NCERT SOLUTIONS FOR CLASS 12 ECONOMICS

NCERT Solutions for Class 12th Economics is provided here. Students can download the complete NCERT solutions for Class 12th biology in the full PDF format. This page provides a complete solution for all Chapters of Class 12th Economics. Download the NCERT Solutions for Class 12th Economics for free in this page. Get the solutions for all individual chapters and exercises of Class 12th Economics. Are you studying Class 12th? Looking for the NCERT Solutions for Class 12th Economics? If yes, you came to the right place. CBSE students who are studying Class 12th Economics can get the Class 12th Economics .

Last modified:2019-10-22

There are chapters which are involved in the 12th Macroeconomics are : 

Chapter 1 Introduction to Economics

Chapter 2 Consumer Equilibrium

Chapter 3 Demand

Chapter 4 Elasticity of Demand

Chapter 5 Production

Chapter 6 Cost

Chapter 7 Supply

Chapter 8 Revenue

Chapter 9 Producer Equilibrium

Chapter 10 Perfect Competition

Chapter 11 Non-Competitive Market

Chapter 12 Market Equilibrium with Simple Applications

 

Macro Economics:

Chapter 1 Introduction to Macroeconomics and its Concepts

Chapter 2 National Income and Related Aggregates

Chapter 3 Money

Chapter 4 Banking

Chapter 5 Aggregate Demand and Its Related Concepts

Chapter 6 National Income Determination and Multiplier

Chapter 7 Excess Demand and Deficient Demand

Chapter 8 Government Budget and the Economy

Chapter 9 Foreign Exchange Rate

Chapter 10 Balance of Payment

 

Question : Discuss the central problems of an economy.

Solution: An economy is a system of organizations and institutions that either facilitate or play a role in the production and distribution of goods and services in a society. We know that resources are limited as against unlimited wants, hence it is important to economise their use and utilize them in the most efficient manner.

Every economy faces three central problems due to multiplicity of wants, scarce availability of resources and problems of choice. This scarcity challenges the best possible usage of these available resources to fulfil the unlimited demands. The three central problems of an economy are as follows: 

(a) Problems of allocation of resources.

 (b) Problems of fuller and efficient utilisation of resources 

(c) Problems of growth of resources. 

(a) Problems of allocation of resources: Every economy has limited resources which can alternatively be used for producing different goods and services. Every economy has to face three problems which we call allocation of resources. It is more elaborated in below mentioned points: What to produce and in what quantities?It is the problem of choosing the different items of goods and the quantities to produce with the available resources. The very first problem encountered by any economy is to decide what goods are to be produced and in what quantities or amount with the limited resources. There is a lot to be decided; whether to produce consumer goods or capital goods; agricultural goods or investment goods; whether to cater education and healthcare sector or to strengthen country’s military. An appropriate example was set by the Latin American nation Costa Rica; they dismantled their military in 1949 and invested the money, which earlier was spent on the maintenance of their army, on education and healthcare. Once it is decided, what to produce, the next decision is to estimate the amount or quantity of the production.For e.g if an economy decides to produce more of wheat  and cloth within a given period of time,then it will have to produce less of machines due to the limited resources available. So the economy constantly struggles to choose what to produce and in what quantities. How to produce? This problem relates to the choice of technique i.e. labour intensive or capital intensive. For example production of cloth is possible either by handloom or by the use of modern machines. In labour intensive technique, proportion of labour is more (eg:production by handloom) and capital is less. With this technique, more employment can be generated. In capital intensive technique, proportion of capital (eg production by machinery) is more and labour is less. It produces goods on large scale using high technology. An economy should adapt that technique which gives efficient production at minimum cost and best use of scarce resources. Developed countries use capital intensive techniques whereas developing countries use more of labour intensive techniques. For whom to produce? This problem refers to selection of category of people who will ultimately consume the goods i.e., the distribution of final goods and services. It is the problem of deciding whether to produce for low income group or high-income group. It depends on the level and distribution of income and wealth.The objective behind selecting such mechanism is to reduce inequality of income, to reduce poverty and to add to the social welfare and standard of living of people. This problem can be categorised under two main heads:

 (a) Personal Distribution: It means how national income of an economy is distributed among different groups of people.

 (b) Functional Distribution: It involves deciding the share of different factors of production in the total national product of the country. 

(c) Problem of efficient and fuller utilisation of resources: Next problem with the economy is how to use its limited resources i.e., land, labour, capital and other resources so that maximum production at least cost can be produced. If the resources are fully utilised, it will mean unemployment or underemployment of resources i.e., wastage of natural and human resources.

(d) Problem of growth of resources: Growth of resources has become a basic problem as the resources are scarce and they will have the possibility of being exhausted after a continuous use. This objective can be achieved  by technological advancement. Underdeveloped countries remain poor of poor growth of resources. Beside fuller utilisation, these countries should try to raise their productive capacities by exploring further availability of resources and discovering better techniques for their use. 

 

Question : What do you mean by the production possibilities of an economy? 

Solution: Production possibilities of an economy imply those numerous alternative combinations of goods and services, which a particular economy can produce, with the given technology/stock of technical knowledge and employing the available resources fully and efficiently. In other words, it refers to various feasible bundles of goods and services that can be produced together by efficiently utilizing the given technology and available resources. 

 

Question : What is a production possibility frontier? 

Solution: The production possibility frontier (PPF) refers to a curve that shows the various combinations of two goods that an economy can produce with the available technology and given resources which are fully and efficiently employed. It is also called the production possibility curve (PPC) because it shows the limit of what is possible to produce with present resources. Assumptions: (a) Productive resources are given in an economy. (b) All the resources are fully employed and efficiently utilised. (c) Techniques of production are given and do not change. (d) The resources are not equally efficient in production of all products.

This graph shows as we increase the production of Good 1, the production of Good 2 falls as there are limited resources in the economy. It means resources are transferred to the production of Good 1 by withdrawing them from Good 2 i.e., one commodity is transformed into the other, not physically but by transferring resources. Therefore, it is also called 'transformation curve'. Thus, PPF or PPC refers to a graphical representation of all the possible combinations of two products that can be produced with given resources and technology. 

 

Question : Discuss the subject matter of economics.

Solution: The subject matter of economics is subdivided into two core branches, Micro Economics and Macro Economics. This division came into existence only after the year 1930 as per the suggestion by Ragnar Frisch. The domains of interest of these two branches of economics can be presented as 

 

rent, interest and profit. In Macroeconomics we study how the economy as a whole operates. It focuses on the determination of the aggregate measures, like aggregate demand, aggregate supply and overall price level and how they change over time. It is also known as the Theory of Income and Employment as its main focus is on how income and employment levels are determined. Macroeconomics helps in understanding and solving problems like inflation, unemployment, Balance of Payments (BOP) disequilibrium, poverty, etc. Aggregate Demand and Aggregate supply are the main tools of analysis. 

 

Question : What do you understand by positive economic analysis?

Solution: Positive economic analysis refers to the analysis in which we study what is or how an economic problem is solved by analyzing various positive statements and mechanisms. In other words, it is also called the cause and effect relationship. It states ‘what is’ These are factual statements and describe what was, what is and what would be. These statements can be tested, proven or disproven and do not involve personal value judgments. For example, if someone says that it is raining outside, then the truth of this statement can be verified. It deals with actual or realistic situations. Economists like Lionel Robbins considers economics as pure science. Other examples can be taken as India is overpopulated country, India has mixed economy, etc 

 

Question : What do you understand by normative economic analysis?

Solution: Normative economic analysis refers to the analysis in which we study whether a particular mechanism is desirable or not. In this analysis, we study ‘what ought to be’ the desired situation or in what ways the economic problems should be solved. It suggests aims and objectives for the economy and points out what ought to be done to achieve these aims and objectives. In normative economic analysis, we come across normative statements that cannot be tested as they involve personal value judgments. It deals with idealistic situations and is based on ethics. An example of a normative statement could be, ‘Central government should not stop providing minimum support price to the farmers’. Another example can be Government should encourage private companies to accelerate the pace of industrialization. Economists like Marshall, Pigou etc. regard economics as a normative science.

 

Chapter 2 : Theory of Consumer Behaviour

Question : What is budget line?

Solution: A budget line represents the different combinations of two goods that are affordable and are available to a consumer; while being aware of his/her income-level and market prices of both thegoods.

Let be the amount of good1.

be the amount of good2.

be the price of good1.

be the price of good2.

= Total money spent on good 1.

 

Question : Explain why the budget line is downwards sloping.

Solution : The budget line is downward sloping because a consumer can increase the consumption of good 1 only by decreasing the consumption of good 2. The consumer has limited income which can be spent to buy good 1 and good 2. The slope of the budget line is which implies the rate of exchange or the rate at which good 2 can be substituted for good 1.

 

Question : A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.

Write down the equation of the budget line.

How much quantify of good 1 can the consumer consume if she spends her entire income on that good?

How much of good 2 can she consume if she spends her entire income on that good?

 

Question : What happens to the budget set if both the prices as well as the income double? 

Answer: There will be no change in the budget line. Let us understand this with the help of an example: Suppose,the price of goods 1 rises from Rs 4 to Rs 8 and that of goods 2 rises from Rs 5 to Rs 10. Income also rises from Rs 20 to Rs 40. With double increase in prices and income, intercepts on both X-axis and Y-axis will remain unchanged at 5 units (goods 1) and 4 units (goods 2) respectively. Slope of the budget line will also remain the same. Therefore, there will be no change in the budget set and the budget line.

 

Question : Define marginal utility. [AI 2006, Foreign 2006]

Answer: Marginal utility is the additional utility derived from consumption of an additional unit of a commodity.

 

Question : What is consumer’s equilibrium? [Foreign 2006, CBSE 2009C, AI 2013C]

Answer: Consumer’s equilibrium refers to a situation where a consumer gets the maximum satisfaction out of his given money income and given market price.

 

Question : What is meant by MU of one rupee?

Answer: MU of one rupee refers to the utility obtained from purchase of commodities with one rupee.

 

Question : Define indifference curve.  

Answer: Indifference curve refers to the graphical representation of various combinations of the two goods that provide the same level of satisfaction to a consumer.

 

Question : Define indifference map?  

Answer: A set of indifference curves is called indifference map.

 

Question : Define marginal rate of substitution.

Answer: MRS is the rate at which a consumer is willing to give up one commodity for an extra unit of other commodity without affecting his total satisfaction.

 

Question : Why are indifference curves always convex to the origin?

Answer: Indifference curves are always convex to the origin because of the diminishing marginal rate of substitution.

 

Question : Why does an indifference curve slope downwards?

Answer: An Indifference curve slopes downwards because increase in units of one good requires a decrease in the number of units of the other good to maintain the same level of satisfaction.

 

Question : Which of the following options is a property of an indifference curve?

(a) It is convex to the origin.

(b) The marginal rate of substitution is constant as you move along an indifference curve.

(c) Marginal utility is constant as you move along an indifference curve.

(d) Total utility is the greatest where the 45 degree line cuts the indifference curve.

Answer: (a)

 

Question : When economists speak of the utility of a certain good, they are referring to-

(a) The demand for the good.

(b) The usefulness of the good in consumption.

(c) The satisfaction gained from consuming the good.

