Documente Academic
Documente Profesional
Documente Cultură
Macroeconomics
Workbook
Class
XII
Solutions
1 ET
QUESTION SETI
Define the following concepts:
1. Aggregates of economic system.
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2. Producing sector.
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3. Household sector.
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4. Government sector.
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7. National income.
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29. Gross national disposable income and net national disposable income.
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QUESTION SETII
Defend or refute the following statements. Write yes or no with reason:
1. National income is a stock concept.
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4. National income at market price is always greater than national income at factor cost.
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5. Remittances from abroad by the NRIs are a part of our national income.
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10. Private factor income includes net factor income from abroad
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11. Market price includes the impact of indirect taxes, but not of subsidies.
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17. Salaries to Indian employees working in Indian embassies abroad are a part of net factor income
from abroad.
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18. Profits earned by non-resident companies in India are not a part of our domestic income.
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20. Income received from the sale of shares is a part of domestic income.
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QUESTION SETIII
Write your comment on each of the following statements in a sentence or two:
1. Increase in national income implies increase in the flow of goods and services in the economy.
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9. The market value of both final and intermediate goods is included in the estimation of national income.
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10. Imputed rent on owner occupied houses does not involve any payment to others. Accordingly, it should
not be included in the estimation of national income.
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11. Brokerage paid to Real Estate Agents only on the sale and purchase of new houses should be included in
the estimation of national income.
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16. Double counting is avoided if GDP is estimated by summing up value of output of all producing units in
the country.
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17. Only final goods and services are to be considered in the estimation of GDP, to avoid double counting.
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18. Expenditure by the households on the construction of residential buildings should not be treated as
investment expenditure.
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20. Net exports are not a component of aggregate expenditure in the economy.
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QUESTION SETIV
Complete the following sentences:
1. Domestic income = National income _______________________________________________________
2. Private factor income = Income from domestic product accruing to the private sector
+ _________________________________________________________________
3. Value of output Change in stock = _________________________________________________________
4. Sales + Change in stock Intermediate consumption = _________________________________________
5. Personal income = Private income _________________________________________________________
6. National income at market price = National income __________________________________________
7. Personal disposable income = Private income ________________________________________________
Introductory Macroeconomics 10 EconomicsXII
8. National income = Domestic income + Factor income from rest of the world ______________________
9. Operating surplus + Compensation of employees + Mixed income of self-employed = ______________
10. Gross value added = Net value added + ______________________________________________________
11. Three essential precautions while measuring national income according to expenditure method are
(i) _________________________, (ii) _________________________, and (iii) _________________________ .
12. Three components of gross domestic fixed investment are (i) _______________________________,
(ii) _________________________, and (iii) ___________________________ .
13. While using value added method of measuring domestic income, two essential precautions are
(i) ________________________________________, and (ii) _______________________________________.
14. While using income method of measuring domestic income, two essential precautions are
(i) ________________________________________, and (ii) _______________________________________.
15. Net national disposable income = National income ___________________________________________
16. Personal disposable income = Personal income ______________________________________________
17. Three important components of depreciation are (i) ____________________, (ii) ____________________,
and (iii) _____________________ .
18. Expected obsolescence occurs on account of (i) ____________________, and (ii) _____________________ .
19. Two components of personal disposable income are (i) _________________, and (ii) _________________ .
20. Sales + Change in Stock Purchase of intermediate products Net indirect taxes = _________________
1. If depreciation reserve fund is not maintained, production capacity in the economy would
tend to reduce.
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2. Both factor income as well as transfer income are included in the estimation of personal
income.
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8. National income exceeds domestic income only when exports are greater than imports.
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9. In the determination of social welfare, what matters is the quantum of output rather than
the composition of output.
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10. Only those goods are included in the estimation of domestic product which are sold or
purchased in domestic market of a country.
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11. Goods produced but retained for self-consumption (and not sold in the market) are not
included in the estimation of national income.
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2 ET
QUESTION SETI
Define the following concepts:
1. Money and value of money.
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3. Supply of money.
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8. High powered money refers to cash reserves of the commercial banks with the central bank.
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14. CRR and SLR are fixed by the commercial banks themselves.
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15. Open market operations are meant to impact money supply in the economy.
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16. Demand deposits are equal to cash deposits with the commercial banks.
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20. Money acts as a store of value only when it is in the form of gold and silver coins.
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2. Money supply in the economy is equal to notes and coins issued by the central bank.
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3. Commercial banks play no role in the stock of money supply in the economy.
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4. Monetary system of exchange facilitates much greater exchange than the barter system.
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5. Loans offered by the commercial banks are only a part of the cash reserves of the commercial banks.
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6. If the commercial banks buy government securities, their capacity to create credit is reduced.
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9. Money becomes a commodity when intrinsic value of money exceeds its face value.
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10. Higher bank rate implies higher credit creation capacity of the banks.
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19. Discounting bills of exchange amounts to offering loans by the commercial banks.
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1. Two principal determinants of credit creation by the commercial banks are (i) ____________________,
2. By selling the securities in the open market, the central bank intends to __________________________ .
8. Primary functions of commercial banks are (i) ____________________, and (ii) _____________________ .
9. Secondary functions of commercial banks are (i) ____________________, and (ii) ___________________ .
10. Two important types of deposit accounts are (i) ____________________, and (ii) _____________________ .
11. Four different ways of giving loans and advances by the commercial banks are (i) ___________________,
13. Four important functions of the central bank are (i) ___________________, (ii) ____________________,
15. Five instruments of monetary policy are (i) ______________________, (ii) _______________________,
16. When bank rate is raised, supply of money in the economy is expected to __________________________ .
17. When the central bank sells government securities in the open market, the supply of money is expected
to ______________________________________________________________________________________ .
