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`, , PART B – MACRO ECONOMICS, Sl.no, 1., 2., 3., 4., 5., 6., , Name of the Chapter, , Page No, , Introduction., National Income Accounting., Money and Banking., Determination of Income and Employment., Government Budget And The Economy, Open Market., , 1

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`, , CHAPTER-1, MACRO ECONOMICS, SUMMARY:,  Macroeconomics is branch of economics that studies economic behaviour of an economy, as whole like aggregate demand and supply, national income, unemployment etc.,  Adam Smith is regarded as the father of Modern Economics and classical school of, economic thought, his well-known work ‘An Enquiry into the Nature and Causes of The, Wealth of Nation’ failed to give solution to Great Depression of 1929.,  The Great Depression was the worst economic downturn in the history of the, industrialized world.,  Macro economics evolved only after the publication of Keynesian book “ The Theory of, Employment, Interest and Money”.,  Various theories studied under macroeconomics are: the theory of National Income,, Theory of Money, Theory of General Price Level, Theory of Employment and Theory of, International Trade., I] Choose the correct answer:1. The individual or institutions which take economic decisions are,, a) Economic variable, b) Economists, c) Economic agents, d) none of the above, 2. In 1936 British economist J.M. Kenynes published his celebrated book,, a) Wealth of Nations, b) Theory of Employment, c) Theory of interest, d) General theory of employment, interest & money, 3. All the laborers who are ready to work will find employment and all the, factories will be working at their full capacity, this school of thought is known as,, a) Modern thought, b) Contemporary thought, c) Classical thought, d) none of the above, 4. The year of great depression is,, a) 1920, b) 1889, , c) 1929, , d) 2018, , 5. In capitalist country production activities are mainly carried out by,, a) Private enterprises, b) Government authority, c) Planning authority, d) none of the above, , 2

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`, , II Fill in the blanks (each question carries 1 mark), 1. Macro economics tries to address situations facing the economy as a whole., 2. A part of the revenue is paid out as Rent for service rendered by land., 3. The domestic country may sell goods to the rest of the world these are called Exports, 4. The production unit will called as firms., 5. Macro Economic policies are pursued by the state itself or statutory bodies like the RBI,, SEBI etc.,, III ONE Marks questions:1. Who are economic agents?, Ans: The individual or institutions which take economic decisions are called a economic, agents., 2. What does classical school of thought say?, Ans: The classical economic thought is, all the laborers who are ready to work will find, employment and all the factories will be working at their full capacity. (Or) Classical, economist thought that labour and other resource are fully employed and utilized., 3. Give the meaning of imports., Ans: Economies which buy the goods from rest of the world are called as imports., 4. Name the well-known work of adman smith., Ans: ‘An enquiry into the nature and causes of the wealth of nations’ – 1776, 5. What do you mean by wage rate?, Ans: Wage rate refers to the price at which the sale and purchase of labour services in the, process of production., VI. TWO Marks questions:, 1. What are the features of capitalist economy?, Ans: The important features of a capitalist of economy are as follows:, There is private ownership of means of productions., There is sale and purchase of labour services at a price which is called wage rate., A Production takes place for selling the output in the market., The entrepreneurs may themselves supply the capital needed or they may borrow the, capital., 2. Name and the meaning of two kinds of trade in external sector., Ans:There are two kinds of Trade in external sector, as follows,, A country may sell goods to the rest of the world – Exports., A country may buy goods from other countries – Imports, 3. Who are macroeconomic decision makers?, Ans: The macroeconomic decisions makers are State itself or statutory bodies like the, 3

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`, , Reserve Bank of India, Securities and Exchange Board of India and similar institutions., * Each such statutory body will have one or more public goals to pursue as defined by law or, the constitution of India itself., V.FOUR Marks questions:, 1.Explain the working of economy of a capitalist country., Ans: If economic activities operate and controlled by private sector are known as, capitalist economy., Features of capitalist economy are, as follows,, a) There is private ownership of means of production., b) Production takes place for selling the output., c) There is sale and purchase of labour service at a price called wage rate., Process of capitalist economy:, In a capitalist country production activities are mainly carried out by capitalist enterprises., They may themselves supply the capital needed to run the enterprise or they may borrow the, capital., - To carry out the production they also need natural resources., - They need the most important element of human labour to carry out production. This is, called as labour., - After producing output with the help of land, labour and capital, the entrepreneur sells the, product in the market to earn money called revenue., - Part of the revenue is paid out as rent for land, interest for capital and wage for labour and, keeps the rest of the revenue as profit., - Profits are often used by the producers in the next period to buy new machinery or to build, new factories, so that production can be expanded., These expenses which raise productive capacity are examples of investment expenditure., 2. Briefly explain in what way macroeconomics is different from micro economics., Sl.no, , Features, , 1, , Scope, , 2, , Method of study, , Micro economics, Micro Economics study in, individual units. so it has a, narrow scope, slicing method, , Sl.no, 1., 2., , 3., , Economic Agents, , In this economy there is a, existence of individual units,, and they thinks about own, interest and welfare, , 4., , Method, , partial equilibrium, , 4., , 5., , Domain, , Consumer behaviour,, production and cost, Rent,, Wages, Interest, etc., , 5., , 6., , Theory, , Theory of Price., , 6., 4, , 3., , Macro economics, Macro Economics study in, aggregates, so it has a scope, of wider., lumping method, In this economy there is an, existence economic agents, are government and RBI and, statutory bodies, they thought, social welfare., general equilibrium, Theory of income, output and, employment, Consumption, Function, Investment, function, Inflation, etc., Theory of Income.

