12th HSC Board Economics:
State With Reasons: Do You AGREE/DISAGREE [4 Marks each]
| Economics |
1. | Choose the Correct Option | 5 Marks | |
2 | Complete the Correction | 5 Marks | |
3 | Give Economic Term | 5 Marks | |
4 | Find the Odd Word | 5 Marks | |
5 | Complete the following Statements | 5 Marks | |
6 | Assertion and Reasoning Questions | 5 Marks | |
7 | Identify and Explain the Concepts | 6 Marks | |
8 | Distinguish Between | 6 Marks | |
9 | Answer in Brief | 12 Marks | |
10 | State with Reasons, Do you Agree/ Disagree | 12 Marks | |
11 | Table, Diagram, Passage Based Questions | 8 Marks | |
12 | Answer in Detail | 16 Marks |
Notes:
(1) Five statements will be given in the question paper. Students are expected to write answers to any three questions.
(2) Rewrite the Statement in answer sheet followed by Agree or Disagree.
(3) 1 marks is allotted for stating Agree' or 'Disagree'. 3 marks are allotted for writing correct reasons.
(4) Draw diagrams, schedule wherever necessary.
Chapter 1: Introduction to Microeconomics
and Macroeconomics
(1) The scope of macroeconomics is unlimited. (Sept. '21)
Ans. I agree with this statement.
Reasons: The scope of macroeconomics is as follows:
(1) Theory of Income and Employment:
Macroeconomics explains how the level of national income and employment is determined. It also examines the causes for fluctuations in national Income and employment. To understand the determination of the level of national income and employment, it also studies the consumption function, investment function and trade cycles. Macroeconomics studies the interrelationship between the level of output, national income and the employment level and suggests policies to solve the problems related to these macro variables.
(2) Theory of General Price Level and Inflation:
Macro- economics shows how the general price level is determined and further explains what causes fluctuations in it. The theory of general price level studies the causes and effects of inflation and depression and suggests economic policies to tackle these problems.
(3) Theory of Growth and Development:
Macroeconomics studies the causes of underdevelopment and poverty in poor countries as well as developing countries and suggest theories and strategies for accelerating growth and development in them. It also explains how the higher rate of growth with stability can be achieved.
(4) Macro Theory of Distribution:
Macroeconomics deals with determination of relative shares of various social classes in the total national income. Macro theory shares of distribution deals with the of rent, wages, interest and profit in the total national Income
(2) Macroeconomics is different from microeconomics. (March '23)
Ans. I agree with this statement.
Reasons: (1) Macroeconomics is the study of entire economy. On the other hand, microeconomics is a study of a particular segment of an economy.
(2) Macroeconomics studies aggregate demand, aggregate supply, national income, general price level, etc. On the other hand. microeconomics studies individual demand, individual supply. Individual income, price determination of particular product, etc.)
(3) Macroeconomics follows general equilibrium analysis. On the other hand, microeconomics follows partial equilibrium analysis. Macroeconomics uses lumping method. On the other hand. microeconomics uses slicing method.)
Therefore, macroeconomics is different from microeconomics.
(3) The scope of microeconomics is unlimited.
Ans. I disagree with this statement.
Reasons :
The term 'microeconomics' is derived from the Greek word 'mikros' which means a small or millionth part. Thus, microeconomics studies particular unit of an economy.
(2) Microeconomics studies the economic behaviour of particular household. Individual firm, individual demand, individual supply, Individual income, price of a particular product, etc.
(3) Microeconomics studies how a particular consumer tries to attain maximum satisfaction and how a particular producer tries to attain maximum profit. Microeconomics does not include the study of the large aggregates. Thus, microeconomics is not aggregative but is individualistic in natures
Therefore, the scope of microeconomics is not unlimited but it is limited.
(4) Macroeconomics deals with the study of individual behaviour.
Ans. I disagree with this statement.
Reasons: (1) Macroeconomics does not study the individual economic unit such as particular consumer, Individual demand. particular seller, individual supply, price determination of particular good, etc.
(2) Microeconomics studies individual economic units and deals with how a particular consumer attain maximum satisfaction and how a particular producer attain maximum profit.
(3) Macroeconomics studies the economic behaviour of aggregates. their functional relationship, their interdependence, their determi nation and causes of fluctuations in them.)
Thus, macroeconomics does not deal with the study of individual behaviour, rather it deals with the study of behaviour of aggregates.
(5) Microeconomics uses slicing method.
Ans. I agree with this statement.
Reasons: (1) Microeconomics studies the individual economic units of an economy. For example, study of a particular firm.
(2) For microeconomics splits the economy into small individual economic units.
(3) Then it studies the economic behaviour of each individual's economic unit separately in detail.
Therefore, microeconomics uses slicing method.
(6) Microeconomics is known as Income Theory.
Ans. I disagree with this statement.
Reasons: (1) Income Theory lies within the scope of macro- economics.
(2) Microeconomics explains how the prices of a variety of goods and services are determined. Thus, theories of demand, supply. production function and cost fall within the scope of microeconomics,
(3) Microeconomics also explains how the prices of factors of production, viz., land, labour, capital and entrepreneur are determined. Thus, theories of rent, wages, interest and profit fall within the scope of microeconomics.
Therefore, microeconomics, is not known as Income Theory but is known as Price Theory.
Chapter 2: Utility Analysis
(7) There are no exceptions to the Law of Diminishing Marginal Utility. (March '22)
Ans. I agree with this statement.
Reasons: There are no real exceptions to the law of DMU. In the following some cases it is considered that the law of DMU is not valid:
(a) Hobbies:
It is said that in case of certain hobbies such as collection of stamps, rare coins, etc. an individual derives more and more utility from every additional stamp or coin.
