MCQ’s 60

1. The value of goods and services produced by residents of a country and the
value of their property is called_
a. Gross domestic product b. Net domestic product
c. Gross national income d. Net national income
2. Total value of goods produced and services provided in a country during one
year, after depreciation of capital goods has been allowed for
a. GDP b. NDP c. NNP d. GNP
3. Which of the following is a method to measure the National Income?
a. Expenditure method b. Income method
c. Product method d. All of the above
4. Which of the following is the correct term for calculating National Income at
the market prices?
a. Money income b. Non-monetary income
c. Real income d. None of the above
5. Keynes liquidity preference theory of the interest rate suggests that the
interest rate is determined by ?
a. the supply and demand for money b .the supply and demand for labor
c. aggregate supply and demand d. the supply and demand for loanable funds
6. Bank is a financial institution which performs the functions of accepting
deposits from the general public and giving loans for investment with the aim of
earning profit.
a. private bank b. Islamic bank c. Commercial bank d. None
7. In most countries which organizations controls the banking system?
a. Central bank b. Investment bank
c. Commercial bank d. World bank
1
8. Management and analysis of the financial activities of an individual,
household, business enterprise, etc. are called
a. Finance b. Private finance
c. Public finance d. None of these
9 .Income and expenditure activities of the state or government are called:
a. Public finance b. Private finance
c. Finance d. None of these
10. A set of institutions, laws, and procedures that establish how money is
created, distributed, used, and regulated in an economy are called
a. Fiscal balance b. Monetary policy
c. Fiscal policy d. Finance
11. It is a type of economic policy which controls and regulates the tax system,
expenditure, borrowings and public debt management within a country.
a. fiscal balance b. Monetary policy
c. Fiscal policy d. financing policy
12. Balance of trade is the
a. Difference between export and import of services
b. Total of export and import of services
c. Difference between export and import of goods
d. Total of export and import of goods
13. Balance of Payments is an accounting statement that records monetary
transactions between:
a. Residents of a nation and the rest of the world
b. Non-residents and the rest of the world
c. Residents of a nation and non- residents
d. None of the above
2
14. Which of the following is international trade?
a. Trade between countries b. Trade between regions
c. Trade between provinces d. Both (b) and (c)
15. In a mixed economic system
a. Only consumer goods are produced for sale in a general market
b. Profits are shared between government and capitalists
c. State-run enterprises are disinvested once they start making profits
d. Both the government and the market together decide the economic
production and distribution
16. The term economic growth is explained by
a. Structural changes in the economy b. Increase in the per
capita production
c. Increase in the per capita income d. All of the above
17. The primary objective of the Islamic economic system is to:
a) Generate wealth for individuals to live beyond their needs.
b) Generate wealth to hoard for future generations.
c) Bridge the gulf between the rich and poor by altering the distribution of
wealth and economic resources
d) Only allow individuals to have the money they need.
18. Gross domestic product of a country is the total of its net domestic product
and
a. Informal economy
b. Earnings on foreign exchange in the domestic country
c. Subsidies on the consumption of goods and services
d. Consumption of capital in the production process

3
 19. A statistical record of a country's economic transactions with the rest of the
world over a specific period of time.
a) Balance of payment b) balance of trade
c) private finance d)none of them
20. The difference between a country's exports and imports over a period of
time. It's calculated by subtracting the total value of imports from the total
value of exports.
a)Balance of payment b) balance of trade
c) public finance d)none of them

21. Progressive taxes are:

(a) Harmful for the economy (b) Decrease evasion of taxes

(c) Bring equality in distribution of incomes (d) Compel rich to be honest

22. This tax is a good example of "ability to pay" principle of taxes:

(a) Excise tax on cigarettes (b) Highway toll tax

(c) Proportional sales tax (d) Personal income tax
23. Who introduced the theory of comparative advantage?
(a) Adam Smith (b) Ricardo
(c) Hicks (d) None
24. Dumping is best described as:

(a) Purchasing goods cheaply abroad and selling them at higher prices locally
(b) Selling expensive items at lower prices
(c) Reducing tariffs
(d) Selling goods internationally at prices below their production costs and
local market prices
25. It is transfer payment

(a) Pocket money of a children (b) Financial support to old parents

(c) Broker’s commission (d) a and b of the above

4
26. If C=200 and I=40 then Y will equal to
(a) 160 (b) 240 (c) 8000 (d) None
27. Which account records investment and lending?
(a) Current Account (b) Capital Account
(c) Financial Account (d) Reserve Account
28. How is NNP calculated from GNP?
(a) GNP + Indirect taxes (b) GNP – Depreciation allowance
(c) GNP – Subsidies (d) GNP + Depreciation allowance

29. What is the primary objective of calculating National Income?

(a) To measure a country’s economic growth
(b) To determine individual income tax
(c) To evaluate International trade balance
(d) To analyze consumer spending pattern
30. What kind of book keeping system BOP follows?
(a) Single-entry (b) Double-entry
(c) Cash-basis accounting (d) None
31. Businesses and consumers are generally optimistic about the future in the
period of …..

(a) Contraction (b) Expansion (c) Recession (d) All

32. Formula for Investment Multiplier is …..

(a) 1/ 1-MPS (b) 1/1-MPC (c) 1/MPS (d) Both b & c

33. This is NOT a principal of taxation.

(a) Principle of equality (b) Principle of adequacy

(c) Principle of secrecy (d) all

34. Another name for mixed economic system is ………

(a) Communism (b) Capitalism

(c) Socialism (d) Dual economic system

35. Value of a currency in terms of another currency is known as ………

(a) Monetary value (b) Fiscal value (c) Interest rate (d) Exchange rate
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36. Total budget outlay of Pakistan for FY25 is …..

(a) Rs. 10.9 billion (b) Rs. 18.9 trillion

(c) Rs. 6.18 trillion (d) Rs. 9.8 billion

37. When the actual level of output (real GDP) exceeds the potential level of output
(potential GDP) at full employment.
(a) Inflationary Gap (b) Deflationary Gap
(c) Unemployment Gap (d) None
38. …… states that as income increases, consumption also increases, but not by as
much as the increase in income.
(a) Marshal’s law (b) Keynesian Psychological law
(c) Recardian law (d) None
39. Liquidity preference theory was introduced by …….

(a) Classicals (b) Neo-classicals

(c) John Maynard Keynes (d) None

40. Tools of Fiscal policy include……

(a) G (b) T (c) Transfer payments (d) All

41. A statistical record of a country's economic transactions with the rest of the
world over a specific period of time.
a)Balance of payment b) balance of trade
c) private finance d)none of them
42. The difference between a country's exports and imports over a period of
time. It's calculated by subtracting the total value of imports from the total value
of exports..
a) Balance of payment b) balance of trade
b) c) public finance d)none of them
43. A interest rates adjust to balance the desire to hold cash against less liquid
assets. The more people prefer liquidity, the higher interest rates must rise to
6
 make them willing to hold bonds.
a) Liquidity preference theory b) quantity theory of money
c) mint par parity theory d)none of them
44. An increase in the level of prices of the goods and services that households buy.
It is measured as the rate of change of those prices
a) Deflation b) Stagflation
c) Recession d)inflation
45. The trough of a business cycle occurs when hits its lowest point.

a .Inflation b. the money supply

c. aggregate economic activity d. the unemployment rate.

46. Which of the following is the correct term for calculating National Income at the
market prices?
a. Money income b. Non-monetary income
c. Real income d. None of the above

47. Keynes liquidity preference theory of the interest rate suggests that the interest
rate is determined by ?
a. the supply and demand for money
b .the supply and demand for labor
c. aggregate supply and aggregate demand
d. the supply and demand for loanable funds

48. Bank is a financial institution which performs the functions of accepting deposits
from the general public and giving loans for investment with the aim of earning
profit.