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`, , 3. Explain the role of government (state) and house hold sector in both developed and, developing countries., Ans:i) Role of Government: In both the developed and developing countries, apart from, capitalist sector, there is the institution of State., The role of the state includes,, a) Framing laws, enforcing them and delivering justice., b) The State here refers to the Government which performs various, developmental functions for the society as whole., c) It undertakes production, apart from imposing taxes., d) Spending money on building public infrastructure, running schools,, providing health services etc., Role of Household sector: By household we mean a single individual who takes, decisions relating to her own consumption or a group of individuals for whom the, decisions relating to consumption are jointly determined., The role of household is as follows,, a) Households consist of people. These people work in firms as workers and, earn wages., b) They are the ones who work in government departments and earn salaries or, they are the owners of firms and earn profits., c) Therefore, the market in which the firms sell their products could not have, been functioning without the demand coming from the households, , ***, , 5

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`, , CHAPTER-2, NATIONAL INCOME AND ACCOUNTING, SUMMARY:,  As a fundamental level, the macroeconomics Can be seen as working in a circular way.,  The Firm employ inputs supplied by household sector and produce goods and service, to be sold to households.,  So we can calculate the national income of a economy in three methods:, o Product or Value-Added Method, o Expenditure Method, o Income Method.,  There may be different categories of aggregate income depending on whom these are, accruing to.,  We have pointed out the difference between GDP, GNP, NNP at market price, NNP at, factor cost, PI and PDI., , Finally we have noted that it may be incorrect to treat GDP as an index of the welfare of, the country…, I] Choose the correct answer:1. The Study of national income is related to,, a) Micro economics, b) Macro economics, c) Both Micro & macro, d) none of the above., 2. NNP = GNP –, a) Deduction, , b) Depreciation, , c) Investment, , d) none of the above, , 3. The value of GDP at the current prevailing price is,, a) Real GDP, b) GDP at Factor Cost c) Nominal GDP, 4. By deducing undistributed profit from national income, we get,, a) Personal disposable income, b) Personal income, c) Private income, d) Subsidies, 5. measuring the sum total of all factor payments will be called,, a) Product method, b) Expenditure method, c) Income Method, d) none of the above, , 6, , d) NDP

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`, , II Fill in the blanks (each question carries 1 mark), 1.Stocks are defined at a particular point of time., 2. Final Goods will not pass through any more stages of production., 3.Depreciationis an annual allowance for wear and tear of capital goods., 4. Inventory is a stock of variable., 5. Pollution is an example for Negative externalities., 6. The net contribution made by a firm is called is Value added., III. Match the following (each question carries 1 mark), 1. Labour, 1.Wages, 2. GDP, 2. Gross domestic product, 3. Inventory, 3. Stock variable, 4. PDI, 4. Personal disposable income, 5. Domestic service, 5.Non monetary exchange, IV. ONE Marks questions:1. What do you mean by final goods?, Ans: The goods that will not pass any more stages to pass or transformations is called a final goods., , 2. Expand CPI., Ans: Consumer price index, 3. Expand GNP., Ans; Gross National product, 4. How do you get value added?, Ans: Deduction the value of depreciation from gross value of goods we get value added., 5. Give the meaning of GDP., Ans: Gross domestic product., 6. Give the meaning of Intermediate goods?, Ans: Those goods used as raw materials or inputs for production of other commodities are, known as intermediate goods., 7. What is depreciation?, Ans: It is a deduction made from the value of gross investment in order to, accommodate regular wear and tear of capital goods., 8. How do you get personal disposable income?, Ans: The personal Disposable Income is obtained by deducting personal tax, payments and non tax payments from Personal Income., 9. Write the question of GVA at market prices., Ans: GVA at Market prices = GVA at basic prices + Net product taxes., 10. What is GDP deflator?, Ans: GDP deflator is the ratio of nominal GDP to real GDP. Its formula ,, GDP deflator =, , 7

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`, , V. TWO Marks questions:1. What are the four factor of production? Mention their rewards., Ans: The four factors of production are Land, Labour, Capital and Organization., The rewards of these factors of production are as follows:, Land gets Rent, Labour gets wages, Capital gets Interest., Organization gets profit., 2. Distinguish between stock and flow. Give example., Sl.no, Stock, Sl.no, Flow, 1., , It is that quantity of, economic variable which, is measured at a particular, point of time., , 1., , It refers to that quantity of, economic variable measured, over a period of time., , 2., , Example capital,, inventory, wealth, foreign, exchange reserves etc., , 2., , Example net investment,, salary, National Income etc., , 3. What is difference between consumer goods and capital goods?, Sl.no, Consumer Goods, Sl.no, Capital Goods, 1., , The Goods which are, purchase for consumption are, known as consumer good., , 1., , These are the durable goods, which are used in the, production process., , 2., , Example food, clothes,, services, like recreation., , 2., , Examples are machinery,, tools, implements etc., , 4. Mention three methods of measuring GDP (national income)., Ans: a) Product or Value-Added Method, b) Expenditure Method and c) Income Method, 5. What do you mean by externalities? Mention its two types., Ans: Externalities refer to the benefits or harms a firm or an individual causes to another for, which they are not paid or penalized. They do not have any market in which they can be, bought and sold., The two types of externalities are Positive Externalities and Negative Externalities., 6. What is equation of GDPmp and GDPfc., Ans: i) GDPmp =C + I + G + X – M, C- Consumption expenditure, I – Investment expenditure, 8

