+2 ECONOMICS EM Study Material

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ℍℝ.𝕊𝔼ℂ.𝕊ℂℍ𝕆𝕆𝕃,𝔻ℍ𝔸ℝ𝕄𝔸ℙ𝕌ℝ𝕀
1.Introduction to Macro Economics

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
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c) Globalisic Economy d) Mixed Economy
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 Mode d) All the above
Part - B
Answer the following questions in one or two sentences
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21. Define Macro Economics.

Macro Economics is the study ofthe economy as a whole.
In other words, macro economics deals with aggregates such as national income,
employment and output.
22. Define the term ‘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.
23. What is meant by an ‘Economy’?

The term economy has been defined by A. J. Brown as, “A system by which
people earn their living.”
In short, an economy is referred to any system or area where economic activities
are carried out.
24. Classify the economies based on status of development.

Developed economies
Underdeveloped economies
Undeveloped economies
Developing economies.
25. What do you mean by Capitalism?

Capitalistic economy is also termed as a free economy (Laissez faire, in Latin) or
market economy where the role of the government is minimum and market
determines the economic activities.
26. Define ‘Economic Model’.

A model is a simplified representation of real situation.
Economists use models to describe economic activities, their relationships and their
behaviour.
A model is an explanation of how the economy, or part of the economy, works.
27. ‘Circular Flow of Income’ - Define.

The circular flow of income is a model of an economy showing connections between
different sectors of an economy.
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.
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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.
Understanding the future problems, needs and challenges of an economy as a whole
is important to evolve precautionary measures.
Macro economics provides ample opportunities to use scientific investigation to
understand the reality.
Macro economics helps to make meaningful comparison and analysis of economic
indicators.
Macro economics helps for better prediction about future and to formulate
suitable policies to avoid economic crises
29. Describe the different types of economic systems.

There are three major types of economic systems. They are:
1. Capitalistic Economy (Capitalism),
2. Socialistic Economy (Socialism)and
3. Mixed Economy (Mixedism)
Capitalism and socialism are two extreme and opposite approaches.
In capitalism, there is total freedom and private ownership of means of production.
In socialism, there is no freedom for private and there is public ownership of means
of production.
Mixedism denotes the Co-existence of capitalism and socialism.
30. Outline the major merits of capitalism.

Merits of Capitalism
1. Automatic Working: Without any government intervention, the economy works
automatically.
2. Efficient Use of Resources: All resources are put into optimum use.
3. Incentives for Hard work: Hard work is encouraged and entrepreneurs get more profit
for more efficiency.
4. Economic Progress: Production and productivity levels are very high in capitalistic
economies.
5. Consumers Sovereignty: All production activities are aimed at satisfying the consumers.
6. Higher Rates of Capital Formation: Increase in saving and investment leads to higher
rates of capital formation.
7. Development of New Technology: As profit is aimed at, producers invest on new
technology and produce quality goods.
31. Indicate the demerits of socialism.

Demerits of Socialism
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1. 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.
2. Absence of Incentive: The major limitation of socialism is that this system does not
provide any incentive for efficiency. Therefore, productivity also suffers.
3. Limited Freedom of Choice: Consumers do not enjoy freedom of choice over the
consumption of goods and services.
4. 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.
32. Enumerate the features of mixed economy.

Features of Mixed Economy
1. 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.
2. 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.
3. 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.
4. 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.
6. 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
Adam Smith is the ‘Father of The term coined by Manfred D Steger (2002) to denote the
Capitalism’. new market ideology of globalisation that connects nations
The means of production in a together through international trade and aiming at global
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capitalistic economy are development.

privately owned.
Manufacturers produce This ideology is also termed as ‘Extended Capitalism’.
goods and services with
profit motive.
34. Briefly explain the two sector circular flow model.

(i) Household Sector:
The household sector is the sole buyer of goods and services, and the sole supplier of
factors of production, i.e., land, labour, capital and organisation.
It spends its entire income on the purchase of goods and services produced by the
business sector.
The household sector receives income from firm sector by providing the factors of
production owned by it.
(ii) Firms:
The firm sector generates its revenue by selling goods and services to the household
sector.
It hires the factors of production, i.e., land, labour, capital and organisation, owned
by the household sector.
The firm sector sells the entire output to households.
Part - D
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Answer the following questions in one page

35. Discuss the scope of Macro Economics.
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.
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.
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.
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. 
Economic Growth:
The growth and development of an economy and the factors determining them could
be understood only through macro analysis.
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.
36. Illustrate the functioning of an economy based on its activities.
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In an economy, the fundamental economic activities are production and

consumption.
These two activities are supported by several other activities.
The ultimate aim of these activities is to achieve growth.
The ‘exchange activity’ supports the production and consumption activities. These
activities are influenced by several economic and non-economic activities.
The major economic activities include transportation, banking, advertising,
planning, government policy and others.
The major non-economic activities are environment, health, education,
entertainment, governance, regulations etc.
In addition to these supporting activities, external activities from other economies
such as import, export, international relations, emigration, immigration, foreign
investment, foreign exchange earnings, etc. also influence the entire functioning of
the economy.
1. Status of Development:
Developed, underdeveloped, undeveloped and developing economies.
2. System of Activities:
Capitalistic, Socialistic and Mixed Economies.
3. Scale of Activities:
Small and Large Economies.
4. Nature of Functioning:
Static and Dynamic Economies.
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5. Nature of Operation:
Closed and Open Economies.
6. Nature of Advancement:
Traditional and Modern Economies.
7. Level of National Income:
Low Income, Middle Income and High Income Economies.
37. Compare the features of capitalism and socialism.
38. Compare the feature among Capitalism, Secularism and Mixedism.

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2.National Income
Part – A
Multiple choice questions
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
13. The financial year in India is ……

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(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
Answer the following questions in one or two sentences.
21. Define National Income.
“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”. -Alfred Marshall.
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22. Write the formula for calculating GNP.

GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad.
23. What is the difference between NNP and NDPP?

NNP NDP
NDP is the value of net
Net National Product refers to the value output of the economy
of the net output of the economy during the year.
during the year. Some of the country’s
NNP is obtained by deducting the value of capital equipment wears out
depreciation, or replacement allowance of or becomes outdated each
the capital assets from the GNP. It is year during the production
expressed as, process.
NNP = GNP – depreciation allowance. N DP = GDP - Depreciation
24. Trace the relationship between GNP and NNP.

GNP NNP
GNP is the total measure of the Net National Product refers to the
flow of final goods and services at value of the net output of the
market value resulting from economy during the year.
current production in a country NNP is obtained by
during a year, including net income deducting the value of depreciation, or
from abroad. replacement allowance of the capital assets
GNP at Market Prices = GDP at from the GNP.
Market Prices + Net Factor income It is expressed as,
from Abroad NNP = GNP – depreciation
allowance
25. What do you mean by the term ‘Personal Income’?

Personal income is the total income received by the individuals of a country from all
sources before payment of direct taxes in a year.
Personal income is never equal to the national income, because the former includes
the transfer payments whereas they are not included in national income.
Personal Income = National Income – (Social Security Contribution and
undistributed corporate profits) + Transfer payments
26. Define GDP deflator.

GDP deflator is an index of price changes of goods and services included in GDP.
It is a price index which is calculated by dividing the nominal GDP in a given year
by the real GDP for the same year and multiplying it by 100
GDP deflator = Nominal GDP x 100
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Real GDP
27. Why is self consumption difficult in measuring national income?

Farmers keep a large portion of food and other goods produced on the farm for self
consumption.
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
Answer the following questions in one Paragraph.
28. Write a short note on per capita income.

 The average income of a person of a country in a particular year is called Per
Capita Income.
 Per capita income is obtained by dividing national income by population.
 Per Capita income = National Income / Population
29. Differentiate between personal and disposable income.

Personal Income Disposable Income
Personal income is the total income Disposable Income is also
received by the individuals of a country known as Disposable
from all sources before payment of direct personal income.
taxes in a year. It is the individuals income
Personal income is never equal to the after the payment of income
national income, because the former tax.
includes the transfer payments whereas This is the amount available
they are not included in national income. for households for
Personal income is derived from national consumption.
income by deducting undistributed Disposable Income =
corporate profit, and employees’ Personal income – Direct
contributions to social security schemes Tax.
and adding transfer payment. As the entire disposable
Personal Income = National Income income is not spent on
– (Social Security Contribution and consumption,
undistributed corporate profits) + Transfer Disposal income =
payments consumption + saving.
30. Explain briefly NNP at factor cost.

NNP refers to the market value of output.
Whereas NNP at factor cost is the total of income payment made to factors of
production.
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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.
NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies.
31. Give short note on Expenditure method.

Under this method, the total expenditure incurred by the society in a particular year
is added together.
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.
Symbolically,
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) Final output method According to this method, the value of intermediate goods is not
considered. Only the value of final goods and services is considered.
(ii) Value added method Another method to avoid the problem of double counting is to
estimate the total value added at each stage of production
33. Write briefly about national income and welfare.

National Income is considered as an indicator of the economic wellbeing of a
country.
The economic progress of countries is measured in terms of their GDP per capita
and their annual growth rate.
A country with a higher per capita income is supposed to enjoy greater economic
welfare with a higher standard of living.
34. List out the uses of national income.

1. To know the relative importance of the various sectors of the economy and their
contribution towards national income; from the calculation of national income, we could
find how income is produced, how it is distributed, how much is spent, saved or taxed.
2. To formulate the national policies such as monetary policy, fiscal policy and other
policies; the proper measures can be adopted to bring the economy to the right path with
the help of collecting national income data.
3. To formulate planning and evaluate plan progress; it is essential that the data pertaining
to a country’s gross income, output, saving and consumption from different sources should
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be available for economic planning.

4. To build economic models both in short - run and long - run.
5. To make international comparison, inter - regional comparison and inter - temporal
comparison of growth of the economy during different periods.
6. To know a country’s per capita income which reflects the economic welfare of the
country (Provided income is equally distributed)
7. To know the distribution of income for various factors of production in the country.
8. To arrive at many macro economic variables namely, Tax – GDP ratio, Current Account
Deficit - GDP ratio, Fiscal Deficit - GDP ratio, Debt – GDP ratio etc
Part - D
Answer the following questions in about a page.
35. Explain the importance of national income.

