KENDRIYA VIDYALAYA SANGATHAN, RAIPUR REGION 2 days workshop for pgts (Economics) (Date: 29-11-2017 to 30-11-2017) CAPSULE FOR SURE SHOT SUCCESS CLASS-XII ECONOMICS Session 2017-18 Chief Patron Ms. Chandana mandal Deputy commissioner, k.v.s. Raipur region patron Shri. D. VENKATESWARLU Asst. commissioner, k.v.s. Raipur region Venue director Mrs. Prabha minj Principal, k.v. no.2 raipur Course director Dr. a. nagamani Principal, k.v. no.4 korba Resource person Shri a.n. Shukla Pgt, economics, k.v. no.2 raipur MS. PRABHA SETH PGT ECONOMICS, K.V. NO.1 RAIPUR SH. ii Venue-Kendriya Vidyalaya No.2 Raipur(c.g.) 1
ECONOMICS CLASS - XII (2017-18) Units Marks Periods Part A Introductory Microeconomics Introduction 4 8 Consumer's Equilibrium and Demand 13 32 Producer Behaviour and Supply 13 32 Forms of Market and Price Determination under perfect competition with simple applications 10 28 40 100 Part B Introductory Macroeconomics National Income and Related Aggregates 10 28 Money and Banking 6 15 Determination of Income and Employment 12 27 Government Budget and the Economy 6 15 Balance of Payments 6 15 40 100 Part C Project Work 20 20 Part A: Introductory Microeconomics Unit 1: Introduction Meaning of microeconomics and macroeconomics; positive and normative economics What is an economy? Central problems of an economy: what, how and for whom to produce; concepts of production possibility frontier and opportunity cost. Unit 2: Consumer's Equilibrium and Demand Consumer's equilibrium - meaning of utility, marginal utility, law of diminishing marginal utility, conditions of consumer's equilibrium using marginal utility analysis. Indifference curve analysis of consumer's equilibrium-the consumer's budget (budget set and budget line), preferences of the consumer (indifference curve, indifference map) and conditions of consumer's equilibrium. Demand, market demand, determinants of demand, demand schedule, demand curve and its slope, movement along and shifts in the demand curve; price elasticity of demand - factors affecting price elasticity of demand; measurement of price elasticity of demand percentage-change method. 2
Unit 3: Producer Behaviour and Supply Meaning of Production Function Short-Run and Long-Run Total Product, Average Product and Marginal Product. Returns to a Factor Cost: Short run costs - total cost, total fixed cost, total variable cost; Average cost; Average fixed cost, average variable cost and marginal cost-meaning and their relationships. Revenue - total, average and marginal revenue - meaning and their relationship. Producer's equilibrium-meaning and its conditions in terms of marginal revenue-marginal cost. Supply, market supply, determinants of supply, supply schedule, supply curve and its slope, movements along and shifts in supply curve, price elasticity of supply; measurement of price elasticity of supply - percentage-change method. Unit 4: Forms of Market and Price Determination under Perfect Competition with simple applications. Perfect competition - Features; Determination of market equilibrium and effects of shifts in demand and supply. Other Market Forms - monopoly, monopolistic competition, oligopoly - their meaning and features. Simple Applications of Demand and Supply: Price ceiling, price floor. Part B: Introductory Macroeconomics Unit 5: National Income and Related Aggregates Some basic concepts: consumption goods, capital goods, final goods, intermediate goods; stocks and flows; gross investment and depreciation. Circular flow of income (two sector model); Methods of calculating National Income - Value Added or Product method, Expenditure method, Income method. Aggregates related to National Income: Gross National Product (GNP), Net National Product (NNP), Gross and Net Domestic Product (GDP and NDP) - at market price, at factor cost; Real and Nominal GDP. GDP and Welfare Unit 6: Unit 7: Unit 8: Money and Banking Money - meaning and supply of money - Currency held by the public and net demand deposits held by commercial banks. Money creation by the commercial banking system. Central bank and its functions (example of the Reserve Bank of India): Bank of issue, Govt. Bank, Banker's Bank, Control of Credit through Bank Rate, CRR, SLR, Repo Rate and Reverse Repo Rate, Open Market Operations, Margin requirement. Determination of Income and Employment Aggregate demand and its components. Propensity to consume and propensity to save (average and marginal). Short-run equilibrium output; investment multiplier and its mechanism. Meaning of full employment and involuntary unemployment. Problems of excess demand and deficient demand; measures to correct them - changes in government spending, taxes and money supply. Government Budget and the Economy Government budget - meaning, objectives and components. Classification of receipts - revenue receipts and capital receipts; classification of expenditure revenue expenditure and capital expenditure. Measures of government deficit - revenue deficit, fiscal deficit, primary deficit their meaning. 3
Unit 9: Balance of Payments Balance of payments account - meaning and components; balance of payments deficit-meaning. Foreign exchange rate - meaning of fixed and flexible rates and managed floating. Determination of exchange rate in a free market. Suggested Question Paper Design S. No. Typology of Questions Very Short Answer/ MCQ 1 Mark Short Answer II 3 Marks Short Answer I 4 Marks Long Answer 6 Marks Marks % 1 Remembering- (Knowledge based Simple recall questions, to know specific facts, terms, concepts, principles, or theories; identify, define, or recite, information) 2 Understanding- (Comprehension to be familiar with meaning and to understand conceptually, interpret, compare, contrast, explain, paraphrase, or interpret information) 3 Application (Use abstract information in concrete situation, to apply knowledge to new situations; Use given content to interpret a situation, provide an example, or solve a problem) 2-2 2 22 27% 2 1 2 1 19 24% 2 1 1 1 15 19% 4 High Order Thinking Skills (Analysis & Synthesis- Classify, compare, contrast, or differentiate between different pieces of information, Organize and/or integrate unique pieces of information from a variety of sources) 1 1 1 1 14 17% 5 Evaluation and Multi-Disciplinary- (Appraise, judge, and/or justify the value or worth of a decision or outcome, or to predict outcomes based on values) 1 1-1 10 13% Total 8x1=8 4x3=12 6x4=24 6x6=36 80 (24) 100% Note: There will be Internal Choice in questions of 3 marks, 4 marks and 6 marks in both sections (A and B). (Total 3 internal choices in section A and total 3 internal choices in section B). 4