It is also said that people who are fond of music derive more and more utility from every additional listening of music. It is also said that people who are fond of reading books derive more and more utility from every additional reading of book.
But in fact as per the assumptions of homogeneity and continuity of the law of DMU, if an individual is asked to collect same type of stamp continuously or to listen same song continuously or to read the same book continuously, the marginal utility will fall and the law will become applicable.
(b) Misers:
It is said that for a miser, the marginal utility of money increases with every increase in the stock of money. But the miser's behaviour is irrational. Thus, he violates the rationality assumption of the law. Therefore, misers are not real exception to the law.
(c) Addictions:
It is said that, a drunkard derives more and more marginal utility from consumption of every additional unit of liquor. But the drunkard's behaviour is irrational. Thus, he violates the rationality assumption of the law. Therefore, the drunkards are not real exception to the law.
(d) Power:
It is said that a person derives more and more utility from every additional acquisition of power. But a person's lust for power is irrational. Thus, he violates the rationality assumption of the law. So power is not a real exception to the law.
(e) Money:
It is said that a person derives more and more marginal utility with every additional unit of a money. But in fact the marginal utility of money also diminishes as its stock increases.
For example, a poor person will get more marginal utility from a 5-rupee note, but a rich person will get less marginal utility from the same 5-rupee note. Thus, in fact, there are no real exceptions to the law of DMU. It has universal applicability.
(Write any three points in the answer.)
Chapter 3 (A) : Demand Analysis
(8) Every desire of an individual is a demand. (July '22)
Ans. I disagree with this statement.
Reasons: For the answer, refer to 9. (9) from Question Set 8.
(9) Demand curve slopes downward from left to right.
Ans. I agree with this statement.
Reasons: (1) According to the Law of Demand propounded by Dr. Alfred Marshall, "Other things being equal as price falls demand tends to rise and as price rises demand tends to fall."
(2) This statement can be explained with the help of the following diagram:
From the diagram it can be seen that as price rises from OP to OP demand falls from 09 to OQ,. Similarly, as price falls from OP to OP demand rises from OQ to 09,. Demand curve, 1.e. DD indicates the inverse relationship between the price and the quantity demanded of a commodity.
(3) Diminishing marginal utility, income effect, substitution effect. multipurpose uses, new consumers, etc. are the reasons for demand curve sloping downward from left to right.
Thus, demand curve slopes downward from left to right.
(10) There are no exceptions to the Law of Demand.
Ans. I disagree with this statement.
Reasons: The following are the exceptions to the Law of Demand:
(a) Giffen goods:
Sir Robert Giffen from England noticed that in the case of inferior quality products (Giffen goods), the Law of Demand does not hold good. When the price of Giffen goods falls, buyers' real Income gets increased. As its effect, buyers demand more of superior quality goods. Thus, a fall in the prices of Giffen goods leads to fall in their demand. For example, as the price of bread falls, people demand less of bread and more of meat.
(b) Prestige goods:
Diamonds, luxury cars, posh bungalows, etc. are considered as prestige goods. Such goods have a snob appeal. Therefore, prestige goods are demanded in greater quantities at higher prices and vice versa.
(c) Speculation:
Some consumers anticipate a fall in the price of a commodity in the near future, so the demand for the commodity in question falls at the present price. Similarly, some consumers anticipate a rise in the price of the commodity in the near future, so the demand for the commodity in question rises at the present price.
(d) Price illusions:
Many consumers wrongly assume that high priced goods are of better quality. Due to this illusion, such buyers demand costlier goods in greater quantities.
(e) Ignorance:
Many times the buyers do not have a complete knowledge of a market. Due to such ignorance, they demand costlier goods in greater quantities.
(f) Habitual goods:
Certain goods like tobacco, cigarettes, etc. are consumed due to the habits. Therefore, demand of such goods remains constant even if their prices change.
In all these cases, the Law of Demand becomes inapplicable. Therefore, they are considered as exceptions to the Law of Demand. The exceptions to the Law of Demand can be explained with the help of the following diagram:
In the diagram. Y-axis represents the price of a commodity and X-axis represents the demand of commodity x. From the diagram, It can be seen that the exceptional demand curve, Le. DD slopes upwards from the left to the right. In exceptional cases the price and demand are directly related to each other. Therefore, the exceptional demand curve has a positive slope.
(Write any three points in the answer.)
(11) Price is the only determinant of demand.
Ans. I disagree with this statement.
Reasons: For the answer, refer to Q. 6 (1) from Model Question Paper given in Section 1 of this book.
(Write any three points in the answer.)
(12) When price of Giffen goods falls, the demand for it Increases.
Ans. I disagree with this statement.
Reasons: (1) Sir Robert Giffen from England noticed that in the use of inferior quality products (Giffen goods), the Law of Demand does not hold good. When the price of Giffen goods falls, buyer's real Income gets increased. As its effect, they demand more of superior quality goods.
(2) For example, when the price of vanaspati ghee falls, (its demand remains less), the demand for pure ghee rises.
(3) Thus, fall in prices of Giffen goods leads to fall in their demand. Therefore Giffen goods are considered as exception to the Law of Demand. This phenomenon is known as Giffen's paradox.
Thus, when price of Giffen goods falls, the demand for it does not Increase but decreases.
Chapter 3 (B): Elasticity of Demand
(13) Various factors influence the elasticity of demand.
Ans. I disagree with this statement.