1. To know the relative importance of the various sectors of the economy and their
contribution towards national income; from the calculation of national income, we could
find how income is produced, how it is distributed, how much is spent, saved or taxed.
2. To formulate the national policies such as monetary policy, fiscal policy and other
policies; the proper measures can be adopted to bring the economy to the right path with
the help of collecting national income data.
3. To formulate planning and evaluate plan progress; it is essential that the data pertaining
to a country’s gross income, output, saving and consumption from different sources should
be available for economic planning.
4. To build economic models both in short - run and long - run.
5. To make international comparison, inter - regional comparison and inter - temporal

comparison of growth of the economy during different periods.
6. To know a country’s per capita income which reflects the economic welfare of the
country (Provided income is equally distributed)
7. To know the distribution of income for various factors of production in the country.
8. To arrive at many macro economic variables namely, Tax – GDP ratio, Current Account
Deficit - GDP ratio, Fiscal Deficit - GDP ratio, Debt – GDP ratio etc
36. Discuss the various methods of estimating the national income of a country.
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1.Product method
Product method measures the output of the country. It is also called inventory
method.
Under this method, the gross value of output from different sectors like agriculture,
industry, trade and commerce, etc., is obtained for the entire economy during a
year.
The value obtained is actually the GNP at market prices. Care must be taken to
avoid double counting.
The value of the final product is derived by the summation of all the values added in
the productive process.
To avoid double counting, either the value of the final output should be taken into
the estimate of GNP or the sum of values added should be taken.
Precautions
1. Double counting is to be avoided under value added method. Any commodity which is
either raw material or intermediate good for the final production should not be included.
2. The value of output used for self consumption should be counted while measuring
national income.
3. In the case of durable goods, sale and purchase of second hand goods (for example pre
owned cars) should not be included.
2.Income Method (Factor Earning Method)

 This method approaches national income from the distribution side.
 Under this method, national income is calculated by adding up all the incomes
generated in the course of producing national product.
Steps involved
1. The enterprises are classified into various industrial groups.
2. Factor incomes are grouped under labour income, capital income and mixed income.
i) Labour income - Wages and salaries, fringe benefits, employer’s contribution to social
security.
ii) Capital income – Profit, interest, dividend and royalty
iii) Mixed income – Farming, sole proprietorship and other professions.
3. National income is calculated as domestic factor income plus net factor incomes from
abroad. In short,
Y = w + r + i + π + (R-P)
w = wages, r = rent, i = interest, π = profits,
R = Exports and P = Imports
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3.The Expenditure Method (Outlay method)

 Under this method, the total expenditure incurred by the society in a particular year
is added together.
 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.
Symbolically,
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?
1 Transfer payments
Government makes payments in the form of pensions, unemployment allowance,
subsidies, etc.
These are government expenditure. But they are not included in the national
income.
Because they are paid without adding anything to the production processes.
2 Diffi culties in assessing depreciation allowance
The deduction of depreciation allowances, accidental damages, repair and
replacement charges from the national income is not an easy task.
It requires high degree of judgment to assess the depreciation allowance and other
charges.
3.Unpaid services
A housewife renders a number of useful services like preparation of meals, serving,
tailoring, mending, washing, cleaning, bringing up children, etc. She is not paid for
them and her services are not directly included in national income.
Such services performed by paid servants are included in national income
4 Income from illegal activities
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Income earned through illegal activities like gambling, smuggling, illicit extraction
of liquor, etc., is not included in national income.
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.
5 Production for self-consumption and changing price
Farmers keep a large portion of food and other goods produced on the farm for self
consumption.
The problem is whether that part of the produce which is not sold in the market can
be included in national income or not.
6 Capital Gains
The problem also arises with regard to capital gains. 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.
Capital gains are excluded from national income.
7 Statistical problems
There are statistical problems, too.
Great care is required to avoid double counting.
Statistical data may not be perfectly reliable, when they are compiled from
numerous sources.
38. Discuss the importance of social accounting in economic analysis.
Under this method, the economy is divided into several sectors.
A sector is a group of individuals or institutions having common interrelated
economic transactions.
The economy is divided into the following sectors
(i) Firms,
(ii) Households,
(iii) Government,
(iv) Rest of the world and
(v) Capital sector.
“ Firms” undertake productive activities. Thus, they are all organizations which
employ the factors of production to produce goods and services.
“ 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. Thus, firms make payment to
households for their services. Households spend money incomes they received on the
goods and services produced by the firms. This is a circular flow of money between
these two groups.
“ The Government sector” refers to the economic transactions of public bodies at

all levels, centre, state and local. In their work concerning social accounting, Edey
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and Peacock have defined government as a collective ‘person’ that purchases goods
and services from firms. These purchases may be financed through taxation, public
borrowings, or any other fiscal means.
“ 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.
“ 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.
3.Theories of Employment and Income

PART A
I. Multiple choice questions
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
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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
.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.

21
(a) Induced price mechanism (b) Automatic price mechanism

(c) Induced demand (d) Induced investment
Part - B
21. Define full employment.
Full employment refers to a situationin which every able bodied person who is
willing to work at the prevailing wage rate, is employed
Keynes defines full employment as the absence of involuntary unemployment.
Lerner defines full employment in an inflationary spiral of wages and prices”. “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 ?

Disguised unemployment
Seasonal unemployment.
23. Give short note on frictional unemployment.
Frictional unemployment arises due to imbalance between supply of labour and

demand for labour. This is because of immobility of labour, lack of necessary skills,
break down of machinery, shortage of raw materials etc.
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.

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.
25. List out the assumptions of Say’s law.

1. No single buyer or seller of commodity or an input can affect price.
2. Full employment.
22
3. People are motivated by self interest and self – interest determines economic decisions.
4. The laissez faire policy is essential for an automatic and self adjusting process of full
employment equilibrium. Market forces determine everything right.
5. There will be a perfect competition in labour and product market.
6. There is wage-price flexibility.
7. Money acts only as a medium of exchange. 8. Long - run analysis.
9. There is no possibility for over production or unemployment.
10. Unutilized resources used until reaches full employment.
11. No Government intervention automatic Price adjustment mechanism operated.
26. What is effective demand ?

Effective demand denotes money actually spent by the people on products of
industry.
The money which entrepreneurs receive is paid in the form of rent, wages, interest
and profit.
Therefore effective demand equals national income.
27. What are the components of aggregate supply ?

1. Aggregate (desired) consumption expenditure (C)
2. Aggregate (desired) private savings (S)
3. Net tax payments (T) (Total tax payment to be received by the government minus
transfer payments, subsidy and interest payments to be incurred by the government)
4. Personal (desired) transfer payments to the foreigners (Rf)(eg. Donations to
international relief efforts
Aggregate Supply = C + S + T + Rf = Aggregate income generated in the economy
PART – C
Answer the following questions in a paragraph.
28. Explain the following in short

(i) 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.
 These industries offer employment only during that season in a year.
 Therefore people may remain unemployed during the off season.
 Seasonal unemployment happens from demand side also; for example ice cream
industry, holiday resorts etc.
23
(ii) Frictional unemployment

unemployment.
(iii) 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
29. According to classical theory of employment, how wage reduction solve the problem of
unemployment diagramatically explain.
30. Write short note on the implications of Say’s law.

2. If there exist unutilized resources in the economy, it is profitable to employ them up to
the point of full employment. This is true under the condition that factors are willing to
accept rewards on a par with their productivity.
3. As automatic price mechanism operates in the economy, there is no need for government
intervention. (However, J.M. Keynes emphasized the role of the State)
4. Interest flexibility brings about equality between saving and investment.
5. Money performs only the medium of exchange function in the economy, as people will
not hold idle money.
31. Explain Keynes’ theory in the form of flow chart.

24
32.What do you mean by aggregate demand ? Mention its components.

In the Keynesian model, output is determined mainly by aggregate demand.
The aggregate demand is the amount of money which entrepreneurs expect to get by
selling the output produced by the number of labourers employed.
Therefore, it is the expected income or revenue from the sale of output at different
levels of employment.
Aggregate demand has the following four components:

1. Consumption demand
2. Investment demand
3. Government expenditure and
4. Net Export ( export – import )
33. Explain about aggregate supply with the help of diagram.

25
Aggregate supply function is an increasing function of the level of

employment.
Aggregate supply refers to the value of total output of goods and services produced
in an economy in a year.
In other words, aggregate supply is equal to the value of national product, i.e.,
national income.
In other words, the aggregate supply refers to the required amount of labourers and
materials to produce the necessary output.
Employers hire labourers, purchase various inputs and raw materials to produce
goods.
The components of aggregate supply are :

1. Aggregate (desired) consumption expenditure (C)
2. Aggregate (desired) private savings (S)
3. Net tax payments (T) (Total tax payment to be received by the government minus
transfer payments, subsidy and interest payments to be incurred by the government) and
4. Personal (desired) transfer payments to the foreigners (Rf)(eg. Donations to

international relief efforts)
Aggregate Supply = C + S + T + Rf = Aggregate income generated in the
economy
Z curve is linear where money wages remains fixed; Z1 curve is non - linear
since wage rate increases with employment.
When full employment level of Nf is reached it is impossible to increase
output by employing more men.
26
So aggregate supply curve becomes inelastic (Vertical straight line).

The slope of the aggregate supply curve depends on the relation between the
employment and productivity.
The capital stock is often fixed and hence the law of diminishing marginal
returns takes place as more workers are employed.
Based upon this relation, the aggregate supply curve can be expected to slope
upwards.
In reality the aggregate supply curve will be like Z1
Thus aggregate supply is an important factor in determining the level of
economic activity.
34. Write any five differences between classism and Keynesianism.
PART - D
Answer the following questions in about page.
35. Describe the types of unemployment.
1. Cyclical Unemployment
This unemployment exists during the downturn phase of trade cycle in the economy.
27
In a business cycle during the period of recession and depression, income and
output fall leading to widespread unemployment.
It is caused bydeficiency of effective demand.
Cyclical unemployment can be cured by public investment or expansionary
monetary policy.
2. 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.
 These industries offer employment only during that season in a year.
 Therefore people may remain unemployed during the off season.
 Seasonal unemployment happens from demand side also; for example ice cream
industry, holiday resorts etc.
3. Frictional unemployment
unemployment.
4 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
5. Technical Unemployment
Modern technology being capital intensive requires less labourersand contributes to
technological unemployment.
Now a days, invention and innovations lead to the adoption of new techniques there
by the existing workers are retrenched.
6. 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.
For example rise in demand for mobile phones has adversely affected the demand
for cameras, tape recorders etc
28
7. Disguised Unemployment
Disguised unemployment occurs when more people are there than what is actually
required.
Even if some workers are withdrawn, production does not suffer. This type of
unemployment is found in agriculture.
36. Critically explain Say’s law of market.

Say’s law of markets is the core of the classical theory of employment.
J.B. Say enunciated the proposition that “Supply creates its own demand”.
Hence there cannot be general over production or the problem of unemployment in
the economy.
According to Say, “When goods are produced by firms in the economy, they pay
reward to the factors of production.
The households after receiving rewards of the factors of production spend the
amount on the purchase of goods and services produced by them.
Therefore, each product produced in the economy creates demand equal to its value
in the market.
Assumptions of the Say’s law of market

1. No single buyer or seller of commodity or an input can affect price.
2. Full employment.
3. People are motivated by self interest and self – interest determines economic decisions.
4. The laissez faire policy is essential for an automatic and self adjusting process of full
employment equilibrium. Market forces determine everything right.
5. There will be a perfect competition in labour and product market.
6. There is wage-price flexibility.
7. Money acts only as a medium of exchange. 8. Long - run analysis.
10. Unutilized resources used until reaches full employment.
29
11. No Government intervention automatic Price adjustment mechanism operated.

12. Interest rate flexibility leads is saving – Investment equality
Implications of Say’s Law

2. If there exist unutilized resources in the economy, it is profitable to employ them up to
the point of full employment. This is true under the condition that factors are willing to
accept rewards on a par with their productivity.
3. As automatic price mechanism operates in the economy, there is no need for government
intervention. (However, J.M. Keynes emphasized the role of the State)
4. Interest flexibility brings about equality between saving and investment.
5. Money performs only the medium of exchange function in the economy, as people will
not hold idle money.
Criticisms of Say’s Law
1. According to Keynes, supply does not create its demand. It is not applicable where
demand does not increase as much as production increases.
2. Automatic adjustment process will not remove unemployment. Unemployment can be
removed by increase in the rate of investment.
3. Money is not neutral. Individuals hold money for unforeseen contingencies while
businessmen keep cash reserve for future activities.
4. 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.
5. Keynes regards full employment as a special case because there is under - employment
in capitalist economies.
6. 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 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.
All the decisions concerning consumption expenditure are taken by the individual
households, while the business firms take decisions concerning investment.
30
It is also assumed that consumption function is linear and planned investment is

autonomous.
There are two approaches to determination of the equilibrium level of income in

Keynesian theory:
1. Aggregate demand – Aggregate supply approach
2. Saving – Investment approach
In the figure, the aggregate demand and aggregate supply reach equilibrium at
point E.
The employment level is No at that point.
At ON1 employment, the aggregate supply is N1 R1. But they are able to produce
M1 N1.
The expected level of profit is M1 R1. To attain this level of profit, entrepreneurs
will employ more labourers.
The tendency to employ more labour will stop once they reach point E.
At all levels of employment beyond, ONo, the aggregate demand curve is below the
aggregate supply curve indicating loss to the producers.
Hence they will never employ more than ONo labour.
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
31
4.Consumption And Investment Functions

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
32
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 spendingConsumption And Investment Functions
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.
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
33
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 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?