(d) The rate at which consumers are willing to exchange one unit of good for another one.

Answer: (c)

 

Question : Budget set is

(a) Right angled triangle formed by the budget line with the axes.

(b) All points on the budget line.

(c) Points inside the budget line.

(d) Points on Y-axis from where budget line starts and the point on X-axis where budget line ends.

Answer: (a)

 

Question : If indifference curve is a straight line downward sloping,

(a) MRS is increasing

(b) MRS is decreasing

(c) MRS is constant

(d) MRS is zero

Answer: (c)

 

Question : If X and Y are two commodities, indifference curve shows—

(a) X and Y are equally preferred

(b) Y is preferred to X

(c) X is preferred to Y

(d) None of these.

Answer: (a)

 

Question : If Marginal Rate of Substitution is constant throughout, the Indifference curve will be:  [CBSE 2015]

(a) Parallel to the x-axis.

(b) Downward sloping concave.

(c) Downward sloping convex.

(d) Downward sloping straight line.

Answer: (d)

 

Question : If Marginal Rate of Substitution is increasing throughout, the Indifference curve will be:

(a) Downward sloping convex.

(b) Downward’ sloping concave.

(c) Downward sloping straight line.

(d) Upward sloping convex.

Answer:(b)

 

Question : Which of the one can be referred to as ‘point of satiety’?

(a) Marginal Utility is negative

(b) Marginal utility is zero

(c) Total Utility is rising

(d) Total Utility is falling

Answer: (b)

 

Question : How many chocolates will a consumer have, if they are available free of cost?

Solution:  In case of free chocolates, consumer will carry on the consumption till his total utility is maximum. It means,till the additional chocolates gives positive satisfaction, consumer will keep on having chocolates. Let us understand this with the help of the figure shown in Question 1. Consumer will stop the consumption at the point of satiety (Point ‘Q’), i.e., where marginal utility is equal to zero.

 

Question : “Total Utility remains the same, whether Marginal Utility is positive or negative”. Defend or refute.

Answer:  The given statement is refuted. When Marginal Utility is positive till point Q as shown in figure of Question 1, then total Utility increases at a diminishing rate and when Marginal Utility is negative after point Q, total Utility decreases.

 

Question :  State with reasons if the following statements are true or false:

At a grand family get-together party you go on eating and eating since you have not to pay.

As we consume more units of a commodity, our total utility from its consumption keeps falling.

Answer:

False: For free goods, a consumer will limit his consumption of a commodity to a point where the point of full satisfaction is reached. Consumption beyond this point will only generate disutility.

False: As we consume more units of a commodity, it’s marginal utility keeps on diminishing. Total utility keeps on rising, but at a diminishing rate till marginal utility becomes zero.

 

Question : A new steel plant comes up in Jharkhand. Many people who were previously unemployed in the area are now employed. How will this affect demand curve for TV? [ 1 Mark]

Answer:  The demand curve for TV will shift towards right. It happens because of an increase in the income of the people due to employment in new steel plant.

 

Question : 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?[1 Mark]

Answer: There will be a downward movement along the same market demand curve (expansion in demand) for air travel to Goa. It happens because of the decrease in the air fare.

 

Question : There are train and bus services between New Delhi and Jaipur. Suppose that the train fare between the two cities comes down. How will this affect demand curve for bus travel between the two cities?[1 Mark]

Answer: Demand curve for bus travel will shift towards the left. It happens because the price of substitute (train fare) has decreased and it will make the bus travel relatively costly.

 

Question :  A good is an ‘inferior’ good for one and at the same time a ‘normal’ good for another consumer. Do you agree? Explain. [3-4 Marks] [CBSE Sample Paper 2013, 2014]

Answer : Yes, the same goods can be inferior for one and normal for another one.

 Whether a good is inferior or normal is determined by the income level of a consumer.

A good is a normal good for the consumer having lower income, may become an inferior good for a consumer having higher income.

When a consumer moves to higher income, he/she may consider some goods below their income status, and treats them as inferior.

 

Question : Normally a household will not buy a second-hand scooter even if the price of scooter falls. How we get a downward sloping market demand curve for scooters? [3-4 Marks]

Answer: We know that though an individual may not buy a second-hand scooter even if the price of scooter falls but there may be some individual that could not afford to buy even a second-hand scooter earlier and now with a fall in their price they can afford it now.

Therefore, the number of consumers of a second-hand scooter increases with a fall in their price leading to an increase in market demand at a lower price.

Thus the market demand curve for scooters will be a downward sloping.

 

Chapter 4: Elasticity of Demand

 

Question : Define price elasticity of demand.

Answer: The degree of responsiveness of quantity demanded to changes in the price of the commodity is known as price elasticity of demand.

 

Question : Why is price elasticity of demand has negative sign always?

Answer: Price elasticity of demand is generally negative because of the inverse relationship between price and quantity demanded.

 

Question : Give the formula for measuring price elasticity of demand according to percentage method.

Answer: Elasticity of demand (ED)

Percentage change in quantity demanded Percentage change in price

 

Question : Give the formula for measuring price elasticity of demand according to point method.

Answer:  Elasticity of demand (ED)

Lower Segment of demand curve (LS)

Upper Segment of demand curve (US)

 

Question : Define perfectly inelastic demand.

Answer: If price changes, and quantity demand remains constant, ed = 0 and the result is known as perfectly inelastic demand.

 

Question : Define perfectly elastic demand.

Answer: If quantity demand changes and price remains constant, ed = o and the result is known as perfectly elastic demand.

 

Question : Demand for product X is perfectly ! elastic. What will be the change in price if demand rises from 50 per unit to 70 per unit?

Answer:  There will be no change in price as demand is perfectly elastic.

 

Question : Define perfectly elastic demand.

Answer: If quantity demand changes and price remains constant, ed = o and the result is known as perfectly elastic demand.

 

Question : Demand for product X is perfectly ! elastic. What will be the change in price if demand rises from 50 per unit to 70 per unit?

Answer:  There will be no change in price as demand is perfectly elastic.

 

Question : If ED < 1, in which portion the point would be located on a straight line demand curve?

Answer: In the lower half.

 

Question : When is the demand of a commodity is said to be inelastic? 

Answer: When percentage change in the quantity demanded is less than the percentage change in price, demand for such a commodity is said to be less elastic.

 

Question : If the price elasticity of demand for a product is equal to one, what will be the nature of its demand curve?

Answer:  Demand curve of a product with unitary elastic demand is a rectangular hyperbola.

 

Question :  A rise in the price of a good results in an increase in expenditure on it. Is its demand elastic or inelastic? [CBSE Sample Paper 2008}

Answer: The demand is inelastic.

 

Chapter 5: Production

 

Very Short Answer Type Questions (1 Mark)

Question : Give the meaning of production function. [CBSE 2007, AI 2011] Or

Define production function. [CBSE Sample Paper 2008]

Answer: The relationship between physical input and physical output of a firm is generally referred to as production function.

 

Question : In which run some factors of production are fixed and others are variable?

Answer:  Short run.

 

Question : What change will take place in marginal product when total product increases at a diminishing rate? [CBSE Sample Paper 2010]

Answer: Marginal product will decline but remains positive.

 

Question : In which phase of Law of Variable Proportions a rational firm aims to operate?

Answer: Diminishing returns to a factor (Phase 2).

 

Question : What is meant by diminishing returns to a factor?

Answer: Diminishing returns to a factor refer to a phase when total product increases at a decreasing rate and marginal product falls, but remains positive with the increase in variable factor.

 

Chapter 6 Cost

Question : Give the meaning of cost.Or [CBSE 2007]

What is meant by cost in economics? [CBSE, Sample Paper 2010} Or

What does ‘cost’ mean in economics? [CBSE 2008]

Answer: Cost of producing a good, in economics, is the sum total of explicit costs, implicit costs and certain minimum profit (normal profit).

 

Question : Give two examples of fixed cost.[ CBSE 2013]

Answer: (i) Rent of the building.

(ii) Salary of permanent employees.

 

Question : Give two examples of variable costs.

Answer: (i) Raw materials.

(ii) Labour engaged on production.

 

Question : Why is average total cost is greater than average variable cost?

Answer: Because AC is sum total of AFC and AVC.

 

Question : What is meant by total cost?

Answer:  During production the expenditure incurred on various factors of production is known as total cost.

 

Question : Why are TC and TVC curves parallel to each other?

Answer: TC and TVC curves are parallel to each other because the vertical gap

between them represents TFC which remains constant at all levels of output.

 

Question : How does the total fixed cost change when output changes? [CBSE 2003]

Answer:  Total fixed cost does not change with the change in output.

 

Question : Give the meaning of marginal cost. [CBSE, Sample Paper 2010]

Answer: The cost incurred on additional unit of output is known as Marginal cost.

 

Question : How is MC related to TFC?

Answer:  MC is independent (not related) of TFC and is affected by change in only TVC.

 

Question : How is TVC derived from MC schedule?

Answer:  TVC = SMC

 

Question : What does the area under marginal cost curve show?

Answer:  Area under marginal cost curve shows total variable cost.

 

Question : Can AC be less than MC when AC is rising?

Answer: Yes, AC can be less than MC, when AC is rising, as long as MC is more than AC.

 

NCERT Solutions for Class 12 Micro Economics Chapter 6 : Cost

NCERT TEXTBOOK QUESTIONS SOLVED

Question : Briefly explain the concept of the cost function.[1 Mark]

Answer:  Cost function shows functional relationship between output and cost of production. It gives the least cost combination of inputs corresponding to different levels of output. Cost function is given as:

C = f(X), ceteris paribus,

where, C = Cost and X = Output

 

Question : What are total fixed cost, total variable cost and total cost of a firm? How are they related?

Or

Draw TVC, TC, and TFC curves in a single diagram. [AI 2012][CBSE Sample Paper 2013][3 Marks]

Answer: (i) TC is divided into two parts TFC and TVC such that TC = TFC + TVC.

(ii) TFC is the overhead cost and it remains constant or fixed whatever be the level of output. TFC curve is a horizontal line parallel to the x-axis.

(iii) TVC is cost due to increased use of variable factors like raw materials, labour, etc. TVC is inverse S-shaped starting from the origin due to law of variable proportion.

(iv) TC is aggregate of TFC and TVC. TC curve is inverse S-shaped starting from the level of fixed cost. The reason behind it shape is the law of variable proportion.

  

Question : What are the average fixed cost, average variable cost and average cost of a firm? How are they related?[3-4 Marks]

Answer: AFC: The per unit cost incurred on fixed factors of production is known as average fixed cost.

AFC=frac { TFC }{ Q }

AFC always decreases as the firm increases the level of production. AVC: It is variable cost per unit of output produced.

AC=frac { TC}{ Q } It is obtained by dividing the total variable cost by the quantity of output.

AVC initially decreases. But after reaching the stage of minimum cost it starts increasing. AVC is U-Shaped. AC: It is cost per unit of output produced. It can be obtained by dividing the total cost by the quantity of output produced.

Relationship between AFC, AVC and AC. There is a unique relationship among AC, AFC and AVC. AC is the sum of AFC and AVC, i.e.,

AC = AFC + AVC.

 

Question : Can there be some fixed cost in the long run? If not, why? [1 Mark]

Answer: No, there are no fixed costs in the long run as all the factors become variable. Fixed cost exists only in the short run.

 

Question : What does the average fixed cost curve look like? Why does it look so?[3 Marks] Or

How does AFC behave as output is increased? [CBSE 2009C]

Or

What is the behaviour of average fixed cost as output increases?

[CBSE 2012]

Answer: The shape of AFC is downward sloping Rectangular hyperbola. AFC falls as output increases because TFC=frac { TFC }{ Output } and TFC remains Output constant. So, as output increases, TFC remains constant, but AFC falls.

 

Question : What do the short run marginal cost, average variable cost and short run average cost curves look like?[1 Mark]

Answer: The Short run marginal cost, average variable cost and short run average cost curves are U-shaped because of Law of variable proportion.

 

Question : Why does SMC curve cut AVC curve at the minimum point of AVC curve?[3 Marks]

Answer:  (i) It happens because when AVC falls, SMC is less than AVC.

(ii) When AVC starts rising, SMC is more than AVC.

(iii) So, it is only when AVC is constant and at its minimum point, that SMC is equal to AVC. Therefore, SMC curve cuts AVC curve at its minimum point.

 

Question : At which point does the SMC curve cut the SAC curve? Give reason in support of your answer.[3 Marks]

Answer:  (i) It happens because when SAC falls, SMC is less than SAC.

(ii) When SAC starts rising, SMC is more than SAC.

(iii) So, it is only when SAC is constant and at its minimum point, that SMC is equal to SAC. Therefore, SMC curve cuts SAC curve at its minimum point.

 

Question : Why is the short run marginal cost curve U- Shaped? [3 Marks]

Answer: Marginal cost is U-shaped because of Law of variable proportion:

(i) As we know the shape of MC depends on the shape of TVC or TC. Let us suppose TVC.

(ii) Initially, TVC increases at a diminishing rate (Total Product increases at Increasing rate), which makes the gap of TVC, i.e. MC to fall.

(iii) Thereafter, TVC increases at an increasing rate( Total Product increases at a diminishing rate) which makes the marginal cost to rise.

(iv) So, from inverse S-shape TVC curve, we derive U-shape MC curve.

 

Question : What do the long run marginal cost and average cost curves look like?

Answer: Out Of Syllabus.

 

Question : The following table shows the total cost schedule of a firm. What is the total fixed cost schedule of this firm?

Calculate the TVC, AFC, AVC, SAC and SMC schedules of the firm.[6 Marks]

Answer: The total fixed cost will be the same at all the levels of output ranging from zero to six. For zero output, total cost is ? 10. At zero output, total variable cost will be zero. Hence, Rs. 10 represents total fixed cost at all levels of output.

 

MORE QUESTIONS SOLVED

I. Very Short Answer Type Questions (1 Mark)

Question : Give the meaning of cost.Or [CBSE 2007]

What is meant by cost in economics? [CBSE, Sample Paper 2010} Or

What does ‘cost’ mean in economics? [CBSE 2008]

Answer: Cost of producing a good, in economics, is the sum total of explicit costs, implicit costs and certain minimum profit (normal profit).

 

Question : Give two examples of fixed cost.[ CBSE 2013]

Answer: (i) Rent of the building.

(ii) Salary of permanent employees.

 

Question : Give two examples of variable costs.

Answer: (i) Raw materials.

(ii) Labour engaged on production.

 

 Question : Why is average total cost is greater than average variable cost?

Answer: Because AC is sum total of AFC and AVC.

 

Question : What is meant by total cost?

Answer:  During production the expenditure incurred on various factors of production is known as total cost.

 

Question : Why are TC and TVC curves parallel to each other?

Answer: TC and TVC curves are parallel to each other because the vertical gap between them represents TFC which remains constant at all levels of output.

 

Question : How does the total fixed cost change when output changes? [CBSE 2003]

Answer:  Total fixed cost does not change with the change in output.

 

Question : Give the meaning of marginal cost. [CBSE, Sample Paper 2010]

Answer: The cost incurred on additional unit of output is known as Marginal cost.

 

Question : How is MC related to TFC?

Answer:  MC is independent (not related) of TFC and is affected by change in only TVC.

 

Question : How is TVC derived from MC schedule?

Answer:  TVC = SMC

 

Question : What does the area under marginal cost curve show?

Answer:  Area under marginal cost curve shows total variable cost.

 

Question : Can AC be less than MC when AC is rising?

Answer: Yes, AC can be less than MC, when AC is rising, as long as MC is more than AC.

 

Question : When AC curve slopes downwards, what will be the position of MC curve?

Answer:  MC curve is below AC curve.

 

Question : What happens to AC when MC is equal to AC?

Answer:  AC is constant and at its minimum point.

 

Question : Can AC and AVC curves touch each other?

Answer:  No, because the difference between AC and AVC is AFC and AFC can never be zero.

 

Question : Give two examples of explicit cost.

Answer: The two examples are: (i) Wages to worker by a firm, and (ii) rent to landlord by a firm.

 

Question : Give two examples of implicit cost of a firm.

Answer:  The two examples are: (i) imputed cost of the seller’s self-owned shop; and (ii) imputed cost of family labour being used free by the seller.

 

Question : What is the behaviour of Total Variable Cost, as output increases? 

Answer:  TVC first increases at a diminishing rate and then increases at an increasing rate.

 

Question : If it is given that the total variable cost for producing 15 units of output is Rs. 3000 and for 16 units is Rs. 3,500. Find the value of Marginal Cost. [CBSE, Sample Paper 2016]

Answer:  MCn = TVCn-TVCn-1

MC16 =TVC16 – TVC15

=3500 – 3000 =500

 

Chapter 5: Production

Question : Give the meaning of production function. [CBSE 2007, AI 2011] Or

Define production function.

Answer: The relationship between physical input and physical output of a firm is generally referred to as production function.

 

Question : In which run some factors of production are fixed and others are variable?

Answer:  Short run.

 

Question : What change will take place in marginal product when total product increases at a diminishing rate? [CBSE Sample Paper 2010]

Answer: Marginal product will decline but remains positive.

 

Question : In which phase of Law of Variable Proportions a rational firm aims to operate?

Answer: Diminishing returns to a factor (Phase 2).

 

Question : What is meant by diminishing returns to a factor?

Answer: Diminishing returns to a factor refer to a phase when total product increases at a decreasing rate and marginal product falls, but remains positive with the increase in variable factor.

 

Question : What is the general shape of the AP and MP curves?

Answer:  AP and MP curves are inversely U-shaped.

 

Question : How does fall in marginal production affect total output?

Answer: Fall in marginal product affects the total output in the following two manners:

  1. When marginal product falls, but remains positive, total product increases at a diminishing rate.

  2. When marginal product falls and become zero, total product falls in its absolute terms.

 

Question : Why MP curve cuts AP curve at its maximum point?

Answer: It happens because when AP rises, MP is more than AP. When AP falls, MP is less than AP. So, it is only when AP is constant and at its maximum point that MP is equal to AP. Therefore, MP curve cuts AP curve at its maximum point.

 

Question : Can AP rise when MP starts declining?

Answer : Yes, AP can rise when MP starts declining. It can happen as long as falling MP is more than AP. However, when MP becomes equal to AP, further decline in MP will also reduce AP.

 

Question : What is the shape of AP and MP?

Answer: Inverse U-Shaped.

 

Question : Give meaning of “Return to a Factor”.

Answer: Return to a factor states that change in the physical output of a good when only the quantity of one input is increased, while that of other input is kept constant.

 

Chapter 6: Cost

Question : Give the meaning of cost.Or [CBSE 2007]

What is meant by cost in economics? [CBSE, Sample Paper 2010} Or

What does ‘cost’ mean in economics? [CBSE 2008]

Answer: Cost of producing a good, in economics, is the sum total of explicit costs, implicit costs and certain minimum profit (normal profit).

 

Question : Give two examples of fixed cost.[ CBSE 2013]

Answer: (i) Rent of the building.

(ii) Salary of permanent employees.

 

Question : Give two examples of variable costs.

Answer: (i) Raw materials.

(ii) Labour engaged on production.

 

Question : Why is average total cost is greater than average variable cost?

Answer: Because AC is sum total of AFC and AVC.

 

Question : What is meant by total cost?

Answer:  During production the expenditure incurred on various factors of production is known as total cost.

 

Question : Why are TC and TVC curves parallel to each other?

Answer: TC and TVC curves are parallel to each other because the vertical gap between them represents TFC which remains constant at all levels of output.

 

Question : How does the total fixed cost change when output changes? [CBSE 2003]

Answer:  Total fixed cost does not change with the change in output.

 

Question : Give the meaning of marginal cost. [CBSE, Sample Paper 2010]

Answer: The cost incurred on additional unit of output is known as Marginal cost.

 

Question : How is MC related to TFC?

Answer:  MC is independent (not related) of TFC and is affected by change in only TVC.

 

Question : How is TVC derived from MC schedule?

Answer:  TVC = SMC

 

Question : What does the area under marginal cost curve show?

Answer:  Area under marginal cost curve shows total variable cost.

 

Question : Can AC be less than MC when AC is rising?

Answer: Yes, AC can be less than MC, when AC is rising, as long as MC is more than AC.

 

Question : When AC curve slopes downwards, what will be the position of MC curve?

Answer:  MC curve is below AC curve.

 

Question : What happens to AC when MC is equal to AC?

Answer:  AC is constant and at its minimum point.

 

Question : Can AC and AVC curves touch each other?

Answer:  No, because the difference between AC and AVC is AFC and AFC can never be zero.

 

Question : Give two examples of explicit cost.

Answer: The two examples are: (i) Wages to worker by a firm, and (ii) rent to landlord by a firm.

 

Question : Give two examples of implicit cost of a firm.

Answer:  The two examples are: (i) imputed cost of the seller’s self-owned shop; and (ii) imputed cost of family labour being used free by the seller.

 

Question : What is the behaviour of Total Variable Cost, as output increases? 

Answer:  TVC first increases at a diminishing rate and then increases at an increasing rate.

 

Question : If it is given that the total variable cost for producing 15 units of output is Rs. 3000 and for 16 units is Rs. 3,500. Find the value of Marginal Cost. [CBSE, Sample Paper 2016]

Answer:  MCn = TVCn-TVCn-1

MC16 =TVC16 – TVC15

=3500 – 3000 =500

 

II. Multiple Choice Questions (1 Mark)

Question : Which cost increases continuously with the increase in production?

(a) Average cost, (b) Marginal cost.

(c) Fixed cost. (d) Variable cost.

Answer: (d)

Question : Which one of the following cost curves is never ‘U’ shaped?

(a) Average cost curve.

(b) Marginal cost curve.

(c) Average variable cost curve.

(d) Average fixed cost curve.

Answer: (d)

Question   Total cost in the short run is classified into fixed costs and variable costs. Which one of the following is a variable cost?

(a) Cost of raw materials.

(b) Cost of equipment.

(c) Interest payment on past borrowings.

(d) Payment of rent on building.

Answer: (a)

Question:  In the short run, when the output of a firm increases, its average fixed cost:

(a) increases.

(b) decreases.

(c) remains constant.

(d) first declines and then rises.

Answer: (b)

Question: Which one of the following statements is correct?

(a) When the marginal cost is rising, the average cost must also be rising.

(b) When the average cost is rising, the marginal cost must be falling.

(c) When the average cost is rising, the marginal cost is above average cost.

(d) When the average cost is falling, the marginal cost must be rising.

Answer: (c)

Question :  Which one of the following statements is an example of “explicit cost”?

(a) The wages a proprietor could have made by working as an employee of a large firm.

(b) The income that could have been earned in alternative uses by the resources owned by the firm.

(c) The payment of wages by the firm.

(d) The normal profit earned by a firm.

Answer: (c)

Question.:Which one of the following statements

is an example of an “implicit cost”?

(a) Interest that could have been earned on retained earnings used by the firm to finance expansion.

(b) The payment of rent by the firm for the building in which it is housed.

(c) The interest payment made by the firm for funds borrowed from a bank.

(d) The payment of wages by the firm.

Answer: (a)

Question : Marginal cost is defined as:

(a) The change in total cost due to a one unit change in output.

(b) Total cost divided by output.

(c) The change in output due to a one unit change in an input.

(d)Total product divided by the quantity of input.

Answer: (a)

Question: Which one of the following statements is true to the relationship between marginal cost function and average cost function?

(a) If MC is greater than ATC, ATC is falling.

(b) ATC curve intersects MC curve at minimum MC.

(c) MC curve intersects ATC curve at minimum ATC.

(d) If MC is less than ATC, ATC is increasing.

Answer: (c)

Question :Which one of the following statements is true to the relationship among the average cost functions?

(a) ATC = AFC – AVC.

(b) AVC = AFC + ATC.

(c) AFC = ATC + AVC.

(d) AFC = ATC – AVC.

Answer: (d)

Question : The difference between average total cost and average variable cost:

(a) is constant

(b) is total fixed cost

(c) gets narrow as output decreases

(d) is the average fixed cost

Answer: (d)

Question : If the total cost curve is parallel to X-axis, marginal cost will:

(a) increase (b) decrease

(c) zero (d) None of these.

Answer: (c)

Question : The total cost at 5 units of output is Rs. 30. The fixed cost is Rs. 5. The average variable cost at 5 units of output is: [CBSE Sample Paper 2014]

(a)Rs.25 (b)Rs.6

(c)Rs.5 (d)Rs.1

Answer: C

 

Class 12 Macroeconomics Aggregate Demand and Its Related Concepts

Question :  Why APC falls with the increase in income? 

Answer :  APC falls continuously with the increase in income because the proportion of income spent on consumption keeps on decreasing.

Question : Can APC be zero?
Answer: APC can be zero only when consumption becomes zero. However, consumption is never zero at any level of income. Even at zero level of national income, there is autonomous consumption (C ).

Question : What can be the maximum value of marginal propensity to save? 

Answer: The maximum value of marginal propensity to save is 1. It is possible only when MPC = 0, i.e., the entire additional income is saved.

Question :  MPC of the poor is more than that of the rich. [1 Mark]
Answer: True. It happens because the poor spend a greater percentage of their increased income on consumption as most of their basic needs remain unsatisfied. As against it, the rich people spend a smaller proportion as their basic needs are already satisfied.

Question :  In Keynes theory, MPC fall with an increase in income. [1 Mark]
Ans: False. Because Keynes assumed MPC remains constant. So, with the increase in income, MPC remains constant.

Question : What is a guideline?
Answer: The aggregate supply (AS) curve which is a 45° positively sloped line from the origin. -It is also called a guideline. Every point on AS curve is equidistant from the horizontal axis and the vertical axis implying that total income is equal to total expenditure or spending, i.e., C + S. If the whole of national income is spent on consumption of goods and services, S = 0. It is called break-even point.

Chapter 13 : 

1. Very Short Answer Type Questions (1 Mark)

Question 1. Define supply. 

Answer:  Supply refers to the quantity of a commodity that a firm is willing and able to offer for sale, at each possible price during a given period of time.

 

Question 2. Define market supply.

Answer:  Market supply refers to the quantity of a commodity that all firms are willing and able to offer for sale at each possible price during a given period of time.

 

Question 3. State any two factors affecting elasticity of supply.

Answer: (i) Nature of commodity;

(ii) Time period.

 

Question 4. What effect does a decrease in input price has on the supply of the commodity?

Answer: Supply will increase.

 

Question 5. What is the shape of a supply curve?

Answer: Supply curve is a positively shaped upward sloping curve.

 

Question 6. State the law of supply.

Answer:  It states that the price of the commodity and quantity supplied are positively related to each other when other factors remain constant (ceteris paribus).

 

Question 7. What causes a movement along the supply curve of a good? 

Answer: Change (increase or decrease) in price causes a movement along the supply curve.

 

Question 8. What causes a downward movement along a supply curve? [CBSE 2004, 09]

Answer: Fall in price and fall in quantity supplied, i.e., contraction in supply.

 

Question 9. What causes an upward movement along the supply curve of a commodity? [CBSE 2004]

Answer: Rise in price and rise in quantity supplied, i.e., expansion in supply.

 

Question 10. Define price elasticity of supply.

Answer: The degree of responsiveness of supply to the changes in the price of the commodity is known as Price Elasticity of Supply.

 

Question 11. If the quantity supplied does not change at all as price changes, what will be the elasticity of supply?

Answer:  Perfectly inelastic supply (ES = 0).

 

Question 12. What is the price elasticity of supply of a commodity whose straight line supply curve passes through the origin forming an angle of 75°? [CBSE Sample Paper 2010]

Answer:  Unitary elastic (ES = 1).

 

Question 13. When is the supply of a commodity called ‘elastic’? [CBSE 2006

Answer: The supply of a commodity is called ‘elastic’ when the percentage change in quantity supplied is more than the percentage change in price, then ES > 1 and the result is known as more than unit elastic supply.

 

Question 14. Price elasticity of supply of a good is 0.8. Is the supply ‘elastic’ or ‘inelastic’, and why? 

Answer: When PES = 0.8, PES is inelastic because the percentage change in quantity supplied is less than the percentage change in price.

 

Question 15. What is meant by perfectly elastic supply of a commodity? [CBSE 08C]

Answer: When quantity supplied changes and price remains constant, then the supply of such commodity is said to be perfectly elastic.

 

Question 16. Price elasticity of supply of a good is 1.5. Is the supply ‘elastic’ or ‘inelastic’, and why?

Answer:  When PES = 1.5, PES is elastic because the percentage change in quantity supplied is more than the percentage change in price.

 

Chapter 8 Revenue

Question 1. Give the meaning of revenue. Or [CBSE 2007]

Define revenue. 

Answer: Revenue of a firm refers to receipts from the sale of output in a given period.

 

Question 2. Define total revenue.[CBSE, All India 2004]

Answer: The amount received from the sale of a given amount of output is known as Total Revenue.

For example, if a firm sells 100 chairs at a price of ? 200 per chair, The total revenue will be 100 Chairs x Rs. 200 = Rs 20,000.

 

Question 3. Define average revenue.[CBSE, Foreign 2004]

Answer: The per unit amount received from the sale of a given amount of output.

 

Question 4. Define marginal revenue.

Answer: The amount received from the sale of an additional unit of output is known as Marginal Revenue.

 

Question 5. How is MR derived from TR?

Answer: M{ R }_{ n }=T{ R }_{ n }-T{ R }_{ n-1 }

 

Question 6. What change in TR will result in a decrease in MR?

Answer: When TR increases at a diminishing rate.

 

Question 7 : When TR falls, what happens to MR?

Answer:  MR is negative.

 

Question 8. How does TR change with the output when MR is zero?

Answer:  Then, TR is maximum and constant.

 

Question 9: What is the behaviour of average revenue in a market in which a firm can sell more only by lowering the price? [CBSE 2012]

Answer:  Average revenue will fall.

 

Question 10: What is the behaviour of Marginal Revenue in a market in which a firm can sell any quantity of the output it produces at a given price? [AI 2012]

Answer: Marginal revenue remains constant.

 

Chapter 9 : Producer Equilibrium

Question 1. What is meant by profit?

Answer: Profit refers to the excess of revenue over cost.

 

Question 2. What are the two methods for determination of producer’s equilibrium?

Answer: (i) TR – TC Approach

(ii) MR – MC Approach

 

Question 3. Explain the producer’s equilibrium. Or

Give meaning of producer’s equilibrium. [CBSE2004C, 05, 07C, 11, 11C;AI05, 08, 11}

Answer: A producer is said to be in equilibrium when he produces that level of output at which his profits are maximum.

Producer’s equilibrium is also known as profit maximisation situation.

 

Question 4. What is the general profit maximising condition for a producer (MR and MC approach)?

Answer:  (i) MC = MR; and

(ii) MC curve cuts the MR curve from below (i.e., MC is rising).

 

Chapter 10: Perfect Competition

Question 1. Define perfect competition.

Answer: It refers to a market situation in which buyers and sellers operate freely and a commodity sells at a uniform price.

 

Question 2. What do you mean by homogeneous product?

Answer: Products sold in the market are homogeneous, i.e., they are identical in all respects like quality, colour, size, weight, design, etc.

 

Question 3. In which market forms are average revenue and marginal revenue of a firm always equal? [CBSE, All India 2004]

Answer: Perfect competition.

 

Question 4. In which market form does a firm faces a perfectly elastic demand curve?

Answer:  Perfectly competitive market.

 

Question 5. What induces new firms to enter an industry? [CBSE Sample Paper 2008]

Answer: Abnormal profits, i.e., above normal profits.

 

Question 6. If the firms are earning abnormal profits how will the ‘number of firms in industry change?

Answer: The number of firms in the industry will increase.

 

Question 7. In which market form are goods sold at a uniform price?

Answer: Perfect competition.

 

Question 8:. Why are selling costs not incurred in perfect competition?

Answer: Selling costs are not incurred in perfect competition as there exists perfect knowledge among the buyers and sellers.

 

Question 9. What is meant by the term ‘price – taker ‘ in the context of a firm?

Answer: A firm is said to be a price-taker if it has to accept the price, as determined by the market forces of demand and supply.

 

Question 10:. Under which market form a firm is a price-taker? [CBSE 2004]

Answer: Perfect competition.

 

Question 11. What is a price taker firm? 

Answer: A price taker firm is one which has no option but to accept the price as determined by the industry as in perfect competition.

 

Question 12: What induces new firms to enter an industry? [CBSE Sample Paper 2008]

Answer: Abnormal profits, i.e., above normal profits.

 

Question 13. If the firms are earning abnormal profits how will the ‘number of firms in industry change?

Answer: The number of firms in the industry will increase.

 

Question 14: In which market form are goods sold at a uniform price?

Answer: Perfect competition.

 

Question 15: Why are selling costs not incurred in perfect competition?

Answer: Selling costs are not incurred in perfect competition as there exists perfect knowledge among the buyers and sellers.

 

Question : Which one of the following options is not a condition of perfect competition?

(a) A large number of firms.

(b) Perfect mobility of factors.

(c) Informative advertising to ensure that consumers have good information.

(d) Freedom of entry and exit into and out of the market.

Answer: (c)

 

Question : Under perfect competition a firm is

(a) price maker and not price taker

(b) price taker and not price maker

(c) neither price maker or price taker

(d) None of these.

Answer: (b)

 

Question : Which one of the following options is not a characteristic of a perfectly competitive market?

(a) Large number of firms in the industry.

(b) Outputs of the firms are perfect substitutes for one another.

(c) Firms face downward-sloping demand curves.

(d) Resources are very mobile.

Answer: (c)

 

Question : Price-taking firms, i.e., firms that operate in a perfectly competitive market are said to be “small” relative to the market. Which one of the following options best describes this smallness?

(a) The individual firm must have fewer than 10 employees.

(b) The individual firm faces a downward-sloping demand curve.

(c) The individual firm has assets of less than Rs 20 lakh.

(d) The individual firm is unable to affect market price through its output decisions.

Answer: (d)

 

Question : For a price-taking firm.

(a) marginal revenue is less than price

(b) marginal revenue is equal to price

(c) marginal revenue is greater than price

(d) the relationship between marginal revenue and price is indeterminate

Answer: (b)

 

Question : The firm in a perfectly competitive market is a price taker. This designation as a price taker is based on the assumption that

(a) the firm has some, but not complete, control over its product price.

(b) there are so many buyers and sellers in the market that any individual firm cannot affect the market.

(c) each firm produces a homogeneous product.

(d) there is easy entry into or exit from the marketplace.

Answer: (b)

Question : Suppose that a sole proprietorship is earning total revenues of Rs 1,00,000 and is incurring explicit costs of Rs 75,000. If the owner could work for another company for Rs 30,000 a year, we would conclude that—————-

(a) the firm is incurring an economic loss.

(b) implicit costs are Rs 25,000.

(c) the total economic costs are Rs 1,00,000.

(d) the individual is earning an economic profit of Rs 25,000.

Answer: (a)

 

Question : A purely competitive firm’s supply schedule in the short run is determined by —————-

(a) its average revenue.

(b) its marginal revenue.

(c) its marginal utility for money curve.

(d) its marginal cost curve.

Answer: (d)

 

Chapter 11 -  Non-Competitive Market

Question 1. Define monopoly. [CBSE 2005, 09]

Answer: ‘Mono’ means single and ‘poly’ means seller, i.e., single seller. Monopoly is a market situation where there is a single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist.

 

Question 2. Under which market form, firm is a price-maker?

Answer: Monopoly.

 

Question 3. What are the shapes of AR and MR curves under monopoly?

Answer: Both AR and MR curves slope downward s. ‘

 

Question 4. How many firms are there in a monopoly market?

Answer: One firm.

 

Question 5. What is a price-maker firm? 

Answer: A price maker firm is one to fix the price itself because of its monopoly power.

 

Question 6. What does Monopolistic Competition mean?

Answer: It refers to a market situation in which there are many firms which sell closely related but differentiated products.

 

Question 7. Why is the demand curve under monopoly less elastic as compared to the demand curve under monopolistic competition?

Answer:  Demand curve under monopoly is less elastic as compared to the demand curve under monopolistic competition due to absence of close substitutes in monopoly.

 

Question 8. Define product differentiation.

Answer: Product differentiation refers to differentiating the products on the  basis of brand, size, colour, shape, etc.

 

Question 9. In which form of market there is product differentiation? [CBSE 2005]

Answer: Monopolistic competition.

 

Question 10.Give the meaning of ‘Oligopoly’. 

Answer: Oligopoly is a market situation in which an industry has only a few firms (or few large firms producing most of its output) mutually dependent for taking decisions about price and output.

 

Chapter-12 Market Equilibrium with Simple Applications

Question 1. Define market equilibrium.

Answer: Market equilibrium refers to the situation when market demand is equal to the market supply.

 

Question 2. Give the meaning of equilibrium price. 

Answer: The price at which equilibrium is reached is called the equilibrium price.

 

Question 3. Give the meaning of equilibrium quantity.

Answer: The quantity bought and sold at the equilibrium price is called equilibrium quantity.

 

Question 4. What is equilibrium point?

Answer: Equilibrium point is the point of intersection of the demand curve and supply of commodity.

 

Question 5. When do you say there is excess demand for a commodity in the market?

Answer: When Market price is below the equilibrium price, then at that given price, demand is greater than supply that leads to excess demand.

 

Question 6. When do you say there is excess supply for a commodity in the market?

Answer: When market price is above the equilibrium price, then at that given price, demand is less than supply, that leads to excess supply.

 

Question 7. For a non-viable industry where does the supply curve lie relative to demand curve?

Answer: Supply curve lies above the demand curve.

 

Question 8. A severe drought results in a drastic fall in the output of wheat. Analyse how will it affect the market price of wheat? 

Answer: Market price of wheat will increase (due to decrease in supply).

 

Question 9. What happens to the equilibrium price of a commodity if there is ‘decrease’ in its demand and ‘increase’ in its supply? 

Answer: Equilibrium price will fall.

 

Question 10. What happens to the equilibrium price of a commodity if there is an ‘increase’ in its demand and ‘decrease’ in its supply? 

Answer: Equilibrium price will increase.

 

II. Multiple Choice Questions (1 Mark)

Question 1. If price is above the equilibrium Price, there is:

(a) excess demand

(b) excess supply

(c) price ceiling

(d) price flooring

Answer:  (b)

 

Question 2. With a given supply curve a decrease in demand causes—————-.

(a) an overall decrease in price but an increase in equilibrium quantity.

(b) an overall increase in price but a decrease in equilibrium quantity.

(c) an overall decrease in price and a decrease in equilibrium quantity.

(d) no change in overall price but a reduction in equilibrium quantity.

Answer: (c)

 

Question 3. Assume that consumers’ incomes and the number of sellers in the market for goods A both decrease. Based upon this information, we can conclude, with certainty, that the equilibrium

(a) price will increase.

(b) price will decrease.

(c) quantity will increase.

(d) quantity will decrease.

Answer: (d)

 

Question 4. Suppose that the supply of cameras increases due to an increase in imports. Which of the following statements will most likely occur?

(a) The equilibrium price of cameras will increase.

(b) The equilibrium quantity of cameras exchanged will decrease.

(c) The equilibrium price of camera film will decrease.

(d) The equilibrium quantity of camera film exchanged will increase.

Answer: (d)

 

Question 5. Assume that in the market for a good Z there is a simultaneous increase in demand and the quantity supplied. The result will be:

(a) An increase in equilibrium price and quantity.

(b) A decrease in equilibrium price and quantity.

(c) An increase in equilibrium quantity and uncertain effect on equilibrium price.

(d) A decrease in equilibrium price and an increase in equilibrium quantity.

Answer: (c)

 

Question 6. Suppose the technology for producing personal computers improves and, at the same time, individuals discover new uses for personal computers so that there is greater utilization of personal computers. Which of the following statements/factors will happen to equilibrium price and equilibrium quantity?

(a) Price will increase; quantity cannot be determined.

(b) Price will decrease; quantity cannot be determined.

(c) Quantity will increase; price cannot be determined.

(d) Quantity will decrease; price cannot be determined.

Answer: (c)

 

Question 7. When there is an increase in demand and decrease in supply, equilibrium price:

(a) Falls (b) Rises

(c) Constant (d) None of these

Answer: (b)

 

NCERT Solutions for Class 12 Macroeconomics

Question 1. What is meant by circular flow of income?

Ans: It refers to flow of money income or the flow of goods and services across different sectors of the economy in a circular form.

 

Question 2. What are the three phases of circular flow of income?

Ans: Production Phase, Distribution Phase and Disposition Phase.

 

Question 3. Give the meaning of factor income.

Ans: Income earned by factor of production by rendering their productive services in the production process is known as Factor Income.

 

Question 4. What is meant by transfer income?

Ans: Income received without rendering any productive services is known as Transfer Income.

 

Question .5. Out of factor income and transfer income which one is a unilateral concept?

Ans: Transfer income.

 

Question 6. Define current transfers

Ans: Transfers made from the current income of the payer and added to the current income of the recipient (who receive) for consumption expenditure are called current transfers.

 

Question 7. Define capital transfers.

Ans: Capital transfers are defined as transfers in cash and in kind for the purpose of investment to recipient made out of the wealth or saving of a donor.

 

Question 8. What is the meaning of final goods?

Ans: These are those which are used for:

Personal consumption (like bread purchased by consumer household), or

Investment or capital formation (like building, machinery purchased by a firm)

 

Question 9. What is meant by intermediate goods?

Ans: These are those, which are used for:

Further processing (like sugar used for making sweets), or

Resale in the same year (If car purchased by a car dealer for resale).

 

Question 10. What is meant by consumption goods?

Ans: Consumption goods are those goods which satisfy the wants of consumers directly.

 

Question 11. Define capital goods.

Ans: Capital goods are defined as all goods produced for use in future productive processes.

 

A. Giving reasons, classify the following into intermediate or final goods.

1. Machines purchased by a dealer of machines. 

Ans: Intermediate good

Reason: Machines purchased by a dealer of machines is an intermediate good because machines are resold by the firms to make profits or value is yet to be added to these goods by way of further processing.

 

2. A car purchased by a household.

Ans: Final good

Reason: A car purchased by a household is a final good because the household is the final user of the car and no value is to be added to the car.

 

3. Furniture purchased by a school. 

Ans: Final good

Reason: Furniture purchased by a school is a final product because school is the final user of the furniture and no value is to be added to the furniture. This will be deemed as investment expenditure because furniture is used by the school for several years and is of high value.

 

4. Chalks, dusters, etc. purchased by a school. 

Ans: Intermediate good

Reason: Chalks, dusters, etc. purchased by a school are intermediate goods as these are used up in the process of value – addition during the year.

 

5. Computers installed in an office.

Ans: Final good

 

6. Mobile sets purchased by a mobile dealer. [CBSE Delhi 2011]

Ans: Intermediate product

Reason: Mobile sets purchased by a mobile dealer is an intermediate product because these are purchased for resale.

 

7. Expenditure on maintenance of an office building. [CBSE Delhi 2011]

Ans: Intermediate product

Reason: Expenditure on maintenance of an office building is an intermediate expenditure as the things purchased for repair and maintenance are used up during the period of one year.

 

8. Expenditure on improvement of a machine in a factory.[CBSE Delhi 2011]

Ans: Final Product

Reason: Expenditure on improvement of a machine in a factory is a final expenditure as the machine is repeatedly used for several years as a fixed asset. Improvement of a machine implies improvement of asset value (through investment expenditure).

 

9. Purchase of furniture by a firm.[CBSE (Al) 2010]

Ans: Final Product

Reason: Purchase of furniture by a firm is a final expenditure because furniture is repeatedly used by the firm for several years and this is of high value.

 

10. Expenditure on maintenance by a firm.

Ans: Intermediate product

Reason: Expenditure on maintenance by a firm is an intermediate expenditure as the things purchased for repair and maintenance are used up during the period of one year.

 

11. Paper purchased by a publisher.

Ans:  Intermediate product

Reason: It is an intermediate product as paper is used for further production during the same year.

 

12. Milk purchased by households.

Ans: Final product

Reason: It is a final product as it is used by households for final consumption.

 

13. Purchase of rice by a grocery shop.

Ans: Intermediate product

Reason: These are intermediate products because these are purchased for resale.

 

14. Coal used by manufacturing firms.

Ans: Intermediate product

Reason: It is an intermediate product as coal is used for further production during the same year.

 

15. Coal used by consumer households.

Ans: Final product

Reason: It is a final product as it is used by households for final consumption.

 

16. Purchase of pulses by a consumer.

Ans: Final Product

Reason: It is a final product as it is used by a consumer for final consumption.

 

17. Fertilizers used by the farmers.

Ans: Intermediate product

Reason: These are intermediate products because fertilizer is used for further production during the same year.

 

18. Printer purchased by a lawyer.

Ans: Final product

Reason: It is a final product because it is purchased for investment.

 

19. Wheat used by the flour mill.

Ans: Intermediate product

Reason: It is an intermediate product as wheat is used for further production during the same year or is meant for resale.

 

20. Unsold coal with trader at an end of the year.

Ans: Final product

Reason: It is a final product as the unsold coal is an investment for the trader.

 

21. Cotton used by a cloth mill.

Ans: Intermediate product

Reason: It is an intermediate product as cotton is used for further production during the same year.

 

22. Wheat used by households.

Ans: Final product

Reason: It is a final product as it is used by households for final consumption.

 

23. Refrigerator installed by a firm.

Ans: Final product

Reason: It is a final product because it is purchased for investment.

 

24. Sugar used by a sweet shop.

Ans: Intermediate product

Reason: It is an intermediate product as sugar is used for further production during the same year.

 

25. Unemployment allowances.

Ans: Transfer income

Reason: It is received without rendering any productive services.

 

26. Salary received by Pankaj from a company.

Ans: Factor income

Reason: It is earned by rendering productive services.

 

27. Financial help to earthquake victims.

Ans: Transfer income

Reason: It is received without rendering any productive services.

 

28. Compensation received from the employer.

Ans:  Factor income

Reason: It is earned by rendering productive services.

 

29. Claim received from Insurance company by an injured worker.

Ans: Transfer income

Reason: It is received without rendering any productive services.

 

30. Birthday gift received from a friend.

Ans: Transfer income

Reason: It is received without rendering any productive services.

 

31. Bonus received on Diwali.

Ans: Factor income

Reason: It is earned by rendering productive services.

 

Chapter 2 : National Income and Related Aggregates

1. Which one of the following statements is incorrect?

(a) GDP at market price = GDP at factor cost plus net indirect taxes.

(b) NNP at factor cost = NNP at market price minus indirect taxes.

(c) GNP at market price = GDP at market price plus net factor income from abroad.

(d) None of them.

Ans: (a)

 

2. National income differs from net national product at market price by the amount———–.

(a) current transfers from the rest of the world

(b) net indirect taxes

(c) national debt interest

(d) it does not differ

Ans: (b)

 

3. Net national product at factor cost is————-.

(a) equal to national income

(b) less than national income

(c) more than national income

(d) sometimes less than national income and sometimes more than it

Ans:  (a)

 

4. The net value added method of measuring national income is also known as—————-.

(a) net output method

(b) production method

(c) industry of origin method

(d) all of the above

Ans: (d)

 

5. Identify the item which is not a factor payment:

(a) Free uniforms to defense personnel

(b) Salaries to the members of Parliament

(c) Imputed rent of an owner occupied a building .

(d) Scholarships given to the students of scheduled caste

Ans: (d)

 

6. Mixed income of the self-employed means

(a) gross profits received by proprietors

(b) rent, interest and profit of an enterprise

(c) combined factor payments which are not distinguishable

(d) wages due to family workers

Ans: (c)

 

7. Demand for final consumption arises in ——————-.

(a) household sector only

(b) government sector only

(c) both household and government sectors

(d) neither in households nor in government sector

Ans: (c)

 

8. Demand for intermediate consumption arises in—————— .

(a) consumer households

(b) government enterprises only

(c) corporate enterprises only

(d) all producing sectors of an economy

Ans: (d)

 

9. Which one of the following options is an economic activity?

(a) Listening to music on the radio.

(b) Teaching one’s own son at home.

(c) Medical facilities rendered by a charitable dispensary.

(d) A housewife doing household duties.

Ans: (c)

 

10. Net value added is equal to—————– .

(a) payments accruing to factors of production

(b) compensation to employees

(c) wages plus rents

(d) value of output minus depreciation

Ans: (a)

 

11. Per capita national income means:

(a) NNP/population

(b) Total capital population

(c) Population NNP

(d) None of them

Ans: (a)

 

12. Which one of the following statements is correct?

(a) If national income rises, per capita income must also rise

(b) If population rises, per capita income must fall.

(c) If national income rises, welfare of the people must rise.

(d) None of them

Ans: (d)

 

13. Net profit of any Bank of India’s branch in USA will not be included in Indian National income.

Ans: False: Net profit of any Bank of India at USA branch is a part of national income of India.

 

14. Exports do not form a part of domestic factor income.

Ans: False: Exports are made from domestic production. It is a part of domestic factor income.

 

15. Gross domestic product at market price includes net factor income from abroad and net indirect taxes.

Ans: False: GDPMP does not include net factor income from abroad but includes net indirect taxes.

 

16. Gross National Product is always less than Gross National expenditure.

Ans: False: Gross national product is always equal to gross national expenditure.

 

17. Exports are a part of net factor income from abroad.

Ans: False: Exports are a part of domestic income. Exports are sent from home production.

 

18. Real GDP includes domestic income at current prices.

Ans: False: Real GDP is taken at some constant prices. It does not have the influence of price fluctuations.

 

19. National disposable income includes current transfers income of government.

Ans: False: National income includes the income of the government sector in the form of receiving of taxes.

 

20. Private income does not include net factor income from abroad.

Ans: False: Private income is a national concept. It also includes net factor income from abroad.

 

21. Personal income does not include income from personal taxes.

Ans: False: Personal income includes personal taxes, but not corporate taxes.

 

22. Personal disposable income is equal to aggregate consumption and savings.

Ans: True: Personal disposable income can be disposed upon consumption and savings both.

 

23. Private income includes earned incomes of private sector from all sources.

Ans: False: Private income includes both earned income (factor income) as well as unearned income (transfer income) of private sector from all sources.

 

24. National disposable income is the disposable income of private sector.

Ans: False: It is the disposable income of the whole country (public sector and private sector).

 

25. Travelling allowance paid by an employer is a part of national income.

Ans: False: Travelling allowances are paid by an employee and then recovered from employer. It is not a part of national income

 

26. Consumption of food grains by farmer himself is not a part of national output.

Ans: False: It is a part of domestic output. It is a part of national income.

 

27. Sale of second hand car is not included in national income.

Ans:  True: It’s original sale has already been included in national income of previous year. If done, it will be a case of double counting.

 

28. Rent received by an American from Reliance Industries with respect to building located in India will neither be included in national income nor in domestic income of India.

Ans: False: Such rent will be included in domestic income of India as building is located within the domestic territory of India.

 

29. Purchase of car by a consumer is a part of gross domestic capital formation.

Ans: False: It is a part of private final consumption expenditure.

 

30. Goods produced for self-consumption will be included in national income.

Ans:  True: Such goods contribute to the current output and their imputed value will be included in national income.

 

31. Gross domestic capital formation is always greater than gross fixed capital formation.

Ans: False: Gross domestic capital formation can be less than gross fixed capital formation if change in stock is negative.

Note: As per CBSE guidelines, no marks will be given if reason to the answer is not explained.

 

Chapter-3 Money

Question 1. What is Barter system? What are its drawbacks? 

Ans:Barter system of exchange is a system in which goods are exchanged for goods.

It’s Drawbacks are:

Lack of double coincidence of wants. 

Lack of divisibility.

 Difficulty in storing wealth.

 Absence of common measure of value.

 Lack of standard of deferred payment.

 

Question 2. What are the main functions of money? How does money overcome the shortcomings of a barter system?

Explain the problem of double coincidence of wants faced under barter system. How has money solved it?

Ans: “Money is a matter of the following four functions: A medium, a measure, a standard, a store”.

Money has overcome the shortcomings of a barter system in the following manner:

(a) Medium of exchange

• Under barter system, there is a lack of double coincidence of wants.

• With money as a medium exchange individuals can exchange their goods and services for money and then use this money to buy other goods and services according to their needs and conveniences.

• A buyer can buy goods through money and a seller can sell goods for money.

(b) Measure of value

• Under barter system, there was no common measure of value. Money has also solved this difficulty.

• As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods.

• Money works as a common denominator into which the values of all goods and services are expressed.

• When we express the values of a commodity in terms of money, it is called price and by knowing the prices of the various commodities, it is easy to calculate exchange ratios between them.

 

Question  3. What is transaction demand for money? How is it related to the value of transactions over specified period of time?

Ans: Deleted from syllabus.

 

Question .4. Why is speculative demand for money inversely related to the rate of interest?

Ans: Deleted from syllabus

 

I.VERY SHORT ANSWER TYPE QUESTIONS 

Question 1. Define Barter system.

Ans: Barter system of exchange is a system in which goods are exchanged for goods.

 

Question 2. What is meant by double coincidence of wants?

Ans: Double coincidence of wants means that goods in possession of two different persons must be useful and needed by each other.

 

Question 3. Define Money.

Ans: Money is something which is generally acceptable as a medium of exchange and can be converted into other assets without losing its time and value.

 

Question 4. What is the basic characteristic of money?

Ans: Durability and weight.

 

Question 5. What is the legal definition of money?

Ans: Legally, money is anything proclaimed by law as a medium of exchange. Paper notes and coins (together called currency) is money as a matter of law.

 

Question 6. Define money supply.

Ans: The stock of money held by the public at a point of time, in an economy,

is referred to as the money supply. Money supply is a stock concept.

 

Question 7. State two components of money supply Or

State the components of money supply.

What is included in money supply?

Ans:Currency notes and coins with public + demand deposits with the banks.

 

Question 8. Define demand deposits

Ans: Demand deposits are those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.

 

Question 9. What are time deposits in banks?

Ans: Time deposits are deposits which can not be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.

 

Chapter-4 Banking

Question 1. Define commercial bank.

Ans: Commercial bank is a financial institution which performs the functions of accepting deposits from the public and making loans and investments, with the motive of earning profit.

 

Question 2. Define money multiplier/credit multiplier/deposit multiplier.

Ans: When the primary cash deposit in the banking system leads to multiple expansion in the total deposits, it is known as the money multiplier or credit multiplier.

 

Question 3. Define central bank.

Ans: The central bank is the apex institution of a country’s monetary system. The design and the control of the country’s monetary policy is its main responsibility. India’s central bank is the Reserve Bank of India.

 

Question 4. Define bank rate

Ans:It is the rate of interest at which the central bank lends to commercial banks without any collateral (security for the purpose of loan).

 

Question 5. What will be the effect of a rise in bank rate on the money supply?

Ans: Money supply will reduce.

 

Question 6. Define open market operations.

Ans: It consists of buying and selling of government securities and bonds in the open market by the central bank.

 

Question 7. What is meant by cash reserve ratio? 

Ans: Cash Reserve Ratio refers to the minimum percentage of a bank's total deposits, which it is required to keep with the central bank.

 

Question 8. What is meant by statutory liquidity ratio? 