Unit -I An Introduction One marks questions Q1:- Define production possibility curve? - It is the curve which shows different combinations of two goods that can be produced with full utilization of resources in a given technology. Q2:- What does a rightward shift in production possibility curve indicate? - (i) Growth of resources (ii) Improvement in technology. Q3:- What does a leftward shift in production possibility curve indicate? - Underutilization of resources. Q4:- Define opportunity cost. - It is cost of best alternative use. Q5:- Why does the problems of choice arises? - Unlimited wants, limited resources having alternative uses. Q6:- Define Micro-economics. - It is branch of Economics which deals with economic problems if individual unit. 3 marks question Q1: What is economic problem? What are its causes? Economic problem is problem of making choices in the presence of scarcity. Unlimited wants, limited resources having alternative uses. Q2: Explain the problem how to produce. The problem is about the choice of technique of production. Whether to produce with labour intensive technique or capital intensive technique. Q3: Draw PP curve showing Growth of resources and underutilization of resources. A = Growth of resources B = Underutilization of resources. - 5 -
Q4: Explain the problem of For whom to produce. It is the problem of distribution of income among factors of production. people earn income in the form of wages, rent, interest and profit. Q.5-Explain the concept of Production Possibility Curve And Opportunity Cost with the help of schedule and diagram. It refers to a curve which shows the various production possibilities that can be produced with given resources and technology. Production Possibility Commodity A Commodity B Marginal opportunity cost of commodity A A 0 15 - - B 1 14 15-14=1 1 C 2 12 14-12=2 2 D 3 09 12-9=3 E 4 05 9-5=4 4 F 5 0 5-0=5 5 3 MRT If the economy devotes all its resources to the production of commodity B, it can produce 15 units but then the production of commodity A will be zero. There can be a number of production possibilities of commodity A & B. If we want to produce more commodities B, we have to reduce the output of commodity A &vice versa. Commodity A - 6 -
Unit 2 Consumer Behavior and Demand One mrks Questions: Q1: What is the meaning of consumer equilibrium? It is the Situation when consumer gets maximum satisfaction by spending his given income to purchase goods and services. Q2: Give meaning of total utility? It is total Psychological Satisfactions that a consumer gets from the consumption a given amount of a particular good. Q3: Give meaning of Marginal Utility. It is change in total utility by using one more or one less unit of a commodity. Q4: Write down the condition of consumer equilibrium. Demand: MU x = P x Q1: What is the meaning of demand? It is quantity of a commodity that a consumer is willing & able to buy in the market at a given price and at a given time. Q2: What is law of demand? Ans : Other factors remaining constant there is inverse relationship between price and demand. Q3: What is demand schedule? The low of demand in tabular form is called demand schedule. Q4: What is demand curve? The Curve which shows relationship between price and demand. Q5: What is market demand? It is total demand of a commodity by the entire consumer in the market. Q6: What is market demand schedule? It is the schedule that shows the demand of the whole market of a commodity at different prices. Q7: What is market demand curve? It is the curve that shows the demand of the whole market of a commodity at different places. Q8: Define inferior goods. The goods whose demand increases with fall in income of the consumer and vice-versa. Q9: Define Normal goods. The goods whose demand increases with increase in income of the consumer and vice-versa. Q10: Define price elasticity of demand. It is measure of percentage change in quantity demanded due to percentage change in price. Q11: Write down cause of contraction in demand. Increase in price - 7 -
Q12: Write down cause of extension in demand. Decrease in price Q13: When coefficient of elasticity of demand is 1.25. Is the demand elastic or inelastic and why? Elastic because it is greater then one Q14: Write down formula for calculating price elasticity of demand Ed= % Change in quantity Demanded % Change in price. 3/4 marks questions Q1: Describe 4 determinants of demand. 1) Price-Inverse relationship between price and quantity demanded. More the price lesser will be demand and vice-versa. 2) Income of the consumer Positive relationship between income of the consumer and demand of a normal god and vice-versa. For an inferior good- inverse relationship between income of the consumer and demand. More the price lesser will be demand and vice-versa. 3) Taste& performance The goods for which there is favourable change in taste their demand will be more. 4) Price of other goods: a) Substitute goods- If the price of Substitute goods increases the demand of given good will increase. Eg: Tea and Coffee. b) Complementary goods- If the price of Complementary goods increases the demand of given good falls. Eg: Pen and Ink. Q2: Write down difference between extension of demand and increase in demand. Extension of demand Increase in demand 1) More quantity due to less price 1) More quantity due to change in other determinants. 2) Other factors Constant 2) Price remains Constant 3) Movement on same demand curve Y D Price 3) Shifty of demand curve towards right D Y D Price D1 O X O Quantity Demand ed X - 8 -
Q3: Difference between Contraction in demand and Decrease in demand. Contraction in demand Decrease in demand 1) Less quantity due to high price 1) ) Less quantity due to other factors. 2) Other factors Constant 2) Price is Constant 3) Movement on same demand curve Y D 3) Shifty of demand curve towards right Y D D1 Price Price O Quantity Demand Quantity Demand ed X O Quantity Demand Quantity Demand ed X Q4: Explain low of demand with the help of demand curve. Meaning- Other factors remaining constant there is inverse relationship between price and demand i.e when price increases less quantity is demanded and vice-versa. The demand curve shows at price P, quantity demanded is Q. but when price rises to P 1 quantity falls to Q 1 and when price falls to P 2 Quantity rises to Q 2 Q5: Factors affecting elasticity of demand. a) Nature of commodity Necessaries like salt & medicines have inelastic demand and demand of luxuries like air conditioner has is more elastic. b) Habits: The goods for which a person is habitual their demand is less elastic. c) Availability of Substitutes- The goods which have substitutes their demand is more elastic. d) Proportion of total expenditure spent on the product goods on which a small portion of income is spent like candles needle etc. their demand is less elastic. e) Time period- Longer the time more elastic will be demand. f) Different uses of a commodity The goods which have many uses like milk used for making sweets, drinking, ice-cream etc have more elastic demand. - 9 -
