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Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 6 Open Economy Macroeconomics Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Open Economy Macroeconomics NCERT Solutions for Class 12 Economics Chapter 6

Open Economy MacroeconomicsQuestions and Answers Class 12 Economics Chapter 6

Question 1.
Differentiate between balance of trade and current account balance. (C.B.S.E 2013,2017)
Answer:
Following are the points of difference between balance of trade and current account balance:

Question 2.
What are official reserve transactions? Explain their importance in the Balance of Payments.
Answer:
The official reserve transactions are the transactions relating to the sale and purchase of the foreign currency in the foreign exchange market. A country, running down its reserves of the foreign exchange, could engage in the official reserve transactions by selling the foreign currency in the foreign exchange market. Importance of Official Reserve Transactions in the Balance of Payments

A country can run a Balance of Payments surplus or deficit by increasing or decreasing its official reserves. Under the fixed exchange rate system, countries maintain official reserves that allow them to have Balance of Payments disequilibrium, without adjusting the exchange rate. For instance, if a country runs a deficit on the overall balance, the central bank of the country can supply foreign exchanges out of its reserve holdings.

However, if the deficit persists, the central bank will eventually run out of its reserves, and the country may be forced to devalue its currency. Under the flexible exchange rate system, on the other hand, central banks do not intervene in the foreign exchange markets. Central banks, therefore, do not need to maintain official reserves. Thus, the official reserve transactions are more relevant under a regime of the pegged exchange rates than when exchange rates are floating.

Question 3.
Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.
Answer:
The nominal exchange rate is the price of one unit of the foreign currency in terms of the domestic currency. The real exchange rate is the relative price of the foreign goods in terms of the domestic goods. It is equal to the nominal exchange rate times the foreign price level divided by the domestic price level.
Thus, the real exchange rate  \(\frac{e P_{f}}{P}\)
where,  P = Price level in the domestic country
Pf = Price level in the other (foreign) country
e = nominal exchange rate

It measures the international competitiveness of a country in the international trade. When the real exchange rate is equal to one, two countries are said to be in the purchasing power parity. While the nominal exchange rate is based on the current prices, the real exchange rate is based on the constant prices.

If we were to decide whether to buy domestic goods or foreign goods, the real exchange rate would be more relevant. It is because real exchange rate measures the prices abroad relative to those at home. If the real exchange rate is more than one, it implies that the goods abroad are more expensive than the domestic goods and vice-versa.

Question 4.
Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1. 2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in term of Indian goods). (Hint First find out the nominal exchange rate as a price of yen in rupees).
Answer.
Foreign price of domestic rupee = 1.25
Price level of foreign country (P_f) = 3
Price level of domestic country (P) =1.2

Thus, the real exchange rate between India and Japan is 2. Since real exchange rate is greater than I, it indicates that Japanese goods are expensive than Indian goods.

Question 5.
Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.
Answer:
Under the gold standard, all the currencies were convertible into gold. Thus, the fixed exchange rate system was in operation. All the countries on the gold standard had stable exchange rate. Each participant country committed itself to convert freely its currency into gold at a fixed price. This, therefore, made each currency convertible into all others at a fixed price.

Under the gold standard, BoP disequilibrium was corrected through a counter-flow of gold. For instance, suppose that Indian imports from Japan are greater than its export to Japan. Since gold is the only means of international payments, it will flow from India to Japan. Consequently, while India experiences a decrease in money supply, Japan experiences an increase.

This implies that the price level will tend to fall in India and rise in Japan. Further, the Indian products become more competitive compared to Japanese products in the export market. This change will improve Indian BoP and deteriorate Japanese BoP, eventually, eliminating the initial BoP disequilibrium.

Question 6.
How is the exchange rate determined under a flexible exchange rate regime?
Answer:
In a system of flexible exchange rates, the exchange rate is determined by the free play of the market forces of demand and supply. Flexible exchange rate system is also known as the floating exchange rate. In a completely flexible system, the central banks do nothing to directly affect the level of the exchange rate. In other words, they do not intervene in the foreign exchange market and hence, there are no official reserve transactions. The equilibrium in the foreign exchange market may be shown with the help of a diagram.

In the given figure, DD and SS are foreign exchange demand and supply curves respectively. DD and SS intersect at point E. Corresponding to this point, the equilibrium exchange rate is R* and the equilibrium quantity of foreign exchange is Q*.

Question 7.
Differentiate between devaluation and depreciation.
Answer:
Following are the points of difference between devaluation and depreciation:

Question 8.
Would the Central Bank need to intervene in a managed floating system? Explain why.
Answer:
Managed floating exchange rate system is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). It is also known as dirty floating. Under this system, the central banks intervene to buy and sell the foreign currencies in an attempt to control the exchange rate movements whenever they feel that such actions are appropriate. Therefore, official reserve transactions are not equal to zero.

Question 9.
Are the concept of demand for domestic goods and domestic demand for goods the same?
Answer:
No, the concepts of demand for domestic goods and domestic demand for goods are not the same. The domestic demand for goods consists of the following:
Y = C + I + G
Where; C = Consumption
I = Domestic Investment
G = Government Expenditure
The demand for the domestic goods, on the other hand, refers to the Aggregate Demand in an open economy, In an open economy, exports (X) constitute an additional source of demand for the domestic goods and services that come from abroad and therefore, must be added to the Aggregate Demand. The imports (M) supplement supplies in domestic markets and constitute that part of domestic demand that falls on the foreign goods and services. Therefore, the national income identity for an open economy is:
Y + M = C + l + G + X
Rearranging, we get;
Y = C + l + G + X- M
= C + I + G – NX
where; NX is net exports (Exports – Imports).

Question 10.
What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?
Answer:
M = 60 + 0.06Y
The import function is given as:
M = \(\bar{M}\)-mY
Thus, m = 0.06
\(\bar{M}\) > 0 is the autonomous component, and 0 < m < I.
Here, m is the marginal propensity to import. It is the fraction of an extra rupee of income spent on imports, a concept analogous to the Marginal Propensity to Consume. There is a positive relationship between marginal propensity to import and Aggregate Demand function. Higher the marginal propensity to import, greater is the Aggregate Demand.