7
 a. private bank b. Islamic bank
c. Commercial bank d. None of these

49. In most countries which organizations controls the banking system?

a. Central bank b. Investment bank

c. Commercial bank d. World bank

50. Management and analysis of the financial activities of an individual, household,

business enterprise, etc. are called
a. Finance b. Private finance
c. Public finance d. None of these

51. Income and expenditure activities of the state or government are called:

a. Public finance b. Private finance c. Finance d. None

52. A set of institutions, laws, and procedures that establish how money is created,
distributed, used, and regulated in an economy are called
a. Fiscal balance b. Monetary policy
c. Fiscal policy d. Finance

53. It is a type of economic policy which controls and regulates the tax system,
expenditure, borrowings and public debt management within a country.
a. fiscal balance b Monetary policy
c Fiscal policy d financing policy

54. Balance of trade is the

a. Difference between export and import of services

8
 b. Total of export and import of services
c. Difference between export and import of goods
d. Total of export and import of goods
55. Balance of Payments is an accounting statement that records monetary
transactions between:
a. Residents of a nation and the rest of the world
b. Non-residents and the rest of the world
c. Residents of a nation and non- residents
d. None of the above
56. Which of the following is international trade?

a. Trade between countries b. Trade between regions

c. Trade between provinces d. Both (b) and (c)

57. In a mixed economic system

a. Only consumer goods are produced for sale in a general market

b. Profits are shared between government and capitalists
c. State-run enterprises are disinvested once they start making profits
d. Both the government and the market together decide the economic
production and distribution

58. The term economic growth is explained by

a. Structural changes in the economy b. Increase in the per

capita production
c. Increase in the per capita income d. All of the above

59. The primary objective of the Islamic economic system is to:

9
 a) generate wealth for individuals to live beyond their needs.
b) generate wealth to hoard for future generations.
c) bridge the gulf between the rich and poor by altering the distribution of
wealth and economic resources
d) only allow individuals to have the money they need.

60. Gross domestic product of a country is the total of its net domestic product and

a. Informal economy
b. Earnings on foreign exchange in the domestic country
c. Subsidies on the consumption of goods and services
d. Consumption of capital in the production process

SHORT
Q # 1 Define Zakat. what is difference between zakat and tax?
Definition of Zakat
Zakat is a form of obligatory charity in Islam, which is levied on eligible Muslims who
possess a certain amount of wealth. The purpose of Zakat is to purify one's wealth
and soul, as well as to help the poor and needy.

Definition of Tax
Tax is a compulsory payment made by individuals and businesses to the government,
typically in the form of a percentage of income or profit. The purpose of tax is to
fund public goods and services, such as infrastructure, education, and healthcare.

Five Key Differences between Zakat and Tax

1. Purpose: Zakat is primarily for the benefit of the poor and needy, while tax is for
funding public goods and services.
2. Rate: Zakat is typically 2.5% of eligible wealth, while tax rates vary depending on
the country and type of tax.
3. Eligibility: Zakat is only obligatory for Muslims who possess a certain amount of
wealth, while tax is applicable to all individuals and businesses within a country.
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4. Payment Method: Zakat is typically paid directly to the poor and needy, while tax
is paid to the government through various channels.
5. Voluntary vs. Compulsory: Zakat is obligatory for eligible Muslims, while tax is
compulsory for all individuals and businesses within a country. However, Zakat can
also be paid voluntarily, beyond the obligatory amount.

Q # 2 Define Money and its functions?

