CLASS 12 – ECONOMICS

PART A
CHAPTER 1 to 6
Imp 1m, 3m, 4m, 6m Question Answer

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 CLASS 12 – INDIAN ECONOMIC DEVELOPMENT
PART A - CHAPTER 1 – 6 (MCQ & IMP Q/A)
2024 – 2025
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CHAPTER 1 - INTRODUCTION TO MACROECONOMICS

Multiple Choice Questions
1.Which of the following is a flow?
(a) Deposits in a bank (b) Capital (c) Depreciation (d) Wealth
2.Which of the following is a stock? .
(a) Savings (b) Production (c) Consumption of fixed capital (d) Capital
3.Which of the following is not a flow?
(a) Capital (b) Income c) Investment (d) Depreciation
4.Which of the following is a stock? (All India (C) 2015)
(a) Wealth (b) Saving c) Exports (d) Profits
5.Macroeconomics study the economy as a whole or in aggregates. Which of the following
are the macroeconomics study aggregates/variables?
(a) Aggregate demand, aggregate supply, individual income and price level
(b) Individual demand, individual supply, national income and price level
(c) Aggregate demand, aggregate supply, national income and price level
(d) None of the above
6.A study of how increase in the Goods and Service Tax (GST) rate will affect the national
unemployment rate is an example of _______
(a) microeconomics (b) descriptive economics
(c) macroeconomics (d) None of the above
7.From the following, which type of goods are ready for the use by their final users?
(a) Intermediate goods (b) Final goods
(c) Capital goods d) All of the above
8.The goods in which value to be added or used for resale are known as
(a) intermediate goods (b) value added goods
(c) capital goods (d) None of the above
9.Purchase of computers, equipments, tools, power and raw materials, etc is a part of
(a) gross investment (b) fixed investment
(c) inventory investment (d) All of the above
10.Which of the following is the reason of depreciation of fixed assets?
(a) Normal wear and tear and unforeseen obsolescence
(b) Normal wear and tear and foreseen obsolescence
(c) Abnormal wear and tear and foreseen obsolescence
(d) Abnormal wear and tear and unforeseen obsolescence
11.Stock variable is defined as any quantity which is measured
(a) over a period of time (b) at a particular point of time
(c) in a financial year (d) All of the above
12.The quantity of a variable which is measured over a period of time, is known as
(a) stock (b) flow (c) goods (d) All of the above
13.Real flow includes
(a) factor services and production of goods and services
(b) factor payments and production of goods and services
(c) factor services and expenditure on goods and services
(d) factor payments and expenditure on goods and services
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14.From the following, which is not the part of injection?‟
(a) Investment (b) Savings (c) Exports (d) None of these
15.Money flow includes
(a) factor services and production of goods and services
(b) factor services and expenditure of goods and services
(c) factor payment and production of goods and services
(d) factor payment and expenditure on goods and services
16.The services of doctors, lawyers, teachers, domestic maids, etc are
(a) final services (b) intermediate services
(c) Both (a) and (b) (d) None of the above
17.Macroeconomics study economic activities and problems as a whole. Macroeconomics
does not include
(a) aggregates (b) economic equilibrium
(c) consumer equilibrium (d) All of the above

IMPORTANT QUESTION ANSWER

1.Give any two examples of flow concept.
Income and savings
2.Define stocks. / Give meaning of stock variables. / Define stock variable.
Stock variables are defined as any quantity measured at a particular point of time. e.g. number of
machines in a plant on 31st March amount in the bank account on 1st July.
3.Define flows. / Give meaning of flow variables. /Define flow variable.
Flow variables are defined as any quantity measured per unit at a particular period of time, e.g.
income or expenditure over a time period of one month or one year.
4.Define investment.
It is the process of capital formation by a firm or increase in the existing stock of capital.
5.Give the meaning of capital goods. / Define capital goods.
The goods which are repeatedly used in the process of production are known as capital goods.
They are the fixed assets of the producer, e.g. building, plant and machinery etc. They help to
convert intermediate goods into final goods.
6.Give two examples of intermediate goods.
Two examples of intermediate goods are
 Steel used in the production of car.
 Mobile sets purchased by a mobile dealer.
7.Define consumption goods.
Goods which are directly used for satisfaction of human wants and which are not used in
production of other goods are known as consumer goods or consumption goods, e.g. ice-cream
and milk consumed by the households.
8.What is macroeconomics?
Macroeconomics studies economic problems at the level of an economy as a whole. It is the study
of aggregates.
9.Define final goods. / Define final product.
The goods, which have crossed the boundary line of production and are ready for use by their final
users are known as final goods, e.g. clothes, milk consumed by a consumer.
10.Define depreciation.
It is the loss in the value of fixed assets in use on account of normal wear and tear, normal rate of
accidental damages and expected or foreseen obsolescence. Depreciation is also called
consumption of fixed capital.
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11.Define intermediate goods.
The goods purchased by a firm for the use in production of other goods or for the purpose of
reselling are known as intermediate goods, e.g. steel used in the production of cars or milk
purchased by a milk seller.
12.Distinguish between stock and flow variables with suitable examples.
Distinguish between stocks and flows. Give an example of each.
Distinguish between stock and flow. Give two examples of each.
Differences between stock and flow are (any three)
Basis Stock Flow
Time It relates to a point of time. It relates to the period of time.
elements
It is not time dimensional. It is time dimensional as per hour, per month,
Dimension
per year.
It influences the flow. Greater It influences the stock e.g. monthly increase in
Impact the stock of capital greater is the the supply of money leads to an increase in
flow of goods and services. the quantity of money.
Concept Static concept. Dynamic concept.
Money in bank account as on Number of births during the month of March
Example
31st March, 2016. 2016.

13.What are capital goods? How are they different from consumption goods?
Consumption goods and capital goods
The goods which are repeatedly used in the process of production are known as capital goods.
They are the fixed assets of the producer, e.g. building, plant and machinery etc. They help to
convert intermediate goods into final goods.
Differences between consumer goods and capital goods are:
Basis Consumer Goods Capital Goods
Meaning These goods are purchased by These goods are purchased by manufacturers
consumers for the satisfaction of and producers for the production of other
their wants and not for resale. goods. These goods are not meant for resale.
Use These are for own use. These are used for production of goods and
services.
Demand High Comparatively less
Examples Bread, butter, jam, etc. Machinery, equipment, etc.
14.Which among the following are final goods and which are intermediate goods? Give
reasons.
(a) Milk purchased by a tea stall
(b) Bus purchased by a school
(c) Juice purchased by a student from the school canteen
(a) „Milk purchased by a tea stall‟ is intermediate goods.
Reason: It will be used for making tea as a raw material and involved value addition.
(b) „Bus purchased by a school is final good.
Reason: School purchase bus as long-term durable product and make investment for school i.e.
not for re-sale.
(c) „Juice purchased by a student from school canteen‟ is final good.
Reason: Here, juice is purchased for direct satisfaction of student‟s need. i.e. juice is consumed by
its end user.

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15.Explain with the help of an example, the basis of classifying goods into final goods and
intermediate goods.
The basis of classification is the end-use of the product. Goods which are used by the producers in
the process of production such as raw material or goods purchased for resale, are known as
intermediate goods, e.g. shirt purchased by a firm for resale. These goods are still within the
production boundary. Goods which are outside the boundary line of production and are ready for
use by their final users are called final goods, e.g. shirt purchased by a consumer.

16.Distinguish between final goods and intermediate goods. Give an example of each.
Distinguish between Final goods and intermediate goods.
Distinguish between intermediate and final goods. Give two examples of each.
Differences between intermediate goods and final goods are (any three)
Basis Intermediate Goods Final Goods
Meaning These goods may be used as raw These goods are not used as raw
materials for the production of other materials for the production of other
goods during the accounting year. goods during the accounting year.
Purpose These goods may be resold by the These goods are not resold by the firms
firms to make profits during an to make profits during an accounting
accounting year. year.
Production These goods remain within the These goods are outside the boundary
boundary boundary line of production and are line of production and are ready for use
not ready for use by their final users. by their final users.
Examples (i) Steel used in the production of (i) A microwave oven sold to consumers.
cars. (ii) A mixer grinder sold to consumers.
(ii) Sugar used in the making of
candies.

17.Explain the circular flow of income.

Circular flow of income refers to the unending flows of production of goods and services and
income and expenditure in an economy. It shows the redistribution of income in a circular manner
between production units (firms) and households. It can be better understood with the diagram
given below

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18.Explain the circular flow of income.
Circular flow of income refers to the unending flows of production of goods and services and
income and expenditure in an economy. It shows the redistribution of income in a circular manner
between production units (firms) and households. It can be better understood with the diagram
given below.
Phases of circular flow of income There are three different phases of generation, distribution and
disposal in circular flow of income, as shown in the given diagram.

M.SAKTHIVEL – 9787576858
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Income is first generated in production units, then, distributed to households and finally spent on
goods and services produced by these units to make the circular flow complete its course.

19.Define intermediate goods and final goods. Can milk be an intermediate good? Give
reason for your answer.
Intermediate goods: The goods purchased by a firm for the use in production of other goods or for
the purpose of reselling are known as intermediate goods, e.g. steel used in the production of cars
or milk purchased by a milk seller.
Final goods: The goods, which have crossed the boundary line of production and are ready for use
by their final users are known as final goods, e.g. clothes, milk consumed by a consumer.
Milk can be final good as well as intermediate good. It totally depends upon end use of milk.
Milk can be a final good if it is being consumed by a household and it can be a intermediate good
for a firm which makes ice-creams.

20.Give reasons and categorise the following into stock and flow.
(i) Capital (ii) Saving (iii) Gross Domestic Product (iv) Wealth
(i) Capital: It is a man made means of production. It is a stock because it is measured at given
point of time.
(ii) Saving: It is the surplus of income over consumption. It is a flow as it is measured with
reference to period of time.
(iii) Gross domestic product: It is a flow as it is the market value of final goods and services
produced within the domestic territory during a period of time.
(iv) Wealth: It is a stock as it is measured at a particular point of time.
21.Should the following be treated as final expenditure or intermediate expenditure? Give
reasons for your answer.
(i) Purchase of furniture by a firm. (ii) Expenditure on maintenance by a
firm.
(i) Purchase of furniture by a firm Final expenditure
Reason: A firm purchases furniture for long-term usp as an investment and not for re-sale,
(ii) Expenditure on maintenance by a firm Intermediate expenditure.
Reason: Expenditure on maintenance is a recurring expense and is undertaken to facilitate the
production process.

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22.Giving reasons, classify following into intermediate products and final products.
(i) Furniture purchased by a school. (ii) Chalks, dusters etc purchased by school.
(i) Furniture purchased by school Final product
Reason: Schools buy furnitures for long-term use and it can be considered as an investment.
(ii) Chalks, dusters etc purchased by school Intermediate good.
Reason: Chalks, dusters etc; are purchased by a school for use in their day-to-day work. This is
meant for further production in the form of services.
23.Give reason and identify whether the following are final expenditures or intermediate
expenditure.
(i) Expenditure on maintenance of an office building.
(ii) Expenditure on improvement of machine in a factory.
(i) Expenditure on maintenance of an office building Intermediate expenditure Reason Expenditure
on maintenance of office building is for production purpose.
(ii) Expenditure on improvement of machine in a factory Final expenditure Reason Expenditure on
improvement of machine in a factory is a kind of capital investment, so it should be considered as
final expenditure.
24.Giving reasons, classify following into intermediate products and final products.
(i) Computers installed in an office. (ii) Mobile sets purchased by a mobile dealer.
(i) Computers installed in an office Final product.
Reason: Offices buy computers as long-term durable products and are investment for them.
(ii) Mobile sets purchased by a mobile dealer Intermediate products.
Reason: A mobile dealer purchases mobile sets for reselling purpose. That‟s why it is considered as
intermediate product.

25.Give reasons and categorise the following into stock and flow.
(i) Profits (ii) Capital (iii) Savings (iv) Balance in bank account
(i) Profits: These are flow variables as it is measured over a period of time.
(ii) Capital: It is a man made means of production. It is a stock because it is measured at given
point of time.
(iii) Savings: It is the surplus of income over consumption. It is a flow as it is measured with
reference to period of time.
(iv) Balance in bank account: This is a stock variable which is measured on a specific date, i.e.
point of time.

26.Give reasons and categorise the following in stock and flow.

(i) Losses (ii) Capital (iii) Production (iv) Wealth
(i) Losses: These are flows as they are measured over a period of time.
(ii) Capital: It is a man made means of production. It is a stock because it is measured at given
point of time.
(iii) Production: It is a flow as it is measured over a period of time.
(iv) Wealth: It is a stock as it is measured at a particular point of time.

27.Giving reasons, classify the following into intermediate and final goods. (All India 2010)
(i) Machine purchased by a dealer of machines. (ii) A car purchased by a household.
(i) Machine purchased by a dealer of machines Intermediate goods.
Reason: A dealer purchases machines for reselling purpose, so it is an example of intermediate
good.
(ii) A car purchased by a household Final goods
Reason: A household purchases a car for consumption purpose, so it is an example of final good.
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 CHAPTER 2 - NATIONAL INCOME ACCOUNTING

Multiple Choice Questions

1.Which of the following affects national income?
(a) Goods and Services tax (b) Corporation tax
(c) Subsidies (d) None of the above
2.National Income is the sum of factor incomes securing to ______
(a) nationals (b) economic territory
(c) residents (d) both residents and non-residents
3.Depreciation of fixed capital assets refers to (Delhi 2016)
(a) normal wear and tear (b) foreseen obsolescence
(c) Both (a) and (b) (d) unforeseen obsolescence
4.………… is not included in National Income.
(a) Salary of an employee (b) Interest on capital
(c) Profits of a company (d) Prize won in a lottery
5.Under National Income accounting, those foreigners are known as non-residents of a
country, who visit that country for
(a) travelling and holidays (b) studies and sports
(c) medical treatment (d) All of these
6.Area of operation generating domestic income refers to as _______
(a) production territory of a country (b) operating territory of a country
(c) domestic territory of a country (d) income territory of a country
7.Under National Income concept, foreign ambassador in India is an example of _________
(a) resident (b) non-resident (c) agents (d) normal resident
8.Net Factor Income from Abroad (NFIA) includes
(a) net compensation of employees (b) net income from property and entrepreneurship
(c) net retained earnings (d) All of the above
9.If the value of Real GDP is ₹ 1,25,000 crore and nominal GDP is ₹ 1,00,000 crore. Find the
value of Current Price Index.
(a) 80 (b) 100 (c) 125 (d) 150
10.From the following data, find Net National Product at Factor Cost (NNPFC).
Items GNPMP Depreciation Indirect Taxes Subsidies
₹ (in crore) 15,000 1,000 500 150
(a) ₹ 1,400 crore (b) ₹ 13,650 crore (c) ₹ 1,300 crore (d) ₹ 14,350 crore
11.If Net National Product at Factor Cost (NNPFC) is ₹ 25,000 and Net Factor Income from
Abroad (NFIA) is ₹ 4,000, then find Net Domestic Product at Factor Cost (NDPFC)?
(a) ₹ 4,000 (b) ₹ 21,000 (c) ₹ 25,000 (d) ₹ 29,000
12.National Income of a country can be calculated as ___________
(a) sum total of value added by all producing units in the economy
(b) sum total of factor incomes generated in the economy
(c) sum total of expenditure on the final goods and services produced in the economy
(d) All of the above
13.Mixed income of self-employed includes
(a) wages (b) interest and profit (c) rent (d) All of these
14.Under expenditure method, the sum total of private final consumption expenditure
government final consumption expenditure, gross domestic capital formation and net
exports is equal to ______
(a) GDPFC (b) GDPMP (c) NNPMP (d) NDPMP

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15.“National Income = National Product = National Expenditure”. This shows _________
(a) triplets (b) equilibrium (c) triple method (d) triple identity
16.Which of the following items are excluded in calculation of National Income under Value
Added method?
i. Imputed rent of owner occupied house
ii. Purchase and sale of second hand goods
iii. Value of intermediate goods
iv. Own account production Codes
(a) (i), (ii), (iii) and (iv) (b) Both (i) and (iv) (c) Both (ii) and (iii) (d) (i), (ii) and (iv)
17.Which among the given would not be included in National Income?
(a) A teacher teaching students under SarvaShikshaAbhiyan Scheme
(b) A teacher teaching students in his college
(c) A teacher teaching in a coaching centre
(d) A teacher teaching his own daughter at home

IMPORTANT QUESTION ANSWER

1.Give one example of negative externality. (April re-exam 2018)

“Environmental pollution caused by industrial plants” is an example of negative externalities.

2.Give the meaning of depreciation. (All India (C) 2014)Or

Define „depreciation‟. (All India 2011)
Depreciation can be defined as a fall in the value of fixed assets due to normal wear and tear due
to usage, passage of time or obsolesence.

3.Define national income. (Delhi 2014)

National income can be defined as the sum total of factor incomes accruing to normal residents of
a country within the domestic territory and from the rest of the world, in a period of one financial
year.

4.Define national product. (Delhi 2014)

National product can be defined as the money value of all goods and services produced by the
normal residents of a country during a period of one financial year.

5.Define domestic product. (All India (C) 2014, 2011, 2010)

The value of all factor incomes generated during an accounting year within the domestic territory
of a country is termed as domestic product or domestic income of a country.

6.What is Nominal Gross Domestic Product? (Delhi 2011)

Nominal Gross Domestic Product (GDP) refers to market value of the final goods and services
produced within the domestic territory of a country during a financial year, as estimated using the
current year prices. It is also called GDP at current price.

7.What is meant by Real Gross Domestic Product? (Delhi (C) 2011)

Real Gross Domestic Product (GDP) refers to market value of the final goods and services produced
within the domestic territory of a country during a financial year, as estimated using the base year
prices. It is also called GDP at constant price.

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8.What is transfer payment? (All India 2011)
Transfer payments are all those unilateral payments corresponding to which there is no value
addition in the economy, e.g. gifts, donations etc.

9.Define the problem of double counting in the computation of national income. State any
two approaches to correct the problem of double counting. (Delhi 2019)
Problem of double counting means including the value of some goods and services more than
once in estimation of national income. In other words, the counting of the value of commodity
more than once is called double counting. This leads to over estimation of the value of goods and
services produced.
To avoid the problem of double counting, following two methods are used
 Final output method According to this method, the value of intermediate goods is not
considered. Only the value of final goods and services is considered.
 Value added method Another method to avoid the problem of double counting is to
estimate the total value added at each stage of production.

10.“Gross Domestic Product (GDP) does not give us a clear indication of economic welfare of
a country.” Defend or refute the given statement with valid reason. (Delhi 2019)
I defend the above statement. GDP does not give us a clear indication of economic welfare of a
country because it does not take into account the following
 GDP does not throw light on equitable distribution of income.
 It does not take into account non-monetary exchanges.
 It does not consider the effect of positive and negative externalities.

11.Given nominal income, how can we find real income? Explain. (March 2018)
Nominal income measures income at current year prices with no adjustment for the effect of
inflation while real income is measured on base year prices which show real growth of economy.
We can explain it with the help of numeric example given below
Assume,
Nominal Income = 270 crore
Price Index = 135
Real Income = NominalIncome / PriceIndex × 100
= 270135 × 100 = ₹ 200 crore

12.If the Real GDP is ₹ 400 and Nominal GDP is ₹ 450, calculate the Price Index (base = 100).
(All India 2015)
Real GDP = ₹ 400
Nominal GDP = ₹ 450
Price index = Nominal.GDP / Real.GDP × 100
= 450400 × 100 = ₹ 112.5

13.If the Real GDP is ₹ 500 and Price Index (base = 100) is 125, calculate the Nominal GDP.
(All India 2015)
Real GDP = ₹ 500 Price Index = 125
Nominal GDP = ?
Price index = Nominal.GDP/ Real.GDP × 100
125 = Nominal.GDP500 × 100
∴ Nominal GDP = 125 × 5 = ₹ 625

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14.If the Nominal GDP is ₹ 600 and Price Index (base = 100) is 120, calculate the Real GDP.
(All India 2015)
Nominal GDP = ₹ 600 Price Index = 120
Real GDP = ?
Price Index = Nominal.GDP / Real.GDP × 100
120 = 600Real.GDP × 100
Real GDP = 600 / 120 × 100
= ₹ 500

15.f Real GDP is ₹ 200 and Price Index (with base = 100) is 110, calculate Nominal GDP.
(Delhi 2015)
Solve as Q. No. 5 on page 17.Nominal GDP = ₹ 220
16.If the Nominal GDP is ₹ 1,200 and Price Index (with base = 100) is 120, calculate Real
GDP. (Delhi 2015)
Solve as Q. No. 6 on page 17.
Real GDP = ₹ 1,000
17.If the Real GDP is ₹ 300 and Nominal GDP is ₹ 330, calculate Price Index (base = 100).
(Delhi 2015)
Solve as Q. No. 4 on page 17.
Price Index = 110
18.If the Nominal Gross Domestic Product = ₹ 4,400 and thePrice Index (base = 100) = 110,
calculate the Real Gross Domestic Product. (Foreign 2015)
Solve as Q. No. 6 on page 17.
Real GDP = ₹ 4,000

19.Distinguish between real and nominal gross domestic product. (All India (C) 2014, All
India 2010)
Differences between real and nominal gross domestic product are:
Basis Real GDP Nominal GDP
It refers to the total market value of It refers to the total market value of the
Definition
the output at the base year prices. output at the current year prices.
Its value can change only when the Its value can change only with change
Changes volume or quantity of output changes in the prices overtime.
overtime.
It can be treated as an index of It cannot be treated as an index of
Indication economic growth i.e. higher real GDP economic growth. Infect, it indicates
indicates higher economic growth. inflation.

20.“Higher Gross Domestic Product (GDP) means greater per capita availability of goods in
the economy.” Do you agree with the given statement? Give valid reason in support of your
answer. (All India 2019)
GDP is the sum total of value of goods and services created by a country in a particular year. So,
we may be tempted to treat higher level of GDP of country as an index of greater well-being of the
people of that country. But, these are the reasons why this may not be correct
 Distribution of GDP – how uniform is it
 Non-monetary exchanges
 Externalities
 Composition of GDP

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21.Explain the meaning of Real Gross Domestic Product and Nominal Gross Domestic
Product, using a numerical example. (All India 2019)
Real gross domestic product:
Real Gross Domestic Product (GDP) refers to market value of the final goods and services produced
within the domestic territory of a country during a financial year, as estimated using the base year
prices. It is also called GDP at constant price.
Nominal gross domestic product:
Nominal Gross Domestic Product (GDP) refers to market value of the final goods and services
produced within the domestic territory of a country during a financial year, as estimated using the
current year prices. It is also called GDP at current price.
The following numerical example will help in understanding this concept:
Real GDP = Nominal GDP/Deflator
e.g. If Real GDP was 11.84 trillion in 2017 and the nominal GDP was 19.39 trillion, then the deflator
was 1.13, i.e. 11.84 trillion = 19.39 trillion/1.13
Numerical Example:
The following numerical example will help in understanding this concept:
Real GDP = Nominal GDP/Deflator
e.g. If Real GDP was 11.84 trillion in 2017 and the nominal GDP was 19.39 trillion, then the deflator
was 1.13, i.e. 11.84 trillion = 19.39 trillion/1.13
Real GDP is a better index of welfare of the people. When Real GDP rises, flow of goods and
services tends to rise, other things remaining constant. This means greater availability of goods per
person, implying higher level of welfare.

22.How is Real Gross Domestic Product different from Nominal Gross Domestic Product?
Explain using a numerical example. (All India 2019)Or
Distinguish between Real Gross Domestic Product and Nominal Gross Domestic Product.
Which of these is a better index of welfare of the people and why? (All India 2013)Or
Distinguish between Real and Nominal Gross Domestic Product. (Delhi 2010)
Differences between real and nominal gross domestic product:
Basis Real GDP Nominal GDP
It refers to the total market value of the It refers to the total market value of
Definition
output at the base year prices. the output at the current year prices.
Its value can change only when the Its value can change only with
Changes volume or quantity of output changes change in the prices overtime.
overtime.
It can be treated as an index of economic It can not be treated as an index of
Indication growth i.e. higher real GDP indicates economic growth. Infact, it indicate
higher economic growth. inflation.
23.What is real GDP? State three limitations of GDP as an index of economic welfare. (Delhi
(C) 2016)
Real GDP:
Real Gross Domestic Product (GDP) refers to market value of the final goods and services produced
within the domestic territory of a country during a financial year, as estimated using the base year
prices. It is also called GDP at constant price.
The three limitations of using GDP as an index of welfare are:
 It fails to indicate the distribution of income among the residents of the country.
 Non-monetary transactions are ignored.
 Externalities are not considered.

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24.Explain why subsidies are added to and indirect taxes are deducted from domestic
product at market price to arrive at domestic product at factor cost? (Delhi (C) 2010)
Subsidies by government are grants that decrease the price of a commodity, whereas indirect taxes
are paid by a firm and households that increase the final price of a commodity. So, subsidies
basically reduce the market price and indirect taxes increase the market price. Hence, to derive
Gross Domestic Product at Factor Cost from Gross Domestic Product at Market Price, we deduct
indirect taxes and add subsidies.
It may be expressed as
GDPFC = GDPMP – Indirect Tax + Subsidies

25.Giving reasons, state whether the following statements are true or false,
(i) Real gross domestic product can be equal to nominal gross domestic product.
(ii) Savings are a stock.
(iii) Butter is only a final product. (Delhi (C) 2012)
(i) The statement is true. Real gross domestic product and nominal gross domestic product will be
equal if price level remains constant. However, this holds true only theoretically.
(ii) The statement is false. Savings are always with reference to a time period. In other words,
savings are a flow concept.
(iii) The statement is false. Butter is only a final product when purchased by households for
consumption. Butter purchased by bakeries for making cakes and pastries is not a final product.
Butter for them is an intermediate good as it is used as raw material for further production.

26.Find Net Value Added at Factor Cost. (Delhi 2016)

Items ₹ (in lakh)

(i) Durable Use Producer Goods with a Life Span of 10 Years 10
(ii) Single Use Producer Goods 5
(iii) Sales 20
(iv) Unsold Output Produced During the Year 2
(v) Taxes on Production 1
Net Value Added at Factor Cost (NVAFC)
= Sales + Unsold Output Produced During the Year – Single use Producer Goods –
Depreciation on Durable use Producer Goods – Taxes on Production
= 20 + 2 – 5 – 1 – 1 = ₹ 15 lakh

27.Find Net Value added at Market Price. (Delhi 2016)

Items ₹ (in lakh)
(i) Fixed Capital Good with a Life Span of 5 Years 10
(ii) Raw Materials 5
(iii) Sales 20
(iv) Net Change in Stock 2
(v) Taxes on Production 1
Net Value Added at Market Price (NVAMP)
= Sales + Net Change in Stock – Raw Materials – Depreciation on Fixed Capital Good
= 25 + (-2) – 6 – 3 = ₹ 14 lakh

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28.Find Gross Value Added at Market Price. (Delhi 2016)
Items ₹ (in lakh)
(i) Depreciation 20
(ii) Domestic Sales 200
(iii) Net Change in Stocks (-)10
(iv) Exports 10
(v) Single Use Producer Goods 120
Gross Value Added at Market Price (GVAMP)
(Domestic Sales + Exports) + Net Change in Stocks – Single use Producer Goods
= (200 +10) + (-10) – 120 = ₹ 80 lakh

29.Calculate Gross Value Added at Factor Cost. (Delhi 2012)

Contents ₹ (in crore)
(i) Units of Output Sold (units) 1000
(ii) Price Per Unit of Output 30
(iii) Depreciation 1000
(iv) Intermediate Cost 12000
(v) Closing Stock 3000
(vi) Opening Stock 2000
(vii) Excise Duty 2500
(viii) Sales Tax 3500
Sales = Units of Output x Price Per Unit of Output
= 1,000 × 30
= ₹ 30,000 crore
Value of Output
= Sales + Change in Stock = 30000 + (1000)
= ₹ 31,000 crore, Where
Change in Stock = Closing Stock – Opening Stock
= 3000 – 2,000 = ₹ 1000 crore
Hence, Gross Value Added at Factor Cost
(GVAFC) = Value of Output – Intermediate Cost – Net Indirect Taxes (Excise Duty + Sales Tax)
= 31,000 – 12,000 – (2,500 + 3,500)
Gross Value Added at Factor Cost (GVAFC)
= ₹ 13,000 crore

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30.Calculate Net Value Added at Factor Cost. (Delhi 2012)
Contents ₹ (in crore)
(i) Consumption of Fixed Capital 600
(ii) Import Duty 400
(iii) Output Sold (units) 2000
(iv) Price Per Unit of Output 10
(v) Net Change in Stocks (-)50
(vi) Intermediate Cost 10000
(vii) Subsidy 500
Sales = Output Sold × Price Per Unit of Output
= ₹ 2000 × 10 = ₹ 20,000 crore
Now, Value of Output = Sales + Change in Stock
= ₹ 20000 + -( 50)
= ₹ 19,950 crore
Gross Value Added at Market Price (GVAMP)
= Value of Output – Intermediate Cost
= ₹ 19,950– 10,000
= ₹ 9,950 crore
Hence,
Net Value Added at Factor Cost (NVAFC)
= GVAMP – Consumption of Fixed Capital – Net Indirect Tax
= 9,950 – 600 – (400 – 500) = ₹ 9,450 crore
[Where, Net Indirect Tax = Import Duty – Subsidy] [As import duty is an indirect tax]

31.Find Net Value Added at Market Price. (Delhi 2012)

Contents ₹ (in crore)
(i) Output Sold (units) 800
(ii) Price Per Unit of Output 20
(iii) Excise 1600
(iv) Import Duty 400
(v) Net Change in Stock (-)500
(vi) Depreciation 1000
(vii) Intermediate Cost 8000

Sales = Output Sold × Price Per Unit of Output = 800 × 20 = ₹ 16,000 crore
Now, Value of Output = Sales + Net Change in Stock
= 16000 + (-500)
= ₹ 15,500 crore
Now, Gross Value Added at Market Price (GVAMP) = Value of Output – Intermediate Cost
= 15,500 – 8,000 = ₹ 7,500 crore
Hence, Net Value Added at Market Price
(NVAMP) = GVAMP – Depreciation
= 7,500 – 1,000 crore = ₹ 6,500 crore

M.SAKTHIVEL – 9787576858
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E-Mail: mpsakthivelpgt@gmail.com

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32.Find Net Value Added at Market Price. (All India 2012)
Contents ₹ (in crore)
(i) Depreciation 700
(ii) Output Sold (units) 900
(iii) Price Per Unit of Output 40
(iv) Closing Stock 1000
(v) Opening Stock 800
(vi) Sales Tax 3000
(vii) Intermediate Cost 20000
Net Value Added at Market Price = (Output Sold × Price Per Unit of Output) + (Closing
Stock – Opening Stock) – Intermediate Cost – Depreciation
= (900 × 40) + (1,000 – 800) – 20,000 – 700
= 36,000 + 200 – 20,000 – 700 = 36,200 – 20,700
= ₹ 15,500 crore

33.Find Gross Value Added at Factor Cost. (All India 2012)

Contents ₹ (in crore)
(i) Units of Output Sold 2000
(ii) Price Per Unit of Output 20
(iii) Depreciation 2000
(iv) Change in Stock (-)500
(v) Intermediate Cost 15000
(vi) Subsidy 3000
Gross Value Added at Factor Cost
(GVAPC) = (Output Sold × Price Per Unit) + Change in Stock – Intermediate Cost + Subsidy
= 2000 × 20 + (-500) – 15000 + 3000
= ₹ 40,000– 15,500 + 3,000
= ₹ 27,500 crore

34.Find out Net Value Added at Factor Cost. (All India 2012)
Contents ₹ (in crore)
(i) Price Per Unit of Output 25
(ii) Output Sold (units) 1000
(iii) Excise Duty 5000
(iv) Depreciation 1000
(v) Change in Stock (-)500
(vi) Intermediate Cost 7000
Net Value Added at Factor Cost
(NVAPC) = (Price Per Unit of Output x Output Sold) + Change in Stock – Intermediate Cost –
Depreciation – Excise Duty
= (25 × 1,000) – 500 – 7,000 – 1,000 – 5000
= 25,000 – 13,500 = ₹ 11,500 crore

M.SAKTHIVEL – 9787576858
MA(HIS).,MA(SWA).,M.Ed.,D.CSE.,PGDCA.,MDSA.,CLP.,DCA.,DDTP.,
E-Mail: mpsakthivelpgt@gmail.com

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35.From the following data, calculate Net Value Added at Factor Cost. (Delhi 2011)
Contents ₹ (in crore)
(i) Purchase of Intermediate Goods 500
(ii) Sales 750
(iii) Import of Raw Materials 50
(iv) Depreciation 60
(v) Net Indirect Taxes 100
(vi) Change in Stock (-)30
(vii) Exports 20
Net Value Added at Factor Cost
(NVAFC) = Value of Output (Sales + Change in Stock) – Purchase of Intermediate Goods –
Depreciation – Net Indirect Taxes
= 750 + (-30) – 500 – 60 – 100
= 750 – 690 = ₹ 60 crore

36.Why are net exports included in national income? Explain. (Delhi 2012)
Net exports represent the excess of exports over imports. The goods exported are a part of
domestic product of India. National income is the sum total of all goods and services i.e. the
domestic product, produced by the residents. Therefore, net exports are included in national
income.

37.Classify the following statements as revenue receipts or capital receipts. Give valid
reasons in support of your answer. (All India 2019)
(a) Financial help from a multinational corporation for victims in a flood affected area.
(b) Sale of shares of a Public Sector Undertaking (PSU) to a private company, Y Ltd
(c) Dividends paid to the Government by the State Bank of India.
(d) Borrowings from International Monetary Fund (IMF).
Answer:
(a) Revenue receipt as neither impacts assets nor liabilities of the government.
(b) Capital receipt as it reduces assets of the government.
(c) Revenue receipt as if was no impact on assets or liabilities.
(d) Capital receipt as it increases liabilities.

38.State any four precautions that are taken while calculating national income by
expenditure method. (Delhi (C) 2016) Or
What precautions (any four) should be taken while estimating national income by
expenditure method? (All India (C) 2015)
While using expenditure method, the following precautions are required to be taken, related to the
calculation of National Income
 Only final expenditure is to be taken into account to avoid error of double counting.
 Expenditure on second hand goods is not to be included, because value of second hand
goods has already been accounted for during the year of their production.
 Expenditure on shares and bonds is not to be included in total expenditure, as these are
mere paper claims and are not related to the production of final goods and services.
 Expenditure on transfer payments by the government is not to be included.
 Imputed value/estimated value of expenditure on goods produced for self-consumption
should be taken into account, as these goods are reflected in the estimation of Gross
Domestic Product (GDP).

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39.How are the following treated while calculating national income? Give reasons for your
answer. (All India (C) 2016)
(i) Receipts from sale of land.
(ii) Profits earned by the branch of an Indian bank in France.
(i) Receipts from sale of land Land is a free gift of nature and hence its sale would not be included
while calculating national income.
(ii) Profits earned by the branch of an Indian bank in France Since profit is being earned by a
normal resident of India, therefore it will be included as factor income earned from abroad.

40.How should the following be treated while calculating national income? Give reasons for
your answer. (All India (C) 2016)
(a) Profits earned by a branch of foreign bank in India.
(b) Salary received by Indian employees working in American embassy in India.
(a) Profits earned by a branch of foreign bank in India Since the profit is being earned by a branch
of foreign bank, it will be considered as factor income to abroad and hence will not be included.
(b) Salary received by Indian employees working in American embassy in India As this salary is
being received by an Indian employee (normal resident of India) from a foreign country in India,
therefore it will be included as factor income from abroad.

41.How should the following be treated while calculating national income? Give reasons for
your answer. (All India (C) 2016)
(i) Interest received by households from banks.
(ii) Dividend received by shareholders.
(i) Interest received by households from banks Money deposited with banks is used for productive
purposes. Bank is a production unit. Therefore, interest received is a factor income and hence
should be included.
(ii) Dividend received by shareholders is a part of the profits of production units which is
distributed to the owners or shareholders. Therefore, it is included as it is a component of national
income.

42.How should the following be treated in the calculation of national income? Give reasons
for your answer. (Delhi (C) 2016)
(i) Government expenditure on street lighting.
(ii) Sale of an old house.
(i) Government expenditure on street lighting It is government‟s final consumption expenditure
and is included while calculating national income as a component of expenditure method.
(ii) Sale of an old house It does not add to the current flow of goods and services. Its value was
included in the national income during the year when it was newly constructed.

43.How should the following be treated while calculating national income? Give reasons for
your answer.
(i) Purchases by foreign tourists.
(ii) Purchase of shares by a domestic firm. (Delhi (C) 2016)
(i) Purchases by foreign tourists Such expenditure by foreign tourists on domestic product is
treated as export of goods and services. Therefore, it is included while calculating national income.
(ii) Purchase of shares by a domestic firm Purchase of shares is merely a financial transaction not
resulting in any production of goods and services, therefore, it is not included while calculating
national income.

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44.How should the following be treated in the calculation of national income? Give reasons
for your answer. (Delhi (C) 2016)
(i) Interest on public debt
(ii) Bonus given to railway employees
(i) Interest on public debt It is not included in the calculation of national income because interest
on public debt is interest on loan taken by the government for consumption purpose and not for
investment.
(iii) Bonus given to railway employees It is included in the estimation of national income because
bonus given to employees is a part of compensation of employees which is a component of
income method of calculating National Income.

45.From the following data, calculate Net Value Added at Factor Cost. (Delhi (C) 2015)
Contents ₹ (in lakhs)
(i) Sales 300
(ii) Opening Stock 10
(iii) Depreciation 30
(iv) Intermediate Consumption 120
(v) Exports 50
(vi) Change in Stock 20
(vii) Net Indirect Taxes 15
(viii) Net Factor Income to Abroad 10
Net Value Added at Factor Cost (NVAFC)
= Sales + Change in Stock – Intermediate Consumption – Depreciation – Net Indirect Taxes
= 300 + 20 – 120 – 30 – 15 = ₹ 155 lakh

46.Describe the expenditure method of calculating Gross Domestic Product at Market Price.
(All India (C) 2015)
For calculating Gross Domestic Product at Market Price (GDPMP) by this method, following steps
should be taken-Step I Estimation of final expenditure
It is the expenditure on the purchase of final goods and services during an accounting year.
It is broadly classified into four categories
 Estimation of private final consumption expenditure the total expenditure on final goods
and services by individuals, households and non-profit private institution which are serving
society are termed as private final consumption expenditure.
 Estimation of government final consumption expenditure the expenditure on final goods
and services by the government and government organisations are termed as government
final consumption expenditure.
 Estimation of investment expenditure the expenditure incurred by the firms (producers) on
capital goods is termed as investment expenditure. It is also referred to as gross domestic
capital formation.
 Estimation of net export it is the difference between exports and imports during an
accounting year.
Step II Summation of above expenditures
The sum of all the above expenditure on final products of all the sectors of the economy gives us
Gross Domestic Product at Market Price (GDPMP).

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47.Calculate Gross Value Added at Factor Cost. (All India (C) 2015)
Contents ₹ (in lakhs)
(i) Domestic Sales 3000
(ii) Change in Stock (-)100
(iii) Depreciation 300
(iv) Intermediate Consumption 2000
(v) Exports 500
(vi) Indirect Taxes 250
(vii) Net Factor Income from Abroad (-)50
Gross Value Added at Factor Cost (GVAPC)
= (Domestic Sales + Exports) + Change in Stock – Intermediate Consumption – Indirect
Taxes
= (3,000 + 500) + (-100) – 2,000 – 250
= ₹ 1150 lakh

48.What precautions should be taken while estimating national income by income method?
(All India (C) 2015)
While using income method for computing National Income, the following precautions should be
taken (any 4)
 Income from illegal activities like smuggling, theft, gambling etc, should not be included.
 Corresponding to production for self consumption, the generation of income should be
taken into account.
 Brokerage on the sale/purchase of shares and bonds is to be included.
 Income in terms of windfall gains should not be included.
 Transfer earnings like old age pensions, unemployment allowances, scholarships, pocket
expenses etc, should not be included.

49.Calculate Net Value Added at Market Price. (All India (C) 2015)
Contents ₹ (in lakhs)
(i) Intermediate Consumption 1000
(ii) Consumption of Fixed Capital 50
(iii) Net Indirect Taxes 150
(iv) Sales 2000
(v) Exports 200
(vi) Net Factor Income to (-)100
(vii) Change in Stock (-)50
GVAMP = Sales + Change in Stock – Intermediate Consumption
= 2,000+ (-50) – 1,000 = ₹ 950 lakh
NVAMP = GVAMP – Consumption of Fixed Capital
= 950 – 50 = ₹ 900 lakh

M.SAKTHIVEL – 9787576858
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E-Mail: mpsakthivelpgt@gmail.com

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50.What (any four) precautions should be taken while estimating national income by
production method? (All India (C) 2015)Or
Explain the precautions that are taken while estimating national income by value added
method. (All India 2017)
While using value added/production method for computing national income, the following
precautions should be taken (any 4)
 The value of intermediate goods should not be included.
 Purchase and sale of second hand goods should be excluded.
 Imputed value of self-consumed goods should be included.
 Value of own account production should be included.
 Value of self-consumed services should not be included in the estimation of National
Income.
 Commission earned on account of sale and purchase of second hand goods is included.
 Imputed rent on the owner occupied house is also taken into the account.
 The value added in the government sector is equal to compensation of employees only.

51.From the following data, calculate “Net Value Added at Factor Cost”. (All India (C) 2014)
Contents ₹ (in lakhs)
(i) Sales 400
(ii) Change in Stock -20
(iii) Intermediate Consumption 200
(iv) N&t Indirect Taxes 40
(v) Exports 50
(vi) Depreciation 30
Value of Output = Sales + Change in Stock
= 400 – 20 = ₹ 380 lakh
GVAMP = Value of Output – Intermediate Consumption
= 380 – 200 = ₹ 180 lakh
NVAFC = GVAMP – Depreciation – Net Indirect Taxes
= 180 – 30 – 40 = ₹ 110 lakh

52.Calculate Net Value Added at Factor Cost from the following data. (Delhi 2014)
Contents ₹ (in lakhs)
(i) Intermediate Consumption 300
(ii) Change in Stock 50
(iii) Net Indirect Taxes 70
(iv) Sales 500
(v) Consumption of Fixed Capital 20
(vi) Imports 40
Value of Output = Sales + Change in Stock
= 500 + 50 = ₹ 550
Gross Value Added at Market Price (GVAMP)= Value of output – intermediate Consumption
= 550 – 300 = ₹ 250 lakh
Net Value Added at Factor Cost (NVAFC) = GVAMP – Consumption of Fixed Capital – Net
Indirect Taxes (NIT)
NVAFC = 250 – 20 – 70 = ₹ 160 lakh

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53.Calculate sales from the following data. (All India 2013)
Contents ₹ (in lakhs)
(i) Subsidies 200
(ii) Opening Stock 100
(iii) Closing Stock 600
(iv) Intermediate Consumption 3000
(v) Consumption of Fixed Capital 700
(vi) Profit 750
(vii) Net Value Added at Factor Cost 2000
Gross Value Added at Market Price (GVAMP)
= Net Value Added at Factor Cost (NVAFC) – Subsidies + Consumption of Fixed Capital
GVAMP = 2,000 – 200 + 700 = ₹ 2,500 lakh
Also, (GVAMP) = Value of Output (Sales + Change in Stock) – Intermediate Consumption
2,500 = Sales + (600 – 100) – 3,000 Sales
= 2,500 + 3,000 – 500
= 5,500 – 500
Sales = ₹ 5,000 lakh
54.Calculate sales from the following data. (Delhi 2013)
Contents ₹ (in lakhs)
(i) Intermediate Cost 700
(ii) Consumption of Fixed Capital 80
(iii) Change in Stock (-)50
(iv) Subsidy 60
(v) Net Value Added at Factor Cost 1300
(vi) Exports 50
Gross Value Added at Market Price (GVAMP)
= Net Value Added at Factor Cost (NVAFC) – Subsidies + Consumption of Fixed Capital
GVAMP = ₹ 1,300-60 + 80 = ₹ 1,320 lakh
Also, GVAMP = Value of Output (Sales + Change in Stock) – Intermediate Cost
1,320 = Sales + (-50) – 700
Sales = 1,320 + 50 + 700
Sales = ₹ 2,070 lakh
55.Calculate sales from the following data. (Delhi 2013)
Contents ₹ (in lakhs)
(i) Net Value Added at Factor Cost 560
(ii) Depreciation 60
(iii) Change in Stock (-)30
(iv) Intermediate Cost 100
(v) Exports 200
(vi) Indirect Taxes 60
Gross Value Added at Market Price (GVAMP)
= Net Value Added at Factor Cost (NVAFC) + Net Indirect Taxes (NIT) + Depreciation
= 560 + 60 + 60 = ₹ 680 lakh, Where
NIT = Indirect Tax – Subsidies = 60 – 0 = ₹ 60 lakh
Also, GVAMP = Value of Output (Sales + Change in Stock) – Intermediate Cost
680 = Sales + (- 30) – 1,000
Sales = 680 + 1,000 + 30 = ₹ 1,710 lakh

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56.Giving reason, explain how should the following be treated in estimating National
Income. (Delhi 2012)
(i) Expenditure on fertilisers by a farmer.
(ii) Purchase of tractor by a farmer.
(i) Expenditure on fertilisers by a farmer It is „not included‟ in the estimation of National Income as
it is an intermediate consumption, as fertilisers are used for furthei; production.
(ii) Purchase of a tractor by a farmer It is included‟ in the estimation of National Income as it is
capital formation or investment expenditure.