The consumption function or propensity to consume refers to income consumption
relationship.
34
It is a “functional relationship between two aggregates viz., total consumption and

gross national income.”
Symbolically, the relationship is represented as
C= f (Y)
Where,
C = Consumption
Y = Income
f = Function
22. What do you mean by propensity to consume?

The consumption function or propensity to consume refers to income consumption
relationship.
It is a “functional relationship between two aggregates viz., total consumption and
gross national income.”
23. Define average propensity to consume (APC).

The average propensity to consume is the ratio of consumption expenditure to any
particular level of income.”
Algebraically it may be expressed as under:
APC = C / Y
Where,
C= Consumption
Y = Income
24. Define marginal propensity to consume (MPC).

The marginal propensity to consume may be defined as the ratio of the change in
the consumption to the change in income.
Algebraically it may be expressed as under:
MPC = ΔC / ΔY
ΔC= Change in Consumption

ΔY = Change in Income
MPC is positive but less than unity
25. What do you mean by propensity to save?

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.
26. Define average propensity to save (APS).
The average propensity to save is the ratio of saving to income.
35
APS is the quotient obtained by dividing the total saving by the total income.
In other words, it is the ratio of total savings to total income. It can be expressed
algebraically in the form of equation as under
APS = S / Y
Where,
S= Saving
Y=Income
27. Define Marginal Propensity to Save (MPS).

 Marginal Propensity to Save is the ratio of change in saving to a change in income.
 MPS is obtained by dividing change in savings by change in income. It can be
expressed algebraically as
MPS = ΔS / ΔY
ΔS = Change in Saving
ΔY= Change in Income
28. Define Multiplier.

 The multiplier is defined as the ratio of the change in national income to change in
investment.
 If ΔI stands for increase in investment and ΔY stands for resultant increase in
income, the multiplier
K =ΔY / ΔI.
29. Define Accelerator

Accelerator is the numerical value of the relation between an increase in
consumption and the resulting increase in investment.
Accelerator (β)= ΔI / ΔC
Part C
Answer the following questions in one paragraph
30. State the propositions of Keynes’s Psychological Law of Consumption
(1) 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.
So, the consumption expenditure increases with increase in income but less than
proportionately.
(2) The increased income will be divided in some proportion between consumption
expenditure and saving.
36
This follows from the first proposition because when the whole of increased income
is not spent on consumption, the remaining is saved.
In this way, consumption and saving move together.
(3) 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.
32. Explain any three subjective and objective factors influencing the
consumption function.
Subjective Factors
1. The motive of precaution:

To build up a reserve against unforeseen contingencies. Eg. Accidents, sickness
2. The motive of foresight:

The desire to provide for anticipated future needs. Eg. Old age
3. The motive of calculation:

The desire to enjoy interest and appreciation.
Objective Factors
1.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.
2. Price level
Price level plays an important role in determining the consumption function.
37
When the price falls, real income goes up; people will consume more and propensity
to save of the society increases
3. 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.

Multiplier effect
An initial change in aggregate demand can have a much greater final impact on
equilibrium national income
This is known as the multiplier effect
It comes about because injections of new demand for goods and services into the
circular flow of income stimulate further rounds of spending – in other words “one
person’s spending is another’s income”
This can lead to a bigger eventual effect on output and employment
The Accelerator Effect
The accelerator effect is when an increase in national income results in a

proportionately larger rise in investment
Consider an industry where demand is rising at a strong pace.
Firms will respond to growing demand by expanding production and making fuller
use of their existing productive capacity.
.
34. State the concept of super multiplier.
The super multiplier is greater than simple multiplier which includes only
autonomous investment and no induced investment, while super multiplier includes
induced investment.
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.
The super multiplier is worked out by combining both induced consumption and
induced investment.
35. Specify the limitations of the multiplier.

1.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.
38
2.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.
3.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.
4.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.
5. 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
Answer the following questions in a page
36. Explain Keynes psychological law of consumption function with diagram.
Keynes propounded the fundamental Psychological Law of Consumption which
forms the basis of the consumption function.
He stated that “The fundamental psychological law upon which we are entitled to
depend with great confidence both prior from our knowledge of human nature and
from the detailed facts of experience, is that men are disposed as a rule and on the
average to increase their consumption as their income increases but not by as much
as the increase in their income.”
Assumptions
1. Ceteris paribus (constant extraneous variables):
The other variables such as income distribution, tastes, habits, social customs, price
movements, population growth, etc. do not change and consumption depends on
income alone.
2. Existence of Normal Conditions:

39
The law holds good under normal conditions.

If, however, the economy is faced with abnormal and extraordinary
circumstances like war, revolution or hyperinflation, the law will not operate.
People may spend the whole of increased income on consumption.
3. Existence of a Laissez-faire Capitalist Economy:
The law operates in a rich capitalist economy where there is no government

intervention.
People should be free to spend increased income.
In the case of regulation of private enterprise and consumption expenditures by the
State, the law breaks down.
Propositions of the Law:
(1) 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.
So, the consumption expenditure increases with increase in income but less than
proportionately.
(2) 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.
In this way, consumption and saving move together.
(3) 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.
40
Proposition (1):
Income increases byRs 60 crores and the increase in consumption is byRs.50 crores.
Proposition (2):
The increased income of Rs 60 crores in each case is divided in some proportion between
consumption and saving respectively
Proposition (3):
As income increases consumption as well as saving increase. Neither consumption nor
saving has fallen.
Diagrammatically, the three propositions are explained in the following figure
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.
37. Briefly explain the subjective and objective factors of consumption function?
Subjective Factors
41
1. The motive of precaution:

To build up a reserve against unforeseen contingencies. Eg. Accidents, sickness
2. The motive of foresight:
The desire to provide for anticipated future needs. Eg. Old age
3. The motive of calculation:
The desire to enjoy interest and appreciation.
4. The motive of improvement:
The desire to enjoy for improving standard of living.
5. The motive of financial independence.
6. The motive of enterprise (desire to do forward trading).
7. The motive of pride.(desire to bequeath a fortune)
8. The motive of avarice.(purely miserly instinct)
Objective Factors
1) 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.
2) Price level
Price level plays an important role in determining the consumption function. When
the price falls, real income goes up; people will consume more and propensity to
save of the society increases.
3) Wage level
Wage level plays an important role in determining the consumption function and
there is positive relationship between wage and consumption.
Consumption expenditure increases with the rise in wages. Similar is the effect with
regard to windfall gains.
4) Interest rate
Rate of interest plays an important role in determining the consumption function.
Higher rate of interest will encourage people to save more money and reduces
consumption.
5) Fiscal Policy
When government reduces the tax the disposable income rises and the propensity to
consume of community increases.
6) Consumer credit
The availability of consumer credit at easy installments will encourage households
to buy consumer durables like automobiles, fridge, computer. This pushes up
consumption.
42
7) Demographic factors
Ceteris paribus, the larger the size of the family, the grater is the consumption.
Besides size of family, stage in family life cycle, place of residence and occupation
affect the consumption function.
8) Duesenberry hypothesis
Duesenberry has made two observations regarding the factors affecting
consumption
9) Windfall Gains or losses

Unexpected changes in the stock market leading to gains or losses tend to shift the
consumption function upward or downward.
38. Illustrate the working of Multiplier.

Suppose the Government undertakes investment expenditure equal to 100 crore
on some public works, by way of wages, price of materials etc.
Thus income of labourers and suppliers of materials increases by 100 crore.
Suppose the MPC is 0.8 that is 80 %. A sum of 80 crores is spent on
consumption .
As a result, suppliers of goods get an income of 80 crores. They inturn spend
64 crores (80% of 80 cr).
In this manner consumption expenditure and increase in income act in a chain like
manner.
The final result isΔY = 100+100×4/5+100 ×[4/5]2+100×[4/5]3 or,

ΔY = 100 + 100 x 0.8 + 100 x (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
43
0.2Y =210
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)
K = 1 / 0.2 = 5
39. Explain the operation of the Accelerator.
Let us suppose that in order to produce 1000 consumer goods, 100 machines are
required.
Also suppose that working life of a machine is 10 years.
This means that every year 10 machines have to be replaced in order to maintain
theconstant flow of 1000 consumer goods.
This might be called replacement demand.
Suppose that demand for consumer goods rises by 10 percent (ie from 1000 to 1100).
This results in increase in demand for 10 more machines. So that total demand for
machines is 20. (10 for replacement and 10 for meeting increased demand).
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).
So we can conclude even a mild change in demand for consumer goods will lead to
wide change in investment.
Diagrammatic illustration:
Operation of Accelerator
44
SS is the saving curve. II is the investment curve.

At point E1, the economy is in equilibrium with OY1 income.
Saving and investment are equal at OI2.
Now, investment is increased from OI2 to OI4.
This increases income from OY1 to OY3, the equilibrium point being E3. If the
increase in investment by I2 I4 is purely exogenous, then the increase in income by
Y1 Y3 would have been due to the multiplier effect.
But in this diagram it is assumed that exogenous investment is only by I2 I3 and
induced investment is by I3 I4.
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

45
5.Monetary Economics
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 of 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
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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
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
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Part – B
21. Define Money.
“ Money is, what money does” - Walker.
“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”.–Crowther
22. What is barter?

Exchange of goods for goods was known as “Barter Exchange” or “Barter System”.
23. What is commodity money?

Commodity money is a form of currency in which the value of the currency comes
from the material of which it is made. gold, silver, grains, livestock, salt, and other
materials have served as commodity money at different points in history.
24. What is gold standard?

Gold Standard is a system in which the value of the monetary unit or the standard
currency is directly linked with gold.
The monetary unit is defined in terms of a certain weight of gold.
The purchasing power of a unit of money is maintained equal to the value of a fixed
weight of gold.
25. What is plastic money? Give example.

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.
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.

Inflation is a consistent and appreciable rise in the general price level.
“ Too much of Money chasing too few goods” - Coulbourn

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“A state of abnormal decrease in the quantity of purchasing power”

- Gregorye
27. What is Stagflation?

Stagflation is a combination of stagnant economic growth, high unemployment and
high inflation.
Part – C
Answer the following questions in one paragraph.
29. What is money supply?

Money supply means the total amount of money in an economy.
It refers to the amount of money which is in circulation in an economy at any given
time.
Money supply plays a crucial role in the determination of price level and interest
rates.
Money supply viewed at a given point of time is a stock and over a period of time it
is a flow.
In India, currency notes are issued by the Reserve Bank of India (RBI) and coins
are issued by the Ministry of Finance, Government of India (GOI).
Besides these, the balance is savings, or current account deposits, held by the public
in commercial banks is also considered money.
The currency notes are also called fiat money and legal tenders.
 Money supply is a stock variable.

 RBI publishes information for four alternative measures of Money supply, namely
M1,M2,M3 and M4.
M1 = Currency, coins and demand deposits
M2 = M1 + Savings deposits with post office savings banks
M3 = M2 + Time deposits of all commercial and cooperative banks
M4 = M3 + Total deposits with Post offices.
M1 and M2 are known as narrow money

49
M3 and M4 are known as broad money
30. What are the determinants of money supply?

Determinants of Money Supply
1. Currency Deposit Ratio (CDR);

It is the ratio of money held by the public in currency to that they hold in bank
deposits.
2. Reserve deposit Ratio (RDR);

Reserve Money consists of two things (a) vault cash in banks and (b) deposits of
commercial banks with RBI.
3. Cash Reserve Ratio (CRR);

It is the fraction of the deposits the banks must keep with RBI.
4. 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 assests.
31. Write the types of inflation.
On the basis of speed

(i) Creeping inflation
(ii) Walking inflation
(iii) Running inflation
(iv) Galloping inflation or Hyper inflation.
Demand-Pull Vs Cost-Push inflation

i. Demand-Pull Inflation
ii. Cost-Push Inflation
Other types of inflation (on the basis of inducement
i) Currency inflation
ii) Credit inflation
iii) Deficit induced inflation
iv) Profit induced inflation:
v) Scarcity induced inflation)
vi) Tax induced inflation
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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
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.
Thus, the price level P = M/KY or the value of money (The reciprocal of price level)
is 1/P = KY/M
ii) Keynes’ Equation

Keynes equation is expressed as: n = pk (or) p = n / 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. Later, Keynes extended his equation in the
following form:
n = p (k + rk') or p = n/(k + rk')
Where,
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n = total money supply

p = price level of consumer goods
k = peoples' desire to hold money in
hand (in terms of consumer goods)
in the total income of them
r = cash reserve ratio
k' = community’s total money deposit in banks, in terms of consumers goods.
34. Explain disinflation.
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.
Disinflation may be defined as the process of reversing inflation without creating
unemployment or reducing output in the economy.
Part – D
Answer the following questions in about a page
35. Illustrate Fisher’s Quantity theory of money.
The quantity theory of money is a very old theory.