Q.6-A consumer consumes two goods X and Y. What will happen if MUx/Px is greater thanmuy/py? If MUx/Px is greater than MUy/Py, then it means that the satisfaction a consumer derives from spending a rupee on Good x is greater than the satisfaction derived from spending a rupee on Good Y. The consumer will relocate her income substitute Good X for Good Y. As the consumption of Good X increases its marginal utility will fall. As the consumption of Good Y decreases, it marginal utility will increase. This is due to the law of diminishing marginal utility. This process will continue till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium. Q,7.How is equilibrium achieved with the help of indifference curve analysis? In the indifference curve approach, consumer s equilibrium is achieved at the point at which budget line just touches a particular indifference curve, i.e. the point, at whichthe budget line is tangent to a particular indifference curve. This is the point of maximum satisfaction. conditions for consumers equilibrium: i) Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py ii) Indifference curve must be convex to the origin.or MRS decreasing. c) Diagram: Y A P Good O IC 1r IC 3 IC 2 Diagrams Explanation: i) AB is the budget line. ii) It is sure that consumer s equilibrium will lie on some point on AB iii) Indifference map (set of IC1, IC2, IC3) shows consumers scale of preferences between different combinations of good x and good y iv) Consumers equilibrium will achieve where budget line (AB) is tangent to the IC2. Consumers cannot achieve the following: i) P and r points on budget line give satisfaction, but, choosing point q puts him on a higher IC gives more satisfaction. ii) He cannot move on IC 3, as it is beyond his money income. - 10 -
Unit-III Production Function and Laws of Production Q1: What do you mean by production function? Production functions mean the functional relationship between physical inputs and physical output. Q2: What do you mean by Short Run and long run production function. a) Short Run production function means variable proportion or factor ratio changes. b) Long run means constant proportion factor ratio remains constant. Q3: What is meant by Producer? Producer is a producing unity who uses and non factor inputs fee the production of goods and services. Q4: What is the meaning of capital as a factor of production? Capital is a stock of the produced means of production. Q5: What does division of labour means? Division of Labour refers to division of work into different processes such that each process is handled by a specialized set of workers. Q6: Define total production. It is the sum total of output produced by all units of labour (along with their other factors of production) TP=AP X L TP=Total Product AP=Product per unit of labour L= Units of labour employed. Q7: When is total output maximum? Total output is maximum when marginal product is zero Q8: When total product increases at decreasing rate. What happens to marginal product? Marginal product should be decreasing. Q9: Explain the relationship marginal product and total product? (i) When MP increases, TP increases at increasing rate. (ii) When MP is constant, TP increases at constant rate. (iii) When MP decreases, TP increases at diminishing rate. (iv) When MP is zero, TP is maximum (v) When MP is negative, TP declines. Q10: Explain the relationship between AP and MP with the help of a diagram. As per diagram the relationship between AP and MP as follows: i) So long as MP greater than AP, AP should be rising ii) So long as MP < AP, AP should be declines - 11 -
Y iii) when MP = AP, MP should be maximum iv) MP curve is always to the left of AP curve, except when the two are equal v) MP can be positive, negative and zero, but AP is always positive. Product AP=MP MP<AP c zero AP O -vc MP X Unit of labour Q11: What do you understand by returns to a factor? We study the behaviour of output when only one variable factor of production is increased, other factors remaining constant. Q12: What do returns to scale refer to? When a producers changes all the factors of production in the same proportion, the proportional relationship between output and factor inputs is known as returns to scale. Q13: What is meant by the law of variable proportion? Explain using a suitable diagram Law of variable proportions states that as more and more of the variable factor is combined with the fixed factor, marginal product of the variable factor may initially increase and subsequently establish but must finally decreased. - 12 -
Q14: Distinguish between returns to factor and returns to scale. Explain the reason for increasing returns to scale. The main differences between returns to a variable factor and returns to scale are as under: 1) Returns to a factor apply when one factor alone is variable and other factors remain fixed, returns to scale apply when all factors of production are variable and changed in the same proportion. 2) Returns to scale is scale is studied only with references to long period. returns to a factor is generally studied with reference to short period. Causes: 1) One reason is in terms of division of labour with increase in the scale, work can be divided into sub processes and each process is assigned to one or a group of specialized workers. 2) Another reason is in the terms of use of specialized machine. When more capital is used, it amounts to using of bigger and more specialized machines. So use of specialized machines raises the productivity. Q15: What is meant by producer s equilibrium? Producers is set to be in equilibrium when he maximizes us profit or minimizes his losses. It occurs when (i) MR=MC and (ii) MC is rising. Revenue, Producer s Equilibrium and the Supply Curve 1. What is meant by total revenue? Ans. Total revenue is the total amount of money received by selling a particular quantity of commodity. 2. What is producer s equilibrium? Defined marginal production. Ans. Producer s equilibrium refers to the situation which the producer don t want to change output. He is in equilibrium when he gets maximum profit. 3. What is meant by law of supply? Ans. Law of supply states, other things being equal, quantity supplied increases with the rise in price and vice versa. 4. What is meant by Change in supply? Ans. Change in supply is due to the change in factors affecting supply other than price of the commodity. Eg. Change in prices of the factors of production, change in technology, change in price of competing goods etc. 5. What is the relationship between Average revenue and Marginal revenue curves under perfect competition? Ans. AR and MR curves under perfect competition are perfectly elastic i.e parallel to X-axis and coincide with each other. - 13 -