Question 11.
Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?
Answer:
The open economy multiplier is smaller than in the closed economy because a part of the domestic demand falls on the foreign goods. An increase in the autonomous demand, therefore, leads to a smaller increase in the output in an open economy. It also results in a deterioration of the trade balance. Since, the marginal propensity to import is always greater than zero; we get a smaller multiplier in an open economy. We know that:

Let us take an example. If c = 0.8 and m = 0.3, we would have the open and closed economy multipliers as

Question 12.
Calculate the open economy multiplier with proportional taxes,T = tY, instead of lump-sum taxes as assumed in the text.
Answer:
Open Economy Multiplier (in case of lump-sum taxes) = \(\frac{1}{1-c+m}\)
In the case of proportional tax, the equilibrium income would be;
Y = C+c( I -t)Y+ I +G+X-M-mY
Y – C(I – t)Y + mY = C+1 + G + X – M
\(Y=\frac{A}{1-c(1-t)+m}\)
where; Autonomous Expenditure (A) = C + I + G + X
Therefore, the open economy multiplier (in case of proportional taxes) =\frac{1}{1-c(1-t)+m}

Question 13.
Suppose C = 40 + 0.8Y_D,T = 50,1 = 60, G = 40, X = 90, M = 50 + 0.05Y
(i) Find equilibrium income.
(ii) Find the net export balance at equilibrium income.
(iii) What happens to equilibrium income and the net export balance when the government purchase increases from 40 to 50?
Answer:
(i) Equilibrium income is determined as:
= \(\bar{C}\)+ cY_D +1 + G + (X – M)
= \(\bar{C}\) + c(Y – T) +1 + G + (X – M)
Given: C = 40 + 0.8Y_D, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y.
Substituting appropriate values in (I), we get:
Y = 40 + 0.8 (Y – 50) + 60 + 40 + 90 – (50 + 0.05Y)
Y = 40 + 0.8Y – 40 + 60 + 40 + 90 – 50 – 0.05Y
Y = o.8Y – 0.5Y + 40-40 + 60 + 40 + 90 – 50
Y = 0.75Y + 140 Y
Y – 0.75Y = 140
\(Y=\frac{140}{0.25}=560\)
Thus, the equilibrium income is 560.

(ii) Net exports are calculated as the difference between the exports and imports. That Exports = X – M
= 90 – [50 + (0.05 x 560]
= 90 – (50 + 28)
= 90-78 = 12
Thus, the net export balance at equilibrium income is 12.

(ii) Change in equilibrium income due to change in government expenditure can

New income = 560 + 40 = 600
Thus, the new equilibrium income is 600.
Net Exports = X – M₁
= 90 – [50 + (0.05 x 600)]
= 90 – (50 + 30)
= 90 – 80 = 10
Thus, the net export balance at new equilibrium income is 10.

Question 14.
In the above question, if exports change to X = 100, find the change in equilibrium income and the net export balance.
Answer:
(i) Equilibrium income is determined as:
Y = \(\bar{C}\) + cY_D +I + G + (X – M)
= \(\bar{C}\) + c(Y – T) +I + G + (X – M)
Given: C = 40 + 0.8Y_D, T = 50, I = 60, G = 40, X = 100, M = 50 + 0.05Y.
Substituting appropriate values in (I), we get:
Y = 40 + 0.8 (Y – 50) + 60 + 40 + 100 – (50 + 0.05Y)
Y = 40 + 0.8Y – 40 + 60 + 40 + 100 – 50 – 0.05Y
Y = 0.8Y – 0.5Y + 40 – 40 + 60 + 40 + 100 – 50
Y = 0.75Y + 150 Y
– 0.75Y = 150
0.25Y = 150
\(Y=\frac{150}{0.25}=600\)
Thus, the equilibrium income is 600.

(ii) Equilbrium Income when exports were 90 Y₁ = 560
Equilibrium Income when exports are 100       Y₂ = 600
Thus, change in equilibrium income;
y = y₂ – y₁
= 600 – 560 = 40
Equilibrium income increased by 40 when exports increased from 90 to 100.

(ii) Net exports are calculated as the difference between the exports and imports.That is,
Net Exports = X – M
= 100-[50 + (0.05 x 600)]
= 100 -(50 + 30)
= 100-80 = 20
Thus, the net export balance at equilibrium income is 20.

Question 15.
Suppose the exchange rate between the Rupee and the dollar was ₹30 = I $ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.
Answer:
The rupee-dollar exchange rate as ₹ 30 = I $ implies that if a good, say a hat, costs $ I in the USA, it will cost ₹ 30 in India. Now, it is assumed that the prices in India double in the next 20 years but remain fixed in the USA.

In, Indian the hat would now cost ₹ 60 while in America, the hat would still cost I $. According to the purchasing power parity theory, I $ is worth ₹ 60 for these two prices to be equivalent. Thus, the exchange rate between dollar and rupee in the year 2030 would be ₹ 60 = I $.

Question 16.
If inflation is higher in country A than in country B, and the exchange rate between the two  countries is fixed, what is likely to happen to the trade balance between the two countries?
Answer:
If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed, the trade balance of country A will show the deficit while that of country B will show surplus. In such a situation, imports of country A will rise or exports of country A will decline. As a result, the trade balance of country A will be unfavourable and the trade balance of country B will be favourable.

Question 17.
Should a current account deficit be a cause for alarm? Explain.
Answer:
When a country runs a current account deficit, there may be a decrease in saving, increase in investment or an increase in the budget deficit, A current account deficit must be a cause for alarm if it reflects smaller saving or a larger budget deficit. The deficit indicates higher private or government consumption. In such cases, the country’s capital stock will not rise rapidly enough to yield growth. It needs to repay its debt.

However, a current account deficit need not be a cause for alarm if it reflects an increase in the investment, which will build the capital stock more quickly and increase future output. In short, the current account deficits need not be an issue of concern if the country invests the borrowed funds yielding a rate of the growth higher than the interest rate.

Question 18.
Suppose C = 100 + 0.75YD, I = 500, G = 750, taxes are 20 percent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.
Answer:
(i) Equilibrium income is determined as:
Y = C + cYD+l + G + (X-M)
= C + c(Y – tY) +1 + G + (X – M)
= C + c(l – t)Y +1 + G + (X – M)
Given: C = 100 + 0.75YD, t = 0.20Y, I = 500, G = 750, X = 150, M = 100 + 0.2Y.
Substituting appropriate values in (I), we get:
Y = 100 + 0.75 (1 -0.20) Y + 500 + 750 + (150 – I00-0.2Y)
Y = 100 + (0.75) (0.8) Y + 500 + 750 + 150 – 100 – 0.2Y
Y = 0.6Y – 0.2Y + 1400 Y = 0.4Y + 1400
Y – 0.4Y = 1400
\(Y=\frac{1400}{0.6}=2333\)
Thus, the equilibrium income is 2,333.

(ii) Budget deficit is estimated as the difference between government expenditure and government receipts. That is,
Budget Deficit
= G – T
= G – tY
\(=750-\left(\frac{20}{100} \times 2333\right)\)
= 750 – 467 = 283
Thus, the budget deficit is 283.