57.Giving reason, explain how should the following be treated in the estimation of National
Income. (Delhi 2012)
(i) Payment of bonus by a firm.
(ii) Payment of interest on loan taken by an employee from the employer.

(i) Payment of bonus by a firm: It is „included‟ in the estimation of National Income as it is a part of
compensation of employee.
(ii) Payment of interest on loan taken by an employee from the employer It will „not included‟ in
the estimation of National Income as it will be treated as transfer income and also loan is taken for
consumption purpose.

58.Giving reason, explain how should the following be treated in estimation of National
Income. (Delhi 2012)
(i) Interest paid by banks on deposits by individuals.
(ii) National debt interest.
(i) Interest paid by banks on deposits by individuals It should be „included‟ in estimation of
National Income as it will be treated as factor income.
(ii) National debt interest It should „not be included‟ in estimation of National Income as it is
assumed that government borrows for consumption and hence, it is treated as transfer income.

59.Giving reason, explain how should the following be treated while estimating National
Income. (All India 2012)
(i) Expenditure on free services provided by government.
(ii) Payment of interest by a government firm.
Answer:
(i) Expenditure on free services provided by government It should be „included‟ in the estimation of
National Income, as it is a final expenditure of the government.
(ii) Payment of interest by a government firm It should „not be included‟ in the estimation of
National Income, as it is a transfer payment.

60.How should the following be treated while estimating National Income? Give reasons. (All
India 2012)
(i) Expenditure on education of children by a family.
(ii) Payment of electricity bill by a school.
(i) Expenditure on education of children by a family It is „included‟ in the estimation of National
Income as it is a part of final consumption expenditure by the household,
(ii) Payment of electricity bill by a school It is „not included‟ in the estimation of National Income as
it is a part of intermediate consumption.

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61.Giving reason, explain the treatment assigned to the following while estimating National
Income. (All India 2011)
(i) Family members working free on the farm owned by the family.
(ii) Payment of interest on borrowings by general government.
(i) Family members working free on the farm owned by the family it should be „included‟ as it is a
part of mixed income of self-employed.
(ii) Payment of interest on borrowings by general government It should „not be included‟ in the
estimation of National Income as it is not mentioned and not clear 1 whether the government has
borrowed for consumption purpose or for production purpose.

62.Giving reason, explain the treatment assigned to the following while estimating National
Income. (All India 2011)
(i) Social security contributions by employees.
(ii) Pension paid after retirement.
(i) Social security contributions by employees It is „included‟ in the estimation of National Income,
as it is a part of compensation of employees and it is an earned income.
(ii) Pension paid after retirement It is „included‟ in the estimation of National Income as it is a kind
of deferred payment to employees.

63.Giving reasons, explain the treatment assigned to the following while estimating National
Income
(i) Expenditure on maintenance of a building.
(ii) Expenditure on adding a floor to the building. (All India 2011)
(i) Expenditure on maintenance of a building It will „not be included‟ in national income because it
is an intermediate expenditure.
(ii) Expenditure on adding a floor to the building It will be included because it is a part of domestic
capital formation.

64.Giving reason, explain how are the following be treated in estimation of National Income
by income method. (All India 2010)
(i) Interest paid by banks on deposits.
(ii) National debt interest.
(i) Interest paid by banks on deposits It will be „included‟ while estimating National Income by
income method, as it is an income earned by depositors and bank use these deposits for
commercial purposes.
(ii) National debt interest It will „not be included‟ while estimating National Income by income
method, as the government takes loan for both productive and non-productive activities.

65.Giving reason, explain how are the following treated in estimating National Income
method. (Delhi (C) 2010)
(i) Interest on a car loan paid by an individual.
(ii) Interest on a car loan paid by a government owned company.
(i) Interest on a car loan paid by an individual It should „not be included‟ while estimating National
Income as the loan is taken for consumption purpose.
(ii) Interest on a car loan paid by a government owned company It should be „included‟ while
estimating National Income as it is a part of government final consumption expenditure.

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66.Define the following.
(a) Value addition (b) Gross domestic product
(c) Flow variables (d) Income from property and entrepreneurship (All India 2019)
(a) Value addition: It refers to difference in the value of output and intermediate expenses in the
production. We arrive at this by using product method of national income measurement.
Value Added = Value of Output- Intermediate Cost
Value of Output = Sales + Change in Stock Change in Stock = Closing Stock – Opening Stock
(b) Gross Domestic Product (GDP): It refers to total value of final goods and services produced
within the domestic territory of an economy in a fiscal year. It only includes the value of final
goods.
(c) Flow variable: It refers to a variable which is measured over a period of time, it is dynamic in
nature, e.g. Savings.
(d) Income from property and entrepreneurship: It refers to income received in the form of
factor income from labour services on capital invested abroad, e.g. Rent received by an indian from
its property abroad.

67.Given the following data, find the values of “Gross Domestic Capital Formation” and
“Operating Surplus”. (All India 2019)
Particulars ₹ (in Crore)
(i) National Income 22,100
(ii) Wages and Salaries 12,000
(iii) Private Final Consumption Expenditure 7,200
(iv) Net Indirect Taxes 700
(v) Gross Domestic Capital Formation ?
(iv) Depreciation 500
(vii) Government Final Consumption Expenditure 6,100
(viii) Mixed Income of Self-Employed 4,800
(ix) Operating Surplus ?
(x) Net Exports 3,400
(xi) Rent 1,200
(xii) Net Factor Income from Abroad (-)150
Let Gross Domestic Capital Formation = x
Operating Surplus = y
We know,
(a) GDPMP = Private Final Consumption Expenditure (PFCE) + Government Final Consumption
Expenditure (GFCF) + Net Exports (NX) …….(i)
Also,
GDPMP = NNPFC + Depreciation – Net Factor Income from Abroad (NFIA) + Net Indirect Taxes (NIT)
= 22,100 + 500 – (-150) + 700 = ₹ 23,450 crore
Now, putting values in eq. (i)
23,450 = 7,200 + 26,100 + x + 3,400
x = 6,750 crore
(b) NDPFC = Compensation of Employees (CoE) + Operating Surplus + Mixed Income ……(i)
Also,
NDPFC = NNPFC – NFIA ⇒ 22,100 – (-150) = ₹ 22,250 crore
Now, putting value in eq. (i)
22,250 = 12,000 + y + 4800
∴ y = ₹ 5,450 crore

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68.(a) Define „Net Factor Income from Abroad‟. How is it different from „Net Exports‟?
(b) Calculate the value of “Rent” from the following data (All India 2019)
Particulars ₹ (in Crore)
(i) Gross Domestic Product at Market Price 18,000
(ii) Mixed Income of Self-employed 7,000
(iii) Subsidies 250
(iv) Interest 800
(v) Rent ?
(vi) Profit 975
(vii) Compensation of Employees 6,000
(viii) Consumption of Fixed Capital 1,000
(ix) Indirect Tax 2,000
(a) Net Factor Income from Abroad (NFIA) is the difference between the factor income earned by
domestic residents from abroad, i.e. factor income received and factor income paid to non-
residents for their services in the domestic country.
On the other hand. Net Exports refers to the difference between the value of exports and value of
imports of goods, i.e. visible trade.
(b) By Income method
NDPFC = Compensation of Employees (CoE) + Operating Surplus + Mixed Income … (i)
„Operating Surplus = Rent + Interest + Profits
And NDPFC = GDPMP – Depreciation – Net Indirect Taxes (NIT)
= 18,000 – 1,000 – (2,000 – 250)
= ₹ 15,250 crore
Now, putting values in eq. (i)
15,250 = 6,000 + Rent + 800 + 975 + 7000
15,250 = 14,775 + Rent
∴ Rent = ₹ 475 crore

69.(a) Define Net Exports. How is it different from Net Factor Income from Abroad?
(b) Calculate value of “Interest” from the following data (All India 2019)
Particulars ₹ (in Crore)
(i) Indirect tax 1,500
(ii) Subsidies 700
(iii) Profits 1,100
(iv) Consumption of Fixed Capital 700
(v) Gross Domestic Product at Market Price 17,500
(vi) Compensation of Employees 9,300
(vii) Interest ?
(viii) Mixed Income of Self-employed 3,500
(ix) Rent 800
(a) Net Factor Income from Abroad (NFIA) is the difference between the factor income earned by
domestic residents from abroad, i.e. factor income received and factor income paid to non-
residents for their services in the domestic country.
On the other hand. Net Exports refers to the difference between the value of exports and value of
imports of goods, i.e. visible trade.

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(b) Let interest be x
We know,
NDPFC = Compensation of Employees (COE) + Rent + Interest + Profits + Mixed Income … (i)
Also, NDPFC = GDPMP – Depreciation – Net Indirect Taxes (NIT)
= 17,500 + 1,100 – (1,500 – 700)
= ₹ 15,600 crore
Now, putting values in eq. (i)
15600 = 9300 + 800 + x + 1,100 + 3,500
∴ x = ₹ 900 crore

70.(a) Define “Value of Output‟. How is it different from “Value Addition‟?

(b) Calculate the value of “Mixed Income of Self-employed” from the following data (All
India 2019)
Particulars ₹ (in Crore)
(i) Compensation of Employees 17,300
(ii) Interest 1,200
(iii) Consumption of Fixed Capital 1,100
(v) Mixed Income of Self-employed ?
(v) Subsidies 750
(vi) Gross Domestic Product at Market 27,500
(vii) Indirect Taxes 2,100
(viii) Profit 1,800
(ix) Rent 2,000
(a) Value of Output refers to the total value of production, which is equal to
Value of Output = Sales + Change in Stock + Production for Self-consumption Value Added refers
actual value of production i.e. net of intermediate expenses Value added = Value of Output –
Intermediate Cost

(b) Let Mixed Income = x We know,

NDPFC = Compensation of Employees (CoE) + Rent + Operating Surplus + Mixed Income …….(i)
Also,

NDPFC = GDPMP – Depreciation – Net Indirect Taxes (NIT)

= 27,500 – 1,100 – (2200 – 750)

= ₹ 25050 crore
Now, putting values in eq. (i)
25050 = 17300 + (200 + 1200 + 1300) + x
∴ x = ₹ 4350 crore

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71.Given the following data, find the missing value of „Government final Consumption
Expenditure‟ and „Mixed Income of Self Employed‟. (Delhi 2019)
Particulars ₹ (in Crore)
(i) National Income 71,000
(ii) Gross Domestic Capital Formation 10,000
(iii) Government Final Consumption Expenditure ?
(iv) Mixed Income of Self-employed ?
(v) Net Factor Income from Abroad 1,000
(vi) Net Indirect Taxes 2,000
(vii) Profits 1,200
(viii) Wages and Salaries 15,000
(ix) Net Exports 5,000
(x) Private Final Consumption Expenditure 40,000
(xi) Consumption of Fixed Capital 3,000
(xii) Operating Surplus 30,000
Answer:
NNPFC = 71,000 (given)
GDPMP = NNPFC – Net Factor Income from Abroad + Depreciation + Net Indirect Taxes
= 71,000 – 1000 + 3000 + 2000 = ₹ 75000
Now, Let Government Final Consumption Expenditure = x

GDPMP = Private Final Consumption Expenditure + Government Final Consumption Expenditure +

Gross Domestic Capital Formation + Net Exports
75000 = 40000 + x + 10000 + 5000
x = 20000
Also, Let Mixed Income = y
NDPFC = Wages and Salaries + Operating Surplus + Mixed Income
70000 = 15000 + 30000 + y
So, y = 25000

72.Given the following data, find the missing values of „Private Final Consumption
Expenditure‟ and „Operating Surplus‟. (Delhi 2019)
Particulars ₹ (in Crore)
(i) National Income 50,000
(ii) Net Indirect Taxes (NIT) 1,000
(iii) Private Final Consumption Expenditure ?
(iv) Gross Domestic Capital Formation 17,000
(v) Profits 1,000
(vi) Government Final Consumption Expenditure 12,500
(vii) Wages and Salaries 20,000
(viii) Consumption of Fixed Capital 700
(ix) Mixed Income of Self-employed 13,000
(x) Operating Surplus ?
(xi) Net Factor Income from Abroad 500
(xii) Net Exports 2,000

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Private Final Consumption Expenditure = y, Operating Surplus = x
We know,
NDPFC = Compensation of Employees (CoE) + Operating Surplus + Mixed Income
Also, NDPFC = NNPFC – Net Factor Income from Abroad (NFIA)
= 50000 – 500 = ₹ 49,500 crore
9,500 = Wages and Salaries + x + 13000
49,500 = 20O00 + 13000 + x
49,500 = 33000 + x
x = 49,500 – 33000 = ₹ 16,500 crore

Also, GDPMP = Private Final Consumption Expenditure (PFCE) + Government Final

Consumption Expenditure + (GFCE) + Gross Domestic Capital Formation + Net Exports
GDPMP = NNPFC + Depreciation+Net Indirect Taxes (NIT) = 49,500 + 700 + 100 = ₹ 51,200 crore
51,200 = y + 12,500 + 17,00 + 2,000
y = ₹ 19,700 crore

73.Given the following data, find the missing values of „Gross Domestic Capital Formation‟
and „Wages and Salaries‟. (Delhi 2019)
Particulars ₹ (in Crore)
(i) Mixed Income of Self-employed 3,500
(ii) Net Indirect Taxes 300
(iii) Wages and Salaries ?
(iv) Government Final Consumption Expenditure 14,000
(v) Net Exports 3,000
(vi) Consumption of Fixed Capital 300
(vii) Net Factor Income from Abroad 700
(viii) Operating Surplus 12,000
(ix) National Income 30,000
(x) Profits 500
(xi) Gross Domestic Capital Formation ?
(xii) Private Final Consumption Expenditure 11,000

Let Gross Domestic Capital Formation = x

Wages and Salaries = y
We know,
NDPFC = Compensation of Employees (COE) + Operating Surplus + Mixed Income
NDPFC = NNPFC – Net Factor Income from Abroad (NFIA)
= 30,000 – 700 = ₹ 29300 crore
29300 = y + 12,000 + 35,000
y = ₹ 13,800 crore
Also,

GDPMP = Private Final Consumption Expenditure (PFCE) + Govt. Final Consumption

Expenditure (GFCE) + Gross Domestic Capital Formation + Net Exports
GDPMP = NDPFC + Depreciation + Net Indirect Tax
= 29300 + 300 + 300 = ₹ 29,900 crore
29,900 = 11000 + 14000 + x + 3000
x = ₹ 1,900 crore

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74.Calculate (a) Operating Surplus, and (b) Domestic Income. (April re-exom 2018)
Particulars ₹ (in Crore)
(i) Compensation of Employees 2,000
(ii) Rent and Interest 800
(iii) Indirect Taxes 120
(iv) Corporation Tax 460
(v) Consumption of Fixed Capital 100
(vi) Subsidies 20
(vii) Dividend 940
(viii) Undistributed Profits 300
(ix) Net Factor Income to Abroad 150
(x) Mixed Income 200
(a) Operating Surplus = Rent and Interest + Corporation Tax + Dividend + Undistributed Profits
= 800 + 460 + 940 + 300 = ₹ 2,500 crore

(b) Domestic Income (NDPFC)= Compensation to Employees + Operating Surplus + Mixed Income
= 2,000 + 2,500 + 200 = ₹ 4,700 crore

75.Calculate (a) Net National Product at market price, and (b) Gross Domestic Product at
factor cost. (March 2018)
Particulars ₹ (in Crore)
(i) Rent and Interest 6,000
(ii) Wages and Salaries 1,800
(iii) Undistributed Profit 400
(iv) Net Indirect Taxes 100
(v) Subsidies 20
(vi) Corporation Tax 120
(vii) Net Factor Income to Abroad 70
(viii) Dividends 80
(ix) Consumption of Fixed Capital 50
(x) Social Security Contribution by Employers 200
(xi) Mixed Income 1,000

(a) NNPMP = Compensation of Employee + Operating Surplus + Mixed Income + NFIA + Net
Indirect Taxes
= 1300 +200 + (6,000 +400 + 120 + 80) + (1000) + (-70) + 100
= ₹ 9630 crore

(b) GDPFC = Compensation of Employees + Operating Surplus + Mixed Income +

Consumption of Fixed Capital
= (1300 + 200) + (6000 + 400 + 120 + 80) + (1000) + 50 = ₹ 9650 crore

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76.Explain the precautions that should be taken while estimating national income by
expenditure method. (All India 2017)
While using expenditure method, the following precautions are required to be taken, related to the
calculation of National Income (any 4)
 Only final expenditure is to be taken into account Lo avoid error of double counting.
 Expenditure on second hand goods is not to be included, because value of second hand
goods has already been accounted for during the year of their production.
 Expenditure on shares and bonds is not to be included in total expenditure. as these are
mere paper claims and are not related to the production of final goods and services.
 Expenditure on transfer payments by the government is not to be included.
 Imputed value/estimated value of expenditure on goods produced for self-consumption
should be taken into account, as these goods are reflected in the estimation of Gross
Domestic Product.

77.Will the following be included in the domestic product of India? Give reasons for your
answer. (All India 2017)
(i) Profits earned by foreign companies in India.
(ii) Salaries of Indians working in the Russian Embassy in India.
(iii) Profits earned by a branch of State Bank of India in Japan.
(i) Profits earned by foreign companies in India This will be included in the estimation of
domestic product, as these companies have earned profit in India, i.e. from the domestic territory
of India.
(ii) Salaries of Indians working in Russian Embassy in India This will not be included in the
domestic product of India as Russian Embassy in India is not a part of India‟s domestic territory.
(iii) Profits earned by a branch of State Bank of India in Japan This will not be included in the
domestic income of India as it is not located within the domestic territory of India.

78.Calculate (i) National Income, and (ii) Net National Disposable income. (All India 2017)
Particulars ₹ (in Crore)
(i) Compensation of Employees 2,000
(ii) Rent 400
(iii) Profit 900
(iv) Dividend 100
(v) Interest 500
(vi) Mixed Income of Self-employed 7,000
(vii) Net Factor Income to Abroad 50
(viii) Net Exports 60
(ix) Net Indirect Taxes 300
(x) Depreciation 150
(xi) Net Current Transfer to Abroad 30

Net Domestic Product at Factor Cost (NDPFC)

= Compensation of Employees + (Rent + Interest + Profit) + Mixed Income of Self-employed
= 2000 + (400 + 500 + 900) + 7000
= ₹ 10,800 crore
(i) National Income = NDPFC – Net Factor Income to Abroad = 10,800 – 50 = ₹ 10,750 crore
(ii) Net National Disposable Income – Not in Syllabus.

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79.Will the following be included in the national income of India? Give reasons for your
answer.
(i) Financial assistance to flood victims.
(ii) Profits earned by the branches of a foreign bank in India.
(iii) Salaries of Indians working in the American Embassy in India. (All India 2017)
(i) Financial assistance to flood victims It will „not be included‟ in the national income of India as
it is a form of transfer payment. It does not add to the stock of goods and services in the economy.
(ii) Profits earned by foreign companies in India This will be included in the estimation of
domestic product, as these companies have earned profit in India, i.e. from the domestic territory
of India.
(iii) Salaries of Indians working in the American Embassy in India It will be „included‟ in
national income because it is a part of net factor income from abroad (NFIA).
80.Calculate the (i) Net National Product at Market Price, and (ii) Gross National Disposable
Income. (All India 2017)
Particulars ₹ (in Crore)
(i) Mixed income of Self-employed 2,000
(ii) Depreciation 400
(iii) Profit 900
(iv) Rent 100
(v) Interest 500
(vi) Compensation of Employees 7,000
(vii) Net Indirect Taxes 50
(viii) Net factor income to Abroad 60
(ix) Net Exports 300
(x) Net Current Transfers to Abroad 150
Net Domestic Product at Factor Cost (NDPFC)
= Compensation of Employees + Rent + Interest + Profit + Mixed Income of Self-employed
= 3,000 + 600 + 700 + 1,000 + 8,000
= ₹ 13,300 crore
(i) Net National Product at Market Price
(NNPMP) = NDPFC – Net Factor Income to Abroad + Net Indirect Taxes
= 13,300 – 60 + 500
= ₹ 13,740 crore
(ii) Gross National Disposable Income – Not in Syllabus.
81.Explain non-monetary exchanges as a limitation of using gross domestic product as an
index of welfare of a country. (Delhi 2017)
Gross Domestic Product (GDP) is the total value of all the final goods and services produced by all
the enterprises (both resident and non-resident) within the domestic territory of a country in a
particular year. GDP is considered as one of the best indicators of judging the economic
performance of a country. GDP may be a good indicator of economic growth, but not of economic
welfare or economic development. One of the reason for this is that non-monetary transactions are
ignored, while calculating GDP.
The non-monetary exchanges which take place in the informal sectors are not included in the
calculation of Gross Domestic Product (GDP) since money is not being used.
For example, service of a housewife while teaching her children or while cooking food in kitchen.
This results in under estimation of GDP. Hence, GDP calculated in the standard manner may not
give us a clear indication of the productive activity and actual welfare of the country.

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82.How will you treat the following while estimating domestic product of a country? Give
reasons for your answer. (Delhi 2017)
(i) Profits earned by branches of country‟s bank in other countries.
(ii) Gifts given by an employer to his employees on Independence Day.
(iii) Purchase of goods by foreign tourists.
(i) Profits earned by branches of country‟s bank in other countries It is not included while
estimating the domestic product of a country as these profits are not earned within the domestic
territory of the country.
(ii) Gifts given by an employer to his employees on Independence Day It is not included while
estimating the domestic product of a country as it is a transfer payment.
(iii) Purchase of goods by foreign tourists It will be included in the estimation of domestic product
of a country as the goods have been produced and sold within the domestic territory of the
country.

83.Calculate (i) Net Domestic Product at Factor Cost and (ii) Gross National Disposable
Income. (Delhi 2017)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 8000
(ii) Government Final Consumption Expenditure 1000
(iii) Exports 70
(iv) Imports 120
(v) Consumption of Fixed Capital 60
(vi) Gross Domestic Fixed Capital Formation 500
(vii) Change in Stock 100
(viii) Net Factor Income to Abroad 40
(ix) Net Factor Income from Abroad 90
(x) Indirect Taxes 700
(xi) Subsidies 50
(xii) Net Current Transfers to Abroad (-)30

Gross Domestic Product at Market Price

(GDPMP) = Private Final ConsumptionExpenditure + Government Final
ConsumptionExpenditure + Gross Domestic Fixed CapitalFormation + Change in Stock +
(Exports – Imports)
= 8,000 + 1,000 + 500 + 100 + (70 – 120)
= ₹ 9,550 crore

(i) Net Domestic Product at Factor Cost (NDPFC)= GDPMP – Consumption of Fixed Capital –
Net Indirect Taxes
= 9,550 – 60 – (700 – 50)
= ₹ 8,840 crore

(ii) Gross National Disposable Income – Not in Syllabus.

M.SAKTHIVEL – 9787576858
MA(HIS).,MA(SWA).,M.Ed.,D.CSE.,PGDCA.,MDSA.,CLP.,DCA.,DDTP.,
E-Mail: mpsakthivelpgt@gmail.com

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84.Calculate (i) National Income (ii) Net National Disposable Income. (Delhi 2017)
Particulars ₹ (in Crore)
(i) Net Factor Income to Abroad (-) 50
(ii) Net Indirect Taxes 800
(iii) Net Current Transfers form Rest of the World 100
(iv) Net Imports 200
(v) Private Final Consumption Expenditure 5,000
(Vi) Government Final Consumption Expenditure 3,000
(vii) Gross Domestic Capital Formation 1,000
(viii) Consumption of Fixed Capital 150
(ix) Change in Stock (-) 50
(x) Mixed Income 4,000
(xi) Scholarship to Students 80
Gross Domestic Product at Market Price(GDPMP) = Private Final Consumption Expenditure +
Government Final ConsumptionExpenditure + Gross Domestic Capital Formation – Net Imports
= 5,000 + 3,000 + 1000 – 200
= ₹ 8,800 crore
(i) National Income = GDPMP – Consumption of Fixed Capital – Net Factor Income to Abroad – Net
Indirect Taxes
= 8,800 – 150 – (-50) – 800 = ₹ 7,900 crore
(ii) Net National Disposable Income – Not in Syllabus.

85.Calculate (i) Net National Product at Market Price and (ii) Gross National Disposable
Income. (Delhi 2017)
Particulars ₹(in Crore)
(i) Gross Domestic Fixed Capital Formation 400
(ii) Private Final Consumption Expenditure 8,000
(iii) Government Final Consumption Expenditure 3,000
(iv) Change in Stock 50
(v) Consumption of Fixed Capital 40
(vi) Net Indirect Taxes 100
(vii) Net Exports (-) 60
(viii) Net Factor Income to Abroad (-) 80
(ix) Net Current Transfers from Abroad 100
(x) Dividend 100
Gross Domestic Product at Market Price (GDPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change
in Stock + Net Exports
= 8,000 + 3,000 + 400 + 50 + (-60)
= ₹ 11,390 crore

(i) Net National Product at Market Price(NNPMP) = GDPMP – Consumption of Fixed Capital – Net
Factor Income to Abroad
= 11,390 – 40 – (-80)
= ₹ 11,430 crore

(ii) Gross National Disposable Income – Not in Syllabus.

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86.Find National Income and Private Income. (Delhi 2016)
Particulars ₹ (in Crore)
(i) Wages and Salaries 1,000
(ii) Net Current Transfers to Abroad 20
(iii) Net Factor Income Paid to Abroad 10
(iv) Profit 400
(v) National Debt Interest 120
(vi) Social Security Contributions by Employers 100
(vii) Current Transfers from Government 60
(viii) National Income Accruing to Government 150
(ix) Rent 200
(x) Interest 300
(xi) Royalty 50

National Income or Net National Product at Factor Cost (NNPFC)= Wages and Salaries +
Social Security Contributions by Employers + Rent + Interest + Royalty + Profit – Net Factor
Income Paid to Abroad

= 1,000 + 100 + 200 + 300 + 50 + 400 – 10

= ₹ 2,040 crore
Private Income – Not in Syllabus.

87.Find Net Domestic Product at Factor Cost and Personal Income. (Delhi 2016)
Particulars ₹ (in Crore)
(i) Rent 200
(ii) Net Current Transfers to Abroad 10
(iii) National Debt Interest 60
(iv) Corporate Tax 100
(v) Compensation of Employees 900
(vi) Current Transfers by Government 150
(vii) Interest 400
(viii) Undistributed Profits 50
(ix) Dividend 250
(x) Net Factor Income to Abroad (-) 10
(xi) Income Accruing to Government 120

Net Domestic Product at Factor Cost (NDPFC) = Compensation of Employees + Rent +

Interest + Corporate Tax + Undistributed Profits + Dividend

= 900 + 200 + 400 +100 + 50 + 250

= ₹ 1,900 crore
„Personal Income – Not in Syllabus.

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88.Find Gross National Product at Market Price and Private Income. (Delhi 2016)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 800
(ii) Net Current Transfers to Abroad 20
(iii) Net Factor Income to Abroad (-)10
(iv) Government Final Consumption Expenditure 300
(v) Net Indirect Tax 150
(vi) Net Domestic Capital Formation 200
(vii) Current Transfers from Government 40
(viii) Depreciations 100
(ix) Net Imports 30
(x) Income Accuring to Government 90
(xi) National Debt Interest 50
Gross National Product at Market Price(GNPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Net Domestic Capital Formation +
Depreciation – Net Imports – Net Factor Income to Abroad
= 800 + 300 + 200 + 100 – 30 – (-10)
= ₹ 1,380 crore
Private Income – Not in Syllabus.

89.Calculate (i) Net Domestic Product at Market Price and (ii) Net National Disposable
Income. (All India (C) 2016)
Particulars ₹ (in Crore)
(i) Compensation of Employees 4,000
(ii) Dividend 500
(iii) Mixed Income 8,000
(iv) Social Security Contribution by Employers 400
(v) Net Factor Income to Abroad 600
(vi) Net Indirect Taxes 1,000
(vii) Rent 800
(viii) Consumption of Fixed Capital 1,200
(ix) Profit 1,500
(x) Net Current Transfers to Rest of the World 200
(xi) Interest 70

(i) Net Domestic Product at Market Price (NDPMP) = Compensation of Employees + Mixed Income
+ Rent + Profit + Interest + Net Indirect Taxes
= 4,000 + 8,000 + 800 + 1,500 + 70 + 1,000
= ₹ 5,370 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

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90.Calculate (i) Gross National Product at Factor Cost and (ii) Net National Disposable
Income. (Delhi (C) 2016)
Particulars ₹ (in Crore)
(i) Compensation of Employees 3000
(ii) Profit 800
(iii) Opening Stock 200
(iv) Closing Stock 150
(v) Indirect Taxes 700
(vi) Rent 600
(vii) Interest 900
(viii) Subsidies 100
(ix) Consumption of Fixed Capital 850
(x) Net Exports (-)250
(xi) Net Factor Income to Abroad 300
(xii) Net Current Transfers from Rest of the World 400
(xiii) Mixed Income of Self-employed 5000

(i) Gross National Product at Factor Cost(GNPMP) = Compensation of Employees + Rent + Interest
+ Profit + Mixed Income of Self-employed + Consumption on Fixed Capital – Net Factor Income to
Abroad
= 3,000 + 600 + 900 + 800 + 5,000 + 850 – 300
= ₹ 10,850 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

91.Find Net National Product at Market Price and Personal Disposable Income. (Delhi 2016)
Particulars ₹ (in Crore)
(i) Personal Taxes 200
(ii) Wages and Salaries 1,200
(iii) Undistributed Profit 50
(iv) Rent 300
(v) Corporate Tax 200
(vi) Personal Income 2,000
(vii) Interest 400
(viii) Net Indirect Tax 300
(ix) Net Factor Income from Abroad 20
(x) Profit 500
(xi) Social Security Contribution by Employers 250

Net National Product at Market Price(NNPMP) = Wages and Salaries + Social Security Contribution
by Employers + Rent + Interest + Profit + Net Factor Income from Abroad + Net Indirect Tax
= 1200 + 250 + 300 + 400 + 500 + 20 + 300
= ₹ 2,970 crore
Personal Disposable Income – Not in Syllabus.

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92.Calculate (i) Gross National Product at Factor Cost and (ii) Net National Disposable
Income (Delhi 2016)
Particulars ₹ (in Crore)
(i) Rent 400
(ii) Compensation of Employees 3,000
(iii) Dividend 200
(iv) Change in Stock 300
(v) Net Factor Income to Abroad 700
(vi) Net Indirect Taxes 800
(vii) Consumption of Fixed Capital 1,000
(viii) Interest 600
(ix) Profits 800
(x) Mixed Income 6,000
(xi) Net Current Transfers to Rest of the World (-) 200

(i) Gross National Product at Factor Cost (GNPFC) = Compensation of Employees + Rent +
Interest + Profits + Mixed Income + Consumption of Fixed Capital – Net Factor Income to
Abroad
= 3,000 + 400 + 600 + 800 + 6,000 + 1,000 – 700
= ₹ 11,100 crore
(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

93.From the following data calculate

(i) Net Domestic Product at Market Price (ii) Net National Disposable Income (Delhi (C)
2016)
Particulars ₹ (in Crore)
(i) Interest 600
(ii) Net Current Transfers from Rest of the World 200
(iii) Consumption of Fixed Capital 800
(iv) Rent 700
(v) Net Factor Income from Abroad 100
(vi) Net Indirect Taxes 850
(vii) Profit 1,200
(viii) Social Security Contribution by Employers 700
(ix) Mixed Income of Self-employed 8000
(x) Compensation of Employees 5,000
(xi) Dividend 400

(i) Net Domestic Product at Market Price (NDPMP)= Compensation of Employees + Rent +
Interest+Profit + Mixed Income of Self-employed + Net Indirect Taxes
= 5,000 + 700 + 600 + 1,200 + 8,000 + 850
= ₹ 16,350 crore

(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

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94.Giving reason, explain how the following should be treated in the estimation of National
Income. (All India 2015)
(i) Payment of interest by a firm to a bank.
(ii) Payment of interest by a bank to an individual.
(iii) Payment of interest by an individual to a bank.
(i) It will be „included‟ in the estimation of National Income, as it is a factor income. Also, firms take
loans for investment purposes.
(ii) It will be „included‟ in the estimation of National Income as it is a factor income.
(iii) It will „not be included‟ in the estimation of National Income as consumer takes loan for
consumption
purposes.

95.Calculate the „National Income‟ and „Private Income‟. (All India 2015)
Particulars ₹ (in Crore)
(i) Rent 600
(ii) Net Factor Income to Abroad 200
(iii) National Debt Interest 800
(iv) Wages and Salaries 700
(v) Current Transfers from Government 100
(vi) Undistributed Profits 850
(vii) Corporation Tax 1,200
(viii) Interest 700
(ix) Social Security Contributions by Employers 8000
(x) Net Domestic Product Accruing to Government 5,000
(xi) Net Current Transfers to Rest of the World 400
(xii) Dividends
Net Domestic Product at Factor Cost (NDPFC) = Rent + Wages and Salaries + Corporation Tax
Social Security Contribution by Employers + Dividends + Undistributed Profits NDPpc = 200 +700
+30 +150 +100 + 50 + 20
= ₹ 1,250 crore
National Income (NNPFC) = NDPFC + Net Factor Income from Abroad (NFIA)
= 1,250 + (-10) = ₹ 1,240 crore
Private Income – Not in Syllabus.

96.Calculate Net National Product at Market Price and Personal Income. (All India 2015)
Particulars ₹ (in Crore)
(i) Transfer Payments by Government 7
(ii) Government Final Consumption Expenditure 50
(iii) Net Imports (-)10
(iv) Net Domestic Fixed Capital Formation 60
(v) Private Final Consumption Expenditure 300
(vi) Private Income 280
(vii) Net Factor Income to Aboad (-)5
(viii) Closing Stock 8
(ix) Opening Stock 8
(x) Depreciation 12
(xi) Corporate Tax 60
(xii) Retained Earnings of Corporations 20
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Net Domestic Product at Market Price (NDPMP) = Government Final Consumption Expenditure +
Net Domestic Fixed Capital Formation + Change in Stock + Private Final Consumption Expenditure
– Net Imports NDPMP
= 50 + 60 + (8 – 8) 300 – (-10) = ₹ 420 crore
Net National Product at Market Price (NNPMP)
= NDPMP + Net Factor Income from Abroad (NFIA)
= 420 + (-5) = ₹ 415 crore
Personal Income – Not in Syllabus.

97.Calculate Net Domestic Product at Market Price and Gross National Disposable Income.
(All India 2015)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 400
(ii) Opening Stock 10
(iii) Consumption of Fixed Capital 25
(iv) Imports 15
(v) Government Final Consumption Expenditure 90
(vi) Net Current Transfers to Rest of the World 5
(vii) Gross Domestic Fixed Capital Formation 80
(viii) Closing Stock 20
(ix) Exports 10
(x) Net Factor Income to Abroad (-) 5
Gross Domestic Product at Market Price ( GDPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change
in Stock + Net Exports
= 400 + 90 + 80 + (20 – 10) + (10 – 15)
= 490 + 80 + 5
= ₹ 575 crore
Net Domestic Product at Market Price (NDPMP) = GDPMP – Depreciation
= 575 – 25
= ₹ 550 crore

Gross National Disposable Income – Not in Syllabus.

98.Giving reason, explain how should the following be treated in estimation of National
Income.
(i) Expenditure by a firm on payment of fees to a Chartered Accountant.
(ii) Payment of corporate tax by a firm.
(iii) Purchase of refrigerator by a firm for own use. (Delhi 2015)

(i) Expenditure by a firm on payment of fees to a Chartered Accountant, will „not be included‟ while
estimation of National Income as it is an intermediate cost.
(ii) Corporate profit already forms part of national income. Hence, payment of corporate tax is „not
included‟ in national income as it is a mere transfer payment.
(iii) Purchase of refrigerator by a firm for own use will be „included‟ while estimation of National
Income, as it is a part of Private Final Consumption Expenditure.

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99.Calculate National Income and Personal Disposable Income. (Delhi 2015)
Particulars ₹ (in Crore)
(i) Personal Tax 7
(ii) Private Final Consumption Expenditure 50
(iii) Undistributed Profits (-)10
(iv) Private Income 60
(v) Government Final Consumption Expenditure 300
(vi) Corporate Tax 280
(vii) Net Domestic Fixed Capital Formation (-)5
(viii) Net Indirect Tax 8
(ix) Depreciation 8
(x) Change in Stocks 12
(xi) Net Imports 60
(xii) Net Factor Income to Abroad 20
Net Domestic Product at Market Price (NDPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in
Stocks + Net Exports
= 600 +100 + 70 + (-10) + (-20)
= 700 + 70 – 30 = 700 + 40
= ₹ 740 crore
National Income (NNPFC)=NDPMP + Net Factor Income from Abroad – Net Indirect Tax
= 740 + (-10) – 60
= 740 – 70 = ₹ 670 crore
„Personal Disposable Income – Not in Syllabus.

100.Calculate „Gross National Product at Market Price‟ and „Net National Disposable
Income‟. (Delhi 2015)
Particulars ₹ (in
Crore)
(i) Rent 100
(ii) Net Current Transfers to Rest of the World 30
(iii) Social Security Contributions by Employers 47
(iv) Mixed Income 600
(v) Gross Domestic Capital Formation 140
(vi) Royalty 20
(vii) Interest 110
(viii) Compensation of Employees 500
(ix) Net Domestic Capital Formation 120
(x) Net Factor Income from Abroad (-) 10
(xi) Net Indirect Tax 150
(xii) Profit 200
Net Domestic Product at Factor Cost (NDPFC) = Rent + Mixed Income + Royalty + Interest +
Compensation of Employees + Profit
= 100 + 600 + 20 + 110 + 500 + 200
= ₹ 1,530 crore
Gross Domestic Product at Market Price (GDPMP) = NDPFC + Depreciation + Net Indirect Tax
= 1,530 + 20 + 150 = ₹ 1,700 crore

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Gross National Product at Market Price (GNPMP) =GDPMP + Net Factor Income from Abroad
= 1,700 + (-10) = ₹ 1,690 crore (Net National Disposable Income – Not in Syllabus
101.Calculate „Net Domestic Product at Factor Cost‟ and „Gross National Disposable Income‟.
(Delhi 2015)
Particulars ₹ (in Crore)
(i) Net Current Transfers to Abroad 15
(ii) Private Final Consumption Expenditure 800
(iii) Net Imports (-)20
(iv) Net Domestic Capital Formation 100
(v) Net Factor Income to Abroad 10
(vi) Depreciation 50
(vii) Change in Stocks 17
(viii) Net Indirect Tax 120
(ix) Government Final Consumption Expenditure 200
(x) Exports 30
Net Domestic Product at Market Price (NDPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Net Domestic Capital Formation – Net Imports
NDPMP = 800 + 200 + 100 – (-20) = ₹ 1,120 crore
Net Domestic Product at Factor Cost (NDPFC) = NDPMP – Net Indirect Tax
NDPFC = 1,120 – 120 = ₹ 1,000 crore
Gross National Disposable Income – Not in Syllabus.

102.Giving reasons explain how should the following be treated in estimation of National
Income. (Foreign 2015)
(i) Payment of corporate tax by a firm.
(ii) Purchase of machinery by a factory for own use.
(iii) Purchase of uniforms for nurses by a hospital.
(i) Corporate profit already forms part of national income. Hence, payment of corporate tax is „not
included‟ in national income as it is a mere transfer payment.
(ii) Purchase of machinery by a factory for own use is „included‟ in the estimation of National
Income as it is an investment expenditure.
(iii) Purchase of uniforms for nurses by a hospital will „not be included‟ in the computation of
National Income as it is a part of intermediate consumption.

103.Calculate the Gross National Product at Market Price and Personal Income.
Particulars ₹ (in Crore)
(i) Wages and Salaries 800
(ii) Personal Tax 150
(iii) Operating Surplus 200
(iv) Undistributed Profits 10
(v) Social Security Contributions by Employers 100
(vi) Corporate Tax 50
(vii) Net Factor Income to Abroad (-) 20
(viii) Personal Disposable Income 1200
(ix) Net Indirect Tax 70
(x) Consumption of Fixed Capital 30
(xi) Mixed Income of Self-employed 500
(xii) Royalty 9
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Net Domestic Product at Factor Cost (NDPFC) = Wages and Salaries + Social Security contribution
by employers + Operating Surplus + Mixed Income of Self-employed
NDPFC = 800 + 100 + 200 + 500
= ₹ 1,600 crore
Gross National Product at Market Price
(GNPMP) = NDPFC + Consumption of Fixed Capital – Net Factor Income to Abroad + Net Indirect
Tax
= 1,600 + 30 – (-20) + 70
= ₹ 1,720 crore ( Personal Income – Not in Syllabus )

104.From the following data calculate

(i) Gross National Product at Market Price and
(ii) Net National Disposable Income. (All India (C) 2015)
Particulars ₹ (in Crore)
(i) Dividends 300
(ii) Compensation of Employees 3,000
(iii) Rent 500
(iv) Depreciation 200
(v) Interest 800
(vi) Net Factor Income to Abroad 100
(vii) Mixed Income 5,000
(viii) Net Indirect Taxes 400
(ix) Profit 1,500
(x) Net Current Transfers to Abroad (-) 50
Net Domestic Product at Factor Cost (NDPFC) = Compensation of Employees + Rent + Interest +
Profit + Mixed Income
= 3000 + 500 + 800 + 1,500 + 5,000
= ₹ 10,800 crore
(i) Gross National Product at Market Price (GNPMP) = NDPFC + Depreciation – Net Factor Income to
Abroad + Net Indirect Taxes
= 10300 + 200 – 100 + 400
= ₹ 11300 crore
(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

105.Calculate (i) National Income and (ii) Gross National Disposable Income. (Delhi to 2015)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 500
(ii) Net Domestic Fixed Capital Formation 100
(iii) Net Factor Income from Abroad 30
(iv) Change in Stock 20
(v) Net Exports 40
(vi) Net Indirect Taxes 50
(vii) Mixed Income 300
(viii) Government Final Consumption Expenditure 200
(ix) Consumption of Fixed Capital 60
(x) Net Current Transfers to Abroad (-) 10

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Net Domestic Product at Market Price (NDPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in
Stock + Net Exports
= 500 + 200 + 100 + 20 + 40
= ₹ 860 crore
(i) National Income (NNPFC) = NDPMP. + Net Factor Income from Abroad – Net Indirect Taxes
= 860 + 30 – 50
= ₹ 840 crore
(ii) Gross National Disposable Income – Not in Syllabus.

