QUESTION BANK FOR ECONOMICS

Ch-1 Introduction to Economics

Q-1 what is economics? Define its scope and nature?

Ans.

Nature and scope from ch-1 pg-1.5

Q-2 State differences between Microeconomics and Macroeconomics?

Ans. pg-1.9

Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; here is a brief summary of what each covers:Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry. (Find out more about microeconomics in Understanding Microeconomics.) Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. Q-3 what is demand and state its determinants?

Ans.

Write meaning of demand

pg-1.10 ch-1with schedule & dig

determinants:- income, prices of related goods……

Q-4 what is supply and state its determinants?

Ans.

Write meaning of supply

pg-1.11 ch-1with schedule & dig

determinants:- input price, technology……

Q-5 State the law of demand?

Ans.

A microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.

The chart below depicts the law of demand using a demand curve, which is always downward sloping. Each point on the curve (A, B, C) reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. 

The law of demand is so intuitive that you may not even be aware of all the examples around you.-When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen.-When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up.The law of demand summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if

the price of pizza increases. John might demand 10 pizzas if they cost $10 each, but only 7 pizzas if the price rises to $12, and only 4 pizzas if the price rises to $20.The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services.Q-6 State the law of supply?

Ans.

A microeconomic law that states, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale.

The chart below depicts the law of supply using a supply curve, which is always upward sloping. A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on. 

The law of supply is so intuitive that you may not even be aware of all the examples around you.-When college students learn computer engineering jobs pay more than English professor jobs,

the supply of students with majors in computer engineering will increase.-When consumers start paying more for cupcakes than for donuts, bakeries will increase their

output of cupcakes and reduce their output of donuts in order to increase their profits.-When your employer pays time and a half for overtime, the number of hours you are willing to

supply for work increases.The law of supply summarizes the effect price changes have on producer behavior. For example,

a business will make more video game systems if the price of those systems increases. The opposite is true if the price of video game systems decreases. The company might supply

1,000,000 systems if the price is $200 each, but if the price increases to $300, they might supply 1,500,000 systems.

The law of supply is one of the most fundamental concepts in economics. It works with the law of demand to explain how market economies allocate resources and determine the prices of

goods and services.

Q-7 what is equilibrium? Explain equilibrium by demand and supply?

Ans.

The state in which market supply and demand balance each other and, as a result, prices become stable. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.

ALSO INCLUDE:

demand meaning,schedule and dig

supply meaning,schedule and dig

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.Q-8 what is elasticity? Explain price elasticity? Or income elasticity? Or cross elasticity?

Ans.

Write meaning of elasticity

pg-1.19 ch-1with formula and dig(=0,>1,<1,=1)

Ch-2 theory of production

Q-9 what is production function?

Ans.

Pg –2.4 in material of ch-2 Meaning of production.

Explain form,utility, place, time and services.

Production function Q=f(a,b,c,d..)

Q-10 what do you mean by factor of production and state its characteristics?

Ans.

Land, Labour, capital, entrepreneur.

Characteristics

Q-11 what do you understand by Law of variable proportion?

Ans.

Pg- 2.6 ch-2

Meaning

Function Q=f(l,k)

Schedule (table of labour, total production, avg product, marginal product)

Explain the Diagram in first, second and third stage.

Q-12 what do you mean by Law of return to scale?

Ans.

Pg- 2.8 ch-2

Meaning

Function Q=f(x1,x2…..)

Explain the Diagram in increasing return (cost< output), diminishing return(cost>output) and constant return(cost= output).

Q-13 what do you mean by cost? Explain short run cost and long run cost with diagram?

Ans.

Pg- 2.11 ch-2

short and long run cost

Q-14 explain fixed cost and variable cost & total cost with diagram?

Ans.

Pg- 2.14 ch-2

Draw dig of fixed and variable cost

Also draw combine dig of fixed and variable for total cost (TC=VC+FC)

Q-15 what is marginal cost explain with example?

Ans.

Pg-2.16 ch-2

Meaning

Diagram, explain dig also

Q-16 what is opportunity cost?

Ans.

Pg-2.11 ch-2

Meaning and example

Q-17 explain breakeven point, when one can say that its breakeven point (draw diagram)?

Ans.

Pg- 2.17

Meaning

Diagram

Formula for BEP in units, BEP in rupees, BEP when profit is given and sales units are to be found

The break-even point determines the amount of sales needed to achieve a net income of zero. It shows the point when a company’s revenue equals total fixed costs plus variable costs, and its fixed costs equal the contribution margin. To calculate the break-even point in sales dollars, you must divide total fixed costs by the contribution margin ratio. For example, the break-even point is $1,000,000 for a company with $500,000 in fixed costs and a contribution ratio of 50 percent. This means that if the company earns $1,000,000 in revenue, it can cover its expenses but does not earn a profit.

Ch-3 markets

Q-18 state the meaning of markets?