It was first propounded in 1588 by an Italian economist, Davanzatti.
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.
He gave it a quantitative form in terms of his famous “Equation of Exchange”.
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

52
This equation is referred to as “Cash Transaction Equation”.

It is expressed as P = MV / 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.
The above equation considers only currency money. But, in a modern economy,
bank’s demand deposits or credit money and its velocity play a vital part in
business. Therefore, Fisher extended his original equation of exchange to include
bank deposits M1 and its velocity V1. The revised equation was:
PT = MV + M1V1
P = MV + M1V1 / T
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)
Figure (A) shows the effect of changes in the quantity of money on the price level.
When the quantity of money is OM, the price level is OP.
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When the quantity of money is doubled to OM2 , the price level is also doubled to
OP2 .
Further, when the quantity of money is increased four-fold to OM4 , the price level
also increases by four times to OP4 .
This relationship is expressed by the curve OP = f (M) from the origin at 45°
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.
When the quantity of money is OM, the value of money is OI / P.
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). But, with the quantity of money
increasing by four-fold to OM4, the value of money is reduced by OI / P4.
This inverse relationship between the quantity of money and the value of money is
shown by downward sloping curve IO / P = f(M).
36. Explain the functions of money.
1.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.
On account of the use of money, the transaction has now come to be divided into two
parts.
First, money is obtained through sale of goods or services. This is known as sale.
Later, money is obtained to buy goods and services. This is known as purchase
ii) Money as a measure of value:

The second important function of money is that it measures the value of goods and
services.
In other words, the prices of all goods and services are expressed in terms of
money.
Money is thus looked upon as a collective measure of value.
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2.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, theborrowed amount could be returned only in terms of
goods and services.
But the modern money-economy has greatly facilitated the borrowing and
lending processes
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.
3.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.
For example, a depositor can make use of cheques only when there are sufficient
funds in his account.
The commercial bankscreate credit on the basis of adequate cash reserves
But, money is at the back of all credit.
ii) Money facilitates distribution of National Income:

The task of distribution of national income was exceedingly complex under the
barter system.
But the invention of money has now facilitated the distribution of income as rent,
wage, interest and profit.
iii) Money helps to Equalize Marginal Utilities and Marginal Productivities:

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Consumer can obtain maximum utility only if he incurs expenditure on

variouscommodities 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.
4.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.
The firm ensures its repayment capacity with money.
Likewise, banks, insurance companies and even governments have to keep some
liquid money (i.e., cash)to maintain their repayment capacity.
ii) Money represents Generalized Purchasing Power:
Purchasing power kept in terms of money can be put to any use.
It is not necessary that money should be used only for the purpose for which it has
been served.
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?
The effects of inflation can be classified into two heads:
(1) Effects on Production and
(2) Effects on Distribution.
1. Effects on Production:
When the inflation is very moderate, it acts as an incentive to traders and
producers.
This is particularly prior to full employment when resources are not fully utilized.
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.
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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.
2. Effects on Distribution
i) Debtors and Creditors:

During inflation, debtors are the gainers while the creditors are losers.
The reason is that the debtors had borrowed when the purchasing power of money
was high and now repay the loans when the purchasing power of money is low due
to rising prices.
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.
Examples are wage, salary, pension, interest, rent etc.
iii) Entrepreneurs:
Inflation is the boon to the entrepreneurs whether they are manufacturers, traders,
merchantsor businessmen, because it serves as a tonic for business enterprise.
They experience windfall gains as the prices of their inventories (stocks) suddenly go
up.
iv. Investors:
The investors, who generally invest in fixed interest yielding bonds and securities
have much to lose during inflation.
On the contrary those who invest in shares stand to gain by rich dividends and
appreciation in value of shares.
38. Describe the phases of Trade cycle.
Definition
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“A trade cycle is composed of periods of good trade characterised by rising prices and low
unemployment percentages altering with periods of bad trade characterised by falling
prices and high unemployment percentages”. - J.M. Keynes
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 thelevel of economic activity becomes extremely low.
Firms incur losses and closure of business becomes a commonunemployment.
Interest prices, profits and wages are low.
The agricultural class and wage earners would be worst hit.
Banking institutions will be reluctant to advance loans to businessmen. 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.
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iv. Recovery:
After a period of depression, recovery sets in.
This is the turning point from depression to revival towards upswing.
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).
6.Banking
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 deposit 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
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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
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

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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?
Credit Creation means the multiplication of loans and advances.

Commercial banks receive deposits from the public and use these deposits to give
loans.
However, loans offered are many times more than the deposits received by banks.
This function of banks is known as ‘Credit Creation’.
23. Define Central bank.
A central bank, reserve bank, or monetary authority is an institution that manages

a state’s currency, money supply, and interest rates.
Central banks also usually oversee the commercial banking system of their
respective countries.
24. Distinguish between CRR and SLR.
Cash Reserves Ratio Statutory Liquidity Ratio

Banks are required to hold a certain It is the amount which a bank
proportion of their deposits in the form of has to maintain in the form of
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cash with RBI. This is known as CRR. cash, gold or approved

securities.
25. Write the meaning of Open market operations
In narrow sense, the Central Bank starts the purchase and sale of Government
securities in the money market.
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?
This is the oldest method of credit control.

Rationing of credit as an instrument of credit control was first used by the Bank of
England by the endof the 18th Century.
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
Answer the following questions in about a paragraph
28. Write the mechanism of credit creation by commercial banks.
Bank credit refers to bank loans and advances.

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.
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.
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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.
This power of commercial bank to create deposits through expanding their loans
and advances is known as credit creation.
Primary / Passive Deposit and Derived / Active Deposit
The modern banks create deposits in two ways.

They are primary deposit and derived deposit.
When a customer gives cash to the bank and the bank creates a book debt in his
name called a deposit, it is known as a “primary deposit’.
But when such a deposit is created, without there being any prior payment of
equivalent cash to the bank, it is called a ‘derived deposit’.
Credit Creation literally means the multiplication of loans and advances.

Every loan creates its own deposits.
Central Bank insists the banks to maintain a ratio between the total deposits they
create and the cash in their possession.
For the purpose of understanding, it is assumed that all banks are obliged to keep
the ratio between cash and its deposits at a minimum of 20 percent.
1. The banks do not keep any excess reserves, in other words, it would exhaust possible
avenues of income earning activities like giving loans etc. up to the maximum extent after
attaining the minimum cash reserves.
2. There are no drains in the supply of money i,e., the public do not suddenly want to hold
more ideal currency or withdraw from the time deposits.
29. Give a brief note on NBFI.
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.
The NBFIs do not carry on pure banking business, but they will carry on other
financial transactions.
They receive deposits and give loans.
They mobilize people’s savings and use the funds tofinance expenditure on
investment activities.
In short, they are institutions which undertake borrowing and lending.
They operate in both the money and the capital markets.
NBFIs can be broadly classified into two categories. Viz..,
63
(1) Stock Exchange;

(2) Other Financial institutions.
Under the latter category comes Finance Companies, Finance Corporations,
ChitFunds, 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?
(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, mediumterm and long-term credits to state co-operative Banks
(SCBs), RRBs, LDBs and other financial institutions approved by RBI.
(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
64
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) and other all India and State
level institutions entrusted with the development of small scale industries, village and
cottage industries, rural crafts, industries in the tiny and decentralized sectors, etc.
(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

Money market is the mechanism Capital Market is a part of
through which sthort term funds are financial system which is
loaned and borrowed. concerned with raising
It designates financial instittutions which capital by dealing in shares,
handle the purchase, sale and transfer of short bonds and other long term
term credit instruments. Commercial banks, investments.
acceptance houses, Non Banking Financial The market where
Institutions and the Central Bank are the investment instruments like
institutions catering to the requirements of bonds, equities and
short term funds in the money Market. mortgages are traded I
known as the capital
market
34. Mention the objectives of demonetizations.

65
1. Removing Black Money from the country.

2. Stopping of Corruption.
3. Stopping Terror Funds.
4. Curbing Fake Notes
Part - D
Answer the following questions in one page
35. Explain the role of Commercial Banks in economic development.
1. 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.
Now-a-days, banks offer very attractive schemes to induce the people to save their
money with them and bring the savings mobilized to the organized money market.
2. 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.
3. 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.
Then only it can be said to have performed an important role in the economic
development.
4. 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.
They grant loans and advances to manufacturers whose products are in great
demand.
The manufacturers in turn increase their products by introducing new methods of
production and assist in raising the national income of the country
5. Banks Monetize Debt

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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.
But credit sales may lead to locking up of capital
6. 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.
7. 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.
8. 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-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
and secondary functions, which are shown in the picture

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(a) Primary Functions:
1. 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.
In other words, the owners of these deposits are allowed to withdraw money
anytime by writing a withdrawal slip or a cheque at the bank counter or from ATM
centres using debit card.
(ii) Time Deposits

It refers to deposits that are made for certain committed period of time.
Banks pay higher interest on time deposits.
These deposits can be withdrawn only after a specific time period by providing a
written notice to the bank.
2. 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.
1. 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.
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(ii) Collecting Income

Commercial banks collect dividends, pension, salaries, rents, and interests on
investments on behalf of their customers.
A credit voucher is sent to customers for information when any income is collected
by the bank.
(iii) Paying Expenses

Commercial banks make the payments of various obligations of customers, such as
telephone bills, insurance premium, school fees, and rents.
Similar to credit voucher, a debit voucher is sent to customers for information when
expenses are paid by the bank.
(2) 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.
This minimizes the risk of loss due to theft at homes.
Banks are not responsible for the items in the lockers.
(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.
However, commercial banks need to take the permission of the Central Bank for
dealing in foreign exchange.
3. 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.
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4. Letter of Credit
Commercial banks issue letters of credit to their customers to certify their
creditworthiness.
(i) Underwriting Securities

Commercial banks also undertake the task of 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
ii) Credit Creation

Credit Creation means the multiplication of loans and advances
(iii) Collection of Statistics:

Banks collect and publish statistics relating to trade, commerce and industry.
Hence, they advice customers and the public authorities on financial matters.
37.Describe the functions of Reserve Bank of India.