(iii) A check on high powered money implies a check on the flow of credit in the economy.
____________________________________________________________________________
____________________________________________________________________________
(iv) Term deposits are near money, and therefore should be treated as a component of
money supply.
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2. Write a note explaining the process of credit creation by the commercial banks.
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3 ET
QUESTION SETI
Define the following concepts:
1. Aggregate demand.
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2. Aggregate supply.
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4. Consumption function.
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5. Saving function.
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8. Equilibrium beyond full employment does not cause increase in output beyond full employment.
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12. Increase in output beyond underemployment equilibrium does not cause inflationary gap.
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14. In a situation when planned S > planned I, inventory investment of the producers is expected to be
larger than desired.
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15. The rate at which C increases always tends to be lower than the rate at which Y increases.
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16. The rate at which S increases always tends to be greater than the rate at which Y increases.
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17. In the context of equilibrium GDP, Keynes considers only autonomous investment.
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19. There is a direct relationship between MPC and value of investment multiplier.
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3. Point of equilibrium GDP must always be on the 45 line drawn from the origin.
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9. It is not possible to combat inflationary gap without causing unemployment in the economy.
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10. When deflationary gap is combated, the level of employment tends to rise in the economy.
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15. The sum total of APC and APS is always equal to one, even when APC > 1.
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16. By raising the level of investment in the economy, the government intends to raise the value of output
multiplier.
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19. Once equilibrium GDP is achieved, the level of output is the same; no matter it is underemployment
equilibrium or full employment equilibrium.
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20. Equilibrium beyond full employment is a better situation (in terms of the level of GDP) than equilibrium
at full employment.
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Introductory Macroeconomics 26 EconomicsXII
QUESTION SETIV
Complete the following sentences:
DY
5. = ________________________________
DI
1
6. = ________________________________
1 MPC
18. Three fiscal measures to correct deficient demand are (i) _________________, (ii) __________________,
3. Higher the level of Y, higher should be the level of autonomous consumption in C-function.
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10. A situation of underemployment is better than that of over-employment because prices tend
to a fall.
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Introductory Macroeconomics 28 EconomicsXII
S
RK HE
Government Budget and The Economy
WO
4 ET
QUESTION SETI
Define the following concepts:
1. Government budget.
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2. Revenue receipts.
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3. Capital receipts.
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4. Revenue expenditure.
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5. Capital expenditure.
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8. Fiscal deficit.
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9. Revenue deficit.
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QUESTION SETII
Defend or refute the following statements. Write yes or no with reason:
1. Balanced budget is that budget in which revenue receipts = revenue expenditure.
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2. Government budget is a statement of all actual receipts and payments of the government.
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6. Revenue deficit is the excess of capital receipts over and above revenue receipts of the government.
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7. Primary deficit does not include interest payments, while fiscal deficit does.
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8. Revenue receipts do not impact asset and liability status of the government.
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7. Loans offered by the central government to the state government are to be treated as capital
expenditure of the central government.
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13. Other things remaining constant, fiscal deficit increases when the government revises salary structure of
its employees, but the primary deficit remains the same.
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QUESTION SETIV
Complete the following sentences:
3. Other things remaining constant, if tax rates are increased, fiscal deficit is _________________________ .
4. Two examples of direct tax are (i) __________________________, and (ii) __________________________ .
5. Two examples of non-tax receipts are (i) _______________________, and (ii) _______________________ .
7. Two principal components of revenue receipts are (i) _________________, and (ii) __________________ .
8. Two examples of non-development expenditure are (i) ________________, and (ii) _________________ .
12. Four principal objectives of the government budget are (i) _________________, (ii) __________________,
(iii) ____________________, and (iv) ____________________.
(ii) Government budget is a statement of government receipts and expenditure over the
past one year.
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(iii) Budgetary deficit points to failure of the government to manage its budget.
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(iv) Revenue deficit increases when the government fails to recover its loans.
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3. Briefly describe how the government budget stimulates the process of growth.
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5 ET
QUESTION SETI
Define the following concepts:
1. Exchange rate and equilibrium exchange rate.
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QUESTION SETII
Defend or refute the following statements. Write yes or no with reason:
1. Balance of payments always balances.
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2. Fixed exchange rate is determined by the forces of supply and demand in the international money
market.
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3. Current account balance of payments includes export and import of goods only.
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4. Autonomous items of trade are undertaken by the government with a view to restore equilibrium in
balance of payments.
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5. Speculative purchases by the domestic investors in the international money market cause loss of foreign
exchange.
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8. Forward market in foreign exchange is that market which deals with sale and purchase of foreign
exchange for current transactions.
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9. Parity value refers to equal value of two currencies in the international money market.
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10. Borrowing and lending in the international money market is a part of current account balance of
payments.
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QUESTION SETIII
Write your comment on each of the following statements in a sentence or two:
1. If balance of trade is in deficit, the balance of payments is also in deficit.
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2. Appreciation of the Indian currency occurs when more rupees are to be paid for a US $.
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3. Current account deficit in balance of payments occurs when export of goods < import of goods.
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7. Below the line items in balance of payments are undertaken with a view to maximising profits.
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8. Transfers to rest of the world is a debit component of balance of payments on current account.
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9. Compensation of employees from rest of the world is a credit component of balance of payments on
capital account.
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10. Foreign private loans are not considered in the construction of balance of payments accounts.
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QUESTION SETIV
Complete the following sentences:
2. In case receipts from rest of the world are less than payments to rest of the world, the country's BoP
shows ___________________________________________________________________________________ .