106.Calculate Net Domestic Product at Factor Cost and Net National Disposable Income
from the following. (Delhi 2014)
Particulars ₹ (inCrore)
(i) Net Current Transfers to Abroad 5
(ii) Government Final Consumption Expenditure 100
(iii) Net Indirect Tax 80
(iv) Private Final Consumption Expenditure 300
(v) Consumption of Fixed Capital 20
(vi) Gross Domestic Fixed Capital Formation 50
(vii) Net Imports 10
(viii) Closing Stock 25
(ix) Opening Stock 25
(x) Net Factor Income to Abroad 10
Net Domestic Product at Factor Cost (NDPFC) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change
in Stock (Closing Stock – Opening Stock) – Net Imports – Net Indirect Taxes – Consumption of
Fixed Capital
= 300 + 100 + 50 + (25 – 25) – (-10) – 80 – 20
=460 – 100 = ₹ 360 arab
Net National Disposable Income (NNDI) – Not in Syllabus.

107.Giving reason explain how should the following be treated in estimating Gross Domestic
Product at Market Price? (Delhi 2014)
(i) Fees to a mechanic paid by a firm.
(ii) Interest paid by an individual on a car loan taken from a bank.
(iii) Expenditure on purchasing a car for use by a firm.
(i) It is not included‟ in the GDPMP, as it is an intermediate expenditure incurred by firm.
(ii) It is not included‟ in the estimation of GDPMP because loan is not being used for production
purpose.
(iii) It is „included‟ in the estimation of GDPMP because it is a part of final expenditure by a firm.

M.SAKTHIVEL – 9787576858
MA(HIS).,MA(SWA).,M.Ed.,D.CSE.,PGDCA.,MDSA.,CLP.,DCA.,DDTP.,
E-Mail: mpsakthivelpgt@gmail.com

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108.Calculate Net National Product at Factor Cost and Private Income from the following.
(Delhi 2014)
Particulars ₹ (in Crore)
(i) National Debt Interest 60
(ii) Wages and Salaries 600
(iii) Net Current Transfers to Abroad 20
(iv) Rent 200
(v) Transfer Payments by Government 70
(vi) Interest 300
(vii) Net Domestic Product at Factor Cost Accruing to Government 400
(viii) Social Security Contributions by Employers 100
(ix) Net Factor Income Paid to Abroad 50
(x) Profits 300
Net National Product at Factor Cost (NNPFC)
= Wages and Salaries + Rent + Interest + Profits + Social Security Contributions by Employers –
Net Factor Income Paid to Abroad
= 600 + 200 + 300 + 300 + 100 – 50
= 1,500 – 50 = ₹ 1,450 arab
„Private Income – Not in Syllabus.

109.Calculate National Income and Net National Disposable Income from the following. (All
India 2014)
Particulars ₹ (in Crore)
(i) Net Change in Stocks 50
(ii) Government Final Consumption Expenditure 100
(iii) Net Current Transfers to Abroad 30
(iv) Gross Domestic Fixed Capital Formation 200
(v) Private Final Consumption Expenditure 500
(vi) Net Imports 40
(vii) Depreciation 70
(viii) Net Factor Income to Abroad (-)10
(ix) Net Indirect Tax 120
(x) Net Capital Transfers to Abroad 25

National Income (NNPFC)

= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross
Domestic Fixed Capital Formation + Net Change in Stocks – Net Imports – Depreciation – Net
Indirect Tax – Net Factor Income to Abroad
= 500 + 100 + 200 + 50 – 40 – 70 – 120 – (-10)
= 860 – 230
= ₹ 630 arab

Net National Disposable Income (NNDI) – Not in Syllabus.

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110.Calculate Net National Product at Market Price and Gross National Disposable Income
from the following. (All India 2014)
Particulars ₹ (in Crore)
(i) Closing Stock 10
(ii) Consumption of Fixed Capital 40
(iii) Private Final Consumption Expenditure 600
(iv) Exports 50
(v) Opening Stock 20
(vi) Government Final Consumption Expenditure 100
(vii) Imports 60
(viii) Net Domestic Fixed Capital Formation 80
(ix) Net Current Transfers to Abroad (-)10
(x) Net Factor Income to Abroad 30
Net National Product at Market Price (NNPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in
Stock (Closing Stock – Opening Stock) + Net Exports (Exports – Imports) – Net Factor Income to
Abroad
= 600 + 100 +80 + (10 – 20) + (50 – 60) – 30
= 780 – 50 = ₹ 730 arab
Gross National Disposable Income (GNDI) – Not in Syllabus.

111.How should the following be treated in estimating National Income of a country? You
must give reason for your answer.
(i) Taking care of aged parents.
(ii) Expenditure on providing police services by the government. (All India 2014)
(i) It is „included‟in the estimation of National Income. Component of care that can be monetised is
included in national income as payment is being made, so that parents can consume final goods
and services.
(ii) It is „included‟ in the estimation of National Income as it is a part of government final
consumption expenditure.

112.Calculate Net National Product at Factor Cost and Gross National Disposable Income
from the following. (All India 2014)
Particulars ₹ (in Crore)
(i) Social Security Contributions by Employees 90
(ii) Wages and Salaries 800
(iii) Net Current Transfers to Abroad (-)30
(iv) Rent and Royalty 300
(v) Net Factor Income to Abroad 50
(vi) Social Security Contributions by Employers 100
(vii) Profit 500
(viii) Interest 400
(ix) Consumption of Fixed Capital 200
(x) Net Indirect Tax 250
Net National Product at Factor Cost (NNPFC) = Wages and Salaries + Social Security Contribution
by Employers + Rent and Royalty + Profit + Interest – Net Factor Income to Abroad
= 800 + 100 + 300 + 500 + 400 – 50
= ₹ 2,050 arab Gross National Disposable Income (GNDI) – Not in Syllabus
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113.Calculate National Income and Gross National Disposable Income from the following.
(Delhi 2014)
Particulars ₹ (in Crore)
(i) Net Current Transfers to Abroad (-) 15
(ii) Private Final Consumption Expenditure 600
(iii) Subsidies 20
(iv) Government Final Consumption Expenditure 100
(v) Indirect Tax 120
(vi) Net Imports 20
(vii) Consumption of Fixed Capital 35
(viii) Net Change in Stocks (-) 10
(ix) Net Factor Income to Abroad 5
(x) Net Domestic Capital Formation 110
National Income (NNPFC)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net
Domestic Capital Formation – Net Imports – Net Indirect Tax – Net Factor Income to Abroad
= 600 + 100 + 110 – 20 – (120 – 20) – 5
= 810 – 125 = ₹ 685 arab
Gross National Disposable Income (GNDI) – Not in Syllabus.

114.Calculate National Income: (All India (C) 2014)

Particulars ₹ (in Crore)
(i) Net Current Transfer from Rest of the World 30
(ii) Private Final Consumption Expenditure 400
(iii) Net Domestic Capital Formation 100
(iv) Change in Stock 50
(v) Depreciation 20
(vi) Government Final Consumption Expenditure 200
(vii) Net Exports 40
(viii) Net Indirect Taxes 80
(ix) Net Factor Income Paid to Abroad 10
Net Domestic Product at Market Price (NDPMP) = Private Final Consumption Expenditure
+ Net Domestic Capital Formation + Government Final Consumption Expenditure + Net Exports
= 400 + 100 + 200 + 40 = 1740 crore
Net National Product at Factor Cost (NNPFC or National Income)
= NDPMP – Net factor income paid to abroad – Net indirect taxes
= 740 – 10 – 80 = ₹ 650 crore

15.Calculate National Income. (Delhi (C) 2014)

Particulars ₹ (in Crore)
(i) Net Domestic Capital Formation 150
(ii) Government Final Consumption Expenditure 300
(iii) Net Factor Income from Abroad (-) 20
(iv) Private Final Consumption Expenditure 600
(v) Depreciation 30
(vi) Net Exports 50
(vii) Net Indirect Taxes 90
(viii) Net Current Transfers from Rest of the World 40
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National Income (NNPFC)
= Government Final Consumption Expenditure + Private Final Consumption Expenditure + Net
Domestic Capital Formation + Net Exports – Net Indirect Taxes + Net Factor Income from Abroad
= 300 + 600 +150 + 50 – 90 + (-20) = ₹ 990 crore

116.How should the following be treated while estimating National Income? You must give
reason in support of your answer. (Foreign 2014)
(i) Bonus paid to employees.
(ii) Addition to stocks during a year.
(iii) Purchase of taxi by a taxi driver.
(i) Yes, it is „included‟ while estimation of National Income as it is a part of compensation of
employees.
(ii) Yes, it is „included‟ while estimation of National Income as it is considered as a change in stock
during the year.
(iii) Yes, it is „included‟ while estimation of National Income as it is an investment expenditure by
the producer.

117.Calculate Gross National Product at Market Price and Net National Disposable Income
from the following. (Foreign 2014)
Particulars ₹ (in Crore)
(i) Net Factor Income to Abroad (-) 10
(ii) Net Current Transfers to Abroad 20
(iii) Wages and Salaries 400
(iv) Corporation Tax 50
(v) Profit after Corporation Tax 150
(vi) Social Security Contributions by Employers 50
(vii) Rent 100
(viii) Interest 70
(ix) Mixed Income of Self-employed 300
(x) Net Indirect Tax 140
(xi) Consumption of Fixed Capital 80
Gross National Product at Market Price (GNPMP)
= Wages and Salaries + Profit after Corporation Tax + Corporation Tax + Social Security
Contributions by Employers + Rent + Interest + Mixed Income Self-employed + Net Indirect Taxes
(NIT) + Net Factor Income from Abroad + Consumption of Fixed Capital
= 400 + 150 + 50 + 50 + 100 + 70 + 300 + 140 + (-10) + 80
= ₹ 1,330 arab
Net National Disposable Income (NNDI) – Not in Syllabus.

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118.Calculate National Income from the following data. (Delhi 2013)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 900
(ii) Profit 100
(iii) Government Final Consumption Expenditure 400
(iv) Net Indirect Taxes 100
(v) Gross Domestic Capital Formation 250
(vi) Change in Stock 50
(vii) Net Factor Income from Abroad (-) 40
(viii) Consumption of Fixed Capital 20
(ix) Net Imports 30
National Income (NNPFC)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross
Domestic Capital Formation – Net Imports – Net Indirect Taxes – Consumption of Fixed Capital +
Net Factor Income from Abroad
= 900 + 400 + 250 – 30 – 100 – 20 + (-40)
= 1,550 – 190 = ₹ 1,360 crore

119.Giving reason explain how should the following be treated in estimating national
income
(i) Electricity consumed by a firm
(ii) Pension paid to the retired employees
(iii) Free treatment of the poor in hospitals (Delhi (C) 2013)
(i) Electricity consumed by a firm It will „not be included‟ in national income because it is an
intermediate product and if included will create the problem of double counting.
(ii) Pension paid to the retired employees It is „included‟ in national income because it is part of
compensation of employees.
(iii) Free treatment of the poor in hospitals It is not included in national income because poor
people are provided free treatment not in return of any productive service. This is a transfer
payment.

120.Calculate Gross National Product at Market Price from the following data. (All India
2013)
Particulars ₹ (in Crore)
(i) Compensation of Employees 200
(ii) Interest 500
(iii) Rent 700
(iv) Profits 800
(v) Employers Contribution to Social Security Schemes 200
(vi) Dividends 300
(vii) 100
(viii) Net Indirect Taxes 250
(ix) Net Exports 70
(x) Net Factor Income to Abroad 150
(xi) Mixed Income of Self-employed 1500

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Net Domestic Product at Factor Cost (NDPFC) = Compensation of Employees + Interest + Rent +
Profits + Mixed Income of Self-employed
= 2,000 + 500 + 700 + 800 + 1,500 = ₹ 5,500 crore
Gross National Product at Market Price (GNPMP) = NDPFC + Net Indirect Taxes – Net Factor Income
to Abroad + Consumption of Fixed Capital
= 5,500 + 250 – 150 + 100
= 5,850 – 150 = ₹ 5,700 crore

121.Find out (i) Net National Product at Market Price and (ii) Gross National Disposable
Income from the following data. (Delhi 2012)
Particulars ₹ (in Crore)
(i) Net Current Transfers from Abroad (-) 10
(ii) Wages and Salaries 1,000
(iii) Net Factor Income from Abroad (-) 20
(iv) Social Security Contributions by Employers 100
(v) Net Indirect Tax 80
(vi) Rent 300
(vii) Consumption of Fixed Capital 120
(viii) Corporation Tax 50
(ix) Undistributed Profits 60
(x) Dividend 200
(xi) Interest 400
Net Domestic Product at Factor Cost (NDPFC) = Wages and Salaries + Social Security Contributions
by Employers + Rent + Corporation Tax + Dividend + Undistributed Profit + Interest
= 1,000 + 100 + 300 + 50 + 200 + 60 + 400
= ₹ 2,110 crore
(i) Net National Product at Market Price (NNPMP) = NDPFC + Net Indirect Tax + Net Factor Income
from Abroad
= 2,110 + 80 + (-20) = ₹ 2,170 crore
(ii) Gross National Disposable Income (GNDI) – Not in Syllabus.

122.Find out
(i) National Income
(ii) Net National Disposable Income (Delhi 2012)
Particulars ₹ (in Crore)
(i) Factor Income from Abroad 15
(ii) Private Final Consumption Expenditure 600
(iii) Consumption of Fixed Capital 50
(iv) Government Final Consumption Expenditure 200
(v) Net Current Transfer to Abroad (-) 5
(vi) Net Domestic Fixed Capital Formation 110
(vii) Net Factor Income to Abroad 10
(viii) Net Imports (-) 20
(ix) Net Indirect Tax 70
(x) Change in Stock (-) 10

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Net Domestic Product at Market Price (NDPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in
Stock – Net Imports
NDPMP = 600 + 200 + 110 + (-10) – (-20)
= ₹ 920 crore
(i) National Income (NNPFC) = NDPMP – Net Factor Income to Abroad – Net Indirect Taxes
= 920 – 10 – 70 = ₹ 840 crore
(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

123.Find out
(i) Gross National Product at Market Price
(ii) Net Current Transfers from Abroad (All India 2012)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 1,000
(ii) Depreciation 100
(iii) Net National Disposable Income 1,500
(iv) Closing Stock 20
(v) Government Final Consumption Expenditure 300
(vi) Net Indirect Tax 50
(vii) Opening Stock 20
(viii) Net Domestic Fixed Capital Formation 110
(ix) Net Exports 15
(x) Net Factor Income to Abroad (-) 10
(i) Gross National Product at Market Price
(GNPMP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure +
Net Domestic Fixed Capital Formation + Change in Stock (Closing Stock – Opening Stock) +
Depreciation + Net Exports – Net Factor Income to Abroad
= 1,000 + 300 +110 + (20 – 20) +100 + 15 – (-10)
= ₹ 1,535 crore
(ii) Net Current Transfer from Abroad- Not in Syllabus.

124.Find out
(i) National Income
(ii) Net National Disposable Income (All India 2012)
Particulars ₹ (in Crore)
(i) Net Imports (-) 10
(ii) Net Domestic Fixed Capital Formation 100
(iii) Private Final Consumption Expenditure 600
(iv) Consumption of Fixed Capital 60
(v) Change in Stock (-) 50
(vi) Government Final Consumption Expenditure 200
(vii) Net Factor Income to Abroad 20
(viii) Net Current Transfers to Abroad 30
(ix) Net Indirect Tax 70
(x) Factor Income from Abroad 10

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(i) Gross Domestic Product at Market Price
(GDPMP) = Private Final Consumption Expenditure + Government Final Consumption Expenditure +
Net Domestic Fixed Capital Formation + Change in Stock + Consumption of Fixed Capital – Net
Imports
= 600 + 200 + 100 + (-50)+ 60 – (-10) = 970 – 50 = ₹ 920 crore
Again,
National Income (NNPFC) = GDPMP – Net Factor Income to Abroad – Net Indirect Tax –
Consumption of Fixed Capital
= ₹ 920– 20 – 70 – 60
= ₹ 770 crore
(ii) Net National Disposable Income (NNDI) – Not in Syllabus.

125.How will you treat the following in the calculation of Gross Domestic Product of India?
Give reasons for your answer. (AII India (C) 2012)
(i) Profits earned by a branch of foreign bank in India.
(ii) Salaries of Indian employees working in embassy of Japan in India.
(iii) Salary of residents of Japan working in Indian embassy in Japan.
(i) Profits earned by a branch of foreign bank in India will be included in the domestic product of
India as the foreign bank is located within the domestic territory of India.
(ii) Salaries of Indian employees working in embassy of Japan in India is not a part of domestic
product of India because Embassy of Japan in India is not a part of domestic territory of India.
(iii) Indian embassy in Japan is a part of domestic territory of India, therefore salaries paid to the
residents of Japan working in Indian embassy is a part of domestic product of India.

126.From the following data calculate Gross National Product at Factor Cost by (i) Income
method, and (ii) Expenditure method. (All India (C) 2012)
Particulars ₹ (in Crore)
(i) Government Final Consumption Expenditure 200
(ii) Private Final Consumption Expenditure 400
(iii) Profits 160
(iv) Net Indirect Taxes 60
(v) Rent 70
(vi) Interest 50
(vii) Compensation of Employees 300
(viii) Exports 65
(ix) Imports 95
(x) Gross Domestic Capital Formation 80
(xi) Consumption of Fixed Capital 10
(xii) Net Factor Income to Abroad 50
(i) Gross National Product at Factor Cost (GNPFC) by Income Method
= Profits + Rent + Interest + Compensation of Employees – Net Factor Income to Abroad +
Consumption of Fixed Capital
= 160 + 70 + 50 + 300 – 50 + 10 = ₹ 540 crore
(ii) Gross National Product at Factor Cost (GNPFC) by Expenditure Method
= Government Final Consumption Expenditure + Private Final Consumption Expenditure + Exports
– Imports + Gross Domestic Capital Formation – Net Indirect Taxes – Net Factor Income to Abroad
= 200 + 400 + 65 – 95 + 80 – 60 – 50 = ₹ 540 crore

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127.Calculate National Income by (i) Income method and (ii) Expenditure method from the
following data. (All India (C) 2012)
Particulars ₹ (in Crore)
(i) Profits 200
(ii) Private Final Consumption Expenditure 440
(iii) Government Final Consumption Expenditure 250
(iv) Compensation of Employees 350
(v) Gross Domestic Capital Formation 90
(vi) Consumption of Fixed Capital 20
(vii) Net Exports (-) 20
(viii) Interest 60
(ix) Rent 70
(x) Net Factor Income to Abroad 50
(xi) Net Indirect Taxes 60
(i) National Income by Income Method
= Profits + Compensation of Employees + Interest + Rent – Net Factor Income to Abroad
= 200 + 350 + 60 + 70-50 = ₹ 630 crore
(ii) National Income by Expenditure Method
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross
Domestic Capital Formation + Net Exports – Net Indirect Taxes – Consumption of Fixed Capital –
Net Factor Income to Abroad
= 440 + 250 + 90 + (-20) – 60 – 20 – 50 = ₹ 630 crore

128.Calculate National Income by (i) income method and (ii) expenditure method from the
following data. (All India (C) 2012)
Particulars ₹ (in Crore)
(i) Government Final Consumption Expenditure 2,000
(ii) Net Domestic Capital Formation 600
(iii) Consumption of Fixed Capital 70
(iv) Net Exports 60
(v) Net Indirect Taxes 200
(vi) Private Final Consumption Expenditure 4,000
(vii) Net Factor Income to Abroad 60
(viii) Compensation of Employees 3,660
(ix) Profits 1,500
(x) Rent 500
(xi) Interest 800
(xii) Dividend 300
National Income by Income Method = Compensation of Employees + Profits + Rent + Interest –
Net Factor Income to Abroad
= 3,660 + 1,500 + 500 + 800 – 60 = ₹ 6,400 crore
National Income by Expenditure Method = Private Final Consumption Expenditure + Government
Final Consumption Expenditure + Net Domestic Capital Formation + Net Exports – Net Indirect
Taxes – Net Factor Income to Abroad
= 4,000 + 2,000 + 600 + 60 – 200 – 60 = ₹ 6,400 crore

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129.Calculate Gross National Product at Factor Cost by (i) Income method, and (ii)
expenditure method, from the following data. (Delhi (C) 2012)
Particulars ₹ (in Crore)
(i) Private Final Consumption Expenditure 800
(ii) Government Final Consumption Expenditure 300
(iii) Compensation of Employees 600
(iv) Net Imports 50
(v) Gross Domestic Capital Formation 150
(vi) Consumption of Fixed Capital 20
(vii) Net Indirect Taxes 100
(viii) Net Factor Income from Abroad (-) 70
(ix) Dividend 150
(x) Rent 120
(xi) Interest 80
(xii) Undistributed Profits 80
(xiii) Social Security Contributions by Employers 60
(xiv) Corporate Tax 50
(i) Gross National product at Factor Cost (GNPFC) by Income method
= Compensation of Employees + Dividend + Undistributed Profits + Corporate Tax +
Rent+Interest + Net Factor Income from Abroad + Consumption of Fixed Capital
= 600 + 150 + 80 + 50 + 120 + 80 + (-70) + 20
= ₹ 1,030 crore
(ii) Gross National Product at Factor Cost (GNPFC) by Expenditure method
= Private Final Consumption Expenditure+Government Final Consumption Expenditure – Net
Imports + Gross Domestic Capital Formation – Net Indirect Tax+Net Factor Income from abroad
= 800 + 300 – 50 + 150 – 100 + (-70) = ₹ 1,030 crore

130.Calculate (i) Net Domestic Product at Factor Cost and (ii) Private Income from the
following data. (All India 2011)
Particulars ₹ (in Crore)
(i) Domestic Product Accruing to Government 300
(ii) Wages and Salaries 1,000
(iii) Net Current Transfers to Abroad (-) 20
(iv) Rent 100
(v) Interest Paid by Production Units 130
(vi) National Debt Interest 30
(vii) Corporation Tax 50
(viii) Current Transfers by Government 40
(ix) Contribution to Social Security Schemes by Employers 200
(x) Dividends 100
(xi) Undistributed Profits 20
(xii) Net Factor Income from Abroad 0
(i) Net Domestic Product at Factor Cost (NDPFC) = Wages and Salaries + Rent + Interest Paid by
Production Units + Corporation Tax + Dividends + Undistributed Profits + Contribution to Social
Security Schemes by Employers
= 1,000 + 100 + 130 + 50 + 100 + 20 + 200
= ₹ 1,600 crore
(ii) Private income – Not in Syllabus.
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131.Calculate (i) Net National Product at Market Price and (ii) Private Income from the
following data. (All India 2011)
Particulars ₹ (in Crore)
(i) Net Current Transfers to Abroad 30
(ii) Mixed Income 600
(iii) Subsidies 20
(iv) Operating Surplus 200
(v) National Debt Interest 70
(vi) Net Factor Income to Abroad 10
(vii) Compensation of Employees 1,400
(viii) Indirect Tax 100
(ix) Domestic Product Accruing to Government 350
(x) Current Transfers by Government 50
(i) Net National Product at Market Price (NNPMP) = Compensation of Employees + Operating
Surplus + Mixed Income + (Indirect Tax – Subsidies) – Net Factor Income to Abroad
= 1,400 + 200 + 600 + (100 – 20) – 10
= ₹ 2,270 crore
(ii) Private Income – Not in Syllabus.

132.Calculate
(i) Gross National Product at Market Price and and
(ii) Personal Disposable Income from the following data. (All India 2011)
Particulars ₹ (in Crore)
(i) Net Factor Income to Abroad 10
(ii) Private Income 1,700
(iii) Operating Surplus 300
(iv) Corporation Tax 150
(v) Undistribued Profits 30
(vi) Mixed Income 500
(vii) Consumption of Fixed Capital 100
(viii) Personal Taxes 200
(ix) Compensation of Employees 1,200
(x) Net Indirect Tax 250
(i) Gross National Product at Market Price (GNPMP) = Operating Surplus + Mixed Income +
Compensation of Employees + Net Indirect Tax – Net Factor Income to Abroad + Consumption of
Fixed Capital
= 300 + 500 + 1,200 + 250 – 10 + 100 = ₹ 2340 crore
(ii) Personal Disposable Income – Not in Syllabus.

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133.Calculate National Income and Gross National Disposable Income from the following.
(Delhi 2011)
Particulars ₹ (in Crore)
(i) Net Current Transfers to the Rest of the World (-) 5
(ii) Private Final Consumption Expenditure 500
(iii) Consumption of Fixed Capital 20
(iv) Net Factor Income to Abroad (-) 10
(v) Government Final Consumption Expenditure 200
(vi) Net Indirect Tax 100
(vii) Net Domestic Fixed Capital Formation 120
(viii) Net Imports 30
(ix) Change in Stock (-) 20
National Income (NNPFC) = Private Final Consumption Expenditure + Government Final
Consumption Expenditure + Net Domestic Fixed Capital Formation + Change in S
took+Consumption of Fixed Capital – Net Imports – Net Indirect Tax – Net Factor Income to
Abroad – Consumption of Fixed Capital
= 500 + 200 + 120 + (-20) + 20 – 30 – 100 – (-10) – 20
= 700 + 100 + 10 – 130
= ₹ 680 crore
Gross National Disposable Income (GNDI) – Not in Syllabus

134.Calculate Net National Product at Market Price and Gross National Disposable Income.
(Delhi 2011)
Particulars ₹ (in arab)
(i) Consumption of Fixed Capital 40
(ii) Change in Stocks (-) 10
(iii) Net Imports 20
(iv) Gross Domestic Fixed Capital Formation 100
(v) Private Final Consumption Expenditure 800
(vi) Net Current Transfer to Rest of the World 5
(vii) Government Final Consumption Expenditure 250
(viii) Net Factor Income to Abroad 40
(ix) Net Indirect Tax 130
Net National Product at Market Price (NNPMP) = Private Final Consumption Expenditure +
Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change
in Stock – Consumption of Fixed Capital – Net Factor Income to Abroad – Net Imports
NNPMP = 800 + 250 + 100 + (-10) – 40 – 40 – 20
= 1,150 – 110
= ₹ 1,040 arab
Gross National Disposable Income (GNDI) – Not in Syllabus.

M.SAKTHIVEL – 9787576858
MA(HIS).,MA(SWA).,M.Ed.,D.CSE.,PGDCA.,MDSA.,CLP.,DCA.,DDTP.,
E-Mail: mpsakthivelpgt@gmail.com

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135.Find out Gross National Product at Market price and Net National Disposable Income
from the following. (Delhi 2011)
Particulars ₹ (in arab)
(i) Opening Stock 50
(ii) Private Final Consumption Expenditure 1,000
(iii) Net Current Transfers to Abroad 5
(iv) Closing Stock 40
(v) Net Factor Income to Abroad (-) 10
(vi) Government Final Consumption Expenditure 300
(vii) Consumption of Fixed Capital 30
(viii) Net Imports 20
(ix) Net Domestic Fixed Capital Formation 150
Gross National Product at Market Price (GNPMP)
= Private Final Consumption Expenditure + Government Final Consumption Expenditure + Net
Domestic Fixed Capital Formation + Closing Stock – Opening Stock – Net Imports – Net Factor
Income to Abroad + Consumption of Fixed Capital
= 1,000 + 300 + 150 + 40 – 50 – 20 – (-10) + 30
= 1,530 – 70 = ₹ 1,460 arab
Net National Disposable Income – Not in Syllabus.

136.Calculate
(i) Gross Domestic Product at Market Price and
(ii) Factor Income from Abroad, from the following data. (All India 2010)
Particulars ₹ (in Crore)
(i) Profits 500
(ii) Exports 40
(iii) Compensation of Employees 1,500
(iv) Gross National Product at Factor Cost 2,800
(v) Net Current Transfers from Rest of The World 90
(vi) Rent 300
(vii) Interest 400
(viii) Factor Income to Abroad 120
(ix) Net Indirect Taxes 250
(x) Net Domestic Capital Formation 650
(xi) Gross Fixed Capital Formation 700
(xii) Change in Stock 50

(i) Gross Domestic Product at Market Price (GDPMP) = Compensation of Employees + Profits + Rent
+ Interest + Gross Fixed Capital Formation + Change in Stock – Net Domestic Capital Formation +
Net Indirect Taxes
= 1,500 + 500 + 300 + 400 + 700 + 50 – 650 + 250 = ₹ 3,050 crore

(ii) Gross National Product at Factor Cost (GNPFC) = GDPMP – Net Indirect Taxes + Factor Income
from Abroad – Factor Income to Abroad
2,800 = 3050 – 250 + Factor Income from Abroad – 120
2,800 = 2680 + Factor Income from Abroad
⇒ Factor Income from Abroad = 2,800 – 2,680 = ₹ 120 crore

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137.How will you treat the following while estimating National Income of India?
(i) Dividend received by an Indian firm from its investment in shares of a foreign company.
(ii) Money received by a family in India from relatives working abroad.
(iii) Interest received on loan given to a friend for purchasing a car. (Delhi 2010)
(i) Dividend received by an Indian firm from its investment in shares of a foreign company will be
„included‟ in the estimation of National Income, as dividend is a part of profit and treated as factor
income from abroad which is added to domestic income.
(ii) Money received by a family in India from relatives working abroad will „not be included‟ while
estimating National Income, as it is merely remittance from abroad and no flow of goods or
services are involved.
(iii) Interest received on loan given to a friend for purchasing a car will „not be included‟ in the
estimation of National Income as loan is given for consumption purpose.

138.How will you treat the following while estimating National Income of India? Give
reasons for your answer. (All India 2010)
(i) Dividend received by a foreigner from investment in share of an Indian company.
(ii) Profits earned by a branch of an Indian bank in Canada.
(iii) Scholarship given to Indian students studying in India by a foreign company.
(i) Dividend received by a foreigner from investment in shares of an Indian company „will be
deducted‟ from National Income as it is factor income to abroad.
(ii) Profits earned by a branch of Indian bank in Canada is factor income received from abroad. It is
„included‟ in National Income.
(iii) Scholarship given to Indian students studying in India by a foreign firm will „not be included‟
while estimating National Income, as it is a transfer payment.

139.Explain the problem of double counting in estimating National Income, with the help of
an example. Also explain, two alternative ways of avoiding the problem while estimation of
National Income. (All India 2010)
The counting of the value of a commodity more than once while estimation of National Income is
called double counting. This leads to over estimation of the value of goods and services produced.
In other words, problem of double counting arises when the value of intermediate goods is also
added in total output, e.g. suppose if we include the price of wheat, in the price of flour and also in
price of bread, then It will lead to the problem of double counting, as the price of wheat is included
three time and that of flour two times.

The problem of double counting can be avoided by the use of following methods of calculating
Gross Domestic Product (GDP)
(i) Final output or final product method In this method, only final products (goods and services) are
added to obtain the GDP. Intermediate products are ignored. Here, final products are only those
products which are ready for end use or consumption by their final users (consumers or
producers).
(ii) Value added method The value added by a firm is the difference between value of output and
the value of intermediate products of each firm of the country. The sum of „value added‟ by all the
firms gives us the GDP of the country. Hence, the problem of double counting is avoided.
Value Added by a Firm = Value of Output of the Firm – Intermediate Consumption of the Firm.

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140.Calculate (i) Gross Domestic Product at Market Price and (ii) Factor Income to Abroad
from the following data. (All India 2010)
Particulars ₹ (in Crore)
(i) Compensation of Employees 1,000
(ii) Net Exports (-) 50
(iii) Profits 400
(iv) Interest 250
(v) Rent 150
(vi) Gross National Product at Factor Cost 1,850
(vii) Gross Domestic Capital Formation 220
(viii) Net Fixed Capital Formation 150
(ix) Change in Stock 20
(x) Factor Income from Abroad 30
(xi) Net Indirect Taxes 100
Net Domestic Product at Factor Cost (NDPFC) = Compensation of Employees + Rent + Interest
+Profit
= 1,000 + 150 + 250 + 400 = ₹ 1,800 crore
(i) Gross Domestic Product at Market Price (GDPMP) = NDPFC + Net Indirect Taxes + Depreciation
= 1,800 + 100 +50 = ₹ 1,950 crore
Depreciation = 220 – (150 + 20) = 220 -170 = ₹ 50 crore
(ii) Gross National Product at Factor Cost (GNPFC)= GDPMP – Net Indirect Taxes + (Factor Income
from Abroad – Factor Income to Abroad)
1,850 = 1,950 – 100 + (30 – Factor Income to Abroad)
⇒ Factor Income to Abroad = 1,850 – 1,820 = ₹ 30 crore

141.From the following data calculate (i) Gross Domestic Product at Market Price and (ii)
Factor Income from Abroad. (All India 2010)
Particulars ₹ (in Crore)
(i) Gross National Product at Factor Cost 6,150
(ii) Net Exports (-) 50
(iii) Compensation of Employees 3,000
(iv) Rent 800
(v) Interest 900
(vi) Profit 1,300
(vii) Net Indirect Taxes 300
(viii) Net Domestic Capital Formation 800
(ix) Gross Fixed Capital Formation 850
(x) Change in Stock 50
(xi) Dividend 300
(xii) Factor Income to Abroad 80
(i) Gross Domestic Product at Market Price (GDPMP) = Compensation of Employees + Rent +
Interest + Profit + Net Indirect Tax + (Gross Fixed Capital Formation + Change in Stock – Net
Domestic Capital formation)
= 3,000 + 800 + 900 + 1,300 + 300 + (850 + 50 – 800)
= 6,300 + 100 = ₹ 6,400 crore
(ii) Factor Income from Abroad
= GNPFC – GDPMP + Net Indirect Tax+Factor Income to Abroad
= 6,150 – 6,400 + 300 + 80 = 6,530 – 6,400 = ₹ 130 crore
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142.From the following data, calculate (i) Gross Domestic Product at Factor Cost and (ii)
Factor Income to Abroad. (Delhi 2010)
Particulars ₹ (in Crore)
(i) Compensation of Employees 800
(ii) Profits 200
(iii) Dividends 50
(iv) Gross National Product at Market Price 1,400
(v) Rent 150
(vi) Interest 100
(vii) Gross Domestic Capital Formation 300
(viii) Net Fixed Capital Formation 200
(ix) Change in Stock 50
(x) Factor Income from Abroad 60
(xi) Net Indirect Taxes 120
(i) Gross Domestic Product at Factor Cost (GDPFC) = Compensation of Employees + Profits + Rent
+ Interest + Gross Domestic Capital Formation – Net Fixed Capital Formation – Change in Stock
= 800 + 200 + 150 + 100 + 300 – 200 – 50 = 1,550 – 250 = ₹ 1,300 crore
(ii) Factor Income to Abroad GDPFC = GNPMP – Net Factor Income from Abroad – Net Indirect Taxes
1,300 = 1,400 – (Factor Income from Abroad – Factor Income to Abroad) – 120
1,300 = 1,400 – (60 – Factor Income to Abroad) – 120
Factor Income to Abroad = 1,300 – 1,400 + 60 + 120 = ₹ 80 crore

143.From the following data, calculate (i) Gross Domestic Product at Factor Cost and (ii)
Factor Income to Abroad. (Delhi 2010)
Particulars ₹ (in Crore)
(i) Gross Domestic Capital Formation 600
(ii) Interest 200
(iii) Gross National Product at Market Price 2,800
(iv) Rent 300
(v) Compensation of Employees 1,600
(vi) Profits 400
(vii) Dividends 150
(viii) Factor Income from Abroad 50
(ix) Change in Stock 100
(x) Net Indirect Taxes 240
(xi) Net Fixed Capital Formation 400
(xii) Net Exports (-) 30

(i) Gross Domestic Product at Factor Cost (GDPFC) = Compensation of Employees + Rent + Profits
+ Interest + (Gross Domestic Capital Formation – Net Fixed Capital Formation – Change in Stock
= 1,600 + 300 + 400 + 200 + (600 – 400 – 100)
= ₹ 2,600 crore

(ii) Net Factor Income to Abroad

GNPMP = GDPFC + NFIA + Net Indirect Tax
2,800 = 2,600 + (50 – Factor Income to Abroad) + 240
Factor Income to Abroad = 2,600 – 2,800 + 50 + 240 = ₹ 90 crore

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 CHAPTER 3 - MONEY AND BANKING
MULTIPLE CHOICE QUESTIONS
1.Money supply includes (All India (C) 2016)
(a) all deposits in banks (b) only demand deposits in banks
(c) only time deposits in banks (d) currency with the banks
2.Who regulates money supply? (All India (C) 2016)
(a) Government of India (b) Reserve Bank of India
(c) Commercial Banks (d) Planning Commission
3.Which of the following is not a function of money? (Delhi (C) 2015)
(a) Medium of exchange (b) Price stability
(c) Store of value (d) Unit of account
4.Which of the following is not a problem of barter system of exchange? (Delhi (C) 2015)
(a) Store of value (b) Double coincidence of wants
(c) Unit of account (d) Unemployment
5.In order to encourage investment in the economy, the Central Bank may (All India 2019)
(a) Reduce Cash Reserve Ratio (b) Increase Cash Reserve Ratio
(c) Sell Government securities in open market (d) Increase Bank Rate
6.Credit creation by commercial banks is determined by (April re-exam 2018)
(a) Cash Reserve Ratio (CRR) (b) Statutory Liquidity Ratio (SLR)
(c) Initial deposits (d) All of the above
7.The Central Bank can increase availability of credit by (March 2018)
(a) Raising repo rate (b) Raising reverse repo rate
(c) Buying government securities (d) Selling government securities
8.The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India
is called (Delhi 2017)
(a) Statutory liquidity ratio (b) Deposit ratio
(c) Cash reserve ratio (d) Legal reserve ratio
9.Demand deposits include . (All India 2017)
(a) saving account deposits and fixed deposits
(b) saving account deposits and current account deposits
(c) current account deposits and fixed deposits
(d) All types of deposits
10.The definition of money includes
(a) currency and foreign exchanges
(b) currency demand deposit and other financial assets
(c) only currency and coins
(d) currency and demand deposits
11.Which of the following is an example of plastic money?
(a) Prepaid gift card (b) Traveller‟s cheque (c) Currency note (d) Demand draft
12.Supply of money is concept.
(a) stock (b) flow (c) income (d) All of these
13.measures of money supply issued by RBI are known as broad money.
(a) M1 and M1 (b) M2 and M3 (c) M3 and M4 (d) High powered money
14.The difference between lending rates and borrowing rates of a commercial bank, is called
(a) capital (b) reserves (c) profits (d) All of the above
15.LRR (Legal Reserve Ratio) includes
(a) CRR (Cash Reserve Ratio) (b) Repo
(c) SLR (Statutory Liquidity Ratio) (d) Both (a) and (c)

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16.The process of credit/money creation in an economy is affected by
(a) initial deposits amount (b) LRR (c) bank rate (d) Both (a) and (b)
17.If LRR is 20% and initial deposit is Rs 10,000 in a commercial bank, find total money
creation amount.
(a) Rs 5,000 (b) Rs 5,00,000 (c) Rs 50,000 (d) Rs 2,000
18.Which is not a feature of fixed deposit accounts?
(a) Specific period of time (b) Higher interest rate
(c) Payable on demand (d) Tax benefit
19.Central Bank is a banker to
(a) State Government (b) Other banks (c) Central Government (d) All of the above
20.Commercial banks maintain for liquidity and to honour the demand of cash withdrawals
by their customers.
(a) SLR (b) margin requirements (c) CRR (d) repo
21.What can RBI do, if it wants to increase credit in the economy?
(a) Decrease repo and CRR (b) Increase repo and CRR
(c) Increase repo and decrease CRR (d) Decrease repo and increase CRR
22.Functions performed by Central Bank related to government does not include which of
the following?
(a) RBI manages public debt
(b) RBI also sells treasury bills
(c) RBI make advances which are repayable within 90 days
(d) RBI comes to rescue the other banks in times of financial crises

IMPORTANT QUESTION ANSWER

1.State the two components of M1 measure of money supply. (April re-exam 2018)
M1 includes, (any 2)
 currency held by public in form of notes and coins.
 net demand deposit held by commercial banks.
 other deposits held by RBI.
2.Define money supply. (Delhi 2018,2011(C). 2010)
The total stock of money in circulation among the public at a particular point of time is called
money supply.
3.State the components of money supply. (Delhi (C) 2015, 2013, 2010: All India 2013) Or
What is included in money supply? (Delhi (C) 2012,2011)Or
Name the two components of money supply. All India 2010
The following are included in money supply
 Currency notes held by public.
 Demand deposits of Commercial Banks.
4.What is barter? (Delhi (C) 2013)
Barter is a system of exchange, where goods are exchanged for goods.
5.Define money. (All India (C) 2012.2011)OrGive the meaning of money. (All India 2010)
Money is defined as an object that is commonly accepted as a medium of exchange. It is an
intermediate good which is acceptable to both the parties i.e. buyers and sellers.
6.Explain the store of value function of money. (Delhi 2017: All India (C) 2014)Or
Explain the store of value as function of money. (Foreign 2014)
Money is an asset that retains its value over time. People store their wealth in the form of money,
without fearing for loss in its value. Money overcomes the problem of storing perishable item
under barter system of exchange. With money, people hold liquidity and value in a much more
convenient manner.
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7.State the meaning and components of money supply. (Delhi 2017)Or
Explain the concept of money supply. (Delhi (C) 2013)Or
Define money supply and explain its components. (Delhi 2014, Foreign 2014)
The total stock of money in circulation among the public at a particular point of time is called
money supply.
Money supply comprises of the following components:
 Currency (notes and coins) held by the public.
 Net demand deposits and time deposits held by the commercial banks.
 Other deposits held by the Central Bank.
 Total deposits with post office (excluding National Saving Certificates).

8.Explain „difficulty in storing wealth problem faced in barter system of exchange.

(All India 2017)
In barter system of exchange, goods were exchanged for goods. Due to absence of money in
barter system, wealth was stored in terms of goods. Storing of goods carried some problems like
cost of storage, loss in value of goods due to passage of time, difficulty to transfer from one place
to other, etc. So, it was difficult for people to store their purchasing power under barter system of
exchange.

9.Explain the medium of exchange function of money. (All India 2017,2013)Or

Explain the significance of medium of exchange function of money. (Delhi 2014)
The primary function of money is, acting as a medium of exchange between two parties involved in
a transaction. It avoids the practical problems of wastage of time and resources, involved in the
barter system of an exchange and it improves the transactional efficiency. It also promotes
allocational efficiency in the trade and production of goods and services. Hence, it can be said that
money has separated the acts of sales and purchases.

10.Explain the significance of the unit of account function of money. (All India 2014)Or
Explain the „unit of account‟ function of money. (All India (C) 2014, 2013)
Money serves as a unit of value or common measure of value in terms of which the value of all
goods and services are measured. This helps in measuring the exchange values of commodities.
The prices of all the goods and services can be fixed in terms of money and the problem of
expressing the value of each commodity in terms of quantities of other goods can be avoided.
This function of money makes it possible to measure the value of different goods and services in a
common value and facilitates the keeping of business accounts. It would not be possible to keep
business account unless all business transaction are expressed in terms of money.