6. What is meant by Market Period? Market period is the period in which neither variable factors of production nor fixed factors of production can be changed to change the production. This is also called very short period. 7. What are the conditions of producer s equilibrium under perfect competition? Conditions of producer s equilibrium:- 1. MC = MR 2. MC is rising. 8. What is the definition of elasticity of supply? Elasticity of supply is the responsiveness change in supply due to change in price. 9. How does an increase in the rate of excise tax shift the supply curve? The supply curve will shift backward showing decreases in supply. Questions of 3-4 marks. 1. How are revenue curves different under monopoly from monopolistic competition and why? AR and MR curves under monopoly and monopolistic competition are downward sloping but more elastic under monopolistic competition. Monopoly Monopolistic Competition Revenue curve are more elastic under monopolistic competition because close substitutes are available. 2. Name any three factors that can shift a supply curve? Ans. Factors which can cause change in supply:- 1. Change in prices of factors of production 2. Change in technology 3. Change in government policy of taxation. - 14 -
3. Explain the conditions of producer s equilibrium under perfect competition with MC and MR curves? Both the conditions of producer s equilibrium are fulfilled at Pt. E where MC= MR and MC is rising because at this point producer is earning maximum profits. Before point A, MC>MR causing losses and after Pt. E, MC>MR causing losses. Therefore E is the only point of equilibrium. 1 Marks Question Q1: Define Fixed cost. Cost of Production Fixed costs are the costs that do not vary with the level of output. Q2: Define Variable Cost. Variable costs are the costs that vary directly with the level of output. Q3: Define Marginal Cost. Marginal Cost is the change in total cost by producing one more unit of output. Q4: Define Average Cost. Average Cost is the cost per unit. Average cost can be calculated dividing TC by quantity produced. Q5: Does fixed cost affect marginal cost. No, fixed costs do not affect the marginal cost. 3 / 4 Marks Questions: Q1: Calculate TFC,TVC,AVC and MC from the following: Output (Unit) 1 2 3 TC(Rs) 20 26 39 AFC(Rs) 6 3 2 Output (Unit) TC AFC TFC TVC AVC MC 1 20 6 6 14 14 14 2 26 3 6 20 10 6 3 39 2 6 33 11 13-15 -
Q2: Distinguish between Fixed and Variable cost. Fixed Cost Variable Cost 1) Fixed cost do not vary with the level of 1) Variable cost vary with the level of output. output. 2) Fixed cost do not become zero. They 2) They can be zero if production is remain same even production is stopped stopped. 3) 3) Q1: What is Market? Unit-IV Forms of market and Price Determination Market is an area in which buying and selling activities takes place commodity. Q2: Define Market Equilibrium. Market Equilibrium exist at point when quantity demanded= quantity supplies. Q3: What is excess demand? When the consumer wants more than what the producers are will to supply. Q4: What is Excess Supply? When the quantity demand is less than the quantity supply. Q5: How does an increase input price affect the supply of an economy? Increase in the input price leads to higher price and less quantity supply. Q6: How does an increase in excess tax rate affect the market price and quantity exchange? An increase in the rate of excise duty leads to higher price and the less quantity in exchange. - 16 -
Q7: How is the demand for a commodity affected by changes in the prices of other commodities? In case of substitutes, if P x rises D y will also rise. In case of Complementary goods, if P x rise, D y will fall. Q8: What is control price? A price fixed by the government, which is below the equilibrium price. Q9: What is Support price? A product price fixed by the Government, which is above the equilibrium price. Q10: Name the two sources of demand shift or supply shift. 1. Change in Income 2. Change in Tastes OR any other two. Sources of change in supply shift: a) Technologies progress b) Change in input price 3 / 4 Marks Questions: Q1: How the Equilibrium price is determined? Eg: Price is determined by two forces. (1) Market Demand (2) Market supply Q2: Explain the affect on equilibrium price and quantity when the demand is perfectly elastic and supply decreases. (i) Price will remain same. (ii) Quantity decreases from OM to OM O - 17 -
Q3: Explain the control price and support price with the help of diagram. Control Price :- A price fixed by the government, which is below the equilibrium price. Support price:- A product price fixed by the Government, which is above the equilibrium price - 18 -
Forms of Market Q1: Name the three forms of imperfectly competitive market. Monopoly, Monopolistic Competition, Oligopoly. Q2: What is break even point? This is the price at which firms make zero abnormal profits. It is equal to the average cost. Q3: What is perfectly competitive market? It is the market form where there are large numbers of buyers and sellers and no single buyer and seller can affect the price. The products are homogeneous. Q4: What are patent rights? It is an exclusive license or right granted to a company or an individual to produce a particular product on the basis of its claim to be the discoverer of the product or technology. Q5: Define Monopoly. The market in which there is only one seller of the product. Q6: Define Monopolistic Competition. It is a market in which there are many sellers, they produce a differentiated product and there is free entry and exit of firms. Q7: What is the shape of AR and MR under Perfect Competition? Q8: What is the relationship between AR and MR in monopoly? AR is more than MR in monopoly. Q9: What is selling cost? Advertisement costs are selling cost. Q10: Give two examples of monopolistic competition? Soap- Pears, Lux or any other. Paste-Colgate, Pepsodent or any. 3 /4 Marks questions: Q1: Explain the four features of perfect competition market? 1. Large number of buyers and sellers 2. Homogenous product 3. Perfect Knowledge 4. Perfect Mobility - 19 -
