Download Study material for Less Achievers Macro Economics XII

Study material for Less Achievers
1.
Define national income?
A.
National income is the sum of income earned by normal residents of a country in the economy
in an accounting year.
2.
What do you mean by circular flow of income?
A.
Income or money first flows from the firms to the households in the form of factor payments
and then from the household to the firms in the form of consumption expenditure. The
income constitutes to flow in a circular way. So it is called circular flow of income.
3.
What do you mean by money flow?
A.
Money flow means the flow of factor payments from firm to households and consumption
expenditure from households to firm.
4.
What do you understand by real flow?
A.
Real flow means the flow of factor services from households to firms and of goods and
services from firms to households.
5.
Name the different methods of measuring national income.
A:
1) Product method, 2) Income method, 3) Expenditure-method
11.
Define intermediate goods.
A.
Intermediate goods are those goods which are meant for either for resale or further production.
12.
Define final goods.
A.
Final goods are those goods which have crossed the boundry line of production
13.
Define stock.
A.
Stock is a variable which is measured at a particular point of time.
Eg: water in a tank; no. of computer in a lab etc.
14.
Define flow.
A.
Flow is a variable which is measured at a specified period of time.
Eg. Leakage of water from a tank, production of computers
15.
Who is a normal resident?
A.
Normal resident is a person who generally lives in a country and whose centre of interest lies
in that country.
Short Answer Questions (3/4 Marks)
1.
What is circular flow of income and product? State its basic principles.
A.
A pictorial illustration of the interdependence between the major sectors (Households and
Firms) of economic activity is called circular flow of income and product.
Basic principles of flow of income and product
In any exchange process the seller or the producer or the firm receives the same amount that
the buyer or the consumer or households spends
Factor payments by firms = Consumption expenditure By households
Goods and services flow in one direction, which the money flows in the other direction, thus it
makes a circular flow. The output flows from the firms to households and the payment from
households to firms. The following circular reveals the flow of income and product.
3.
Distinguish between stock and flow.
A.
STOCK
Stock is a variable which is measured at a
particular point of time.
4.
FLOW
flow is a variable which is measured at
a specified period of time.
It has no time dimension
It has time dimension
Eg. Water in a tank
Eg: Leakage of water out of tank
Distinguish between consumer goods and capital goods
A.
CONSUMER GOODS
CAPITAL GOODS
1. Consumer goods are those goods Capital goods are those goods which
which satisfy human wants directly satisfy human wants indirectly.
2. Eg: car. Petrol, pen etc.,
Eg: machine; wood used in furniture
3. Consumer goods cannot be used for Capital goods can be used for further
further production
production
5.
Distinguish between intermediate goods and final goods.
A.
INTERMEDIATE GOODS
FINAL GOODS
Intermediate goods and those goods which Final goods are those goods which are
are meant for either for resale or further meant for either for final consumption or
production
investment.
Eg; coal used in a thermal station
Eg; car used by a household
These are meant for further production or These are meant for final use and not for
resale
resale
The value of these will not included while Value of these goods only included in
calculating national income because it leads national income
to the problem of double counting
4.
A.
Explain the following:
a)
Real flow
b)
Money flow
a) Real flow: Let us assume that money is not being used in an economy. In this situation,
households provide factor services to the firms. Business firms produce goods and services
by utilizing these factor services. Afterwards business firms provide goods and services to
the households as a reward of their factor services. Such flow of goods and services from
firms to households is known as real flow or commodity flow.
Money flow: In modern economics, households supply factor services to business firms
and get money income from these firms in the form of rent, interest, wages and profit.
Households utilize this money in purchasing goods and services produced by firms. Thus
money flows from firms to households and again from households to firms. This is called
money flow or income flow.
6.
Distinguish between national income at constant and current prices.
A:
National income at constant prices:
It is the sum total of money value of final goods and
services produced by the normal residence of a country during an accounting year. Hear
value is estimated at base year prices. It is also called real national income.
National income at Current prices:
It refers to total current money value of final goods
and services produced by the normal residents of a country during a year. Here value is
estimated at market prices/current prices. So it is called national income at current
prices/monetary income.