Reasons: The factors influencing the elasticity of demand are as follows:
(a) Nature of Commodities:
Nature of commodities is one of the important factors influencing the elasticity of demand. We can classify commodities as necessaries, comforts and luxury goods. The necessary goods like salt, medicines, etc. have less elastic demand. On the other hand, comfort and luxury goods like cars, perfumes. jewellery, etc. have more elastic demand.
(b) Availability of Substitute Goods:
A commodity having larger number of substitutes tends to have elastic demand and vice versa. For example, due to the availability of larger number of substitutes, the demand for cold drinks tends to be elastic. Similarly due to a lack of substitutes, the demand for salt is inelastic.
(c) Number of uses:
A commodity which has specific use has less elastic demand. For example, a demand for a particular vegetable is less elastic. A commodity which can be put to several uses has elastic demand. When the price of such a commodity falls, it is put into various uses. Similarly, when the price of such a commodity rises, it is put only for important purposes. For example, electricity has elastic demand.
(d) Habits:
The demand for habituated goods tends to be inelastic. For example, a smoker's demand for cigarettes is inelastic. On the other hand, the demand for non-habituated goods tends to be elastic.. For example, demand for biscuits is more elastic.
(e) Durability:
Elasticity of demand also gets influenced by the durability of a commodity. Durable commodities such as washing machine, television set tend to have elastic demand and the perishable commodities such as milk, eggs tend to have inelastic demand.
(f) Complementary Goods:
Demand for complementary goods is inelastic. Complementary goods are demanded jointly. Therefore. their demand remains almost fixed. For example, the demand only for sim card or mobile phone tends to be inelastic. The goods which are not complementary to each other have more elastic demand. For example, the demand of only magazines or only cold drinks is elastic.
(g) Income of consumer:
The demand for commodities tends to be inelastic with a rise in income and elastic with a fall in income. For example, a rich person's demand for a particular commodity may be inelastic, but a poor person's demand for that same commodity may be elastic.
(h) Urgency of needs:
The commodities that are needed urgently, Le. the commodities whose consumption cannot be postponed have less elastic demand. For example, demand for medicines. On the other hand, the commodities that are not needed urgently, i.e. the commodities whose consumption can be postponed have more elastic demand. For example, demand for computer.
(i) Time period:
In a short run, the demand for specific commodity may tend to be inelastic. In the long run, a consumer may demand a cheaper substitute commodity. Thus, the demand for an original commodity tends to be elastic in the long run.
(Write any three points in the answer.)
Chapter 4: Supply Analysis
(14) There are exceptions to the Law of Supply.(Sept. '21)
Ans. I agree with this statement.
Reasons: The exceptions to the Law of Supply are as follows:
(a) Labour supply:
In the initial stages, labour supply increases as wage rate increases. However, at a later stage, workers would prefer leisure to work. They prefer to earn same amount of income by working for less hours.
Therefore, in the initial stage, the labour supply curve slopes upwards from the left to the right. However, in the later stage, the labour supply curve bends backward. This is explained in the following schedule and diagram:
Wage Rate (Rs.) (Per share) | Hours of Work (Per Day) |
100 | 5 |
200 | 7 |
300 | 6 |
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From the schedule and diagram, it can be seen that in the initial stages as wage rate rises from 100 to 200, the supply of labour also rises from 5 hours to 7 hours. However, when the wage rate rises from ₹200 to 300, the supply of labours do not rise further; rather it is reduced from 7 hours to 6 hours. Thus, after the wage level 200, the supply curve slopes backwards from the point A towards Yazis Indicating that at higher prices fewer labour hours are supplied.
(b) Agricultural goods:
Agricultural goods require suitable climatic conditions and sufficient period of growth. Therefore, the supply of agricultural goods cannot be increased overnight though their prices rise. Similarly, due to favourable conditions, the supply of agricultural goods may rise even at their constant prices. Therefore, in case of agricultural goods the law is inapplicable. Therefore, agricultural goods are exception to the Law of Supply.
(c) Urgent need for cash:
If a seller needs cash urgently he is forced to sell more even at less prices/below market prices. Therefore, the sale of goods influenced by the need for cash is considered as an exception to the Law of Supply.
(d) Perishable goods:
Perishable goods like vegetables, flowers, eggs, etc. cannot be stored for a long period of time. Seller has to bear a huge loss, if perishable goods do not get sold. Therefore, in case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. Therefore, the sale of perishable goods at low price is considered as an exception to the Law of Supply.
(e) Rare goods:
The seller shows less willingness to sell the rare and precious articles like rare paintings, old coins, antique goods, etc. even though their prices are high. The supply of rare articles remains unchanged though their prices are high. Therefore, rare articles are exceptions to the Law of Supply.
(15) Supply curve of labour is backward bending. (March 22)
Ans. I agree with this statement.
Reasons: The exceptions to the Law of Supply are as follows:
(a) Labour supply:
In the initial stages, labour supply increases as wage rate increases. However, at a later stage, workers would prefer leisure to work. They prefer to earn same amount of income by working for less hours.
Therefore, in the initial stage, the labour supply curve slopes upwards from the left to the right. However, in the later stage, the labour supply curve bends backward. This is explained in the following schedule and diagram:
Wage Rate (Rs.) (Per share) | Hours of Work (Per Day) |
100 | 5 |
200 | 7 |
300 | 6 |
From the schedule and diagram, it can be seen that in the initial stages as wage rate rises from 100 to 200, the supply of labour also rises from 5 hours to 7 hours. However, when the wage rate rises from ₹200 to 300, the supply of labours do not rise further; rather it is reduced from 7 hours to 6 hours. Thus, after the wage level 200, the supply curve slopes backwards from the point A towards Yazis Indicating that at higher prices fewer labour hours are supplied.