Q2: Explain the four features of monopoly? 1. Single seller and many buyers. 2. Lack of perfect knowledge 3. Insignificant presence of selling cost. 4. No close substitute. 5. Price discrimination. 6. Price Maker Q3: Differentiate between perfect competition and monopolistic competition? (1) AR and MR Curves: Under perfect competition AR curve is horizontal straight line and MR=AR at all level of output. On the other hand AR curve slopes downward so does the MR curve but MR curve is below the AR. (2) Price policy: Price=MC under perfect competition and price > MC under monopolistic competition. (3) Nature of product: product are homogenous under perfect competition and product differentiation under monopolistic competition. (4) Number of firms: Large number of firms under perfect competition but the no of firms is not very large under monopolistic competition. Diagrams 1.Effect of change in demand when supply remains same: (i)when demand Increases * The Price will increase from OP to OP 1 * The quantity will increase from OM to OM 1 (ii)when demand decreases * The price will come down from OP to OP O * The quantity will decrease from OM to OM O - 20 -
2. Effect of change in supply when demand remains the same: (i) When Supply Increases: * The price will come down from OP to OP O * The quantity will increase from OM to OM 1 (ii) When Supply decreases:- * The Price will increase from OP to OP 1 * The quantity will decrease from OM to OM o (iii) When both Demand and Supply changes (i) When demand and supply increase in the same amount * Price Remains same * Quantity increases from OM to OM 1-21 -
(ii) When increase in demand in demand is more as compared to increase in Supply. * Price will increase * Supply will increase (iii) When Increase in supply is more as compared to increased in demand * Price will comedown from OP to OP O * Quantity will increase from OM to OM 2 (iv) When demand and supply decreases in the same amount * Price will remain the same * The quantity will decrease from OM to OM o OM (V) When decrease in demand is more than decrease in supply. * Price will come down * Quantity will decrease from OM to - 22 -
Unit-5 National Income Accounting One marks questions: Q1: Define National Income? National Income refers to the money value of all final goods and services produced by the Normal residents of a country, during an accounting year. Q2: Define Transfer Payments? Payments made where there is no good are service received in exchange. Q3: Define Factor Income. The income of the factor of the production for rendering their service to the product. Q4: Define Net Exports. It is the difference between payments made and received from the rest of the world. Q5: Define Mixed Income. Income earned by self-employed and incorporated enterprises from all sources. Q6: Define real flow of Income. When goods and services flow from one sector of the economy to the other. Q7: What is the alternative name of value added method? Product Method. Q8: What is a depreciations charge? Fall in the value of assets due to normal wear and tear. Q9: What is Net Indirect Taxes? It is the difference between indirect tax and subsidies. Q10: When GNP MP = NNP MP. When deprecation is equal to zero, Q11: When Domestic product is equal to National Product? When NFIA is equal to zero. Q12: Why sale of share and bonds not included while calculated National Income? Because it is just transfer of ownership and does not lead to flow of goods and services. Q13: Are services of housewife included in National Income? No, because market value of such services cannot be calculated. Q14: Is scholarship is included while calculated National Income? No, because these are transfer payment and do not lead to flow of goods and services. - 23 -
Q15: What is gross domestic Capital Formation? It is sum total of gross fixed capital formation and change in stock. Short Answer Questions: Q1: What is the difference between Intermediate and final goods? Intermediate goods are those goods which are used for the production of other goods and services for e.g.: seeds, fertilizers. Final goods are those goods which are sold to their final users during a year. These are not mean for resale in the market for e.g.: cloth. Q2: Distinguish between transfer payments and factor payment? Transfer Payments are those payments which are given to the household without rendering their services e.g.: gift. Factor Payments are those which are given by the producer to the factors by rendering their services to producer sectors. Q3: Difference in the Leakages and Injections? Injections: These are those flow variables which cause positive effect in the process of production in the economy. Leakages: These are those flow variables which have as negative effect on the process of production in the economy. Q4: Distinguish between GDP MP and NNP FC? GDP MP : It is the market value of final goods and services produced with in domestic territory of the economy during an accounting year. NNP FC : It is the factor payment and received by the factor in place of producing goods and services during an year including net factor income from abroad. Q5: What is money flow? Money Flow: It refers to flow of factor income from the producing sector to household sector and corresponding money flow from household to producing sector as household expenditure. Q6: Calculate National income by Income method? ITEMS Rs(Crore) Compensation of employee 1200 NFIA -10 Interest 310 Rent 200 Mixed Income 900 Profit 800 Solution: = 1200+(-10)+310+200+900+800=3400-24 -
Q7: Find out National Income by expenditure Method. ITEMS Rs(Crore) 1.Private Final Consumption expenditure 510 2.Government Final Consumption expenditure 75 3.Gross fixed capital formation 130 4.Change in Stock 35 5.Exports 50 6.Imports 60 7.Consumption of fixed capital 40 8.Net factor Income from Abroad -5 9.Indirect Taxes 90 10.Subsidies 10 Solution: Items= 1+2+3+4+5+6+7+8+9+10 = 510+75+130+35+ (50-60)+40+(-5)+(90-10) = 65 crore Q8. Write any four precautions that are to be taken while calculating National Income by Income method? 1. Transfer earning like old age pension and scholarship should not be included. 2. Income illegal activities like theft should not be included. 3. Sale of second hands good should not to be included. 4. Sale proceeds of shares and bonds are not to be included. 5. Imputed rent for self occupied house should be added. - 25 -