(iii) Trade deficit or surplus is estimated as the difference between the exports and imports, That is, Net Exports = X – M
= 150- [100 + (0.2 x 2333)]
= 150-(100 + 467)
= 150 – 567 = – 417
Since net exports are negative, there exists trade deficit of 417.

Question 19.
Discuss some of the exchange rate arrangements that countries have entered in to bring about stability in their external accounts.
Answer:
Following are some of the exchange rate arrangements that country have entered in to bring about stability in their external accounts:
(i) The Gold Standard: From 1870 to 1914, the prevailing system was the gold standard, which was the epitome of the fixed exchange rate system. All currencies were defined in terms of gold; indeed some were actually made of gold.

Each participant country committed to guarantee the free convertibility of its currency into gold at a fixed price. This meant that residents had, at their disposal, a domestic currency which was freely convertible at a fixed price into another asset (gold) acceptable in the international payments.

(ii) The Bretton Woods System: The Bretton Woods Conference held in 1944 set up the IMF and the World Bank, and re-established a system of fixed exchange rate. This was different from the international gold standard in the choice of the asset in which national currencies would be convertible. The US monetary authorities guaranteed the convertibility of the dollar into gold at the fixed price of gold.

(iii) The Fixed Exchange Rates: The countries have had flexible exchange rate system ever since the breakdown of the Bretton Woods System in the early 1970s. Prior to that, most countries had fixed or what is called the pegged exchange rate system, in which the exchange rate is pegged at a particular level.

Under a fixed exchange rate system, such as the gold standard, adjustment to BoP surplus or deficit cannot be brought about through changes in the exchange rate. Adjustment must either come about automatically through the workings of the economic system or be brought about by the government.

(iv) Managed Floating: Managed floating exchange rate system is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). It is also known as dirty floating. Under this system, the central banks intervene to buy and sell the foreign currencies in an attempt to control the exchange rate movements whenever they feel that such actions are appropriate.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 5 Government Budget and the Economy Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Government Budget and the Economy NCERT Solutions for Class 12 Economics Chapter 5

Government Budget and the Economy Questions and Answers Class 12 Economics Chapter 5

Question 1.
Explain why public goods must be provided by the government.
Answer:
Public goods are those goods which are consumed collectively. These are financed by the government through the budget and made available free of any direct payment. National defence, roads, the government administration, etc. are known as public goods. These goods must be provided by the government because of the following reasons:

(i) People have no compelling reason to voluntarily pay for public goods as they have with private goods. This gives rise to free-rider problem, which refers to the problem of enjoying benefits of a good without paying for its costs.

(ii) The benefits of public goods are not limited to a particular consumer; rather they become available to all. The consumption of such goods by several individuals is non-rivalry as an individual can enjoy the benefits without reducing their availability to others.

(iii) In case of private goods, anyone who does not pay for the good can be excluded from enjoying its benefits. however, there is no feasible way of excluding anyone from enjoying the benefits of the public goods. They are non-excludable. Since non-paying users usually cannot be excluded, it becomes difficult or impossible to collect fees for the public good.

Question 2.
Distinguish between revenue expenditure and capital expenditure. (C.B.S.E. 2012,2013,2019)
Answer:
Following are the points of distinction between revenue expenditure and capital expenditure:

Question 3.
The fiscal deficit gives the borrowing requirement of the government.’ Elucidate.
Answer:
Fiscal deficit is the difference between the government’s total expenditure and its total receipts, excluding borrowings.
Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Creating Capital Receipts)

Fiscal deficit implies that the government is spending more than what it is receiving. It, therefore, gives an indication to the government about the total borrowing requirements from all the available sources. Fiscal deficits can be financed through domestic borrowings and/or borrowings from abroad. Greater fiscal deficit implies greater borrowings by the government.

Question 4.
Give the relationship between the revenue deficit and the fiscal deficit.
Answer:
There is a strong positive relationship between revenue deficit and fiscal deficit. ;
Revenue Deficit: Revenue deficit refers to the excess of the government’s revenue expenditure over; revenue receipts. That is, Revenue Deficit = Revenue Expenditure – Revenue Receipts :
Fiscal Deficit: Fiscal deficit refers to the excess of the total budget expenditure over total receipts, excluding borrowings. That is,
Fiscal Deficit = Total Budget Expenditure – Revenue Receipts – Non-debt creating capital receipts ;

Question 5.
Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y.
(i) What is the level of equilibrium income?
(ii) Calculate the value of the government expenditure multiplier and the tax multiplier.
(iii) If government expenditure increases by 200, find the change in equilibrium income.
Answer:
Investment (I) = 200
Government Purchases (G) = 150
Net taxes (T) = 100
Consumption (C) =100 + 0.75Y
Where, C = 100 and c = 0.75

(I) Equilibrium Income; Y = I C-c(Y-T) + I + G
Y= 100 + 0.75 (Y- 100) + 200+ 150
Y = 100 + 0.75 Y – (0.75) (100) + 200 + 150
Y = 0.75 Y + 375
Y – 0.75 Y = 375
0.25 Y = 375 Y= 375 0.25
The level of equilibrium income is 1,500.

(ii)

The equilibrium income increases by 800 due to increase in government spending by 200.

Question 6.
Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50,TR = 100.
(i) Find the equilibrium level of income and the autonomous expenditure multiplier in the model.
(ii) If government expenditure increases by 30, what is the impact on equilibrium income?
(iii) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
Answer:
C = 20 + 0.80Y where \(\bar{C}\)= 20, c = 0.80
I = 30
G = 50
TR= 100
(i) Equilibrium level of income
Y = \(\bar{C}\)+ c (Y + TR) + I + G
Y = 20 + 0.80 (Y + 100)+ 30+ 50
Y = 20 + 0.80Y + 80 + 80
Y = 0.80Y + 180
Y – 0.80Y = 180
\(Y=\frac{180}{0.20}=900\)
Thus, the equilibrium income is 900.

The equilibrium income increases by 150 due to increase in government spending by 30

The equilibrium income increases by 120 due to increase in tax by 30

Question 7.
In the above question, calculate the effect on output of a 10 percent increase in transfers, and a 10 percent increase in lump-sum taxes. Compare the effects of the two.
Answer:
In the above question
C = 20 + 0.8Y where \(\bar{C}\) = 20, c = 0.80
I = 30
G = 30
TR= 100
Given, increase in transfers = 10 percent
\(\text { Transfer multiplier }=\frac{c}{\mid-c}=\frac{0.80}{1-0.80}=\frac{0.80}{0.20}\)
Therefore, increase in output = 10 x 4 = 40 -per cent Increase in lump-sum taxes = 10 per cent Tax multiplier = 4
Decrease in output = 10 x 4 = 40 percent
The effect of change in transfers and change in taxes are equal because their size of changes as well as multipliers are equal.