(b) Agricultural goods:
Agricultural goods require suitable climatic conditions and sufficient period of growth. Therefore, the supply of agricultural goods cannot be increased overnight though their prices rise. Similarly, due to favourable conditions, the supply of agricultural goods may rise even at their constant prices. Therefore, in case of agricultural goods the law is inapplicable. Therefore, agricultural goods are exception to the Law of Supply.
(c) Urgent need for cash:
If a seller needs cash urgently he is forced to sell more even at less prices/below market prices. Therefore, the sale of goods influenced by the need for cash is considered as an exception to the Law of Supply.
(d) Perishable goods:
Perishable goods like vegetables, flowers, eggs, etc. cannot be stored for a long period of time. Seller has to bear a huge loss, if perishable goods do not get sold. Therefore, in case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. Therefore, the sale of perishable goods at low price is considered as an exception to the Law of Supply.
(e) Rare goods:
The seller shows less willingness to sell the rare and precious articles like rare paintings, old coins, antique goods, etc. even though their prices are high. The supply of rare articles remains unchanged though their prices are high. Therefore, rare articles are exceptions to the Law of Supply.
.
(16) There are no exceptions to the Law of Supply. (March 23)
Ans. I disagree with this statement.
Reasons: The exceptions to the Law of Supply are as follows:
(a) Labour supply:
In the initial stages, labour supply increases as wage rate increases. However, at a later stage, workers would prefer leisure to work. They prefer to earn same amount of income by working for less hours.
Therefore, in the initial stage, the labour supply curve slopes upwards from the left to the right. However, in the later stage, the labour supply curve bends backward. This is explained in the following schedule and diagram:
Wage Rate (Rs.) (Per share) | Hours of Work (Per Day) |
100 | 5 |
200 | 7 |
300 | 6 |
From the schedule and diagram, it can be seen that in the initial stages as wage rate rises from 100 to 200, the supply of labour also rises from 5 hours to 7 hours. However, when the wage rate rises from ₹200 to 300, the supply of labours do not rise further; rather it is reduced from 7 hours to 6 hours. Thus, after the wage level 200, the supply curve slopes backwards from the point A towards Yazis Indicating that at higher prices fewer labour hours are supplied.
(b) Agricultural goods:
Agricultural goods require suitable climatic conditions and sufficient period of growth. Therefore, the supply of agricultural goods cannot be increased overnight though their prices rise. Similarly, due to favourable conditions, the supply of agricultural goods may rise even at their constant prices. Therefore, in case of agricultural goods the law is inapplicable. Therefore, agricultural goods are exception to the Law of Supply.
(c) Urgent need for cash:
If a seller needs cash urgently he is forced to sell more even at less prices/below market prices. Therefore, the sale of goods influenced by the need for cash is considered as an exception to the Law of Supply.
(d) Perishable goods:
Perishable goods like vegetables, flowers, eggs, etc. cannot be stored for a long period of time. Seller has to bear a huge loss, if perishable goods do not get sold. Therefore, in case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. Therefore, the sale of perishable goods at low price is considered as an exception to the Law of Supply.
(e) Rare goods:
The seller shows less willingness to sell the rare and precious articles like rare paintings, old coins, antique goods, etc. even though their prices are high. The supply of rare articles remains unchanged though their prices are high. Therefore, rare articles are exceptions to the Law of Supply.
(17) There is a direct relationship between price and quantity supplied. (July 22)
Ans. I agree with this statement.
Reasons: The Law of Supply can be stated and explained with the help of the following points:
(a) Law of Supply: The Law of Supply was propounded by Dr. Alfred Marshall in his famous book. 'Principles of Economics. The Law of Supply explains the direct relationship between the price and the supply.
(b) Statement of Law: "Other things being constant, the higher the price of a commodity, greater is the quantity supplied and lower the price of a commodity, smaller is the quantity supplied."
(c) Symbolic Representation: The Law of Supply can be expressed symbolically as follows:
S=f(Px)
Where, S, stands for supply of a commodity x, Æ’ stands for function of and P, stands for the price of a commodity x.
(d) Individual Supply Schedule:
The Law of Supply can be explained with the help of the following individual supply schedule:
Price (₹) | Quantity Supplied (in units) |
10 | 100 |
20 | 200 |
30 | 300 |
40 | 400 |
50 | 500 |
(e) Explanation:
From the above individual supply schedule it can be observed that at a lesser price (₹10) less units of commodity x are supplied (100 units). Similarly, at a higher price (₹50) more units of commodity x are supplied (500 units). Thus, there exists a direct relationship between the price and the quantity supplied.
(f) Individual Supply Curve:
The Law of Supply can be explained with the help of the following diagram of the individual supply curve:
(g) Explanation:
In the above diagram, Y-axis represents price of a commodity x and X-axis represents supply of a commodity x. From the above diagram it can be seen that the supply curve, i.e. SS slopes upwards from the left to the right. The supply curve has positive slope as there is direct relationship between the price and the supply.
Chapter 5: Forms of Market
(18) Price under perfect competition is decided by the interaction between demand and supply. (March '22)
Ans. I agree with this statement.
Reasons: (A) Meaning:
A perfectly competitive market is one which has a large number of buyers and sellers of a homogeneous product. According to Mrs. Joan Robinson, "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."
(B) Price Determination:
(1) The price of the product in perfect competition is determined by the interaction of market demand and market supply forces. This price is called an equilibrium price.