Ans: It refers to minimum percentage of net total demand and time liabilities,

which commercial banks are required to maintain with themselves.

 

Chapter 5: Aggregate Demand and Its Related Concepts

Question 1. What is Aggregate demand in Macroeconomics? 

Answer: It is aggregate expenditure on ex-ante (planned) consumption and ex-ante (planned) investment that all sectors of the economy are willing to incur at each income level.

 

Question 2. What is Aggregate Supply in Macroeconomics?

Answer: Aggregate supply is the total amount of money value of goods and services, (which is paid to the factor of production against their factor services) that all the producers are willing to supply in an economy.

 

Question 3. What is consumption function?

Answer: Consumption function expresses functional relationship between aggregate consumption and national income.

 

Question 4. Can the value of APC be less than zero?

Answer: No, because even at the zero level of income, we will consume something i.e., autonomous consumption.

 

Question 5. Why can value of MPC be not greater than one? 

Answer: It is so because Keynes’ psychological law of consumption states that when income increases, consumption also increases but at a lesser rate. So, increase in consumption is always less than increase in income, i.e., MPC=ΔC/ΔY is always less than one.

 

Question 6. Can the value of average propensity to save be negative? If yes,when?

Answer: Yes, the value of average propensity to save can be negative when consumption is more than national income, i.e., before the break-even point.

 

Question 7. What can be the maximum value of marginal propensity to save?

Answer: The maximum value of marginal propensity to save is 1. It is only possible when MPC = 0, i.e., the entire additional income is saved.

 

Question 8. What is the relationship between APC and APS?

Answer: The sum of APC and APS is equal to one, i.e., APC + APS = 1.

 

Question 9. What is the relationship between marginal propensity to save and marginal propensity to consume?[CBSE Sample Paper 2010]

Answer: The sum total of MPC and MPS is equal to one, i.e., MPC + MPS = 1.

 

Question 10. Give the meaning of autonomous consumption. 

Answer: It refers to a minimum level of consumption (i.e., C) , which is needed for survival, i.e., consumption at zero level of national income.

 

Question 11. Why APC falls with the increase in income? 

Ans: APC falls continuously with the increase in income because the proportion of income spent on consumption keeps on decreasing.

 

Question 12. Can APC be zero? 

Answer: APC can be zero only when consumption becomes zero. However, consumption is never zero at any level of income. Even at zero level of national income, there is autonomous consumption (C ).

 

Question 13. What can be the maximum value of marginal propensity to save? Answer: The maximum value of marginal propensity to save is 1. It is possible only when MPC = 0, i.e., the entire additional income is saved.

 

Question 14. MPC of the poor is more than that of the rich. 

Answer: True. It happens because the poor spend a greater percentage of their increased income on consumption as most of their basic needs remain unsatisfied. As against it, the rich people spend a smaller proportion as their basic needs are already satisfied.

 

Question 15. In Keynes theory, MPC fall with an increase in income. 

Ans: False. Because Keynes assumed MPC remains constant. So, with the increase in income, MPC remains constant.

 

Question 16. What is a guideline? 

Answer: The aggregate supply (AS) curve which is a 45° positively sloped line from the origin. -It is also called a guideline. Every point on AS curve is equidistant from the horizontal axis and the vertical axis implying that total income is equal to total expenditure or spending, i.e., C + S. If the whole of national income is spent on consumption of goods and services, S = 0. It is called break-even point.

 

Chapter-6 National Income Determination and Multiplier

Question 1. If planned savings are greater than planned investments, what will be its effect on inventories? 

Answer: The inventories will rise.

 

Question 2. What is meant by effective demand?

Answer: The level at which the economy is in equilibrium, i.e., where aggregate demand = aggregate supply, is called effective demand.

 

Question 3. Define the term ‘multiplier’. How do we measure it?

Answer: The ratio of change in national income (Delta Y) due to change in investment (Delta I) is known as multiplier (K).

(K)=frac { Delta Y }{ Delta I }

 

Question 4. An increase of Rs 1000 crore in investment leads to a rise of Rs 5000 crore in the national income. Calculate the value of multiplier.

Answer: Multiplier (k)=frac { Change in Income }{ Change in Investment }

= frac { 5000 }{ 1000 } =Rs 5

 

Question 5. If investment multiplier is 1, what will be the value of marginal propensity to consume?

Answer: Marginal propensity to consume = 0.

 

II.Multiple Choice Questions (1 Mark)

Question 1. If in an economy investment is greater than saving, national income of the economy,

(a) increases

(b) decreases

(c) remains constant

(d) None of them

Answer: (a)

 

Question 2. What happens to the level of national income, when aggregate supply falls short of aggregate demand?

(a) Increases (b) Decreases

(c) Constant (d) None of them

Answer: (a)

 

Question 3. What happens to the level of national income, when aggregate supply exceeds aggregate demand?

(a) Increases

(b) Decreases

(c) Remains constant

(d) None of them

Answer: (b)

 

Question 4. If MPC and MPS are equal, value of multiplier is,

(a) 2 (b) 1

(c) 5 (d) 3

Answer: (a)

 

Question 5. What is the relationship between MPS and Multiplier?

(a) Positive (b) Negative

(c) Constant (d) None of them

Answer: (b)

 

Question 6. What can be the minimum value of investment multiplier?

(a) 0 (b) 1

(c) 2 (d) 5

Answer: (b)

 

Chapter-7 Excess Demand and Deficient Demand

Question 1. What is meant by excess demand in macroeconomics? 

Answer: When in an economy aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand.

 

Question 2. Define inflationary gap. 

Answer: When in an economy aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand and the gap is called inflationary gap.

 

Question 3. Give the meaning of deficient demand.

Answer: When in an economy aggregate demand falls short of aggregate supply at full employment level, the demand is said to be as deficient demand.

 

Question 4. Define deflationary gap. 

Give the meaning of deflationary gap. 

Answer: When in an economy aggregate demand falls short of aggregate supply at full employment level, the demand is said to be deficient demand and the gap is called a deflationary gap.

 

Question 5. What is the impact of increase in margin requirements?

Answer: Increase in margin requirements discourages borrowings and decreases the aggregate demand.

 

Question 6. Give the meaning of full employment.

Answer: Full employment equilibrium refers to the situation where aggregate demand = aggregate supply and all those who are able to work and willing to work (at the existing wage rate) are getting work.

 

Question 7. Give the meaning of involuntary unemployment

Answer: Involuntary unemployment refers to a situation in which all able and willing persons to work at existing wage-rate do not find work. They are rendered unemployed against their wish. Hence, it is termed as involuntary unemployment.

 

Question 8. Is it necessary that equality between AD and AS is established at the full employment level?

Answer: No, it is not necessary that full employment occurs when AD = AS. Equilibrium can be achieved at full employment level, under employment level or at over full employment level.

 

Question 9. What is meant by full employment equilibrium?

Answer: Full employment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply at full employment level.

 

Question 10. What is underemployment equilibrium?

Answer: Underemployment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply below full employment level or when resources are not fully employed.

 

Question 11. What is the meaning of over full employment equilibrium?

Answer: Over full employment level refers to a situation when equilibrium is attained, i.e., aggregate demand is equal to aggregate supply beyond the full employment level.

 

Chapter-8 Government Budget and the Economy

Question 1. Define government budget.

Answer:  A government budget is an annual financial statement showing item wise estimates of expected revenue and anticipated expenditure during a fiscal year.

 

Question 2. State any one objective of a government budget.

Answer: Activities to secure a reallocation of resources

 

Question 3. Define a tax.

Answer: A tax is a legally compulsory payment imposed by the government on income and profit of persons and companies without reference to any benefit. Tax is of two types: Direct tax and Indirect tax.

 

Question 4. Why is service tax an indirect tax?

Answer: Its impact and incidence lie on different persons.

 

Question 5. State any two sources of non-tax revenue receipts.

Answer: Commercial revenue (profit and interest)

Administrative revenue fees, fines and penalties, escheats etc)

 

Question 6. Is borrowing by the government a revenue receipt?

Answer: No, it is not so because it creates a liability (for the government) of repayment.

 

Question 7. Why is tax not a capital receipt?

Answer: Tax is not a capital receipt because it leads neither to creation of liability nor to reduction in assets.

 

Question 8. Why is interest termed as a revenue receipt?

Answer: Interest is a revenue receipt because it creates neither any liability nor causes a reduction in the assets of the government.

 

Question 9. Why are borrowings a capital receipt?

Answer: They create a liability (in terms of repayment).

 

Question 10. Why are subsidies treated as revenue expenditure?

Answer: Subsidies are treated as revenue expenditure because they create neither any asset nor cause a reduction in any liability of the government.

 

Question 11. Why is repayment of loan a capital expenditure?

Answer: It reduces the liabilities of the government.

 

Question 12. Why is recovery of loans treated as a capital receipt?[CBSE All India 2005]

Answer: Recovery of loans is treated as a capital receipt because it reduces assets of the government.

 

Question 13. Why are receipts from taxes categorised as revenue receipts?

Answer: Receipts from taxes are categorised as revenue receipts because they create neither any liability nor cause a reduction in the assets of the government.

 

Question 14. What is meant by revenue deficit?

Answer: Revenue deficit refers to the excess of revenue expenditure of the government over its revenue receipts. Revenue Deficit = Revenue Expenditure- Revenue Receipts

 

Question 15. If the revenue receipts are Rs. 1,000 crore and revenue expenditure is Rs. 1,200 crore, how much will be the revenue deficit?

Answer: Revenue Deficit = Revenue Expenditure – Revenue Receipts = 1,200 – 1,000 = Rs. 200 crore.

 

Question 16. Define fiscal deficit.

Answer: Fiscal deficit is defined as the excess of total expenditure over total receipts (revenue and capital receipts) excluding borrowing.

 

Question 17. What is the meaning of primary deficit?

Answer: Primary deficit refers to the difference between fiscal deficit of the current year and interest payments on the previous borrowings.

 

Question 18. How is primary deficit calculated?

Answer: Primary Deficit = Fiscal Deficit – Interest Payments

 

Question 19. What does zero primary deficit mean?

Answer: If primary deficit is zero, fiscal deficit= interest payments. It means the government has to borrow only for its interest commitments on earlier loans.

 

II 

Question 1. Budget is placed before:

(a) Lok Sabha

(b) Rajya Sabha

(c) Both Lok Sabha and Rajya Sabha

(d) Parliament 

Answer: (c)

 

Question 2. Budget is a:

(a) Financial statement

(b) Monetary statement

(c) Political statement

(d) All of them

Answer: (a)

 

Question 3. Which article of the Constitution takes about the budget?

(a) Article 110 (b) Article 111

(c) Article 112 (d) Article 113

Answer: (c)

 

Question 4. One year period from 1 April to 31 March of next year is called a:

(a) Monetary year (b) Fiscal year

(c) Plan year (d) Tax year

Answer: (b)

 

Question 5. Capital receipts may come from:

(a) Market borrowings

(b) Provident funds

(c) Recoveries of loans

(d) All of them

Answer: (d)

 

Question 6. Find direct tax among the following taxes:

(a) Personal income tax

(b) Excise duty

(c) Sales tax

(d) Service tax

Answer: (a)

 

Question 7. Among the following types of taxes, find the indirect one.