5. Five components of current account BoP are (i) ______________________, (ii) _____________________,
(iii) ____________________, (iv) ____________________, and (v) _____________________ .
6. Six components of capital account BoP are (i) ______________________, (ii) _______________________,
(iii) ________________, (iv) ________________, (v) __________________, and (vi) ___________________ .
7. Two examples of invisible items of trade are (i) ___________________, and (ii) ______________________ .
8. Four principal merits of fixed exchange rate are (i) ___________________, (ii) ____________________,
(iii) ____________________, and (iv) _____________________ .
10. The principal difference between spot market and forward market is that _________________________ .
11. Demand for foreign exchange arises on account of (i) ___________________, (ii) ____________________,
(iii) ____________________, and (iv) _____________________ .
12. Sources of supply of foreign exchange are (i) ______________________, (ii) _______________________,
(iii) ____________________, and (iv) _____________________ .
13. Three important functions of foreign exchange market are (i) _____________________________,
(ii) ___________________________, and (iii) ___________________________.
18. Economic causes of disequilibrium in BoP include (i) ___________________, (ii) ____________________,
(iii) ________________, (iv) ________________, and (v) ___________________ .
(ii) Greater flow of foreign exchange from rest of the world indicates higher degree of our
development.
____________________________________________________________________________
____________________________________________________________________________
(v) Fixed exchange rate system requires huge international reserves. While flexible
exchange rate does not.
____________________________________________________________________________
____________________________________________________________________________
2. How would you interpret a situation of unfavourable balance of trade for a country like India? Write
brief note.
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_________________________________________________________________________________________
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QUESTION SET-II
1. No, it is a flow concept. Because it is related to a period of time.
2. No, it can be less than domestic income. National income is greater than domestic income only when
net factor income from abroad is positive.
3. No. National Income = Domestic Income + Net Factor Income from Abroad.
National income can be less than domestic income in case net factor income from abroad is a negative
number.
4. No. National income at market price = National income at factor cost + Net indirect taxes.
National income at market price can be less than national income at factor cost in case net indirect taxes
is a negative number.
5. No. Because remittances from abroad by the NRIs are transfer payments.
6. No. X M (Exports Imports) is equal to net exports. It has nothing to do with factor incomes.
7. Yes. Gross Investment = Net Investment + Depreciation.
Therefore, gross investment can occur even when net investment is zero.
8. Yes. National income is the sum total of factor incomes earned by normal residents of a country during
a given year. Domestic income is the sum total of factor incomes generated within the domestic territory
of a country.
9. Yes. Private income is the total income from all sources (factor income as well as current transfers) that
accrues to the private sector, during the period of one year.
10. Yes. Private Factor Income = Income from Domestic Product accruing to Private Sector + Net Factor
Income from Abroad.
11. No. Market price includes the impact of both indirect taxes and subsidies. Indirect taxes raise the
market price while subsidies lower it.
12. Yes. But only expected obsolescence is to be considered as a part of depreciation.
13. No. Population of a country is a stock concept because it is related to a point of time.
14. Yes. Net investment always implies increase in the stock of capital. Because it does not include
replacement investment.
15. No. Mixed income of the self-employed includes only factor incomes. Transfer payments are not
included.
16. No. Domestic income estimated in the context of a open economy as well.
17. No. Indian embassy in abroad is a part of domestic territory of India. Therefore, salaries to Indian
employees working in Indian embassies abroad are a part of domestic factor income.
QUESTION SET-III
1. Yes. Because, national income is defined as the market value of the goods and services produced
during the period of one year.
2. Yes. Compensation of employees = Wages and salaries in cash + Payment in kind
+ Employers contribution to social security schemes + Pension on retirement.
3. No. Net factor income from abroad is the difference between the factor income earned by normal
residents of a country from abroad and the factor income earned by non-residents in our country. It
has nothing to do with exports and imports.
4. No. Final goods can finally be consumed by the households as well as by the producers.
5. No. Change in the stock of consumer goods also forms a part of capital formation.
6. No. The same good may be a final good or an intermediate good. It all depends on the end-use of the
goods. Example: Sugar is a final good when used by households. It is an intermediate good when used
by candy-makers.
7. No. Autonomous investment can change, though it is independent of the level of income.
8. No. Inventory investment is a flow concept because it is related to a period of time.
9. No. Only the value of final goods is included in the estimation of national income.
10. No. Imputed rent is included in the estimation of national income as a component of rent.
11. No. Brokerage paid to Real Estate Agents on the sale and purchase of new as well as second hand
houses should be included in the estimation of national income.
12. No. Net capital formation is the increase in the stock of physical capital. Whereas shares are a part of
financial capital only.
13. No. Income in the form of capital gains means income accruing to the individuals on account of
increase in prices of land, shares, bonds, etc. They do not add to the stock of physical capital.
14. Yes. Expenditure by all domestic institutional units on the net purchase of old physical assets from rest
of the word is a part of domestic capital formation. It adds to the stock of national capital.
15. Yes. Gross investment = Net investment + Depreciation. And, expected obsolescence is a part of
depreciation.
16. No. Double counting is avoided if GDP is estimated by summing up value added by all the producing
units in the country.
17. Yes. Only final goods and services are to be considered to avoid double counting in the estimation of
GDP. Because, final goods and services do not require further value-addition. These are outside the
boundary line of production.
18. No. Expenditure on the construction of residential buildings by the households is a part of investment
expenditure. Therefore, it should be treated as investment expenditure.
19. No. Change in stock as a part of investment expenditure is a component of aggregate expenditure in
the economy.
