Question1.Economic stability implies avoiding fluctuations in economic activities. It is important to avoid the economic and financial crisis.

The challenge is to minimise the instability without affecting productivity, efficiency, employment. Find out the instruments to face the challenges and to maintain an economic stability. Answer: Economic Stability :Promoting economic stability is partly a matter of avoiding economic and financial crisis. A dynamic market economy necessarily involves some degree of instability, as well as gradual structural change. The challenge for policy makers is to minimise this instability without reducing the ability of the economic system to raise living standards through increasing productivity, efficiency and employment. Economic stability is fostered by robust economic and financial institutions and regulatory frameworks. Economic stability implies avoiding fluctuations in the level of economic activities as 100% stability is neither possible nor desirable. It implies only relative stability in the overall level of economic activities.. Instruments of Economic Stability Following are the instruments of economic stability: 1. Monetary Policy. 2. Fiscal Policy 3. Physical policy or Direct Controls. The central bank and the government have developed these instruments to correct the discrepancies that occur in the process of economic growth.
Monetary Policy :Monetary policy is a part of the overall economic policy of a country. It is employed by the government as an effective tool to promote economic stability and achieve certain predetermined objectives. Meaning and definition: Monetary policy deals with the total money supply and its management in an economy. It is essentially a programme of action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public, and the flow of credit with a view to achieving economic stability and certain predetermined macroeconomic goals. Monetary policy can be explained in two different ways. In a narrow sense, it is concerned with administering and controlling a countrys money supply including currency notes and coins, credit money, level of interest rates and managing the exchange rates. In a broader sense, monetary policy deals with all those monetary and non-monetary measures and decisions that affect the total money supply and its circulation in an economy. It also includes several nonmonetary measures like wages and price control, income policy, budgetary operations taken by the Government which indirectly influence the monetary situations in an economy. Monetary policy basically deals with total supply of legal tender money, i.e., currency notes and coins, total amount of credit money, level of interest rates, exchange rate policy and general liquidity position of the country. Credit policy, which is different from the monetary policy, affects allocation of bank credit according to the objective of the monetary policy. The government, in consultation with the central bank, formulates a monetary policy and it is generally carried out and implemented by the central bank. It is evolved over a period of time on the basis of the experience of a nation. It is structured and operated within the institutional framework and money market of the country. Its objectives, scope and nature of working is collectively conditioned by the economic environment and philosophy of time. Monetary policy along with fiscal policy and debt management lumped together form the financial policy of the country.
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Monetary policy is passive when the central bank decides to abstain deliberately from applying monetary measures. It is active when the central bank makes use of certain instruments to achieve the desired objectives. It may be positive or negative. It is positive when it promotes economic activities and it is negative when it restricts or curbs economic activities.

Fiscal Policy :In the previous section, we discussed about monetary policy. Let us now discuss fiscal policy. Fiscal policy is an important part of the overall economic policy of a nation. It is being increasingly used in modern times to achieve economic stability and growth throughout the world. Lord Keynes, for the first time, emphasised the significance of fiscal policy as an instrument of economic control. It exerts deep impact on the level of economic activity of a nation. Meaning The term fisc in English language means treasury, and the policy related to treasury or government exchequer is known as fiscal policy. Fiscal policy is a package of economic measures of the Government regarding public expenditure, public revenue, public debt or public borrowings. It concerns itself with the aggregate effects of government expenditure and taxation on income, production and employment. In short, it refers to the budgetary policy of the government. Physical Policy or Direct Controls :In the previous section, we discussed about fiscal policy. Let us now discuss physical policy or direct controls. Government interference with the forces of demand and supply in the market, and state regulation of prices of commodities are common features in these days. Thus, when monetary and fiscal measures are inadequate to control prices, government resorts to direct control. During wars, when inflationary forces are strong, price control involves imposing ceilings in respect of certain prices and prices are to be stopped from rising too high. In a planned economy, the objective of price control is to bring about allocation of resources in accordance with the objects of plan. Price control normally involves some control of supply or demand or both. These are done by control of distribution of commodities through rationing. Rationing is, therefore, an essential part of the price control policy. In the U.S., price control takes the form of price support programme in which prices are prevented from falling below certain levels considered fair. Under certain circumstances, government may resort to dual pricing which is yet another form of price control by the government.