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`, , G –Government consumption and expenditure, X – Export, M – Import, ii) GDPfc = GDPmp – NIT ( net direct tax), 7. Write the difference between nominal and real GDP., SL, 1, 2, 3, , Nominal GDP, If the GDP is measured based, on current year price are known, as nominal GDP, It is not reliable, It does not give clear picture of, economic development of a, country, , SL, 1, 2, 3, , Real GDP, If the GDP is measured based, on base year price is known as, Real GDP., It is reliable, It give clear picture of, economic development of a, country., , VI.FOUR Marks questions:1. Write a short note on the concept of final good., Ans: The final goods are those goods which are meant for final use and will not pass through, any more stages of production or transformations. They are called final goods., Because, once they have been sold they pass out of the active economic flow. However, they, may undergo transformation by the action of the ultimate purchaser. In fact, many final, goods are transformed during their consumption., Example: For instance, Tea leaves purchased by the consumer are not consumed in that, form – they are used to make drinkable tea, which is consumed., Similarly most of the items that enter our kitchen are transformed through the process of, cooking. But cooking at home is not an economic activity, even though the product involved, undergoes transformation. Home cooked food is not sold to the market., However, if the same cooking or tea was done in hotel where the cooked product would be, sold to customers, then the same items are not considered as final goods and would be, counted as inputs to which economic value addition can take place., Thus, it is not in the nature of the good but in the economic nature of its usage that a good, becomes a final good., 2. Explain the circular flow of income of an economy., Ans: The circular flow of income of an economy can be explained with the help of following, assumptions:, a) Existence of two sectors viz., household sector and producers., b) Households are the owners of the factors of production., c) Households receive income by selling the factor services., d) There are no savings., e) The firms produce goods to the households., f) The economy is a closed economic system( where no Government or, 9

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`, , external trade or savings), The circular flow of income in a simple economy can be illustrated with the, help of following chart., In Above the diagram, at point A House hold, sector sells a factor of production, like land labour, capital, organization to firm sector, by collecting factor payment, this method is known as income method of, calculating national income., At point b, household sector spend entire income, they earn to purchase goods and, services produced by firm sector this method is, known as expenditure method., And finally at point C, firm sector supplies the, goods produced to household sector this method called a product method of calculating, national income., 3. Write a note on externalities., Ans: Externalities refer to the benefits or harms a firm or an individual causes to another for, which they are not paid or penalized., There are two types of externalities viz.,, i. Positive Externalities and, ii. Negative Externalities., For example, let us imagine that there is oil refinery which refines crude petroleum and sold, in the market. The output of the industry is taken for counting GDP of an economy. This is, positive externality., While carrying out the production the oil refinery industry may also be polluting the nearby, river. This may cause harm to the people who use the water of the river. Hence their health, will be affected. Pollution also may kill fish and other organisms of the river. As a result, the, fishermen of the river may lose their livelihood. Such harmful effects that the industry is, inflicting on others, for which it will not bear any cost are called negative externalities., 4. Illustrate unplanned accumulation and decumulation of inventories with an example., Ans: The unsold goods, unused raw materials or semi-finished goods which a firm carries, from a year to the next year are known as inventories. If there is unexpected increase or, decrease in the sales there will be unplanned decumulation of inventories., This can be explained with the help of following illustration:, Suppose a firm produces T Shirts. It starts the production year with an inventory of 100T, Shirts. During the coming year it expects to sell 1000 T shirts. Hence, it produces 1000 T, shirts, expecting to keep an inventory of 100 T Shirts at the end of the year. However, during, the year, the sales of T Shirts became low unexpectedly., The firm is able to sell only 600 T Shirts. This means that the firm is left with 400 unsold T, 10

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`, , Shirts. The firm ends the production year with 400 + 100=500 T shirts. The unexpected, increase of inventories by 500 T shirts is an example for unplanned accumulation of, inventories., On the other hand, if the sales had been more than 1000 we would have unplanned, decumulation of inventories. For instance, if the sales had been 1050, then not only the, production of 1000 T shirts will be sold, the firm will have to sell 50 T shirts out of the, inventory. This 50 (T shirts) unexpected reduction in inventories is an example of, unexpected decumulation of inventories., 5. Explain the examples of planned accumulation and decumulation of inventories., Ans: The unsold goods, unused raw materials or semi-finished goods which a firm carries, from a year to the next year are known as inventories., A planned change in inventories is the change in the stock of inventories which has occurred, in a planned way., The planned accumulation and decumulation of inventories are explained with example, as follows:, Suppose a firm wants to increase the inventories from 100 T shirts to 200 T shirts during the, year. Expecting sales of 1000 T shirts during the year, the firm produces 1000 + 200 = 1200, T shirts., If the sales are actually 1000 T shirts, the firm ends up with a rise of inventories. The new, stock of inventories is 200 T shirts, which was planned by the firm. This is planned, accumulation of inventories., On the other hand, if the firm had wanted to reduce the inventories from 100 to 25, it would, be produce only 925 T shirts instead of selling expecting sell of 1000 T shirts during the, year. And remaining 75 T shirts would be used by initial inventories of the year. Then, the, firm left with planned reduced inventory of 75 T Shirts., VII.SIX Marks questions:1. Explain the macroeconomics identities., a) Ans: Gross Domestic Product (GDP): Gross Domestic Product measures the final, value of all goods and services produced in a country and include foreign national staying, in the country. Formula,, GDPMP = C + I + G + NET X, b) Net Domestic Product (NDP): NDP is the final value of all goods and services, produced in a country during a year and less depreciation cost., NDP = GNP – Depreciation, c) Gross National Product: GNP is the final value of all goods and services produced in, the country during a year and include the income from abroad., Formula: GNP = C + I + G + (X – M) + (R – P), OR, GDPFC = GDPMP – NIT. (Net income from abroad), d) Net National Product (NNP) at factor cost: If we less depreciation cost from gross, 11