Ans. A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, but price is often determined by the forces of supply and demand. 

Q-19 which are the different types of market and state its characteristics?

Ans. Types of markets:

1. Perfect competition

2. Monopoly

3. Monopolistic

4. Oligopoly

Explain all markets and its characteristics as provided in word file

Q-20 what do you mean by national income?

Ans.

• The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.

• NNI = C + I + G + (NX) + net foreign factor income - indirect taxes – depreciation+ subsidies

• where:

• C = Consumption

• I = Investments

• G = Government spending

• NX = net exports (exports minus imports)

• NX also can be written as (X-M) which determines current account

Q-21 explain stock and flow concept?

Ans.

• A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

Q-22 explain NI at current price and NI at constant price?

Ans.

• National Income at Current Price:

• It is the money value of final goods and services produced by normal residents of a country in a year, measured at the prices of the current year. For example, measurement of India’s National Income of 2013-2014 at the prices of 2013-2014.

• i.e It is also known as ‘Nominal National Income’.

• ii. It does not show the true picture of economic growth of a country as any increase in nominal national income may be due to rise in price level without any change in physical output.

• So, in order to eliminate the effect of price changes, national income is also estimated at a constant price.

• National Income at Constant Price:

• It is the money value of final goods and services produced by normal residents of a country in a year, measured at base year price. Base Year is a normal year which is free from price fluctuations. Presently 2004-2005 is taken as the base year in India. If we measure India’s National Income of 2013-2014 at the prices of 2004-2005, then it is termed as ‘National Income at constant price’.

• i. It is also known as ‘Real National Income’.

• ii. It shows the true picture of economic growth of a country as any increase in real national income is due to increase in output only.

• The National Statistical Commission (NSC), has suggested to revise the base year to 2011-12 from the current base year of 2004-05 for the calculation of new Gross Domestic Product (GDP) of the country.

Q-23 what is GDP?

Ans.

• GDP – Gross Domestic Product

– The value of output produced within a country during a time period

– GDP = C + I + G + (X - M)

Q-24 what is GNP?

Ans.

• GNP – Gross National Product

– The value of output produced within a country plus net property income from abroad

– Gross National Product =Consumption + Government Expenditures + Investments + Exports + Foreign Production by Indian Companies – Domestic Production by Foreign Companies

Q-25 what is NNP?

Ans.

• The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation).

NNP= GNP-Depreciation

Q-26 what is NDP?

Ans.

NDP at factor cost is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year.

NDP= NNP at market prices- indirect taxes+ subsidies

Q-27 explain personal income?

Ans.

• Total compensation received by an individual. Personal income includes compensation from a number of sources - salaries, wages and bonuses received from employment or self-employment; dividends and distributions received from investments; rental receipts from real estate investments; profit-sharing from a business and so on. In most jurisdictions, personal income above a certain exemption threshold is subject to taxation. Personal income is generally computed on a pre-tax basis. 

• PI= NI-corporate income taxes- undistributed corporate profits-social security contribution+ transfer payments

Q-28 explain disposal income?

Ans.

The amount of money that households have available for spending and saving after income taxes have been accounted for. Disposable personal income is often monitored as one of the many key economic indicators used to gauge the overall state of the economy.

Calculated as: DPI= personal income- personal income tax payments.

Ch-4 basic economic problem

Q-29 state the meaning of poverty?

Ans.

Poverty is a characteristic of the economic situation of the individual or social group in which they cannot satisfy a certain range of the minimum requirements needed for life saving ability.

Q-30 explain absolute and relative poverty?

Ans.

• Absolute poverty or destitution refers to the deprivation of basic human needs, which commonly includes food, water, sanitation, clothing, shelter, health care and education. Relative poverty is defined contextually as economic inequality in the location or society in which people live.

For more see mahajan book

Q-31 state the causes and measures to reduces poverty?

Ans.

Causes:

1. High population growth

2. Unemployment

3. Inflation

4. Underutilization of natural resources

5. Backwardness of agriculture

6. Social causes

7. Political causes

Measures:

1. Employment opportunity

2. Establishment of small scale industry

3. Education

4. Reduces inflation

5. Check population growth

6. Proper utilization of resources

7. Uplift agriculture

Q-32 state the meaning of unemployment?

Ans.

• Unemployment is defined as a state of affairs when in a country there are a large number of able-bodied persons of working age who are willing to work but cannot find work at the current wage level.

Q-33 state the types of unemployment and causes of unemployment?

Ans.

Types:

1. Voluntary unemployment

2. Frictional unemployment

3. Casual unemployment

4. Seasonal unemployment

5. Structural unemployment

6. Technological unemployment

7. Cyclical unemployment

8. Chronic unemployment

9. Disguised unemployment

Causes:

1. Growth without adequate employment opportunity

2. Growing population

3. Inappropriate technology

4. Inappropriate education system

This are sub points for description see mahajan book

Q-34 state the remedies to control unemployment?