Question 8.
We suppose that C = 70 + 0.70 Y_D, I = 90, G = 100,T = 0. 10Y.
(i) Find the equilibrium income.
(ii) What are tax revenues at equilibrium income? Does the government have a balanced budget?
(i) Equilibrium level of income
Y = \(\bar{C}\) + c(Y – tY) +1 + G
Y = \(\bar{C}\) + c(Y – 0.10Y) + 90 + 100
Y = 70 + 0.70 (Y – 0.10Y) + 90 + 100
Y = 70+ 0.70 (0.90Y) + 190
Y = 70 + 0.63Y + 190
Y – 0.63Y = 260
Y = \(\frac{260}{0.37}[latex] =702.70
Thus, equilibrium income is 702.70.

(ii) Tax Revenue = 0.10Y = 0.10x 702.70 = 70.27
Since, tax revenue are 70.27 and government spending is 100, government does not have a balanced budget. For balanced budget, it is essential that government spending must be equal to government revenue (taxes).

Question 9.
Suppose Marginal Propensity to Consume is 0.75 and there is a 20 percent proportional income tax. Find the change in equilibrium income for the following;
(i) Government purchases increase by 20
(ii) Transfers decrease by 20
Answer:
MPC = 0.75
Proportional tax (f) = 20 percent
(i) Increase in government purchases (ΔG) = 20
Government expenditure multiplier =

The equilibrium income increases by 100 due to increase in government spending by 20.

(ii) Decrease in transfers (ΔTR) = 20
Transfer multiplier = [latex]\frac{1}{1-c}=\frac{1}{1-0.75}=\frac{1}{0.25}=4\)
Decrease in equilibrium income = \(=\frac{1}{1-c} \Delta T R\)
= 4×20
= 80
The equilibrium income decreases by 80 due to decrease in transfers by 20.

Question 10.
Explain why tax multiplier is smaller in absolute value than government expenditure multiplier.
Answer:
The tax multiplier is smaller in absolute value than the government expenditure multiplier.
\(\text { Tax multiplier }=\frac{|-c|}{\mid-c}\)
And, Government Expenditure Multiplier = \(\frac{1}{1-c}\)(c = Marginal Propensity to Consume) Here, \(\frac{c}{1-c}<\frac{1}{1-c}\), because c ≤ I. An increase in the government expenditure directly affects the total expenditure. The taxes, on the other hand, enter the multiplier process through their impact on disposable income which influences the household consumption (which is a part of expenditure).

Question 11.
Explain the relation between government deficit and government debt.
Answer:
Government deficit and government debt are closely related. The government deficit is a flow concept but it adds to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt and the government has to pay more and more in the form of interest, These :interest: payments themselves contribute to the debt. Thus, deficit is the cause and effect of the debt.

Question 12.
Does public debt impose a burden? Explain.
Answer:
The public debt does not always impose a burden.
(i) Case 1 : A public debt imposes a burden: By borrowing, the government transfers the burden of reduced consumption on future generations. When the government borrows by issuing bonds to the people living at present, it may decide to pay off the bonds, say, twenty years later by raising the tax rate.

These taxes may be levied on the young population that have just entered the workforce. Consequently, the young population’s disposable income will fall and hence, their consumption level. This reduces the capital formation and growth in the economy. Thus, the debt acts as a burden on the future generations in this case.

Further, any debt that is owed to foreigners involves a burden as goods are sent abroad in lieu of the interest payments on foreign borrowings.

(ii) Case 2: A public debt does not impose a burden: It is generally argued that the ‘debt does not matter because we owe it to ourselves.’ The reason is that the purchasing power remains within the nation even though, there is a transfer of resources between generations.

If investment by the government in infrastructure makes the future generations better off, the returns on such investments will be greaterthan the rate of interest. The actual debt could be paid off by the growth in economy’s total output. The debt, therefore, should not be considered as a burden.

Question 13.
Are fiscal deficit inflationary?
Answer:
The fiscal deficit may be inflationary because when the government increases spending or cuts taxes, the Aggregate Demand increases. The firms may not be able to the produce or supply the higher quantities that are being demanded at the existing prices.

As a consequence, the price level rises. However, if there are unutilised resources, the output is neld back due to lack of demand. A high fiscal deficit is accompanied by the higher demand and the greater output and thei efore, need not be inflationary.

Question 14.
Discuss the issue of deficit reduction.
Answer:
The government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase the tax revenue with greater reliance on direct taxes. There has also been an attempt to raise receipts through the sale of shares in Public Sector Units (PSUs).

However, the major thrust has been towards reduction in the government expenditure. This could be achieved through making the government activities more efficient through better planning of the programmes and better administration.

Only large deficits do not signify that an expansionary fiscal policy is being implemented. The same fiscal measures can give rise to a large or small deficit, depending upon the state of the economy.

For example, if an economy experiences a recession and GDP falls then the tax revenue also fall because the firms and the households pay lower taxes when they earn less. This means that the deficit increases during a recession and falls during a boom, even with no change in the fiscal policy.

Question 15.
What do you understand by G.S.T? How good is the system of G.S.T as compared to the old tax system? State its categories.
Answer:
The GST or Good and Services Tax is a value-added tax paid by the consumers and remitted to the government by the seller of various goods and services. GST is levied on most goods and services that are sold for domestic consumption.  GST is better than the old tax system due to the following reasons:

(i) It is a broader scheme with only one law and only one CGST rate and a uniform rate of SGST across all states., as GST includes various indirect taxes.

(ii) With GST, all taxes have been integrated and hence, tax burden on the tax payer has reduced significantly. The burden is now shared equally by the providers of goods and services.

(iii) Due to multiplicity of laws, tax compliance was complicated procedure. However, tax compliance would be much easier with GST as there is only one law subsuming other taxes.