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`, , national product we can get net national product. Formula,, NNP = GNP – DC, e) Personal Income (PI): It refers to the part of National income (NI) which is received by, households. It is obtained as follows:, PI = NI – Undistributed Profits – Net interest payments made by the households – Corporate, tax + Transfer payments to the households from the Government and firms., f) Personal Disposable Income (PDI): If we deduct the personal tax payments (income tax), and Non-tax payments (fines, fees) from Personal Income, we get PDI. Therefore,, PDI = PI – Personal tax payments – Non-tax payments., 2. Briefly explain the expenditure method of measuring GDP., Ans: Expenditure method is the alternative way to calculate the GDP by looking at the, demand side of the products., In this method we add the final expenditures that each firm makes. Final expenditure is that, part of expenditure which is undertaken not for intermediate purposes. It means the concept, of expenditure methods includes all the final expenditure made by individuals, firms,, institutions, and government of the country., Example:, If the baker buys Rs.50 worth of wheat from the farmers is considered as intermediate good, and the final expenditure received by the baker is 200. Then the aggregate value of output of, the economy is Rs.200 + Rs.50 = Rs.250., Let us assume that firm imakes the final expenditure on the following accounts:, Final consumption expenditures on the goods and services by households, denoted as Ci, Final investment expenditure incurred by the firms on capital goods, denoted as Ii, The expenditure that the Government makes on the final goods and services produced, by the firm, denoted as Gi, The export revenues that firm iearns by selling its goods and services abroad, denoted as Xi., Now GDP according to the expenditure method is expressed as follows:, GDP = ∑Ni-1 RVi= C + I + G + X – M, 3. Explain the numerical example to show that all the three methods of estimating GDP, give us the same answer., Ans: The three methods of calculating GDP viz.,, - Product or Value Added Method,, - Expenditure method ,, - Income Method, give us the same answer., * This can be explained with the help of numerical example as follows:, Let us imagine, there are two firms X and Y. Suppose X use no raw material and produces, cotton worth Rs.50. X sell its cotton to firm Y, who uses it to produce cloth. Y sells the cloth, produced to consumers for Rs.200., GDP in the phase of product method:, Here the value added = Sales – Intermediate goods., Thus VA X = 50 – 0, VA Y = 200 – 50 = 150., 12

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`, , Thus GDP = VAX + VA Y = 50 + 150 = 200 ., GDP distribution for firms X and Y, Particulars, Firm X Firm Y, Sales, 50, 200, Intermediate goods 50, Value added, 50, 250, GDP in the phase of Expenditure Method: Under this method, GDP is the sum of, final expenditure/s on goods and services for end use., In the above case, final expenditure is expenditure by consumers on cloth., Therefore, GDP = 200., GDP in the phase of Income Method: Under this method, GDP is obtained by adding, factor payments. Let us imagine firm X, from Rs.50 received gives Rs.30 as wages and, keeps the remaining Rs.20 as its profits. Similarly, firm Y gives Rs.100 as wages and keeps, Rs.50 as profits., It can be stated in the following table:, Particulars, Firm X, Firm Y, Wages, 30, 200, profits, 20, 50, Total, 50, 250, Now the GDP of the country in income method also Rs.250, thus all 3 methods of, calculating National income give us same answer., 4. Write down some of the limitations of using GDP as an index of welfare of an, economy., a) Distribution of Gross Domestic Product (GDP): Generally, the rise in GDP will not, represent increase in the welfare of the country. If the GDP of the country is rising, but it, may be concentrated in the hands of very few individuals or firms. For the remaining, the, income may in fact might have decreased. In such a situation the welfare of the entire, country cannot be said to have improved., b) Non-monetary exchanges: Some of the activities in a country are not evaluated in terms, of money. For instance, the domestic services of housewife, Services of N.S.S students,, charitable trust, and NGO’s works are not paid., The exchanges which take place in the informal sector without the help of money are called, barter exchanges. In barter exchanges goods are directly exchanged against each other., In India, because of many remote areas, these kinds of exchanges still take place and they are, generally not counted in the GDP. Therefore, Gross Domestic Product calculated in the, standard manner may not give us a clear indication of welfare of a country., c) Externalities: Externalities refer to the benefits or harms a firm or an individual causes to, another for which they are not paid or penalized. They do not have any market in which they, can be bought and sold., The two types of externalities are Positive Externalities and Negative Externalities., d) Production of harmful goods:, A productions of, tobacco, illicit brewing of liquor, cigarettes, etc, may be rise the, 13

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`, , income of a economy but this all injurious to health of people in a society may not, achieve social welfare., f) Manner of production: The economic welfare also depends on the manner of, production of goods and services. If goods are produced by child labour or by, exploitation of workers, then the economic welfare cannot increase., , ***, , 14

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`, , CHAPTER-3, MONEY AND BANKING, SUMMARY:, , , , , , Exchange of commodities without money is called Barter System., Barter exchange suffer from lack of double coincidence of wants., According to the decreasing order of liquidity is classified as narrow and broad money., In India money supply regulated by the RBI (Reserve Bank of India) which act as the, monetary authority of the country., , I] Choose the correct answer:1. The main function of money is,, a) Saving, b) Expenditure, , c) Medium of exchange, , 2. The bank which acts as monetary authority of India., a) RBI, b) NABARD, c) RRB, , d) Investment, , d) IDBI, , 3. The banks which are part of the money creating system of the economy are,, a) Bankers, b) Commercial Bank, c) RBI, d) none of the above, 4. The rate at which the RBI lends money to commercial banks against securities, a) Bank rate, b) Repo rate, c) Reserve Repo Rate d) none of the above, 5. The important tool by which RBI influences money supply is,, a) Open market operation, b) Closed market operation, c) Money operation, d) none of the above, II Fill in the blanks (each question carries 1 mark), 1. Economic exchanges without the use of money are referred to as Barter system, 2. RBI is the only institution which can issue currency in India., 3. Government of India is issues coins in India., 4. The principal motive for holding money is to carry out Transaction, 5. M1 and M2 are known as Narrow money, III. Match the following (each question carries 1 mark), 1. SLR, 1. Statutory liquidity ratio, 2. Circulation of Coins, 2. Government of India, 3. Money, 3. Medium of exchange, 4. M3 and M4, 4. Broad money, 5. Repurchase agreement, 5. Repo, , 15