7.
Explain the concept of National Disposable Income (NDI).
A:
National Disposable Income: National Disposable Income is different from the concept of
personal disposable income. National disposable income can be calculated by adding the
following two items in the national income.
a) Net indirect taxes
b) Net current transfers from abroad.
8.
What are the limitations of GDP as a measure of welfare?
A:
The following are the limitsations.





Size of population: If a country,s population increasing more than that of GDP
though GDP is larger but welfare remains low
Distribution of income: Unequal distribution of income in an economy means lack of
welfare of lower income of society.
Production of defence goods: GDP may be more due to production of defence goods
but the welfare remains low.
Non-marketed Production : In some economies, goods are produced not for
exchange. Its GDP may be low but welfare is not less.
EXTERNALITIES: it is good or bad effect of a work for which no reward or
punishment is imposed.
Long Answer Questions (06 marks)
2.
Explain briefly the production, income and expenditure flows that arise in the process of
production indicating their inter-relation ship.
OR
Explain the circular flow of National Income in a two sector economy.
A:
Production of goods and services is the result of combined efforts of the four primary factors
of production. And in the process of production, income is generated or the production
emerging from the production process distributed among factors of production in the form of
money income. (Eg. Rent, wages, interest and profit)
1)
Production generated Income
2)
This generated income gives rise to demand for produced goods and
services. In other words the households (i.e. suppliers of factors of
production) spend their income on goods and services to satisfy their
wants.
3)
Hence, income creates expenditure which ultimately leads to further
production.
As above mentioned production, Income and expenditure become circular.
Money and Banking
Q1. What is money ?
ans. Any thing which is generally acceptable as a medium of exchange of value measure of value and
store of value is known as money.
Q2. What do you mean by barter system?
ans,. Direct exchange of goods for goods is known as barter system.
Q3. Explain the concept of M1 of money supply.
ans. in m1 we include the following itemsi) c= currency held by the public
ii) dd= demand deposits in commercial banks
iii) od= other deposits of RBI
Q4. What are the main functions of money?
ans . There are mainly two functions of moneyi) Primary functions
ii) Secondary functions
in primary functions we includes-a) medium of exchange--- it is the main important function of
money. We can sell and purchase goods and services by money.
b) Measure of value--- by money we can measure the value of goods and services. for
Example this book value is rs.160/- only
ii) Secondary function- a) standard of deferred payments—deferred payments refers
to the payments which are made sometimes in the future.
b) Store of value--- money acts as a store of value , as a store of value money is held
without plans for immediate exchange of goods and services.
c) transfer of value- we can also transfer the value by using money for example
we sold house in Mumbai and get the money and buy house in Chennai by that money
or we can buy other things.
Q5. Explain the main functions of RBI or central bank of the country.
ans. the main functions of RBI are as follows—
a) Issue of currency- -- the RBI or central bank of the country has the monopoly to issue
currency
notes. While issuing currency notes the RBI use minimum reserve system . in this system RBI
has
to keep minimum gold stock and foreign currency and issue currency according the needs.
b) Banker to the govt--- central bank act as a banker to the govt . , agent and advisor to the govt.
central bank advances loan to the govt for approved securities.
c) Bankers bank.--- central bank or RBI provide loans to the commercial banks for approved
securities.
d) Lender of the last resort--banks.
the central bank is the lender of the last resort for commercial
when commercial banks fail to meet the obligation of their depositors central bank comes to
their
rescue and give loans to them . this save the commercial bank from a breakdown.
e) Custodian of the nations reserves of foreign exchange---it is the responsibility of the of central
bank to keep the sufficient reserve of foreign currency to keep the external value of currency
stable.
f) Clearing house function----bills
central bank perform the function of clearing house by clear the
of exchange.
g) Control of credit---- central bank acts as a controller of the credit by monetary policies
instruments
such as Bank rate, Open market operations, CRR, SLR etc.
DETERMINATION OF INCOME AND EMPLOYMENT
Q1- What is aggregate demand?