Unit: -6 Money & banking. Q1:- Define money. - Money is something that is generally accepted as means of exchange an act as a measure and store of value..q2:- What is money supply? - It refers to the total stock of all the form of money(paper money, coins and bank deposits) which are held by a country at any particular point of time. Q3:- What do you mean by banking? - Banking is defined as accepting for the purpose of lending or investment of deposit money from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise. Q4:- What is a central bank? - The central bank is the apex. Institution of a country s monetary system. It is the banker to the other banks and to govt. It issues notes, controls money supply and credit and maintain monetary stability. Q5:- Write any two function of central bank. - 1. Currency Authority 2. Banker to the government. 3. Credit Control. Questions of 3 /4 Marks: Q1:- What are four measure of money supply in India? - M 1 = C + DD + OD M 2 = M 1 + Saving deposits with post office saving banks. M 3 = M 1 + Net time deposits of banks. M 4 = M 3 + Total receipts with post office saving organization(excluding NSC) Q2.Explain the Process of credit creation by commercial banks. Credit creation (or deposit creation or money creation) by the banks is determined by (i) the amount of the initial fresh deposits. (ii) the Legal Reserve Ratio (LRR), the minimum ratio of deposit legally required to be kept as cash or in liquid form by the banks. It is assumed that all the money that goes out of banks is re-deposited into the banks, and LRR consists of CRR and SLR decided by RBI. Example :- Let the LRR be 20% and there is a fresh deposit of Rs.10,000. As required the banks keep 20% i.e. Rs.2,000 as cash. Suppose the banks lend the remaining Rs. 8,000. Those who borrow, use this money for making payments. As assumed those who receive payments put the money back into the banks. In this way bank receives fresh deposits of Rs. 8,000. The bank again keep 20% i.e. Rs.1,600 as cash and lend Rs.6,400, which is also 80% of the last deposits. The money again comes back to the banks leading to a fresh deposit of Rs.6,400. The money goes on multiplying in this way this process continues till new deposit become nil., and ultimately total money creation is Rs.50,000. Total money creation = initial deposit x 1/LRR =10000 x1/20% = 10000 X 100/20 Total money creation = 50000. - 26 -
whole process can be explained through following table:- Banks Initial Deposit Rs. Legal Reserve Ratio (20%) Secondary Deposit (Lending) Rs. A B.. N 10000 8000 2000 1600..... 8000 6400..... Total 50000 10000 40000 Where Money multiplier is 1/LRR=1/20%=1/20*100=10/2= 5 It is the multiple by which total deposits increase due to initial deposit. Q.3-Explain the functions of Central Bank. 1. Issue of Currency: The Central Bank is given the monopoly of issuing currency in order to secure control over volume currency and credit. These notes are circulated through out due country as legal tender money. It has to keep a reserve in the form if gold and foreign securities as per the statutory rules against the notes issued by it. It issues notes above Rs.2/-. One Rupee coins and other small coins are issued by the mints of Government. 2. Bankers to Government: Central Bank acts as the bank of Central and State governments. It carries out all banking business of Government. Government keep their cash balances in the current account with Central Bank. Similarly central bank accepts receipts and makes the payment on behalf of the Government. Also Central bank carries out exchange, remittances and other banking operation on behalf of Government. Central Bank gives the loans and advances for a short period to the Governments. It also manages the public debt of the country. 3. Bankers Bank & Supervisor: All the scheduled banks are controlled and supervised by the Central Bank. These banks are required to keep certain percentage of their deposits with Central Bank. They can take loans from the Central Bank. 4. Controller of Credit & Money Supply: Central Bank regulates the supply of money and credit according to the interest of the country. It follows various instruments like (i) Bank rate, (ii) Open Market operations (iii) Cash reserve ratio, (iv) Moral suasion (v) Marginal requirements. They are the instruments of Monitory policy. 5. Exchange Control:It maintains the external value of currency. Every citizen should deposit foreign currency they earn with RBI and they can get foreign currency from RBI with application. 6. Lender of Last Resort:-Scheduled banks can take the loans by rediscounting first class bills or short term approved securities, whenever they do not get funds from any other sources. 7. Custodian of Foreign Exchange Balance: Central Bank maintains the balance of foreign exchange gold and bullions. 8. Clearing house function: Central Bank clears the cheques received by a bank belongs to other banks issued by the customers without delay. - 27 -
Price Level 9. Collection and publication of data: It collects, completes the data regarding the other banks and publishes this information. 1 Marks questions Unit: - 7 Aggregate Demand & Aggregate Supply Q1:- What is Aggregate Demand? - It is the money value of all the goods and services demanded by the people in an economy during the given period of time. Q2:- What is aggregate supply? - It is the total value of goods and services produced by all the factors of production during the given period. Q3:- Name any one component of Aggregate demand. - Consumption expenditure by household sector. Q4:- Define propensity to consume. - Propensity to consume expresses functional relationship between aggregate consumption and national income. Q5:- Define multiplier. - Multiplier is the ratio of an increase in income to given increase in investment. Q6:- Define average propensity to consume. - the ratio of total consumption to total income is called APC. Q7:- Define Marginal propensity to consume. - The ratio of change in consumption to change in income is called MPC. Q8:- What is the relationship between MPC & MPS? - MPC + MPS = 1 Q9:- Define induced investment? - Investment which depends upon level of income is called induced investment. Q10:- Give formula for measuring investment multiplier? - K = 1 = _1 1 MPC MPS 3 or 4 Mark Questions:- Q1:- Explain the concept of multiplier with the help of an example? - Multiplier is the ratio between change in income to change in investment. Symbolically:- K = Δ Y Δ I Example :- If an increase in 10 crore of investment generate Rs. 40 Crore of income then the size of multiplier would be K = Δ Y = 40 (crore) = 4 Δ I 10 (crore) Q2:- Briefly explain the behaviour of aggregate supply? - As is the flow of goods and services in an economy. In technical terms it is the sum total of consumption expenditure and saving on a given level of employment. As curves increase with every increase in emp. But beyond to y axis which is shown in the diagram. AS - 28 - Full Employment