11.Explain the significance of standard of deferred payment function of money. (All India
2014, 2012)
Money simplifies the mechanism of deferred payments significantly. Deferred payments means
future payment. When we take a loan from somebody, we not only pay the principal amount but
also the interest amount. Under barter system of exchange, it was very difficult to make such
transactions. As money maintains a standard value over a period of time, provided price remains
constant, deferred payments can be easily made.

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12.Explain the problem of double coincidence of wants faced under barter system. How has
money solved it? (Delhi 2013)Or
Explain how money has solved the problem of double coincidence of wants. (Delhi (C) 2013)
Barter system can only work, when both the persons are ready to exchange each other‟s goods i.e.
person A should have the good person B wants and vice-versa. But usually this type of double
coincidence is rare, especially in modem times.
Money eliminates the problem of double coincidence of wants. In modern times, the buyer and the
seller exchange goods for money, due to common measure of value function of money. It
facilitates exchanges of goods and services and helps in carrying on trade smoothly.

13.Explain the „medium of exchange function of money. How has it solved the related
problem created by barter? (All India 2016)
Medium of exchange function of money: Money serves as a unit of value or common measure of
value in terms of which the value of all goods and services are measured. This helps in measuring
the exchange values of commodities. The prices of all the goods and services can be fixed in terms
of money and the problem of expressing the value of each commodity in terms of quantities of
other goods can be avoided.
This function of money has solved the problem of „double co-incidence of wants‟ created by the
barter system of exchange. Under the barter system, it was very rare when the owner of some
goods or services could find someone who wanted his goods or services and at the same time, he
possessed that goods or services that the first person wanted, e.g. a man wanting rice in exchange
of wheat had to find a man wanting wheat in exchange of rice.

This made the exchange of goods and services difficult. But the evolution of money has solved this
problem. A person can sell his wheat in the market for money and from that money he can
purchase rice. So, the „medium of exchange‟ function of money has solved the problem of „double
co-incidence of wants‟ related with the barter system of exchange.

14.Explain the „standard of deferred payment‟ function of money. How has it solved the
related problem created by barter? (All India 2016)
Answer:
Money simplifies the mechanism of deferred payments significantly. Deferred payments means
future payment. When we take a loan from somebody, we not only pay the principal amount but
also the interest amount. Under barter system of exchange, it was very difficult to make such
transactions. As money maintains a standard value over a period of time, provided price remains
constant, deferred payments can be easily made.
The related problem created by the barter system of exchange was „lack of standard of deferred
payments‟. In barter system, it was difficult to return value in future in terms of goods of same
quantity and quality. Therefore, future payments regarding interest and loans became difficult. But
money has solved this problem. Loans can be re-paid back in money and interest payments can
also be made in money.
15.Explain the „store of value‟ function of money. How has it solved the related problem
created by barter? (Delhi 2016)

Money is an asset that retains its value over time. People store their wealth in the form of money,
without fearing for loss in its value. Money overcomes the problem of storing perishable item
under barter system of exchange. With money, people hold liquidity and value in a much more
convenient manner.

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The related problem of barter which this function of money has solved is the problem of „lack of
store of value‟. Due to absence of money in barter system, wealth was stored in terms of goods.
Storing of goods carried sortie problems like cost of storage, loss of value, difficult to transfer from
one place to other etc. So, it was difficult for people to store their purchasing power, under the
barter system of exchange. But this problem was solved with the emergence of money as a
medium of exchange.

16.Explain the „unit of account‟ function of money. How has it solved the related problem
created by barter? Delhi 2016
Money serves as a unit of value or common measure of value in terms of which the value of all
goods and services are measured. This helps in measuring the exchange values of commodities.
The prices of all the goods and services can be fixed in terms of money and the problem of
expressing the value of each commodity in terms of quantities of other goods can be avoided.
The related problem of barter which this function of money has solved is the problem of Tack of
common measure of value‟.In barter system, there was absence of a common unit of measurement
in which the value of goods and services can be measured. In the absence of common unit, proper
valuation was not possible.
e.g. cloth is measured in metre (i.e. length) while milk is measured in litre (i.e. capacity), hence both
cannot be measured in a single unit, thereby complicating the process of exchange. But the
evolution of money has solved this problem, and now every good or service can be measured in
terms of money.

17.How does money overcome the problems of barter system? Explain briefly.
(All India 2011)
Money overcomes the problem of barter system by replacing the C-C economy with monetary
economy, as is explained below.
 In barter system, there was a problem of double coincidence of wants. It was very difficult to
match the expectations of two different individuals. Thus, money was evolved to overcome
the problem of coincidence of wants, as it was very difficult to find two persons having
goods needed by each other in the barter system of exchange.
 When there was no money, it was difficult to give common unit of value to measure goods
or services but when money evolved it gave a common unit of account to every goods and
services.
 Money facilitates the contractual and future payments i.e. deferred payments which, were
very difficult to pay under the barter system.
 Money is also a legal tender which has a general acceptance which was not the case under
the barter system.

18.Define „money multiplier‟. (All India 2019)

Money multiplier refer to the fraction by which money get multiplied in the process by the
commerical banks.
19.Define demand deposits. (All India 2019, 2015 (C). 2014, 2012, 2011, 2010; Delhi 2014,
2013, 2012)
Demand deposits are current and savings account deposits with banks or other financial
institutions, which are payable on demand.

20.State the role played by the Central Bank as the “lender of last resort”. (All India 2019)
Central Bank functions as a lender of last resort which means, when commercial banks fails to get
credit from any other source, Central Bank help commercial banks by lending money.
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21.What is reverse repo rate? (All India (C) 2016)
It is the rate at which the Central Bank accepts deposits of commercial banks.

22.Give the meaning of cash reserve ratio. (Delhi (C) 2016)Or

What is meant by cash reserve ratio? (All India (C) 2015; All India (C) 2014)Or
Define cash reserve ratio. (Delhi 2011)
The percentage of total deposits, which a Commercial Bank needs to keep as reserve with the
Central Bank, is termed as Cash Reserve Ratio.

23.What are time deposits? (All India 2014, All India (C) 2013,2012; Delhi (C) 2014, 2010)Or
What are time deposits in banks? (All India (C) 2013)
Time deposits are fixed term and recurring deposits having a fixed period of maturity, where the
term of deposit may vary. Cheques cannot be issued against them and they are not payable on
demand but these deposits yield interests for the depositor.

24.What is a Central Bank? (Foreign 2014)

The Central Bank is an apex banking institution which controls the entire banking system and
money supply of a country. Reserve Bank of India is the Central Bank of India.

25.What is statutory liquidity ratio? (All India (C) 2014)Or

Define statutory liquidity ratio. (All India 2011)
Commercial Bank is required to maintain a fixed percentage of its assets in the form of cash or
other liquid assets. This is termed as Statutory Liquidity Ratio.

26.What is meant by bank rate? (All India (C) 2014)Or

What is bank rate? (Delhi (C) 2012)
The rate at which Commercial Banks can borrow funds from Central Bank without any collateral
security.

27.Explain the bankers‟ bank function of the Central Bank. All India 2017Or
Explain the role of Central Bank as banker‟s bank. (All India (C) 2014)Or
Explain the banker‟s bank function of Central Bank. (Foreign 2016: All India 2015,2014: Delhi
(C) 2013, Delhi 2012, All India (C) 2013)
Central Bank keeps the cash balances of Commercial Banks and issues loans to them on
requirements in the same manner as the Commercial Bank does for its customers. A Central Bank
has almost the same relation with the other Commercial Banks of the country that the Commercial
Banks have with the common public. That is why the Central Bank is also called as banker‟s bank.

28.Explain the process of credit creation by commercial banks. (All India 2017)Or
Explain the process of money creation by bank. (Delhi 2010)Or
Explain the process of money creation by Commercial Banks with the help of a numerical
example. (Delhi 2011; All India (C) 2010,2010)
Commercial banks create credit out of their total deposits which are many more times greater than
their initial level of deposits. Money created by commercial banks can be ascertrained by using the
given formula
Money Creation = Initial Deposits × 1LRR
For example, let the LRR be 20% and Initial deposits = Rs 10,000
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As required, the banks keep 20%, i.e. Rs 2,000 as cash and lend the remaining amount of Rs 8,000.
Further, it is also assumed that, persons receiving the debt will deposit the amount in the bank.
This will result in banks receiving fresh deposits of Rs 8,000. The banks again keep ? 1,600 as cash
and lend Rs 6,400, which is also 80% of the last deposit, this money also comes back to the banks
leading to a fresh deposit of Rs 6,400. In this way, the money goes on multiplying and ultimately,
total money creation according to the formula, will be
Money Creation = 10,000 × 1 / 20
= Rs 50,000

29.Explain the currency authority function of Central Bank. (Foreign 2014)Or

Explain the „bank of issue‟ function of the Central Bank. (All India 2016; Delhi 2016)
Central Bank of the country has the sole authority of currency issue in the country, which gives it a
monopoly in issuing currency. As in India RBI issues the currency, while currency notes are printed
by the subsidiaries of RBI and coins are minted by the Central Government of the country. However
both currency notes and coins are circulated by RBI, which gives RBI the power to control,
supervise and enhance the money supply in the economy.

30.Explain lender of the last resort function of the Central Bank. (Delhi 2014,2010: All India
2013, 2010)Or
Explain the role of Reserve Bank of India as lender of last resort. (March 2018: Delhi 2014; All
India 2012)
When a Commercial Bank fails to accommodate its financial requirements then it can approach the
Central Bank and the Central Bank acts as the lender of last resort. The Central Bank issues loans to
a Commercial Bank against specified and approved securities of the bank. In this way, the Central
Bank ensures the smooth functioning of Commercial Banks and appropriate flow of credit in the
economy.

31.Explain the role of Central Bank as a „Banker to the government‟. (Delhi (C) 2014)Or
Explain the banker to the government function of the Central Bank. (Delhi 2013,2010: All
India 2010)Or
Explain „banker to the government‟ function of the Central Bank. (Delhi 2017)
Central Bank acts as a banker, advisor and agent to the Central and State Governments. As the
common public keep their cash balance, demand deposits and time deposits with Commercial
Banks, in the same way the Central Bank manages the cash reserves and demand deposits of
governments in current accounts. It carries out the exchange, remittance and other banking
operations on behalf of the government, i.e. the Central Bank maintains same relation with the
government as Commerical Banks has with the general public.

32.Explain the meaning of cash reserve ratio and statutory liquidity ratio. (All India 2010)
Cash reserve ratio: The percentage of total deposits, which a Commercial Bank needs to keep as
reserve with the Central Bank, is termed as Cash Reserve Ratio.
Statutory liquidity ratio: Commercial Bank is required to maintain a fixed percentage of its assets in
the form of cash or other liquid assets. This is termed as Statutory Liquidity Ratio.

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33.Distinguish between „Qualitative and Quantitative tools‟ of credit control as may be used
by a Central Bank. (All India 2019)
Answer:
Central Bank uses different instrument to control money supply. These tools can be broadly
classified as
(i) Quantitative tools These are those which directly impacts the quantity of money supply in the
economy. These tools are very effective to either increase or decrease money supply. These tools
includes
 Bank rate
 Legal reserve ratio
 Open market operations
 Repo and reverse repo rate
(ii) Qualitative tools These on the other hand, are those which impacts the quality of money supply
not volume. These are not much effective tool to control money supply. It includes
 Margin requirement
 Moral suasion
 Selective credit control.

34.Discuss briefly the following functions of a Central Bank. (All India 2019)
(i) Banker‟s bank
(ii) Lender of last resort
(i) Central Bank keeps the cash balances of Commercial Banks and issues loans to them on
requirements in the same manner as the Commercial Bank does for its customers. A Central Bank
has almost the same relation with the other Commercial Banks of the country that the Commercial
Banks have with the common public. That is why the Central Bank is also called as banker‟s bank.
(ii) When a Commercial Bank fails to accommodate its financial requirements then it can approach
the Central Bank and the Central Bank acts as the lender of last resort. The Central Bank issues
loans to a Commercial Bank against specified and approved securities of the bank. In this way, the
Central Bank ensures the smooth functioning of Commercial Banks and appropriate flow of credit
in the economy.

35.Discuss briefly the „credit controller‟ function of a Central Bank. (All India 2019)
By credit control, it is meant that flow of credit can be regulated in such a way that it may rise or
fall according to the needs of the economy. This is done by the Central Bank by using two types of
tools which are stated below
(i) Quantitative tools These are those which directly impacts the quantity of money supply in the
economy. These tools are very effective to either increase or decrease money supply. These tools
includes
 Bank rate
 Legal reserve ratio
 Open market operations
 Repo and reverse repo rate
(ii) Qualitative tools These on the other hand, are those which impacts the quality of money supply
not volume. These are not much effective tool to control money supply. It includes
 Margin requirement
 Moral suasion
 Selective credit control.

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36.Explain, using a numerical example, how a reduction in reserve deposit ratio, affects the
credit creation power of the banking svstem. (All India 2019)
An increase in bank lending due to decrease in legal reserves should translate to an expansion of a
country‟s money supply. The size of the multiplier depends on the percentage of deposits that
banks are required to hold as reserves. In other words, it is the money used to create more money
and is calculated by dividing total bank deposits by the reserve requirement.
To calculate this, start with the amount banks initially take in through deposits and divide this by
the reserve ratio. If, for example, the reserve requirement is 20% for every Rs 100, a customer
deposits into a bank (from say earlier 25%), Rs 20 must be kept in reserve out of each Rs 100
deposited. However, the remaining Rs 80 can be loaned out to other bank customers. This Rs 80 is
then deposited by the customers into another bank account, which in turn must also keep 20% or
Rs 16 in reserve, but can lend out the remaining Rs 64.
This cycle continues as more people deposit money and more banks continue lending it until
finally the Rs 100 initially deposited creates a total of Rs 500 (Rs 100/0.2) in deposits. As money
multiplier is inversely associated with legal reserves ratio,
i.e. money multiplier = 1 / LRR and money created = Initial Bank Deposits × Money Multiplier.
So, if LRR is 25%, banks will create 4 time more money while if LRR falls to 20%, banks will create 5
times more money and so on.
37.Discuss briefly the credit creation process of the banking system using a hypothetical
numerical example. (All India 2019)Or
Explain the credit creation role of Commercial Banks with the help of a numerical example.
(All India (C) 2014,2013: Delhi (C) 2014)Or
How do Commercial Banks create deposits? Explain. Delhi 2013 Or
How does a Commercial Bank create money? All India 2010
Commercial banks create credit out of their total deposits which are many more times greater than
their initial level of deposits. Money created by commercial banks can be ascertrained by using the
given formula
Money Creation = Initial Deposits × 1 / LRR
For example, let the LRR be 20% and Initial deposits = Rs 10,000
As required, the banks keep 20%, i.e. Rs 2,000 as cash and lend the remaining amount of Rs 8,000.
Further, it is also assumed that, persons receiving the debt will deposit the amount in the bank.
This will result in banks receiving fresh deposits of Rs 8,000. The banks again keep ? 1,600 as cash
and lend Rs 6,400, which is also 80% of the last deposit, this money also comes back to the banks
leading to a fresh deposit of Rs 6,400. In this way, the money goes on multiplying and ultimately,
total money creation according to the formula, will be
Money Creation = 10,000 × 1 / 20
= Rs 50,000
38.Explain, using a numerical example, how an increase in reserve deposit ratio affects the
credit creation power of the banking system. (All India 2019)
Reverse deposit ratio is the rate of interest at which commercial banks can park their surplus funds
with the Central Banks for a short period of time. Increase in reverse deposit rate will reduce the
credit supply and vice-versa. The following numerical example will make this clear Suppose the
reverse deposit ratio is 3%. At this rate, commercial banks are willing to deposit Rs 10 crore with
the Central Bank out of total deposits of Rs 50 crore. Assuming legal reserve ratio to be 10%, then
Money creation = 40 × 1 / 0.1 = Rs 400 crore
Now, reverse deposit ratio rises to 5% and at this rate commercial banks are willing to deposit Rs
20 crore with the Central Bank out of total deposits of Rs 50 crore. Now, money creation = 30 × 1 /
0.1 = Rs 300 crore. So, we see that as reverse deposit ratio rises, then credit creation falls.

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39.Explain the role of reverse repo rate in controlling money supply. (Delhi 2017)
Reverse repo is the rate of interest at which commercial banks can deposit their surplus funds with
the Central Bank for a short period of time.
It is an important quantitative tool for controlling money supply in the economy. If the Central
Bank wants to increase money supply in the economy, then it reduces the reverse repo rate. With
fall in reverse repo rate, the commercial banks reduce the deposits of surplus funds with the
Central Bank, thereby increasing the money supply. On the other hand, if the Central Bank wants to
decrease money supply, then it increases the reverse repo rate. With rise in reverse repo rate, the
commercial banks increase the deposits of surplus funds with the Central Bank, thereby decreasing
the money supply.
Thus, reverse repo rate plays an important role in controlling money supply.

40.Explain how repo rate can be helpful in controlling credit creation? (All India 2016)
Repo rate is the rate at which Reserve Bank of India (RBI) lends funds to commercial banks for a
period ranging from 1 day to 14 days. It is quite an effective quantitative tool in controlling credit
creation. If the RBI wants to decrease the level of credit creation in the country, then it increases
the Repo Rate which makes the credit dearer. As the cost of borrowings increase, the people‟s
demand for credit goes down. This also leads to a fall in liquidity. All this leads to fall in the rate of
credit creation.
On the other hand, if the RBI wants to increase the level of credit creation in the economy then it
decreases the repo rate which makes the credit cheaper. As the cost of borrowings fall, people‟s
demand for credit goes up. This leads to increase in the rate of credit creation.

41.Explain the role of cash reserve ratio in controlling credit creation. (All India 2016)
Cash Reserve Ratio (CRR) is the fraction of total deposits that each commercial bank must keep
with the Central Bank of the country, as a part of fractional reserve system.
CRR is an important quantitative tool in controlling the credit creation in the country. When the
Central Bank wants to decrease the level of credit creation in the economy, it increases the CRR. As
the CRR increases, the loanable deposits left with the commercial bank decreases. This reduces the
lending powers of the bank and as a result, the process of credit creation falls.
If on the other hand, the Central Bank wants to increase the level of credit creation in the country,
it lowers the CRR. As the CRR decreases, the loanable deposits left with the commercial banks
increases. This increases the lending powers of the banks and as a result, the level of credit creation
in the country rises.

42.Explain how „margin requirements‟ are helpful in controlling credit creation? (Delhi 2016)
„Margin requirements‟ refer to the difference between the amount of loan granted and the current
value of security offered for loans. It is an important qualitative instrument for controlling credit
creation. If the Central Bank of the country wants to expand the process of credit creation, then it
lowers the margin requirements. Lowering of margin requirements enables the borrower to borrow
more against the security offered. This increases the money supply in the economy and credit
creation expands.
On the other hand, if the Central Bank wants to contract the process of credit creation, then it
increases the margin requirements. Increasing margin requirements ensures that the borrower is
able to borrow less against the security offered. This reduces the money supply in the economy
and consequently credit creation contracts.

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43.Explain how bank rate is helpful in contrplling credit creation? (Delhi 2016)Or
How does the Central Bank control credit creation in the economy through bank rate?
Explain. (All India (C) 2014)Or
How do changes in bank rate affect money creation by Commercial Banks? (Delhi 2010)Or
How do changes in bank rate affect the money supply in an economy? Explain.
(Delhi (C) 2015)
The rate at which Commercial Banks can borrow money from RBI, when they run short of reserves,
is called bank rate.
When the Central Bank increase the bank rate, it increases the cost of borrowing and hence,
discourages the borrowers from taking a loan.
Due to this, the process of credit creation and flow of money also reduces. On the other hand,
when the Centred Bank decreases the bank rate, it encourages the borrower to take more and
more loan. A high demand of loan increases the credit multiplier and credit creation process of the
Commercial Banks.

44.Explain how open market operations are helpful in controlling credit creation? (Delhi
2016)Or
How does Central Bank control credit creation by Commercial Banks through open market
operations? Explain. (All India 2013)Or
Explain, how do open market operations by the Central Bank affect money creation by
Commercial Banks? (All India 2010)Or
Explain the meaning of open market operations. How is it used to reduce money supply in
the economy? (All India (C) 2016)
Under open market operations, RBI purchases or sells government securities to general public for
the purpose of increasing or decreasing the stock of money in an economy. The purchase or sale
of securities controls the money in the hands of public as they deposit or withdraw the money
from Commercial Banks. Thus, money creation by Commercial Banks get affected.
Suppose, the Central Bank purchases securities of Rs 1,000 from a bond holder with issuing a
cheque. The seller of the bond produces this cheque of Rs 1,000 to his Commercial Bank. The
Commercial Bank credits the account of the seller by Rs 1,000 and the deposits of the bank goes
up by Rs 1,000, which increase the credit creation capacity of the banks.

Thus, purchase of security increases the money creation of Commercial Banks and similarly, sale of
securities decreases the credit creation of Commercial Banks. Thus, the Central Bank controls the
process of money creation by Commercial Banks by open market operations.
45.What is Legal Reserve Ratio? Explain its components. (All India (C) 2013)Or
Explain the components of Legal Reserve Ratio. (Delhi 2012)
The minimum percentage of a bank‟s total demand and time deposits, that is required to be
maintained in the form of cash or specified liquid assets by the Commercial Banks with the Central
Bank is termed as Legal Reserve Ratio.
The components of Legal Reserve Ratio are as follows
 Cash reserve ratio: The percentage of total deposits, which a Commercial Bank needs to
keep as reserve with the Central Bank, is termed as Cash Reserve Ratio.
 Statutory liquidity ratio: Commercial Bank is required to maintain a fixed percentage of its
assets in the form of cash or other liquid assets. This is termed as Statutory Liquidity Ratio.

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46.Explain any two methods of credit control used by Central Bank. (All India 2013)
The Central Bank acts as a controller of money supply and credit, using the following methods
(i) Margin requirement It is a qualitative method of credit control. A margin refers to the difference
between market value of the security offered for loan and the amount loan offered by the
Commercial Banks. During inflation, supply of credit is reduced by raising the requirement of
margin. During deflation supply of credit is increased by lowering the requirement of „margin‟. This
measure is often used to discourage the flow of credit into speculative business activities.
(ii) Under open market operations, RBI purchases or sells government securities to general public
for the purpose of increasing or decreasing the stock of money in an economy. The purchase or
sale of securities controls the money in the hands of public as they deposit or withdraw the money
from Commercial Banks. Thus, money creation by Commercial Banks get affected.

47.(a) State any two components of M1 measure of money supply.

(b) Elaborate any two instruments of credit control, as exercised by the Reserve Bank of
India. Delhi 2019
(a) Components of Money Supply:
The total stock of money in circulation among the public at a particular point of time is called
money supply.
Money supply comprises of the following components:
 Currency (notes and coins) held by the public.
 Net demand deposits and time deposits held by the commercial banks.
 Other deposits held by the Central Bank.
 Total deposits with post office (excluding National Saving Certificates).
(b) Two instrument of credit control are as follows
(i) Repo rate: Repo rate is the rate at which Reserve Bank of India (RBI) lends funds to commercial
banks for a period ranging from 1 day to 14 days. It is quite an effective quantitative tool in
controlling credit creation. If the RBI wants to decrease the level of credit creation in the country,
then it increases the Repo Rate which makes the credit dearer. As the cost of borrowings increase,
the people‟s demand for credit goes down. This also leads to a fall in liquidity. All this leads to fall
in the rate of credit creation.
On the other hand, if the RBI wants to increase the level of credit creation in the economy then it
decreases the repo rate which makes the credit cheaper. As the cost of borrowings fall, people‟s
demand for credit goes up. This leads to increase in the rate of credit creation.
(ii) Cash reserve ratio: The percentage of total deposits, which a Commercial Bank needs to keep
as reserve with the Central Bank, is termed as Cash Reserve Ratio.

48.Define credit multiplier. What role does it play in determining the credit creation power
of the banking system? Use a numerical illustration to explain. (Delhi 2019)
Credit or money multiplier refers to the fraction by which commercial banks would be able to
multiply money from their initial level of deposits. It is obtained by the following formula
Credit/Money
Multiplier = 1 / LegalReserveRato(LRR)
Commercial banks create credit out of their total deposits which are many more times greater than
their initial level of deposits. Money created by commercial banks can be ascertrained by using the
given formula
Money Creation = Initial Deposits × 1 / LRR
For example, let the LRR be 20% and Initial deposits = Rs 10,000
As required, the banks keep 20%, i.e. Rs 2,000 as cash and lend the remaining amount of Rs 8,000.
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Further, it is also assumed that, persons receiving the debt will deposit the amount in the bank.
This will result in banks receiving fresh deposits of Rs 8,000. The banks again keep ? 1,600 as cash
and lend Rs 6,400, which is also 80% of the last deposit, this money also comes back to the banks
leading to a fresh deposit of Rs 6,400. In this way, the money goes on multiplying and ultimately,
total money creation according to the formula, will be
Money Creation = 10,000 × 120
= Rs 50,000

49.Describe any two methods by which Reserve Bank of India can regulate money supply.
(Delhi (C) 2016)
(i) Reverse repo rate: It is the rate at which the Central Bank accepts deposits of commercial banks.
(ii) Repo rate: Repo rate is the rate at which Reserve Bank of India (RBI) lends funds to commercial
banks for a period ranging from 1 day to 14 days. It is quite an effective quantitative tool in
controlling credit creation. If the RBI wants to decrease the level of credit creation in the country,
then it increases the Repo Rate which makes the credit dearer. As the cost of borrowings increase,
the people‟s demand for credit goes down. This also leads to a fall in liquidity. All this leads to fall
in the rate of credit creation.
On the other hand, if the RBI wants to increase the level of credit creation in the economy then it
decreases the repo rate which makes the credit cheaper. As the cost of borrowings fall, people‟s
demand for credit goes up. This leads to increase in the rate of credit creation.

50.Describe any two functions of Central Bank. (Delhi (C) 2016)Or

Explain any two main functions of a Central Bank. (All India (C) 2015: Delhi (C) 2015, Delhi
(C) 2012)
OrExplain any two functions of Central Bank. (All India (C) 2012)
OrExplain the following functions of the Central Bank. (All India 2011)
(i) Bank of issue
(ii) Banker‟s bank
(i) Central Bank of the country has the sole authority of currency issue in the country, which gives it
a monopoly in issuing currency. As in India RBI issues the currency, while currency notes are
printed by the subsidiaries of RBI and coins are minted by the Central Government of the country.
However both currency notes and coins are circulated by RBI, which gives RBI the power to control,
supervise and enhance the money supply in the economy.
(ii) Central Bank keeps the cash balances of Commercial Banks and issues loans to them on
requirements in the same manner as the Commercial Bank does for its customers. A Central Bank
has almost the same relation with the other Commercial Banks of the country that the Commercial
Banks have with the common public. That is why the Central Bank is also called as banker‟s bank.

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 CHAPTER 4 - DETERMINATION OF INCOME AND EMPLOYMENT

MULTIPLE CHOICE QUESTIONS

1.Suppose in a hypothetical economy, the income rises from ₹ 5,000 crore to ₹ 6,000 crore.
As a result, the consumption expenditure rises from ₹ 4,000 crore to ₹ 4,600 crore. Marginal
propensity to consume in such a case would be _________ (Delhi 2019)
(a) 0.8 (b) 0.4 (c) 0.2 (d) 0.6
2.If the Marginal Propensity to Consume is greater than Marginal Propensity to Save, the
value of the multiplier will be (All India 2017)
(a) greater than 2 (b) less than 2 (c) equal to 2 (d) equal to 5
3.If MPC = 1, the value of multiplier is …………. (All India 2015)
(a) 0 (b) 1 (c) between 0 and 1 (d) infinity
4.The value of multiplier is ………… . (Delhi 2015)
(a) 1MPC (b) 1MPS (c) 11−MPS (d) 1MPC−1
5.If MPC = 0, the value of multiplier is Foreign 2015
(a) 0 (b) 1 (c) between 0 and 1 (d) infinity
6.Aggregate Demand can be increased by (Delhi 2017)
(a) increasing bank rate
(b) selling government securities by Reserve Bank of India
(c) increasing cash reserve ratio
(d) None of the above
7.Which of the following are sectors of two sector economy?
(a) Government and households (b) Households and private firms
(c) Private firms and government (d) External and households
8.Consumption function (C) = C + bY, what does C̅ indicates?
̅
(a) Consumption at zero level of income (b) Autonomous consumption
(c) Dis-savings (d) All of the above
9.Under autonomous investment function, the investment curve is
(a) parallel to 7-axis (b) parallel toA-axis
(c) downward sloping (d) upward sloping
10.Aggregate supply is always equals to National Income (AS = Y) if C = ₹ 800 crore and Y =
₹ 1,700 crore, then find savings (S).
(a) ₹ 800 crore (b) ₹ 900 crore (c) ₹ 2,500 crore (d) ₹ 1,700 crore
11.…………. refers to the situation where some people are not getting work, even when they
are willing to work at the existing wage rate.
(a) Voluntary unemployment (b) Disguised unemployment
(c) Involuntary unemployment (d) Under unemployment
12.In macroeconomics, under short-run economic equilibrium analysis, ………. factor remains
constant.
(a) raw material (b) employment (labour)
(c) technology (d) All of the above
13.When …………. flow of goods and services in the economy tends to exceed their demand.
As a result, some of the goods would remain unsold.
(a) AS < AD (b) S < I (c) AS > AD (d) AS = AD
(Where, AS = Aggregate Supply, AD = Aggregate Demand, = Investment, = Savings)
14.If MPS = 0, then what would be the value to Investment Multiplier (K)?
(a) 0 (b) 1 (c) ∞ (d) 2

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15.What will happen, when AS < AD?
(a) To clear unwanted stocks, the producers would plan a cut down in production
(b) To rebuild the desire stocks, the producers would plan greater production
(c) The producers would plan same level of production
(d) Both (a) and (c)
16.…………. is a quantitative instrument of Central Bank monetary policy.
(a) Margin requirements (b) Bank rate policy
(c) Moral suasion (d) Selective credit control
17.Deflationary gap exists in the economy when
(a) AD = AS (b) AD < AS (c) deficit demand (d) Both (b) and (c)
18.During deficit demand, RBI decreases ……….. which is the fraction of total deposits that
each commercial bank must keep with RBI.
(a) CRR b) Repo (c) Reverse repo (d) SLR
19.If MPS = 0.2, Find the value of MPC?
(a) 0.2 (b) 1 (c) 0.8 (d) 8
20.………….. refers to a situation in which actual aggregate demand tends to be higher than
what is required to maintain full employment.
(a) Under employment equilibrium (b) Over employment equilibrium
(c) Full employment equilibrium (d) Zero employment equilibrium
21.Find the value of consumption, if autonomous consumption = ₹ 100 crore, Income = ₹
500 crore and MPC = 0.8.
(a) ₹ 600 crore (b) ₹ 400 crore (c) ₹ 500 crore (d) ₹ 480 crore

IMPORTANT QUESTION ANSWER

1.Why does consumption curve not start from the origin? (March 2018)
Consumption curve does not start from origin due to autonomous consumption which is minimum
level of consumption even when income is zero.
2.Define Aggregate Supply. (April Re-exam 2018, Delhi 2014)Or
What is Aggregate Supply in macroeconomics? (Delhi 2015)Or
Give the meaning of Aggregate Supply. (Foreign 2014)
Aggregate Supply is the money value of the final goods and services or national product produced
in an economy during an accounting year. It is equal to income generated.
3.Define Marginal Propensity to Consume. (All India 2017; Delhi 2014)
The ratio between the change in consumption expenditure with the change in income is called
Marginal Propensity to Consume. Symbolically,
Marginal Propensity to Consume (MPC) = changeinconsumption(ΔC) / Changein income(ΔY)
4.What is Aggregate Demand in macroeconomics? (All India 2015)Or
Give the meaning of Aggregate Demand. (Delhi 2012,2010)
The sum total of the demand for all the goods and services in an economy during an accounting
year is termed as Aggregate Demand of the economy.
5.Name any two components of „Aggregate Demand‟. (Foreign 2015)
Two components of Aggregate Demand are
(i) Household consumption expenditure
(ii) Net exports
6.What is excess of exports of goods over the imports of goods called? Foreign 2014
It is referred to as „net exports‟.

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7.Define investment. (Delhi 2014)
Investments are additions made to the present stock of capital. They lead to an increase in capital
assets, i.e. capital formation.
8.Define Average Propensity to Consume. (Delhi (C) 2012)
The ratio between the consumption expenditure and income is known as Average Propensity to
Consume. Symbolically,
= ConsumptionExpenditure(C) / Income(Y)
9.How is the value of Marginal Propensity to Save calculated? (Delhi (C) 2012)Or
Give the meaning of Marginal Propensity to Save. (All India 2010)Or
Define Marginal Propensity to Save. (All India 2010)
Marginal Propensity to Save is the ratio of change in saving with the change in income.
Symbolically,
Marginal Propensity to Save (MPS) = changeinsaving(ΔS) / changeinIncome(ΔY)
10.The consumption function of an economy is : C = 40 + 0.8 Y (amount ₹ in crores).
Determine that level of income where Average Propensity to Consume will be one.
(All India 2019)
APC is equal to one when Consumption (C) is equal to Income (Y), i.e. C = Y
Therefore, Y = 40 + 0.8Y
Y – 0.8Y = 40
0. 2 Y = 40
Y = 40 / 0.2
= 200
So, when income is 200, then APC will be one.

11.Which of the two, Average Propensity to Consume or Average Propensity to Save, can be
negative and why? (All India 2019)
Out of Average Propensity to Consume (APC) and Average Propensity to Save (APS), APC can never
be zero as consumption is always positive. APS can be zero or negative as it depends upon saving
which is zero when income is equal to consumption and negative when income is less than
consumption.

12.Distinguish between Marginal Propensity to Consume and Average Propensity to

Consume. Give a numerical example. (Delhi 2016)
Differences between Marginal Propensity to Consume and Average Propensity to Consume are (any 2)

The numerical example given below will help to understand the computation of MPC and APC
Income (Y) Consumption (C) APC (C/Y) ΔC ΔY MPC (ΔC/ΔY)
0 0 – – – –
200 200 1.75 50 200 0.25
400 400 1 50 200 0.25
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13.Calculate consumption expenditure in the economy whose equilibrium level of income is
₹ 20,000, autonomous consumption is ₹ 500 and Marginal Propensity to Save is 0.5. (All
India 2016)
Given, Income (Y) = ₹20,000; Autonomous Consumption (C̅) = ₹ 500;
Marginal Propensity to Save (MPS ) = 0.5; Consumption Expenditure (C) = ?
We know that,
MPC = 1 – MPS = 1 – 0.5 = 0.5 C
C = C̅ + MPC(Y)
= 500 + (0.5)20,000
∴ C = 500 + 101)00
= ₹ 10,500

14.From the following data calculate Marginal Propensity to Consume.

Equilibrium level of income = ₹ 2,000
Autonomous consumption = ₹ 200 Investment expenditure = ₹ 800 (Delhi (C) 2016)
Given Income (Y) = ₹2,000; Autonomous Consumption (C̅) = ₹200;
Investment (I) = ₹ 800
We know that. Consumption Expenditure (C) = C̅ + (MPC)Y and Y = C + I
∴ Y = C̅ + (MPC )Y + I
2,000 = 200 + (MPC) 2000 + 800
∴ MPC = 1000 / 2000 = 0.5

15.What is Aggregate Demand? State its components. (All India 2016)

Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting
year is termed as Aggregate Demand of the economy.
Following are the components of Aggregate Demand
 Household consumption expenditure
 Private investment expenditure
 Government expenditure
 Net exports

16.Which of the following cannot have a negative value? Give reasons.

(i) Average Propensity to Save
(ii) Marginal Propensity to Save (All India (C) 2015)

(i) Average Propensity to Save (APS) represents the ratio between savings and income. When
consumption expenditure is more than indome, then it gives rise to negative savings or dis-
savings. In this case, APS will be negative.

(ii) Marginal Propensity to Save (MPS) represents the ratio between change in savings and change
in income. As such, its value cannot be negative. It‟s value ranges between 0 and 1. If the whole of
income is spend on consumption, then MPS is zero. On the other hand, if whole of income is saved
then MPS is one.

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17.Give the meaning of Average Propensity to Save. What is its relation with Average
Propensity to Consume? (Delhi (C) 2014)
The ratio between total savings and total income in an economy at a given level of income is
termed as Average Propensity to Save. Symbolically,

Average Propensity to Save (APS) = Saving(S) / Income(Y)

Average Propensity to Consume (APC) is the ratio of the total consumption to total income and
Average Propensity to Save (APS) is the ratio of total saving to total income.
As we know that,
Income (Y) = Consumption (C) + Saving (S) Dividing throughout by Y, we get,
Y/Y=C/Y+S/Y
1 = APC + APS
Or APC = 1 – APS
And APS = 1 – APC

18.Explain the distinction between „Autonomous Investment‟ and „Induced investment‟.

(Delhi (C) 2013)
Differences between Autonomous Investment and Induced Investment are
Basis Autonomous Investment Induced Investment
Motive It is done to promote social welfare. It is driven by profit motive.
Sector It is generally undertaken by the It is generally done by private
government sector. sector.
Income It is not affected by the changes in It is affected by the changes in the
Elasticity income level. income level.

19.Find consumption expenditure from the following.

Autonomous Consumption = ₹ 100 Marginal Propensity to Consume= 0.70 National Income
= ₹ 1,000 (Delhi 2012)
Here, Autonomous Consumption
(C̅) = ₹ 100,
MPC (b) = 0.70 and Income (Y) = ₹ 1,000
So, Consumption Expenditure (C) = C̅ + bY
= 100 + 0.7 × 1,000
= 100 + 700 = ₹ 800

20.Find consumption expenditure from the following.

National Income = ₹ 5,000 Autonomous Consumption = ₹ 1,000 Marginal Propensity to
Consume = 0.8 (All India 2012)
Here, Y = ₹5,000, C̅ = ₹ 1,000, MPC or b = 0.8
So, Consumption Expenditure (C) = C̅ + bY
= 1000 + [0.8 × 5,000]
= 1,000 + 4,000 = ₹ 5,000

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21.Outline the steps taken in deriving consumption curve from the saving curve. Use
diagram. (Delhi 2012)OrGiven saving curve, derive the consumption curve and state the
steps in doing so. Use diagram. (All India 2016)
Various steps to be taken for derivation of consumption curve from saving curve are

(i) At zero level of income, savings is negative (i.e. dissavings)

represented by OS. This is equal to the autonomous consumption
level equal to OC̅.
(ii) We draw a 45° line passing through the origin which shows
that C = Y. This is the income line.
(iii) Now, we draw a vertical line from the point E, where saving is
zero. At zero level of saving, C = Y, so B is the break-event point.
(iv) The consumption curve is derived by joining C̅ and B and
extending it forward.

22. Explain the relationship between Average Propensity to Consume and Average
Propensity to Save. Which of these can have a negative value and when? (All India 2011)
Relationship between average propensity to Consume and Average Propensity to Save:
The ratio between total savings and total income in an economy at a given level of income is
termed as Average Propensity to Save. Symbolically,
Average Propensity to Save (APS) = Saving(S) / Income(Y)
Average Propensity to Consume (APC) is the ratio of the total consumption to total income and
Average Propensity to Save (APS) is the ratio of total saving to total income.
As we know that,
Income (Y) = Consumption (C) + Saving (S) Dividing throughout by Y, we get,
Y/Y=C/Y+S/Y
1 = APC + APS
Or APC = 1 – APS
And APS = 1 – APC
Average Propensity to Save can have negative value, when the amount of consumption
expenditure is more than the income.

23.Given that National Income is ₹ 80 crore and consumption expenditure is ₹ 64 crore, find
out Average Propensity to Save. When income rises to ₹ 100 crore and consumption
expenditure to ₹ 78 crore, what will be the Average Propensity to Consume and Marginal
Propensity to Consume? (Delhi 2011)
Here, in first condition, Income (Y) = ₹ 80 crore
Consumption (C) = ₹ 64 crore Hence, Savings (S) = Y– C = 80 – 64 = ₹ 16 crore
Now, Average Propensity to Save (APS) = S / Y
= 1680 = 0.20
Again, when income and consumption expenditure rises.
New Income (Y) = ₹ 100 crore; Change in Income (ΔY) = ₹ 20 crore (100– 80)
New Consumption (C) = ₹ 78 crore; Change in Consumption (ΔC) = ₹ 14 crore (78– 64)
So, Average Propensity to Consume (APC) = C / Y
= 78100 = 0.78
And, Marginal Propensity to Consume (MPC)
ΔC / ΔY = 14 / 20
= 0.70
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24.If National Income is ₹ 90 crore and consumption expenditure is ₹ 81 crore, find out
Average Propensity to Save. When income rises to ₹ 100 crore and consumption expenditure
to ₹ 88 crore, what will be the Marginal Propensity to Consume and Marginal Propensity to
Save? (Delhi 2011)
Here, in first condition. Income (Y) = ₹ 90 crore and Consumption (C) = ₹ 81 crore
Average Propensity to Save (APS) = S / Y = Y−C / Y
= 91−81 / 90 = 0.10
Again, when the income and consumption expenditure rises,
New Income (Y) = ₹ 100 crore;
Change in Income (ΔY) = ₹ 10 crore (100– 90)
New Consumption (C) = ₹ 88 crore; Change in Consumption (ΔC) = ₹ 7 crore (88– 81)
So, Marginal Propensity to Consume (MPC)
= ΔC / ΔY = 91−81 / 90 = 0.70
And, Marginal Propensity to Save (MPS) = 1 – MPC = 1 – 0.7 = 0.3

25.In an economy, the Marginal Propensity to Consume is 0.75. Investment expenditure in

the economy increases by ₹ 75 crore. Calculate the total increase in National Income. (All
India 2011)
Here, Marginal Propensity to Consume (MPC) = 0.75, and Change in Investment = ₹ 75 crore We
know that change in investment equals to change in savings,
Change in Saving (ΔS) = ₹ 75 crore
Marginal Propensity to Save (MPS) = 1 – MPC
= 1 – 0.75 = 0.25

Or 0.25 = 75 / ΔY
Or ΔY = 75 / 0.25
Or Total increase in National Income (ΔY)
= ₹ 300 crore

26.Explain the meaning of Marginal Propensity to consume. What is its relationship with
Marginal Propensity to Save? (Delhi (C) 2011)
The ratio between the change in consumption expenditure with the change in income is called
Marginal Propensity to Consume.
Symbolically,
Marginal Propensity to Consume (MPC)

Relationship between Marginal Propensity to Consume (MPC) and Marginal Propensity to Save
(MPS) is explained below
As we know that. Change in Income (ΔY) = Change in Consumption (ΔC) + Change in Saving (ΔS)
So, ΔY / ΔY = ΔC / ΔY + ΔS / ΔY
(on dividing throughout by ΔY)
Hence, 1 = MPC + MPS
Or MPS = 1 – MPC
And MPC = 1 – MPS

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27.In an economy, total savings are ₹ 2,000 crore and the ratio of Average Propensity to
Save and Average Propensity to Consu‟me is 2 : 7. Calculate the level of income in an
economy. (All India 2010)
Here, Total Saving (S) = ₹ 2,000 crore

Or APS = Saving(S)Income(Y)
= 2 / 7+2 = 2 / 9
Also, S = 2 / 9 × Y
Or 2,000 = 29 × Y
Or Y = 9 / 2 × 2,000
Or National Income = ₹ 9,000 crore

28.In an economy, the consumption expenditure is ₹ 8,750 crore and the ratio of Average
Propensity to Consume and Average Propensity to Save is 7 : 1. Calculate the level of income
in the economy. (All India 2010)
Here, Consumption Expenditure (C)
= ₹ 8,750 crore

So, ratio of consumption to income (APC)

= 7 / 7+1 = 7 / 8
Also, C = 7 / 8 × Y
[Where, Income (Y) = Consumption (C) + Saving (S)]
Or Y = 8 / 7 × 8,750
National Income = ₹ 10,000 crore

29.In an economy, the ratio of Average Propensity to Consume and Average Propensity to
Save is 5 : 3. The level of income is ₹ 6,000. How much are the savings? Calculate. (Delhi (C)
2010)
Here

and Income (Y) = ₹ 60,000

Now, as APCAPS = 53
So, ratio of consumption to income (APC) = 5 / 5+3 = 5 / 8
[As, Income (Y) = Consumption (C) + Saving (S)]
So, C = 5 / 8 × 60,000
= ₹ 3,750
Hence, Saving (S) = Y – C = 6,000 – 3,750 = ₹ 2,250

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30.State and discuss the components of Aggregate Demand in two sector economy. (Delhi
2019)
A two sector economy comprises of households and firms components of Aggregate Demand (AD)
in such an economy are as follows:
(i) Consumption Expenditure (C) It refers to the total expenditure incurred by all the household in
an econpmy on final goods and services in order to satisfy their wants.
(ii) Investment (I) It refers to planned investment expenditure by the firms. It includes addition to
stock of physical capital like machines, equipmentsetc and change in inventory.

31.What is mean by Aggregate Demand? State its components. March 2018

Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting
year is termed as Aggregate Demand of the economy.

Following are the components of Aggregate Demand

 Household consumption expenditure
 Private investment expenditure
 Government expenditure
 Net exports

32.What is Ex-ante consumption? Distinguish between Autonomous Consumption and

Induced Consumption. (April re-exam 2018)
Ex-ante consumption refers to planned (desired) consumption expenditure of households (in two
sector economy). In other words, it is one which is expressed in terms of what the people had
planned to consume in the same period.

Differences between Autonomous and Induced Consumption are

Basis Autonomous Induced Consumption

Consumption
Meaning Autonomous consumption Iduced consumption is that part of
is the minimum level of consumption that varies directly with
consumption required for disposable income. With increase in
sustenance. income, autonomous consumption also
increases and vice-versa.
Representation in In a consumption equation, In a consumption equation, induced
Consumption autonomous consumption consumption is represented as by, where b
Equation is represented by C̅. is the MPC and Y is the income.
Zero Level It is not zero at zero It is zero at zero income.
income.

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33.The value of Marginal Propensity to Consume is 0.6 and initial income in the economy is
₹ 100 crore. Prepare a schedule showing Income, Consumption and Saving. Also show the
equilibrium level of income by assuming Autonomous Investment of ₹ 80 crore. (March
2018)
Marginal Propensity to Consume (MPC) = 0.6,
Initial Income (Y) = ₹ 100 crore,
Assuming autonomous Consumption (C̅) = ₹ 200 crore
Schedule showing Income, Consumption and Saving
Income Consumption Saving (s) Change in Income Change in MPC (DYDC)
(y) (c) (DX) Consumption (DC)

100 260 -160 – – –

200 320 -120 100 60 0.6
300 380 -40 100 60 0.6
400 440 -40 100 60 0.6
500 550 0 100 60 0.6
600 560 40 100 60 0.6
At equilibrium levels, Y = C + I
Or Y = C̅ + bY + I
On substituting, Y = 200 + 0.6 Y + 80
Y – 0.6 Y = 280
0.4Y = 280
Y = 280 / 0.4 = ₹ 700 crore

34. An economy is in equilibrium. From the following data, calculate the Marginal Propensity
to Save. (All India 2017)
(a) Income = ₹ 10,000
(b) Autonomous Consumption = ₹ 500
(c) Consumption Expenditure = ₹ 8,000
We know that,
Consumption Expenditure = C̅ + bY,
Where, C̅ = Autonomous Consumption,
b = Marginal Propensity to Consume and Y = Income
So, on substituting the given variables, we get,
8,0 = 500 + b x 10,000
Or 8,000 – 500 = b x 10000
Or b = 7500 / 10000
Marginal Propensity to Consume = 0.75.
We also know that,
MPC + MPS = 1
Where, MPC = Marginal Propensity to Consume and MPS = Marginal Propensity to Save
On substituting MPC = 0.75, we get,
0.75 + MPS = 1
Or MPS = 1 – 0.75 = 0.25, i.e.
Marginal Propensity to Save = 0.25

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35.Complete the following table.
Income Marginal Propensity to Save Average Propensity to Save Consumption Expenditure
200 – 0.4 120
400 – – 220
– – 0.48 260

Income(Y) Consumption Expenditure(C) Savings (S) Average Propensity to Save MPS

200 120 80 0.4 –
400 220 180 0.45 0.5
500 260 240 0.48 0.6
Formulae used:
S=Y–C
MPS = ΔS / ΔY; APS = S / Y

36.If National Income is ₹ 50 crore and saving ?5 crore, find out Average Propensity to
Consume. When income rises to ₹ 60 crore and saving to ₹ 9 crore, what will be the Average
Propensity to Consume and the Marginal Propensity to Save? (Delhi 2011)
National Income (Y) = ₹ 50 crore
Saving (S) = ₹ 5 crore
∴ Consumption (C) = Y – S
= 50 – 5 = ₹ 45 crore
∴ APC = CY = 45 / 50 = 0.90
After change,
Income (Y1) = ₹ 60 crore
Change in Income (ΔY) = 60 – 50 = 10
Consumption (C1) = 60 – 9 = 51
Change in Saving (ΔS) = 9 – 5 = 4
∴ APC = C1 / Y1 = 51 / 60 = 0.85
And MPS = ΔS / ΔY ⇒ 4 /10 = 0.40

37.Given a consumption curve, outline the steps required to be taken in deriving a saving
curve from it. Use diagram. (All India 2017)Or
Given consumption curve, derive saving curve and state the steps taken in the process of
derivation. Use diagram. (Delhi 2016)Or
Outline the steps required to be taken in deriving saving curve from the given consumption
curve. Use diagram. (Delhi 2014)
Steps taken for derivation of saving curve are
(i) At zero level of Income (Y), the Autonomous Consumption is OC̅. If we take the vertical distance
between the Consumption Curve, CC̅ and income line at zero level of income, then S¯¯¯ = -OC̅.

(ii) The consumption curve intersects income line at point B. It is the break-
even point where Consumption (C) is equal to income (C = Y). At this
point. Saving (S) will be zero as all the income is consumed. Hence, the
saving curve will intersect the A-axis (at point E) at this income level.
(iii) The consumption is less than income beyond point E. It means the
excess income after consumption is saved and hence, the saving curve
moves towards positive direction above A-axis with the increase in the
level of income. 84 / 166
Hence, the saving curve starts from the point S¯¯¯ on the negative Y-axis.

38.Explain the consumption function and saving function. (Foreign 2014)

Consumption function The functional relationship between the consumption expenditure and the
income is known as consumption function. Mathematically it is expressed as,
C = f (Y), which is read as „consumption is a function of income‟.
Consumption function in terms of an algebraic expression can be written as C = C̅ + bY
Where, C = Consumption Expenditure
C̅ = Autonomous consumption, when income is zero
b = Marginal Propensity to Consume
Y = Income
Saving function The functional relationship between the savings and income is known as saving
function. Mathematically, it is expressed as S = f (Y), which is read as „Saving is a function of
income‟. Saving function, as an algebraic expression, can be written as S = –S¯¯¯ + SY Where,
S = Savings
–S¯¯¯ = Savings at zero level of income (Dis-savings or borrowings)
s = Marginal Propensity to save
Y = Income

39.Complete the following table. (Delhi 2013)

Income Saving Average Propensity to Marginal Propensity to
(Y) (S) Consume (APC) Consume (MPC)
0 -40 – –
50 -20 – –
100 0 – 0.6
150 30 0.8 –
200 50 – –

Answer:
Formulae used:
C Y – S; APC= C/Y, MPC = ΔC / ΔY
Income Saving Consumption Average Propensity to Marginal Propensity to
(Y) (S) (C) Consume (APC) Consume (MPC)
0 -40 40 ∞ –
50 -20 70 1.4 0.6
100 0 100 1 0.6
150 30 120 0.8 0.4
200 50 150 0.75 0.6

40.Complete the following table. (Delhi 2013)

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 Income Consumption Marginal Propensity to Average Propensity to
(Y) Expenditure (C) Save (MPS) save (APS)
0 80 – –
100 140 0.4 –
200 – – 0
– 240 – 0.20
– 260 0.8 0.35

Answer:
Formulae used
C = Y – S, S = Y – C, MPS = ΔS / ΔY, APS = S / Y.
Income Consumption Saving Change Change Marginal Average
(Y) (C + Expenditure (C) (S) (Y – in Saving in Propensity to Propensity to
S) (Y – S) C) (ΔS) Income Save (MPS) save (APS)
(ΔY)
0 80 -80 – – – –
100 140 -40 40 100 0.4 0.4
200 200 0 46 100 0.4 0
300 240 60 60 100 0.6 0.20
400 260 140 80 100 0.8 0.35

41.Complete the following table. (Delhi 2013)

Consumption expenditure (₹) Savings (₹) Income (₹) Marginal Propensity to Consume
100 50 150 –
175 75 – –
250 100 – –
325 125 – –

Answer:
Formulae used:
Y = C + S, MPC = ΔC / ΔY
Consumption expenditure (₹) Savings (₹) Income (₹) Marginal Propensity to Consume
100 50 150 –
175 75 250 0.75
250 100 350 0.75
325 125 450 0.75

41.Explain consumption function, with the help of a schedule and diagram. (All India 2011)
The functional relationship between the consumption expenditure and the income is known as
consumption function. Symbolically,
C = f(Y), Which is read as, „Consumption is a function of income‟.
Consumption function in terms of an algebraic expression can be written as C = C̅ + bY
Where, C = Consumption expenditure
C̅ = Autonomous consumption at zero level of income b = Marginal Propensity to Consume
Y = Income, Let us understand it with the help of a schedule and diagram

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 Consumption Income Marginal Propensity to Change in Change in
(C) (Y) Consume (MPC) = ΔC / ΔY Consumption (ΔC) Income (ΔY)
100 0 – – –
170 100 0.7 70 100
240 200 0.7 70 100
310 300 0.7 70 100
380 400 0.7 70 100
450 500 0.7 70 100

The point B represents the break-even point, where the consumption expenditure equals the
income. To the left of point B, consumption is greater than income and to the right of point B,
consumption is less than income.

42.If the value of Marginal Propensity to Save is 0.4, what will be the value of investment
multiplier? (All India 2012)
Answer:
Investment Multiplier (K) = 1 / MPS
= 1 / 0.4 = 10 / 4 = 2.5

43.What can be the minimum value of investment multiplier? (Delhi (C) 2012)
The minimum value of investment multiplier is 1.
44.Give the meaning of ex-ante savings. (Delhi 2010)
The planned or desired savings by the people during an accounting year is termed as ex-ante
saving.
45.What is Ex-ante Aggregate Demand? (All India 2010)
The planned expenditure on the purchase of goods and services in an economy during a period of
an accounting year, is termed as Ex-ante Aggregate Demand.
46.When will there be equilibrium level of National Income? (All India 2010)
When Aggregate Demand (AD) is equal to Aggregate Supply (AS) in an economy, at full
employment level, then it is termed as the equilibrium level of National Income.
47.Calculate change in final income, if Marginal Propensity to Consume (MPC) is 0.8 and
change in initial investment is ₹ 1,000 crore. (All India 2019)
MPC (b) = 0.8
Change in Investment (ΔI) = ₹ 1,000 crore
Investment Multiplier
(K) = Income / Investment=1 / 1−0.8=1 / 0.2 = 5
⇒ 5 = ΔY / 1000
ΔY = ₹ 5,000 crore
48.State the meaning of the following. (All India 2019)
(a) Ex-ante savings (b) Full employment (c) Autonomous consumption

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(a) The planned expenditure on the purchase of goods and services in an economy during a period
of an accounting year, is termed as Ex-ante Aggregate Demand.
(b) Full employment It refers to the state where all those who are willing and able to work at a
particular wage rate are employed.
(c) Autonomous consumption It refers to the consumption at zero level of income, i.e. it is
independent of level of income. This is the basic amount required for consumption at all levels of
income.
49.Estimate the change in final income if Marginal Propensity to Consume (MPC) is 0.75 and
change in initial investment is ₹ 2,000 crore. (All India 2019)
Change in Final Income (ΔY) = ?
MPC = 0.75
Change in Initial Investment (ΔI) = ₹ 2,000 crore
Investment Multiplier (K) = 1 / 1−MPC
= 1 / 1−0.75=1 / 0.25 = 4
Also,

4 = ΔY / 2000
AY = ₹ 8,000 crore

50.If in an economy
Change in initial investment (ΔI) = ₹ 500 crore
Marginal Propensity to Save (MPS) = 0.2 Find the values of the following
(a) Investment Multiplier (K)
(b) Change in final income (ΔY) (Delhi 2019)
Answer:Investment Multiplier (K) = 1/ MPS = 1/0.2 = 5

5 = ΔY/500
ΔY = ₹ 2,500 crore

51.Define Multiplier. What is the relation between Marginal Propensity to Consume and
Multiplier? Calculate the Marginal Propensity to Consume if the value of Multiplier is 4.
(March 2018)
Investment multiplier is the ratio between change in income and the corresponding change in
investment. It represents the responsiveness of income to change in investment. It is denoted by K.
Symbolically,
Investment Multiplier

There is direct or positive relationship between Marginal Propensity to Consume (MPC) and
Multiplier (K). Higher the MPC, higher will be the value of Multiplier and vice-versa.
Multiplier (K) = 1 / 1−MPC
e.g. If MPC = 0.5, then K = 1 / 1−0.5=1 / 0.5 = 2
When MPC increase to 0.75, then
K = 1 / 1−0.75=1 / 0.25 = 4
So, we observe that as MPC rises, K also rises.
We know that, K = 1 / 1−MPC
4 = 11−MPC

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4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC = 3 / 4 = 0.75

52.Define Investment Multiplier. How is it related to Marginal Propensity to Consume? (April

Re-Exam 2018)
Investment multiplier is the ratio between change in income and the corresponding change in
investment. It represents the responsiveness of income to change in investment. It is denoted by K.
Symbolically,
Investment Multiplier

There is direct or positive relationship between Marginal Propensity to Consume (MPC) and
Multiplier (K). Higher the MPC, higher will be the value of Multiplier and vice-versa.
Multiplier (K) = 1 / 1−MPC
e.g. If MPC = 0.5, then K = 1 / 1−0.5=1 / 0.5 = 2
When MPC increase to 0.75, then
K = 1 / 1−0.75=1 / 0.25 = 4
So, we observe that as MPC rises, K also rises.
We know that, K = 1/ 1−MPC
4 = 11−MPC
4 (1 – MPC) = 1
4 – 4 MPC = 1
-4 MPC = 1 – 4 = -3
MPC = 3 / 4 = 0.75

53.In an economy investment is increased by ₹ 300 crore. If Marginal Propensity to Consume

is 2/3, calculate increase in National Income. (Delhi 2016)
Given,
Marginal Propensity to Consume (MPC)
= 23 or 0.678
Change in Investment Expenditure (ΔI)
= ₹ 300 crore
We know that,
Investment Multiplier (K) = 1 / 1−MPC=1 / 1−0.67
= 1 / 0.33 = 3.03 ~ 3
Also,
Investment Multiplier (K)

So 3 = ΔY / 300
ΔY = 900
National Income increases by ₹ 900 crore.
54.Suppose Marginal Propensity to Consume is 0.8. How much increase in investment is
required to increase National Income by ₹ 2,000 crore? Calculate. (Delhi 2016)
Given, Marginal Propensity to Consume (MPC)
= 0.8

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Change in National Income (AY) = ₹ 2,000 crore
We know that,
Investment Multiplier (K) = 1 / 1−MPC=1 // 1−0.8 = 5
Also, Investment Multiplier (K)
So 5 = 2000 / ΔI Or ΔI = 400
i.e. investment should be increased by ₹ 400 crore, in order to increase income by ₹ 2,000 crore.
55.In an economy an increase in investment by ₹ 100 crore led to increase in National
Income by ₹ 1,000 crore. Find Marginal Propensity to Consume. (Delhi 2016)
Given,
Increase in Investment (ΔI) = ₹ 100 crore
Increase in Income (ΔY) = ₹ 1,000 crore
We know that,
Investment Multiplier (K) = ΔY / ΔI=1,000 / 100 = 10
Also, K = 1 / 1−MPC
So, 10 = 1 / 1−MPC Or 10 (1 – MPC) = 1,
Or 10 – 10 MPC = 1,
Or – 10MPC = 1 – 10 Or MPC = −9 / −10 = 0.9
i.e. Marginal Propensity to Consume = 0.9

56.An economy is in equilibrium. Calculate Marginal Propensity to Consume National

Income = ₹ 1,000,
Autonomous Consumption Expenditure = ₹ 200
Investment Expenditure = ₹ 100 (All India 2016)
Given, National Income (Y) = ₹ 1,000,
Autonomous Consumption Expenditure (C̅) = ₹ 200,
and Investment Expenditure (I)= ₹ 100,
Marginal Propensity to Consume (MPC/b) = ₹ We know that at the equilibrium level,
Savings = Investment,
So, Income (Y) = Consumption Expenditure (C) + Investment (I)
Also, Consumption Expenditure (C) = C̅ + bY So, it follows that,
Y = C̅ + bY + I
On substituting the given variables, we get
1000 = 200 + b × 1,000 + 100
Or 1,000 = 300 +1000 b.
Or 700 = 1,000 b,
Or b = 700 / 1000
Or Marginal Propensity to Consume (MPC) = 0.7

57.From the following data calculate investment expenditure. (All India 2016)
Marginal Propensity to Save = 0.2
Equilibrium level of Income = ₹ 22,500
Autoriomous Consumption = ₹ 500
Given, MPS = 0.2,
Y = ₹22,500, C̅ = ₹ 500, I = ?
We know that, MPC = 1 – MPS = 1 – 0.2 = 0.8
At equilibrium level,
Y=C+I
and C = C̅ + (MPC)Y
∴ Y = C̅ + (MPC)Y + I
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22,500 = 500 + (0.8)22,500 + I
I = 22,500 – 500 – 18000 = ₹ 4,000

58.What is Investment Multiplier? How is its value determined? What can be its minimum
and maximum values? (Delhi (C) 2016) Or
Explain the meaning of investment multiplier. What can be its minimum and maximum
value? (Delhi (C) 2014)
It is also equal to 1 / 1−MPC where
MPC is Marginal Propensity to Consume So, the value of Multiplier depends on the value of MPC.
Since, 0 < MPC < 1, therefore, if
MPC = 0, then K = 1, and if MPC = 1, then K = ∞
So, it follows that the minimum value of investment multiplier can be 1 and maximum value can be
infinity.

59.An economy is in equilibrium. Find investment expenditure.

National Income = ₹ 1,200
Autonomous Consumption Expenditure = ₹ 150
Marginal Propensity to Consume = 0.8 (All India 2016)
Given, National Income (Y) = ₹ 1200
Autonomous Consumption Expenditure (C̅) = ₹ 150,
Marginal Propensity to Consume (MPC/b) = 0.8 We know that, Y = C̅ + bY + I, Where I is the Total
Investments in the economy.
On substituting the given variables, we get,
1200 = 150 + 0.8 × 1200 + 1, Or 1200 = 1210 + I Or
I = 1200 – 1210 = 90
Investment Expenditure = ₹ 90

60.In an economy investment expenditure is ₹ 1,000, autonomous consumption is ₹ 500 and

Marginal Propensity to Save is 0.2. Calculate its equilibrium level of income. (All India 2016)
Given, Investment (l)= ₹ 1,000,
Autonomous Consumption (C̅) = ₹ 500,
Marginal Propensity to Save (MPS) = 0.2,
Income (Y) = ?
We know that, MPC = 1 – MPS = 1 – 0.2 = 0.8
At equilibrium level,
Y = C + I and C = C̅ + (MPC)Y
∴ Y = C̅ +(MPC)Y + I
⇒ Y = 500 + (0.8)Y + 1,000
0.2 Y = 1,500 ⇒ Y = ₹ 7,500

61.From the following data calculate the equilibrium level of National Income Autonomous
Consumption = ₹ 500 Marginal Propensity to Save = 0.2 Investment = ₹ 2.000
Given, Autonomous Consumption (C̅) = ₹ 500;
Marginal Propensity to Save (MPS) = 0.2,
Investment (I) = ₹ 2,000,
We know that, MPC = 1 – MPS
= 1 – 0.2
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∴ MPC = 0.8
Also, Consumption Expenditure (C) = C̅ + (MPC)Y
and at equilibrium level, Y = C + I
.‟. Y = C̅ + (MPC)Y + I
Y = 500 + 0.8Y + 2,000
Y = 2,500 + 0.8Y
0.2 Y = 2,500
Y = ₹ 12,500
∴ Equilibrium level of National Income = ₹ 12,500

62.Calculate investment expenditure in the economy from the following data. Equilibrium
Level of Income = ₹ 10,000 Autonomous Consumption = ₹ 500 Marginal Propensity to
Consume 0.75 (Delhi (C) 2016)
Given Y = ₹10,000; C̅ = ₹ 500; MPC = 0.75,
We know that, C = C̅ + (MPC )Y and Y = C + I
∴ Y = C̅ + (MPC)Y + I
10,000 = 500+ (0.75) × 10,000 + I
I = 10,000 – 500 – 7,500
∴ I = ₹ 2,000

63.In an economy 20 % of increased income is saved. How much will be the increase in
income if investment increase by ₹ 10,060? Calculate. (All India (C) 2015)
Marginal Propensity to Save (MPS)
= 20% = 20 / 100 = 0.2
Investment Multiplier (K) = 1 / MPS
⇒ K = 1 / 0.2=10 / 2 = 5
K = ΔY / ΔI ⇒ 5 = ΔY / 10,000
∴ ΔY = 50,000
Therefore, increase in investment by ₹ 10,000, increases the income by ₹ 50,000.

64.In an economy autonomous consumption is ₹ 500, Marginal Propensityto Save is 0.2 and
investment expenditure is ₹ 2,000. Calculate its equilibrium level of income. (All India)
C = ₹ 500, MPS = 0.2, I = ₹ 2,000
MPC = 1 – MPS = 1 – 0.2
∴ MPC = 0.8
Consumption function, C = C̅ + bY
[where, b = MPC]
= 500 + 0.8Y
At equilibrium level,
National Income (Y) = C + I
⇒ Y = 500 + 0.8Y + 2,000
⇒ Y – 0.8Y = 500 + 2,000
⇒ 0.2Y = 2,500
Y = 2.500 / 0.2=25.000 / 2
∴ Y = ₹ 12,500

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65.What is the relationship between Marginal Propensity to Save and Investment Multiplier.
There is an indirect or negative relationship between Marginal propensity to save (MPS) and
multiplier (K). Higher the MPS, lower will be the value of Multiplier and vice-versa.
Multiplier (K) = 1 / MPS
e.g. If MPS = 0.5, then K = 10.5 = 2
if MPS =0.75, then K =1 / 0.75 = 1.33
So, we observe that when MPS rises to 0.75 from 0.5, the value of Multiplier falls from 2 to 1.33.

66.In an economy investment increases from 300 to 500. As a result of this, equilibrium level
of income increases by ₹ 2,000, calculate the Marginal Propensity to Consume. (All India to
2015)
Given,
Change in Income (ΔY) = ₹ 2,000
And, Change in Investment (ΔI) = 200(500 – 300)
∴ Investment Multiplier (K) = ΔYΔI=2,000 / 200 = 10
Also, K = 1 1-MPC , Where
MPC = Marginal Propensity to Consume
So, 10 = 1 / 1-MPC
Or 10 (1 – MPC) = 1
Or 10 – 10MPC = 1
Or 9 = 10 MPC
⇒ MPC = 9/10 = 0.9

67.S = -100 + 0.2 Y is the saving function in an economy. Investment expenditure is ₹ 5,000.
Calculate the equilibrium level of income. (Delhi (C) 2015)
At the equilibrium level of income,
Saving (S) = Investment (I)
∴ -100 + 0.2 Y = 5,000
0.2 Y = 5,000 + 100 = 5,100
Y = 5,100 / 0.2 = 25,500
∴ Income = ₹ 25,500
68.Calculate the equilibrium level of income in the economy. (Delhi (C) 2015)
C = 500 + (0.9) Y;
Investment expenditure = 3,000
Given, C = 500 + (0.9 )Y.
Investment Expenditure (I) = ₹ 3,000
At equilibrium level, Y = C + I
⇒ Y = 500 + (0.9 )Y + 3,000
⇒ Y – (0.9 )Y = 3500 ⇒ (0.1)Y = 3,500
∴ Y = 3,500 / 0.1 = ₹ 35,000
69.Calculate equilibrium level of income (Delhi (C) 2015)
Autonomous Consumption = ₹ 200
Marginal Propensity to Consume = 0.9
Investment Expenditure = ₹ 1,000
Autonomous Consumption (C) = ₹ 200 [Given]
MPC = 0.9, I = ₹ 1,000
At equilibrium level, Y = C + I …….. (i)
And C = C̅ + bY [Where, b = MPC]
C = 200 + (0.9 )Y
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Substituting the value of C in equation (i), we get,
Y = 200 + (0.9 )Y + 1,000
Y – (0.9 )Y = 1200 ⇒ (0.1)Y = 1200
∴ Y = 1200 / 0.1 = ₹ 12,000
70.Give the meaning of Investment Multiplier and Aggregate Supply. (Delhi (C) 2015)
Aggregate supply Aggregate supply is the money value of the final goods and services produced
in an economy during an accounting year. It is equal to income generated, symbolically,
Aggregate Supply (AS) = Consumption (C) + Savings (S)
71.The value of Marginal Propensity to Consume is double the value of Marginal Propensity
to Save. Find the value of Multiplier. (All India 2014)
We know that, MPC + MPS = 1 ……. (i)
Given MFC is double the value of MPS
⇒ MPC = 2 MPS
Substituting this in equation (i), we get,
2 MPS + MPS = 1
⇒ 3 MPS = 1
∴ MPS = 1 / 3
Now multiplier, K = 1 / MPS = 1/ 1/3 = 3
∴ Value of multiplier is 3.
72.Calculate „Investment‟ from the following. Equilibrium Income = ₹ 500
Consumption Expenditure at zero income = ₹ 50
Marginal Propensity to Consume = 0.7 (Delhi (G) 2013)
Here, Y = ₹500; MPC = 0.7; C̅ = ₹ 50
∴ C = C̅ + MPC × Y
Now, Y = C̅ + MPC × Y + I
⇒ 500 = 50 + 350 + I
⇒ 500 – 400 = I
Investment (I) = ₹ 100
73.Calculate Marginal Propensity to Consume from the following.
Equilibrium Income = ₹ 350
Consumption Expenditure at zero income = ₹ 20
Investment = ₹ 50 (Delhi (c) 2013)
Given, Y = ₹ 350, Investment, I = 50, C = ₹ 20
Now, Y = C̅ + bY + I
350 = 20 + b(350) + 50
⇒ 350 = 70 + b(350)
350 – 70 = b(350)
⇒ 280 = b (350), b = 280 / 350 = 0.8
∴ MPC = b = 0.8
74.Find „Investment‟ from the following National Income = ₹ 500 Autonomous Consumption
= ₹ 100 Marginal Propensity to Consume = 0.75 (Delhi 2012)
National Income (Y) = ₹ 500;
Autonomous Consumption (C̅) = ₹ 100
MPC(b) = 0.75
Y = C̅ + bY + I (Investment)
Or Y – C̅ – bY = I
Or 500 – 100 – 0.75(500) = I
Or 400 – 375 = I
Or I = ₹ 25
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75.In an economy 20 % fall in investment results in 40 % fall in income. Calculate the value
of Marginal Propensity to Consume. (All India (C) 2012)
Investment Multiplier (K) = ΔY / ΔI=0.4 / 0.2 = 2
Since, K = 1MPS
∴ MPS = 1/K = 1/2
∴ MPC = 1 – MPS = 1 – 1/2=1/2 = 1//2 Or 0.5

76.Find National Income from the following. Autonomous consumption = ₹ 100 Marginal
Propensity to Consume = 0.60 Investment = ₹ 200 (All India 2012)
Here, C̅ = ₹ 100, MPC or b = 0.60, I = ₹ 200
At equilibrium level, I = S = ₹ 200
Now, we know that, Y = C + S
Or Y – S = C
Or Y – S = C̅ + bY because C = C̅ + bY
Or Y- 200 = 100 + 0.6 Y
Or Y – 0.6 Y = 100 + 200
Or 0.4 Y = 300
Hence, Y = 300 / 0.4 = ₹ 750
Hence, National Income (Y) = ₹ 750
77.Find investment from the following. (All India 2012)
National Income = ₹ 600 Autonomous Consumption = ₹ 150
Marginal Propensity to Consume = 0.70
Here, Y = ₹ 600, C = ₹ 150, MPC Or b = 0.70
We know that, Y = C + S
Or S = Y – C
Or S = 600 – [C̅ + bY]
Or S = 600 – [150+ (0.7 × 600)]
Or S = 600 – [150 + 420]
Or S = 600 – 570 Or S = ₹ 30
As, I = S = ₹ 30
Hence, Investment = ₹ 30

78.In an economy a 40 % increase in investment results in a 40 % increase in income.

Calculate the Marginal Propensity to Consume. (Delhi (C) 2012)

MPC = 1 – 1 = 0
∴ MPC = 1 – MPS = 1 – 1 = 0

79.As a result of increase in investment by ₹ 60 crore, National Incomerises to ₹ 240 crore.

Calculate Marginal Propensity to Consume. (All India 2011)
Here, Change in Investment (ΔI) = ₹ 60 crore,
Change in Income (ΔY) = ₹ 240 crore

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Hence, Multiplier (K) = ΔY / ΔI=240 / 60 = 4
Now K = 11−MPC, Where MPC is the marginal prosensity to consume
Or 4 = 1 / 1−MPC
Or 4 – 4 MPC = 1
Or 4 MPC = 4 – 1
Or MPC = 3 / 4
MPC = 0.75

80.In an economy, investment is increased by ₹ 2,000 crore. Calculate the change in total
income, if Marginal Propensity to Save is 0.25. (All India 2010)
Here, Change in Investment (ΔI)= ₹ 2,000 crore,
Marginal Propensity to Save (MPS) = 0.25
Now, Multiplier (K) = 1 MPS =10.25 = 4
Again, we know that,

Or 4 = ΔY / 2000
Or ΔY = 2,000 × 4
Change in Total Income (ΔY) = ₹ 8,000 crore

81.Find the value of multiplier given Marginal Propensity to Consume = 1 and Marginal
Propensity to Save = 1. (All India 2010)
(i) Here, Marginal Propensity to Consume (MPC) = 1
Hence, Multiplier (K) = 1 / 1−MPC=1 // 1−1 = ∞
So, Multiplier (K) = ∞ (Infinity)
(ii) Here, Marginal Propensity to Save (MPS) = 1
Now, K = 1 / MPS=1 / 1
Hence, Multiplier (K) = 1

82.In an economy, as a result of increase in investment by ₹ 100 crore, National Income rises
by ₹ 1,000 crore. Find Marginal Propensity to Consume. (Delhi (C) 2010)
Here, Change in Investment (ΔI) = ₹ 100 crore,
Change in Income (ΔY)= ₹ 1,000 crore
Now, Multiplier (K) = ΔYΔI = 1000 / 100 = 10
Now, we know that, K = 1 / 1−MPC, Where MPC is the Marginal Propensity to Consume
Or 10 = 1 / 1−MPC
Or 10 – 10 MPC = 1
Or 10 MPC = 10 – 1
Or MPC = 910
Or MPC = 0.9

83.If Marginal Propensity to Save is one, what is the value of multiplier? What can you say
about the change in National Income, given Change in Investment. (Delhi (C) 2010)
Here, Marginal Propensity to Save (MPS) = 1
So, Multiplier (K) = 1 / MPS = 11 = 1
Now, suppose Change in Investment is given ₹ 100 crore
S0, K = Income(ΔY) / Investment(ΔI)
Or 1 = ΔY / 100

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Or Change in National Income (AY) = ₹ 100 crore,
So, it follows that the National Income will change in that quantum only with which investment
changes.

84.An economy is in equilibrium. From the following data about an economy calculate
autonomous consumption. (Delhi 2017)
Income = ₹ 5,000
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 800
Given,
Income (Y) = ₹ 5,000,
Marginal Propensity to Save (MPS) = 0.2, and Investment Expenditure = 800 We know that,
MPS + MPC = 1,
On substituting MPS = 0.2, we get,
MPC (b) = 1-0.2 = 0.8
We also know that, at the point of equilibrium, Savings = Investment
∴ Savings = ₹ 800
Now, Income = Consumption + Savings
5000 = C̅ + b. 5,000 + 800,
Where, C̅ = Autonomous Consumption and b = MPC
∴ 5,000 – 800 = C̅ + 0.8 x 5,000
4200 = C̅ + 4,000
∴ C̅ = 4,200 – 4,000 = 200
∴ Autonomous consumption in the economy = ₹ 200

85.An economy is in equilibrium. Calculate the investment expenditure from the following:
(All India 2015)
National Income = ₹ 800
Marginal Propensity to Save = 0.3
Autonomous Consumption = ₹ 100
Given, National Income (Y) = ₹ 800
Marginal Propensity to Save (MPS) = 0.3
Marginal Propensity to Consume
(MPC or b ) = 1 – MPS = 1 – 0.3 = 0.7
Autonomous Consumption (C̅) = 100
As the economy is in equilibrium, therefore,
Saving = Investment
So, Income
(Y) = Consumption (C) + Investment (I)
Also, we know that, C = C̅ + bY
∴ Y = C̅ + bY + I …(i)
On substituting the variables in equation (i), we get,
800 = 100 + 0.7(800) + 1,700 = 560 + I
I = 140, i.e. Investment = ₹ 140

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86.An economy is in equilibrium. Calculate the Marginal Propensity to Save from the
following: (All India 2015)
National Income = ₹ 1,000
Autonomous Consumption = ₹ 100
Investment = 120
According to the question.
National Income (Y) = 1,000
Autonomous Consumption (C̅) = ₹ 100
Investment (I) = ₹ 120
An economy is in equilibrium, therefore,
Saving = Investment
∴ Y = C̅ + I
Or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the variables in eq (i), we get,
1,000 = 100 + b (1,000) + 120
Or 1,000 – 220 = b (1,000)
Or b = 780 / 1,000 b = 0.78 (b = MPC)
MPS = 1 – MPC
∴ MPS = 1 – 0.78 = 0.22

87.An economy is in equilibrium. Calculate the National Income from the following: (All
India 2015)
Autonomous Consumption = 120
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 150
Autonomous Consumption (C̅) = ₹ 120
Marginal Propensity to Save (MPS) = 0.2
Marginal Propensity to Consume (MPC) = 1 – MPS
= 1 – 0.2
MPC = 0.8
Investment expenditure (I) = ₹ 150
As the economy is in Equilibrium, therefore,
Saving = Investment
Y=C+I
Or Y = C̅ + bY + I, …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
Y = 120 + 0.8 Y + 150
Y – 0.8 Y = 270
0.2Y = 270
Y = 270 / 0.2 = ₹ 1,350

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88.An economy is in equilibrium. Calculate National Income from the following: (Delhi 2015)
Autonomous Consumption = ₹ 100
Marginal Propensity to Save = 0.2
Investment Expenditure = ₹ 200
Autonomous Consumption (C̅) = ₹ 100
Marginal Propensity to Save (MPS) = 0.2
Investment Expenditure (I) = ₹ 200
Marginal Propensity to Consume (MPC) = 1 – MPS
= 1 – 0.2
∴ MPC (b) = 0. 8
As the economy is in equilibrium, therefore, Saving = Investment
Y= C + I
Y = C̅ + bY + I ,..(i)
C = C̅ + bY
On substituting the variables in eq (i), we get
Y = 100 + 0.8Y + 200
Y – 0.8Y = 300
Y = 300 / 0.2
Y= 1,500, i.e. National Income = ₹ 1,500

89.An economy is in equilibrium. Find „Autonomous Consumption‟ from the following:

(Delhi 2015)
National Income = ₹ 1,000
Marginal Propensity to Consume = 0.8
Investment Expenditure = ₹ 100
Now, National Income (Y) = ₹ 1,000
Marginal Propensity to Consume (MPC/b) = 0.8
Investment Expenditure (I) = ₹ 100,
At equilibrium. Saving = Investment
∴Y=C+I
Or Y = C̅ + bY + I ………(i)
C = C̅ + bY
On substituting the given variables in equation (i),
we get,
1,000 = C̅ + 0.8 (1000) + 100
1000 = C̅ + 800 + 100
C̅ = ₹ 100
i.,e. Autonomous Consumption = ₹ 100

90.An economy is in equilibrium. Find Marginal Propensity to Consume from the following:
(Delhi 2015)
National Income = ₹ 2,000
Autonomous Consumption = ₹ 400
Investment Expenditure = ₹ 200
Given, National Income (Y) = ₹ 2,000
Autonomous Consumption (C̅) = ₹ 400
Investment Expenditure (I) = ₹ 200
It is given in the question that the economy is in equilibrium,
hence Saving = Investment
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∴Y=C+I
Or Y = C̅ + bY + I ………. (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
2,000 = 400 + b (2,000) + 200
2,000 b = 1,400
b = 1,400 / 2,000
b = 0.7, i.e. Marginal Propensity to Consume (MPC) = 0.7

91.An economy is in equilibrium. Calculate Marginal Propensity to Save from the following:
(Foreign 2015)
National Income = ₹ 1,000
Autonomous Consumption = ₹ 100
Investment Expenditure = ₹200
It is given that.
National Income (Y) = ₹ 1,000
Autonomous Consumption (C̅) = ₹ 100
Investment expenditure (I) = ₹ 200
At the equilibrium level, Saving = Investment
∴ Y = C + I (as S = I)
Or Y = C̅ + by + I ……… (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
⇒ 1,000 = 100 + b (1000) + 200
or 1000 = 300 + 1,000 b
1,000 – 300 = 1000 b
Or 700/1000 = b = 0.7
Or Marginal Propensity to Consume (MPC) = 0.7
Marginal Propensity to Save (MPS) = 1 – MPC
= 1 – 0.7
∴ MPS = 0.3

92.Calculate Marginal Propensity to Consume from the following data about an economy
which is in equilibrium.
National Income = ₹ 2,000
Autonomous Consumption Expenditure = ₹ 200
Investment Expenditure = ₹ 100 (All India 2014)
Given, Income (Y) = ₹ 2,000
Autonomus Consumption (C̅) = ₹ 200,
Inve-tment (I) = ₹ 100 We know, Y = C + I
Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given varibales in equation(i), we get,
2,000 = 200 + 2000 b + 100
b = 2000−300 / 2,000
= 1,700 / 2,000 = 0.85
Thus, Marginal Propensity to Consume (MPC) = 0.85

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93.Calculate autonomous consumption expenditure from the following data about an
economy which is in equilibrium.
National Income = ₹ 500
Marginal Propensity to Save = 0.30
Investment Expenditure = ₹ 100 (All India 2014)
Given, National Income (Y) = ₹ 500,
Marginal Propensity to Save (MPS) = 0.30, Investment (I) = ₹ 100
Marginal Propensity to Consume (b/MPC)
= 1 – MPS, 1 – 0.30 = 0.70
Also, Y = C + I
Or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
500 = C̅ + 0.70 × 500 + 100
500 = C̅ + 350 + 100
C̅ = 500 – 450 = 50
∴ Autonomous Consumption (C) = ₹ 50

94.Calculate investment expenditure from the following data about an economy which is in
equilibrium. (Delhi 2014)
National Income = ₹ 1,000
Marginal Propensity to Save = 0.25
Autonomous Consumption Expenditure = ₹ 200
National Income (Y) = ₹ 1000
Marginal Propensity to Save (MPS) = 0.25, Autonomous
Consumption Expenditure (C) = ₹ 1000
Marginal Propensity to Consume (MPC/b) = I – MPS = 1 – 0.25 = 0.75
We know, Y = C + I, or Y = C̅ + bY + I …(i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1000 = 200 + 0.75 × 1000 + I
1000 = 200 + 750 + I
1,000 = 950 + I
⇒ I = 1000 – 950 = 50
i. e. Investment = ₹ 50

95.Calculate autonomous consumption expenditure from the following data about an

economy which is in equilibrium.
National Income = ₹ 1200 (Delhi 2014)
Marginal Propensity to Save = 0.20
Investment Expenditure = ₹ 100
Given, Investment Expenditure (I) = ₹ 100,National Income (Y) = ₹ 1200,
Marginal Propensity to Save (MPS) = 0.20 Marginal Propensity to Consume (MPC/b)
= 1 – Marginal Propensity to Save (MPC) = 1 – 0.20 = 0.80
Also, Y = C + I, or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1,200 = C̅ + 0.80 × 1200 + 100
1200 = C̅ + 960 + 100
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= C̅ + 1,060
⇒ C̅ = 1200 – 1,060 = ₹ 140
Autonomous Consumption Expenditure (C̅) = ₹ 140

96.Calculate Marginal Propensity to Consume from the following data about an economy
which is in equilibrium. (Delhi 2014)
National Income = ₹ 1,500
Autonoumous Consumption Expenditure = ₹ 300
Investment Expenditure = ₹ 300
National Income (Y) = ₹ 1,500,
Autonomous Consumption Expenditure (C̅) = ₹ 300,
Investment (I) = ₹ 300
Also, Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1,500 = 300 + b (1,500) + 300
1,500 = 600 + 1,500 b
900 = 1,500 b or b = 900/1,500
b = 0.6
Therefore, Marginal Propensity to Consumer (MPC/b) = 0.6

97.Calculate „autonomous consumption expenditure‟ from the following data about an

economy which is in equilibrium.
National Income = ₹ 900
Marginal Propensity to Save = 0.10 Investment Expenditure = ₹ 80 (Foreign 2014)
It is given that,
National Income (Y) = ₹ 900,
Marginal Propensity to Save (MPS) = 0.10, and Investment (I) = ₹ 80
Marginal Propensity to Consume (MPC/b)
= 1 – MPS = 1 – 0.10 = 0.90
At the equilibrium level. Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in equation (i).
we get,
900 = C̅ + 0.90 x 900 + 80
900 = C̅ + 810 + 80
900 = C̅ + 890
⇒ C̅ = 900 – 890 = 10
i.e. Autonomous Consumption (C̅) = ₹ 10

98.Calculate „investment expenditure‟ from the following data about an economy which is in
equilibrium.
National Income = ₹ 700 Marginal Propensity to Consume = 0.8 Autonomous Consumption
Expenditure = ₹ 70 (Foreign 2014)
It is given that,
National Income (Y) = ₹ 700,
Marginal Propensity to Consume (MPC/b) = 0.8 and
Autonomous Consumtion Expenditure (C̅) = ₹ 70
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At the equilibrium level, Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C= C̅ + bY
On substituting the given variables in equation (i), we get,
700 = 70 + 0.8 × 700 + I
700 = 70 + 560 + I
700 = 630 + I
⇒ I = 700 – 630 = 70
i.e. Investment Expenditure = ₹ 70

99.Calculate „Marginal Propensity to Consume‟ from the following data about an economy
which is in equilibrium. (Foreign 2014)
National Income = ₹ 800 Autonomous Consumption Expenditure = ₹ 100
Investment Expenditure = ₹ 100
It is given that,
National Income (Y) = ₹ 800,
Autonomous Consumption Expenditure (C̅) = ₹ 100 and Investment Expenditure (I) = ₹ 100
As we know that at equilibrium level,
Saving = Investment,
∴ Y = C + I Or Y = C̅ + bY + I … (i)
C = C̅ + bY
On substituting the given variables in eq (i), we get,
800 = 100 +b (800) + 100
800 = 200 + 800 b
600 = 800 b
Or b = 600/800 = 0.75
i.e. Marginal Propensity to Consume (MPC/b) = 0.75

100.In an economy the Marginal Propensity to Save is 0.4. National Income in the economy
increase by ₹ 200 crore as a result of change in investment. Calculate the change in
investment. (All India 2011)

∴ ΔI = 200 / 2.5 = 200 × 10 / 25 = ₹ 80 crore

101.State whether the following statements are true or false. Give reasons for your answer.
(i) When Marginal Propensity to Consume is greater than Marginal Propensity to Save, the
value of investment multiplier will be greater than 5.
(ii) The value of Marginal Propensity to Save can never be negative. (Delhi 2010)
(i) No, the statement is false. This can be understood by an example. Suppose, the value of
Marginal Propensity to Consume (MPC) = 0.6, hence. Marginal Propensity to Save (MPS) = 0.4 (as
MPS = 1 -MPC) Here, MPC > MPS Now, Investment Multiplier
(K) = 1 / 1−MPC
= 1 / 1−0.6=1 / 0.4 = 2.5
So, K < 5 even if MPC > MPS.
(ii) Yes, the statement is true.