Ans- It is the total demand for all the goods and services in an economy during an accounting year.
Q2- What are the components of aggregate demand?
Ans- They are: consumption expenditure
b- investment expenditure
c- Government expenditure
d- net export
Q3- Define aggregate supply.
Ans – It is the value of goods and services produced by all the sectors in ecnomy during a
Financial year.
Q4- Define APS.
Ans- It is ratio between saving and national income. MPS=saving/income.
Q5- Define MPC.
Ans- It is ratio of change in consumption and change in income.
Q6- Define involuntary unemployment.
Ans- It is a situation in which an able and willing bodied do not get job at the existing wage rate.
Q7- If MPC is 0.4, find MPS.
Ans- MPS=1-MPC=1-0.4=0.6
Q8- What is the relationship between MPC and MPS?
Ans- MPC+MPS=1
Q9- If the value of MPC is 0.75, calculate the value of multiplier?
Ans- 1/1-MPC=1/1-0.75=1/0.25=4
Q11- Define excess demand or inflationary gap.
Ans- It is a situation in which aggregate demand exceeds aggregate supply.
Q12- Define multiplier.
Ans- It is ratio of change in income and change in investment.
Q13
What do you mean by deficient demand?
Ans. When aggregate demand is less than aggregate supply at full employment it is known as
deficient demand.
Government Budget and the Economy
Very Short Answer Question ( 1 Mark)
Q1. Give the meaning of budget.
Ans. A budget is an annual statement of the estimated receipts and
expenditure of the government over the fiscal year.
Q2. Name the two components of budget.
Ans. 1) Budget Receipts 2) Budget Expenditure.
Q3. Why is borrowings considered as Capital receipt?
Ans. It increases the liability of the government, so it is considered as
Capital receipt.
Q4. Define tax
Ans. Tax is legal compulsory payment imposed by the government on
the people.
Q5. Give two example of direct tax.
Ans. 1) Income tax
2) Gift tax
Q6. Give two example of indirect tax.
Ans. 1) Sales tax
2) Custom duty
Q7. Give two example of non-tax revenue.
Ans. 1) dividend
2) Fees and fines
Q8. Why is tax not a Capital receipt?
Ans. Tax neither creates liability nor reduces assets, so it is not
considered as capital receipt.
Q9. Give two example of revenue expenditure.
Ans. 1) Payment of Salaries
2) Interest payment
Q10. Give two example of Capital expenditure.
Ans. 1) Loan to public 2) Acquiring land, building, machine and
investment in shares etc.
Q11. Give the formula to calculate ‘ revenue deficit’.
Ans. Revenue deficit = Total revenue expenditure – Total revenue
receipts.
Q12. Give the formula to calculate ‘ fiscal deficit’.
Ans. Fiscal Deficit = Total budget expenditure = Total budget receipts
net of borrowings.
Q13. Give the formula to calculate ‘ primary deficit’.
Ans. Primary deficit = Fiscal deficit – interest payment.
Q14. Define Capital receipts.
Ans. Capital Receipts refer to those receipts of the government which i)
tend to create a liability or ii) Causes reduction in its assets.
Q15. Define revenue receipts.
Ans. A revenue receipts are those receipts which neither create a liability
nor reduce assets of the government. eg. Tax and non-tax receipts.
Q16. Define revenue expenditure.
Ans. It does not result in creation of assets or reduction in liabilities
eg. Payment of salaries.
Q17. Define Capital expenditure.
Ans. It refers to the expenditure which leads to creation of assets and
reduction in liabilities eg. Expenditure incurred on construction of
building, roads, bridges etc.
Q18. Give two sources of Capital receipts.
Ans. 1) Recovery of loans
2) Borrowings.
Q19. Give one objective of budget.
Ans. To reduce inequalities of income and wealth.
Q20. Define direct tax.
Ans. These taxes are those tax in which liability to pay and burden of tax
falls on same person.
Q21. Define indirect tax.
Ans. Liability to pay and burden of indirect tax falls on different persons.
Short Answer Question (3/4 Mark)
Q1. Write any three objective of government Budget.