Question2. Explain any eight macroeconomic ratios.

Answer:- Definition of Macroeconomics:Macroeconomics is that branch of economics, which deals with the study of aggregative or average behavior of the entire economy. In macroeconomics, we study the collective functioning of the whole economy. It deals with the gross aggregates of the economic system rather than with individual parts of it. It is the study of the entire forest rather than the study of individual trees. Hence, it is called as Aggregative Economics. It splits up the economy into big lumps for the purpose of convenience of the study and therefore, it is called as Lumping Method. It gives a detailed description about the performance and achievements of different sectors of the economy like agriculture, industry, export and import, etc. As part of macroeconomics, we also study how the entire economy reaches the position of equilibrium. Hence, it is
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called as General Equilibrium Analysis. It explains how the equilibrium level of national income is determined in an economy and so it is called as Income Theory.
Macroeconomic Ratios In this section, let us try to understand some of the important macroeconomic ratios. There are several macroeconomic ratios and an attempt is made to explain twelve such macroeconomic ratios. For a business firm, the knowledge of these macroeconomic ratios is indispensable for taking microeconomic decisions. Consumption income ratio Y= C + S. Out of a given income (Y); people can either spend or save (S), or they can consume (C) their entire income. Hence, C = Y S. The consumption income ratio explains the relationship between two variables, i.e., the amount of income and the amount of consumption. 1. In other words, it tells us about the percentage of consumption out of a given level of income. This can be expressed as C = f [Y] where C = consumption, Y = income and f = function. Consumption is an increasing function of income. Higher the income, higher would be the consumption and vice-versa. There is a direct relationship between the two. For example, out of Rs. 100, a person can consume Rs. 80, and save Rs 20. In this case, the consumption income ratio is 1:0.8. This ratio helps business personnel to forecast his/her sales in the market. 2. Saving income ratio Excess of income over expenditure is saving. The saving function can be easily derived by subtracting spending from income. Hence, S = Y C where S = saving, Y = income and C = consumption. It is a function of income. S = f [Y]. It implies that there is a direct relationship between the two. Higher the income, higher would be the savings and vice-versa. The saving-income ratio indicates the amount of savings made out of a given level of income 3. Capital output ratio There is a close relationship between capital investment and income-growth in any economy. Capital is regarded as the lifeblood of all economic activities and as such, it constitutes a major determinant of economic growth rate in an economy. The volume of investment generally determines the rate of growth in the real income of the people in an economy. 4. Capital labour ratio This ratio indicates the proportion of two factor inputs. It tells us the ratio between the numbers of labourers required for a given amount of capital invested in any business. 5. Output-labour ratio The term productivity in general is defined as a ratio of what comes out of a business to what goes in to the business, i.e., it is the ratio of outcome to the efforts of the business. Hence, productivity would mean the value of output divided by the value of inputs employed. There are different kinds of productivity ratios. 6. Input- output ratio This ratio explains the relationship between two variables of inputs and outputs. Input-output ratio indicates the quantity of inputs employed and the quantity of outputs obtained. 7. Value added output ratio Value added output is the difference between the value of output produced and the value of inputs employed. In other words, it is a ratio of increase in the quantity of inputs employed and the corresponding increase in the output obtained 8. Cash reserve ratio

A commercial bank mobilises deposits from the general public and the entire amount of deposits is not kept in the form of cash. An experienced banker knows that all depositors will not withdraw their entire deposits on the same day at the same time. 9. Cash income ratio