(iv) GST is levied only at final destination of consumption and not at each stage of production and consumption. This brings more transparency and corruption-free tax administration. There are five categories of GST, as stated below:

• Exempted Goods – No GST
• Commonly used goods and services – GST @ 5%
• Standard goods and services (Slab I) – GST@ 12%
• Standard goods and services (Slab 2) – GST @ 18%
• Special category of goods and services (including luxury items) – GST @ 28%

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 4 Determination of Income and Employment were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Determination of Income and Employment NCERT Solutions for Class 12 Economics Chapter 4

Determination of Income and Employment Questions and Answers Class 12 Economics Chapter 4

Question 1.
What is marginal propensity to consume? How is it related to marginal propensity to save? (C.B.S.E. 2011 Comp.)
Answer:
Marginal Propensity to Consume (MPC) is the ratio of change in consumption due to the change in ‘ income. It is the rate of in umption due to a unit increment in income.
\(M P C=\frac{\Delta C}{\Delta Y}\)

Marginal Propensity to Save (MPS) is the ratio of change in saving due to the change in income. It is the rate of increase in ex-ante saving due to a unit increment in income.
\( \mathrm{MPS}=\frac{\Delta \mathrm{S}}{\Delta Y}\)

Question 2.
What is the difference between ex-ante investment and ex-post investment?
Answer:
Following are the points of difference between ex-ante investment and ex-post investment:

Question 3.
What do you understand by ‘parametric shift of a line’? How does a line shift when its
(i) slope decreases and (ii) its intercept increase?
Answer:
Parametric shift means a shift in the straight line curve due to a change in the value of a parameter. As the value of the parameter changes, the straight line curve rotates upward or downward along the same vertical intercept .
(i) When the slope of a line decreases, the line rotates downwards along the same-vertical intercept. It can be shown with the help of a diagram.

In the diagram, the original line is represented by an equation: b = a + 2. The slope is I. As the slope decreases from I to 0.5, the line shifts downwards to b = 0.5a + 2.

(ii) When the intercept of a line increases, there is a parallel shift in the line. It can be shown with the help of a diagram

In the diagram, the original line is represented by an equation: b = 0.5a + 2. The intercept is 2. As the intercept increases from 2 to 3, the line shifts upwards to b = 0.5a + 3.

Question 4.
What is ‘effective demand’? How will you drive the autonomous expenditure multiplier when price of final goods and the ratio of interest are given?
Answer:
Effective demand refers to the Aggregate Demand, which is equal to the Aggregate Supply under the conditions of fixed price of final goods and constant rate of interest in the economy. The supply of final goods is assumed to be infinitely elastic at constant price over short period of time.

Autonomous expenditure multiplier is the ratio of change in aggregate output or income to a change in autonomous spending. That is, \(\text { Autonomous Expenditure Multiplier }=\frac{\text { Change in Aggregate Output }}{\text { Change in Autonomous Spending }}\) An increase or decrease in autonomous spending causes more than proportionate increase in the aggregate output of final goods through the multiplier process.

Question 5.
Measure the level of ex-ante Aggregate Demand when autonomous investment and consumption expenditure (A) is ₹ 50 crore, and MPS is 0.2 and level of income (Y) is ₹ 4000 crores. State whether the economy is in equilibrium or not (cite reasons).
Answer:
Level of income (Y) = ₹ 4,000 crores
Autonomous expenditure \(\overline{\mathrm{A}}\) = ₹ 50 crores
Marginal Propensity to Save (MPS) = 0.2
Hence, Marginal Propensity to Consume (MPC = c) = 1 – MPS = 1 – 0.2 = 0.8
Ex-ante Aggregate Demand = \(\overline{\mathrm{A}}\) + cY
Substituting the appropriate values; we get
Ex-ante Aggregate Demand
= 50 + (0.8 x 4000)
= 50 + 3200
= 3250
Thus, the level of ex-ante Aggregate Demand is ₹ 3,250 crores.
Since the ex-ante Aggregate Demand is less than the level of income (output), there is an excess supply in the economy. Thus, ₹ 4,000 crores is not the equilibrium level of income in the economy.

Question 6.
Explain ‘Paradox of Thrift.’
Answer:
The attempt by an economy as a whole to save more, not only results in a decrease in amount they actually succeed to save, but may reduce the equilibrium level of income and output. The unexpected result is called Paradox of thrift When individuals try to save more, they end up consuming less. The decline in consumption will-lead to a fall in Aggregate Demand, which causes producers to cut back production and lay people off. Eventually, income falls, and both consumption and savings decline.

In other words, the increase in the Marginal Propensity to Save means a decrease in the Marginal Propensity to Consume, and therefore, a fall in the value of the multiplier. Given autonomous spending, the new macroeconomic equilibrium associated with the new value of the multiplier will be lower, meaning lower output, income, and employment. The phenomena can be explained with the help of a diagram.

In the diagram, the initial level of equilibrium is E, and the level of output corresponding to equilibrium is OY*. A decline is Marginal Propensity to Consume (MPC) reduces the slope of the Aggregate Demand (AD) curve. As a result the AD curve shifts downwards from AD to AD, The equilibrium level shifts from E to E, which reduces the income from OY* to OY*.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 3 Money and Banking were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Money and Banking NCERT Solutions for Class 12 Economics Chapter 3

Money and Banking Questions and Answers Class 12 Economics Chapter 3

Question 1.
What is a barter system? What are its drawbacks?
Answer:
Economic exchanges without the mediation of money are referred as barter system. In other words, barter system is a system under which goods are exchanged for goods.

Following are the drawbacks of barter system:

(i) Lack of Double Co-incidence of Wants: The barter system requires that a person having a surplus of one commodity should be able to find another person who wants that commodity as well as has something acceptable to offer in exchange. This is called double coincidence of wants, which is hard to find.

(ii) Lack of Common Measure ofValue: Different commodities are of different value. There is no common unit of measuring value under the barter system. It is difficult to decide the proportion in which the two goods are to be exchanged.

(iii) Lack of Standard of Deferred Payments: The barter system lacks any satisfactory unit to engage in contracts involving future (deferred) payments. It may be due to disagreement regarding the specific commodity and its quality. Moreover, there is a risk of an increase or decrease in the value of the good over time, thus benefitting the lender or borrower of the good respectively.

(iv) Difficulty of Storage of value: It is difficult to store wealth for further use. Most of the goods like wheat, rice, cattle, etc. deteriorate with the passage of time or involve heavy storage cost.

(v) Difficulty of Transfer of Value: Under barter system, wealth in the form of goods cannot be transferred from one place to another. It is a difficult task as it requires a lot of time and resources.

Question 2.
What are the main functions of money? How does money overcome the shortcomings of a barter system? (C.B.S.E Outside Delhi 2011 Comp.)
Answer:
The following are the important functions of money:
(i) Medium of Exchange: Money acts as an intermediary in the exchange transactions of goods and services. Money solves the problem of double coincidence of wants by acting as a medium of exchange for all goods and services.

(ii) Unit of value: Money acts as a convenient unit of account The value of all the goods and services can be expressed in monetary units. Money as a unit of value helps in measuring the value of exchange for various goods and services.