20. No. Net exports (exports imports) is a component of aggregate expenditure in the economy.
QUESTION SET-II
1. No. In case coins are made of gold and silver, intrinsic value of money may over time exceed its face
value.
2. No. Double coincidence of wants is a typical feature of barter system of exchange.
3. No. Credit money is money whose face value is more than its commodity value.
4. Yes. With the introduction of money, an individual can buy or sell a thing without selling or buying
anything in return.
5. No. Under barter system, goods themselves are the medium of exchange for goods. Of course, there is
no common medium of exchange like money.
6. Yes. Money serves as a measure of value in terms of unit of account and store of value in terms of store
of wealth.
7. Yes. Money serves as a convenient mode of transfer of value because of its general acceptability and the
merit of liquidity.
8. No. High powered money refers to currency with public and cash reserves with the commercial banks.
9. Yes. All financial institutions are not banking institutions but all banking institutions are financial
institutions. Example: LIC is a financial institution, but not a banking institution.
10. No. Commercial banks advance loans both for investment as well as consumption purposes.
11. Yes. The central bank is the sole authority of issuing notes in the country. However, by advancing loans
through credit creation, commercial banks contribute to money supply in the economy.
12. Yes. The central bank is an apex bank of all banks in the country.
13. Yes. A central bank advances loan to a bank who fails to get financial accommodation from anywhere
against approved securities.
14. No. CRR and SLR are fixed by the central bank of the country.
15. Yes. In order to increase or decrease money supply in the economy, central bank purchases or sells
securities in the open market.
16. No. Demand deposits are many times more than the cash deposits with the commercial banks. The
differential between the two explains how commercial banks create credit in the economy.
17. No. When CRR is raised, flow of credit is reduced in the economy.
18. No. CRR and SLR are complementary to each other.
19. Yes. It happens when intrinsic value of money exceeds its face value.
20. No. Money acts as a store of value even when it is not in the form of gold or silver coins. Example:
Deposits with the bank are a store of value.
QUESTION SET-IV
1. (i) Cash reserves, and (ii) CRR.
2. decrease money supply in the economy.
3. increased.
4. Currency with Public + Demand Deposits + Other Deposits with the Reserve Bank.
5. M1 + Deposits with Post Office Saving Bank Account.
6. M1 + Net Time Deposits with the Commercial Banks.
7. M3 + Total Deposits with Post Offices (Other than National Saving Certificate.)
HOTS
1. (i) Yes. If CRR is lowered credit creation capacity of the commercial banks is enhanced. Availability of
easy credit increases investment demand.
(ii) No. Bank rate is an instrument of quantitative credit control.
(iii) Yes. Because high powered money includes currency with the public as well as cash reserves with
the banks. It serves as the basis of credit-creation by the commercial banks.
(iv) Yes. According to broader concept of money supply,
M3 = M1 + Net Time Deposits (or term deposits or fixed deposits) with the commercial banks.
(v) No. Commercial banks do not create credit only on the advice of government. However, their
capacity to create credit depends on credit policy of the central bank of the country.
QUESTION SET-II
1. No. Consumption can be greater than income. There is always some minimum level of consumption
even when income is zero.
2. No. Saving can be negative when consumption is greater than income. Negative saving amounts to
borrowing.
3. No. Average propensity to consume can be greater than one when consumption is greater than income.
4. No. APC and MPC can be equal. When APC is constant, APC will be equal to MPC.
5. Yes. We know that,
Y=C+S
Y C S
= + (Dividing both sides by Y)
Y Y Y
C S
1= +
Y Y
APC + APS = 1.
6. No. MPC + MPS = 1.
7. Yes. Because, expost investment includes undesired/unwanted change in stock while ex-ante
investment does not.
8. Yes. Equilibrium beyond full employment does not cause increase in output beyond full employment
because economy is already in the state of full capacity production. Only the market value of output
tends to rise.
9. Yes. In the situation of underemployment equilibrium, AD fails to cope with full employment of the
factors. Implying the existence of excess capacity in the economy.
10. Yes. Equilibrium GDP is achieved where AS = AD or desired AS = desired AD.
11. Yes. In the Keynesian model of equilibrium GDP, AS is assumed to be perfectly elastic, implying that AS
converges with AD at all levels of AD without causing any increase in the price level in the economy.
12. Yes. Increase in output beyond underemployment equilibrium does not cause inflationary gap because
excess capacity exists in the economy and AS catches up with AD at the existing price level.
13. No. When AS = AD, S necessarily be equal to I.
14. Yes. When planned S > planned I, some output would remain unsold and producers will have
undesired stock of goods.
15. Yes. The rate at which consumption increases is often less than the rate at which income increases. This
is in accordance with the Psychological Law of Consumption.
16. No. Because a part of increased income is also spend on consumption.
17. Yes. In the context of equilibrium GDP, Keynes considers only autonomous investment which is
independent of the level of income.
QUESTION SET-III
1. Yes. Under deflationary gap or deficient demand, underemployment equilibrium occurs at a point
where level of AD is less than that of full employment. Since AS is assumed to be perfectly elastic, it
adapts itself to the low level of AD.
2. Yes. In the situation of inflationary gap, output remains constant and pressure of demand on the
existing output causes rise in prices. Due to this AD ultimately comes down to full employment level of
AS.
3. Yes. Equilibrium GDP must be struck on the 45o line because it is only on this line that AD = AS.
4. Yes. Inflationary gap or excess demand can be combated by reducing autonomous investment
expenditure because investment is a component of AD.
5. Yes. Deflationary gap can be corrected by increasing the level of AD. Because it is the deficiency of AD
that causes deflationary gap.
6. No. Bank rate should be increased in a situation of inflationary gap in order to lower money supply in
the economy. Implying that AD should reduce.