(2) According to Alfred Marshall, market demand and market supply are like two blades of a pair of scissors. Just as cutting cloth is not possible with the use of one blade, equilibrium price of a commodity cannot be determined either by the forces of market demand or by market supply alone.
(3) The equilibrium price determination under perfect competition is explained in the following schedule:
(4) Explanation:
(a) From the schedule, it can be seen that when the price of the commodity is low, the quantity demanded is more and quantity supplied is less. (For example, at price of apples₹ 100, quantity demanded is 5000 > quantity supplied is 1000. Similarly, at price of apples 200, quantity demanded is 4000 > quantity supplied is 2000.) In this condition of excess of market demand, the price of the commodity starts rising. Due to a rise in the price, the market demand starts contracting and market supply starts expanding In this way, the process of equilibrium in market demand and market supply gets initiated.
(b) From the schedule, it can be seen that when the price of the commodity is high, the quantity demanded is less and quantity supplied is more. (For example, at price of apples 400, quantity demanded is 2000 < quantity supplied is 4000. Similarly, at price of apples₹ 500, quantity demanded is 1000 < quantity supplied is 5000.) In this condition of excess of market supply, the price of the commodity starts falling. Due to a fall in the price, the market demand starts expanding and market supply starts falling. In this way, the process of equilibrium in market demand and market supply gets initiated.
(c) From the schedule, it can be seen that at a particular price, the market demand and market supply are equal to each other. (For example, at price of apples300, quantity demanded is 3000 = quantity supplied is 3000.) This is called an equilibrium price. An equilibrium price is the price at which quantity demanded is equal to the quantity supplied. In this way an equilibrium price is determined in perfect competition. This equilibrium price is accepted by the large number of buyers as well as large number of sellers.
(5) The equilibrium price determination under perfect competition Is explained in the following diagram:
(6) Explanation:
(a) In the diagram. Y-axis represents the price of apples and the X-axis represents the market demand and market supply of apples. In the diagram. DD is a downward sloping demand curve indicating the inverse relationship between the price and quantity demanded. SS is an upward sloping supply curve indicating the direct relationship between the price and the quantity supplied.
(b) From the diagram, it can be seen that both the curves intersect each other at point E which is the equilibrium price of apples. In this example, the equilibrium price is 300.
(19) Perfect competition means monopolistic competition.
Ans. I disagree with this statement.
Reasons: (1) In perfect competition, there are large number of sellers. In monopolistic competition there are fairly large number of sellers, but they are smaller than that in a perfect competitive market
(2) In perfect competition, all sellers sell homogeneous product. On the other hand, in monopolistic competition, all sellers sell differentiated products.
(3) In perfect competition selling cost is not incurred by the sellers. On the other hand, in monopolistic competition, all sellers incur selling cost to attract consumers. In perfect competition, there is a uniform price of a product. On the other hand, in monopolistic competition, the price of the differentiated products of every seller is different.
Thus, perfect competition does not mean monopolistic competition. They are two different forms of market.
Chapter 6: Index Numbers
(20) Index numbers can be constructed without the base year. (July '22)
Ans. I disagree with this statement.
Reasons:
(1) Index numbers measures the changes in an economic variable in present times with reference to the year in the past. This year in the past is known as base year.
(2) For the calculation of index numbers, the normal year from the past is selected as the base year. The base year should be normal te. it should be free from natural calamities, warlike conditional emergencies, etc. Similarly, it should not be too distant in the past.
(3) While preparing index numbers with reference to the base year, it is denoted by the suffix. The base year's index of a selected variable is assumed as 100. The index numbers are measured for the current year on the basis of the past year.
Thus, index numbers cannot be constructed without the base year.
(21) Index numbers economics. are very significantly/important in (March '23)
Ans. I agree with this statement.
Reasons: The significance of index numbers in economics can be explained as follows:
(1) Helpful in framing suitable policies:
Index numbers provide guidelines to policy makers in framing suitable economic policies. Index numbers are helpful in framing the economic policies such as agricultural policy and industrial policy. Index numbers also help in the fixation of wages and dearness allowances in accordance with the cost of living, etc.
(2) Helpful in studying trends and tendencies:
Index numbers are widely used to measure changes in various economic variables such as production, prices, exports, imports, etc. over a period of time. For example, by examining the index of industrial production for the last five years, important conclusions about the trend of industrial production, i.e. whether the industrial production shows an upward tendency or a downward tendency can be drawn.
(3) Helpful in forecasting future economic activity:
Index numbers helps in making predictions on the basis of analysis of the past and present trends in the economic activities. For example, increasing, by examining the data pertaining to exports of alphonso mangoes from the year 2009 to 2014 and from the year 2014 to 2019, if it is noticed that the export of alphonso mangoes has been it can be predicted that an increase in export will continue in future.
(4) Helpful in measurement of inflation:
Index numbers are also used to measure changes in the price level from time to time. The measurement of inflation enables the government to undertake appropriate anti-inflationary measures. For example, there is a legal provision to pay the D.A. (dearness allowance) to the employees in organized sector on the basis of changes in Dearness Index. Thus, with the help of the Dearness Index, the government can increase the D.A. from time to time.
(5) Useful to present financial data in real terms:
Rise in money supply over a period of time leads to inflation in an economy. Inflation has its effects on various economic variables such as total production, national income, price level, wage level, etc. Index numbers can exclude the effects of inflation by deflating the values of these various economic variables on the basis of their constant prices. Thus, index numbers can measure the changes in the values of various economic variables in real terms.
(Write any four points in the answer.)
Chapter 7: National Income
(22) Gross National Product and Gross Domestic Product are same concepts.\
Ans. I disagree with this statement.
Reasons: (1) Gross National Product is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad.
(2) Gross Domestic Product is the gross market value of all final goods and services produced within the domestic territory of a country during a period of one year. Net income from abroad is excluded from Gross Domestic Product.
(3) The formula of Gross National Product is as follows: GNPC+I+G+(XM) + (R-P).
Whereas, the formula of Gross Domestic Product is as follows:
GDPC+I+G+(X-M). Therefore, Gross National Product and Gross Domestic Product are not same concepts, but are different concepts.
(23) Under output method, value added approach is used to avoid double counting.
Ans. I agree with this statement.
Reasons: (1) According to output method, the value added at each stage of production process is included. The difference between the value of final outputs and inputs at each stage of production is called value added.
(2) Thus, GNP is obtained as the sum total of the values added by all different stages of the production process, till the final output is reached in the hands of consumers, to meet the final demand.
(3) This can be illustrated with the help of the following table:
Production Stage
Value of Output (₹)
30
50
Value of Input (₹)
0
Value Added (₹)
Sugar cane (Farmer)
30
20
Sugar (Manufacturer)
30
Retailer (Merchant)
60
50
10
Total Value
60
In the given example, a farmer produces and sells sugar cane for 30 to the sugar manufacturer. Sugar manufacturer sells sugar for 50 to the retailer. Retailer sells sugar for₹60 to the consumer. So the value added by farmer (30), manufacturer (20), and retailer (10) i.e. total of 60 is included in national income.
(24) The money value of intermediate goods is included in the estimation of national income.
Ans. I disagree with this statement.
Reasons: (1) National income includes the money value of only final goods and services. The money value of intermediate goods already get included in the money value of final goods and services.
(2) For example, in the value of the final product i.e. bread, the values of intermediate goods are already included.
(3) A separate accounting of the values of intermediate goods (wheat, flour, etc.) along with the accounting of the value of final product (bread) would lead to double counting. Due to double counting, the national income gets overestimated.
Therefore, to avoid the error of double counting, the money value goods is not included in the estimation of national ✓ Intermediate Income.
Chapter 8: Public Finance in India
(25) Obligatory function is the only function of the government. (Sept. '21)
Ans. I disagree with this statement.
Reasons: (1) In modern times, modern government performs many other optional functions in addition to the traditional obligatory functions of defence and civic administration.
(2) The government performs optional functions for the purpose of boosting economic and social development in the country. The optional functions of the government are constantly increasing.
(3) Provision of education and health services, implementation of social security schemes, promotion of industrial development. employment generation, etc. optional functions are carried out by the government.
Thus, obligatory function is not the only function of government; it is one of many functions.
(26) Capital budget consists of revenue receipts and revenue expenditure.
Ans. I disagree with this statement.
Reasons: (1) The capital budget consists of government's estimated capital receipts and anticipated capital expenditure.
(2) Capital receipts of capital budget includes in the form of tax and non-tax sources, debt recovery and other receipts.
(3) Capital expenditure of capital budget includes expenditure in the form of payment of interest on loans, payment of dividends on Investments, provision of grants to states, etc.
Thus, capital budget does not consist of revenue receipts and revenue expenditure, but it consists of capital receipts and capital expenditure.
Chapter 9: Money Market and Capital Market in India
(27) Reserve Bank of India performs various functions. (Sept. '21) OR
There are many functions of the Reserve Bank of India.
Ans. I agree with this statement.
Reasons: The functions of RBI are as follows:
(a) Issue of currency notes:
The Reserve Bank of India has a monopoly on printing of all rupee notes except one rupee note and all coins. According to the Minimum Reserve Policy of 1957, the Reserve Bank of India has to reserve at least 200 crore. Of this, 115 crore is kept in terms of gold and 85 crore are kept in terms of foreign currency.
(b) Acting as a banker to the government:
The Reserve Bank of India acts as a banker to the government. The Reserve Bank of India accepts deposits from the Central and State Governments and makes payments on their behalf as a representative of the Government. The Reserve Bank of India assists the government in managing public debt and provides advice on a number of financial issues.
(c) Acting as a banker to banks:
The Reserve Bank of India has statutory control over all banks in India. All Scheduled Banks in India are required to reserve minimum cash with the Reserve Bank of India as per their demand and term liabilities. The Reserve Bank of India provides financial assistance to banks by discounting of eligible bills, providing advances against approved securities.
(d) Acting as a custodian of foreign exchange reserves:
The Reserve Bank of India acts as the custodian of foreign exchange reserves. The Reserve Bank of India conducts the buying and selling of currencies of all member countries of the International Monetary Fund. The Reserve Bank of India helps in maintaining the official rate of exchange of rupee as well as ensure its stability.
(e) Controlling credit:
As the Supreme bank in the country, the Reserve Bank of India controls the credit creation process of commercial banks. The Reserve Bank of India uses quantitative techniques to control the volume of credit, such as bank rates, open market operations, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The Reserve Bank of India uses qualitative tools to regulate the use of credit, such as fixing margin requirements, credit rationing, moral suasion, etc.
(f) Collection and publication of data:
The Reserve Bank of India collects and publishes statistical information related to banking and other financial sectors of the economy.
(g) Carrying out promotional and developmental functions:
The Reserve Bank of India carries out promotional and developmental functions such as extending banking services in semi-urban and rural areas of India, providing financial securities to depositors, providing agricultural credit to farmers, providing industrial credit to boost industries.
(h) Performing other functions:
The Reserve Bank of India acts as a clearing house for settling the accounts between its member banks. The Reserve Bank of India acts as the lender of last resort to all banks in India and provides liquidity to banks experiencing financial difficulties.