Determination of Income, Output and Employment Q1:- What is an excess demand? - Situation of AD > AS corresponding to full emp. Level. Q2:- What is deficient Demand? AD<AS corresponding to full emp. Level. Q3: Define inflationary gap. It is the extent of excess of current aggregate demand over current aggregate supply on full emp. Level. Q4: Define deflationary gap. Extent of deficiency of aggregate demand over aggregate supply available on full emp.level. Q5: What is Fiscal policy? Policy concerning govt. budgeting, taxation and borrowing for meeting definite object. Q6: Define monetary Policy. Policy concerned with the measure taken to regulate the supply of money the cost and credit availability in the economy. Q7: What is bank rate? The rate at which central bank lends money to its member banks is called bank rate. Q8: What is margin requirement? Margin requirement refers to the difference between the current value of security offered for loan and the value of loan granted. Q9: Give two examples of direct taxes. Income tax, Wealth tax. 3 or 4 Mark Questions:- Q1: Show with the help of an example (i) Full Employment Equilibrium (ii) Under Employment Equilibrium (iii) Over full Employment Equilibrium Ans. 1. Full Employment Employment refers to the situation where AD=AS over full emp. Level. There is absence of involuntary unemp. It is shown by point e in the diagram. 2. under emp equi. Where AD=AS at less full emp. level. There is existence of involuntary unemployment in diagram point e 1 3. Over full Emp. Equi: Where AD=AS at more than full emp. Level which is point e 2 Q2: What are the main causes of excess demand? (i) Increase in propensity to consume. (ii) Deficit Financing. (iii) Increase in autonomous investment (iv) Surplus in BOP - 29 -
Q3: State any three fiscal measures to reduce AD in the economy? When there is situation of excess demand. (i) Surplus Budget (ii) Increase in taxation (iii) Decrease in Govt. Exp. (iv) Increase in Public Borrowings. Q4: Explain various measures of credit control? Quantitative: (i) Bank rate (ii) Open market operations. (iii) Change in cash reserve ratio and liquidity ratio. (iv) Repo rate and reverse Repo rate. Qualitative measures: (i) Change in margin requirement of loans. - 30 -
Unit: -8 Government Budget One Marks Questions Q1:- What is Budget? - It is the estimated income & expenditure of Govt in an accounting year. Q2:- Give two examples : -Direct Taxes. - (a) Income tax (b) Wealth Tax Q3:- What are capital receipts? - Monetary receipts which either create liability for the Govt or cause reduction in the assets of the Govt. Q4:- Give two examples of capital receipts - (a) Borrowing of loans (b) Disinvestment Q5:- What is Revenue expenditure? - Neither creates assets nor reduces liability Q6:- Expenditure on law & order is planned or unplanned expenditure. - Unplanned expenditure Q7:- What is primary Deficient? - It is fiscal deficient minus interest payments on loans. Q8:- Name two types of Budget Receipts - (a) Revenue receipt (b) capital receipt Q9:- Give two examples of capital expenditure - (a) Purchase of machinery (b) Investment in shares Q10:- When estimated receipts are more than estimated expenditure in an accounting year. What type of Budget in this? - Surplus Budget 3 / 4 marks Questions :- Q1:- What are objective of Budget? i. Redistribution of Income and Wealth. The government uses fiscal instruments for Equitable distribution of income & wealth to ensure social justice. To improve the distribution of income and wealth in the economy It taxes the rich and gives subsidies on essential items, expenditure is done on social security or public works etc.. ii. Reallocation of resources The government seeks to reallocate with a view to balance the goals of profit maximization and social welfare. A production of goods which are injurious to health like wine is discouraged through heavy taxation. On the other hand production of socially useful goods like Khadi is encouraged through subsidies. iii. Economic stability using its revenue and expenditure policy in Budget the government ensures economic stability in the economy by maintaining price stability and high levels of employment. The forces of supply and demand generate trade cycles in the economy, which govt. tries to prevent and control. iv. Direct participation and Economic growth by Managing Public sector Enterprises The Government targets to increase the rate of growth by establishing public sector enterprises to produce goods and services at low cost to promote social welfare like railways. Provisions are made in the budget for these PSU s. Often, public sector enterprises are encouraged in areas where private monopolies occur. - 31 -
Q2:- Distinguish between (a) Direct & indirect Taxes (b) Development & non-development expenditure - (a)direct taxes:- When liability to pay the tax fall on the same person. Like income tax,wealth Tax Indirect Taxes :- When liability to pay the tax can be shifted to other person like sale Tax, Exercise Tax. (b) Development Expenditure:- Expenditure on the economic & social development of country like exp. On Railway & Post & Telegraph. Non-Development Expenditure:- Expenditure on general service of Govt. like Police, defence exp. Q3:- How the Budgetary deficient is financial? - Budgetary deficient is financed by borrowings from RBI and by printing new currency. One Marks Questions UNIT -9 Foreign Exchange rate & balance of Payment Q1:- What is Foreign exchange rate? - Rate at which currency & another country is exchanged Q2:- What is Foreign exchange market? - The market in which currencies of various countries are converted & exchanged. Q3:- How the rate of foreign exchange is determined? - By demand & Supply of foreign exchange. Q4:- What do you mean by balance of Payment? - Accounts recording all economics transactions of a given country with the rest of world in a year. Q5:- What do you mean by balance of Trade? - Difference between visible items of exports & imports 3 /4 Marks Questions:- Q1:- Distinguish between Balance of Trade & Balance of Payments. - BOT records visible merchandise Transacting BOP records visible & invisible goods & services. BOT does not Transaction of capital nature. BOP does transaction of capital nature. BOT can be favorable, unfavorable or balanced. BOP is always balanced. Q2:- Name the main components of current account of balance of payment account. What does a deficient in current account indicate? - (i) Imports & exports of goods (ii) Imports & exports of services. (iii) Unilateral Transfers It will be taken case of with the help of capital account Q3:- Distinguish between current account & capital account & balance of payments account. Mention any two transaction of capital account. - 32 -