A bank is a commercial institution based on business principles. Its main objective is to make profits. This depends on its portfolio management. A bank has to keep adequate amount of cash in order to meet the requirements of its customers. How much deposits it will keep in the form of liquid cash and how much money it will lend and invest on various assets will depend on its CRR. This ratio helps the banker to know the income earning capacity during a financial year.
10. Labours share of income Production is the result of combined and cooperative efforts put in by all the factors of production in the production process. All factors of production which are involved in this process of production are entitled to enjoy their respective rewards in the form of rent, wages, interest and profits. If we add all factor incomes, we derive national income at factor cost. Hence, NI at factor cost = a sum of total rent + total wages + total interest + total profits. For example, if national income is Rs. 1000; the share of rent could be Rs. 200-00, the share of wages at Rs. 300, the share of capital at Rs. 150 and the share of profit could be Rs. 350. 11. Capitals share of income Capital is a very powerful and important input in the production process. Capital is described as the lifeblood of all economic activities. Without adequate capital, no economic activity can be undertaken. Capital as a factor of production is earning interest as its income in the total national income generation. 12. Lands share of income Land is one of the primary factors of production. It is a free gift of nature. It is an immovable factor input. The landlord supplies this factor input and earns income in the form of rent.

Question 3. Define Inflation and explain the types of inflation.

Answer:- Inflation:- Inflation has become a global phenomenon in recent years. Development economics is very much associated with inflation. An in-depth study of inflation is of paramount importance to a student of managerial economics. The term inflation is used in many senses and hence it is very difficult to give a generally accepted, universally agreeable, and precise definition to the term inflation. Popularly, inflation is associated with high prices, which causes a decline in the value of money. Inflation is commonly understood as a situation of substantial and rapid increase in the level of prices and consequent deterioration in the value of money over a period of time. It refers to the average rise in the general level of prices and fall in the value of money. Inflation is statistically measured in terms of percentage increase in the price index, as a rate (percent) per unit of time- usually a year or a month.
Types of inflation Depending upon the rate of rise in prices and the prevailing situation, inflation has been classified into the following six types: Creeping inflation When the rise in prices is very slow (less than 3%) like that of a snail or creeper it is called creeping inflation.

Walking inflation When the rise in prices is moderate (in the range of 3 to 7%) and the annual inflation rate is of single digit it is called walking inflation. It is a warning signal for the government to control it before it turns into running inflation. Running inflation When the prices rise rapidly at a rate of 10 to 20% per annum it is called running inflation. Such inflation affects the poor and middle classes adversely. Its control requires strong monetary and fiscal measures; otherwise, it can lead to hyperinflation. Hyperinflation Hyperinflation is also called by various names like jumping, runaway, or galloping inflation. During this period, prices rise very fast (double or triple digit rates) at a rate of more than 20 to 100% per annum and become absolutely uncontrollable. Such a situation brings a total collapse of the monetary system because of the continuous fall in the purchasing power of money. Demand-pull Inflation The total monetary demand persistently exceeds the total supply of goods and services at current prices so that prices are pulled upwards by the continuous upward shift of the aggregate demand function. It arises as a result of an excessive aggregate effective demand over aggregate supply of goods and services in a slowly growing economy. Supply of goods and services will not match the rising demand. The productive ability of the economy is so poor that it is difficult to increase the supply at a quicker rate to match the increase in demand for goods and services. When exports increase, the money income of people rises. With excess money income, purchasing power, demand, and prices move in the upward direction.

Cost-push inflation Prices rise on account of increasing cost of production. Thus, in this case, rise in price is initiated by growing factor costs. Hence, such a price rise is termed as cost-push inflation as prices are being pushed up by rising factor costs. A number of factors contribute to the increase in cost of production. They are: labour class.

Increase in the prices of different inputs in the market.