Ans.

1. The very first solution for the unemployment is to control the rising population of our country. Government should motivate people to have small families. Indian government has started initiatives to control the population but still the population is rising.

2. The quality of Indian education should be improved. The current education system is not upto the level. Government should keep a strict watch on the education system and try to implement new ways to generate skilled labour force. Government should select a committee to look after the schools and universities. The syllabus taught is of no use to the industries so the education should be as per the current requirements of the industries. Before completing the education a practical knowledge should be given.

3. Also today’s youth should join the institute or select the course where proper training is given and the course is as per the current industries requirements. Take the course as per your interest and which will bright your future.

4. Government should encourage and develop the agriculture based industries in rural areas so that the rural candidates don’t migrate to the urban areas. More employment should be generated in rural areas for the seasonal unemployment people.

5. Rapid Industrialization should be created.

6. Development of the rural areas will stop the migration of the rural people to the urban cities and this will not put more pressure on the urban city jobs.

7. Government should allow more foreign companies to open their unit in India, so that more employment opportunities will be available.

Q-35 what do you mean by inflation?

Ans.

• The general upward movement in the average level of prices of the goods and services in an economy

Q-36 state the types of inflation and causes of inflation?

Ans.

Types of Inflation Rate of price increase

Creeping 2 – 5 per cent

Walking 5 – 10 per cent

Running 10 - 20 per cent

Galloping 20 – 50 per cent

Hyper Above 50 per cent

For description see mahajan book

Q-37 state the measures to control inflation?

Ans.

• Monetary measures

1. Credit control

2. Demonetization of currency

3. Issue of new currency

• Fiscal measures

1. Reduction in unnecessary expenditure

2. Increases in taxes

3. Increases savings

4. Surplus budgets

5. Public debts

Ch-5 money

Q-38 state the meaning and functions of money?

Ans.

• Money is the set of assets in an economy that people regularly use to buy goods and services from other people.

Function:

• Money has three functions in the economy:

– Medium of exchange

– Unit of account

– Store of value

For detail refer mahajan book

Q-39 which are the types of money?

Ans.

1) M1= Currency with the public i.e coins and currency notes + Demand deposits of the public known as narrow money + other deposits with RBI.

2) M2= M1 + Post office saving deposits.

3) M3= M2 + Time deposits of the public with banks called broad money.

4) M4= M3 + Total post office deposits. (excluding National Savings Certificates)

Q-40 what do you understand by monetary policy?

Ans.

• The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy.

These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy.

Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it.

Q-41 state the objectives and tools of monetary policy?

Ans.

Objectives:

• The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy.

• Stability for the national currency (after looking at prevailing economic conditions),

• Growth in employment and income are also looked into.

• The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications.

Tools:

1. Bank Rate of Interest

2. Cash Reserve Ratio

3. Statutory Liquidity Ratio

4. Open market Operations

5. Margin Requirements

6. Deficit Financing

7. Issue of New Currency

8. Credit Control

Q-42 what do you understand by fiscal policy?

Ans.

• It refers to the Revenue and Expenditure policy of the Govt. which is generally used to cure recession and maintain economic stability in the country.

Q-43 state the objectives and tools of fiscal policy?

Ans.

Objectives:

• Development by effective allocation of resources.

• Reduction of income and wealth inequality.

• Price stability and control of inflation.

• Employment generation.

• Balanced regional development.

• Reducing deficit in balance of payment.

• Increase national income.

• Development of infrastructure.

Tools:

1. Reduction of Govt. Expenditure

2. Increase in Taxation

3. Imposition of new Taxes

4. Wage Control

5. Rationing

6. Public Debt

7. Increase in savings

8. Maintaining Surplus Budget

Q-44 what do you understand by the word “Banking”?

Ans.

“ Banking is an Institution of keeping, lending and exchanging of money”

Q-45 state the types and functions of bank?

Ans.

Types:

1. Commercial Banks

2. Exchange Banks

3. Industrial Banks

4. Agricultural Banks

5. Cooperative Banks

6. Savings Banks

7. Central Banks

Function:

1. Accepting Deposits

2. Advancing Loans

• Cash credit

• Call loans

• Overdraft

• Discounting Bills of Exchange

3. Credit creation

4. Financing foreign trade

5. Agency services

6. Miscellaneous services

Q-46 which is the central bank of India? State its function and concept?

Ans.

• The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

• Preamble

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Q-47 What is CRR, BANK RATE, REPO RATE, REVERSE REPO RATE, SLR?

Ans.

CRR:

• Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank.

BANK RATE:

'Bank Rate'

• The interest rate at which a nation's central bank lends money to domestic banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

• The bank rate can also refer to the interest rate which banks charge customers on loans.

REPO RATE:

The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. 

REVERSE REPO RATE:

• Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest.

• An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

SLR:

• Statutory liquidity ratio (SLR) refers to the amount that the commercial banks require to maintain in the form of gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies.