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51.

Define : (a) Nominal GNP and (b) Real GNP.

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Solution :(a) GNP measured at current prices is called nominal GNP.
(B) GNP measured at CONSTANT prices is called Real GNP.
Discussion
52.

Identify the following as Normal Residents of India : Indian employes working in W.H.O.located in India.

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SOLUTION :NORMAL RESIDENTS.
Discussion
53.

Under monopoly all firms can sell at any price.

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SOLUTION :FALSE: Under MONOPOLY there is only ONE FIRM.
Discussion
54.

With the help of suitable example explain the problem of 'for whom to produce'

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Solution :This ECONOMIC problem basically focuses on the distribution of final goods and serives produced. The distribution of the final goods and services is equivalent to the distribution of National Income (or National Product) among the factors of production such as land, LABOUR, capital and entreprenur.
For instance, imagine an economy producing two goods-normal rice (priced at Rs 15/kg) and graded rice (priced at Rs 100/kg). If the economy decided to cater the needs of the lower section of the society, then it would produce more of normal rice and less of the graded rice. In such a case, the PPC curve will be as DEPICTED in FIGURE (ii). On the other hand, if the economy decided to cater the needs of the HIGHER section of the society, then it would produce more of the graded rice and less of the normal rice. In such a case, the PPC curve will be as depicted in figure (i)
Discussion
55.

Give the meaning of: (i) Barter Exchange, (ii) Money, (iii) Money Supply.

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Solution : (i) Barter Exchange: In trade, barter (derived from baretor) is a SYSTEM of exchange where participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money.(ii) Money: Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of DEBTS, such as taxes, in a PARTICULAR country or socio-economic context.(iii) Money Supply: The money supply is the total value of money available in an economy at a point of time. There are several ways to define "money", but standard MEASURES usually include currency in circulation and demand deposits. Each country’s central bank may use its own DEFINITIONS of what constitutes money for its purposes.
Discussion
56.

Global warming is caused by :

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Heat GENERATED by sun rays passing through earth
A PART of sun's rays heat REFLECTED back towards space.
Reflection of heat into space blocked by greenhouse gases.
None of the above

Answer :C
Discussion
57.

(a) State any twoprecautionsthat must be taken into considerationwhile estimatingnationalby value added method. (b) In an economy, following transactionstook place. Calculatevalue of output and value added by Firm B : (i) Firm A sold to firmB goods of Rs. 80 core, to firm C Rs. 50 crore, to household Rs. 30 crore and goods of value Rs. 10 crore remain unsold. (ii) Firm B sold to firm C goods of Rs. 70 crore, to firm D Rs. 40 crore, goods of value Rs. 30 crore were exported and goods of value Rs. 5 crore was sold to government .

Answer»

Solution :(a) Precautions of value added method are :
(i) Value of sale and purchase of second hand goods is not CONSIDERED while estimatingvalue added as the value of second hand goods is already accountedduring the year theywere PRODUCED.
(ii) Value of intermediate goodsis not included in the estimationof value added because value of intermediate goods is reflectedin the value of final goods.
(b) Value of output of firm B = SALES of firm B to firm +Sales of firm B to firm D + Exports + Sales of firm B to Government
`=70+40+30+5`
= Rs. 145 crores
Value Added by Firm B = Value of output by Firm B - Purchases by Firm B from firm A
= 145-80
= Rs. 65 Crore
Discussion
58.

Give the meaning of equilibrium price.

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Solution :The price at which equilibrium is REACHED is CALLED EQUIIBRIUM price.
Discussion
59.

Direct tax is called direct because it is callected directly from:

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The PRODUCERS on GOODS produced
The SELLERS on goods sold
The BUYERS of goods
The INCOME earners

Answer :D
Discussion
60.

When will the domestic income exceed the national income ?

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SOLUTION : It happens because net factor INCOME from ABROAD is ZERO due to no INTERACTION with the restof the world.
Discussion
61.