1. 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.
2. 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.
3. The issuer of Banking License:

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As per Sec 22 of Banking Regulation Act, every bank has to obtain a banking license
from RBI to conduct banking business in India.
4. Banker to the Government:
It acts as banker both to the central and the state governments.
It provides short-term credit.
It manages all new issues of government loans, servicing the government debt
outstanding and nurturing the market for government securities.
It advises the government on banking and financial subjects.
5. 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.
6. 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.
7. 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.
8. Custodian of foreign exchange reserves:
It acts as a custodian of FOREX. It administers and enforces the provision of

Foreign Exchange Management Act (FEMA), 1999.
RBI buys and sells foreign currency to maintain the exchange rate of Indian rupee
v/s foreign currencies.
9. Regulator of Economy:
It controls the money supply in the system, monitors different key indicators like
GDP, Inflation, etc.
10. Managing Government securities:

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RBI administers investments in institutions when they invest specified minimum

proportions of their total assets/liabilities in government securities.
11. Regulator and Supervisor of Payment and Settlement Systems:

The Payment and Settlement Systems Act of 2007 (PSS Act) gives RBI oversight
authority for the payment and settlement systems in the country.
RBI focuses on the development and functioning of safe, secure and efficient
payment and settlement mechanisms.
12. Developmental Role:

This role includes the development of the quality banking system in India and
ensuring that credit is available to the productive sectors of the economy
13. Publisher of monetary data and other data:

RBI maintains and provides all essential banking and other economic data,
formulating and critically evaluating the economic policies in India.
RBI collects, collates and publishes data regularly.
14. Exchange manager and controller: RBI represents India as a member of the
International Monetary Fund [IMF].
Most of the commercial banks are authorized dealers of RBI.
15. Banking Ombudsman Scheme:

RBI introduced the Banking Ombudsman Scheme in 1995.
16. Banking Codes and Standards Board of India:

To measure the performance of banks against Codes and standards based on
established global practices, the RBI has set up the Banking Codes and Standards
Board of India (BCSBI).
38. What are the objectives of Monetary Policy? Explain.

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1. Neutrality of Money
Economists like Wicksteed, Hayek and Robertson are the chief exponents of neutral
money.
They hold 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. According
to neutralists, the monetary change causes distortion and disturbances in the
proper operation of the economic system of the country.
2. Exchange Rate Stability

Exchange rate stability was the traditional objective of monetary authority.
This was the main objective under Gold Standard among different countries.
When there was disequilibrium in the balance of payments of the country, it was
automatically corrected by movements
3. Price Stability
Economists like Crustave Cassel and Keynes suggested price stabilization as a main
objective of monetary policy.
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
4. Full Employment
During world depression, the problem of unemployment had increased rapidly.

It was regarded as socially dangerous, economically wasteful and morally
deplorable.
Thus, 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
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objective of monetary policy.
5. 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.
6. 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.
This is simply due to the problem of international liquidity on account of the
growth of world trade at a more faster speed than the world liquidity
7. International Economics
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?

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a) absolute cost b) comparative cost c) Factor endowment theory d) none of these
6. Exchange rates are determined in

a) money marke t 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
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?
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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
Answer the following questions. Each question carries 2 marks.
21. What is International Economics?

International Economics is that branch of economics which is concerned with the
exchange of goods and services between two or more countries.
In other words, International Economics is a specialized field of Economics which
deals with the economic interdependence among countries and studies the effects of
such interdependence and the factors that affect it.
22. Define international trade.

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It refers to the trade or exchange of goods and services between two or more
countries.
In other words, it is a trade among different countries or trade across political
boundaries.
It is also called as ‘external trade’ or ‘foreign trade’ or ‘inter-regional trade’.
23. State any two merits of trade.
International trade helps a country to export its surplus goods to other countries
and secure a better market for it.
Similarly, international trade helps a country to import the goods which cannot be
produced at all or can be produced at a higher cost.
I. Efficient Production
Equalization of Prices between Countries
24. What is the main difference between Adam Smith and Ricardo with regard to the
emergence of foreign trade?
Adam Smith argued that all nations can be benefitted when there is free trade and
specialisation in terms of their absolute cost advantage
According to Ricardo, a country can gain from trade when it produces at relatively
lower costs
25. Define Terms of Trade.

It is the rate at which the goods of one country are exchanged for goods of another
country.
It is expressed as the relation between export prices and import prices.
Terms of trade improves when average price of exports is higher than average price
of imports.
26. What do you mean by balance of payments?

BoP 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?

Exchange Rate is the external value of domestic currency.
Thus, exchange rate may be defined as the price paid in the home currency (say
Rs.75) for a unit of foreign currency (say 1 US $).
Part C
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28. Describe the subject matter of International Economics.
1. 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.
2. 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.
3. 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).
4. 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.
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30. Explain the Net Barter Terms of Trade and Gross Barter Terms of Trade.
Net Barter Terms of Trade
This type was developed by Taussig in 1927.
The ratio between the prices of exports and of imports is called the “net barter
terms of trade’.
It is named by Viner as the ‘commodity terms of trade’.
It is expressed as:
Tn= (Px / Pm) x 100
Where,
Tn = Net Barter Terms of Trade
Px = Index number of export prices
Pm = Index number of import prices
Gross Barter Terms of Trade
This was developed by Taussig in 1927 as an improvement over the net terms of
trade.
It is an index of relationship between total physical quantity of imports and the
total physical quantity of exports.
Tg= (Qm/Qx) 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
Balance of Trade (BOT) refers to BoP is a systematic record of
the total value of a country’s exports a country’s economic and financial
of transactions with the rest of the world
commodities and total value of imports over a period of time
of commodities.
32. What are import quotas?
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.
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.
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34. State the objectives of Foreign Direct Investment.

1. Sales Expansion
2. Acquisition of resources
3. Diversification
4. Minimization of competitive risk
Part D
35. Discuss the differences between Internal Trade and International Trade.
36. Explain briefly the Comparative Cost Theory.

David Ricardo , the British economist in his ‘Principles of Political Economy and
Taxation’ published in 1817, formulated a systematic theory called ‘Comparative
Cost Theory’.
Later it was refined by J.S Mill, Marshall, Taussig and others.
Ricardo demonstrates that the basis of trade is the comparative cost difference.
In other words, trade can take place even if the absolute cost difference is absent but
there is comparative cost difference.
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According to Ricardo, a country can gain from trade when it produces at relatively
lower costs.
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.
Assumptions
1. There are only two nations and two commodities (2x2 model)
2. Labour is the only element of cost of production.
3. All labourers are of equal efficiency.
4. Labour is perfectly mobile within the country but perfectly immobile between countries.
5. Production is subject to the law of
constant returns.
6. Foreign trade is free from all barriers.
7. No change in technology.
8. No transport cost.
9. Perfect competition.
10. Full employment.
11. No government intervention.
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
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It is evident from the example India has an absolute advantage in production of

both cloth and wheat
However, India should concentrate on the production of wheat in which she enjoys a
comparative cost advantage. (80/120 < 90/100).
For America the comparative cost disadvantage is lesser in cloth production.
Hence America will specialize in the production of cloth and export it to India in
exchange for wheat
Criticisms
1. Labour cost is a small portion of the total cost. Hence, theory based on labour cost is
unrealistic.
2. Labourers in different countries are not equal in efficiency.
37. Discuss the Modern Theory of International Trade.
The modern theory of international trade was developed by Swedish economist Eli
Heckscher and his student Bertil Ohlin in 1919.
This model was based on the Ricardian theory of international trade.
This theory says that the basis for international trade is the difference in factor
endowments.
It is otherwise called as ‘Factor Endowment Theory’.
The Theory
The classical theory argued that the basis for foreign trade was comparative cost
difference and it considered only labour factor.
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But the modern theory of international trade explains the causes for such
comparative cost difference.
This theory attributes international differences in comparative costs to:
i) difference in the endowments of factors of production between countries, and

ii) differences in the factor proportions required in production.
Assumptions
1. There are two countries, two commodities and two factors. (2x2x2 model)
2. Countries differ in factor endowments.
3. Commodities are categorized in terms of factor intensity.
4. Countries use same production technology.
5. Countries have identical demand conditions.
6. There is perfect competition in both product and factor markets in both thecountries.
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”.
A factor is regarded abundant or scare in relation to the quantum of other factors.
A country can be regarded as richly endowed with capital only if the ratio of capital
to other factors is higher than other countries.
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
1. Factor endowment of a country may change over time.
2. 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.
1 The Single Factoral Terms of Trade
Viner has devised another concept called ‘‘the single factoral terms of trade’’ as an
improvement upon the commodity terms of trade.
It represents the ratio of export-price index to the importprice index adjusted for
changes in the productivity of a country’s factors in the production of exports.
Symbolically, it can be stated as
Tf = (Px / Pm) Fx
Where, Tf stands for single factoral terms of trade index.

Fx stands for productivity in exports (which is measured as the index of cost in
terms of quantity of factors of production used per unit of export).
2 Double Factoral Terms of Trade
Viner constructed another index called ‘‘Double factoral terms of Trade’’. It is

expressed as
Tff = (Px / Pm) (Fx / Fm)
which takes into account the productivity in country’s exports, as well as the
productivity of foreign factors.
Here, Fm represents import index (which is measured as the index of cost in terms
of quantity of factors of production employed per unit ofimports).
39. Bring out the components of balance of payments account.

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The credit and debit items are shown vertically in the BOP account of a country.
Horizontally, they are divided into three categories, i.e.
a) The current account,
b) The capital account and
c) The official settlements account or official reserve assets account.
a) 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).
b) 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.
c) The Official Reserve Assets Account:

Official reserve transactions consist of movements of international reserves by
governments and 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).
40. Discuss the various types of disequilibrium in the balance of payments.
There are three main types of BOP Disequilibrium, which are discussed below.
(a) Cyclical Disequilibrium,

(b) Secular Disequilibrium,
(c) Structural Disequilibrium
a) 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.
b) 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.
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 In the initial stages of development, domestic investment exceeds domestic savings

and imports exceed exports, as it happens in India since 1951.
c) 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.
1. Differentials in Inflation
Inflation and exchange rates are inversely related.
A country with a consistently lower inflation rate exhibits a rising currency value,
as its purchasing power increases relative to other currencies.
2. Differentials in Interest Rates

There is a high degree of correlation between interest rates, inflation and exchange
rates.
Central banks can influence over both inflation and exchange rates by manipulating
interest rates.
Higher interest rates attract foreign capital and cause the exchange rate to rise and
vice versa.
3. Current Account Deficits

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A deficit in the current account implies excess of payments over receipts.

The country resorts to borrowing capital from foreign sources to make up the
deficit. Excess demand for foreign currency lowers a country’s exchange rate.
4. Public Debt
Large public debts are driving out foreign investors, because it leads to inflation. As
a result, exchange rate will be lower.
5. Terms of Trade
A country’s terms of trade also determines the exchange rate.
If the price of a country’s exports rises by a greater rate than that of its imports, its
terms of trade will improve.
Favorable terms of trade imply greater demand for the country’s exports and thus
BoP becomes favorable.
6. Political and Economic Stability

If a nation’s political climate is stable and economic performance is good, its
currency value will be appreciated by attracting more foreign capital.
7. Recession
Interest rates are low during the recession phase.
This will decrease inflow of foreign capital.
As a result, a currency will be depreciated against other currencies, thereby
lowering the exchange rate.
8. Speculation
If a country’s currency value is expected to rise, investors will demand more of that
currency in order to make a profit in the near future.
This results in appreciation of the exchange rate
42. Explain the relationship between Foreign Direct Investment and economic
Development
1. FDI may help to increase the investment level and thereby the income and employment
in the host country.
2. Direct foreign investment may facilitate transfer of technology to the recipient country.
3. FDI may also bring revenue to the government of host country when it taxes profits of
foreign firms or gets royalties from concession agreements.
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4. A part of profit from direct foreign investment may be ploughed back into the
expansion, modernization or development of related industries.
5. It may kindle a managerial revolution in the recipient country through professional

management and sophisticated management techniques.
6. Foreign capital may enable the country to increase its exports and reduce import
requirements. And thereby ease BoP disequilibrium.
7. Foreign investment may also help increase competition and break domestic monopolies.
8. If FDI adds more value to output in the recipient country than the return on capital
from foreign investment, then the social returns are greater than the private returns on
foreign investment.
9. By bringing capital and foreign exchange FDI may help in filling the savings gap and the
foreign exchange gap in order to achieve the goal of national economic development.
10. Foreign investments may stimulate domestic enterprise to invest in ancillary industries
in collaboration with foreign enterprises.
11. Lastly, FDI flowing into a developing country may also encourage its entrepreneurs to
invest in the other LDCs. Firms in India have started investing in Nepal, Uganda, Ethiopia
and Kenya and other LDCs while they are still borrowing from abroad. Larger FDI to
India comes from a small country (Mauritius).
8.International Economic Organisations