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`, , IV. ONE Marks questions:1. What do you mean by Barter system?, Ans: The economic exchanges without the mediation of money, is called Barter system., 2. Give the meaning of money., Ans: Money is the commonly accepted as medium of exchange., According to F.A.walker ‘Money is what money does’., 3. What is time deposit?, Ans:These are the deposits in which money deposited is fixed for a period of time and, cannot be withdrawn before stipulated time. High rate of interest is paid. Interest rate, depends on the duration of money., 4. What is fiat money?, Ans: Fiat Money is the money which does not have any intrinsic value. Intrinsic value is the, value of metal or paper which is equal to face value of coin or currency note., 5. Write the meaning of high powered money?, Ans: The total liability of the monetary authority of the country, – RBI, is called high powered money., - It consists of currency (coins and notes in circulation with the public and vault cash of, commercial banks) and deposits held by the Government of India and commercial banks, with RBI., 6. Expand CRR., Ans: Cash Reserve Ratio., 7. What is bank rate?, Ans: Ans: Bank Rate is the rate at which the RBI gives loans to the commercial banks., V. TWO Marks questions:1. Mention two functions of money., Ans: The two functions of Money are, Medium of exchange, Measure of value, 2. Give the meaning of CRR and SLR., Sl.no, , 1., , Cash reserve ratio, , Sl.no, , Each commercial bank is need, to save a portion of its deposits, in RBI it’s called a Cash, Reserve ratio., , 1., , 16, , Statutory liquidity ratio, As per the Direction of RBI, each commercial bank save a, portion of its deposit in itself in, bank it’s known as Statuary, liquidity ratio.

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`, , 3. State the credit control instruments of RBI., Ans: There are two instruments of RBI to control credit viz.,, Quantitative techniques, Qualitative techniques, Bank rate, Margin requirements, Open market operations, Direct action, Cash reserve ratio, Credit rationing, Statutory liquidity ratio, Moral suasion, etc, 4. Mention the two motives of demand for money., Ans: The two motives of demand for money are as follows:, The transaction Motive, The Speculative Motive., Precautionary Motive, 5. How does bank rate influences money supply., Ans: : The RBI can influence money supply by changing the rate at which it gives loans to, the commercial banks. This rate is called as Bank Rate., i) By increasing the bank rate, loans taken by commercial banks become more expensive, which reduces the reserves held by the commercial bank and hence decreases money supply., ii) A fall in the bank rate can increase the money supply., 6. What role RBI is known as Lender of last resort., Ans: When commercial banks need more funds in order to be able to create more credit, they, may go to market for raising such funds or go to the RBI. The RBI provides them funds, through various instruments., This role of RBI, that of being ready to lend to banks at all times is said to be the lender of, last resort., VI.FOUR Marks questions:, 1. ‘Money acts as a convenient unit of account’ explain this sentence with the example., For smoothen the transactions an intermediate good is necessary which is acceptable to both, parties is called money. Let us see how the money acts as a convenient unit of account as, follows., The value of all goods and services can be expressed in monetary units. When we say that, the value of a certain wrist watch is Rs 500 we mean that the wrist watch can be exchanged, for 500 units of money, where a unit of money is rupee in this case. If the price of a pencil is, Rs 2 and that of a pen is Rs 10 we can calculate the relative price of a pen with respect to a, pencil, viz. a pen is worth 10/2=5 pencils. The same notion can be used to calculate the value, of money itself with respect to other commodities. In the above example, a rupee is worth, 1/2=0.5 pencil or 1/10=0.1 pen. Thus if prices of all commodities increase in terms of money, 17

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`, , i.e., there is a general increase in the price level, the value of money in terms of any, commodity must have decreased–in the sense that a unit of money can now purchase less of, any commodity. We call it deterioration in the purchasing power of money., 2. Briefly explain the functions of RBI., Ans: Reserve bank of India is established on 1935 April 1st. its head quarters located in, Mumbai., The functions of RBI as follows,, Issuing currency: RBI is having a monopoly power of issuing currency notes in a country., Such as Rs.5, 10, 20,50,100,200,500,2000., Government Bank: RBI is act as government bank, it means it’s borrow the loans,, accepting deposits and revenue behalf of Government., Bankers Bank:if any commercial bank in India is establish and expand the branches they, need to take permission by RBI., Credit control: RBI implements both Quantitative and qualitative techniques to control, the credit generated by commercial banks. The Quantitative measures to control credit are, Bank rate policy, Open market operations, Repo and Reverse Repo rates, Cash reserve ratio, and Statutory liquidity ratio., Controller of money market: RBI is the leader of money market. All the activities and, components of money market like commercial banks and financial institutions are controlled, and directed by RBI., 3. Write a note on legal definition of money., Ans: The total stock of money in circulation among the public at a particular point of time is, called money supply. The legal definitions of money are defined as follows:, M1 = CU + DD (CU currency notes held by the public; DD is net demand of the public, held by the banks., M2 = M1 + Savings deposits with Post office savings banks, M3 = M1 + Net time deposits of commercial Banks, M4 = M3 + Total deposits with post office savings organizations., M1 and M2 are narrow money. M3 and M4 are broad money., , VII. SIX Marks questions:1. Explain the functions of money. How does money overcome the short comings of a, barter system?, Ans: Exchanging goods for goods are known as Barter system. This system has many short, comings as follows,, Difficulties to storing of wealth, Difficulties to transfer value, Lack of common measure, Lack of double coincidence, 18