- Current account records in flows and outflows of foreign exchange and transfers on the other hand. Capital account records transaction leading to change in foreign financial assets (a) Borrowing (b) Lending Q4: Appreciation of currency Appreciation means increase in price of domestic currency due to changes in demand and supply of foreign exchange. increasing in price of rupee from rupee 55/$ to rupees 45/$ Appreciation occurs in Flexible Exchange Rate Depreciation of currency Depreciation means decrease in price of domestic currency due to changes in demand and supply of foreign exchange. decreasing in price of rupee from rupee55/$ to rupees 65/$ depreciation occurs in Flexible Exchange Rate Q5:- Sources of Demand for foreign exchange: 1. To purchase goods and services from other countries 2. To send gifts abroad 3. To purchase financial assets (shares and bonds) 4. To speculate on the value of foreign currencies 5. To undertake foreign tours 6. To invest directly in shops, factories, buildings 7. To make payments of international trade. Q6-Sources of Supply of foreign exchange: Foreign currencies flow into the domestic economy due to the following reason. 1. When foreigners purchase home countries goods and services through exports 2. When foreigners invest in bonds and equity shares of the home country. 3. Foreign currencies flow into the economy due to currency dealers and speculators. 4. When foreign tourists come to India Q.7-Explain the effect of depreciation of domestic currency on exports. Domestic currency depreciates when there is a rise in foreign exchange rate With the rise in foreign exchange rate the foreign counties can now purchase more quantity of goods and services from the same amount of foreign currency from the domestic economy. As a result exports rise. Q. 8- Explain the effect of appreciation of domestic currency on imports. Domestic currency appreciates when there is a fall in foreign exchange rate With the fall in foreign exchange rate the domestic economy can now buy more quantity of goods and services from foreign countries from the less amount of domestic currency. As a result imports rise. - 33 -
SURE SHOT QUESTIONS CLASS-XII, SUBJECT-ECONOMICS UNIT-1 1.What are the central problems? 2.Discuss the properties of PPC & its shape with the behaviour of MOC. 3.Distinguish between microeconomics and macroeconomics. Give examples. 4.State and discuss any two factors that will shift the Production Possibility Frontier(PPF). 5. What is Marginal rate of transformation. Explain with a schedule.. UNIT-2 6. State the Law of Diminishing marginal utility? 7. A consumer consumes only two commodities. Explain the condition of consumer equilibrium using utility approach. 8.Define consumer s equilibrium. Explain its conditions under indifference curve analysis. 9.State the Properties of Indifference Curve? 10. Explain the law of demand with the help of diagram and schedule. 11.Write three causes of increase / decrease in demand 12. Distinguish between the change in quantity demanded and change in demand 13.Explain any three determinants of individual demand for a commodity. 14.Explain any Four factors that affect price elasticity of demand 15.Define market demand for a goods. State the factors that affect it. 16.Explain with the help of a numerical example, the meaning of diminishing marginal rate of substitution. 17..Explain the effect of the change in the prices of related goods on the market demand for a given good. 18. Distinguish between normal goods and inferior goods. UNIT-3 19- Draw Total Variable Cost, Total Cost, and Total Fixed Cost curves in a single diagram. 20- Distinguish between explicit cost and implicit cost and give examples 21- Explain the effect of fall in prices of other goods on the supply of a given good. 22- State three causes of Increase &decrease in supply. 23- Explain the Relation between AC, MC & AVC,AFC curve? 24- Explain the Relationship between Total Revenue Average Revenue Marginal Revenue. Use Diagram. 25-.Briefly explain determinants of a supply of a commodity? 26- Differentiate between Expansion in supply & Contraction in Supply. 27-Differenciate between Increase in supply & Decrease in supply. 28- What does the Law of Variable Proportion show? State the behavior of marginal product according to this law. 29-Explain how changes in prices of inputs influence the supply of a product. 30- What is producer equilibrium? Explain the conditions of producer s equilibrium through the marginal cost and marginal revenue approach. Use diagram. 31- Explain Return to scale & causes of its behavior. UNIT-4 32. What are the implication of following features of perfect competition market-(a) Large no. of buyers and sellers (b) homogeneous product (c) Free entry and exit 33.What is the implication of product differentiation in monopolistic competition market? 34. Write any three difference between monopoly and monopolistic competition. Why demand curve in monopoly is less elastic as compare to monopolistic competition? 35. Distinguish between collusive (cooperative) and non-collusive (non-cooperative) oligopoly. 36. Explain non-price competition feature of oligopoly. 37.Define equilibrium price of a commodity. How is it determined? Explain with the help of a schedule.&diagram 38.Market for a good is in equilibrium. There is simultaneous decrease both in demand and supply but there is no change in market price. Explain with the help of schedule how it is possible. 39.Give the meaning of excess demand of a commodity. Explain its chain of effects on equilibrium price, quantity demanded and quantity supplied. - 34 -