7. No. CRR should be lowered to combat deflationary gap. This raises capacity of the commercial banks to
create credit in the economy. Thus, AD tends to rise.
8. No. SLR should be lowered. This raises capacity of the commercial banks to create credit in the
economy. Thus, AD tends to rise.
9. No. When inflationary gap is combated, the economy is brought back to its full employment level.
Hence no question of decrease in employment.
10. Yes. Because deflationary gap causes a fall in the level of employment. When deflationary gap is
combated, there is rise in the employment level in the economy.
11. Yes. Multiplier process assumes the existence of excess capacity in the economy.
1 1
12. No. When MPC = 0, multiplier (K) = 1. K= 1 MPC = 1 0 =1
13. No. In response to increase in AD, output increases only till full employment equilibrium is struck in
the economy.
14. No. A tax on the households only reduces their disposable income.
15. Yes. APC + APS = 1, even when APC > 1. Because consumption and saving are the only two
components of income.
16. No. By raising the level of investment, the government intends to increase the level of AD in the
economy.
17. Yes. Equilibrium GDP is attained when actual stocks = desired stocks. It implies that the producers do
not suffer the burden of unwanted stock or the loss of unfulfilled demand.
18. Yes. Equilibrium GDP is achieved when S= I since S refers to withdrawals from the circular flow
and I refers to injections into circular flow, it implies that at a point of equilibrium injections =
withdrawals.
QUESTION SET-IV
1. minimum level of consumption, even when Y=0.
2. negative saving when Y = 0 and there is some minimum level of consumption in the economy.
3. one.
4. a horizontal straight line parallel to X-axis.
5. investment multiplier.
6. value of investment multiplier.
7. DS (change in saving).
8. DC (change in consumption).
9. one.
10. one.
11. MPS.
12. there is excess of AD over and above its level required to maintain full employment equilibrium in the
economy.
13. AD is in excess of its full employment level.
14. AD = AS.
15. actual stocks > desired stocks.
16. actual stocks < desired stocks.
17. (i) rise in bank rate
(ii) rise in CRR
(iii) rise in SLR.
18. (i) rise in government expenditure.
(ii) cut in taxation (so that disposable income rises)
(iii) a cut in public borrowing so that liquidity is not reduced in the economy.
19. tends to rise.
20. tends to be lower than at full employment.
HOTS
1. True. When I < S, producers will have undesired stock. In order to clear their stock, the producers
would like to produce less output implying AS tends to contract.
2. True. When I > S, producers would plan to produce higher output to cope with higher demand.
However, output/income level will rise only upto the point of full employment.
3. False. Because autonomous consumption is not related to the level of Y.
4. True. Because MPC shows the rate at which consumption increases in response to increase in Y. Or,
MPC is the slope of C-function.
QUESTION SET-II
1. No. Balanced budget is that budget in which total expenditure = total receipts.
2. No. Government budget is a statement of expected receipts and expenditure of the government during
a fiscal year.
3. No. Expenditure on law and order is a component of non-development expenditure because it does
not directly add to the flow of goods and services in the economy.
4. No. Non-plan expenditure does not contributes to economic growth because it is not incurred in
accordance with planned development programmes of the country.
5. Yes. Because fiscal deficit is equal to total borrowing by the government.
QUESTION SET-III
1. No. Borrowing by the government is not a measure of revenue deficit. It is a measure of fiscal deficit.
2. No. Tax is a revenue receipt of the government. It does not impact asset/liability status of the
government.
3. Yes. Because repayment of loan causes reduction in liabilities of the government. Therefore, it is a
capital expenditure.
4. No. Sales tax is an indirect tax because its burden can be shifted on to other persons.
5. No. A regressive tax, by definition, causes a greater real burden on the poor.
6. No. Income tax in India is progressive in nature. Because tax rate increases with increase in income.
7. Yes. Because loans offered by the central government to state government create assets for the central
government.
8. No. Payment of interest is a revenue expenditure because it does impact asset/liability status of the
government.
9. Yes. Subsidies are treated as revenue expenditure of the government, because subsidies do not impact
asset/liability status of the government.
10. Yes. All grants, as a matter of convention are treated as revenue expenditure of the government.
11. No. Construction of fly-over is a capital expenditure of the government because it adds to assets of the
government.
12. No. Primary deficit is equal to fiscal deficit reduced by interest payments.
13. Revision of salary structure enhances revenue expenditure of the government. If other things are
constant (implying that interest payment by the government is also constant), increase in fiscal deficit
should also be reflected as increase in primary deficit (Fiscal deficit Interest payment = Primary
deficit).
14. No. Primary deficit is only a part of fiscal deficit.
Fiscal deficit = Primary deficit + Interest payment.
15. No. Because fiscal deficit also depends on capital receipts and expenditures of the government.
QUESTION SET-III
1. No. Because balance of trade is only a part of balance of payments current account.
2. No. In case of appreciation, the value of domestic currency increases in relation to the value of other
currency and hence less rupees are to be paid for a US$.
3. No. Because current account balance depends on:
(i) export and import of goods
(ii) export and import of services
(iii) unilateral transfers from one country to another.
4. No. Foreign direct investment is a component of capital account balance of payments.
5. No. Balance of payments is not balanced through unilateral transfers. These transfers are only a
component of current account BoP.
6. No. Above the line items in balance of payments refer to autonomous items only.
7. No. Below the line items in balance of payments are not undertaken with a view to maximising profits.
These are meant to restore balance of payments identity.
8. Yes. Transfers to rest of the world is recorded as negative item and therefore reflected in the debit side
of balance of payments on current account. This is because it involves the payment of foreign exchange
to rest of the world.