Part – A
1. International Monetary Fund was an outcome of
a) Pandung Conference b) Dunkel Draft
c) Bretton Woods Conference d) Doha Conference
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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
. 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
14. The term BRIC was coined in

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

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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
Answer the following questions (2 marks)
21. Write the meaning of Special Drawing rights.
The Fund has succeeded in establishing a scheme of Special Drawing Rights (SDRs)
which is otherwise called ‘Paper Gold’.
They are a form of international reserves created by the IMF in 1969 to solve the
problem of international liquidity
22. Mention any two objectives of ASEAN.
i) To promote the welfare of the people of South Asia and improve their quality of life;
ii) To accelerate economic growth, social progress and cultural development in the region;
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23. Point out any two ways in which IBRD lends to member countries.
The Bank advances loans to members in three ways

i) Loans out of its own fund,
ii) Loans out of borrowed capital and
iii) Loans through Bank’s guarantee.
24. Define 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.
e.g. European Common Market (ECM)
25. What is 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. e.g. 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
International Bank for Reconstruction and Development

International Development Association
International Finance Corporation
Multilateral Investment Guarantee Agency
International Centre for Settlement of Investment Disputes
.
Part C
Answer the following questions (3 marks):
28. Mention the various forms of economic integration.
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. e.g. SAFTA, EFTA
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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. e.g. BENELUX (Belgium, Netherland and Luxumbuarg).
Common market is established through trade pacts. A group formed by countries

within a geographicalarea to promote duty free trade and free movement of labour
and capital among its members. e.g. European Common Market (ECM)
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. (e.g. European Economic Union)
29. What are trade blocks?

Some countries create business opportunities for themselves by integrating their
economies in order to avoid unnecessary competition among them.
Trade blocks cover different kinds of arrangements between or among countries for
mutual benefit.
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) Basic Credit Facility:

The IMF provides financial assistance to its member nations to overcome their
temporary difficulties relating to balance of payments.
A member nation can purchase from the Fund other currencies or SDRs, in
exchange for its own currency, to finance payment deficits.
(ii) 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.
(iii) Compensatory Financing Facility

In 1963, IMF established compensatory financing facility to provide additional
financial assistance to the member countries, particularly primary producing
countries facing shortfall in export earnings.
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In 1981, the coverage of the compensatory financing facility was extended to

payment problem caused by the fluctuations in the cost of cereal inputs.
(iv) 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.
(v) 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.
(vi) Structural Adjustment Facility

The IMF established Structural Adjustment Facility (SAF) in March 1986 to
provide additional balance of payments assistance on concessional terms to the
poorer member countries.
31. What is Multilateral Agreement?

It is a multi national legal or trade agreements between countries. It is an agreement
between more than two countries but not many.
An international agreement involving three or more parties
For example, the GATT (General Agreement o Tariffs and Trade) has been, since
its establishments in 1947, seeking to promote trade liberalization through
multilateral negotiations
32. Write the agenda of BRICS Summit, 2018.
South Africa hosted the 10th BRICS summit in July 2018.

The agenda for BRICS summit 2018 includes
Inclusive growth,
Trade issues,
Global governance
S hared Prosperity,
International peace and security
33. State briefly the functions of SAARC.

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1. Maintenance of the co operation in the Region

2. Prevention of common problems associated with the member nations.
3. Ensuring strong relationship among the member nations.
4. Removal of the poverty through various packages of programmes.
5. Prevention of terrorism in the region.
34. List out the achievements of ASEAN.

ASEAN has demonstrated the capability to react to international developments and
to handle interstate relations on a constructive and cooperative basis.
It is perhaps the most valuable achievement of ASEAN that the Association taking
advantage of its well‐established dialogue mechanisms has successfully managed to
keep residual conflicts between the members (especially territorial dispute) from
developing into full‐blown crises.
The Association of Southeast Asian Nations (ASEAN) has scored major
achievements in economic development and integration
Significant progress has been made on initiatives related to electronic commerce
and the digital economy.
Part D
Answer the following questions (5 marks)
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.
1. Investment for productive purposes

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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.
2. 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.
3. Provision of loans and guarantees

Arranging the loans or providing guarantees on loans by various other channels so
as to execute important projects.
4. 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.
5. 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:
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.
India gets market access in several countries without any bilateral trade
agreements.
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Advanced technology has been obtained at cheaper cost.

India is in a better position to get quick redressal from the trade disputes. 5. The
Indian exporters benefited from wider market information
38. Write a note on a) SAARC b) BRICS

South Asian Association For Regional Co-Operation (SAARC)
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 and also for friendship and co-operation with other developing
countries.
The SAARC Group (SAARC) comprises of Bangaladesh, Bhutan, India, The
Maldives, Nepal, Pakistan and Sri Lanka.
In April 2007, Afghanistan became its eighth member.
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.
The SAARC Secretariat was established in Kathmandu (Nepal) on 16th January
1987.
The first SAARC summit was held at Dhaka in the year 1985.
SAARC meets once in two years
Recently, the 20th SAARC summit was hosted by Srilanka in 2018
BRICS
BRICS is the acronym for an association of five major emerging national

economies: Brazil, Russia, India, China and South Africa. Originally the first four
were grouped as "BRIC" before the induction of South Africa in 2010.
The term ‘BRIC’ was coined in 2001. The BRICS members are known for their
significant influence on regional affairs.
Since 2009, the BRICS nations have met annually at formal summits. South Africa
hosted the 10th BRICS summit in July 2018.
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The agenda for BRICS summit 2018 includes Inclusive growth, Trade issues, Global
governance, Shared Prosperity, International peace and security.
It’s headquarters is at Shanghai, China.
The New Development Bank (NDB) formerly referred to as the BRICS
Development Bank was established by BRICS States.
The first BRICS summit was held at Moscow and South Africa hosted the Tenth
Conference at Johanesberg in July 2018.
India had an opportunity of hosting fourth and Eighth summits in 2012 and 2016
respectively.
9.Fiscal Economics
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
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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
11. The difference between revenue expenditure and revenue receipts is

a. Revenue deficit b. Fiscal defici tc. 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
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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 D
Two mark questions
21. Define public finance.

Public finance is a study of the financial aspects of Government.
It is concerned with the revenue and expenditure of the public authorities and with
adjustment of the one to the other.
“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”. -Huge Dalton
“Public finance is an investigation into the nature and principles of the state revenue
and expenditure”. -Adam Smith
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22. What is public revenue?
The income of the government through all sources is called public income
or public revenue.
According to Dalton, the term “Public Income” has two senses — wide
and narrow.
In its wider sense it includes all the incomes or receipts which a public
authority may secure during any period of time.
In its narrow sense, it includes only those sources of income of the public
authority which are ordinarily known as “revenue resources.”
23. Differentiate tax and fee.
Tax is a compulsory payment by the citizens to the government to meet the public
expenditure.
It is legally imposed by the government on the tax payer and in no case tax payer
can refuse to pay taxes to the government.
Fees are another important source of revenue for the government.

A fee is charged by public authorities for rendering a service to the citizens.
Unlike tax, there is no compulsion involved in case of fees.
24. Write a short note on zero based budget.
The Government of India presented Zero-Base-Budgeting (ZBB first) in 1987-88.

It involves fresh evaluation of expenditure in the Government budget, assuming it as
a new item.
25. Give two examples for direct tax.
Corporation tax
Iincome tax
26. What are the components of GST?
CGST
SGST
IGST
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27. What do you mean by public debt?
Public debt deals with the methods of raising loans from internal and external
sources.
“The debt is the form of promises by the Treasury to pay to the holders of these
promises a principal sum and in most instances interest on the principal. Borrowing
is resorted to in order to provide funds for financing a current deficit.” – Philip
E.Taylor
Part C
Three mark questions:
28. Describe canons of Taxation.
1.Canon of Ability
The Government should impose tax in such a way that the people have to pay taxes
according to their ability.
In such case a rich person should pay more tax compared to a middle class person
or a poor person.
2.Canon of Certainty
The Government must ensure that there is no uncertainty regarding therate of tax
or the time of payment.
If the Government collects taxes arbitrarily, then these will adversely affect the
efficiency of the people and their working ability too.
3.Canon of Convenience
The method of tax collection and the timing of the tax payment should suit the
convenience of the people.
The Government should make convenient arrangement for all the tax payers to pay
the taxes without difficulty.
4.Canon of Economy
The Government has to spend money for collecting taxes, for example, salaries are
given to the persons who are responsible for collecting taxes.
The taxes, where collection costs are more are considered as bad taxes.
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Hence, 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.
1. Rationality
Both public finance and private finance are based on rationality.
Maximization of welfare and least cost factor combination underlie both.
2. 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.
3. Resource utilization
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?
The modern state is a welfare state and not just police state.
The state assumes greater roles by creating economic and social overheads, ensuring
stability both internally and externally, conserving resources for sustainable
development and so on.
(i) Defence
The primary function of the Government is to protect the people from external
aggression and internal disorder.
The government has to maintain adequate police and military forces and render
protective services.
(ii) Judiciary:
Rendering justice and settlement of disputes are the concern of the government.
It should provide adequate judicial structure to render justice to all classes of
citizens.
(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. 31. State any three characteristics of taxation.
(vii) Social Justice

During the process of growth of an economy, certain sections of the society gain at
the cost of others.
The Government needs to intervene with fiscal measures to redistribute income.
(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.
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33. What is 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)
34. Mention any three methods of redemption of public debt.

(1) 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.
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(2) Conversion
Conversion of loans is another method of redemption of public debt.
It means that an old loan is converted into a new loan.
(3) 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
Five mark questions:
35. Explain the scope of public finance.
1. 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.
2. Public Expenditure
This part studies the fundamental principles that govern the Government
expenditure, effects of public expenditure and control of public expenditure.
3. Public Debt
Public debt deals with the methods of raising loans from internal and external
sources.
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The burden, effects and redemption of public debt fall under this head.
4. 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.
5. Fiscal Policy
Taxes, subsidies, public debt and public expenditure are the instruments of fiscal
policy.
36. Bring out the merits of indirect taxes over direct taxes.
(1) 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.
(2) Equitable
The indirect tax satisfies the canon of equity when higher tax is imposed on luxuries
used by rich people.
(3) Economical
Cost of collection is less as producers and retailers collect tax and pay to the
Government.
The traders act as honorary tax collectors.
(4) 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.
(5) 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.