Question 4. Define Fiscal Policy and the instruments of Fiscal policy

Answer:- Fiscal Policy:- Meaning
The term fisc in English language means treasury, and the policy related to treasury or government exchequer is known as fiscal policy. Fiscal policy is a package of economic measures of the Government regarding public expenditure, public revenue, public debt or public borrowings. It concerns itself with the aggregate effects of government expenditure and taxation on income, production and employment. In short, it refers to the budgetary policy of the government. Fiscal policy is concerned with the manner in which all the different elements of

public finance, while still primarily concerned with carrying out their own duties (as the first duty of a tax is to raise revenue), may collectively be geared to forward the aims of economic policy.
Instruments of fiscal policy The instruments of fiscal policy include: 5

1. Public revenue: It refers to the income or receipts of public authorities. It is classified into two parts - tax-revenue and non-tax revenue. Taxes are the main source of revenue to a government. There are two types of taxes. They are direct taxes such as personal and corporate income tax, property tax, expenditure tax, and indirect taxes such as customs duties, excise duties, sales tax (now called VAT). Administrative revenues are the bi-products of administrate functions of the government. They include fees, licence fees, price of public goods and services, fines, escheats and special assessment. 2. Public expenditure policy: It refers to the expenditure incurred by the public authorities like central, state and local governments. It is of two kinds: development or plan expenditure and non-development or non-plan expenditure. Plan expenditure includes income-generating projects like development of basic industries, generation of electricity, development of transport and communications and construction of dams. Non-plan expenditure includes defence expenditure, subsidies, interest payments and debt servicing changes. 3. Public debt or public borrowing policy: All loans taken by the government constitutes public debt. It refers to the borrowings made by the government to meet the ever-rising expenditure. It is of two types, internal borrowings and external borrowings. 4. Deficit financing: It is an extraordinary technique of financing the deficits in the budgets. It implies printing of fresh and new currency notes by the government by running down the cash balances with the central bank. The amount of new money printed by the government depends on the absorption capacity of the economy. 5. Built in stabilisers or automatic stabilisers (BIS): The automatic or built-in stabilisers imply automatic changes in tax collections and transfer payments or public expenditure programmes so that it may reduce the destabilising effect on aggregate effective demand. When income

expands, automatic increase in taxes or reduction in transfer payments or government expenditures will tend to moderate the rise in income. On the contrary, when the income declines, tax falls automatically and transfers and government expenditure will rise and thus built-in stabilisers cushion the fall in income.

Question: 5.Investment is a part of income which can be used for various purposes. It is necessary to create employment in an economy and to increase national income. To understand the benefits of income, study the various types of investment.
Answer:- Investment:- Investment is the second important component of effective demand.
In Keynesian economics, the term investment has a different meaning. In the ordinary language, it refers to financial investment. i.e. purchase of stocks, shares, debentures, bonds, etc. In this case, there is only transfer of rights or titles from one person to another. It is an investment by one and disinvestment by another and as such, the value transaction mutually cancels out each other. They do not add anything to the total stock of capital of the nation. Investment, according to Keynes, refers to real investment. It implies creation of new capital assets or additions to the existing stock of productive assets. It refers to that part of the aggregate income, which is used for the creation of new structures, new capital equipments, machines, etc that help in the production of final goods and services in an economy. Creation of income earning assets is called investment. Types of investment Keynes speaks of 5 types of investment. They are as follows: 1. Private investment

It is made by private entrepreneurs on the purchase of different capital assets like machinery, plants, construction of houses and factories, offices, shops, etc. It is influenced by MEC and interest rate. It is profit elastic. Profit motive is the basis for private investment. Private entrepreneurs would take up only those projects which yield quick results and generally those that have a small gestation period. 2. Public investment It is undertaken by the public authorities like central, state and local authorities. It is made on building infrastructure of the economy, public utilities and on social goods, for example, expenditure on basic industries, defense industries, construction of multipurpose river valley projects, etc. In this case, the basic criterion and motto is social net gain, social welfare and not profits. The principle of maximum social advantage would govern public expenditure. It is also influenced by social and political considerations. 3. Foreign investment It consists of excess of exports over the imports of a country. It depends on many factors such as propensity to export of a given country, foreigners capacity to import, prices of exports and imports, state trading and other factors.