(iii) Store of value: Money is not a perishable item and its storage costs are also considerably low. Moreover, it is acceptable to anyone at any point of time. Thus, money acts as a store of value for individuals. Under barter system, wealth in the form of goods like wheat, rice, cattle, etc. deteriorate with the passage of time or involve heavy storage cost. However, wealth can easily be stored in the form of money for future use.

(iv) Standard of Deferred Payments: Money acts as standard in terms of which future or deferred payments are stated because money maintains a constant value o\ c a period of time. Under barter system, goods could not be used for future contracts due to the risk associated with type, quality and value of the goods. Money exchange has no such problem.

Question 3.
What is transaction demand for money? How it is related to the value of transactions over a specified period of time?
Answer:
Transaction demand for money is a measure of the money held by the public to carry out ordinary day to day transactions. People tend to hold their incomes to undertake transactions over a certain period of time. The relationship between transaction demand for money and value of transactions can be expressed as:
\(\begin{aligned}
M_{T}^{\phi} &=k \cdot T \\
\frac{1}{k} M_{T}^{d} &=T \\
v_{0} M_{T}^{d} &=T
\end{aligned}\)

where \(M_{T}^{d}Md\)= Transaction Demand for Money
v =\(\frac{1}{k}= \) Velocity of Circulation of Money (k being a positive fraction)
T = Total Value of Nominal Transactions in the economy over a time period

The transaction demand for money is positively related to total value of transactions and negatively related to the velocity with which the money is circulated in the economy.

Question 4.
What are the alternative definitions of money supply in India?
Answer:
Money supply is a stock variable. It is the total stock of different types of money (currency in circulation and deposits) available in an economy at a specific point of time. In India,-‘M(, M2, M3, M4 are the four alternative measures of money supply.
They are defined as follows:

M₁ = CU + DD
M₂= M₁ Savings deposits with post office saving banks
M₃ = M₁ + Time deposits of commercial banks
M₄ = M₃ + Total deposits with post office savings organisations (excluding National Savings Certificates)
CU = Currency (notes and coins held by public)
DD = Net demand deposits held by the commercial banks

Question 5.
What is a ‘legal tender? What is ‘fiat money’?
Answer:
Legal tender is the money that, by law, must be accepted as a medium of exchange and payment for debt by the citizens of a country. It cannot be refused by any person against the payment for transactions. Everyone is bound to accept it because its non-acceptance is an offence. Example of legal tender is currency notes issued by Reserve Bank of India. Fiat money refers to the currency notes and coins made legal tender by the order of the government. They do not have intrinsic value like a gold or silver coin.

Question 6.
What is high powered money?
Answer:
The total liability of the monetary authority of the country (RBI in India) is called the monetary base or high powered money. It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the government of India and commercial banks with RBI. High powered money can be expressed with the help of equation:
H = CU +R
= cdr x DD + rdr x DD
= (cdr + rdr) DD

Where, H = High powered money
cdr= Currency Deposit Ratio
rdr= Reserve Deposit Ratio

Question 7.
Explain the functions of a commercial bank.
Answer:
The functions of a commercial bank are classified below:
I. Primary Functions: Following are the primary functions of a commercial bank:

(i) Acceptance Deposits: Commercial banks accept deposits from the public and lend this money to companies and other people for investment projects. The banks offer interests on deposits to the deposit holders. Deposits are broadly into:

• Demand Deposits: These are, payable by the banks on demand from the account holder. For example: Current and Savings Account Deposits
• Time Deposits: These deposits have a fixed period to maturity. For example: Fixed Deposits.

(ii) Advancing Loans: Extending loans is another important primary function of the commercial banks. After keeping a certain portion of the deposits as reserves, the bank gives the balance to borrowers in the form of loans and advances.

The rate at which banks lend out their reserve to investors is called the lending rate. Lending by commercial banks consists mainly of cash credit, demand and short-term loans to private investors and banks. The credit worthiness of a person is judged by his current assets or the collateral (a security pledged for the repayment of a loan) he can offer.

2. Secondary Functions: Following are the secondary functions of a commercial bank:

• To transfer funds from one place to another.
• To collect funds on behalf of the customers.
• To purchase and sell shares and debentures on behalf of the customers.
• To provide income-tax consultancy.
• To pay bills and insurance premium as per customer’s direction.
• To provide facility of travellers’ cheque and letter of credit.

Question 8.
What is money multiplier? What determines the value of this multiplier?
Answer:
Money Multiplier: Money multiplier may be defined as the ratio of the stock of money (money supply) to the stock of high powered money in an economy. That is,
Money Multiplier = MoneyStock
\(\begin{aligned}
\text { Money Multiplier } &=\frac{\text { Money Stock }}{\text { High Powered Money }} \\
&=\frac{M}{H}
\end{aligned}\)
Since the stock of money is always greater than the high powered money, the value of money multiplier is always greaterthan one.
Following ratios play an important role in the determination of the value of the money multiplier:

(i) Currency Deposit Ratio: Currency deposit ratio is the ratio of currency held by public to the net demand deposits held by the commercial banks.
Currency Deposit Ratio = \(\frac{C U}{D D}\)

(ii) Reserve Deposit Ratio: Reserve deposit is a ratio of total deposits, which the commercial banks keep as reserves to the net demand deposits held by them.
Reserve Deposit Ratio = \(\frac{R}{D D}\)

where, CU = Currency (notes and coins held by public)
R = Reserves held by the commercial banks
DD = Net demand deposits held by the commercial banks

Question 9.
What are the instruments of monetary policy of RBI?
Answer:
Following are the instruments of monetary policy of RBI:
Open Market Operation: Open market operation is the policy of the central monetary authority to sell and buy the government securities in the market. RBI purchases or sells government securities to the general public in a bid to increase or decrease the stock of high powered money in the economy.

Bank Rate Policy: Bank rate is the minimum rate at which the central bank discounts the first class bills of exchange and provides credit to the commercial banks. Higher bank rate reduces the lending capacity of the commercial banks as they get funds at a higher interest rate from RBI. Consequently, credit contracts in the economy as public borrows less at high rate of interest.

Similarly, lower bank rate increases the lending capacity of the commercial banks as they get funds at a lower interest rate from RBI. Consequently, credit expands in the economy as public borrows more at low rate of interest

Varying Reserve Requirements: Cash Reserve Ratio (CRR) is the minimum fraction of the total deposits with the commercial banks, which they are required to keep with the central bank. Statutory Liquidity Ratio (SLR), on the other hand, is the minimum fraction of the total deposits with the commercial bank, which they are required to maintain in the form of specified liquid assets.

A high or low value of CRR or SLR helps increase or decrease the value of reserve deposit ratio, thus diminishing or increasing the value of the money multiplier and money supply in the economy.