(Write any three points in the answer.)
(28) Capital market plays an important role in India. (March '22)
Ans. I agree with this statement.
Reasons: The role of the capital market in India is explained in the Mowing points:
(1) Mobilization of long-term savings:
Industrial organizations d the government need a large amount of funds for investment and financial resources. Availability of financial resources are insufficient meet the demand for these funds. In such a case, the sale of securities by the capital market helps to bring together the long-term Savings of different sections of the population.
(2) Provision of equity capital:
The capital market provides equity capital to entrepreneurs. Entrepreneurs use the share capital buy assets for the industry and to fund business operations.
(3) Operational efficiency:
Capital market reduces the cost of transactions and simplifies the transaction process. Capital market helps financial transactions to achieve operational efficiency by educing the time taken to buy and sell stocks.
(4) Quick valuation:
Capital market helps to determine the fair and quick value of equities (shares) and debt (bonds and debentures).
(5) Integration
The capital market coordinates by consolidating the real and financial sector, equities and debt instruments, public Sector and private sector, domestic and external funds, etc.
(Write any three points in the answer.)
(29) There are no problems faced by money market of India.
Ans. I disagree with this statement.
Reasons: The problems faced by the money market in India are as follows:
(1) Dual structure:
The money market in India has a dual structure, i.e. organized sector of money market and unorganized sector of money market. The organized sector of money market Includes the Reserve Bank of India, commercial banks, co-operative banks, development financial institutions, Discount and Finance House of India, etc. The unorganized sector of money market in India Includes money lenders, indigenous bankers, unregulated financing intermediates, etc. Due to this dual structure of the money market, there is a lack of transparency and stability in the Indian money market. There is a lack of coordination in the sector of the Indian money market. Also, the unorganized sector of the Indian money market does not come under the direct control and supervision of the Reserve Bank of India. unorganized non-bang
(2) Lack of uniformity in the rates of interest:
The interest rate charged on the debt in the unorganized money market in India is relatively high. In the organized money market of India, there exists a difference in the rate of interest of commercial banks, Co operative banks, non-bank finance companies, development finance institutions, investment companies, etc. This lack of similarity in interest rate adversely affects the efficiency of the money market of India.
(3) Shortage of funds:
Due to limited per capita income, lack of banking habits among the general public, over/emphasis on useless consumption expenditure, inadequate banking facilities in rural areas. etc., the savings rate among the people of India is low. Inadequate savings have led to a shortage of funds in the money market of India.
(4) Seasonal fluctuations:
In India, during the peak season, i.e. from October to June, there is a huge demand for finance due to various reasons such as trading in agricultural products, investing in agro-based businesses, etc. During the peak season, the demand for finance in the money market is high and the supply is low, leading to an increase in lending rates. Demand for finance is relatively low in the post-harvest period, leading to lower borrowing rates. As a result, the money market of India, especially the unorganized sector, experiences significant fluctuations in seasonal interest rates and lending rates, adversely affecting the efficiency of the money market of India.
(5) Lack of financial inclusion:
Banking facilities are not adequately accessible to the economically weaker lower income groups in India. As a result, people in this group do not have adequate savings and loan opportunities. As a result, there is a lack of financial inclusion in the money market of India.
(6) Delays in technological upgradation :
It is essential to use the latest technology for the development and smooth functioning of the money market. Due to some delays in the improvement of technology in India, the functioning of the money market in India is hampered
(Write any three points in the answer.)
(30) Commercial banks accept various types of deposits.
Ans. I agree with this statement.
Reasons:
Accepting deposits: Deposits are the main source of funds for commercial banks. Commercial banks accept the following types of deposits:
(A) Demand deposits:
Demand deposits are deposits that are withdrawn on demand. The following are the two types of demand deposits accepted by the commercial banks:
(1) Current deposits: Current deposits are generally kept in current account by businessmen, corporations and trusts. The account holder can deposit money in the current deposit account any number of times and withdraw as many times as demanded. Current deposit account holders are also given the facility of overdraft. l.e. facility to withdraw in excess of the balance in the account.
(2) Savings deposits: Savings deposits are held mainly by salaried class and small traders. The account holder can deposit money in the savings deposit account at any number of times and withdraw money as and when required.
(B) Term deposits:
Deposits held for a fixed period are called term deposits. The following are the two types of term deposits accepted by commercial banks:
(1) Recurring deposits: Recurring deposits are regularly kept in the recurring deposit account, especially by small savers. Recurring deposits encourage regular savings.
(2) Fixed Deposits: Fixed deposits are kept by the saver for a fixed period. The amount deposited by the saver can be withdrawn after the stipulated period. Interest is paid at the highest rate on fixed deposits.
(31) Many reforms have been introduced in the money market of India.
Ans. I agree with this statement.
Reasons: The major reforms introduced in the money market of India are as follows:
(1) Introduction of new instruments:
New instruments like treasury bills, Commercial Papers (CPs), Certificates of Deposits (CDs) and Money Market Mutual Funds (MMMFs) have been introduced in the money market of India.
(2) Liquidity Adjustment Facility:
The Liquidity Adjustment Facility (LAF) in the money market of India includes the Repos and Reverse Repos of the Reserve Bank of India.
(3) Mechanism of market forces:
In the money market of India, the emphasis is mainly on determining interest rates by market forces.
(4) Facilities for faster transfer of funds:
National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) funds have been introduced to facilitate faster transfer of funds in the money market of India.
(5) Technological upgradation:
An electronic dealing system has been introduced to bring technological upgradation in the money market of India.
(Write any three points in the answer.)
(32) There are many problems faced by the capital market of India.