4. Induced investment:- Induced investment is another name for private investment.

Investment, which varies with the changes in the level of national income, is called induced investment. When national income increases, the aggregate demand and level of consumption of the community also increases. In order to meet this increased demand, investment has to be stepped up in capital goods sector which finally leads to increase in the production of consumption goods Therefore, we can say that induced investment is income elastic i.e., it increases as income increases and vice-versa.
5. Autonomous investment

Autonomous investment is another name for public investment. The investment, which is independent of the level of income, is called as autonomous investment. Such investments do not vary with the level of income. Therefore it is called income-inelastic. It does not depend on changes in the level of income, consumption, rate of interest or expected profit. Autonomous investment depends upon population growth, technological
progress, discovery of new resources, etc. For example, expenditure on public buildings, transport and communications, defense, public utilities, water supply, generation of electricity, etc are considered as autonomous investment. It is guided by social welfare rather than profit motive. The autonomous investment curve is perfectly inelastic. And as such it indicates that though income changes, investment more or less remains constant.

Question6. Discuss any two laws of returns to scale with example. Answer:- Laws of returns to scale
The concept of returns to scale is a long run phenomenon. In this case, we study the change in output when all factor inputs are changed or made available in required quantity. An increase in scale means that all factor inputs are increased in the same proportion. In returns to scale, all the necessary factor inputs are increased or decreased to the same extent so that whatever the scale of production, the proportion among the factors remains the same. Three phases of returns to scale Generally speaking, we study the behaviour pattern of output when all factor inputs are increased in the same proportion under returns to scale. Many economists have questioned the validity of returns to scale on the ground that all factor inputs cannot be increased in the same proportion and the proportion between the factor inputs cannot be kept uniform. But in some 7

cases, it is possible that all factor inputs can be changed in the same proportion and the output is studied when the input is doubled or tripled or increased five-fold or ten-fold. An ordinary person may think that when the quantity of inputs is increased 10 times, output will also go up by 10 times. But it may or may not happen as expected. It may be noted that when the quantity of inputs are increased in the same proportion, the scale of output or returns to scale may be either more than equal, equal or less than equal. Thus, when the scale of output is increased, we may get increasing returns, constant returns or diminishing returns. When the quantity of all factor inputs are increased in a given proportion and output increases more than proportionately, then the returns to scale are said to be increasing; when the output increases in the same proportion, then the returns to scale are said to be constant; when the output increases less than proportionately, then the returns to scale are said to be diminishing. Table shows an example to explain the law of returns to scale.

Laws of Returns to Scale

Sl no. 1 2 3 4 5 6 7 8 Scale 1 Acre of land + 3 Labour 2 Acre of land + 5 Labour 3 Acre of land + 7 Labour 4 Acre of land + 9 Labour 5 Acre of land + 11 Labour 6 Acre of land + 13 Labour 7 Acre of land + 15 Labour 8 Acre of land + 17 Labour Total Product in Units 5 12 21 32 43 54 63 70 Marginal Product in units 5 7 9 11 11 11 9 7

It is clear from the table that the quantity of land and labour (scale) is increasing in the same proportion, i.e. by 1 acre of land and 2 units of labour throughout in our example. The output increases more than proportionately up to the point where the producer is employing 4 acres of land and 9 units of labour. Output increases in the same proportion when the quantity of land is 5 acres and 11 units of labour and 6 acres of land and 13 units of labour. In the later stages, when the producer employs 7 & 8 acres of land and 15 & 17 units of labour, output increases less than proportionately. Thus, one can clearly understand the operation of the three phases of the laws of returns to scale with the help of the table.