Ans. The objective that are pursued by the government through the
budget arei) To achieve economic growth.
ii) To reduce in equalities in income and wealth.
iii) To achieve economic stability.
Q2. Explain the basis of classifying government receipts into revenue
receipts and capital receipts.
Ans. Revenue Receipts :-A government revenue receipts are those
receipts i) which neither create liability ii) nor reduce assets of the
government eg. Dividend.
Capital Receipts :- Capital Receipts refer to those receipts of the
government which i) tend to create a liability or ii) Causes
reduction in its assets of the government. eg. Borrowings
Q3. Distinguish between direct tax and indirect tax
Ans.
Direct Tax
1. Liability to pay and burden of
direct tax falls on same person.
2. Levied on income and property
of person.
3. eg. Income tax
Indirect Tax
1. Liability to pay and burden
of direct tax falls on some
other person.
2. Levied on goods and
services on their sale,
production, import and export.
3. eg. Sales tax
Q4. Define revenue receipts. Write the groups in which they are
classified.
Ans. Any receipts which does not either create a liability or lead to
reduction in assets is called revenue receipts. Revenue receipts
consist of 1) Tax Revenue and 2) Non-Tax Revenue.
Q5. Distinguish between Revenue and Capital expenditure.
Ans.
Revenue Expenditure
1. It does not result in creation of
assets
Capital Expenditure
1. It result in creation of assets
2. It is for short period and
recurring in nature
2. It for long period and nonrecurring in nature
3. eg. Expenditure on salaries of
employees
3. eg. Expenditure on acquisition
of assets like land, building etc.
BALANCE OF PAYMENTSQ.1 what do you mean by foreign exchange?
Currencies other than domestic currencies are called foreign exchange.
Q.2 what is foreign exchange rate?
The rate at which currency of one country is exchanged with currency of other country is known as
foreign exchange rate.
Q.3 what are two systems of determining foreign exchange rate?
1.Fixed exchange rate system-rate which is determined by govt
2.flexible exchange rate-rate which is determined by market forces of demand and supply.
Q.4 what is foreign exchange market?
It is the market where sale and purchase of currencies of different countries is done.
Q.5How is foreign exchange rate determined?
It is determined by market forces of demand and supply.
Q.5 What is managed floating?
Managed floating is a combination of fixed and flexible exchange rate.
Q.6 what do you mean by balance of payments accounts of a country.
Balance of payments account of a country is a systematic record of all economic transactions
ofbetween a country and rest of the world.
Q.7what is current account of balance of payments account?
Current account keeps record of visible items invisible items and unilateral transfers
Q.8what is balance of trade ?
Balance of trade shows transaction of visible items that is balance of export and imports.
Q.9 What is difference between autonomous items and accommodating items of balance of payments
account?
Autonomous items
Accommodating items
1.these are undertaken for the purpose of profits
These are undertaken for the purpose of
adjustment
2.these may cause imbalance in bop
These may be used for correction
3.these involve movement of goods across
borders
These do not involve movement of goods in fact
they involve movement of official reserves
Q.10 why is foreign exchange demanded?
it is demanded by residents of a country to perform various economic activities abroad.
A)for imports
b)for investment
c)for purchase of property abroad
d)for remittances abroad
e) speculative trading in foreign currency
Q.11 why more of foreign exchange demanded when its price falls?
When price of foreign exchange falls ,purchasing power of domestic currency increases so it can
purchase more from abroad . People increase their economic activities abroad for example they start
purchasing more from that country or they start more investment in that country.
Q.12 what brings supply of foreign exchange to a country?
Any economic activity done by foreigners in a country brings supply of foreign exchange to that
country for example
a)for exports
b)for investment in that country
c)for purchase of property in that country
d)remittances by non residents living abroad.
Q.13 why supply of foreign exchange increases when its price increases?
When price of foreign exchange increases its supply increases because purchasing power of foreign
exchange increases. It can purchase more from domestic area of that country. So foreign people
increase their economic activities in that country. for example direct purchases in that country or
exports from that country increase.