Question 10.
Do you consider a commercial bank ‘creator of money’ in the economy?
Answer:
A commercial bank is a ‘creator of money’ in the economy. The process of money creation can be explained as below:
Suppose every bank is required to maintain 10 percent of its total deposits in the form of cash reserves. Further assume that Bank A receives a primary deposit of? H. Bank A will keep 10 percent of ₹ H (₹ 0.1H) as reserves and will lend out the balance, ₹ 0.9H, to the borrowers. People who receive ₹ 0.9H from Bank A are expected to spend the amount or pay their creditors, and hence, the money will come back to the banking system, say in Bank B.

After keeping a reserve of ₹ 0.09H (10 percent of ₹0.9H), Bank B will lend out the balance, ₹ 0.81H, to the borrowers. Again, those who receive ₹ 0.81H from Bank B are expected to spend the amount, and hence, the money will come back to the banking system, say in Bank C.

After keeping a reserve of ₹ 0.081H (10 percent of ₹ 0.81H), Bank C will lend out the balance, ₹ 0.729H, to the borrowers. This process of deposit turning into loan or investment, which again becomes a new deposit, goes on until the primary deposit of ₹ H is completely exhausted. The total of all the deposits resulting from primary deposit will be 10 times of ₹ H.

Question 11.
What role of RBI is known as ‘lender of last resort’?
Answer:
If all the account holders of all commercial banks in the country want their deposits back at the same time, the bank will not have enough means to satisfy the need of every account holder and there will be bank failures. The Reserve Bank of India plays a crucial role in the situation of Bank run. During crisis, if commercial banks fail to meet the obligations of their depositors, the central bank plays a crucial role.

The central bank stands by the commercial banks as a guarantor and extends loans to ensure the solvency of the latter. This saves the commercial banks from possible breakdown. The central banks always provide the help needed by the commercial banks. This function of the central bank makes it the ‘lender of the last resort’.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 2 National Income Accounting Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

National Income Accounting NCERT Solutions for Class 12 Economics Chapter 2

National Income Accounting Questions and Answers Class 12 Economics Chapter 2

Question 1.
What are the four factors of production and what are the remunerations to each of these called?
Answer:
The four factors of production and their respective remunerations: Land – Rent; Labour – Wage; Capital – Interest; and Entrepreneur – Profit.

Question 2.
Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
Answer:
The aggregate final expenditure of an economy should always be equal to the aggregate factor payments (or incomes) because of the circular flow of income. The final expenditure and aggregate factor payments are two sides of the same coin. The firms hire or purchase factor services from households and use them to produce goods and services.

Factor payments made by the firms become factor incomes in the hands of households. Households spend their income on purchase of goods and services, which are produced by firms. Expenditure by household implies income to the firms. Thus, the income of economy goes througn the two sectors, firms and households, in a circular way. This is represented in the following figure:

In the figure, the uppermost arrow moving from the households to the firms represents the spending of households on goods and services produced by the firms. The second arrow moving from the firms to the households is the counterpart of the arrow above. It stands for the goods and services, which are flowing from the firms to the households.

Similarly, the two arrows at the bottom of the diagram represent the factor of the production market The lowermost arrow moving from the households to the firms symbolises the services that the households are rendering to the firms. Using these services, the firms are manufacturing the output. The arrow above’-this, moving from the firms to the households,

represents the payments made by the firms xo the households for the services provided by the latter. Thus, there is no leakage from this circular flow of income between households and firms. That is, the money spent by the firms on factor services is exactly equal to the money they receive for the goods and services sold to the households.

Question 3.
Distinguish between stock and flow. (C.B.S.E. Outside Delhi 2013,2017).
Between net investment and capital, which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank.
Answer:
Following are the points of difference between stock and flow:

Net investment is a flow while capital is a stock. Net investment is a flow variable because its magnitude is measured over a period of time, say, one year. Capital is a stock because its magnitude is measured at a point of time, say, on 31 st March, 2017. Net investment and capital can be compared with flow of water into a tank.

Capital is like water in tank while net investment is the water flowing in to and out of the tank. Flow of water into tank is measured over a period of time while water in the tank is measured at a particular point of time.

Question 4.
What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm.
Answer:
The change in inventories may be planned or unplanned. Following points explain the difference between the two:

Value added is the difference between the value of the total output and the value of intermediary goods used by each production unit in an economy. It includes the change in firm’s stock of inventories. Thus, Gross Value Added of firm = Value of sales by the firm + Value of change in inventories : – Value of intermediate goods used by the firm
GVA = V + A – Z
The change in inventories means difference between opening inventories and closing inventories. The change in inventories affects the Gross Value Added. It is derived from the production and sales of the firm.

Question 5.
Write down the three identities of calculating the GDP of a country by the three methods. Also ; briefly explain why each of these should give us the same value of GDP.
Answer:
Following are the three methods and their respective identities for calculating GDP:
(i) Value Added Method:
GDP_Mp = GVA₁ + GVA₂ +………….+GVA_N
\(G D P_{M P}=\sum_{j=1}^{N} G V A\)

(ii) Income Method:
GDP_Mp = Rent + Wage + Interest + Profit + Depreciation + Met Indirect Taxes
GDP_Mp= R + W+ l_n + P + Depreciation + NIT

(iii) Expenditure Method:
GDP_W = Private Consumption + Investment + Government Consumption + (Exports-lmports)
GDP_mp = C + I + G + (X-M)

All the three methods of measuring National: Income give the same value of GDP. Each method reflects three different phases of the same circular flow of income.

• Production phase gives the GDP using output or value added method.
• Distribution phase give the GDP using income method.
• Disposition phase gives the GDP using expenditure method.

Question 6.
Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was ₹ 2,000 crores. The amount of budget deficit was (-) ₹ 1,500 crores. What was the volume of trade deficit of that country?
Answer:.
Budget deficit means the excess of the government expenditure (G) over tax revenue (T).
Budget Deficit = G – T
Trade deficit means the excess of import (M) expenditure over the export revenue (X) earned by the economy.
Trade Deficit = M – X
Given:   I – S = ₹ 2,000 crores
G – T = ₹ 1,500 crores
Trade Deficit = (I – S) + (G – T)
= 2,000 + 1,500 = 3,500
Thus, the volume of trade deficit of the country is ₹ 3,500 crores.