Find change in income if multiplier is 4 and increase in investment is 15 crore.

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Solution :`K=(DELTAY)/(DeltaI)=(DeltaY)/15`
`4=(DeltaY)/("15 CRORE")`
`RIGHTARROW DeltaY=60crore`
Discussion
62.

Explain ''freedom of entry and exist to firms in industry'' features of monopolistic competition.

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Solution :Freedom of entry and exist to firms in a monopolistic industry implies that there exists no restrction for the new entrants and existing firms to quit the industry. The new firms are attracted into the industry whenever price exceeds the minimum of short run average cost (SAC) in short run and whenever price exceeds the minimum of long run average cost (LAC) in the long run. Due to the free entry of the new firms in the industry, the quantity produced increases, which results in the rise of the supply of the OUTPUT and finally, this pushes the equilibrium price down. Thus, the equilibrium price continues to fall, until it become EQUALS to the minimum of average cost curve, where, all the firms earns normal profit. At this point, no new firm has any incentive to entre the industry.
Similarly, on the other hand, the existing firms leave the industry whenever the price falls short of the minimum of short run average cost curve (SAC) in the short run or whenever price falls short of the minimum of long run average cost (LAC) in the long run. This is because under such circumstances, the existing firms each losses and consequently wishes to quit. Now, as there are no restrictions imposed on the EXIT of the firms, so firm quits the industry. This leads to the fall in the supply of the commodity. Hence, the price start rising and reaches the point at LAC where a firm earns only normal profit. ltbr. Thus, it is due freedom of the entry and exit to firms that price remains equal to the minimum of average cost implying the normal profit only.
Discussion
63.

What are the components of capital account?

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Solution :The components of capital account are: (i) Private TRANSACTIONS; (II) Official transactions; (iii) BANKING capital; (iv) FOREIGN direct investment; (v) Portfolio investment.
Discussion
64.

When price of a commodity falls by 50%, the quantity supplied decreases by 100%. Find out its price elasticity of supply.

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Solution :
ES `=("Percentage Change in supply")/("Percentage Change in Price")=(100%)/(50%)=2`
`ES=2` (Supply is highly elastic as `ES GT 1` )
ES is always positive due to direct relationship betweenn price and QUANTITY supplied.
Discussion
65.

The gap by which actual aggregate demand exceeds the aggregate demand required to establish full employment equilibrium is known as_________

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Deficient Demand
Deflationary GAP
Inflationary Gap
Excess Demand

Solution :C. The gap by which actual aggregate demand exceeds the aggregate demand REQUIRED to ESTABLISH full EMPLOYMENT equilibrium is known as Inflationary Gap.
Discussion
66.

Explain the feature of interdependence of firms' in an oligopoly market.

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Solution :(i) Interdependence means that actions of one firm affects the actions of other firms.
(ii) Since the number of sellers is small, each firm has to take into consideration the possible reaction of its competitors, when making DECISIONS.
(III) The business decision of a single seller will have a substantial impact on the product price, output and profits of the rival firms.
(iv) For EXAMPLE the "National Newspapers" MARKET, when the "Economic Times" introduced invitation pricing policy-they offered the newspaper at a price of Rs.1.50 on weekdays. The Hindustan Times was forced to reduce its prices from Rs.2.50 per copy to Rs.1.50 per copy on weekdays. When Hindustan Times was celebrating its 75 years of service, they offered the newspaper at Rs.1/- weekdays. The Times of India responded by matching the price CUT.
Discussion
67.

According to income method, domestic income is equal to :

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Rent and royalty + Interest + Profit + COMPENSATION of employees + MIXED INCOME
Operating Surplus + Compensation of employees + Income of self-employed
Both (a) and (b)
Neither (a) nor (b)

Solution :According to income METHOD, domestic income is equal to :Rent and royalty + Interest + Profit + Compensation of employees + Mixed Income+ Operating Surplus + Compensation of employees + Income of self-employed
Discussion
68.

Capital formation is a flow

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Solution :CAPITAL FORMATION is measured over a PERIOD of time.
Discussion
69.

What is meant by measurement of value?

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SOLUTION :It REFERS to MONETARY expression of the market VALUE of goods and SERVICES in terms of price
Discussion
70.

Can MC increase when AC falls?

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Solution :Yes, it can happen when MC is below, than AC at the time of MC increases. The reason is that MC is confined to only one unit of the commodity produced whereas AC is RELATED to all the units of commodity produced. As a RESULT when MC increase, in CASE of MC, the whole increase is confined to the concerned one unit but in case of AC, this increase is shared by all the units of commodity produced. As the result of, RISING MC is unable to bring about an increase in AC.
Discussion
71.

Wjhat is a central bank?

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Discussion
72.

What is price elasticity of demand for life saving drugs ?

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Solution :Life SAVING drugs are essential. So a change in their price will not affect in its quantity demanded. That is ED = 0. Life saving drugs have a PERFECTLY INELASTIC demand.
Discussion
73.

Does quilibriumlevelofincomeandoutputalwaysindicatestateoffullemploymentin theeconomy? Explain .

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SOLUTION :theequilibriumlevelof INCOME andoutputdoesnot reflect alwaysthe STATEOF full employmentinthe ECONOMY, whenaggregatedemand(AD)isshortof Aggregatesupply(AS)at fullemploymentlevel ',thenit isunderemploymentequilibriumon thecontrarywhen ADisgreaterthan As , at fullemploymentlevel', atthattimesituationofexcessdemandfullemploymentequilibriumtakesplaceonlywhen AD=AS at full employmentlevel.
Discussion
74.

How does a central bank influence credit creation by commercial banks "through open marketoperation '? Expalin

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Solution :Central banks affect the quantity of money in circulation by buying or selling government securities through the process known as open market operations (OMO). When a central bank is looking to increase the quantity of money in circulation, it purchases government securities from commercial banks and institutions. This frees up bank assets—they now have more cash to loan. This is a part of an expansionary or easing monetary POLICY which brings down the interest RATE in the economy. The opposite is done in a CASE where money needs to taken out from the system. In the United States, the Federal Reserve uses open market operations to reach a targeted federal funds rate. The federal funds rate is the interest rate at which banks and institutions LEND money to each other overnight. Each lending-borrowing pair negotiates their own rate, and the average of these is the federal funds rate. The federal funds rate, in turn, affects every other interest rate. Open market operations are a widely used instrument as they are flexible, easy to use, and effective.
Discussion
75.

What is meant by variable (prime) cost of a firm? Give examples.

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SOLUTION :Cost of PRODUCING a good, in ECONOMICS, is the sum total of explicit cost, IMPLICIT cost and certain minimum profit (normal profit).
Discussion
76.

Will the following factor incomes be a part of domestic factor income of India ? Give reasons for your answer Profit earned by an Indian company from its branch in Singapore.

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Answer :Will not be included as it is earned OUTSIDE the DOMESTIC territory of India. American EMBASSY is domestic territory of America and not of India.
Discussion
77.

Will the following factor incomes be a part of domestic factor income of India ? Give reasons for your answer Compensation of employees given to residents of China working in Indian Embassy in China.

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ANSWER :Will be included as it is EARNED within domestic territory of INDIA.
Discussion
78.

Export of machinery is recorded in the:

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credit SIDE of capital account
debit sale of capital account
credit side of CURRENT account
debit side of current account

Answer :C
Discussion
79.

Will the following factor incomes be a part of domestic factor income of India ? Give reasons for your answer Salaries received by Indian residents, working in American ambassy in India.

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Answer :Will not be INCLUDED as it is EARNED outside the domestic territory of India. AMERICAN embassy is domestic territory of AMERICA and not of India.
Discussion
80.

Will the following factor incomes be a part of domestic factor income of India ? Give reasons for your answer Profit eraned by foreign banks from their branches in India.

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ANSWER :Will be included as it is earned WITHIN DOMESTIC of India.
Discussion
81.

How will you treat the following while estimating national income of India ? Give reasons for your answer. (i) Salaries received by Indian residents working in Russian Embassy in India . (ii) Profits earned by an Indian bank from its branches abroad. (iii) Goods and Services Tax received by the government.

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Solution :1.Yes, it will be INCLUDED in the national income as it is a PAN of factor income from abroad.2.Yes, they will be included in the national income as they are a PART of the factor income from abroad.3.NO we will not be included it in national income , because we calculate national income at factor COST .
Discussion
82.

Value of investment multiplier varies between zero and infinity.

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Solution :LET US consider the FOLLOWING equation:K = 1/1-MPCwhere K is the investment MULTIPLIER and MPC is the MARGINAL Propensity to Consume.Here, if MPC is 0 , the value of investment multiplier will be 1 and if MPC is 1 , the value of investment multiplier will be infinity ( the value of MPC ranges from 0 to 1).So, value of K does not varies from 0 to infinity instead it varies from 1 to infinity.
Discussion
83.

When planned saving is less than planned investment, It indicates a situation when:

Answer»

AD`lt`AS
AD=AS
AD`gt`AS
None of these

Solution :EXCESS of planned SAVINGS (say, 25,000 crore) over planned Investment (say, 20,000 crore) means that expenditure in the economy is less than what producers had expected.This would result in undesired build-up of unsold stock. Consequently, AD falls SHORT of AS. So, OPTION1 is correct.
Discussion
84.

In an economy C=500 + 0.9Y and I= 1000, Find (i) equilibrium level of income (ii) consumption at equilibrium.

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SOLUTION :`15000,14000`
Discussion
85.

A consumer consumes only two good X and Y both priced at Rs.3 per unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium ? Give reasons. What will a rational consumer do in this situation ? Explain. OR A consumer consumes only two goods X and Y whose prices are Rs.4 and Rs.5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reason. What will a rational consumer do in this situation? Use utility analysis.

Answer»

Solution :At the POINT of consumer equilibrium the following equality should be met :
`MRS=(P_(x))/(P_(y))`
According to the question,
MRS=3
`(P_(x))/(P_(y))=(3)/(3)=1`
So, MRS is greater than the price ratio. Thus, to reach the equilibrium point a RATIONAL consumer would decrease the consumption of GOOD y.
OR
According to the utility approach, a consumer reaches equilibrium where the following equality is met.
`(MU_(x))/(P_(x))=(MU_(y))/(P_(y))`
According to the given question,
`(MU_(x))/(P_(x))=(5)/(4)`
`(MU_(y))/(P_(y))=(4)/(5)`
So, `(MU_(x))/(P_(x))` is greater than `(MU_(y))/(P_(y))`. Thus, to reach the equilibrium, a rational consumer would INCREASE the consumption of good x and decrease that of good y.
Discussion
86.

Is national income a stock concept or flow concept ?

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Solution :NATIONAL INCOME is a flow concept as it measured over a PERIOD of TIME.
Discussion
87.

Give and explain the types of propensity to consume.

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Solution :Average Propensity to Consume (APC): It refers to the RATIO of consumption expenditure (C ) to the corresponding level of income(Y). `APC=(C )/(Y)`
(b).Marginal Propensity to Consume (MPC). It refers to the ratio of CHANGE in consumption expenditure `(DeltaC)` to change in TOTAL income `(DeltaY)` `MPC=(DeltaC)/(DeltaY)`
Discussion
88.

Supply curve of foreignexchange :

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HORIZONTAL straight line PARALLEL to X-axis
Verical straight line parallel to Y-axis
Slope downwards
Slope upwards

SOLUTION :N//A
Discussion
89.

Suppose there are 20 consumers for a good and they have identical demand functions : d(p) = 10 -3p for any price less than or equal to (10)/(3) and d_(1)(p) 0 at any price greater than (10)/(3). What is the market demand funciton ?

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SOLUTION :It can be seen from the given DEMAND functions, that 20 consumer do not WANT to demand the goods at any PRICE greater than or equal to `(10)/(3)`. All of them demand only at a price of less than Rs `(10)/(3)`.
For a single consumer d[P] = 10 - 3P For 20 consumers,
`d_("market")[P] = [10 xx 3P] xx 20 = 20 - 60 P`, for price `(10)/(3)` and`d_("market")[P] = 0`, ......, for price `gt = (10)/(3)`
Discussion
90.

An economyis onlyinequilibriumwherethereis fullemployment .

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ANSWER :Falseas equilibriumcanoccur withfullemo=ployment, underemploymentand overfullemployment .
Discussion
91.

Define total fixed cost (Supplement/ Indirect/overhead cost).

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SOLUTION :(i) Fixed COSTS are those costs of PRODUCTION which do not change with a change in output.
(ii) These are the costs INCURRED on fixed factors, like rent 4of land and building, interest, ETC. These are unavoidable contractual costs.
(iii) Fixed costs are also called overhead costs or general costs because these are common for all the units produced. These costs are also called supplementary costs or indirect costs.
(iv) The shape of Total fixed Cost is horizontal (Parallel to X-Axis). They have to be incurred when the output is large or small or even zero.
Discussion
92.

If the value of marginal propensity to save is 0.25, what is the value of multiplier ?

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SOLUTION :MULTIPLIER `=1/(MPS)=1/0.25 =4`.
Discussion
93.

Law of demand is one sided. It explains only the effect of change in price on the quantity demanded. It states nothing about the effect of change in quantity demanded on the price of the commodity.

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Solution :The conditions are :

(i) PRICE of substitute gods rises.
(ii) Price of complementary goods FALLS.
(iii) Income of a consumer rises in case of normal goods.
(IV)Income of aconsumer falls in case of INFERIOR goods.
(v) When the PREFERENCES are favourable.
Discussion
94.

Discuss the difference betweenn a central bank and a commercial bank

Answer»
Discussion
95.

Expenditure on exports by foreigners.

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ANSWER :NET EXPORTS of GOODS and SERVICES
Discussion
96.

Distinguish between real gross domestic product and nominal gross domestic product. Can gross domestic product be used as an index of welfare of the people ? Give two reasons.

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Solution :Nominal GDP is the sum-total of the economic output produced in a YEAR valued at the CURRENT market PRICE. Real GDP is the sum-total of the economic output produced in a year values at a PREDETERMINED base market price. Nominal GDP doesn't take inflation into account.GDP does not incorporate any measures of welfarebecause1.GDP only includes market transactions2.GDP ignores externalities
Discussion
97.

In order to encourage tourism in Goa, Indian Airlines reduces the air fare to Goa. How will it affect market demand curve for air travel to Goa?

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Solution : There will be a DOWNWARD movement along the same MARKET demand curve (expansion in demand) for AIR TRAVEL to Goa. It happens because of DECREASE in the air fare.
Discussion
98.

Average revenue will always be equal to marginal revenue in all market conditions. Defend or refute.

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Solution :REFUTE: MR and AR will be equal only for a perfectly competitive firm, because it is faced with a horizontal straight line demand curve. Under all other market conditions MR will always be LESS than AR.
Discussion
99.

One of the following is a renewable source of energy :

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Coal
Oil
Solar energy
Natural gas

Solution :N//A
Discussion
100.

What is the basic difference between the sport market and forward market?

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Solution :If the operation of markets is of DAILY nature, it is called sport or current market WHEREAS, if the operation of market is for FUTURE delivery of FOREIGN exchange, it is called FORWARD market.
Discussion