Economics 37

Chapter - 7 International Economics 59

Chapter - 8 International Economic Organisations 70

Chapter - 9 Fiscal Economics 77

Chapter - 10 Environmental Economics 88

Chapter - 11 Economics of Development and Planning 96

Chapter - 12 Introduction to Statistical Methods and Econometrics 106

M.Varadarajan, M.Com., M.A (Eco)., M.Ed., M.Phil.,

M.Varadarajan, M.Com., M.A., M.Ed., M.Phil.,

2. Who coined the word „Macro‟?

3. Who is regarded as Father of Modern Macro Economics?

4. Identify the other name for Macro Economics.

5. Macro economics is a study of ____________.

6. Indicate the contribution of J M Keynes to economics.

7. A steady increase in general price level is termed as ____________.

8. Identify the necessity of Economic policies.

9. Indicate the fundamental economic activities of an economy.

10. An economy consists of

M.Varadarajan / E-Mail: [email protected] / Mobile: 9786868699 & 9842868699 / Page: 1

12. Economic system representing equality in distribution is ____________.

13. Who is referred as „Father of Capitalism‟?

14. The country following Capitalism is ____________.

15. Identify The Father of Socialism.

17. Quantity of a commodity accumulated at a point of time is termed as ____________.

18. Identify the flow variable.

19. Identify the sectors of a Two Sector Model.

20. The Circular Flow Model that represents an open Economy.

M.Varadarajan / E-Mail: [email protected] / Mobile: 9786868699 & 9842868699 / Page: 2

M.Varadarajan / E-Mail: [email protected] / Mobile: 9786868699 & 9842868699 / Page: 3

29. Describe the different types of economic systems.

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32. Enumerate the features of mixed economy.

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(vi) The basic identifies of the two-sector economy is as under:

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36. Illustrate the functioning of an economy based on its activities.

M.Varadarajan / E-Mail: [email protected] / Mobile: 9786868699 & 9842868699 / Page: 7

3. Solution of Central Free Market System Central Planning Central Planning

M.Varadarajan, M.Com., M.A., M.Ed., M.Phil.,

M.Varadarajan / E-Mail: [email protected] / Mobile: 9786868699 & 9842868699 / Page: 8

M.Varadarajan, M.Com., M.A., M.Ed., M.Phil.,

2. Primary sector is ____________.

3. National income is measured by using ____________ methods.

4. Income method is measured by summing up of all forms of ____________.

5. Which is the largest figure?

6. Expenditure method is used to estimate national income in ____________.

7. Tertiary sector is also called as ____________ sector.

8. National income is a measure of the ____________ performance of an economy.

9. Per capita income is obtained by dividing the National income by ____________.

10. GNP = ____________ + Net factor income from abroad.

11. NNP stands for ____________.