Question 7.
Suppose the GDP at market price of a country in a particular year was ₹ 1, 100 crores. Net Factor Income from Abroad was f 100 crores. The value of indirect taxes – subsidies was ₹ 150 crores and National Income was ^ 850 crores. Calculate the aggregate value of depreciation.
Answer:
The following information is given:

National Income (NNP_FC) = GDP_Mp + Net Factor Income from Abroad – Net Indirect Taxes – Depreciation
Substituting appropriate values from the table, we get:
850 = 1, 100 + 100 – 150 – Depreciation Depreciation = 1, 100 + 100 – 150 – 850 = 1,200- 1000 = 200
Thus, the aggregate value of depreciation is ? 200 crores.

Question 8.
Net National Product at Factor Cost of a particular country in a year is ₹ 1,900 crores. There are no interest payments made by the households to the firms/ government, or by the firms/ governments to the households. The Personal Disposable Income of the households is ₹ 1,200 crores. The personal income taxes paid by them ₹ 600 crores and the value of retained earnings of the firms and government is valued at? 200 crores. What is the value of transfer payments made by the government and firms to the households?
Answer:
The following information is given:

Personal Disposable Income
= NNP_fC– Retained Earnings – Personal Taxes + Transfer Payments from the Government and the Firms Substituting appropriate values from the table, we get:
1,200 = 1,900 – 200 – 600 + Transfer Payments from the Government and the Firms
Transfer payments from the Government and the firms
= 1,200 + 600 + 200- 1,900 = 2,000 – 1,900 = 100
Thus, the value of transfer payments made by the government and firms to the households is ₹ 100 crores.

Question 9.
From the following data, calculate Personal Income and Personal Disposable Income.
Answer:

Answer:
Personal Income
= Net Domestic Product at Factor Cost + Net Factor Income from Abroad – Undistributed Profit – Corporate Tax + Interest Received by Households + Transfer Income – Interest paid by Households
= 8,000 + 200-1,000 -500+1,500 + 300-1,200
= 10,000-2,700
= 7,300
Personal Disposable Income
= Personal Income – Personal Tax = 7,300 – 500 = 6,800
Thus, the Persona! Income is ₹ 7,300 crores and Personal Disposable Income is ₹ 6,800 crores.

Question 10.
In a single day, Raju, the barber, collects 500 from haircuts; over this day, his equipment depreciates in value by ₹ 50. Of the remaining ₹ 450, Raju pays sales tax worth ₹ 30, takes home ₹ 200 and retains ₹ 220 for improvement and buying of new equipments. He further pays ₹ 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income:

• Gross Domestic Product
• NNP at Market Price
• NNP at Factor Cost
• Personal Income
• Personal Disposable Income

Answer:
The following information is given:

(i) Gross Domestic Product at Market Price (GDP_mp) = ₹ 500
Gross Domestic Product at Factor Cost (GDP_FC) = GDP_mp – GDP_mp
= ₹ 500 – ₹ 30
= ₹ 470

(ii) NNP at Market Price = GDP_mp – Depreciation
= ₹ 500 – ₹ 50
= ₹ 450

(iii) NNP at Factor Cost = NNP_mp – Indirect Taxes
= ₹ 450 – ₹ 30
= ₹ 420

(iv) Personal Income = NNP_FC – Retained Earning
= ₹ 420 – ₹ 220
=₹ 200

(v) Personal Disposable Income = Personal Income – Personal Taxes
= ₹ 200 – ₹ 20
= ₹ 180

Question 11.
The value of the nominal GNP of an economy was ₹ 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was ₹ 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?
Answer:
Nominal GNP = 2,500 crores
Real GNP = 3,000 crores

Since the GNP deflator is less than 100 percent, price level has not risen. In fact, price level declined between the base year and the year under consideration.

Question 12.
Write down some of the limitations of using GDP as an index of welfare of a country.
Answer:
Following are the some of the limitations of using GDP as an index of the welfare of a country:
(i) Distribution of GDP: The level of economic welfare may not rise if with an increase in the level of Gross Domestic Product (GDP), the distribution of GDP becomes more unequal. Since only a few people benefit from the increase in the level of income, rich are becoming richer and poor are becoming poorer, If GDP growth increases the gap between rich and poor then it cannot be treated as an index of welfare for a country.

(ii) Non-monetary Exchanges: In economies like India, barter system of exchange is not totally non-existent. Non-monetary transactions are quite evident in rural areas where payments to farm labourers are often made in kind rather than cash. Such transactions are not recorded because they are outside the monetary system of Exchange. Further, women at homes do not get paid for the household services they perform for the family. To this extent, GDP remains underestimated and is therefore, not an appropriate index of welfare.

(iii) Externalities: Externalities refer to the harms (or benefits) a firm or an individual causes to another for which they are not penalised (or paid for). Externalities may be positive or negative.

For example, increase in GDP may be at the cost of considerable pains and’sacrifices in the form of environment pollution. As a result, increase in GDP may mean less economic welfare. If increase in GDP has been brought about by making workers work in bad working conditions, increase in GDP will not raise the level of economic welfare.

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 1 Introduction Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Introduction to Macroeconomics NCERT Solutions for Class 12 Economics Chapter 1

Introduction to Macroeconomics Questions and Answers Class 12 Economics Chapter 1

Question 1.
What is the difference between microeconomics and macroeconomics?
Answer:
Following points explain the difference between microeconomics and macroeconomics:

Question 2.
What are the important features of a capitalist economy?
Answer:
Following are the important features of a capitalist economy:

• There is private ownership of means of production.
• Production takes place for selling the output in the market with profit as the primary motive.
• Prices of goods and services are determined by market forces of demand and supply with minimum intervention by the government.
• Consumers are free to choose whatever they can afford.

Question 3.
Describe the four major sectors in an economy according to the macroeconomic point of view.
Answer:
Following are the four major sectors in an economy:
(i) Household Sector: By household sector, we mean a group of individuals who purchase goods and services for consumption.

(ii) Firm/Production Sector: The production units are called firms, The firm sector includes all the  units that buy factors of production from households.

(iii) Government Sector: The role of the government sector includes framing laws, enforcing them and delivering justice. The government, in many instances, undertakes production apart from imposing taxes and spending money on building public infrastructure, running schools, colleges, providing health services, etc.

(iv) External Sector: The external sector includes exports and imports of goods and services. Capital  from foreign countries may also flow into the domestic country, or the domestic country may be exporting capital to foreign countries.

Question 4.
Describe the Great Depression of 1929.
Answer:
The period from 1929 to 1933 is known as the Great Depression. This period witnessed tremendous decline in the level of output and employment in the countries of Europe and North America. It affected other countries of the world as well. The demand for goods in the market was low, many factories were lying idle and workers were thrown out of jobs.

During this period, unemployment rate in USA rose from 3 percent to 25 percent while aggregate output fell by about 33%. These events made the economists think about the functioning of the economy in a different way. In other words, we can say that macroeconomics was born as a result of the great depression.