Ans. I agree with this statement.
Reasons: The following are the problems of capital market in India:
(1) Financial Scams:
Financial scams are on the rise in the Indian capital market. Rising financial scandals have increased the distrust of the general public and as a result, investors' confidence in investing in the capital market has waned. As a result, capital markets face irreparable losses in the form of declining public confidence.
(2) Insider trading and price manipulation:
Since some individuals have access to confidential information of companies, such individuals, for personal gains, buy and sell securities on the basis of the unpublished confidential information of companies. Some Individuals deliberately raise or lower the price of shares by buying and selling shares of certain companies for personal gain. Such illegal transactions are adversely affecting the smooth functioning of the capital market of India.
(3) Inadequate debt instruments:
In the capital market of India, debt instruments include bonds, debentures, etc. Due to narrow investor base, high cost of issuance, restrictions on entry of small and medium enterprises into the capital market, etc., there is relatively few trading in debt securities.
(4) Decline in the volume of trade:
Capital market investors can trade online. As a result, capital market investors in various parts of the country prefer to invest in securities listed in premier stock exchanges like in the Bombay Stock Exchange and in the National Stock Exchange. As a result, there has been a sharp decline in trade in regional stock exchanges in India.
(5) Lack of information efficiency:
If the company's current stock price incorporates all the information about the company, then a market is said to be informationally efficient. However, the efficiency of information in the Indian stock market is relatively low compared to other developed countries. As a result, investors do not get the expected return on investment and thus lose faith in the capital market.
(Write any three points in the answer.)
(33) Many reforms have been introduced in the capital market of India.
Ans. I agree with this statement.
Reasons: Capital market reforms in India are as follows:
(1) Establishment of SEBI:
The Securities and Exchange Board of India (SEBI) was established in 1988 to improve capital market transactions in India and was given statutory recognition in 1992.
(2) Establishment of Stock Exchange:
India's leading stock exchange, i.e. National Stock Exchange (NSE) was established in 1992 to improve capital market transactions in India.
(3) Adoption of computerized system:
As part of modernization, Computerized Screen Based Trading System (SBTS) was introduced in the capital market of India.
(4) D-MAT account facility:
D-MAT account facility has been made available to the investors in the capital market since 1996 so that investors can easily buy and sell shares.
(5) Increased access to global funds:
Increased access to global Funds by Indian companies is allowed through American Deposit Receipts (ADR) and Global Deposit Receipts (GDR).
(6) Establishment of Investor Education and Protection Fund:
The Investor Education and Protection Fund (IEPF) was stablished in 2001 to raise the awareness of investors in the capital market and to safeguard the interests of investors.
(Write any three points in the answer.)
(34) Money market plays an important role in India.
Ans. I agree with this statement.
Reasons: The role of money market in India can be explained with the help of the following points:
(a) Meeting the short-term requirements of the borrower:
Due to the money market, the short-term financial needs of the borrower are met at realistic interest rates.
(b) Liquidity management:
Money market facilitates better management of liquidity and money in the economy by the monetary authorities. As a result, the country enjoys economic stability and economic development.
(c) Portfolio management:
Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of investors. This enables the investors to manage portfolios to minimize the risks and to maximize the returns.
(d) Equilibrating mechanism:
Money market leads to rational allocation of financial resources. The money market accelerates savings in the investment stream. The money market helps to strike a balance between the demand for and the supply of short-term funds.
(e) Meeting the financial requirements of the government :
Money market helps the government to fulfil its short-term financial needs on the basis of the Treasury Bills.
(f) Implementation of monetary policy:
The main objective of monetary policy is to manage the quantity of money in the economy. In India, monetary policy is implemented by the Reserve Bank of India. Monetary policy makes it possible to meet the economic needs of different sectors of the economy and accelerate economic growth. The money market guides the Reserve Bank of India in developing appropriate interest rates. Thus, a fully developed money market in the economy helps in the successful implementation of monetary policy.
(g) Economising the use of cash:
The money market is not about the actual money but about various financial instruments that are the close substitutes to money. As a result, the money market helps to use cash sparingly.
(h) Promoting the growth of commerce, industry and trade :
Local traders as well as international traders who are in the need of short-term funds have the facility to discount bills of exchange in the money market. Money market provides working capital for agro- industries and small scale industries. As a result, the money market drives the growth of commerce, industry and trade in the country.
(Write any three points in the answer.)
Chapter 10: Foreign Trade of India
(35) Balance of payment is same as Balance of trade. (March '22-23)
Ans. I disagree with this statement.
Reasons:
(1) Balance of payment refers to a systematic record of all inter (1) Beconomic transactions of a price refers to for period. On the other hand, balance of trade refers to the differenc between the value of country's exports and imports for a given period
(2) Balance of trade gets included in Balance of payment. It is a part of Balance of Payment.
(3) Balance of payment is a broader concept. Balance of trade is a narrower concept.
Thus, Balance of payment and Balance of trade are not one and the same but are different concepts.
(36) During British rule, indigenous handicrafts suffered 1 severe blow.
Ans. I agree with this statement.
Reasons: (1) Prior to 1947, India was a British colony. Therefore India's foreign trade was colonial.
(2) Before independence, India mainly exported raw materials to England and imported finished goods from England. Prior to independence, India relied heavily on trade with England for industrial goods.
(3) In the pre-independence period, England started selling large quantities of finished goods made in factories in England to India As a result, many people in India started buying goods from England and this reduced the demand for indigenous goods. As a result, many small and medium enterprises in India closed down.
Thus, during British rule, indigenous handicrafts suffered a severe blow.
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