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The process of repaying a public debt is called redemption
(1) 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.
(2) 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.
(3) 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.
(4) Terminal Annuity
In this method, Government pays off the public debt on the basis of terminal
annuity in equal annual instalments.
This is the easiest way of paying off the public debt.
(5) Repudiation
It is the easiest way for the Government to get rid of the burden of payment of a
loan.
In such cases, the Government does not recognise its obligation to repay the loan.
It is certainly not paying off a loan but destroying it.
However, in normal case the Government does not do so; if done it will lose its
credibility.
(6) Reduction in Rate of Interest
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Another method of debt redemption is the compulsory reduction in the rate of

interest, during the time of financial crisis.
(7) 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.
This is the most controversial method of debt repayment.
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.
1. Principle of Independence.
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2. Principle of Equity.
3. Principle of Uniformity.
4. Principle of Adequacy.
5. Principle of Fiscal Access.
6. Principle of Integration and coordination.
7. Principle of Efficiency.
8. Principle of Administrative Economy.
9. Principle of Accountability
1. 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.
The Government should normally enjoy autonomy in fiscal matters.
2. 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.
3. Principle of Uniformity
In a federal system, each state should contribute equal tax payments for federal
finance.
But this principle cannot be followed in practice because the taxable capacity of
each unit is not of the same.
4. Principle of Adequacy of Resources

The principle of adequacy means that the resources of each Government i.e. 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.
5. 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.
In nutshell, the resources should grow with the increase in the responsibilities of the
Government.
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6. 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.
This should be done in such a way to promote the overall economic development of
the country.
7. 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.
8. 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.
9. Principle of Accountability
Each Government should be accountable to its own legislature for its financial
decisions i.e 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.
(a) Revenue Deficit
(b) Budget Deficit
(c) Fiscal Deficit, and
(d) Primary Deficit
(A) 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.
When RE - RR > 0
(B) Budget Deficit
Budget deficit is the difference between total receipts and total expenditure
(both revenue and capital)
Budget Deficit = Total Expenditure – Total Revenue
(C) Fiscal Deficit
Fiscal deficit (FD) = Budget deficit + Government’s market borrowings and

liabilities
(D ) Primary Deficit
Primary deficit is equal to fiscal deficit minus interest payments.
It showsthe 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.
1. Population Growth
During the past 67 years of planning, the population of India has increased from36.1
crore in 1951, to 121 crore in 2011.
The growth in population requires massive investment in health and education, law
and order, etc
2. Defence Expenditure
There has been enormous increase in defence expenditure in India during planning
period.
The defence expenditure has been increasing tremendously due to modernisation of
defence equipment.
3. Government Subsidies
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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.
4. 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.
5. 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.
6. Urbanisation
There has been an increase in urbanization.
In 1950-51 about 17% of the population was urban based.
Now the urban population has increased to about 43%. T
here are more than 54 cities above one million population.
7. 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.
8. 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.
10.Environmental Economics
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
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4. Who developed Material Balance Models?

a. Thomas and Picardy b. AlenKneese 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
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
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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 ------------Air pollution

a. Water Pollution b. Land pollution c. Noise pollution d. Air Pollution
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.
The term environment has been derived from a French word “Environia” means to
surround.
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?

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).
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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.
The U.S.A, India and Japan
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?
1. Use of noise barriers

2. Newer roadway for surface transport
3. Traffic control
4. Regulating times for heavy vehicles
5. Installations of noise barriers in the work place
6. 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.
Average temperatures around the world have risen by 0.75ºC (1.4ºF) over the last
100 years.
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
28.Brief the linkage between economy and environment.
Man’s life is interconnected with various other living and non-living things.
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The life also depends on social, political, ethical, philosophical and other aspects of
economic system.
In fact, the life of human beings is shaped by his living environment.
The relationship between the economy andthe environment is generally explained in
the form of a “Material Balance Model’’ developed by AlenKneese and R.V. Ayres.
The model considers the total economic process as a physically balanced flow
between inputs and outputs.
Inputs are bestowed with physical property of energy which is received from the
environment.
29.Specify the meaning of material balance principle.
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”.
This is known as the Material Balance Approach or Material Balance Principle.
The material flow diagram implies that mass inputs must equal mass outputs for
every process.
Moreover, all resources extracted from the environment eventually become
unwanted wastes and pollutants.
Production of output by firms from inputs resulting in discharge of solid, liquid and
gaseous wastes. Similarly, waste results from consumption activities by households.
In short, material and energy are drawn from environment, used for production
and consumption activities and returned back to the environment as wastes.
30. Explain different types of air pollution.
Types of Air pollution
1.Indoor Air Pollution:

It refers to toxic contaminants that we encounter in our daily lives in our homes,
schools and workplaces.
For example, cooking and heating with solid fuels on open fires or traditional
stoves results in high levels of indoor air pollution.
2. Outdoor Air Pollution:
It refers to ambient air.
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?

1. Discharge of sewage and waste water:
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Sewage, garbage and liquid waste of households, agricultural runoff and effluents
from factories are discharged into lakes and rivers.
These wastes contain harmful chemicals and toxins which make the water poisonous
for aquatic animals and plants
2. Dumping of solid wastes:

The dumping of solid wastes and litters in water bodies cause huge problems.
3. Discharge of industrial sastes:

Industrial waste contains pollutants like asbestos, lead, mercury, grease oil and
petrochemicals, which are extremely harmful to both people and environment.
4. 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.
5. 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.
6. Global warming:
Due to global warming, there is an increase in water temperature as a result aquatic
plants and animals are affected.
7. Eutrophication:
Eutrophication is an increased level of nutrients in water bodies.
This results in bloom of algae in water. It also depletes the oxygen in water which
negatively affects fish and other aquatic animal population.
32. State the meaning of e-waste.

Electronic waste which is commonly referred as “e-waste” is the new byproduct of
the Info Tech society.
It is a physical waste in the form of old discarded, end of life electronics. 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".
Similarly, e-waste can be defined as the result when consumer, business and
household devices are disposed or sent for re-cycling (example, television,
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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.
The land pollution is defined as, “the degradation of land because of the disposal of
waste on the land”. 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
-Protection of the Environment Operations Act 1997
Causes of Land Pollution

i. Deforestation and soil erosion:
Deforestation carried out to create dry lands is one of the major concerns.
Land that is once converted into a dry or barren land, can never be made fertile
again, whatever the magnitude of measures to convert it.
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.
However the overuse of these chemicals, results in contamination and poisoning of
land.
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.
Items that cannot be recycled become a part of the landfills that cause land
pollution.
v. Industrialization:
Due to increasing consumerism more industries were developed which led to
deforestation.
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Research and development paved the way for modern fertilizers and chemicals that
were highly toxic and led to soil contamination.
vi. Construction activities:

Due to urbanization, large amount of construction activities are taking place.
This has resulted in large waste articles like wood, metal, bricks, plastic.
These are dumped at the outskirts of urban areas that lead to land pollution.
vii. Nuclear waste:

The leftover radioactive materials, harmful and toxic chemicals affect human
health.
They are dumped beneath the earth to avoid any casualty.
34.Write a note on a) Climate change and b) Acid rain
Climate Change
The climate change refers to seasonal changes over a long period with respect to the
growing accumulation of greenhouse gases in the atmosphere.
Recent studies have shown that human activities since the beginning of the
industrial revolution. have contributed to an increase in the concentration of carbon
dioxide which in turn has led to global warming.
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.
Sea levels and temperatures are expected to be rising.
Acid Rain
Acid rain is one of the consequences of air pollution.

It occurs when emissions from factories, cars or heating boilers contact with the
water in the atmosphere.
These emissions contain nitrogen oxides, sulphur dioxide and sulphur trioxide
which when mixed with water becomes sulfurous acid, nitric acid and sulfuric acid.
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
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environment.
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.
It is a measure of the condition of an environment relative to the requirements of
one or more species and to any human need.
Environmental quality has been continuously declining due to capitalistic mode of
functioning.
Environment is a pure public good that can be consumed simultaneously by

everyone and from which no one can be excluded.
A pure public good is one for which consumption is non-revival and from which it is
impossible to exclude a consumer.
Pure public goods pose a freerider problem.
As a result, resources are depleted.
The contribution of the natureto GDP as well as depletion of natural

resources are not accounted in the present system of National Income Enumeration.
36. Explain the concepts of externality and its classification

Externalities refer to external effects or spillover effects resulting from the act of
production or consumption on the third parties.
Externalities arise due to interdependence between economic units.
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.
Negative Consumption Externality

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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.
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.
Negative Production Externality

The emissions and effluents of a factory cause air and water pollution.
Water becomes contaminated and unfit for drinking e.g. Tanneries.
The innocent community bears the external cost for which it is not compensated.
37. Explain the importance of sustainable development and its goals.
It is crucial to harmonize three core elements such as economic growth, social

inclusion and environmental protection.
A set of 17 goals for the World’s future can be achieved before 2030 withthree
unanimous principles fixed by United Nations such as Universality, Integration
and Transformation
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 wellbeing 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, promotesustainable industrialization and foster
innovation.
10. Reduce inequality within and amongc ountries
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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 desertifi cation, halt and reverse land degradation,
halt biodiversity loss
16. Promote just, peaceful and inclusive societies
17. Revitalize the global partnership for sustainable development
11.Economics of Development and Planning
Part-A
1. "Redistribution with Growth" became popular slogan of 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?
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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
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 longterm 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
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
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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
 Generally speaking, economic development refers to the problems of
underdeveloped countries and economic growth to those of developed countries
22. Mention the indicators of development.
Gross National Product (GNP

GNP per capita
Welfare:
Social Indicators
23. Distinguish between economic growth and development
24. What is GNP?

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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 (includingincome of those
located abroad), minus income of non-residents located in that country.
25. Define economic planning.

Economic Planning is “collective control or suppression of private activities of
production and exchange”. -Robbins-
“Economic Planning in the widest sense is the deliberate direction by persons in-
charge of large resources of economic activity towards chosen ends”. Dalton-
26. What are the social indicators of economic development?

Social indicators are normally referred to as basic and collective needs of the people.
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
NITI Aayog (National Institution for Transforming India) was formed on January
1, 2015 through a Union Cabinet resolution.
NITI Aayog is a policy thinktank of the Government of India.
It replaced the Planning Commission from 13th August, 2014.
The Prime Minister is the Chairperson of NITI Aayog and Union Ministers will be
Ex-officio members.
The Vice- Chairman of the NITI Aayog is the functional head and the first Vice-
Chairman was Arvind Panangariya.
Part-C

28. Elucidate major causes of vicious circle of poverty with diagram
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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).
Nurkse explains the idea in these words: “It implies a circular constellation of
forces tending to act and react upon one another in such a way as to keep a poor
country in a state of poverty. For example, a poor man may not have enough to eat;
being underfed, his health may be weak; being physically weak, his working
capacity.
The vicious circle of poverty operates both on the demand side and the supply
side.
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.
Thus the vicious circle is complete from the supply side.
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?

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30. How would you break the vicious circle of poverty?
The vicious circle of poverty is associated with low rate of saving and investment on
the supply side.
In UDCs the rate of investment and capital formation can be stepped up without
reduction in consumption.
For this, the marginal rate of savings is to be greater than average rate of savings.
To break the vicious circle on the demand side, Nurkse suggested the strategy of
balanced growth.
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.
The balanced growth i.e. simultaneous investment in large number of industries
creates mutual demand.
Thus, through the strategy of balanced growth, vicious circle of poverty operating
on the demand side of capital formation can be broken.
31. Trace the evolution of economic planning in India.
1. 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”.
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It was a 10 year plan.

2. Jawaharlal Nehru (1938):
set-up “National Planning Commission” by acommittee but due to the changes in
the political era and second World War, it did not materialize.
3. Bombay Plan (1940):

The 8 leading industrialists of Bombay presented “Bombay Plan”.
It was a 15 Year Investment Plan.
4. S. N Agarwal (1944)
gave the “Gandhian Plan” focusing on the agricultural and rural economy.
5. M.N. Roy (1945)

drafted ‘People’s Plan”.
It was aiming at mechanization of agricultural production and distribution by the
state only.
6. 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.
After considering all the plans, in the same year Planning Commission was set up to
formulate Five Year Plan in India by Jawaharlal Nehru. He was the first Chairman
of Planning Commission, Government of India.
32. Describe the case for planning.

Case for planning
1. To accelerate and strengthen market mechanism:

The market mechanism works imperfectly in underdeveloped countries because of
the ignorance and unfamiliarity with it.
A large part of the economy comprises the non-monetized sector.
The product, factor, money and capital markets are not organized properly.
Therefore the planned economy will be a better substitute for free economy.
2. 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.
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The need for planning in underdeveloped countries is further stressed by the

necessity of removing widespread unemployment and disguised unemployment in
such economies.
3. 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.
i) Development of Agriculture and Industrial Sectors:

The need for developing the agriculture sector along with the industrial sector
arises from the fact that agriculture and industry are interdependent.
Reorganization of agriculture releases surplus labour force which can be absorbed
by the industrial sector.
ii) Development of Infrastructure:

The agriculture and industrial sectors cannot develop in the absence of economic
and social overheads.
The building of canals, roads, railways, power stations, etc., is indispensable for
agricultural and industrial development
iii) Development of Money and Capital Markets:

The expansion of the domestic and foreign trade requires not only the development
of agricultural and industrial sectors along with social and economic overheads but
also the existence of financial institutions.
4. 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 refers to that planning which seeks to remove economic
difficulties by directing all the planning activities within the existing economic and
social structure.
The structural planning refers to a good deal of changes in the socioeconomic

framework of the country. This type of planning is adopted mostly in under
34. What are the functions of NITI Aayog?