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`, , To overcome these defects money was invented as commonly accepted medium of, exchange in society., FUNCTIONS OF MONEY, , Secondary Function, , Contingent Funcyion, , Medium of Exchange, , Store of Value, , Basic of credit, , Measures of Value, , Transfer of Value, , Distribution of NI, , Future Payment, , Maximize Consumer, & Producers, Satisfaction., , Primary Function, , Explanations:, i) Primary Function:, - Medium of Exchange: Money is the commonly accepted medium of exchange. It, facilitates exchange of goods and services for money. It has solved the problems of barter, system., - Measures of value:, The money acts as a common measure of value. The values of all goods and services can be, expressed in terms of money. It helps to Facilitates the maintenance of accounts., Ex: If the cost of pencil is Rs.2 and Pen is Rs.10, the 5 pencil are equals to relative price of 1 pen., , ii) Secondary Functions:, - Store of value: People can save part of their present income and hold the same for future., Money can be stored for precautionary motives needed to overcome financial stringencies., Whatever the money can be saved in bank it get interest or profit. Money solves one of the, deficiencies of barter system i.e., difficulty to carry forward one’s wealth under the barter, system., - Standard of deferred payments: All the credit transactions are expressed in terms of, money. The payment can be delayed or postponed. So, money can be used for delayed, settlement of dues or financial commitments., Ex: Loans, Salary, etc.,, - Transfer of value: Money acts as a transfer of value from person to person and from place, to place. As a transfer of value, money helps us to buy goods, properties or anything from, any part of the country or the world., iii) Contingent Functions of Money:, - Basis of Credit: Money serves as a basis of the credit. The modern credit system exists, only because of existence of money., - Distribution of National Income: Money helps in distribution of national income. The, reward paid to factors of production in the form of rent, wages, interest and profit are nothing, but the distribution of National Income at factor prices., - Helps in consumers’ and producers’ equilibrium: All goods and services are expressed, 19

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`, , in terms of money. The consumer get satisfaction by purchasing goods with lesser prices and, a producer get satisfaction by selling a goods higher prices., 2. Write the story of gold smith LaLa on the process of deposit and loan (credit), creation by commercial banks., Ans: - Once there was a goldsmith named Lala in a village. In this village, people used gold, and other precious metals in order to buy goods and services. These metals were acting as, money., - People in the village started keeping their gold with Lala for safe keeping. In return for, keeping their gold, Lala issued paper receipts to people of the village and charged a small fee, from them., - Slowly, over time, the paper receipts issued by Lala began to circulate as money. This, means that instead of giving gold for purchasing wheat, some would pay for wheat or shoes, or any other good by giving the paper receipts issued by Lala. Thus, the paper receipts, started acting as money since everyone in the village accepted these as a medium of, exchange., Example:, Let us imagine that Lala had 100 kgs of gold, deposited by different people and he had, issued receipts corresponding to 100 kgs of gold. At this time Ramu comes to Lala and asks, for a loan of 25 kgs of gold., Now Lala can decide that everyone with gold deposits will not come to withdraw their, deposits at the same time and so he may as well give the loan to Mr.Ramu and charge him, for it., If Lala gives the loan of 25 kgs of gold, Ramu could also pay Mr.Ali with these 25 kgs of, gold and Ali could keep the 25 kgs of gold with Lala in return for a paper receipt. In effect,, the paper receipts, acting as money, would have increased to 125 kgs now. It seems that Lala, has created money out of thin air. The modern banking system works precisely the way Lala, behaves in this example., 3. Explain the open market operation., Ans: The open market operations as one of the tools of RBI to control money supply, refers, to buying and selling of bonds issued by the Government in the open market. This purchase, and sale is entrusted to the RBI on behalf of the Government., - When RBI buys a Government bond in the open market, it pays for it by giving a cheque., This cheque increases the total amount of reserves in the economy and thus increases the, money supply., - Similarly, selling of a bond by RBI to private individuals or institutions leads to reduction, in quantity of reserves and money supply., There are two types of open market operations. They are as follows:, a) Outright: Outright open market operations are permanent in nature. When the RBI buys, the securities, it is without any promise to sell them later. Similarly, when the RBI sells these, 20

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`, , securities, it is without any promise to buy them later. As a result, the injection/absorption of, the money is of permanent nature., b) Repo: This is another type of operation in which the RBI buys the security with, agreement of purchase on particular date and price. This is called repo. The interest rate at, which the money is lent in this way is called repo rate., The RBI conducts repo and reverse repo operations at various maturities like overnight, 7, days, 14 days etc., 4. Requirement of reserve acts as limit to money (credit) creation. Explain., Ans: i) Cash reserve ratio: As per the Direction of RBI Each commercial bank is need to, save a portion of its deposits in RBI it’s called a Cash Reserve ratio., ii) Statutory liquidity ratio: As per the Direction of RBI each commercial bank save a, portion of its deposit in itself in bank it’s known as Statuary liquidity ratio., * The both CRR and SLR act as limit to money (credit) creation as follows:, For example, let us assume there is only exist one bank in economy. And its starts with a, deposit of Rs.100 made by Mr.X. The reserve ratio is 20%. Thus Bank has Rs.80 (100 –, 20=80.i.e.,20% of 100 is deducted) to lend and the bank lends out of Rs.80 to Mr.Y., This is shown in the bank’s deposits in the next round as liabilities, making a total of Rs.180, as deposits. Now bank is required to keep 20% of 180 i.e., 36 as cash reserves. The bank had, started with Rs.100 as cash. Since it is required to keep only Rs.36 as reserves it lends Rs.64, (100-36=64). The bank lends out Rs.64 to Mr.Z. This in turn shows up in the bank, as, deposits., The process keeps repeating itself till all the required reserves become Rs.100. The required, reserves will be Rs.100 only when the total deposits become Rs.500. This is because, for, deposits of Rs.500, cash reserves would have to be Rs.100 (20% of 500 = 100), The process is illustrated in the following table:, Round, , Deposit in Bank Required Reserve, , Loan made by Bank, , 1, 100, 20, 80, 2, 180, 36, 64, Last, 500, 100, 400, In the above table, the first column lists each round. The second column depicts the total, deposits with the bank at the beginning of each round. 20% of these deposits need to be, deposited with the RBI as required reserves ( 3rd column). What the bank lends in each round, gets added to the deposits with the bank in the 2nd round. 4th column indicates the loans made, by the banks., 21