DEFINITIONS OF MONEY
1. According to F. A Walker, "Money is that money does".
2. Seligman defines money as one thing that possesses general acceptability".
3. According to D. H. Robertson, "anything which is widely accepted in payment for
goods or in discharge of other kinds of business obligations is called money".
4. Crowther defines money as "anything that is generally acceptable as a means of
exchange and at the same time acts as a measure and store of value".
5. G. F. Knapp says that money is anything, which is declared, as money by
government becomes money.
Thus money is anything which is acts as a measure and store of value and widely
accepted for the settlement of all debts and, has legal sanction as a medium of
exchange.
FUNCTIONS OF MONEY
The functions of money can be stated under three main headings that include
primary functions, secondary functions and contingent functions.
PRIMARY FUNCTIONS
Primary functions are also called static functions. These functions are performed in
every country whether static or dynamic.
1. Medium of exchange: Money can be used to make payments for all transactions
of goods and services. It is the most essential function of money. Money has the
quality of general acceptability. So all exchanges take place in terms of money.
2. Measure of value: Money as measure of value means that money works as a
common denomination, in which values of all goods and services are expressed
SECONDARY EUNCTIONS
Secondary functions are also called static functions. These functions are performed
in every country whether static or dynamic.
1. Standard of deferred payments: Money serves as a standard of deferred
payments. The sellers provide goods and services on the spot and payments will be
received in future. Money encourages such transactions and helps in capital
formation and economic development.
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2. Store of value: Money acts as store of value. Money is the most economical and
convenient for store of value. It provides security to individuals to meet
contingencies, unpredictable emergencies and to pay future debts.
3. Transfer of value: Money is a generally acceptable means of payment and acts as
a store of value. It keeps on transferring values from person to person and place to
place. A person who holds money in cash can transfer that to any other person. Thus
money facilitates transfer of value between persons and places.
4. Unit of account: Money is used as unit of account. In Pakistan unit of account is
rupee. Therefore the books of accounts are written in rupees.

Q # 3 Define role of State in ISLAM?

Islamic Economic System
The Islamic economic system is based on principles derived from Sharia law, which
emphasizes economic justice, ethical business practices, and social welfare. The
state plays an important role in ensuring that economic activities align with Islamic
principles.
Role and Responsibility of the State
Enforcing Islamic Law (Sharia): The state ensures that all economic transactions
comply with Islamic law, which prohibits interest (riba) and promotes fairness,
justice, and ethical behavior in business.
Regulating Financial Institutions: The government oversees Islamic financial
institutions to ensure they operate within the bounds of Sharia, which includes risk-
sharing models like Mudarabah (profit-sharing) and Musharakah (joint ventures).
Collecting and Distributing Zakat: The state plays a key role in ensuring the proper
collection of zakat, a mandatory form of charity that redistributes wealth to the
poor and needy. The state may administer this process to promote social welfare
and reduce poverty.
Promoting Economic Justice: The state is responsible for ensuring economic equity
by preventing exploitation, monopolies, and ensuring that wealth is not
concentrated in the hands of a few.
Providing Basic Needs: Islamic governments ensure that essential services like
education, healthcare, and housing are provided to all, focusing on the well-being
of society as a whole.

12
Ensuring Ethical Business Practices: The state monitors businesses to ensure they
operate in line with Islamic ethical standards, avoiding prohibited activities such as
gambling, alcohol trade, and fraud.
State's Role is Ethical and Regulatory: In the Islamic system, the state ensures that
economic activities align with Islamic principles, focusing on justice, social welfare,
and ethical governance.

Q # 4 Define National income at marketprice /product method/output

method/value added method?
Value added method:
According to this method, total value of output can be calculated by adding-up
“value-added” at various stages in all the sectors of an economy during a period of
one year.
To understand the concept of value-added, let us consider an example of cotton.
A farmer sells cotton for Rs.100/- to a ginner who separates seeds from cotton and
sells the same cotton to a spinning mills for Rs.120. The mills makes yarn of the
cotton and sells it to a weaving mills for Rs.150. Again, the weaving mills makes cloth
and sells it for Rs.180. Thus the value-added at every stage is shown below:

Stage Sale value at every stage Value-added at every

stage
Raw cotton Rs. 100 Rs. 100
Cotton without seeds 120 20
Cotton yarn 150 30
Cotton cloth 180 30
550 180

Thus, to avoid double counting, either the value of final goods (cloth) which is Rs.180
is taken or the addition of value at every stage is measured which is also Rs.180.
The raw material or semi-finished goods which are used in the production of final
product should not be included in GDP because these will double the value of
output. Thus, only value added at each level of output is included.
Q # 5 Difference between commercial bank and central bank?
1. Ownership: Commercial bank is owned by public. Central bank is usually
owned by government.