1. Cooperative and Competitive Federalism
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2. Shared National Agenda

3. Decentralized Planning
4. Vision and Scenario Planning
5. Network of Expertise
6. Harmonization
7. Conflict Resolution
8. Coordinating Interface with the World
9. Internal Consultancy
10. Capacity Building
11. Monitoring and Evaluation
Part-D
35. Discuss the economic determinants of economic development.
1. Natural Resource:
 The principal factor affecting the development of an economy is the availability of
natural resources.
 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.
2. Capital Formation:
 Capital formation is the main key to economic growth.
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 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.
3. Size of the Market:

 Large size of the market would stimulate production, increase employment and
raise the National per capita income.
 That is why developed countries expand their market to other countries through
WTO.
4. 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 such as agricultural, animal husbandry, forestry, etc;
 Secondary sector such as industrial production, constructions and Tertiary sector
such as trade, banking and commerce.
5. Financial System:
 Financial system implies the existence of an efficient and organized banking system
in the country.
 There should be an organized money market to facilitate easy availability of capital.
6. 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.
 It raises the purchasing power, employment and output in other sectors of the
economy.
7. 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.
8. Economic System:
 The countries which adopt free market mechanism (laissez faire) enjoy better
growth rate compared to controlled economies.
 It may be true for some countries but not for every country.
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36. Describe different types of Planning.
1. Democratic Vs Totalitarian:
Democratic planning implies planning within democracy.
People are associated at every step in the formulation and implementation of the
plan.
A democratic plan is characterized by the widest possible consultations with the
various state governments and private enterprises at the stage of preparation.
Under totalitarian planning, there is central control and direction of all economic
activities in accordance with a single plan.
Consumption, production, exchange, and distribution are all controlled by the state.
In authoritarian planning, the planning authority is the supreme body.
2. Centralized Vs Decentralized:
Under centralized planning, the entire planning process in a country is under a
central planning authority.
This authority formulates a central plan, fixes objectives, targets and priorities for
every sector of the economy.
Under decentralized planning local organizations and institutions formulate, adopt,

execute and supervise the plan without interference by the central authorities.
3. Planning by Direction Vs Inducement:

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.
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Under planning by inducement, the people are induced to act in a certain way
through various monetary and fiscal measures.
If the planning authority wishes to encourage the production of a commodity, it can
give subsidy to the firms.
4. Indicative Vs Imperative Planning:

Indicative planning is peculiar to the mixed economies.
It has been in practicein France since the Monnet Plan of 1947-50.
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.
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.
The USSR President Stalin used to say, ‘Our plans are our instructions’.
5. Short, Medium and Long 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’.
The medium-term plans last for the period of 3 to 7 years.
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.
6. Financial Vs Physical Planning:

Financial planning refers to the technique of planning in which resources are
allocated in terms of money.
Physical planning pertains to the allocation of resources in terms of men, materials

andmachinery.
7. Functional Vs Structural Planning:

Functional planning refers to that planning which seeks to remove economic
difficulties by directing all the planning activities within the existing economic and
social structure.
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The structural planning refers to a good deal of changes in the socioeconomic

framework of the country. This type of planning is adopted mostly in under
8. Comprehensive Vs Partial Planning:

General planning which concerns itself with the major issues for the whole economy
is known as comprehensive planning
Partial planning is to consider only the few important sectors of the economy.
37. Bring out the arguments against planning.

1. 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.
The economic freedom comprises freedom of consumption, freedom of choice of
occupation, freedom to produce and the freedom to fix prices for the products.
Under planning, the crucial decisions are made by the Central Planning Authority.
The consumers, producers and the workers enjoy no freedom of choice.
2. 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.
The absence of initiatives may affect progress in following ways.
a. The absence of private ownership and profit motive discourages entrepreneurs from
taking bold decisions and risk taking. Attractive profit is the incentive for searching new
ideas, new lines and new methods. These are missing in a planned economy.
b. As all enjoy equal reward under planned economy irrespective of their effort, efficiency
and productivity, nobody is interested in undertaking new and risky ventures.
c. The bureaucracy and red tapism which are the features of planned economy, cripple the
initiative as they cause procedural delay and time loss. The ease of doing business is
disrupted. .
3. High cost of Management

No doubt the fruits of planning such as industrialization, social justice and regional
balance are good.
But the cost of management of the economic affairs outweighs the benefits of
planning. Plan formulation and implementation involve engagement of an army of
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staff for data collection and administration.
4. Difficulty in advance calculations

Price mechanism provides for the automatic adjustment among price, demand and
supply in a Laissez Faire economy.
The producers and consumers adjust their supply and demand based on price
changes.
There is no such mechanism in a planned economy
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.
12.Introduction to Statistical Methods and Econometrics
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)
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
135
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
(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) RagnarFrish (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
136
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
Answer the following in one or two sentences
21. What is Statistics?
 Statistics as a science of estimates and probabilities - Boddington
 Statistics may be defined as the collection, organisation, presentation, analysis and

interpretation of numerical data- Croxton & Cowden
22. What are the kinds of Statistics?

Descriptive Statistics
Inferential Statistics
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?

Quantitative data
Qualitative data.
25. Define Correlation.

Correlation is a statistical device that helps to analyse the covariation of two or
more variables.
Correlation is the relationship between two or more variables, which vary with the
other in the same or the opposite direction
26. Define Regression.

137
Regression is the study of the relationship between the variables.

Regression means going back and it is a mathematical measure showing the average
relationship between two variables,
27. What is Econometrics?

 H Theil“Econometrics is concerned with the empirical determination of economic
laws”
The term econometrics is formed from two words of Greek origin, ‘oukovouia’
meaning economy and ‘uetpov’ meaning measure.
{Economics + Statistics + Mathematics}+Empirical Data = Econometrics
Part-C
Answer the following questions in one paragraph:
28. What are the functions of Statistics?
Statistics presents facts in a definite form.
It simplifies mass of figures.
It facilitates comparison.
It helps in formulating and testing.
It helps in prediction.
It helps in the formulation of suitable policies.
29. State and explain the different kinds of Correlation.

138
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.
Positive Correlation:
The correlation is said to be positive if the values of two variables move in the same
direction
Negative Correlation:
The Correlation is said to be negative when the values of variables move in the
opposite directions. Ex. Y= a – bx
Type II: Based upon the number of variables studied.
 There are three types based upon the number of variables studied as
a) Simple Correlation
b) Multiple Correlation
c) Partial Correlation
Simple Correlation:
139
If only two variables are taken for study then it is said to be simple correlation.
Multiple Correlations:
If three or more than three variables are studied simultaneously, then it is termed as
multiple correlation.
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.
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.
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.
30. Mention the uses of Regression Analysis.

 Regression analysis is widely used for prediction and forecasting, where its use has
substantial overlap with the field of machine learning
 Regression analysis is also used to understand which among the independent
variables are related to the dependent variable, and to explore the forms of these
relationships.
31. Specify the objectives of econometrics.

1. It helps to explain the behaviour of a forthcoming period that is forecasting economic
phenomena.
2. It helps to prove the old and established relationships among the variables or between
the variables
3. It helps to establish new theories and new relationships.
4. It helps to test the hypotheses and estimation of the parameter.
32. Differentiate the economic model with econometric model.
1. Models in Mathematical Economics are developed based on Economic Theories, while,

Econometric Models are developed based on Economic Theories to test the validity of
Economic Theories in reality through the actual data.
140
2. Regression Analysis in Statistics does not concentrate more on error term while
Econometric Models concentrate more on error terms
Statistics Regression: Yi = β0 + β1Xi
Econometrics Regression:
Yi = β0 + β1Xi+ Ui
(with more than 2 variables) or Y = β0 + β1X1 + β2X2 + β3X3+Ui
Systematic Part: β0 + β1Xi or explained part and Random Part: Ui unexplained

part in a regression.
Ui represents the role of omitted variables in specifying a regression relationship of
Y on X.
Hence, the Ui cannot and should not be ignored.
33. Discuss the important statistical organizations (offices) in India.
The Statistics Wing called the National Statistical Office (NSO) consists of
The Central Statistical Office (CSO),

The Computer Centre
The National Sample Survey Office (NSSO).
Central Statistical Office (CSO)
The Central Statistical Office is one of the two wings of the National Statistical
Organisation (NSO)
The Computer Centre also under the CSO is located in R K Puram, New Delhi.
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
.It is the largest organisation in India, conducting regular socio-economic surveys.
141
1. Survey Design and Research Division (SDRD)
2. Field Operations Division (FOD)
3. Data Processing Division (DPD)
4. Co-ordination and Publication Division (CPD)
Besides these three wings, there is National Statistical Commission created through
a Resolution of Government of India (MOSPI) and one autonomous Institute, viz.,
Indian Statistical Institute declared as an institute of National importance by an Act
of Parliament.
Part-D
Answer the following questions
34. Elucidatethe nature and scope of Statistics.
Nature of Statistics
 Different Statisticians and Economists differ in views about the nature of statistics,
some call it a science and some say it is an art.
 Tipett on the other hand considers Statistics both as a science as well as an art.
Scope of Statistics
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.
Statistics and Firms

 Statistics is widely used in many firms to find whether the product is conforming to
specifications or not.
Statistics and Commerce
 Statistics are life blood of successful commerce.
 Market survey plays an important role to exhibit the present conditions and to
forecast the likely changes in future.
Statistics and Education

 Statistics is necessary for the formulation of policies to start new course, according
to the changing environment
Statistics and Planning:

 Statistics is indispensable in planning.
142
 In the modern world, which can be termed as the “world of planning”, almost all
the organisations in the government are seeking the help of planning for efficient
working, for the formulation of policy decisions and execution of the same
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.
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.
𝕍.𝔹𝕆𝕆ℙ𝔸𝕋ℍ𝕐 ℙ𝔾𝕋 𝔸𝔻ℍ𝕀𝕐𝔸𝕄𝔸ℕ

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𝕍.𝔹𝕆𝕆ℙ𝔸𝕋ℍ𝕐 ℙ𝔾𝕋 𝔸𝔻ℍ𝕀𝕐𝔸𝕄𝔸ℕ 𝔾𝕆𝕍𝕋.𝔹𝕆𝕐𝕊

1.Introduction to Macro Economics

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

c) Globalisic Economy d) Mixed Economy

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.

16. An economic system where the economic activities of a nation are

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.

21. Define Macro Economics.

22. Define the term ‘Inflation’.

23. What is meant by an ‘Economy’?

24. Classify the economies based on status of development.

25. What do you mean by Capitalism?

26. Define ‘Economic Model’.

27. ‘Circular Flow of Income’ - Define.

29. Describe the different types of economic systems.

30. Outline the major merits of capitalism.

31. Indicate the demerits of socialism.

32. Enumerate the features of mixed economy.

33. Distinguish between Capitalism and Globalism.

capitalistic economy are development.

34. Briefly explain the two sector circular flow model.

Answer the following questions in one page

Poverty and Unemployment:

In an economy, the fundamental economic activities are production and

37. Compare the features of capitalism and socialism.

38. Compare the feature among Capitalism, Secularism and Mixedism.

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 ……….

13. The financial year in India is ……

(a) April 1 to March 31 (b) March 1 to April 30

15. The value of NNP at production point is called ……

16. The average income of the country is ….

17. The value of national income adjusted for inflation is called ….

18. Which is a flow concept ?

19. PQLI is the indicator of ………………

20. The largest proportion of national income comes from …….

22. Write the formula for calculating GNP.