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102.Giving reasons, state whether the following statements are true or false.
(i) Average Propensity to Save is always greater than zero.
(ii) Value of investment multiplier varies between zero and infinity. Delhi 2010
(i) No, the statement is false.
(ii) No, the statement is false.
We know that,
K = 1 / 1−MPC so even if the Marginal Propensity to Consume (MPC) will have its minimum value,
i.e. 0, the investment multiplier will be I.
Similarly, when MPC = 1, the value of investment multiplier is infinity. Hence, value of investment
multiplier varies between one and infinity.

103.Giving reasons, state whether the following statements are true or false.
(i) When Marginal Propensity to Consume is zero, the value of investment multiplier will also
be zero.
(ii) Value of Average Propensity to Save can never be less than zero. (All India 2010)
(i) No, the statement is false.
When Marginal Propensity to Consume (MPC) is zero, the value of investment multiplier will be 1
(not zero).
K = 1 / 1−MPC or K = 1 / 1−0=11 = 1
(ii) The statement is false.

104.Giving reasons state whether the following statements are true or false.
(i) If the ratio of Marginal Propensity to Consume and Marginal Propensity to Save is 4 : 1,
the value of investment multiplier will be 4.
(ii) Sum of Average Propensity to Consume and Marginal Propensity to Consume is always
equal to 1. (All India 2010)
(i) No, the statement is false.
If the ratio of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) is 4 :
1, then the value of investment multiplier is 5 and not 4.
MPC = 4 / 4+1=4 / 5 = 0.8
K = 1 / 1−0.8=1 / 0.2 = 5
(ii) No, the statement is false.
The sum of average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) is
not necessarily 1.
Consider the following schedule
Income Consumption Change in Change in Average Marginal
(Y) (C) Income Consumption Propersity to Propersity
(ΔY) (ΔC) Consume C/Y Consume
(ΔC/ΔY)
1000 800 – – 0.8 –
1500 1200 500 400 0.8 0.8
In the given schedule, APC = 0.8 and MPC = 0.8
And 0.8 + 0.8 ≠ 1
Therefore, the sum of APC and MPC is not 1,
i.e. APC + MPC ≠ 1

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105.What is meant by the “Effective Demand Principle” in Keynesian theory of employment?
Discuss using a schedule or a diagram. (All India 2019)
According to the Keynesian theory, “Effective Demand Principle”, equilibrium happens to a point
where Aggregate Demand is equal to Aggregate Supply at an under employment situation, which
creates deficit demand or deflationary gap.
Deflationary gap refers to a situation, where AD = AS at less than full employment hereby creating
unemployment due to under utilised capacity as shown in the diagram below

As shown in the diagram, AD (ex-ante) and AS (ex-ante) intersects at point E, which is the level of
effective demand at full employment level. Now, if AD1 (ex-post) intersects AS(ex-ante) at E‟ then it
gives under full employment equilibrium due to shortage of effective demand. „Ea‟ area in the
above diagram shows the deficit demand which creates deflationary gap.

106.Assuming that increase in investment is ₹ 1,000 crore and Marginal Propensity to

Consume is 0.9, explain the working of Multiplier. (Delhi 2017)
Investment Multiplier or simply the multiplier is measured as a ratio between change in output or
income and change in investment.
Symbolically, Investment multiplier (K)

Also, there is a direct relationship between Investment Multiplier and Marginal Propensity to
Consume (MPC). Multiplier can also be estimated by using the following formula
K = 1 / 1−MPC
So, if MPC = 0.9, then K = 1 / 1−0.9=1 / 0.1 = 10
Now, if the investment increases by ₹ 1,000 crore, then increase in income can be computed by
substituting the values in the following formula
K = ΔY / ΔI ⇒ 10 = ΔY / 1,000
⇒ Change in Income (A Y) = ₹ 10,000crore
So, if investment increases by ₹ 1,000 crore and MPC = 0.9, then in such an instance, income will
increase by ₹ 10,000 crore.

107.Assuming that increase in investment is ₹ 800 crore and Marginal Propensity to

Consume is 0.8, explain the working of Multiplier. (All India 2017)
Change in Income = ₹ 4,000 crore
Solve as Q. No. 2 on page 108 and 109.
108.Assuming that‟s increase in investment is ₹ 900 crore and Marginal Propensity to
Consume is 0.6, explain the working of Multiplier. (All India 2017)
Increase in income = ₹ 2,250 crore
Solve as Q. No. 2 on page 108 and 109.

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109.Calculate investment expenditure from the following data about an economy which is in
equilibrium. (All India 2014)
National Income = ₹ 1,000
Marginal Propensity to Save = 0.20
Autonomous Consumption Expenditure = ₹ 100
Given, National Income (Y) = ₹ 1,000,
Marginal Propensity to Save (MPS) = 0.20,
Autonomous Consumption (C̅) = ₹ 100
Marginal Propensity to Consume
(b/MPC) = I – MPS, I – 0.20 = 0.80
Y = C + I Or Y = C̅ + bY + I …………. (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
1000 = 100 + 0.80 × 1000 + I
I = 1000 – 900 = 100
i.e. Investment = ₹ 100

110.On the basis of the following information about an economy calculate its equilibrium
level of income. (Delhi (C) 2014)
Autonomous Consumption = ₹ 100
Marginal Propensity to Consume = 0.75
Investment = ₹ 5,000
Income (Y) = Consumption (C) + Investment (I), since at the equilibrium level, Saving = Investment
Also, Consumption Expenditure (C) = C̅ + bY
Where, C̅ = Autonomous Consumption
b = Marginal Propensity to Consume
Y = Income
So, from the above two relations, we get,
Y = C̅ + bY + I
Y = 100 + 0.75Y + 5100
Y – 0.75Y = 5,100
0.25Y = 5100
Y = 5,100 / 0.25 = 20,400
Therefore, equilibrium level of income = ₹ 20,400

111.From the following data about an economy, calculate its equilibrium level of income:
Marginal Propensity to Consume = 0.5
Autonomous Consumption = ₹ 300
Investment = ₹ 6,000 (Delhi (C) 2014)
Autonomous Consumption (C̅) = ₹ 300; Investment(I) = ₹ 6,000 We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = 300 + 0.5Y + 6,000
⇒ Y – 0.5Y = 6300
0.5Y = 6,300
⇒ Y = 6,300 / 0.5 = 12,600

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112.(i) Explain the distinction between ex-ante measures and ex-post measures.
(ii) From the following data about an economy, calculate its equilibrium level of income
Autonomous consumption = ₹ 200 Marginal Propensity to Consume = 0.9 Investment = ₹
1,000 (All India (C) 2014)
(i)(a) Ex-ante measures These measures are planned or desired measures. Ex-ante measures are
generally classified as:
 Ex-ante savings These are desired savings. These represent the amount that households
firms want to save during the period of an accounting year.
 Ex-ante investments These are desired investments. These represent the amount that
households/firms want to invest during the period of an accounting year.
(b) Ex-post measures These measures are actual or realised measures. Ex-post measures are
generally classified as
 Ex-post savings These represent the actual savings of firms or households during the period
of an accounting year.
 Ex-post investments These represent the actual investments of firms or households during
the period of an accounting year.
(ii) Autonomous Consumption (C̅) = 1200
Marginal Propensity to Consume (MPC/b) = 0.9
Investment (I) = ₹ 1,000
We know that.
Income (Y) = C + I
And C = C̅ + b(Y)
⇒ Y = 200 + 0.9Y + 1,000
⇒ Y – 0.9 Y = 1,200 ⇒ 0.1 Y = 1,200
⇒ Y = 1,200 / 0.1 = 1,200 × 10 / 1 = ₹ 12,000
∴ Equilibrium level of income will be ₹ 12,000.

113.From the following data about an economy, calculate its equilibrium level of income :
Marginal Propensity to Consume = 0.75
Autonomous consumption = ₹ 200 Investment = ₹ 6,000 (All India (C) 2014)
Autonomous Consumption (C̅) = ₹ 200
Marginal Propensity to Consume (MPC/b) = 0.75
Investment (I) = ₹ 6,000
We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = C̅ +b(Y) + I
⇒ Y = 200 + 0.75Y + 6,000
⇒ Y – 0.75Y = 6200
⇒ 0.25Y = 6200
⇒ Y = 6,200 / 0.25 = 6,200 × 100 / 25
= ₹ 24,800
∴ Equilibrium level of income will be ₹ 24,800.

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14.From the following data about an economy, calculate its equilibrium level of income :
Autonomous consumption = ₹ 400
Marginal Propensity to Consume = 0.5
Investment = ₹ 4,000 (All India (C) 2014)
Given,
Autonomous Consumption (C̅) = ₹ 400
Marginal Propensity to Consume (MPC/ b) = 0.5
Investment (I) = ₹ 4,000
We know that,
Income (Y) = C + I
And C = C̅ + b(Y)
∴ Y = C̅ + b(Y) + I
⇒ Y = 400 + 0.5 (Y) + 4,000
⇒ Y – 0.5Y = 4,400
⇒ 0.5Y = 4,400
⇒ Y = 4400 / 0.5 = 4,400 × 10 // 5 = ₹ 8,800
∴ Equilibrium level of income will be ₹ 8,800.

115.(i) Distinguish between Aggregate Demand and Aggregate Supply.

(ii) From the following data about an economy, calculate its equilibrium level of income.
Marginal Propensity to Consume = 0.8
Investment = ₹ 5,000
Autonomous consumption = ₹ 500 (All India (C) 2014)

(i) Differences between Aggregate Demand and Aggregate Supply are

Basis Aggregate Demand Aggregate Supply
Meaning Aggregate Demand (AD) refers to the Aggregate Supply (AS) means the
total value of final goods and services value of final goods and services
that all sectors of the economy taken planned to be „produced‟ by all the
together are planning to „buy‟ at a production units in the economy
given level of income during a period of taken together during a period of
time. time.
Components Components of AD are private Components of AS are consumption
consumption expenditure, private expenditure and savings.
investment expenditure, government
expenditure and net exports.
Origin of AD curve originates from Y-axis. AS curve originates from origin.
the curve
(ii) It is given that,
Marginal Propensity to Consume (MPC/b) = 0.8
Investment (I) = ₹ 5,000, and
Autonomous Consumption (C̅) = ₹ 500
At the equilibrium level, Saving = Investment
∴ Y = C + I Or Y = C̅ + bY + I …… (i)
C = C̅ + bY
On substituting the given variables in equation (i), we get,
Y = 500 + 0.8Y + 5,000
Y – 0.8Y = 5,500

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0.2Y = 5,500
Or Y = 5,500/0.2 = 27,500
i.e. Equilibrium level of Income (Y) = ₹ 27,500
Question 116.
In an economy C = 200 + 0.75Y is the consumption function where C is consumption expenditure
and Y is National Income. Investment expenditure is ₹ 4,000. Calculate equilibrium level of income
and consumption expenditure. (All India 2013)
Answer:
Consumption function (C) = 200 + 0.75Y,
Investment (I) = ₹ 4,000
Now, Y = C + I Or Y = 200 + 0.75Y + 4,000
Y – 0.75Y = 4,200 Or 0.25Y = 4,200
⇒ Y = 4200 × 100 / 25
⇒ Y = 16,800
∴ Equilibrium income will be ₹ 16,800.
∴ Consumption Expenditure
(C) = 200 + 0.75Y = 200 + 0.75 (16,800)
= 200 + 12,600 = ₹ 12,800

117. From the following data about an economy, calculate

(i) Equilibrium level of National Income and
(ii) Total consumption expenditure at equilibrium level of national income.
(a) C = 200 + 05Y is the consumption function, where C is Consumption Expenditure and Y is
National Income.
(b) Investment expenditure is ₹ 1,500. (All India 2013)
(i) Consumption function (C) = 200 + 0.5Y Investment (I) = ₹ 15,000 We know that, Y = C + I
∴ Y = 200 + 0.5Y + 1,500
⇒ Y = 1,700 + 0.5Y
Or 0.5Y = 1,700
⇒ Y = 1,700 × 10 / 5 = 3,400
Equilibrium level of National Income (Y) = ₹ 3,400
(ii) Total Consumption Expenditure (C)
= 200 + 0.5Y = 200 + 0.5 (3,400)
= 200 + 1,700 = ₹ 1,900

118. From the data given below about an economy, calculate (i) Investment expenditure (ii)
Consumption expenditure.
Equilibrium level of Income = ₹ 5,000
Autonomous Consumption = ₹ 500
Marginal Propensity to Consume = 0.4 (All India 2013)
Given, Equilibrium Level of Income (Y) = ₹ 5,000,
Autonomous Consumption (C̅) = ₹ 500,
and Marginal Propensity to Consume (MPC/b) = 0.4
We know that,
Consumption (C) = C̅ + bY = 500 + 0.4 × 5,000 = 500 + 2,000
∴ Consumption (C) = ₹ 2,500
We also know that,
Income (Y) = Consumption (C) + Investment (I)
At the equilbrium level, Saving = Investment
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∴ 5,000 = 2,500 + I Or I = 5,000 – 2,500 = 2,500
So, Investment Expenditure (I) = ₹ 2,500
Consumption Expenditure (C) = ₹ 2,500

119. In an economy, S = -100 + 0.6 Y is the saving function, where S is saving and Y is
National Income. If investment expenditure is ₹ 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
(i) Given, S = -100 + 0.6Y, and Investment Expenditure (I) = ₹ 1100
At equilibrium level of National Income, Saving = Investment
∴ -100 + 0.6Y = 1100
0.6Y = 1100 + 100
Y = 1200 / 0.6 = ₹ 2000
∴ Y = ₹ 2,000, i.e.
Equilibrium level of National Income = ₹ 2,000
(ii) Consumption expenditure at equilibrium level of National Income Income (Y) = Consumption
(C) + Investment (I)
Or C = Y – I
C = 2,000 – 1,100 = ₹ 900
∴ Consumption (C) = ₹ 900

120. C = 100 + 0. 4Y is the consumption function of an economy, where C is Consumption

Expenditure and Y is National Income. Investment expenditure is ₹ 1,100. Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
(i) Given, C = 100 + 0.4 Y, and
Investment (I) = ₹ 1,100
Equilibrium level of National Income (Y) = Consumption (C) +Investment (I)
Y= 100 + 0.4Y + 1100
Y – 0.4Y = 100 + 1,100
0.6Y = 1,200
Y = 1200 / 0.6 = 2000
i.e. Equilibrium level of income (Y) = 2000
(ii) Consumption expenditure at equilibrium
level of income
C = 100 + 0.4 Y
C = 100 + 0.4 × 2,000
C = 100 + 800 = 900
i.e. Consumption Expenditure (C) = ₹ 900

121. C = 50 + 0. 5Y is the consumption function of an economy, where C is Consumption

Expenditure and Y is National Income and Investment Expenditure is ₹ 2,000 in an economy.
Calculate
(i) Equilibrium level of National Income.
(ii) Consumption Expenditure at equilibrium level of National Income. (Delhi 2013)
(i) Given, C = 50 + 0.5Y, and Investment (I) = ₹ 2000
Equilibrium level of National Income (Y) = Consumption (C) + Investment (I)
Y = 50 + 0.5y + 2000
Y – 0.5 Y = 50 + 2000 = 2050
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Y = 2050/0.5 = 4100
i.e. Equilibrium level of Income (Y) = ₹ 4100
(ii) Consumption expenditure at equilibrium level of National Income
C = 50 + 0.5Y
C = 50 + 0.5 × 4100
C = 50 + 2,050
i.e. Consumption Expenditure (C) = ₹ 2,100

122. In an economy 75% of the increase in income is spent on consumption. Investment is

increased by ₹ 1,000 crore. Calculate (Delhi 2010)
(i) Total increase in income.
(ii) Total increase in consumption expenditure.
(i) Here, Marginal Propensity to Consume (MPC) = 0.75
and change in investment (ΔI) = ₹ 1000 crore
Now Multiplier (K) = 1 / 1−MPC=1 / 1−0.75 = 4
Again we know that

Or 4 = ΔY / 1000
Or AY = ₹ 4,000
Or Increase in Income = ₹ 4,000 crore

Or ΔC = MPC × ΔY
Or ΔC = 0.75 × 4,000
Or Increase in consumption expenditure (ΔC) = ₹ 3000 crore

123. In an economy, the equilibrium level of income is ₹ 12,000 crore. The ratio of Marginal
Propensity to Consume and Marginal Propensity to Save is 3 : 1. Calculate the additional
investment needed to reach new equilibrium level of income of ₹20,000 crore. (All India
2010)
Here, Change in Income (ΔY) = ₹ 8,000 crore (₹ 20,000– ₹ 12,000)
Marginal Propensity to Consume (MPC)
= 34 as (MPCMPS = 31) = 0.75
Where, MPS is the Marginal Propensity to Save
Hence, Multiplier (K)

Or Additional Investment Required = ₹ 2,000 crore

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124. How is saving and investment approach derived from the Aggregate Demand and
supply approach of income determination? Explain and use diagrAnswer: (Delhi (C) 2010)
The equilibrium level of income or output is that level at which the planned savings and planned
investments are equal. It is derived from Aggregate Demand and Supply approach in the following
way.
Aggregate Demand (AD) in a two sector economy is defined as the sum of Consumption
Expenditure(C) and Investment Expenditure (I) i.e. AD = C + I, whereas Aggregate Supply (AS) is
defined as the sum of Consumption (C) and Saving (S) i.e. AS = C + S.
Mathematically, AD = AS
Or C + I = C + S
Hence, I = S
Or S = I

In the graph given, OP or OP is the equilibrium level of income. E is the equilibrium point where
Aggregate Demand equals Aggregate Supply. Equality between AS and AD implies the equality
between S and I. When we extend the line EP vertically downward, it meets at point E‟ with S and I.
It is the equilibrium point of saving and investment approach. OP or OP represents the level of
income at which the economy is in equilibrium.

125. Give the meaning of involuntary unemployment. (Delhi 2017) Or

What is involuntary unemployment? (Delhi 2014)
Involuntary unemployment is a situation in the economy when even, if people are willing to work
at existing wage rates, they are not getting work.
126. Give the meaning of deflationary gap. (All India 2014; Delhi 2010)
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand from the level required to maintain a full employment equilibrium. This short fall is
termed as deflationary gap.
127. What is meant by excess demand in macroeconomics? (Foreign 2014) Or
What is excess demand in macroeconomics? (All India 2014)
The situation of an economy, when Aggregate Demand is more than the Aggregate Supply
corresponding to full employment, it is termed as excess demand situation.
128. Define inflationary gap. (All India 2014) Or
Give the meaning of inflationary gap. (All India (C) 2012, 2010)
The excess of Aggregate Demand above the level that is required to maintain full employment
equilibrium in an economy, is termed as inflationary gap.

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129. What is full employment? (All India 2014)
A situation when all those who are willing to or able to work are getting work, is termed as full
employment in an economy.
130. Give the meaning of deficient demand. (Foreign 2014)
A situation when the Aggregate Demand is less than the Aggregate Supply in an economy,
corresponding to full employment, is termed as deficient demand.
131. State the impact of „Excess Demand‟ under the Keynesian theory on employment in an
economy. (All India 2019) Or
Describe the adjustments that may take place in an economy when Ex-ante Aggregate
Demand is greater than Ex-ante Aggregate Supply. (All India 2019) Or
In an economy planned spending is greater than planned output. Explain all the changes
that will take place in the economy. (All India 2014) Or
In an economy, Aggregate Demand is greater than Aggregate Supply. Explain the changes
that will take place in this economy. (Delhi (C) 2011)
When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output)
in an economy, it will lead to inflationary pressure in the economy when price level and wage rate
tends to rise. This inflationary gap encourages producers to increase their output to meet the
excess demand. It will lead to gradual increase in income and output and ultimately Aggregate
Supply will also increase to the point to be equal to Aggregate Demand.

132. Describe the adjustments that may take place in an economy when Ex-ante savings are
less than Ex-ante Investments. (All India 2019)
If ex-ante savings is less than ex-ante investment (I), then savings curve lies below the investment
curve, i.e households are saving less, which means that they are speeding more. This will lead to an
unplanned, undesired decrease in inventories of unsold stock. To raise that unshod stock,
producers will increase employment so as to increase their output and they will come back to
output level where savings become equal to investment and there is thus no further tendency to
change.

133. Describe the adjustments that may take place in an economy when Ex-ante Savings are
greater than Ex-ante Investments. (All India 2019)
If Savings(S) is greater than Investment (I), then saving curve lies above the investment curve, i.e.
households are saving more, which means that they are spending less. This will lead to an
unplanned, undesired increase in inventories of unsold stock. To clear this unsold stock, producers
will cut back employment so as to reduce their output and they will come back to output level
where savings become equal to investment and there is thus no further tendency to change.

134. What is meant by inflationary gap? State three measures to reduce this gap. (March 23)
Inflationary gap:
The excess of Aggregate Demand above the level that is required to maintain full employment
equilibrium in an economy, is termed as inflationary gap.
The following are the three measures to reduce this gap
 Reduction in government expenditure on public works, public welfare, defence etc.
 Reduction in public expenditure on transfer payments and subsidies.
 Increase in taxes to lower the disposable income with the people.

135. Explain the role of taxation in reducing excess demand. (Delhi (C) 2016)
Excess demand refers to the situation when Aggregate Demand (AD) is in excess of Aggregate

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Supply (AS) corresponding to full employment in the economy.

In a situation of excess demand, government raises the rates of all taxes. This reduces the
purchasing power of the people and reduces both consumption and investment expenditures. A
fall in consumption and investment expenditures reduces the level of Aggregate Demand and
helps to check the problem of excess demand.

136. Explain how controlling money supply is helpful in reducing excess demand. (India 16)
The Reserve Bank of India controls money supply in the country with the help of its monetary
policy.
The various tools of the monetary policy which are helpful in reducing excess demand are
 Bank rate is increased.
 Government securities are sold in the open market.
 Cash reserve ratio and statutory liquidity ratio are increased.
 Margin requirements are increased.
 The RBI will persuade the commercial banks to make the credit costlier or decrease the
availability of credit.
 Credit rationing will be encouraged.
The above quantitative (i-iii) and qualitative (iv-vi) measures will decreases the money supply in the
economy. As money supply decreases, it leads to decrease in liquidity in the economy. Decreased
liquidity causes a fall in the level of Aggregate Demand, and hence the problem of excess demand
is checked.

137. Explain the changes that take place when Aggregate Demand is less than Aggregate
Supply. (All India (C) 2016) Or
Explain the meaning of deflationary gap with the help of diagram. (All India (C) 2015) Or
What is the meaning and implications of deflationary gap? (All India 2011) Or
In an economy, Aggregate Demand is less than Aggregate Supply. Explain the changes that
will take place in this economy. (All India 2011)
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand from the level required to maintain a full employment equilibrium.

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This short fall is termed as deflationary gap. EF is deflationary gap in the diagram given below.

Deflationary Gap = Deficient Demand = ADFE – ADIU = EF

Where, ADFE = AD in full employment
ADIU =AD in involuntary unemployment.
As a result of this, producers will stop producing more and hence, income level will fall in the
economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to
Aggregate Demand.

138. Give the meaning of

(i) involuntary unemployment (ii) inflationary gap (Delhi (C) 2015)
(i) Involuntary unemployment:
It is a situation in the economy when even, if people are willing to work at existing wage rates, they
are not getting work.
(ii) Inflationary gap:
The excess of Aggregate Demand above the level that is required to maintain full employment
equilibrium in an economy, is termed as inflationary gap.

139. Give the meaning of

(i) Autonomous consumption, and (ii) Full employment (Delhi (C) 2015)
(i) Autonomous consumption:
The initiator minimum level of consumption required for sustenance at zero level of income is
termed as autonomous consumption.
(ii) Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full
employment in an economy.

140. Give the meaning of aggregate demand and full employment. (Delhi (C) 2015)
Aggregate demand:
The sum total of the demand for all the goods and services in an economy during an accounting
year is termed as Aggregate Demand of the economy.
Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full
employment in an economy.

141. Explain the distinction between voluntary and involuntary unemployment. (India 2011)
Or Distinguish between voluntary unemployment and involuntary unemployment. (Del2011)
Voluntary unemployment is a kind of unemployment, when people are able to work but not willing
to work at all or are not willing to work at the existing wage rate. It is self induced.
Involuntary unemployment is a situation in the economy when even if people are able and willing
to work at existing wage rates, they are not getting work. Hence, they are unemployed against
their wishes.
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142. In the given figure, what does the gap „KT‟ represent? State any two fiscal measures to
correct the situation. (Delhi 2019)

Answer:
In the given figure, the gap KT represents inflationary gap. AD and AS represents Aggregate
Demand and Aggregate Supply respectively at full employment level and „E‟ is the point of
equilibrium. AD represents actual aggregate demand which exceed aggregate demand at the point
of equilibrium. This will create inflationary pressures in the economy.
Two fiscal measures to correct the situation are as follows
 Increase tax
 Reduce government expenditure

143. Discuss the working of the adjustment mechanism in the following situations.
(a) Aggregate demand is greater than Aggregate supply.
(b) Ex-ante investments are less than Ex-ante savings. (All India 2019)
(a) When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned
output) in an economy, it will lead to inflationary pressure in the economy when price level and
wage rate tends to rise. This inflationary gap encourages producers to increase their output to
meet the excess demand. It will lead to gradual increase in income and output and ultimately
Aggregate Supply will also increase to the point to be equal to Aggregate Demand.
(b) If Savings(S) is greater than Investment (I), then saving curve lies above the investment curve,
i.e. households are saving more, which means that they are spending less. This will lead to an
unplanned, undesired increase in inventories of unsold stock. To clear this unsold stock, producers
will cut back employment so as to reduce their output and they will come back to output level
where savings become equal to investment and there is thus no further tendency to change.

144. What is monetary policy? State any three instruments of monetary policy. (Apr re-ex18)
Monetary Policy: It is the policy of correcting excess or deficient demand in the economy by
controlling the supply of credit. It regulates the cost of credit (i.e. rate of interest) and availability of
credit (i.e. money supply).
The three instruments of monetary policy include
 Open market operations
 Cash reserve ratio
 Margin requirements

145. Define full employment in an economy. Discuss the situation when Aggregate Demand
is more than Aggregate Supply at full employment income level. (April re-exam 2018)
Full employment:
A situation when all those who are willing to or able to work are getting work, is termed as full
employment in an economy.
When AD is more than AS:
When Aggregate Demand (planned spending) in greater than Aggregate Supply (planned output)
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in an economy, it will lead to inflationary pressure in the economy when price level and wage rate
tends to rise. This inflationary gap encourages producers to increase their output to meet the
excess demand. It will lead to gradual increase in income and output and ultimately Aggregate
Supply will also increase to the point to be equal to Aggregate Demand.

146. Distinguish between Inflationary gap and Deflationary gap. (All India 2012)
Differences between inflationary gap and deflationary gap are
Basis Inflationary Gap Deflationary Gap
Meaning The excess of aggregate demand above The short fall of aggregate demand below
the level that is required to maintain full the level that is required to maintain full
employment level of equilibrium is employment level of equilibrium is
termed as inflation any gap. termed as deflationary gap.
Effect Inflationary gap causes inflation and Deflationary gap causes deflation and
increases wages and price level in the decreases wages and price level in the
economy. economy.

147. Discuss the adjustment mechanism in the following situations. (All India 2019)
(a) Aggregate Demand is less than Aggregate Supply.
(b) Ex-ante Investments are greater then Ex-ante Savings.
(a) Adjustment mechanism when aggregate demand is less than aggregate supply:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand from the level required to maintain a full employment equilibrium.
This short fall is termed as deflationary gap. EF is deflationary gap in the diagram given below.

Deflationary Gap = Deficient Demand = ADFE – ADIU = EF

Where, ADFE = AD in full employment
ADIU = AD in involuntary unemployment.
As a result of this, producers will stop producing more and hence, income level will fall in the
economy. The fall in Aggregate Supply will continue till the time, it again becomes equal to
Aggregate Demand.
(b) Adjustment mechanism when ex-ante investments are greater than ex-ante savings:
If ex-ante savings is less than ex-ante investment (I), then savings curve lies below the investment
curve, i.e households are saving less, which means that they are speeding more. This will lead to an
unplanned, undesired decrease in inventories of unsold stock. To raise that unshod stock,
producers will increase employment so as to increase their output and they will come back to
output level where savings become equal to investment and there is thus no further tendency to
change.

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148. What are two alternative ways of determining equilibrium level of income? How are
these related? (April re-exam 2018)
The equilibrium level of income/output can be studied with the help of following two approach
1. AS = AD approach Equilibrium level of output in an economy is determined at a point where
planned spending (i.e. AD = C + I) equals to planned output (i.e.Y/AS = C + S).
2. S = I approach Equilibrium output /GDP is achieved, when S = I.
Both Approach are Interrelated We know that,
=+=+=
In simple words, we can say that equality between AS and AD implies the equality between S and I.
We can explain it with the help of following diagram

There is one and only one equilibrium of GDP, when AS = AD (i.e Y = AD) or when S = I. In either
case, the equilibrium of GDP= OQ.

149. Explain the situation of deficient demand in an economy. Also explain the role of repo
rate in correcting his. (All India (C) 2016)
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand (AD) from the level that is required to maintain a full employment equilibrium. This short
fall is termed as deflationary gap or deficient demand.

In this figure, ADFE = AD at full employment level

ADIU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand
situation (due to involuntary unemployment) of ADIU, the Aggregate Demand is less than the
actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= ADFE – ADIU = EF

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Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can
borrow from Central Bank against some approved securities for a shorter period of time. In the
situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as
cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the
economy and the problem of deficient demand is checked.

150. State whether the following statements are true or false. Give reasons for your answer.
(i) Inventories accumulate when planned investment is less than planned saving.
(ii) Inflationary gap exists when Aggregate Demand is greater than Aggregate Supply.
(iii) Average Propensity to Save can be negative. (Delhi (C) 2016)
(i) The given statement is True. When planned investment is less than planned savings, then in such
a situation, Aggregate Demand is less than Aggregate Supply which leads to accumulation of
inventories.
(ii) The given statement is False. Inflationary gap exists when at full employment level aggregate
demand is greater than aggregate supply.
(iii) The given statement is True. APS can be negative when consumption expenditure exceeds
income.

151. What is „Inflationary Gap‟? Explain the role of Cash Reserve Ratio in removing this gap.
Or Explain the concept of inflationary gap. Also, explain the role of legal reserves in
reducing it. (All India 2011,2010) Or
Define and represent inflationary gap on a diagram. Explain the role of the varying reserves
requirement in removing the gap. (Delhi (C) 2010)
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS)
corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand
causes inflation in the economy and price levels tend to rise.

In the above figure,

ADFE = AD at full employment level
ADAE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is
more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and
Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= ADAE – ADFE = EF
Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash
Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary
gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total
demand and time deposits in the form of cash and other liquid assets with the Central Bank. This
ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank

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increases the CRR. It reduces the supply of money and credit money creation capabilities of
commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the
economy attains equilibrium situation.
(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in
the form of cash or other liquid assets that is required to be maintained by the bank with
themselves. During the situation of inflationary gap, SLR is increased. This reduces the credit
creation capacity of commercial banks and reduces the flow of money in the economy. As a result
of that, the Aggregate Demand comes down and ultimately the economy attains equilibrium again.

152. What is „deficient demand‟? Explain the role of „Margin Requirements‟ in removing this
gap. (Foreign 2015) Or
Explain the concept of deflationary gap. Also, explain the role of margin requirement in
reducing it. (All India 2012,2011, 2010)
Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand (AD) from the level that is required to maintain a full employment equilibrium. This short
fall is termed as deflationary gap or deficient demand.

In this figure, ADFE = AD at full employment level

ADIU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand
situation (due to involuntary unemployment) of ADIU, the Aggregate Demand is less than the
actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= ADFE – ADIU = EF
Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can
borrow from Central Bank against some approved securities for a shorter period of time. In the
situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as
cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the
economy and the problem of deficient demand is checked.
Role of margin requirements to reduce deflationary gap Margin requirement refers to the
difference between the amount of loan granted and the current value of security offered for
Answer: In case of deflationary gap, the margin requirements are lowered to increase the flow of
credit by encouraging people to borrow. As a result of that, the Aggregate Demand increases and
ultimately the economy attains equilibrium.

153. Explain the concept of inflationary gap. Explain the role of „repo rate‟ in reducing this
gap. (Delhi 2015)
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS)
corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand

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causes inflation in the economy and price levels tend to rise.

In the above figure,

ADFE = AD at full employment level
ADAE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is
more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and
Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= ADAE – ADFE = EF
Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash
Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary
gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total
demand and time deposits in the form of cash and other liquid assets with the Central Bank. This
ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank
increases the CRR. It reduces the supply of money and credit money creation capabilities of
commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the
economy attains equilibrium situation.
(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the
form of cash or other liquid assets that is required to be maintained by the bank with themselves.
During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity
of commercial banks and reduces the flow of money in the economy. As a result of that, the
Aggregate Demand comes down and ultimately the economy attains equilibrium again.
Role of repo rate in reducing inflationary gap:
Repo rate refers to the rate at which commercial banks can borrow from Central Bank against
some approved securities for a shorter period of time. In the situation of inflation Central Bank
increases repo rate which makes credit dearer (cost of borrowings increases), hence liquidity falls,
which helps in bringing down the inflation rate through fall in Aggregate Demand.

154. Explain the concept of deflationary gap and the role of „open market operations‟ in
reducing this gap. (Delhi 2015)
Deflationary gap or deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand (AD) from the level that is required to maintain a full employment equilibrium. This short

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fall is termed as deflationary gap or deficient demand.

In this figure, ADFE = AD at full employment level

ADIU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand
situation (due to involuntary unemployment) of ADIU, the Aggregate Demand is less than the
actual supply in the economy. Hence, EF is the deflationary gap.
Deflationary Gap = Deficient Demand
= ADFE – ADIU = EF
Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can
borrow from Central Bank against some approved securities for a shorter period of time. In the
situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as
cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the
economy and the problem of deficient demand is checked.
Role of open market operations in reducing deflationary gap Open market operations refers to the
buying and selling of securities in the open market to the general public and commercial banks by
the Central Bank.
In the situation of deflationary gap. Central Bank opts for open market purchases. This process
leads to increase in the money supply in the economy and hence increase in Aggregate Demand to
check the deflationary gap.

155. What is „Deficient Demand‟? Explain the role of „bank rate‟ in removing it. (All India
2015) Or Explain the concept of deficient demand in macroeconomics. Also, explain the
role of bank rate in correcting it. (Delhi 2012: All India 2011)
Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand (AD) from the level that is required to maintain a full employment equilibrium. This short
fall is termed as deflationary gap or deficient demand.

In this figure, ADFE = AD at full employment(FE) level

ADIU = AD at involuntary unemployment(IU) level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand
situation (due to involuntary unemployment) of ADIU, the Aggregate Demand is less than the
actual supply in the economy. Hence, EF is the deflationary gap.

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Deflationary Gap = Deficient Demand
= ADFE – ADIU = EF
Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can
borrow from Central Bank against some approved securities for a shorter period of time. In the
situation of deficient demand Central Bank reduces the repo rate. This makes the credit cheaper, as
cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the
economy and the problem of deficient demand is checked.
Role of bank rate in correcting the problem of deficient demand The rate at which the Central Bank
lends money to commercial banks is termed as bank rate. In case of deficient demand, the Central
Bank reduces the bank rate to increase the money supply in the economy.
Reduction in bank rate increases the credit/money creation capacity of commercial banks and also
reduces the market rate of interest which encourages people to borrow more. In this way, the
Aggregate Demand increases to the level of Aggregate Supply and the economy attains
equilibrium.

156. What is „excess demand‟? Explain the role of „reverse repo rate‟ in removing it. (Ind 15)
Excess demand or inflationary gap:
Inflationary gap occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS)
corresponding to full employment level. This inflationary gap i.e. excess of Aggregate Demand
causes inflation in the economy and price levels tend to rise.

In the above figure,

ADFE = AD at full employment level
ADAE = AD above full employment level.
The point E is the equilibrium point where AD = AS. But at this point, Aggregate Demand FP is
more than the Aggregate Supply in the economy. This difference of actual Aggregate Demand and
Aggregate Supply, i.e. EF is the inflationary gap Inflationary Gap = Excess Demand
= ADAE – ADFE = EF
Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash
Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary
gap.
(i) Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total
demand and time deposits in the form of cash and other liquid assets with the Central Bank. This
ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank
increases the CRR. It reduces the supply of money and credit money creation capabilities of
commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the
economy attains equilibrium situation.
(ii) Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the
form of cash or other liquid assets that is required to be maintained by the bank with themselves.

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During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity
of commercial banks and reduces the flow of money in the economy. As a result of that, the
Aggregate Demand comes down and ultimately the economy attains equilibrium again.
Role of „reverse repo rate‟ in correcting the problem of excess demand Reverse repo rate is the rate
at which commercial banks keep their excess funds with the Central Bank, or in other words, the
rate at which Central Bank borrows from commercial banks. In the situation of excess demand.
Central Bank raises the „reverse repo rate‟ which locks the excess liquidity of commercial banks with
Central Bank, hence it causes a fall in Aggregate Demand to attain the full employment
equilibrium.

157. Explain the changes that take place when aggregate demand and aggregate supply are
not equal. (Delhi 2015) Or
Explain National Income equilibrium through Aggreate Demand and Aggregate Supply. Use
diagram. Also explain the changes that take place in an economy when the economy is not
in equilibrium. (Delhi 2014)
In an economy, equilibrium level of income and employment is determined when Aggregate
Demand (AD) is equal to Aggregate Supply (AS). According to Keynes, Aggregate Supply may be
assumed to be perfectly elastic in an economy where full employment of resources is yet to be
achieved. Accordingly, Aggregate Demand becomes the principal determinant of equilibrium level
of income. In the following figure, AD represents Aggregate Demand curve and 45° line is the line
of reference, representing Aggregate Supply (AS). Equilibrium level of income Yis determined at
point E, where AD = AS.
Prior to point E, Aggregate Demand exceeds Aggregate Supply, it means demand for goods and
services in economy is more than their flow. To increase inventory upto desirable level, firms would
plan to increase output which increases output and income level in economy. This process will
continue till AD and AS become equal to each other.
Beyond that point, Aggregate Supply exceeds Aggregate Demand, it means demand for goods
and services in the economy is less than their flow. To clear excess inventory, firm would plan to
reduce output which decreases output and income level. This process will continue till AD and AS
become equal to each other.

When AS = AD the equilibrium is struck. Because the equality between AS and AD implies that the
desired level of output in the economy (as indicated by AS) is exactly equal to the desired level of
expenditure (indicated by AD) In the economy.

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158. In an economy planned spending is greater than planned output. Explain all the
changes that will take place in the economy. (All India (C) 2015)
If in an economy, planned spending, i.e. aggregate demand is greater than the planned output i.e.
aggregate supply then the following changes will take place in the economy.

(i) Since the aggregate demand exceeds aggregate supply, therefore the existing stocks of the
producers will be sold out.
(ii) To rebuild the desired stocks, so as to be able to meet the demand, the producers would plan
greater production.
(iii) This decision of producers will increase the level of aggregate supply, till the point it converges
with aggregate demand, as is shown in the diagram given above.

159. When is an economy in equilibrium? Explain with the help of saving and investment
function. Also, explain the changes that take place in an economy when the economy is not
in equilibrium. Use diagram. (All India 2014)
Equilibrium level of income is determined at a point, where ex-ante or planned saving is equal to
planned investment. This is because, in equilibrium
Aggreate Supply (AS) = Aggreate Demand (AD),
Or Consumption (C) + Saving (S)
= Consumption (C) + Investment (I),
Or Saving (S) = Investment (I).
In the diagram given below,
E is the point where S = 1,
Hence, the point at which the economy is in equilibrium. OY is the equilibrium level of National
Incomes.

When savings are greater than investment in an economy, it refers to AD < AS. There will be a rise
in inventory stock and prices will start to fall. To clear their stocks, the producers would now plan
lesser output. This would mean lesser income in the economy. Lesser income implies lesser saving.
The process would continue till S = I.
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But if investments are more than savings, it means that AS < AD. Stocks would reduce and prices
will start to rise. To stand benefited from such a condition, the producers will increase their
production, leading to an increase in investments. The process would continue till S = I. Question
160. Explain all the changes that will take place in an economy when Aggregate Demand is not
equal to Aggregate Supply. (All India 2013) Answer: There may be two possible conditions (i)
Aggregate Demand is greater than Aggregate Supply (AD > AS) When AD is greater than AS, flow
of goods and services in the economy tends to be less than their demand. The existing stocks of
the producers would be sold out. To rebuild the desired stocks the producer would plan greater
production. AS would increase to become equal to AD.
(ii) Aggregate Demand is less than Aggregate Supply (AD < AS) When AD is less than AS, flow of
goods and services in the economy tends to exceed their demand. As a result, some of the goods
would remain unsold. To clear unwanted stocks, the producers would plan a cut in production.
Consequently, AS would reduce to become equal to AD. This is how AS adapts itself to AD.

161 Distinguish between Inflationary Gap and Deflationary Gap. State two measures by
which these can be corrected. (All India 2013)
Differences between inflationary gap and deflationary gap:
Basis Inflationary Gap Deflationary Gap
Meaning The excess of aggregate demand The short fall of aggregate demand
above the level that is required to below the level that is required to
maintain full employment level of maintain full employment level of
equilibrium is termed as inflation any equilibrium is termed as deflationary
gap. gap.
Effect Inflationary gap causes inflation and Deflationary gap causes deflation and
increases wages and price level in the decreases wages and price level in the
economy. economy.
Two measures by which inflationary gap can be corrected
(i) Increase in bank rate
(ii) Increase in repo rate
Two measures by which deflationary gap can be corrected
(i) Decrease in bank rate
(ii) Decrease in repo rate

162. Explain the meaning of under employment equilibrium. Explain two measures by which
full employment equilibrium can be reached. (All India 2013)
In an economy, when AS = AD or S = I but without the fuller utilisation of labour force, the
economy is said to be in under employment equilibrium. Under employment, equilibrium occurs
when AS = AD but without the fuller utilisation of labour force.

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Measures to correct under employment equilibrium:
(i) Bank rate Central Bank should decrease the bank rate. A decrease in bank rate lowers the rate of
interest and credit becomes cheap. Accordingly, the demand for credit expands and Aggregate
Demand increases.
(ii) Open market operations By buying the government securities, the Central Bank injects
additional purchasing power into the system which results in the expansion of credit. As a result.
Aggregate Demand increases.