13
 2. Dealing: Commercial banks are usually owned by general public Central bank
does not deal with general public
3. Competition: Commercial banks compete among themselves. Commercial
banks directly deal with general public. Central bank does not compete with
commercial banks
4. Note issue: Central bank has authority of note issue Commercial banks have
no such authority
5. Foreign exchange:
Central bank is custodian of foreign exchange reserves. Commercial banks are
only dealers in foreign exchange

Q # 6 Define private finance and public finance with examples?

Private Finance
Private finance refers to the management of financial resources by
individuals, businesses, and organizations to achieve their financial
goals. It involves the allocation of financial resources to maximize
returns and minimize risks.

Examples of Private Finance:

1. Personal Budgeting: An individual creates a budget to manage
their income and expenses.
2. Investing in Stocks: A business invests in stocks to generate
returns and grow its wealth.
3. Mortgage Financing: A family takes out a mortgage to
purchase a home.
4. Corporate Financing: A company issues bonds to raise capital
for expansion.

Public Finance
Public finance refers to the management of financial resources by
governments to achieve their economic and social objectives. It
involves the allocation of financial resources to provide public goods
and services.

Examples of Public Finance:

14
1. Government Budgeting: A government creates a budget to
allocate funds for public goods and services.
2. Taxation: A government collects taxes to fund public
expenditures.
3. Public Investment: A government invests in infrastructure
projects, such as roads and bridges.
4. Social Welfare Programs: A government provides financial
assistance to low-income individuals and families through programs
such as unemployment benefits and food stamps.

Q # 7 Define trade cycle and its phases?

TRADE CYCLE / BUSINESS CYCLE
Trade cycle is also known as business cycle. There are so many upward and
downward swings in business. The periods of business prosperity alternate with the
periods of adversity. Every boom is followed by a slump and vice versa. These
fluctuations in the business activities are known as trade cycle or Business Cycle.

Wage Iterative Stages / Segments of Business Cycle

The business cycle is furnished with four phases. They are as under:
1).DEPRESSION
In this phase the business is at its lowest ebb and depression is prevailing all around.
The lucky ones who are employed get very low wages.
2).Recovery
The depression does not last forever. Economy gradually converts into recovery. The
depression contains in Itself the germs of recovery.
3).BOOM/PEAK
The recovery converts into Boom or Prosperity. The revivals or investment in one
industry leads to a revival in another. The wages paid to workers in one industry
create demand for goods produced by others.
4). CONTRACTON
The boom does not last forever. The germs of sluggishness develop during the
period of prosperity. The banks had advanced loans excessively so they tighten their
policy of advancing loans.

Q # 8 Define state-controlled economy and Islamic economic system?

Types of Economic Systems:
1. Islamic Economic System:

15
 The Islamic economic system is based on Islamic law (Sharia), which
emphasizes justice, fairness, and the prohibition of certain practices like
interest (riba). It seeks to align economic activities with ethical and moral
values rooted in Islam.
2. State Control Economy:

The government or central authority makes all economic decisions,

including what to produce and how to distribute resources. Examples
include North Korea and historically, the Soviet Union.

Q # 9 Define Quantity Theory of Money and also give its equation?

Answer: Define
Other things remaining the same, when the quantity of money is doubled the price
will also doubled.
Equation:
PT=MV+M’V’
Where:
P=price level ; M=metallic money& currency notes
V=velocity of money ; M’=credit money
V’=velocity of credit money ; T=transaction to be done.
1. Credit Ceiling

A credit ceiling is a limit imposed by the central bank on the amount of credit that
commercial banks can extend to certain sectors or industries. By imposing credit
ceilings, the central bank can control the flow of credit in the economy.

2. Margin Requirements

Margin requirements refer to the minimum percentage of the value of a security

that must be deposited by an investor when buying on margin. By increasing or
decreasing margin requirements, the central bank can influence the level of
speculation in the economy.

16
 3. Moral Suasion

Moral suasion refers to the use of persuasion and guidance by the central bank to
influence the behavior of commercial banks and other financial institutions. The
central bank may use moral suasion to encourage commercial banks to lend more to
certain sectors or industries.