9. No. Compensation of employees from rest of the world is a credit component of balance of payments on
current account.
10. No. Foreign private loans are included in the capital account of balance of payments.
750 150
1,000 200
Sol.
Income (Y) Change in Income (DY) Saving (S) Consumption (C) Change in
(`) (`) (`) (`) Consumption (DC)
(`)
DC 200
Marginal propensity to consume = = = 0.8
DY 250
MPS = 1 MPC
= 1 0.8 = 0.2
Ans. MPC = 0.8.
MPS = 0.2.
4. What will be the value of average propensity to save when
(i) C = 200 at Y = 1,000?
(ii) S = 450 at Y = 1,200?
S
Sol. APS =
Y
400 240
500 320
600 395
700 465
Sol.
Level of Consumption Saving Marginal Propensity Marginal
Income (Y) Expenditure (C) (S) = Y C to Consume Propensity to Save
() () () DC DS
(MPC) = (MPS) =
DY DY
1,000 900
1,200 1,060
1,400 1,210
1,600 1,350
Sol.
Level of Consumption Saving Marginal Propensity Marginal Propensity
Income (Y) Expenditure (C) (S) = Y C to Consume to Save
() () () DC DS
(MPC) = (MPS) =
DY DY
Sol.
Income (Y) Consumption (C) Saving Marginal Average
(`) (`) (S) = Y C Propensity to Consume Propensity to Save
(`) DC S
(MPC) = (APS) =
DY Y
0 20 20
50 55 5 35 5
= 0.7 = 0.1
50 50
100 90 10 35 10
= 0.7 = 0.1
50 100
150 125 25 35 25
= 0.7 = 0.16
50 150
0 0.5 80
50 0.5
100 0.5
150 0.5
200 0.5
Sol.
Income Marginal Propensity Saving Consumption Average Average Propensity
(Y) to Consume (S) = Y C (C) Propensity to Save to Consume
(`) (MPC) (`) (`) S C
(APS) = (APC) =
Y Y
0 80 80
50 0.5 55 80 + 25 = 105 55 105
= 11
. = 2.1
50 50
100 0.5 30 80 + 50 = 130 30 130
= 0.3 = 13
.
100 100
150 0.5 5 80 + 75 = 155 5 155
= 0.03 = 103
.
150 150
200 0.5 20 80 + 100 = 180 20 180
= 0.1 = 0.9
200 200
Sol. Budgetary Deficit = Revenue expenditure + Capital expenditure - (Revenue receipts + Capital receipts)
= ` 60,000 crore + ` 30,000 crore ` 50,000 crore ` 25,000 crore
= ` 90,000 crore ` 75,000 crore
= ` 15,000 crore
Ans. Budgetary deficit = ` 15,000 crore.
3. Find fiscal deficit from the information given below:
Items (` in lakh)
(i) Borrowing by the government 600
(ii) Revenue receipts 100
(iii) Capital receipts 750
(iv) Interest payment 150
Sol. Fiscal Deficit = Borrowing by the government
= ` 600 lakh
Ans. Fiscal deficit = ` 600 lakh.
4. Find primary deficit from the following data:
Items (` in crore)
(i) Fiscal deficit 9,000
(ii) Interest payment by the government 900
Sol. Primary Deficit = Fiscal deficit - Interest payment by the government
= ` 9,000 crore ` 900 crore
= ` 8,100 crore
Ans. Primary deficit = ` 8,100 crore.
Balance of Payments
1. The balance of trade shows a deficit of ` 5,000 crore and the value of imports are ` 9,000 crore. What is the value of
exports?
Sol. Balance of trade = (-) ` 5,000 crore
Value of imports = ` 9,000 crore
Balance of Trade = Exports - Imports
Exports = Balance of trade (Deficit) + Import
= ` 5,000 crore + ` 9,000 crore
= ` 4,000 crore
Ans. Value of exports = ` 4,000 crore.
2. The balance of trade shows a deficit of ` 300 crore. The value of exports are ` 500 crore. What is the value of imports?
Sol. Balance of Trade = Exports - Imports = (-) ` 300 crore
Imports = Exports - Balance of trade (Deficit)
= ` 500 crore - (-) ` 300 crore
= ` 800 crore
Ans. Value of imports = ` 800 crore.
3. Find current account balance from the following data:
Items (` in lakh)
(i) Balance of visible trade 9,000
(ii) Export of services 9,000
(iii) Import of services 3,000
Sol. Current Account Balance
= Balance of visible trade + Balance of invisibles (Export of services Import of services)
= ` 9,000 lakh + ` 9,000 lakh ` 3,000 lakh
= ` 15,000 lakh
Ans. Current account balance = ` 15,000 lakh.
4. Find the balance on non-factor services from the following information:
Items (` in crore)
(i) Balance of visible trade 500
(ii) Income 200
(iii) Transfers 100
(iv) Current account balance 900
Sol. Current Account Balance
= Trade balance + Balance on non-factor services + Balance on income + Balance on transfers
Or,
Balance on Non-factor Services
= Current account balance Trade balance Balance on income Balance on transfers
= ` 900 crore - ` 500 crore - ` 200 crore - ` 100 crore
= ` 100 crore
Ans. Balance on non-factor services = ` 100 crore.