163. Explain the concept of excess demand in macroeconomics. Also, explain the role of
open market operation in correcting it. (Delhi 2012)
Excess demand:
The situation of an economy, when Aggregate Demand is more than the Aggregate Supply
corresponding to full employment, it is termed as excess demand situation.
Role of open market operations to correct the problem of excess demand Open market operations
refer to sale and purchase of securities by the Central Bank on behalf of government in the open
market. It directly affects the supply of money in the hands of citizens of the country.
In case of excess demand, the Central Bank sells its securities to common public and financial
institutions. It reduces the supply of money in the economy and reduces the money/credit creation
power of commercial banks. Thus, the Aggregate Demand comes down and the economy attains
equilibrium.

164. Explain the role of the following in correcting deficient demand in an economy.
(i) Open market operations (ii) Bank rate (Delhi 2012, 2011, 2010)
(i) Role of open market operations in correcting deficient demand Open market operations refers
to sale and purchase of securities by the Central Bank on behalf of government in the open market.
It directly affects the supply of money in the hands of commercial banks and citizens of the
country. In case of deficient demand, the Central Bank purchase securities from public and financial
institutions. It increases the supply of money in the economy as well as credit/money creation
power of commercial banks. Thus, the Aggregate Demand increases and ultimately the economy
attains equilibrium.
(ii) Role of bank rate in correcting Deficient demand:
When there is involuntary unemployment in the economy, there is a short fall in Aggregate
Demand (AD) from the level that is required to maintain a full employment equilibrium. This short
fall is termed as deflationary gap or deficient demand.

In this figure, ADFE = AD at full employment level

ADIU = AD at involuntary unemployment level
The point E is the equilibrium point, where AD = AS. But at the current levels, deficient demand
situation (due to involuntary unemployment) of ADIU, the Aggregate Demand is less than the
actual supply in the economy. Hence, EF is the deflationary gap.

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Deflationary Gap = Deficient Demand
= ADFE – ADIU = EF
Role of repo rate in correcting it Repo rate refers to the rate at which commercial banks can
borrow from Central Bank against some approved securities for a shorter period of time. In the
situation of deficient demand Central Bank reduces the reporate. This makes the credit cheaper, as
cost of borrowings decrease. Because of this, the level of Aggregate Demand increases in the
economy and the problem of deficient demand is checked.
Role of bank rate in correcting the problem of deficient demand The rate at which the Central Bank
lends money to commercial banks is termed as bank rate. In case of deficient demand, the Central
Bank reduces the bank rate to increase the money supply in the economy.
Reduction in bank rate increases the credit/money creation capacity of commercial banks and also
reduces the market rate of interest which encourages people to borrow more. In this way, the
Aggregate Demand increases to the level of Aggregate Supply and the economy attains
equilibrium.

165. Explain the role of the following in correcting the inflationary gap in an economy:
(i) Legal reserves (ii) Bank rate (All India 2011)
(i) Legal Reserves:
Role of legal reserves ratio to removing the problem of inflationary gap Legal reserves like Cash
Reserve Ratio and Statutory Liquidity Ratio are the tools to correct the problems of inflationary
gap.
Cash Reserve Ratio (CRR) Every Commercial Bank has to keep a certain proportion of its total
demand and time deposits in the form of cash and other liquid assets with the Central Bank. This
ratio is termed as cash reserve ratio. To correct the problem of inflationary gap the Central Bank
increases the CRR. It reduces the supply of money and credit money creation capabilities of
commercial banks. Due to lesser supply of money, the Aggregate Demand comes down and the
economy attains equilibrium situation.

Statutory Liquidity Ratio (SLR) It refers to a fixed percentage of the total assets of a bank in the
form of cash or other liquid assets that is required to be maintained by the bank with themselves.
During the situation of inflationary gap, SLR is increased. This reduces the credit creation capacity
of commercial banks and reduces the flow of money in the economy. As a result of that, the
Aggregate Demand comes down and ultimately the economy attains equilibrium again.
Role of „reverse repo rate‟ in correcting the problem of excess demand Reverse repo rate is the rate
at which commercial banks keep their excess funds with the Central Bank, or in other words, the
rate at which Central Bank borrows from commercial banks. In the situation of excess demand.
Central Bank raises the „reverse repo rate‟ which locks the excess liquidity of commercial banks with
Central Bank, hence it causes a fall in Aggregate Demand to attain the full employment
equilibrium.

(ii) Bank Rate – The rate at which Central Bank lends money to Commercial Banks is termed as
bank rate. In case of inflationary gap in the economy, the Central Bank increases the bank rate to
reduce the money supply in the economy. Increase in bank rate reduces the money/credit creation
power of commercial banks and also increases the market rate of interest which discourages
people to borrow more. In this way, the Aggregate Demand falls in the economy and equilibrium is
restored.

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166. Explain the role of the following in correcting the deflationary gap in an economy (All
India 2011) (i) Open market operations. (ii) Margin requirements.
(i) Open market operations:
Role of open market operations in correcting deficient demand Open market operations refers to
sale and purchase of securities by the Central Bank on behalf of government in the open market. It
directly affects the supply of money in the hands of commercial banks and citizens of the country.
In case of deficient demand, the Central Bank purchase securities from public and financial
institutions. It increases the supply of money in the economy as well as credit/money creation
power of commercial banks. Thus, the Aggregate Demand increases and ultimately the economy
attains equilibrium.

(ii) Margin requirements:

Role of margin requirements to reduce deflationary gap Margin requirement refers to the
difference between the amount of loan granted and the current value of security offered for loans.
In case of deflationary gap, the margin requirements are lowered to increase the flow of credit by
encouraging people to borrow. As a result of that, the Aggregate Demand increases and ultimately
the economy attains equilibrium.

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 CHAPTER 5 - GOVERNMENT BUDGET AND THE ECONOMY

MULTIPLE CHOICE QUESTIONS

1. Dividends received from Public Sector Undertakings (PSUs) are a part of the governmental
(All India 2019)
(a) non-tax revenue receipts (b) tax receipts
(c) capital receipts (d) capital expenditure
2. Which of the following sources of receipts in government budget increases its liabilities?
(Delhi (C) 2016)
(a) Direct taxes (b) Recovery of loans
(c) Borrowings (d) Dividend from public sector undertakings
3. Which of the following is a direct tax? (Delhi (C) 2016)
(a) Corporation tax (b) Entertainment tax (c) Excise duty (d) Service tax
4. Which of the following is a source of capital receipt? (All India (C) 2016)
(a) Foreign donations (b) Dividends (c) Disinvestment (d) Indirect taxes
5. Direct tax is called direct because it is collected directly from ………. (All India 2015)
(a) the producers on goods produced (b) the sellers on goods sold
(c) the buyers of goods (d) the income earners
6. The non-tax revenue in the following is…….. (Delhi 2015)
(a) export duty (b) import duty (c) dividends (d) excise
7. Which one of these is a revenue expenditure? (Foreign 2015)
(a) Purchase of shares (b) Loans advanced
(c) Subsidies (d) Expenditure on acquisition of land
8. Which of the following is not a revenue receipt? (All India (C) 2015)
(a) Recovery of loans (b) Foreign grants
(c) Profits of public enterprises (d) Wealth tax
9. Which one of the following is a combination of direct taxes? (Delhi (C) 2015)
(a) Excise duty and Wealth tax (b) Service tax and Income tax
(c) Excise duty and Service tax (d) Wealth tax and Income tax
10. Primary deficit in a government budget will be zero, when ………………….. (All Ind)
(a) revenue deficit is zero (b) net interest payments are zero
(c) fiscal deficit is zero (d) fiscal deficit is equal to interest payment
11. Fiscal deficit equals (Delhi 2016)
(a) interest payments (b) borrowings
(c) interest payments less borrowings (d) borrowings less interest payments
12. Primary deficit equals (All India 2016)
(a) borrowings (b) interest payments
(c) borrowings less interest payments (d) both borrowings and interest payments
13. Primary deficit is the difference between _________. (All India (C) 2016)
(a) fiscal deficit and revenue deficit (b) revenue deficit and interest payments
(c) total expenditure and total revenue receipts (d) fiscal deficit and interest payments
14. Primary deficit in a government budget is _________ (All India 2015)
(a) revenue expenditure – revenue receipts (b) total expenditure – total receipts
(c) revenue deficit – interest payments (d) fiscal deficit – interest payments
15. Borrowings in government budget are _________ (Delhi 2015)
(a) revenue deficit (b) fiscal deficit (c) primary deficit (d) deficit in taxes
16. Primary deficit in a government budget equals (Foreign 2015)
(a) interest payments (b) interest payments less borrowings
(c) borrowings less interest payments (d) None of these
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17. Which of the following is a correct measure of primary deficit? (All India (C) 2015)
(a) Fiscal deficit minus revenue deficit (b) Revenue deficit minus interest payments
(c) Fiscal deficit minus interest payments (d) Capital expenditure minus revenue expenditure
18. Which of the following statements is true? (Delhi (C) 2015)
(a) Fiscal deficit is the difference between total expenditure and total receipts
(b) Primary deficit is the difference between total receipt and interest payments
(c) Fiscal deficit is the sum of primary deficit and interest payments
(d) Primary deficit is the difference between revenue deficit and interest payments
19. Following are the impacts of government budget on the economy excluding
(a) brings better allocation of resources (b) implement government welfare programmes
(c) brings aggregate fiscal indiscipline level (d) better access of public goods
20. Goods and Service Tax (GST) is an example of under government receipts.
(a) indirect tax (b) direct tax (c) non-tax revenue (d) income tax
21. An expenditure which is of recurring or non-recurring in nature, and which is based on
five year economic plan is called
(a) revenue expenditure (b) capital expenditure
(c) plan expenditure (d) non-plan expenditure
22. Which of the following is capital expenditures?
(a) Subsidies (b) Interest payments (c) Purchase of shares (d) Defence purchases
23. The expenditure incurred for smooth functioning of government departments and for
day-to-day expenses of the government is called
(a) capital expenditure (b) non-plan expenditure
(c) revenue expenditure (d) All of the above
24. Which of the following does not form the part of capital receipts of the Union
Government?
(a) Non-tax revenue (b) Loan recoveries
(c) Net external assistance (d) Net market borrowings
25. Cost of tax collection, cost of audit and printing notes, pension, expenditure on defence
and law and order are treated as of the government.
(a) government expenditure (b) revenue expenditure
(c) non-development expenditure (d) plan expenditure
26. Which of the following budget is more suitable for developing economies like India?
(a) Deficit Budget (b) Balanced Budget (c) Surplus Budget (d) None of these
27. Zero primary deficit means that the government has to resort to borrowings only to
make _______
(a) interest payment (b) fiscal payment (c) capital payment (d) primary payment
28. From the following, which is not an implication of fiscal deficit?
(a) It determine total borrowing requirements to the government
(b) It increase liability of the government
(c) It increase foreign dependence
(d) Repayment of loan together with interest further decreases the fiscal deficit
29. The government starts selling its securities to private sector. What is this process called?
(a) Open market operation (b) Disinvestment
(c) Monetary expansion (d) All of the above
30. If fiscal deficit is ₹ 550 crore and interest payment is ₹ 200 crore, then primary deficit.
(a) ₹ 200 crore (b) ₹ 550 crore (c) ₹ 765 crore (d) ₹ 350 crore

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31. If government borrowings = ₹ 800 crore and interestpayments = ₹ 155 crore, then find
fiscal deficit and primary deficit.
(a) Fiscal deficit = ₹ 155 crore and Primary deficit = ₹ 800 crore
(b) Fiscal deficit = ₹ 800 crore and Primary deficit = ₹ 155 crore
(c) Fiscal deficit = ₹ 155 crore and Primary deficit= ₹ 645 crore
(d) Fiscal deficit = ₹ 800 crore and Primary deficit = ₹ 645 crore
32. Primary Deficit = Fiscal Deficit-
(a) Borrowings (b) Subsidies (c) Interest payments (d) Transfer payments

IMPORTANT QUESTION ANSWER

1. What do you mean by direct tax? (All India 2019) Or
What is a direct tax? (Delhi (C) 2014) Or Define a direct tax. (All India 2012)
Direct taxes are those taxes for which the incidence and impact of tax falls on the same person, i.e.
actual burden of these taxes cannot be shifted, e.g. income tax, corporation tax etc.
2. State any two examples of non-tax revenue receipts of the government. (India 2019) Or
Give two examples of non-tax revenue receipts. (All India (C) 2014) Or
State any two sources of non-tax revenue receipts. (Delhi (C) 2011)
Two sources of non-tax revenue receipts are
a) Fees b) Grants/donations
3. What do you mean by an indirect tax? (All India 2019) Or
Define an indirect tax. (All India (C) 2014)
An indirect tax is one in which the burden of the tax can be shifted to another person.
4. Define the term „tax‟. (Delhi 2019) Or What is a tax? (All India (C) 2014; Delhi (C) 2012)
Or Define tax. (Delhi 2012: All India 2010)
Tax is a compulsory payment made by an individual, household or a firm to the government
without reference to anything in return.
5. Define government budget. (All India (C) 2017,2014; Delhi 2014) Or
What is government budget? (Delhi 2014,2013, All India (C) 2012)
Government budget is a statement of expected receipts and expenditures of the government over
the period of a financial year, i.e. from 1st April to 31st March.
6. What are revenue receipts in a government budget? (Delhi, All India 2016) Or
Define revenue receipts in a government budget. (All India 2010)
The receipts which neither create any corresponding liability for the government nor create any
reduction in assets, are termed as revenue receipts, e.g. tax receipts of government.
7. What is revenue expenditure? (Delhi 2016) Or
What is revenue expenditure in government budget? (Delhi (C) 2010)
The expenditure of the government which neither cause any increase in the government assets nor
cause any reduction in government liabilities, are termed as revenue expenditures, e.g. expenditure
on old age pensions, salaries etc.
8. Give two examples of indirect taxes. (Delhi (C) 2014, 2013)
Sales Tax and Value Added Tax
9. Give two examples of revenue expenditure. (All Indio (C) 2014)
Salaries of government employees and administration expenses.
10. Give two examples of capital receipts in a government budget. (All India 2012)
Two examples of capital receipts are
i. Proceeds from disinvestment of public sector units. ii. Loan from World Bank.
11. Give two examples of direct tax.AII India 2010
Two examples of direct tax are
i. Income tax ii. Corporation tax
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12. Define capital expenditure. (Delhi (C) 2010)
Answer:
The expenditure of the government which leads to an increase in government assets or reduction
in government liabilities, is termed as capital expenditure, e.g. expenses on the construction of
national highways, dams and re-payment of loans etc.

13. Explain the basis of classifying taxes into direct and indirect tax. Give examples. (Delhi
2017) Or Explain the basis of classifying taxes into direct and indirect tax. Give two examples
of each. (All India (C) 2016)
The basis of classifying taxes into direct and indirect taxes is „shifting the impact of tax‟. Direct taxes
are those taxes for which the incidence and impact of tax falls on the same person, i.e. actual
burden of taxes cannot be shifted, e.g. income tax, corporation tax etc. Whereas indirect taxes are
those taxes for which the incidence and impact fall on separate persons, i.e. burden of these taxes
can be shifted to others, e.g. service tax, entertainment tax etc.

14. Distinguish between direct taxes and indirect taxes. Give an example of each. (All India
2017) Or Distinguish between direct tax and indirect tax. (All India 2011) Or
Explain the distinction between direct tax and indirect tax. Give one example of each. (Delhi
(C) 2012)
Differences between direct tax and indirect tax are
Basis Direct Tax Indirect Tax
A direct tax is one in which the An indirect tax is one in which the burden of
Meaning
burden of tax cannot be shifted. tax can be shifted.
Nature Progressive nature Regressive nature
Income tax and corporation tax are Value Added Tax and Goods and Service Tax
Example
examples of direct tax. are examples of indirect tax.

15. Is the following a revenue receipt or a capital receipt in the context of government
budget and why?
(i) Tax receipts
(ii) Disinvestment (All India 2014)
(i) Tax receipts are revenue receipts for the government because neither they create a liability nor
they lead to reduction in any assets.
(ii) Disinvestment refers to the withdrawal of existing investment, e.g. the government of „ India is
undertaking disinvestment by selling its shares in MarutiUdyog Ltd. It is a capital receipt for the
governments as it reduces the assets of the government.

16. Is the following revenue expenditure or capital expenditure in the context of

government budget? Give reason.
(i) Expenditure on collection of taxes.
(ii) Expenditure on purchasing computers. (Delhi 2014)
(i) Expenditure on collection of taxes is a revenue expenditure for the government as it neither
adds to the assets nor reduces the liabilities.
(ii) Expenditure on purchasing computers is a capital expenditure for the government as it results
in increase in assets.

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16. Giving reason, state whether the following is a revenue expenditure or a capital
expenditure in a government budget
(i) Expenditure on scholarships
(ii) Expenditure on building a bridge (Foreign 2014)
(i) Expenditure on scholarships is a revenue expenditure because neither it leads to decrease in
liabilities nor leads to an increase in assets.
(ii) Expenditure on building a bridge is a capital expenditure because it increases the assets of the
country.

17. State three sources each of revenue receipts and capital receipts in government budget.
(All India 2013)
Sources of revenue receipts are
 Income from public enterprises
 Tax revenue
 Fees and fines
Sources of capital receipts are
 Recovery of loans
 Borrowings
 Disinvestment

18. Explain any one objective of government budget. (Delhi 2013)

One of the objectives of government budget is „Generation of Employment‟. Government takes
steps to promote labour intensive technology, public works programme like construction of roads,
dams, canals, bridges etc. to promote employment generation in the economy. Several
programmes are initiated through budget to reduce the problem of poverty and unemployment.
MNREGA is one such example.

19. Distinguish between revenue expenditure and capital expenditure in a government

budget. Give an example of each. (Delhi 2013; All India 2013) Or
Distinguish between revenue expenditure and capital expenditure in a budget. Give
examples. (Delhi 2012) Or
Distinguish between revenue expenditure and capital expenditure. (All India 2010) Or
Distinguish between the following Revenue receipts and capital receipts.
Differences between revenue expenditure and capital expenditure are
Basis Revenue Expenditure Capital Expenditure
Revenue expenditure is the expenditure Capital expenditure is the expenditure
of government which neither cause of government which leads to increase
Meaning
increase in government assets nor cause in government assets or reduction in
any reduction in government liabilities. government liabilities.
Revenue expenditure is spent on normal Capital expenditure is spent on
functioning of government departments acquisition of assets, re-payment of
Purpose
and for providing various provisions for borrowings and granting of loans and
social welfare. advances.
Expenditure on old age pensions, Expenditure on the construction of
expense on administrative services, national highways, re-payment of
Example
expense on national security, expense government loans, establishment of
on health and education etc. factories etc.

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20. Distinguish between revenue receipts and capital receipts in a government budget. (All
India 2013, Delhi (C) 2010) Or
Distinguish between revenue receipts and capital receipts in a government budget. Give
example in each case. (All India 2012) Or
How are capital receipts different from revenue receipts? Discuss briefly. (Delhi 2019) Or
Distinguish between revenue receipts and capital receipts. Give two examples of each.
Differences between revenue receipts and capital receipts are
Basis Revenue Receipts Capital Receipts
The receipts which neither create The receipts which create corresponding
any corresponding liability for the liability for the government or which lead to
Meaning government nor do they create any reduction in assets of the government are
reduction in assets, are termed as termed as capital receipts.
revenue receipts.
Revenue receipts are recurring in Capital receipts are non-recurring in nature.
Nature
nature.
Tax receipts and non-tax receipts, Loans taken by the government and
Example
i.e. fees, grants, donations etc. disinvestment of PSUs etc.

21. Explain the basis of classifying government receipts into revenue receipts and capital
receipts. Which type of these receipts are „borrowings by government‟ and why? (All India)
The basis of classifying government receipts into capital and revenue receipts is „reduction in
assets‟ or „increase in liabilities‟.
The receipts which result in reducing the assets of the government or increasing its liabilities are
referred to as capital receipts. The receipts which neither reduce government‟s assets or increase
it‟s liabilities are revenue receipts. Borrowings by government are capital receipts as they increase
the liability of the government.

22. State three objectives of a government budget. (Delhi (C) 2011)

Objectives of a government budget are as follows
 Re-distribution of income and wealth.
 Re-allocation of resources.
 Economic stability.

23. On what basis is government expenditure classified into capital expenditure and revenue
expenditure? Give an example of each. (Delhi (C) 2011)
Government expenditures are aimed at providing benefits to the people and enhancing the
development of the country. On the basis of causing a change in the assets and liabilities position
of the country, these expenditures can be classified as
(i) Capital expenditure: The expenditure of the government which leads to an increase in
government assets or reduction in government liabilities, is termed as capital expenditure, e.g.
expenses on the construction of national highways, dams and re-payment of loans etc.
(ii) Revenue expenditure: The expenditure of the government which neither cause any increase in
the government assets nor cause any reduction in government liabilities, are termed as revenue
expenditures, e.g. expenditure on old age pensions, salaries etc. Payment of salaries to government
employees is revenue expenditure as it neither results in increase in assets or reduction in liabilities.

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24. Explain how the government can use the budgetary policy in reducing inequality of
income in the economy? (All India 2019)
Reducing inequality is a major objective of government‟s budget especially in developing country
like India, where inequality of income and wealth is very high.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of
income and wealth. In order to ensure equity of income, progressive tax structure is followed in
India, which imposes higher burden of taxes on higher income group and lesser burden on lower
income group. Also, those who earn below a substantial limit are exempted from payment of taxes.
The additional income generated from higher income group is re-distributed by the government in
the form of subsidies to the poor sections of the society, to ensure the objective of welfare. LPG
subsidy is a good example of such re-distribution of income.

25. Discuss briefly the role of the government budget in influencing “allocation of
resources” in the economy. (All India 2019)
The government of a country, through its budgetary policy, directs the allocation of resources in a
manner such that there is a balance between the goals of profit maximisation and social welfare by
ensuring that there should be production of necessity goods as well .as comfort and luxury goods
and the goods which cannot be provided through market mechanism e.g. roads, parks, street lights
(public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is
spent on providing public goods and giving subsidies on necessary goods to the poorer section of
society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to
the poor, and tries to achieve equitable distribution of income.

26. (a) How are tax receipts different from non-tax receipts? Discuss briefly.
(b) State any two items of revenue expenditure in a Government budget. (Delhi 2019)
(a) Differences between tax receipts and non-tax receipts are
Basis Tax Receipts Non-tax Receipts
Nature It is recurring in nautre. It is non-recuring in nature.
Examples Goods and Service Registration fees, penalties and fines etc.
(b) Two items of revenue expenditure in a government budget are as follows
 Salaries of government officials
 Expenditure on defence.

27. Explain the basis of classifying government expenditure into revenue and capital
expenditures. (All India (C) 2012)
The basis of classifying government expenditure into revenue and capital is as follows:
 If an expenditure results in increase in the value of assets or decrease in the value of liability,
then it is classified as capital expenditure.
 If an expenditure results neither in increase in the value of assets, nor in decrease in the
value of liability, then it is classified as revenue expenditure.

28. Classify the following receipts into revenue receipts and capital receipts. Give reasons in
support of your answer.
(i) Recovery of loans. (ii) Interest received on loans. (Delhi (C) 2012)
(i) Recovery of loans is a capital receipt as it will lead to decline in financial assets of government.
(ii) On the other hand, interest received on loans are revenue receipts as they neither create liability
nor any reduction in assets of the government.
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29. Giving reasons, classify the following into direct and indirect tax. (Delhi 2010)
(i) Wealth tax (ii) Value added tax
(i) Wealth tax It is a kind of direct tax as it is paid by the same person on which it is levied or
imposed, i.e. burden of this tax is not possible to shift to the other person.
(ii) Value added tax It is a kind of indirect tax as it is imposed on one person and its burden shifts
to other person.

30. Explain the following objectives of government budget:

(a) Allocation of resources (b) Reducing income inequalities (March 2018)
(a) The government of a country, through its budgetary policy, directs the allocation of resources in
a manner such that there is a balance between the goals of profit maximisation and social welfare
by ensuring that there should be production of necessity goods as well .as comfort and luxury
goods and the goods which cannot be provided through market mechanism e.g. roads, parks,
street lights (public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is
spent on providing public goods and giving subsidies on necessary goods to the poorer section of
society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to
the poor, and tries to achieve equitable distribution of income.

(b) Reducing income inequalities Reducing inequality is a major objective of government‟s budget
especially in developing country like India, where inequality of income and wealth is very high.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of
income and wealth. In order to ensure equity of income, progressive tax structure is followed in
India, which imposes higher burden of taxes on higher income group and lesser burden on lower
income group. Also, those who earn below a substantial limit are exempted from payment of taxes.
The additional income generated from higher income group is re-distributed by the government in
the form of subsidies to the poor sections of the society, to ensure the objective of welfare. LPG
subsidy is a good example of such re-distribution of income.

31. What is government budget? Explain its major components. (April re-exam 2018) Or
Explain the role of government budget in influencing allocation of resources. (All India)
Government budget is a financial statement of estimated receipts and expenditure of the
government during a financial year (i.e. 1st April to 31st March).
Components of government budget:
1. Budget receipts It refers to estimated money receipts of the government from all sources during
the fiscal year.
These are classified as
(i) Revenue receipts Government receipts which neither create liabilities nor reduce assets are
known as revenue receipts. Constituents of revenue receipts
 Tax receipts, i.e. income tax, GST, etc.
 Non-tax receipts, i.e. fees, grants, fines, etc.
(ii) Capital receipts Government receipts which either create liabilities or reduce assets are called
capital receipts.
Constituents of capital receipts
 Recovery of loan
 Borrowing
 Dis-investment

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2. Budget payment/expenditure:
It refers to estimated expenditure of the government during the fiscal year.
These are classified as:
(i) Revenue expenditure Government expenditure which does not create assets or causes a
reduction in liabilities, e.g. interest payment, defence purchases, subsidies, etc.
(ii) Capital expenditure Government‟s expenditure which creates assets or causes a reduction in
liabilities, e.g. purchase of machine, loans to state government, etc.
(iii) Plan and non-plan expenditure: Government‟s expenditure can be planned or non-planned.
These are as follows
 Planned expenditure Refers to the expenditure on planned programmes.
 Non-planned expenditure Refers to the expenditure which is not related to specific plan or
programmes, e.g. relief funds given to rail accident victims.

32. Explain
(a) allocation of resources and
(b) economic stability as objectives of government budget. (April re-exam 2018)
(a) The government of a country, through its budgetary policy, directs the allocation of resources in
a manner such that there is a balance between the goals of profit maximisation and social welfare
by ensuring that there should be production of necessity goods as well .as comfort and luxury
goods and the goods which cannot be provided through market mechanism e.g. roads, parks,
street lights (public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is
spent on providing public goods and giving subsidies on necessary goods to the poorer section of
society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to
the poor, and tries to achieve equitable distribution of income.
(b) Economic stability Government budget can be helpful in bringing economic stabilisation in the
economy by checking inflationary and deflationary tendencies.
To curb the inflationary tendency, the government can prepare a surplus budget. Such a budget
reduces the money supply in the economy. With a fall in the money supply, the purchasing power
of people also fall, leading to a fall in the level of aggregate demand. As aggregate demand falls,
the price level or the rate of inflation also falls. To curb the deflationary tendency, the government
can prepare a deficit budget. Such a budget increases the money supply in the economy. With
increase in money supply, the purchasing power of people also rise, leading to an increase in the
level of aggregate demand. As aggregate demand rises, the price level also rises and rate of
deflation begins to fall.

33. Define revenue receipts in a Government Budget. Explain how Government Budget can
used to bring in price stability in the economy? (Delhi 2016)
Receipts which do not create a liability for the government or do not lead to reduction in assets,
are known as revenue receipts. Revenue receipts are receipts of the government which are non-
redeemable, i.e. they cannot be re-claimed from the government. These are divided into tax and
non-tax revenues
(i) Tax revenue It consists of the proceeds of taxes and other duties levied by the Central and the
State Governments. Tax revenues comprise of direct taxes and indirect taxes.
(ii) Non-tax revenue Non-tax revenue of the government mainly consists of interest receipts on
account of loans by the government, dividends and profits on investments made by the
government, fees and other receipts for services rendered by the government. Grants-in-aid from
foreign countries and international organisations are also a part of non-tax revenue.
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The Government Budget is a statement of estimated receipts and expenditures of the government
during the financial year. One of the objective of the Government Budget is to achieve „economic
stability‟. Government tries to establish economic stability by its budgetary policies related to
income and expenditure. Economic stability refers to a situation without fluctuations in price levels
and stability of exchange rate in an economy. Economic stability is achieved by protecting the
economy from harmful effects of various trade cycles and its phases, i.e. boom, recession,
depression and recovery.

34. What is government budget? Explain how taxes and subsidies can be used to influence
allocation of resources? (Delhi 2016)
Government budget is a statement of the estimates of the government‟s expected receipts and
government‟s expected expenditure during the financial year or fiscal year which runs from 1st
April to 31st March. One of the important objective of the government budget is „re-allocation of
resources‟.
Allocation of resources:
The government of a country, through its budgetary policy, directs the allocation of resources in a
manner such that there is a balance between the goals of profit maximisation and social welfare by
ensuring that there should be production of necessity goods as well .as comfort and luxury goods
and the goods which cannot be provided through market mechanism e.g. roads, parks, street lights
(public goods) etc are provided by the government.
So, the government levies tax on the richer sections of society. The money collected from taxes is
spent on providing public goods and giving subsidies on necessary goods to the poorer section of
society.
So, the government re-allocates resources by collecting taxes from the rich and giving subsidies to
the poor, and tries to achieve equitable distribution of income.

35. What is the difference between revenue expenditure and capital expenditure? Explain
how taxes and government expenditure can be used to influence distribution of income in
the society? (All India 2016)
Difference between revenue expenditure and capital expenditure:
Basis Revenue Expenditure Capital Expenditure
Revenue expenditure is the Capital expenditure is the expenditure of
expenditure of government which government which leads to increase in
Meaning neither cause increase in government government assets or reduction in
assets nor cause any reduction in government liabilities.
government liabilities.
Revenue expenditure is spent on Capital expenditure is spent on acquisition
normal functioning of government of assets, re-payment of borrowings and
Purpose
departments and for providing granting of loans and advances.
various provisions for social welfare.
Expenditure on old age pensions, Expenditure on the construction of
expense on administrative services, national highways, re-payment of
Example
expense on national security, expense government loans, establishment of
on health and education etc. factories etc.
Distribution of income in society:
Reducing income inequalities Reducing inequality is a major objective of government‟s budget
especially in developing country like India, where inequality of income and wealth is very high.
Government uses its financial tools of taxation and subsidies to enhance equal distribution of
income and wealth. In order to ensure equity of income, progressive tax structure is followed in
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India, which imposes higher burden of taxes on higher income group and lesser burden on lower
income group. Also, those who earn below a substantial limit are exempted from payment of taxes.
The additional income generated from higher income group is re-distributed by the government in
the form of subsidies to the poor sections of the society, to ensure the objective of welfare. LPG
subsidy is a good example of such re-distribution of income.

36. Explain the budgetary measures for achieving the following objectives
(i) Setting up of production units in backward regions.
(ii) Reducing inequalities of income and wealth. (Delhi 2016)
(i) The possible budgetary incentives that a government might decide to give to investors for
making investments in backward region are as follows:
(a) The government might give a tax-holiday for a stipulated period for such investors The reason
behind this is that the incentive of tax-holiday might motivate the investors to invest in backward
region.
(b) The government may offer subsidy on loans for such investors The provision of subsidy implies
that the investors will not be required to pay back a certain percentage of the loan taken by them.
This might induce them to invest.
(c) The government might waive-off the excise duty on goods manufactured by investors in these
regions Excise duty is levied on goods manufactured or produced in India. Waiving of the excise
duty will ensure that the price of the good is less and this will increase the demand for the good
and ensure a ready market for the product. This will motivate the investors to invest in backward
region.

(ii) For reducing inequalities of income and wealth, the government can initiate the following
budgetary measures:
(a) High taxes on higher income: The government may levy higher taxes on people with higher
incomes.
(b) Providing subsidies to lower income groups: To reduce inequalities, the government may
provide subsidies on necessary consumption items to lower income groups.
(c) Improving social infrastructure: The government can increase it‟s expenditure on social
infrastructure, such as construction of schools and hospitals, so that the lower income group can
avail of such facilities and improve their standard of living.

37. Classify the following taxes into direct and indirect tax. Give reasons for your answer.
(i) Corporation tax (ii) Entertainment tax (iii) Excise duty
(iv) Income tax (All India (C) 2016)
(i) Corporation tax It is a direct tax as its impact and incidence is on the same person (Company).
(ii) Entertainment tax It is an indirect tax as its impact and incidence are on different people.
(iii) Excise duty It is an indirect tax as the burden of its payment can be shifted to another person.
(iv) Income tax It is a direct tax as its impact and incidence are on the same person.

38. Suppose you are a member of the “Advisory Committee of the Finance Minister of
India”. The Finance Minister is concerned about the rising revenue deficit in the budget.
Suggest any one measure to control the rising revenue deficit of the government. (All India)
Measures to control revenue deficit are (any one)
 Increased emphasis on tax-based revenues and appropriate measures to reduce tax evasion.
 Disinvestment should be done where assets are not being used effectively.

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39. What is meant by fiscal deficit? (Delhi 2019) Or What is fiscal deficit? (Delhi (c) 2017,
2012) Or Define fiscal deficit. (All India 2016,2014)
Fiscal deficit is the difference between the government‟s total expenditure and total receipts
excluding borrowings.
Fiscal deficit = Total Budget Expenditure – Total Budget Receipts (Excluding borrowings)
Or Fiscal Deficit = Borrowings
40. What is meant by primary deficit? (Delhi 2019) Or
What is „primary deficit‟? (Delhi (C) 2017,2012; Foreign 2014) Or
How is primary deficit calculated? (Delhi (C) 2010)
The difference between fiscal deficit and interest payment is known as primary deficit.
Primary Deficit = Fiscal Deficit – Interest Payments
41. What is „revenue deficit‟? (Delhi 2017: All India 2013) Or
What is meant by revenue deficit? (All India 2010)
When the revenue receipts are less than the revenue expenditures in a government budget, this
shortfall is termed as revenue deficit. Revenue Deficit = Revenue Expenditure – Revenue Receipts
42. What is revenue deficit in government budget? (Delhi 2016)
Revenue deficit is defined as the excess of government‟s revenue expenditure over revenue
receipts. The revenue deficit includes only such transactions that affect the current income and
expenditure of the government. It is calculated as
Revenue Deficit = Revenue Expenditure – Revenue Receipts

43. Distinguish between fiscal deficit and revenue deficit. (Delhi 2013: All India (C) 2012) Or
Explain the distinction between fiscal deficit and primary deficit. Delhi to 2013
Differences between fiscal deficit and revenue deficit are
Basis Fiscal Deficit Revenue Deficit
It is the difference between total It results when revenue receipts are less
Meaning revenue and total expenditure of the than the revenue expenditure.
government (excluding borrowings).
It is an indicator of the total It indicates the dependency on loans in
Indicator borrowings needed by the near future.
government.
It arises due to hike in capital It arises when the government‟s actual net
Arises expenditure. receipts are lower than the projected
receipts.

44. Explain the meaning and implications of revenue deficit. (All India 2011)
When the revenue receipts are less than the revenue expenditures in the government budget, this
short-fall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
 High revenue deficit shows accumulated and recurring expenses of government such as
expenses on defence, payment of interest etc.
 The revenue deficit is managed by borrowing or by disinvestment. Hence, high revenue
deficit either increases government liability or reduces government assets.
 High revenue deficit leads to inflationary situation in the economy, as high government
expenditure increases the aggregate demand of the economy.
 High revenue deficit implies high future burden of loan and interest payments on the
government.

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45. Distinguish between fiscal deficit and primary deficit. (All India 2010) Or
Revenue deficit and fiscal deficit. (All India (C) 2014: Delhi (C) 2014)
Differences between fiscal deficit and primary deficit are
Basis Fiscal Deficit Primary Deficit
Meaning It is the excess of total budget It is the difference between fiscal
expenditure over the total budget deficit and interest payments by the
receipt excluding borrowing. government.
Calculation It is calculated as, Fiscal Deficit = Total It is calculated as, Primary Deficit =
Budget Expenditure – Total Budget Fiscal Deficit – Interest Payments
Receipt (excluding borrowings)
Scope It is broad or wide in scope. Primary deficit is the part of fiscal
deficit hence, narrow in scope.

46. Explain revenue deficit in a government budget. What does it indicate? (Delhi 2012) Or
What is revenue deficit? Explain its implications. (Delhi 2012)
When the revenue receipts are less than the revenue expenditures in the government budget, this
short-fall of receipts is known as revenue deficit.
Implications of revenue deficit are as follows:
 High revenue deficit shows accumulated and recurring expenses of government such as
expenses on defence, payment of interest etc.
 The revenue deficit is managed by borrowing or by disinvestment. Hence, high revenue
deficit either increases government liability or reduces government assets.
 High revenue deficit leads to inflationary situation in the economy, as high government
expenditure increases the aggregate demand of the economy.
 High revenue deficit implies high future burden of loan and interest payments on the
government.
Two measures to reduce revenue deficit are as follows
 Reduction in expenditure The government should take measures to reduce unnecessary and
wasteful expenditure.
 Increase in revenue The government should try to increase its revenue by expanding its tax
base.

47. Explain the concept of fiscal deficit in a government budget. What does it indicate? (All
India 2012)
Fiscal deficit is the difference between the government‟s total expenditure and total receipts
excluding borrowings.
Fiscal deficit = Total Budget Expenditure – Total Budget Receipts (Excluding borrowings)
Or
Fiscal Deficit = Borrowings
Implications of fiscal deficit are:
 Borrowing requirements of government.
 High interest payments by government.
 High level of inflation due to high government expenditure.
 Increased foreign dependence of the economy.

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48. From the following data about a government budget, find out the following:
(i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit (Delhi 2011)
Contents ₹ (in Arab)
(a) Capital Receipts Net of Borrowings 95
(b) Revenue Expenditure 100
(c) Interest Payments 10
(d) Revenue Receipts 80
(e) Capital Expenditure 110
(i) Revenue Deficit = Revenue Expenditure – Revenue Receipts
= 100 – 80 = ₹ 20 Arab
(ii) Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipt +
Capital Receipt Net of Borrowing) = (100 + 110) – (80 + 95)
= 210 – 175 = ₹ 35 Arab
(iii) Primary Deficit = Fiscal Deficit – Interest Payments = 35 – 10 = ₹ 25 Arab

49. From the following data about a government budget, find

(i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit (All India 2011)
Contents ₹ (in Arab)
Tax Revenue 47
Capital Receipts 34
Non-tax Revenue 10
Borrowings 32
Revenue Expenditures 80

(i) Revenue Deficit = Revenue Expenditure – (Tax Revenue + Non-tax Revenue)

= 80 – [47 + 10]
= 80 – 57
= ₹ 23 Arab
(ii) Fiscal Deficit = Borrowings Borrowings = ₹ 32 Arab So, Fiscal Deficit = ₹ 32 Arab
(iii) Primary Deficit = Fiscal Deficit – Interest Payments = 32 – 20 = ₹ 12 Arab

50. Define a government budget. Give meanings of revenue deficit, fiscal deficit and primary
deficit. (Delhi 2011) Or
What is a government budget? Explain the meanings of fiscal deficit and primary deficit. (All
India (C) 2010)
Government budget is a statement of expected/estimated receipts and expenditure of the
government over a period of one financial year, i.e. from 1st April to 31st March. (1)
Revenue deficit:
When the revenue receipts are less than the revenue expenditures in a government budget, this
shortfall is termed as revenue deficit. Revenue Deficit = Revenue Expenditure – Revenue Receipts
Fiscal deficit:
Fiscal deficit is the difference between the government‟s total expenditure and total receipts
excluding borrowings.
Fiscal deficit = Total Budget Expenditure – Total Budget Receipts (Excluding borrowings)
Or Fiscal Deficit = Borrowings
Primary deficit:
The difference between fiscal deficit and interest payment is known as primary deficit.
Primary Deficit = Fiscal Deficit – Interest Payments

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51. Explain the meaning of the following:
(a) Revenue deficit (b) Fiscal deficit (c) Primary deficit (March 2018)
(a) Revenue deficit:
When the revenue receipts are less than the revenue expenditures in a government budget, this
shortfall is termed as revenue deficit. Revenue Deficit = Revenue Expenditure – Revenue Receipts
(b) Fiscal deficit:
Fiscal deficit is the difference between the government‟s total expenditure and total receipts
excluding borrowings.
Fiscal deficit = Total Budget Expenditure – Total Budget Receipts (Excluding borrowings)
Or Fiscal Deficit = Borrowings
(c) Primary deficit:
The difference between fiscal deficit and interest payment is known as primary deficit.
Primary Deficit = Fiscal Deficit – Interest Payments

52. Distinguish between Primary deficit and revenue deficit (All India (C) 2014)
Differences between primary deficit and revenue deficit are:
Basis Primary Deficit Revenue Deficit
Meaning Primary deficit is the difference Revenue deficit is the difference between
between fiscal deficit and interest revenue expenditure and revenue receipts.
payments.
Implications Primary deficit indicates the Revenue deficit shows the inefficiency of
borrowing requirement of the the government to meet its current
government. expenditure.
Scope It has a narrow scope. It has a wide scope.