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`, , VIII] Project oriented questions:, 1. Write a note on demonetization., Ans:-Demonetisation was a new step taken by the Government of India on 8th November,, 2016. As per the regulations Old currency notes of Rs.500 and Rs.1000 were no longer legal, tender. New currency notes in denomination of Rs.500 and Rs.2000 were introduced., - The public were advised to deposit old currency notes in their bank account till 31st of, March 2017 without any declaration and up to31st March 2017 with the RBI with, declaration., - In order to avoid a complete breakdown and scarcity of cash, Government allowed, exchange of Rs.4000 old currency notes with new currency restricting to a person per day., Further till 12th December 2016, old currency notes were acceptable as legal tender at petrol, pumps, Government hospitals and for payment of Government dues like taxes, power bills, etc., - This initiative had both appreciation and criticism. There were long queues outside banks, and ATM centers. There was acute shortage of currency notes and had adverse effect on, economic activities. But now, normalcy has returned., * The demonetization also has positive effects., a) It improved tax compliance as a large number of people were bought in the tax ambit., b) The savings of individual were channelized into the formal financial system., c) As a result, banks have more resources at their disposal which can be used to provide, more loans at low rate of interest., d) Demonetization helps in curbing black money, reducing tax evasion and corruption will, decrease., e) Demonetization also helps to shifting transaction out of the cash economy into the formal, payment system. Now a days, households and firms have started to shift from cash payment, to electronic payments., ***, , 22

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`, , CHAPTER-4, DETERMINATION OF INCOME AND EMPLOYMENT, SUMMARY:,  When at a particular price level, aggregate demand for final goods equal Aggregate, supply of final goods, the final goods or product market reaches Its equilibrium.,  Aggregate demand for final goods consists of ex ante consumption, ex ante, Investment, ex ante investment, government spending etc.,  The rate of increase in ex ante consumption due to a unit increment in income, Is called marginal propensity to consume.,  An increase or decrease in autonomous spending causes aggregate output of final goods, to increase or decrease by a larger amount through the multiplier process., , I] Choose the correct answer:1. Consumption which is independent of income is called,, a) Induced consumption, b) Autonomous consumption, c) Wasteful consumption, d) past consumption, 2. Value of MCP Lies between, a) 1 And 2, b) 0 and 1, , c) 2and 4, , d) 0 and 0.5, , 3. The pint where ex-ante aggregate demand is equal to ax-ante aggregate supply will be, a) Equilibrium, b) Disequilibrium, b) Excess Demand, c) excess Supply, 4. Easy Availability of credit encourages, a) Saving, b) Investment, c) Rate of Interest, , d) None of the above, , 5. in the situation of excess demand, a) Demand is less than the level of output, b) Demand is more than the level of output, c) Supply is less than the level of out put, d) Supply is more than the level of output, II Fill in the blanks (each question carries 1 mark), 1. CY shows the dependence of consumption on Income, 2. Savings is that part of income that is Not consumed, 3. Avarage propensity to consume (APC) is the consumption per unit of Income, 4. Investment is defined as addition to the stock of physical capital., , 23

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`, , 5. Size of the multiplier depends on the value of Marginal propensity to consume, 6. I is a positive contact which represent the Autonomous Investment in the economy., III. Match the following (each question carries 1 mark), 1. Savings, 1. Y – C, 2. Raw material, 2. Intermediate good, 3. Consumption per unit of income, 3. Average propensity consumption, 4. Aggregate demand for final goods, 4. C + I + cY, 5. Excess demand, 5. Leads to rise in the prices in the long run, , IV. ONE Marks questions:1. Write the meaning of autonomous consumption., Ans: The consumption which is independent of income is called as autonomous, consumption., 2. Give the meaning of marginal propensity to save (MPS)., Ans: It is the change in savings per unit change in income. It is denoted by S + C = I., 3. Define average propensity to save (APS)., Ans: It is the consumption per unit of income. It is obtained by dividing consumption by, income i.e., APS = C/Y ., where c is consumption and y is income., 4. Write the meaning of full employment level of income., Ans: Full employment level of income is that level of income where all the factors of, production are fully employed in the production process, 5. Mention two fiscal variables which influence aggregate demand., Ans: The two fiscal variables which influence aggregate demand are as follows:, a) Tax., b) Government Expenditure., 6. Write the formula for MPC., Ans: MPC is change in consumption by changing in each units of level of income., MPC = ∆C / ∆Y, V. TWO Marks questions:1. Write the meaning of excess demand and deficit demand., Sl.no Excess Demand, Sl.no Deficit Demand, 1., If the equilibrium level of output is 1., If the equilibrium level of output is, more than the full employment, less than the full employment of, level, it is due to the fact that the, output, it is due to fact that demand, demand is more than the level of, is not enough to employ all factors, output produced at full employment, of production. This situation is, level. This situation is called excess, called deficient demand., demand., 2. Give the meaning of investment multiplier. Write its formula., Ans: Investment multiplier is the ratio of the total increment in equilibrium value of final, 24

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`, , goods output to the initial increment in autonomous expenditure. Its formula is, Investment, Multiplier = ∆Y / ∆A, 3. Give the meaning of paradox of thrifts., Ans: If all the people of the economy increase the proportion of income they save, total value, of savings in the economy will not increase – it will either decrease or remain unchanged., This result is known as the Paradox of Thrift., , VI.FOUR Marks questions:1. Give the meaning of aggregate demand function. How can it be obtained, graphically?, Ans: The aggregate demand function shows the total demand at each level of income., Graphically it means the aggregate demand function can be obtained by vertically adding the, consumption and investment function., Here, OM = C, OJ = I, OL = C + I, , The aggregate demand is obtained by vertically adding the, consumption and, investment functions. The aggregate demand function is, parallel to the, consumption i.e., they have the same slope of ‘c’, , 2. Briefly explain consumption function., Ans: The consumers demand can be expressed by the equation C = Ĉ + cY, where Ĉ is, autonomous expenditure and c is the marginal propensity to consume., The consumption function can be graphically expressed as follows:, , In the above diagram Ĉ is the intercept of the consumption., ‘c’ is slope of, consumption function equals α., , 3. Explain the investment function with the help of graphs., The functional relationship between investment and autonomous investment is called, investment function. Investment function can be shown as I= , here is a positive constant, which represents the autonomous investment in the economy in a given year., 25