Introductory Macroeconomics
3 MARKS QUESTIONS
1. Calculate Gross Value Added at Factor Cost:
Items
(i) Units of output sold (units) 1,000
(ii) Price per unit of output () 30
Introductory Macroeconomics 89 EconomicsXII
(iii) Depreciation () 1,000
(iv) Intermediate cost () 12,000
(v) Closing stock () 3,000
(vi) Opening stock () 2,000
(vii) Excise () 2,500
(viii) Sales tax () 3,500
Ans. Gross Value Added at Factor Cost
= Sales (Units of output sold Price per unit of output) + Closing stock - Opening stock
Intermediate cost Excise Sales tax
= (1,000 ` 30) + ` 3,000 ` 2,000 ` 12,000 ` 2,500 ` 3,500
= ` 30,000 + ` 3,000 ` 2,000 ` 12,000 ` 2,500 ` 3,500
= ` 13,000
Gross value added at factor cost = ` 13,000.
2. Explain the significance of the store of value function of money.
Ans. Store of value means store of wealth in terms of money.
In the absence of money, people used to save in terms of expensive goods which involved difficulty of
storage and transportation/portability. With the invention of money, people found a very convenient
means of saving their wealth on account of the following characteristics of money:
(i) Saving in terms of money allows convenient portability. It involves only paper titles which can be
handled anywhere and in any part of the world with just a click of the mouse.
(ii) Saving in terms of money allows fractional denominations to any extent. It is unlike saving in
terms of goods which have limited divisibility.
(iii) Saving in terms of money allows a high degree of liquidity which is not possible in case of goods.
Note: While saving is a virtue from the individuals point of view, it may not always be so from the
viewpoint of the economy as a whole. Saving means not spending, which may lead to a situation of
deficiency of aggregate demand and therefore a situation of recession or depression in the economy.
3. Outline the steps taken in deriving saving curve from the consumption curve. Use diagram.
Ans. Fig. 1 shows how saving curve is derived from Y Y
consumption curve.
It involves the following steps: C
bY
C+
(i) We take OA =OA. Because OA = consumption C=
Break-even
when Y = 0. So that, OA (= OA) is negative
Consumption/Saving
point Q
saving when Y = 0. It is indicated by C in the b )Y S
saving function. 1
C +(
A
(ii) Point P on the saving curve is marked corresponding S=
to point Q on the consumption curve. While Q 45
indicates that Y = C, point P indicates that S = 0. O
P
X
Income
Obviously, when Y = C, S = 0.
(iii) By joining points A and P and stretching it to A'
form a straight line, we get S curve. S-function is
linear C-function. Y'
Figure 1
Note: Since MPC + MPS = 1, MPS = 1 MPC. So that
while in C-function MPC is indicated by b, in S-function it is indicated by 1 b.
point Q
minimum consumption when Y = 0. )Y S
1 b
(ii) Point Q on the Y-line (45 angle) is marked +(
A C
corresponding to point P on the saving curve. S=
Because at P, saving = 0, and at point Q, 45
consumption = income (implying that S = 0). O
P
X
Income
(iii) Joining points A & Q and stretching it to form a
straight line, we get C-curve. C-function is linear A'
as it is derived from a linear S-function.
Note: Since MPC + MPS = 1, MPS = 1 MPC. So that Y'
while in C-function, MPC is indicated by b, in Figure 2
S-function it is indicated by 1 b.
13. Find consumption expenditure from the following:
National income = 5,000.
Autonomous consumption = 1,000.
Marginal propensity to consume = 0.80.
Ans. We know that, C = C + MPC(Y)
= 1,000 + 0.80(5,000)
= 1,000 + 4,000
= 5,000
Consumption expenditure = 5,000.
45
O X
Y1 Y2 Income (Y)
A'
Y
Figure 3
22. Find investment from the following:
National income = 800.
Autonomous consumption= 50.
Marginal propensity to consume = 0.8.
Ans. We know that, Y= C + I
Or, Y = C + MPC(Y) + I
Or, I = Y C MPC(Y)
I = 800 50 0.8(800)
I = 800 50 640
I = 110
Investment = 110.
23. Distinguish between revenue expenditure and capital expenditure in a government budget. Give
example in each case.
Or
Explain the role of government budget in reducing income inequalities.
Ans. Revenue expenditure is that expenditure which creates no assets or causes no reduction in
liabilities of the government. Examples: (i) Expenditure on interest payments, (ii) Expenditure
on salaries.
Capital expenditure is that expenditure of the government which either creates assets or causes a
reduction in government liability. Examples: (i) Expenditure on purchase of shares, (ii) Expenditure
on buildings.
Or
Governments budgetary policy can help reduce inequalities of income through redistribution of
income and wealth in the economy. To achieve this objective, government uses fiscal instruments of
taxation and subsidies. By imposing taxes on rich and giving subsidies to the poor, government
redistribute income in favour of poorer sections of the society. Equitable distribution of income and
wealth is a sign of social justice.
Introductory Macroeconomics 96 EconomicsXII
24. Find Net Value Added at Factor Cost:
Items
(i) Intermediate cost () 15,000
(ii) Output sold (units) 9,000
(iii) Price per unit of output () 4
(iv) Consumption of fixed capital () 2,000
(v) Excise duty () 4,000
(vi) Change in stock () ()1,000
Ans. Net Value Added at Factor Cost
= Sales (Output sold Price per unit of output) + Change in stock - Intermediate cost
Consumption of fixed capital - Excise duty
= (9,000 ` 4) + () ` 1,000 ` 15,000 ` 2,000 ` 4,000
= ` 36,000 ` 1,000 ` 15,000 ` 2,000 ` 4,000
= ` 14,000
Net value added at factor cost = ` 14,000.
25. Find consumption expenditure from the following:
Autonomous consumption =150.
Marginal propensity to consume = 0.75.
National income = 1,000.
Ans. We know that, C = C + MPC(Y)
= 150 + 0.75(1,000)
= 150 + 750
= 900
Consumption expenditure = 900.