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 CHAPTER 6 - BALANCE OF PAYMENTS AND FOREIGN EXCHANGE RATE

MULTIPLE CHOICE QUESTIONS

1.Other things remaining unchanged, when in a country the price of foreign currency rises,
National Income is ………. (Delhi 2015)
(a) likely to rise (b) likely to fall (c) likely to rise and fall both (d) not affected
2.Other things remaining the same, when in a country the market price of foreign currency
falls, National Income is likely ……… . (All India 2015)
(a) to rise (b) to fall (c) to rise or to fall (d) to remain unaffected
3.Other things remaining the same, when foreign currency becomes cheaper, the effect on
National Income is likely to be (Foreign 2015)
(a) positive (b) negative (c) Both (a) and (b) (d) no effect
4.Foreign exchange transactions dependent on other foreign exchange transactions.
(a) Current account transactions (b) Capital account transactions
(c) Autonomous transactions (d) Accommodating transactions
5.Foreign exchange transactions which are independent of other transactions in the Balance
of Payments Account are called (All India 2016)
(a) current transactions (b) capital transactions
(c) autonomous transactions (d) accommodating transactions
6.…………. is the price of one currency in terms of another currency.
(a) Fixed exchange rate (b) Real exchange rate
(c) Real effective exchange rate (d) Foreign exchange rate
7.Which of the following is not a source of supply of foreign exchange?
(a) Tourism and reinittance from abroad
(b) Speculative purchases of foreign exchange
(c) Grant and donation from rest of the world
(d) Grant and donation to rest of the world
8.……………. is a custodian of foreign exchange reserve in India.
(a) SBI (b) RBI (c) Foreign bank (d) Ministry of finance
9.We demand foreign exchange for _________
(a) import of foreign goods and services (b) investing in abroad
(c) payments of international loans (d) All of the above
10.Decrease in the value of a domestic currency in terms of a foreign currency. It is known
as________
(a) depreciation of a domestic currency (b) devaluation of a domestic currency
(c) revaluation of a domestic currency (d) appreciation of a domestic currency
11.Let foreign exchange rate between Indian Rupee and US dollar is ₹ 40/1$ and it changes
to ₹ 50/1$. Which of the following is the reason of depreciation of Indian currency?
(a) Increase in demand of US dollar and decrease in supply of US dollar
(b) Increase in both demand and supply of US dollar
(c) Increase in supply of US dollar and decrease in demand of US dollar
(d) Decrease in both demand and supply of US dollar
12.A BoP account of a country is always in balance because it is based on the principle of ___
(a) accounts (b) mathematics (c) statistics (d) economics
13.Which item(s) is/are excluded in BoT, but included in BoP?
(a) Invisible items (b) Visible items
(c) Income receipts and payments (d) Both (a) and (c)
14.Unilateral transfers are transfers between residents and non-residents which include
(a) interest and profits (b) dividend and royalty (c) gifts and donation(d) All of the above
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15.Decrease in value of a foreign currency in terms of domestic currency. It is of domestic
currency.
(a) revaluation (b) devaluation (c) depreciation (d) appreciation
16.Under depreciation of a foreign currency in terms of domestic currency, who will be
benefited?
(a) Importers (b) Exporters (c) Both (a) and (b) (d) Neither (a) nor (b)
17.In a foreign exchange market, equilibrium exchange rate is determined by in India.
(a) RBI (b) government (c) demand and supply (d) IMF
18.Favourable disequilibrium in BoP. (i.e. BoP Surplus) occurs when there is __________
(a) BoT surplus
(b) total exports are more than total imports
(c) total exports are less than total imports
(d) total exports are equal to total imports
19.Which one is not an effect of BoP deficit?
(a) Increase in financial burden (b) Increase in economic credibility
(c) Reduce in foreign exchange reserve (d) Increase in foreign dependence

IMPORTANT QUESTION ANSWERS

1.What is meant by depreciation of domestic currency? (All India 2017)
Depreciation of domestic currency means that the value of domestic currency decreases in relation
to the value of foreign currency under flexible exchange rate system.
2.Give the meaning of managed floating exchange rate. (All India 2014; Delhi 2012)
Under this system, the exchange rate is determined by the market forces of demand and supply.
However, excessive fluctuation is checked by the Central Bank.
3.Define foreign exchange rate. (All India 2014; Delhi 2011)
Foreign exchange rate refers to the rate at which one currency can be exchanged for the other
currency in foreign exchange market, e.g. If ₹ 58 is paid, to buy one US dollar, then ₹/$ exchange
rate will be 58, i.e. ₹ 58 per dollar.
4.What is floating exchange rate? (All India 2014)
The rate of exchange which is determined by the market forces of demand and supply of foreign
currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.
5.What is a fixed exchange rate? (All India 2013, 2012) Or
Give the meaning of fixed foreign exchange rate. (All India 2012)
Fixed exchange rate is the system under which the central authority or government maintains their
exchange rate fixed either against gold or some other foreign currency, (say USD)
6.How can increase in foreign direct investment affect the price of foreign exchange?
Increase in foreign direct investment will reduce the price of foreign exchange.
7.How can Reserve Bank of India help in bringing down the foreign exchange rate which is
very high? (All India 2013)
The Reserve Bank of India can help in bringing down the high foreign exchange rate by selling
foreign exchange from its reserve.
8.What is foreign exchange? (All India 2011)
Foreign exchange refers to all currencies other than domestic currency of a given country, e.g.
currency of US and UK are the foreign exchanges for India.
9.State two sources of supply of foreign exchange. (Delhi 2010)
Two sources of supply of foreign exchange are
 Export of goods and services from domestic country to foreign country.
 Foreign direct investment.

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10.State two sources of demand for foreign exchange. (All India 2010)
Two sources of demand for foreign exchange are
 Payment of loans and interests to international organisations.
 Gifts and grants to the rest of the world.
11.Describe any three sources of demand for foreign exchange. (All India (C) 2016,2015;
The three sources of demand for foreign exchange are described below
 Purchase of foreign goods by domestic residents: To purchase of foreign goods domestic
residents need foreign exchange. So, this results in demand for foreign exchange.
 Re-payments of international loans: International loans have to be paid back in foreign
exchange, so, this also results in demand for foreign exchange.
 Tourism to abroad: When Indian tourists visit abroad, they need foreign exchange to meet
their expenses related to boarding and lodging. So, they demand foreign exchange.

12.Why are foreign exchange rate and demand for foreign exchange inversely related?
Explain. Or
When price of a foreign currency rises, its demand falls. Explain why. (Delhi 2011)Or
Explain, why there is a fall in demand of foreign exchange, when its price rises. Or
Explain why there is an inverse relationship between price of foreign currency and its
demand.
Exchange rate of foreign currency is inversely related to the demand. When price of a foreign
currency rises, it results into costlier imports for the country. As imports become costlier, the
demand for foreign products also reduce. This leads to reduction in demand for that foreign
currency and vice-versa.

13.Why are foreign exchange rate and supply of foreign exchange directly related? Explain.
OrWhen price of a foreign currency rises, its supply also rises. Explain why? (Delhi 2011)
OrExplain why there is an increase in supply of foreign currency when its price rises.
Rise in exchange rate of foreign currency refers to appreciation of foreign currency in relation to
domestic currency. When there is rise in foreign exchange rate (Say from ₹ 55 per $ to ₹ 60 per $),
it leads to depreciation of domestic currency and rise in exports leading to rise in supply of foreign
exchange.

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14.What are fixed and flexible exchange rates? (All India 2015)Or
Distinguish between fixed and flexible foreign exchange rate. (All India 2010)
Fixed exchange rate refers to the rate of exchange which is fixed by the central authority of the
country. It is not affected by change in demand or supply of foreign exchange. It discourages
venture capital.
Flexible exchange rate refers to the rate of exchange which is determined by the demand and
supply of foreign exchange in the foreign exchange market, with no intervention from any central
authority. It incourages venture capital.

15.Explain the meaning of managed floating exchange rate. (All India 2015)
Managed floating exchange rate refers to the rate, which is determined by the demand and supply
of foreign exchange in the foreign exchange market with excessive fluctuations if any, being
checked by some central authority. It is a hybrid system of exchange rate determination which
combines the features of both fixed exchange rate and flexible exchange rate. It encourages
venture capital.

16.Describe any three sources of supply of foreign exchange. Delhi (C) 2015
Three sources of supply of foreign exchange are
 Exports of goods and services When goods and services are exported to other countries
then the foreign exchange earned is a source of supply of foreign exchange.
 Gifts and remittances from abroad Gifts and remittances from abroad are also a source of
supply of foreign exchange.
 Foreign Direct Investments (FDI) Foreigners invest in India. This is also an important source
of foreign exchange.

17.Give the meanings of devaluation and depreciation of domestic currency. (All India)
OrDistinguish between devaluation and depreciation of domestic currency. (Delhi)
OrDistinguish between Depreciation of a Currency and Devaluation of a Currency.
Differences between Devaluation and Depreciation of domestic currency are
Basis Devaluation Depreciation
Devaluation is the fall in the value of It occurs when the value of domestic
domestic currency in relation to foreign currency decreases in relation to the
currency. It is planned by the Central value of foreign currency in the foreign
Meaning Bank in situation, when exchange rate is exchange market.
not determined by the forces of demand
and supply.

The government has changed the $/₹ The increase in demand or decrease in
exchange rate from ₹ 40 to ₹ 45. supply for the foreing exchange causes
depreciation of domestic currency, e.g.
Example
$/₹ exchanges rate is ₹ 45 instead of ₹
40 due to the market forces of demand
and supply.

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18.Explain the effect of rise in price of foreign currency on exports. (Delhi (C) 2015)Or
Foreign exchange rate in India is on the rise recently. What impact is it likely to have on
exports and how? (All India 2014)Or
Explain the effect of depreciation of domestic currency on exports. (All India 2013)Or
Explain the effect of a rise in the price of foreign currency on exports. (Delhi (C) 2012; All
India (C) 2012)
With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise
in exchange rate implies depreciation in domestic currency. It encourages exports from a country,
because due to depreciation of the domestic currency, domestic goods become cheaper in the
international market.
19.When foreign exchange rate in a country is on the rise, what impact is it likely to have on
imports and how? (All India 2014)Or
Foreign exchange rates have risen considerably in a country. What is its likely impact on
imports of that country and why? (All India (C) 2013)
With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise
in exchange rate implies depreciation in domestic currency. It encourages exports from a country
and discourages imports from rest of the world as the residents of the country have to pay more to
buy foreign goods.
20.What is „appreciation‟ of domestic currency? What is its likely effects on export and how?
(Foreign 2014)Or
Explain the effect of appreciation of domestic currency on exports. (All India 2014)
Appreciation of domestic currency implies that there is a fall in the foreign exchange rate. A fall in
the exchange rate means that the foreigners will have to pay more for the goods and services
purchased by them. This will reduce their demand and accordingly exports will fall.
21.How is exchange rate determined in the foreign exchange market? (All India 2013)
Foreign exchange rate is determined by the market forces of demand and supply in foreign
exchange market. The rate at which demand and supply of foreign exchange are equal, gives the
equilibrium rate of exchange, as shown in the figure.

22.How can Reserve Bank of India helps in bringing down the foreign exchange rate which is
very high? All India 2013
A high rate of exchange implies that the demand
for foreign exchange is quite high. So, to bring
down the exchange rate, the supply for foreign
exchange has to be increased. So, the Reserve
Bank of India starts selling foreign exchange
from its reserve to increase the supply of foreign
exchange. As the supply increases, the exchange
rate comes down, as is illustrated in the graph
given above.

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23.How can increase in foreign direct investment affect the price of foreign exchange?
Increase in foreign direct investment will result in more supply of foreign exchange therefore, due
to excess supply, price of foreign exchange will fall. i.e. exchange rate falls which leads to
appreciation of domestic currency.

24.When the price of a foreign currency falls, the demand for that foreign currency rises.
Explain why? (All India 2011)Or
Explain why there is a rise in demand for foreign exchange, when its price falls?
Foreign exchange rate shares an inverse relationship with the demand for that currency. With a fall
in the price of foreign exchange, value of domestic currency increases (i.e. appreciation of domestic
currency) and that means foreign goods become cheaper and their domestic demand (i.e. imports)
increases. The rising domestic demand for
foreign goods implies higher demand for foreign exchange which increases from OQ1 to OQ2 as
shown in the figure.

25.When the price of a foreign currency falls, the supply of that foreign currency also falls.
Explain why? (All India 2011)Or
Explain why there is an increase in demand for foreign currency when its price falls. The
supply of foreign currency is directly proportional to the price of foreign exchange. When the price
of a foreign currency falls, it leads to cheaper imports and costlier exports because it leads to
appreciation of domestic currency.
The exporters are discouraged due to costlier exports. This results lesser inflow or supply of foreign
currency in the economy. As a result supply of foreign exchange decreases from OQ2 to OQ1.

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26.Give the meaning of foreign exchange rate. How it is determined under flexible exchange
rate system? All India 2011
Foreign exchange rate:
Foreign exchange rate refers to the rate at which one currency can be exchanged for the other
currency in foreign exchange market, e.g. If ₹ 58 is paid, to buy one US dollar, then ₹/$ exchange
rate will be 58, i.e. ₹ 58 per dollar.
Determination of flexible exchange rate:
Foreign exchange rate is determined by the market forces of demand and supply in foreign
exchange market. The rate at which demand and supply of foreign exchange are equal, gives the
equilibrium rate of exchange, as shown in the figure.

27.Giving two examples, explain the relation between the rise in price of a foreign currency
and its demand. (Delhi 2011,2010)
The following two examples explain the relation between the rise in price of a foreign currency and
its demand
 When the price of a foreign currency rises, the imports become costlier so, the value of
imports will fall with time, hence the demand for foreign exchange will fall.
 When the price of foreign currency rises, residents of a country find it costlier to travel
abroad. So, the number of foreign travellers decrease, and consequently the demand for
foreign currency also decreases.

28.By giving two examples, explain why there is a rise in demand for a foreign currency
when its price falls? (All India 2010)
The following two examples explain why there is a rise in demand for a foreign currency when its
price falls
 When there is a fall in the price of foreign currency, the import gets cheaper. It encourages
the importers to import more and consequently, the demand for that foreign currency
increases.
 When the price of a foreign currency falls, the price of foreign assets also falls.
It encourages domestic people and companies to buy foreign assets and consequently, the
demand for that foreign currency increases.

29.Give the meanings of fixed, flexible and managed floating exchange rates.
Fixed rate of exchange:
Fixed exchange rate is the system under which the central authority or government maintains their
exchange rate fixed either against gold or some other foreign currency, (say USD)
flexible exchange rate:
The rate of exchange which is determined by the market forces of demand and supply of foreign
currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.

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Managed floating exchange rate:
Under this system, the exchange rate is determined by the market forces of demand and supply.
However, excessive fluctuation is checked by the Central Bank.

30.What is meant by appreciation and depreciation of domestic currency? Explain.

When the value of domestic currency increases in relation to a foreign currency due to demand
and supply forces in a free market, it is termed as appreciation of the domestic currency.
Depreciation of the domestic currency occurs when the value of domestic country‟s currency
decreases in relation to a foreign currency.
For example, Increase in exchange rate is currency depreciation and decrease in exchange rate is
currency appreciation.
 When ₹/$ exchange rate falls from 55 to 50, it is termed as appreciation of domestic
currency. (i.e. Indian rupee)
 When ₹/$ exchange rate rises from 50 to 55,
it is termed as depreciation of domestic currency.

31.Explain the meaning and two merits of fixed foreign exchange rate. (Delhi 2010)
Fixed exchange rate is the system under which the central authority or government maintains their
exchange rate fixed either against gold or some other foreign currency, (say USD)
Two merits of fixed foreign exchange rate are
 Less speculation in the currency market.
 Encourages international trade and investment flows.

32.Explain the effect of appreciation of domestic currency in imports. (All India

2014)Appreciation of domestic currency implies fall in foreign exchange rate in India and
therefore, the demand for foreign currency decreases.
It encourages imports from rest of the world as the residents of country have to pay less to buy
foreign goods, e.g. When ₹/ $ exchange ratefalls from 55 to 50, it leads to currency appreciation
and this will help in buying more and more units of foreign goods. As a result, demand for foreign
goods will rise, i.e. imports will rise.

33.(a) Distinguish between appreciation of home currency and depreciation of home

currency.
(b) What is meant by “current account surplus”?
(c) State any one source of supply of foreign currency for a country are (All India 2019)
(a) Difference between appreciation and depreciation of domestic currency:
(i) Depreciation of domestic currency refers to decrease in the value of domestic currency as
compared with foreign currency due to change in market forces of demand and supply, while
appreciation of domestic currency refers to increase in the value of domestic currency as compared
with foreign currency due to change in market forces of demand and supply.
(ii) Due to depreciation, exports increase and imports fall while due to appreciation, exports fall
and imports increase.
(iii) Depreciation is shown by increase in exchange rate, while appreciation is shown by decrease in
exchange rate.
(b) Current account surplus refers to the state where credit side balance is greater than debit side
balance on current account, i.e. inflows are more than outflows.
(c) Export of goods and services.

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34.Discuss briefly the meanings of
(a) Fixed Exchange Rate
(b) Flexible Exchange Rate
(c) Managed Floating Exchange Rate (April re-exam 2018)
(a) Fixed Exchange Rate:
Fixed exchange rate is the system under which the central authority or government maintains their
exchange rate fixed either against gold or some other foreign currency, (say USD)
(b) Flexible exchange rate:
The rate of exchange which is determined by the market forces of demand and supply of foreign
currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.
(c) Managed Floating Exchange Rate:
Under this system, the exchange rate is determined by the market forces of demand and supply.
However, excessive fluctuation is checked by the Central Bank.

35.Why does the demand for foreign currency fall and supply rises when its price rises?
Explain. (Delhi 2017)
Foreign exchange rate shares an inverse relationship with the demand for the currency. With a fall
in the price of foreign exchange, value of domestic currency increases (i.e. appreciation of domestic
currency) and that means foreign goods become cheaper and their domestic demand (i.e. imports)
increases.
The rising domestic demand for foreign goods implies higher demand for foreign exchanges which
increases from OQ1 to OQ2 as shown in the figure

The supply of foreign currency is directly proportional to the price of foreign exchanges. When the
price of a foreign currency falls, it leads to cheaper imports and exports because it leads to
appreciation of domestic currency. The exporters are discouraged due to costlier exports. This
results lesser inflow or supply of foreign currency in the economy. As a result supply of foreign
exchange decreases from OQ2 to OQ1 as shown in the figure.

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36.Give the meaning of foreign exchange and foreign exchange rate. Give the reason,
explain the relation between foreign exchange rate and demand for foreign exchange. (All
India 2012)
Foreign exchange:
Foreign exchange refers to all currencies other than domestic currency of a given country, e.g.
currency of US and UK are the foreign exchanges for India.
Foreign exchange rate:
Foreign exchange rate refers to the rate at which one currency can be exchanged for the other
currency in foreign exchange market, e.g. If ₹ 58 is paid, to buy one US dollar, then ₹/$ exchange
rate will be 58, i.e. ₹ 58 per dollar.
relation between foreign exchange rate and demand for foreign exchange:
Exchange rate of foreign currency is inversely related to the demand. When price of a foreign
currency rises, it results into costlier imports for the country. As imports become costlier, the
demand for foreign products also reduce. This leads to reduction in demand for that foreign
currency and vice-versa.

37.Give the meaning of Balance of Payments. (Delhi 2017)

Balance of Payments (BoP) of a country is a systematic record of all the economic transactions
between the residents and non-residents of a country during an accounting year.
38.What is the meaning of deficit in Balance of Payments? (Delhi 2014,2010)Or
How is Balance of Payment „deficit‟ measured? Explain. (Foreign 2014)
When the payments of a country on account of autonomous transactions exceed the receipts of
the country on account of autonomous transactions, this difference is termed as BoP deficit.
Suppose, the receipts of the domestic country is ₹ 200 crore, whereas payments are ₹ 220 crore.
Then, BoP deficit will be = 220 – 200 crore = ₹ 20 crore.
39.Give meaning of Balance of Trade. (Delhi 2014)Or
What is trade balance? (All India 2010)
The difference between export and import of goods i.e. only the visible items of economic
transactions is termed as Balance of Trade.
40.What is „current account deficit‟ in the Balance of Payments? (Delhi 2014)
When receipts of current account of BoP falls short of expenditure of current account, then it is
referred to as „current account deficit‟.
41.Name two invisible items of the Balance of Payments account. (Delhi (C) 2010)
Two invisible items of the Balance of Payments account are
 Banking services
 Insurance services
42.Give the meanings of „autonomous‟ transactions and „accommodating‟ transactions in the
Balance of Payments account. (Foreign 2015)Or
Distinguish between autonomous and accommodating transactions of Balance of Payments
account. (All India 2014,2010; Delhi (C) 2010)Or

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Distinguish between Autonomous and Accommodating transactions of Balance of Payments
account.
Differences between Autonomous and Accommodating transactions are
Basis Autonomous Transactions Accommodating Transactions
Meaning Autonomous transactions are the Accommodating transactions are those
transactions between the residents of transactions which help to restore
two countries which take place due to identity of Balance of Payments.
consideration of profit.
Recorded These transactions can either be These transactions are recorded only in
in recorded in current account or capital capital account.
account, depending on their nature.
Example Exports and imports of goods and Borrowings from IMF, change in foreign
services, unilateral transactions etc are exchange reserves etc are examples of
examples of autonomous transactions. accommodating transactions.

43.Give the meanings of Balance of Trade and Balance on Current Account of Balance of
Payments Account. (Foreign 2015)Or
Distinguish between Balance of Trade and Balance on Current Account. Or
Distinguish between Balance of Trade and Balance on Current Account of Balance of
Payments. (All India (C) 2014,2013)
Differences between Balance of Trade and Balance on Current Account are:
Basis Balance of Trade Balance on Current Account
Meaning Balance of Trade includes only visible Balance on Current Account is the
items. It is the difference between difference between sum of credit items
exports and imports of goods of a and sum of debit items on current account.
country.
Coverage Balance of Trade does not record any Balance of Current Account includes
transactions of invisible items and balance of visible items, balance of
unilateral transfers. invisible items and balance of unilateral
transfer.
Concept Balance of Trade is a narrow concept Balance of Current Account includes the
and it is only a part of the Balance of Balance of Trade hence, it is a broader
Payment Account. concept.
Financing A deficit in Balance of Trade can be Deficit in Current Account cannot be met
of deficit met from the surplus of Current from the surplus of BoT.
Account.

44.Name the broad categories of transactions recorded in the capital account of the Balance
of Payments Account. (Delhi 2015)Or
State the components of capital account of Balance of Payments. (Delhi 2011)
Components of Capital Account of Balance of Payments are
 Investments It includes investments to and from abroad in the form of Foreign Direct
Investment (FDI) and Foreign Institutional Investor (FII). Investment from abroad is a „credit‟
item, whereas investment to abroad is a „debit‟ item.
 Borrowing and lending It includes the borrowings by residents from the residents of abroad
(credit item). And lending to the residents of foreign country (debit item) by residents of
domestic country.

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  Foreign exchange It includes the reserve of foreign currency gold and Special Drawing
Rights (SDRs)
with the domestic country.

45.Name the broad categories of transactions recorded in the Current Account of the
Balance of Paynjents Account. (Delhi 2015)Or
List the transactions of Current Account of the Balance of Payments. (All India 2011)Or
State the components of current account of Balance of Payments. (Delhi 2011)
The transactions included in the Current Account of the Balance of Payments are
 Export and import of visible items
 Export and import of services (invisible items)
 Unilateral transfers

46.Where will sale of machinery to abroad be recorded in the Balance of Payments Account?
Give reasons. (Delhi 2015)
Sale of machinery will be recorded in Current Account of Balance of Payments account, as it is
export of goods to abroad.
47.Where is „Borrowings from Abroad‟ recorded in the Balance of Payments Account? Give
the reasons. (All India 2015)
„Borrowings from Abroad‟ will be recorded in the Capital Account of Balance of Payments account,
as it is concerned with the assets and liability position of the country. And borrowings from abroad
will increase liabilities hence it will be recorded in the credit side of Capital Account.
48.Giving reason, explain where charity to foreign countries is recorded in the Balance of
Payments account. (Foreign 2015)
Charity given to foreign countries is a form of unilateral transfer. So, it will be recorded in the debit
side of the Current Account of the Balance of Payments account.
49.Distinguish between current account and capital account of the Balance of Payments
account on the basis of its components. Delhi [Cl 2014
Current account includes:
 Export and imports of visible and invisible items.
 Unilateral transactions to and from abroad.
Capital account includes:
 Investment to and from abroad.
 Borrowings and lendings to and from abroad.
 Official reserves which contains foreign, currency, SDRs and gold.

50.Explain the meaning of Balance of Payments deficit. (Delhi 2014)Or

Explain the meaning of deficit in Balance of Payments. (Delhi 2010)Or
Explain the concept of „Deficit‟ in the Balance of Payments. (All India (c) 2013)
When the receipts of the country on account of autonomous transactions are less than the
payments of the country on account of autonomous transactions, then this difference is termed as
deficit in Balance of Payments.
So, BoP Deficit = R < P, Where R = Receipts of the country and P = Payments of the country, e.g. If
the receipts of the country is 1200 crore and the payments are ₹ 250 crore, then BoP deficit will be
₹ 50 (250-200) crore.

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51.List the items included as invisibles in the Balance of Payments account. (All India (C)
2012)
The following items are included as invisibles in the Balance of Payments account
 Income from abroad and income to abroad.
 Export and import of services.
 Current transfers from abroad and current transfers to abroad.
52.What does a Balance of Payments account show? Name the two parts of the Balance of
Payments account. (Delhi 2011)
The Balance of Payment (BoP) of a country is a systematic record of all economic transactions
between its residents and residents of foreign countries during an accounting year. It summarises
the exports and imports and other international transactions of a country with other countries.
Two parts of Balance of Payments account are as follows
 Current account
 Capital account
53.Which transactions determine the Balance of Trade? When is Balance of Trade in surplus?
(All India 2011)
The transactions involving export and import of goods, i.e. only the visible items of economic
transactions, determines the Balance of Trade. Balance of Trade is in surplus, when the value of
export of goods are more than the value of import of goods.
54.Explain the concept of surplus in the Balance of Payments account. (All India 2010)
When the receipts of the country on account of autonomous transactions exceed the payments of
a country on account of autonomous transactions, this difference is termed as BoP surplus.
BoP Surplus = R > P, Where R = Receipts of the country, P = Payment of the country, e.g. If the
receipts of the country is ₹ 200 crore and the payments are ₹ 190 crore, then BoP surplus will be
(200 – 190) = ₹ 10 crore.
55.In the context of Balance of Payments Account, state whether the following statements
are true or false. Give reasons for your answer.
(i) Profits received from investments abroad is recorded in capital account.
(ii) Import of machines is recorded in current account. (All India (C) 2015)
(i) False, profit received from investments abroad affect neither the assets not the liabilities of a
country or its residents. Therefore it is recorded in Current Account
(ii) True, machine is a visible item. Therefore, it‟s import is recorded in the Current Account.

56.Distinguish between autonomous transactions and the accommodating transactions in

the balance of payments. What is the significance of this distinction? (Delhi (c) 2015)
Differences between Autonomous and accommodating Transactions:
Basis Autonomous Transactions Accommodating Transactions
Meaning Autonomous transactions are the Accommodating transactions are
transactions between the residents of those transactions which help to
two countries which take place due to restore identity of Balance of
consideration of profit. Payments.
Recorded These transactions can either be These transactions are recorded only
in recorded in current account or capital in capital account.
account, depending on their nature.
Example Exports and imports of goods and Borrowings from IMF, change in
services, unilateral transactions etc are foreign exchange reserves etc are
examples of autonomous transactions. examples of accommodating
transactions.

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The distinction between these two transactions is important to understand the causes of
disequilibrium and to restore the identity of Balance of Payments account.

57.Are the following entered (i) on the credit side or the debit side and (ii) in the current
account or capital account in the Balance of Payments account? You must give reasons for
your answer.
(i) Investments from abroad.
(ii) Transfer of funds to relatives abroad. (All India (C) 2013)
(i) Investments from abroad are entered in the credit side of capital account because they increase
the assets of the country by increasing the flow of foreign exchange in the country.
(ii) Transfer of funds to relatives abroad are entered on the debit side of current account as they
result in outflow of domestic currency with no returns.
58.What is Balance of Payments Account? Where are borrowings from abroad recorded in it
and why? (Delhi 2011)
The Balance of Payments (BoP) account of a country is a systematic record of all economic
transactions between its residents and residents of foreign countries during an accounting year.
Balance of Payments account is classified into Current Account and Capital Account.
Borrowing from abroad are recorded in the Capital Account (credit side) of Balance of Payments as
it is a foreign liability on the country and it is to be repaid with interest.

59.What is Balance of Payments? Give meanings of Trade balance and Current Account
balance. Delhi 2011; All India 2011
Balance of payments:
Balance of Payments (BoP) of a country is a systematic record of all the economic transactions
between the residents and non-residents of a country during an accounting year.
Trade balance The difference between export and import of goods, i.e. only the visible items of
economic transactions is termed as Balance of Trade.
Balance of Trade = Export of Goods – Import of Goods
Current account balance Current account is that account of BoP, which records exports and
imports of visible and invisible items and unilateral transfers.

60.Give reasons and state whether the following statements are true or false.
(i) Current Account of Balance of Payment account records only export and import of goods
and services.
(ii) Foreign investments are recorded in the Capital Account of Balance of Payments.
(i) False, as Current Account of Balance of Payments Account also records unilateral transfers.
(ii) True, as all kind of foreign investments (foreign direct investments and portfolio investments)
are included in the Capital Account of Balance of Payments as they affect the assets positions of
the country.
61.Give reasons and state whether the following statements are true or false.
(i) Excess of foreign exchange receipts over foreign exchange payments on account of
accommodating transactions equals deficit in the Balance of Payments.
(ii) Export and import of machines are recorded in Capital Account of Balance of Payments
account. (Delhi (C) 2011)
(i) False, as accommodating transactions removes both surplus and deficit from Balance of
Payments account.
(ii) False, export and import of machine, will be recorded in Current Account as it is a producer
good.

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62.State whether the following statements are true or false. Give reasons for your answer.
(i) Difference between value of exports and imports of goods and services are called Balance
of Trade.
(ii) External assistance is not recorded in Balance of Payments account. (Delhi (C) 2011)
(i) False, because Balance of Trade only records the export and import of visible items, i.e. goods.
(ii) False, because external assistance is recorded in the Current Account of Balance of Payments as
unilateral receipts.
63.(a) Define„Trade Surplus‟ and „Trade Deficit‟.
(b) Discuss briefly the concept of managed floating system of foreign exchange rate
determination. (All India 2019)
(a) Trade surplus:
When the receipts of the country on account of autonomous transactions exceed the payments of
a country on account of autonomous transactions, this difference is termed as BoP surplus.
BoP Surplus = R > P, Where R = Receipts of the country, P = Payment of the country, e.g. If the
receipts of the country is ₹ 200 crore and the payments are ₹ 190 crore, then BoP surplus will be
(200 – 190) = ₹ 10 crore.
Trade deficit:
Charity given to foreign countries is a form of unilateral transfer. So, it will be recorded in the debit
side of the Current Account of the Balance of Payments account.
(b) Managed floating system of foreign exchange rate determination:
Managed floating exchange rate refers to the rate, which is determined by the demand and supply
of foreign exchange in the foreign exchange market with excessive fluctuations if any, being
checked by some central authority. It is a hybrid system of exchange rate determination which
combines the features of both fixed exchange rate and flexible exchange rate. It encourages
venture capital.

64.(a) Distinguish between „Trade Deficit‟ and „Current Account Deficit‟.

(b) Discuss briefly the concept of flexible exchange rate system of foreign exchange rate
determination. (All India 2019)
(a) Trade deficit is the situation where exports of goods are less than import of goods. While deficit
in current account is the situation where inflow from visible (BOT) and invisible items are less than
outflow from visible and invisible items, i.e. trade deficit is only one component of current account
account deficit other factors including balance on invisible trade, balance on capital transfer. So, a
deficit in balance of trade may not lead to deficit in current account.
(b) Flexible exchange rate system:
The rate of exchange which is determined by the market forces of demand and supply of foreign
currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.

65.(a) State any two factors responsible for inflow of foreign currency.
(b) State on which side of capital account/ current account will the following transactions be
recorded and why
(i) Interest on loan received from Nepal
(ii) Import of mobile phones from China (All India 2019)
(a) Two factors responsible for inflow of foreign currency:
Two sources of supply of foreign exchange are
(i) Export of goods and services from domestic country to foreign country.
(ii) Foreign direct investment.

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(b) (i) It will be recorded in the credit side of current account of BoP, as it doesn‟t affects the assets
or liabilities of the country.
(ii) It will be recorded in debit side of current account of BoP, as it leads to outflow of foreign
currency but doesn‟t affects assets or liabilities of the country.

66.(a) Define „Trade Surplus‟. How is it different from „Current accounts surplus‟?
(b) “Indian Rupees (₹) plunged to all time low of ₹ 74.48 against the US Dollar (S)”.
In the light of the above repon, discuss the impact of the situation on Indian Imports. (Delhi
2019)
(a) Trade surplus is a situation where exports of goods are more than import of goods. While
surplus )n current account is the situation where inflow from visible and invisible interns is more
than outflow from visible and invisible items, i.e. trade surplus is only one components of current
account, while current account includes other factors including balance of visible trade, balance of
unilateral transfers and balance of capital transfer.
(b) As the price of Indian rupees reached to its highest, this shows that the value of Indian rupee is
falling as compared with USD. Also, due to depreciation of rupee, Indians will find imported goods
costlier. So, our imports will decrease and at the same time, exports from India will become
cheaper for foreigners, leading to increase in exports.

67.(a) Explain the impact of rise in exchange rate on National Income.

(b) Explain the concept of „deficit‟ in . Balance of Payments. (March 2018)
(a) Impact of rise in exchange rate on National Income Domestic currency depreciates when there
is a rise in foreign exchange rate. The foreign countries can now purchase more quantity of goods
and services from the same amount of foreign currency from the domestic country. As a result,
exports will rise and imports will fall.
A rise in the export raises the level of aggregate demand which further raises the level of output
and income. Hence, as the domestic currency depreciates an economy experiences trade surplus.
This in turn boosts the National Income.
(b) Deficit in Balance of Payment (BoP) It refers to a situation when receipts of the country arising
out of autonomous transactions are less than the corresponding payments to the rest of the world
during the period of an accounting year. It highlights our net liabilities towards rest of the world.

68.Distinguish between (i) Current account and Capital Account, and (ii) Autonomous
Transactions and accommodating transactions of Balance of Payments account. (All India
2017)
(i) Differences between Current and Capital Account of Balance of Payments (BoP) are
Basis Current Account of BoP Capital Account of BoP
These are the transactions which These are the transactions which
Nature of transaction do not affect the assets or affect assets or liabilities position
liabilities position of the country. of the country.
Concept It is a flow concept. It is a stock concept.
Current Account = Exports and Capital Account = Borrowings and
Imports of Visible and Invisible Lending from and to Abroad +
Formula/Components Items + Unilateral Transactions Investment to and from Abroad +
+ Income Received and Paid to Change in the Reserve of Foreign
Abroad. Exchange.

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(ii) Differences between autonomous and accommodating transactions:
Basis Autonomous Transactions Accommodating Transactions
Autonomous transactions are the Accommodating transactions are those
Meaning transactions between the residents of transactions which help to restore
two countries which take place due to identity of Balance of Payments.
consideration of profit.
These transactions can either be These transactions are recorded only in
Recorded recorded in current account or capital capital account.
in account, depending on their nature.
Exports and imports of goods and Borrowings from IMF, change in foreign
Example services, unilateral transactions etc are exchange reserves etc are examples of
examples of autonomous transactions. accommodating transactions.

69.(i) In which sub-account and on which side of Balance of Payments Account will foreign
investments in India be recorded? Give reasons.
(ii) What will be the effect of foreign investments in India on exchange rate? Explain. (Delhi
2016)
(i) Foreign investments in India will be recorded in the credit side of the capital account of the
Balance of Payments Accounts. Capital account records the capital transactions such as loans and
investments between India and the rest of the world, which causes a change in the assets and
liabilities status of the residents of the country or the government. One of the component of
capital account is „foreign investment‟, which records Foreign Direct Investment (FDI), Foreign
Institutional Investment (FII) or portfolio investment by the residents of India in abroad or by the
rest of the world in the domestic territory. So, foreign investments in India will be a part of this
component and therefore will be recorded in the capital account.
In the capital account, all transactions causing flow of foreign exchange in the country are recorded
on the credit side. Since investments from abroad will cause a flow of foreign exchange in the
country, therefore it will be recorded in the credit side.
(ii) The market exchange rate will tend to fall due to the foreign investment. The foreign investors
who want to invest in India will increase the supply of foreign exchange.
At the supply of foreign exchange rises, with demand remaining unchanged, the market exchange
rate will fall, as is explained in the diagram given below

As the supply of foreign exchange increase, the exchange rate falls from OR to OR 1. This is a
situation of appreciation of the domestic currency.

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70. Indian investors lend abroad. Answer the following questions.
(i) In which sub-account and on which side of the Balance of Payments Accounts such
lending is recorded? Give reasons.
(ii) Explain the impact of this lending on market exchange rate. (All India 2016)
(i) Indian investors lend abroad. This will be recorded in the debit side of the capital accounts of
the Balance of Payments Accounts. Capital account records the capital transactions such as loans
and investments between India and the rest of the world, which causes a change in the assets and
liabilities status of the residents of the country or the government.
One of the component of capital account is „Foreign Investment‟, which records Foreign Direct
Investment (FDI), Foreign Institutional Investment (FII) or portfolio investment by the residents of
India in abroad or by the rest of the world in the domestic territory. So, lending by Indian investors
will be a part of this component and therefore will be recorded in the capital account.
In the capital account, all transactions causing flow of foreign exchange out of the country are
recorded in debit side. Since, lendings to abroad will cause a flow of foreign exchange out of the
country, therefore it will be recorded in the debit side.
(ii) The market exchange rate will tend to rise due to this lending.

The investors who want to lend abroad will demand foreign exchange. As the demand for foreign
exchange rises, with supply remaining the same, the market exchange rate will also rise, as is
explained in the diagram given above. As the demand for foreign exchanges rises, the exchange
rate rises from OR to OR1. This is a situation of depreciation of domestic currency.

71.Explain the distinction between autonomous and accommodating transactions in Balance

of Payments. Also explain the concept of Balance of Payments deficit in this context. (Delhi
2012)
Autonomous items, also termed as „above the line items‟, are those items, which are related to
transactions which are determined by considerations of profit (economic motive). Autonomous
transactions are that transaction between the residents of two countries which take place due to
the considerations of profit. Autonomous items are not conditioned by the BoP status of the
country, i.e. these are independent. Autonomous transactions are not done to establish identity of
BoP, i.e. Current Account and Capital Account.
Accommodating items, also termed as „below the line items‟, are those items of BoP that are not
determined by considerations of profit but to restore identity of BoP. These are undertaken to
maintain balance in the BoP accounts. These transactions correct the disequilibrium in autonomous
items of BoP account. Accommodating transactions are also known as „below the line items‟ and
include foreign exchange reserve and borrowings to meet BoP deficit.
BoP deficit:
When the payments of a country on account of autonomous transactions exceed the receipts of
the country on account of autonomous transactions, this difference is termed as BoP deficit.
Suppose, the receipts of the domestic country is ₹ 200 crore, whereas payments are ₹ 220 crore.
Then, BoP deficit will be = 220 – 200 crore = ₹ 20 crore.

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 Important Formulas for Economics (MSV – 9787576858)

Indicator/Term Formula Explanation

GDP = C + I + G + (X – M) Total economic output: C (Consumer
GDP Spending), I (Investment), G (Government
Spending), X (Exports), M (Imports).

Unemployment Rate = (Number Percentage of unemployed people in the

Unemployment
of Unemployed / Labour Force) x labour force.
Rate
100
Money Multiplier Money Multiplier = 1 / Reserve Indicates how much money supply can
Ratio expand per unit of reserves held by banks.
Rate
Real GDP = (Nominal GDP / GDP Economic output adjusted for
Real GDP Deflator) x 100 inflation/deflation.

CPI = (Cost of Basket in Current The average change in consumer prices

CPI Year / Cost of Basket in Base over time.
Year) x 100
Inflation Rate = ((CPI in Current Percentage increase in consumer prices.
Inflation Rate Year – CPI in Previous Year) / CPI
in Previous Year) x 100
Real Interest Rate = Nominal Adjusted interest rate considering
Real Interest
Interest Rate – Inflation Rate inflation.
Rate
Total Revenue = Price x Quantity Income from selling goods or services.
Total Revenue

Marginal Revenue = Change in Additional revenue from selling one more

Marginal
Total Revenue / Change in unit.
Revenue
Quantity
Average Revenue = Total Average income per unit sold.
Average Revenue Revenue / Quantity Sold

Total Cost = Fixed Costs + The sum of fixed and variable production
Total Cost
Variable Costs costs.
Marginal Cost = Change in Total Additional cost of producing one more
Marginal Cost Cost / Change in Quantity unit.

Total Average Total Average Cost = Total Cost / Average cost per unit of output.
Cost Quantity

Average Fixed Costs = Fixed Fixed cost per unit of output.

Average Fixed
Costs / Quantity
Costs

Average Variable Average Variable Costs = Variable cost per unit of output.
Costs Variable Costs / Quantity

Profit = Total Revenue – Total Financial gain or loss for a firm.

Profit
Cost

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Relevance of Formulas for Economics – MSV 9787576858
Macro-Economics Formulas

The following are the top 8 macroeconomics formulas -

#1 - Gross Domestic Product

The gross domestic product can be expressed per the expenditure approach and net income
approach. As per the expenditure approach,

the gross domestic product is expressed as the sum of private consumption investments followed
by government expenditures and the net exports happening in the nation. On the other hand, the
income approach is determined as the sum of labor, interest, rent, and the remaining profits.

Mathematically, two formulas can be expressed as follows: –

GDP = C + G + I + NX

Here,

 The consumption is represented by C.

 G represents the government expenditures.

 I represent an Investment.

 The net exports are represented by NX.

GDP = W + I + R + P

Here,

 The labor is represented by W.

 I represent the Interest.

 The rent is represented by R.

 The remaining profits are represented by P.

#2 - Unemployment Rate

The economics can also be assessed as per the unemployment rate in the country. It is normally
determined as the ratio of the count of the unemployed labor force to the count in the employed
labor force.

Mathematically it can be represented as follows: -

Unemployment Rate= Total number of Unemployed / Total number of employed
individuals.
#3 - Money Multiplier Rate

The next metric to understand the situation of the economy is by utilizing the money multiplier
metric. It is normally defined as the inverse of the reserve ratio maintained by the bank.
Mathematically, it can be represented as follows: -

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Money Multiplier Metric = 1 / Reserve Ratio

This metric helps assess how the money deposits can be utilized to enhance the supply of money
in the system.
#4 - Real GDP

The real GDP is determined as the ratio of nominal GDP and the GDP deflator. The real GDP is
instrumental in the computation and assessment of economic output along with the adjustment
for deflation or inflation. The nominal GDP assesses economic output without the effect of inflation
and hence Real GDP is considered a better measurement tool than the Nominal GDP.

The Real GDP is expressed as follows: -

Real GDP = GDP on Nominal Terms / Deflator of GDP.
#5 - Consumer Price Index

The consumer price index is determined as the ratio of the cost of products and services for a
given year to the cost of products and services for a determined base year. This metric helps in
comparing prices for products and services and the changes in the inflation levels. The basket for
products and services is to be updated daily, followed by the determination of the cost of the
basket and the determination of the Index.

Mathematically, it can be represented or described as follows: -

Consumer Price Index = Cost of products and Services for the Given Year/Cost of Products
and Services for the Determined Base Year.
#6 - Inflation Rate

The inflation rate signals how the prices of services and products have shaped up from year to
year. The rate is computed as the difference between the current year CPI level and last year's CPI
level with last year's CPI level. It is further expressed in percentage terms.

The inflation rate can be expressed as follows: -

Inflation Rate = (Changes in CPI levels/levels of CPI last year) x 100

Here,

 Changes in CPI Levels = Levels of CPI for current-year – levels of CPI index last year.
#7 - Real Interest Rate

The real rate of interest is determined as the difference in the nominal interest rate and inflation
rates. Alternatively, it can be determined using Fischer‟s Equation. As per Fischer‟s Equation, it is
determined as the ratio of nominal interest rates and inflation rates.

Mathematically, it can be expressed as follows: -

Real Interest Rate = Interest Rate in Nominal Terms – Rate of Anticipated Inflation

As per Fischer‟s equation, it can be expressed as follows: -

Real Interest Rate = (1 + Nominal Rate) / (1 + rate of inflation) – 1

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#8 - Quantity Theory of Money

This relationship can be described as a direct relationship between money and output levels. John
Maynard Keynes postulated this relationship.

Mathematically, this relationship would be described or illustrated as follows:

MV = PT

Here,

 M represents the supply of money.

 The circulation or speed of the money is expressed as V.

 The mean level of prices is expressed as P.

 The transaction volume of services and goods.

Therefore, in Macroeconomics, the following can be summarized as follows: -

Sr Formula Name Formula
No
1 Nominal GDP GDP = C + G + I + NX
2 Nominal GDP GDP = W + I + R + P
3 Unemployment Rate Total number of Unemployed / Total number of employed
individuals
4 Money Multiplier Metric 1/Reserve Ratio
5 Real GDP GDP on Nominal Terms / Deflator of GDP
6 Consumer Price Index Cost of products and Services for the Given Year/Cost of
Products and Services for the Determined Base Year.
7 Inflation Rate (Changes in CPI levels/levels of CPI last year) x 100
8 Real Interest Rate Interest Rate in Nominal Terms – Rate of Anticipated
Inflation
9 Real Interest Rate (1 + Nominal Rate) / (1 + rate of inflation) – 1
10 Quantity Theory of Money MV = PT

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