(a) Gift tax

(b) Corporate income tax

(c) VAT

(d) Wealth tax

Answer: (c)

 

Question 8. If budgetary deficit is nil and borrowings and other liabilities are 70 crore, what is the amount of fiscal deficit?

(a) Nil (b) 30 crore

(c) Can’t say (d) 70 crore

Answer: (d)

 

Question 9. When the government tries to meet the gap of public expenditure and public revenue through borrowing from the banking system, it is called

(a) deficit financing

(b) debt financing

(c) credit financing

(d) none of them

Answer: (a)

 

Question 10. ……is the difference between total receipts and total expenditure.

(a) Fiscal deficit

(b) Budget deficit

(c) Revenue deficit

(d) Capital deficit

Answer: (b)

 

Question 11. If borrowings and other liabilities are added to the budget deficit, we get

(a) revenue deficit

(b) capital deficit

(c) primary deficit

(d) fiscal deficit

Answer: (d)

 

Question 12. Payment of interest is _

(a) revenue expenditure.

(b) capital expenditure

(c) primary deficit.

(d) fiscal deficit

Answer: (a)

 

Question 13. If the total receipts are Rs.1000 crore and total expenditure is ?1500 crore, how much will be the budgetary deficit?

(a) 500 crore (b) 1500 crore

(c) 1000 crore (d) -500 crore

Answer: (a)

 

Question 14. A government shows a primary deficit of ?4400 crore. The revenue expenditure on interest payment is Rs.400crore. How much is the fiscal deficit?

(a) 4000 crore (b) 4800 crore

(c) 4400 crore (d) -400 crore

Answer: (b)

 

Question 15. A government shows a primary deficit of Rs 10,000 crore. The revenue expenditure on interest payment is Rs 8000 crore. How much is the fiscal deficit?

(a) 18000 crore (b) 10000 crore

(c) 8000 crore (d)-8000 crore

Answer: (a)

 

Question 16. In a government budget, revenue deficit is Rs50,000 crore and borrowings are Rs.75,000 crore. How much is the fiscal deficit?

(a) 50000 crore (b) 75000 crore (c) 25000 crore (d) -25000 crore

Answer: (b)

 

Question 17. Borrowing in government budget is: (Choose the correct alternative)

(a) Revenue deficit

(b) Fiscal deficit

(c) Primary deficit

(d) Deficit in taxes

Answer: (b)

 

Question 18. The non – tax revenue in the following is: (Choose the correct alternative

(a) Export duty (b) Import duty (c) Dividends (d) Excise

Answer: (c)

 

Question 19. Primary deficit in a government budget is: (Choose the correct alternative)

(a) Revenue expenditure – Revenue receipts

(b) Total expenditure – Total receipts

(c) Revenue deficit – Interest payments

(d) Fiscal deficit – Interest payments

Answer: (d)

 

Question 20. Direct tax is called direct because it is collected directly from: (Choose the correct alternative)

(a) The producers on goods produced

(b) The sellers on goods sold

(c) The buyers of goods

(d) The income earners

Answer: (d)

 

Question 21. The government budget has a revenue deficit. This gets financed by:

(A) Borrowing

(B) Disinvestment

(C) Tax revenue

(D) Indirect taxes

(a) A and D (b) C and D

(c) A and B (d) C and D

Answer: (c)

 

Question 22. Which of the following statement is not true for fiscal deficit?

A fiscal deficit:

(a) represents the borrowing of the government.

(b) is the difference between total expenditure and total receipts of the government.

(c) is the difference between total expenditure and total receipts other than borrowing.

(d) increases the future liability of the government

Answer: (b)

 

Question 3. Which article of the Constitution takes about the budget?

(a) Article 110 (b) Article 111

(c) Article 112 (d) Article 113

Answer: (c)

 

Question 4. One year period from 1 April to 31 March of next year is called a:

(a) Monetary year (b) Fiscal year

(c) Plan year (d) Tax year

Answer: (b)

 

Question 5. Capital receipts may come from:

(a) Market borrowings

(b) Provident funds

(c) Recoveries of loans

(d) All of them

Answer: (d)

 

Question 6. Find direct tax among the following taxes:

(a) Personal income tax

(b) Excise duty

(c) Sales tax

(d) Service tax

Answer: (a)

 

Question 7. Among the following types of taxes, find the indirect one.

(a) Gift tax

(b) Corporate income tax

(c) VAT

(d) Wealth tax

Answer: (c)

 

Question 8. If budgetary deficit is nil and borrowings and other liabilities are 70 crore, what is the amount of fiscal deficit?

(a) Nil (b) 30 crore

(c) Can’t say (d) 70 crore

Answer: (d)

 

Question 9. When the government tries to meet the gap of public expenditure and public revenue through borrowing from the banking system, it is called

(a) deficit financing

(b) debt financing

(c) credit financing

(d) none of them

Answer: (a)

 

Question 10. ………is the difference between total receipts and total expenditure.

(a) Fiscal deficit

(b) Budget deficit

(c) Revenue deficit

(d) Capital deficit

Answer: (b)

 

Question 11. If borrowings and other liabilities are added to the budget deficit, we get

(a) revenue deficit

(b) capital deficit

(c) primary deficit

(d) fiscal deficit

Answer: (d)

 

Question 12. Payment of interest is 

(a) revenue expenditure.

(b) capital expenditure

(c) primary deficit.

(d) fiscal deficit

Answer: (a)

 

Question 13. If the total receipts are Rs.1000 crore and total expenditure is ?1500 crore, how much will be the budgetary deficit?

(a) 500 crore (b) 1500 crore

(c) 1000 crore (d) -500 crore

Answer: (a)

 

Question 14. A government shows a primary deficit of ?4400 crore. The revenue expenditure on interest payment is Rs.400

crore. How much is the fiscal deficit?

(a) 4000 crore (b) 4800 crore

(c) 4400 crore (d) -400 crore

Answer: (b)

 

Question 15. A government shows a primary deficit of Rs 10,000 crore. The revenue expenditure on interest payment is Rs 8000 crore. How much is the fiscal deficit?

(a) 18000 crore (b) 10000 crore

(c) 8000 crore (d)-8000 crore

Answer: (a)

 

Question 16. In a government budget, revenue deficit is Rs50,000 crore and borrowings are Rs.75,000 crore. How much is the fiscal deficit?

(a) 50000 crore (b) 75000 crore (c) 25000 crore (d) -25000 crore

Answer: (b)

 

Question 17. Borrowing in government budget is: (Choose the correct alternative)

(a) Revenue deficit

(b) Fiscal deficit

(c) Primary deficit

(d) Deficit in taxes

Answer: (b)

 

Question 18. The non – tax revenue in the following is: (Choose the correct alternative

(a) Export duty (b) Import duty (c) Dividends (d) Excise

Answer: (c)

 

Question 19. Primary deficit in a government budget is: (Choose the correct alternative)

(a) Revenue expenditure – Revenue receipts

(b) Total expenditure – Total receipts

(c) Revenue deficit – Interest payments

(d) Fiscal deficit – Interest payments

Answer: (d)

 

Question 20. Direct tax is called direct because it is collected directly from: (Choose the correct alternative)

(a) The producers on goods produced

(b) The sellers on goods sold

(c) The buyers of goods

(d) The income earners

Answer: (d)

 

Question 21. The government budget has a revenue deficit. This gets financed by:

(A) Borrowing

(B) Disinvestment

(C) Tax revenue

(D) Indirect taxes

(a) A and D (b) C and D

(c) A and B (d) C and D

Answer: (c)

 

Chapter – 9 Foreign Exchange Rate

Question 1: What is meant by foreign exchange rate? 

Answer: The rate at which one currency is exchanged for another is called foreign exchange rate.

 

Question 2. What is meant by foreign exchange market?

Answer: Foreign exchange market is the market where foreign currencies are bought and sold.

 

Question 3. Define flexible exchange rate system.

Answer: Flexible exchange rate system refers to a system in which the exchange rates of different currencies is determined by the forces of demand and supply in foreign exchange market.

 

Question 4. The price of 1 US Dollar has fallen from Rs. 50 to Rs. 48. Has the Indian currency appreciated or depreciated?

Answer: Indian currency has appreciated.

 

II. Multiple Choice Questions (1 Mark)

Question 1. Which function of foreign exchange market protects against the foreign exchange risk?

(a) Credit function

(b) Hedging function

(c) Transfer function

(d) All of them

Answer: (b)

 

Question 2. Reduction in the value of domestic currency by the government is called

(a) depreciation (b) devaluation

(c) revaluation (d) appreciation

Answer: (b)

 

Question 3. Reduction in the value of domestic currency through market forces is called ………….

(a) depreciation (b) devaluation

(c) revaluation (d) appreciation

Answer: (a)

 

Question 4. Increase in the value of domestic currency by the government is called

(a) depreciation (b) devaluation

(c) revaluation (d) appreciation

Answer: (c)

 

Question 5. Increase in the value of domestic currency through market forces is called _______ .

depreciation (b) devaluation

revaluation (d) appreciation

Answer: (d)

 

Question 6. Which function of foreign exchange market protects against the foreign exchange risk?

(a) Credit function

(b) Hedging function

(c) Transfer function

(d) All of them

Answer: (b)

 

Question 7. Reduction in the value of domestic currency by the government is called

(a) depreciation (b) devaluation

(c) revaluation (d) appreciation

Answer: (b)

 

Question 8. Reduction in the value of domestic currency through market forces is called ………….

(a) depreciation 

(b) devaluation

(c) revaluation 

(d) appreciation

Answer: (a)

 

Question 9. Increase in the value of domestic currency by the government is called

(a) depreciation 

(b) devaluation

(c) revaluation 

(d) appreciation

Answer: (c)

 

Question 10. Increase in the value of domestic currency through market forces is called _______ .

(a)depreciation 

(b) devaluation

(c)revaluation 

(d) appreciation

Answer: (d)

 

Question 11. What will be the effect on exports if foreign exchange rate increases?              (a) Increases 

(b) Decreases

(c) Remains constant 

(d) None of them

Answer: (a)

 

Question 12. Foreign exchange is demanded by………………..

(a) domestic residents to purchase goods and services from other countries

(b) sending gifts and grants to foreign countries (abroad)

(c) the domestic residents to purchase financial assets in a particular country

(d) all of them

Answer: (d)

 

Question 13 . The supply of foreign exchange comes from…………

(a) the foreigners purchasing home country’s goods and services through exports

(b) the foreigners who invest in home country through joint ventures or through financial market operations

(c) currency dealers and speculators.

(d) all of them

Answer:(d)

 

Question 9. Buyers and sellers of foreign exchange are _______ .

(a) central banks

(b) commercial banks

(c) brokers

 (d) all of them

Answer: (d)

 

Question 10. Which exchange rate measures the average relative strength of a given currency with respect to other currencies without eliminating the effect of change in price? 

(a) Nominal exchange rate

(b) Nominal effective exchange rate

(c) Real exchange rate

(d) Real effective exchange rate

Answer: (b)

 

Question 11. When one country manipulates the exchange rate against the interest of other countries, is known as ……………..

(a) managed floating ( b) dirty floating

(c) wide band (d) crawling peg

Answer: (b)




 


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