26. Find Gross Value Added at Factor Cost:
Items
(i) Import duty () 1,000
(ii) Excise () 1,000
(iii) Output sold (units) 5,000
(iv) Price per unit of output () 6
(v) Change in stock () 600
(vi) Intermediate cost () 16,000
(vii) Subsidy () 500
Ans. Gross Value Added at Factor Cost
= Sales (Output sold Price per unit of output) + Change in stock Intermediate cost Import duty
Excise + Subsidy
= (5,000 ` 6) + ` 600 ` 16,000 ` 1,000 ` 1,000 + ` 500
= ` 30,000 + ` 600 ` 16,000 ` 1,000 ` 1,000 + ` 500
= ` 13,100
Gross value added at factor cost = ` 13,100.
4 MARKS QUESTIONS
1. Giving reason explain how should the following be treated in estimating national income:
(i) Expenditure on fertilisers by a farmer.
(ii) Purchase of tractor by a farmer.
Ans. (i) Expenditure on fertilisers by a farmer is not included in national income, because it is an
intermediate cost for the farmer as fertilisers are used up in the process of production.
(ii) Purchase of tractor by a farmer is included in national income because it is investment
expenditure or capital formation. A tractor is used by the farmer for several years in the process of
farming and he is a final user of it.
2. Explain the components of Legal Reserve Ratio.
Or
Explain bankers bank function of central bank.
Ans. Legal reserve ratio has two variants: (i) Cash reserve ratio and (ii) Statutory liquidity ratio.
Cash reserve ratio (CRR) refers to cash reserves of commercial banks with the central bank as a
percentage of their deposits. Statutory liquidity ratio (SLR) refers to reserves in the form of liquid
assets (including: (i) cash, (ii) gold, and (iii) approved securities) with the commercial banks
themselves, as a percentage of their total deposits.
Note: (i) Both CRR and SLR are fixed by the central bank, and both are a legal binding for the commercial
banks. In this sense, both CRR & SLR are legal reserve ratios.
(ii) CRR and SLR cannot be treated as components of legal reserve ratio. Because, whereas CRR
by definition includes cash reserves only, SLR includes (a) cash reserves, (b) gold reserves,
and (c) reserves of approved securities, with the commercial banks.
(iii) If CRR and SLR are treated as components of legal reserve ratio, both CRR and SLR should add
up to LRR (legal reserve ratio). In practice, however, this is not true. If CRR + SLR = LRR then,
in a situation when LRR is constant, any increase in CRR must imply a corresponding decrease in
SLR. There is no evidence to such a situation whatsoever.
Hence, the students are advised to treat CRR and SLR NOT as components of LRR, but only as
variants of LRR.
Or
Central bank is an apex bank of all banks in the country. The central bank has almost the same relation
with other banks in the country as a commercial bank has with its customers. As a bankers bank, the
central bank offers loans to the commercial bank, and also accepts deposits from them. The central
bank keeps some cash balances of the commercial banks as a compulsory deposit. Central bank uses
6 MARKS QUESTIONS
1. Find out (a) National Income, and (b) Net National Disposable Income:
Items ( crore)
(i) Factor income from abroad 15
(ii) Private final consumption expenditure 600
(iii) Consumption of fixed capital 50
(iv) Government final consumption expenditure 200
(v) Net current transfers to abroad ()5
(vi) Net domestic fixed capital formation 110
(vii) Net factor income to abroad 10
(viii) Net imports ()20
(ix) Net indirect tax 70
(x) Change in stocks ()10
Ans. (a) National Income
= Private final consumption expenditure + Government final consumption expenditure + Net
domestic fixed capital formation + Change in stocks Net imports - Net indirect tax Net factor
income to abroad
= ` 600 crore + ` 200 crore + ` 110 crore + (-) ` 10 crore (-) ` 20 crore ` 70 crore - ` 10 crore
= ` 600 crore + ` 200 crore + ` 110 crore - ` 10 crore + ` 20 crore ` 70 crore - ` 10 crore
= ` 840 crore
R2
foreign exchange becomes cheaper than before) we
get more dollar per unit of our currency. Accordingly, R
domestic traders would tend to buy more goods in
the international market. This raises demand for
R1
foreign currency from OD to OD1 when exchange
D
rate falls from OR to OR1 in Fig. 4. Similarly, when
O X
the price of foreign currency rises, we get less dollar D2 D D1
per unit of our currency. Accordingly, domestic Quantity Demanded
(Foreign Currency)
traders would be able to buy less goods in the Figure 4
international market. As a result, demand for foreign
currency will fall from OD to OD2 when exchange rate rise from OR to OR2 in Fig. 4.
9. Find out (a) National Income, and (b) Net National Disposable Income:
Items ( crore)
(i) Net imports ()10
(ii) Net domestic fixed capital formation 100
(iii) Private final consumption expenditure 600
(iv) Consumption of fixed capital 60
(v) Change in stocks ()50
R1
domestic currency), purchasing power of foreign
R
currency in the domestic economy tends to reduce.
R2
This causes reduction in export from the domestic
economy. Accordingly, supply of foreign currency S
reduces from OS to OS2 when exchange rate falls X
O S2 S S1
from OR to OR2 as shown in Fig. 5. Quantity Supplied
(Foreign Currency)
Similarly, when the price of foreign currency rises (in Figure 5
relation to domestic currency), purchasing power of
foreign currency in the domestic economy tends to increase. This causes increase in export from the
domestic economy. Accordingly, supply of foreign currency increases from OS to OS1 when
exchange rate rises from OR to OR1 as shown in Fig. 5.