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`, , The investment function shown in the above graph as a horizontal, line at a height equal to, above the horizontal axis. In this diagram, is autonomous which, means, it is the same no matter, whatever is the level of income., , VII. SIX Marks questions:1. Explain the effects on autonomous change in aggregate demand on income and, output., Ans: The equilibrium level of income depends on aggregate demand. If aggregate demand, changes, the equilibrium level of income also changes. This happens in any one or, combination of the following situations., a) Change in consumption: The change in consumption can happen due to Change in, autonomous consumption (Ĉ) and marginal propensity to consume (c), b) Change in investment: It is assumed that investment is autonomous. That means it does, not depend on income. There are other variables which can affect investment, they are, - Availability of credit: easy availability of credit encourages investment., - Interest rate: Rate of interest is the cost of investible funds and at higher interest rates,, firms tend to lower investment., * The effect of an autonomous change in Aggregate demand on Income and, output can be explained with the help of following diagram, In the above diagram, Income is measured in X, axis and Aggregate demand is measured in Y, axis. When the people income is OY1 the, aggregate demand is AD1 its equilibrium point, can be shown in the point of ‘Y1E1’., Similarly when the income of people will, increases to OY2 the aggregate demand of, people also increases to AD2 and equilibrium, point is shift to point of ‘Y2E2’., 2. Explain the supply side of macro economics equilibrium., Ans: Under macroeconomics, we consider the price level as fixed. Here, the aggregate, supply or the GDP is assumed to smoothly move up or down since they are unused resources, of all types available., Whatever is the level of GDP, that much will be supplied and price level has not role to play., This kind of supply situation is shown by a 450 line., 26

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`, , In the above diagram Income is measured in, horizontal axis and Aggregate supply, is measured in vertical axis. If GDP is Rs.1000 at, point A, the goods worth of, Rs.1000 is supplied., , Equilibrium: Equilibrium is shown graphically by putting ex ante aggregate demand and, supply together in the following diagram., , The point where ex ante aggregate demand (AD) is, equal to ax ante aggregate supply (AS) will be, equilibrium. Thus equilibrium point is E and, equilibrium level of income is OY1., , 3. Explain the multiplier mechanism., Ans: The production of final goods employs factors like labour, capital, land and, entrepreneurship. the total value of the final goods output is distributed among different, factors of production payments, such as,, - Land : Rent, - Labour : Wages, - Capital : Interest, - Organization : Profit, The remaining part is profit to entrepreneur. Thus the sum of aggregate factor payments i.e.,, National Income, is equal to the aggregate value of the output of final goods. Its also known, as GDP., Example:, If the value of the extra output 10 is distributed among various factors of production, the, income of the economy also goes by 10., When income increases by 10, consumption expenditures goes up by 10., Since people spend 0.8 (marginal propensity to consume) fraction of their additional, income on consumption., Hence, in the next round, aggregate demand in the economy goes up by (0. 8)210 and, there again emerges an excess demand equal to 10 and so on. This can be represented in the, following table., 27

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`, , Rounds, , Consumption, (0.8) 10, (0. 8)2 10, (0. 8)3 10, -, , Aggregate, Demand, 10, (0.8) 10, (0. 8)2 10, (0. 8)3 10, -, , Output/Income, 10, (0.8) 10, (0. 8)2 10, (0. 8)3 10, -, , Round 1, Round 2, Round 3, Round 4, Etc.,, The ratio of the total increment in equilibrium value of final goods output to the initial, increment in autonomous expenditure is called investment multiplier of the economy., The investment multiplier can be expressed as follows:, Δ /ΔA =1/1 - C =1/, 4. Discuss the paradox thrift., Ans: The paradox of Thrift is a situation where, if all the people of the economy increase, their savings, the total value of savings in the economy will not increase but it either, decreases or remains constant. That means, the people become more thrifty and they end up, saving less or same as before., Suppose, at the initial equilibrium of Y=250, there is an autonomous shift in people’s, expenditure pattern- they suddenly become more thrifty. This may happen due to a new, information regarding an imminent war or some other disaster, which makes people more, conservative about their expenditures., Hence the MPS (marginal propensity to save) of the economy increases or the MPC, (marginal propensity to consume) from 0.9 to 0.6. At the initial income of Ad1=Y1=250, this, sudden decline in MPC will imply a decrease in aggregate consumption spending and, aggregate demand by an amount equal to (0.9-0.6) x 250 = 75. This can be regarded as an, autonomous reduction in consumption expenditure to the extent that, the change in marginal propensity consume is occurring from some exogenous cause and is, not a consequence of changes in the variables of the model. As Aggregate demand decreases, by 75, it falls short of the output Y1=250 and there will be excess supply equal to 75 in the, economy. Stocks will pile up in warehouses and producers decide to cut the value of, production by 75 in the next round to restore equilibrium in the market which further leads to, reduction in factor payments in the next round and hence reduction in income by 75. As, income decreases people reduce consumption proportionately and aggregate demand goes, down again by (0.6)2 75. The process goes on as follows:, 75 + (0.6)75 + (0.6)275 + ………..∞. The total reduction in output turns out to be:, 75/1-0.6, The paradox of thrift can be explained in the following diagram., 28

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`, , As per the above diagram, when A changes the, line shifts upwards or downwards, in parallel. When c changes, however, the line, swings up or down. An increase in, marginal propensity to save or a decline in, marginal propensity to consume, reduces the slope of the AD (Aggregate, Demand) line and it swings downwards., The above diagram depicts the paradox of thrift, – downwards swing of AD line., , ***, , 29