4. Credit Guarantee Schemes

Credit guarantee schemes involve the central bank providing guarantees to

commercial banks for loans extended to certain sectors or industries. By providing
credit guarantees, the central bank can encourage commercial banks to lend more
to these sectors.

Q #10 What is Current Account of BOP? What does it reflect?

The Current Account of the Balance of Payments (BOP) is a statistical statement that
records a country's transactions with the rest of the world over a specific period,
typically a year. It reflects the country's trade in goods and services, income, and
transfers.
What the Current Account Reflects:
The Current Account reflects a country's:

1. Trade balance: The difference between exports and imports of goods and
services.
2. Net income from abroad: The difference between income earned from foreign
sources and income paid to foreign residents.
3. Net transfers: The difference between transfers received from and paid to foreign
residents.

A surplus in the Current Account indicates that a country is exporting more goods
and services than it is importing, and/or earning more income from abroad than it is
paying out. A deficit, on the other hand, indicates that a country is importing more
17
goods and services than it is exporting, and/or paying out more income to foreign
residents than it is earning from abroad.

Q #11 Differentiate Socialism and Capitalism?

Economic Systems
1. Socialism: An economic system where the means of production, distribution, and
exchange are owned and controlled by the community as a whole.
2. Capitalism: An economic system where private individuals and businesses own
and control the means of production, distribution, and exchange.

Key Characteristics
Socialism
1. Collective Ownership: Community ownership of resources and industries.
2. Central Planning: Government planning and decision-making.
3. Redistribution of Wealth: Wealth is redistributed from the rich to the poor.
4. Social Welfare: Emphasis on social welfare and public services.
5. Economic Equality: Reduces economic inequality by redistributing wealth.
6. Social Justice: Promotes social justice by providing essential services.
7. Community Well-being: Prioritizes community well-being over individual
interests.

Capitalism
1. Private Ownership: Private individuals and businesses own resources and
industries.
2. Market Mechanism: Market forces determine prices and allocation of resources.
3. Profit Motive: Businesses operate to maximize profits.
4. Individual Freedom: Individuals have the freedom to pursue their own economic
interests.
5. Economic Growth: Encourages economic growth through innovation and
competition.
6. Individual Freedom: Protects individual freedom and choice.
7. Efficient Allocation: Allocates resources efficiently through market mechanisms.

Q # 12 What is Deflationary Gap? How it can be removed?

A deflationary gap, also known as a deflationary gap in aggregate demand, occurs
when the actual level of aggregate demand in an economy is less than the level
required to achieve full employment. This results in a shortage of aggregate demand,
leading to:
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1. Unemployment: Labor resources are underutilized.
2. Idle Capacity: Industrial capacity is underutilized.
3. Deflation: General price level decreases.

Causes of Deflationary Gap:

4. Insufficient Aggregate Demand: Aggregate demand is too low to achieve full
employment.
5. Overproduction: Supply exceeds demand, leading to excess inventory and
reduced production.
6. Monetary Policy: Tight monetary policy, such as high interest rates, reduces
aggregate demand.

Removal of Deflationary Gap:To remove a deflationary gap, the goal is to increase

aggregate demand to match the full employment level. This can be achieved
through:

1. Expansionary Fiscal Policy: Increase government spending or cut taxes to boost

aggregate demand.
2. Expansionary Monetary Policy: Lower interest rates or increase the money supply
to stimulate borrowing and spending.
3. Investment and Consumption: Encourage private investment and consumption
through incentives, such as tax breaks or subsidies.
4. Supply-Side Policies: Implement policies to improve productivity and increase
aggregate supply, such as investing in infrastructure or education.
5. Price and Wage Adjustments: Allow prices and wages to adjust to their
equilibrium levels, which can help increase aggregate demand.

LONG
Q # 1 Define trade cycle and its phases in details?

TRADE CYCLE / BUSINESS CYCLE

Trade cycle is also known as business cycle. There are so many upward and
downward swings in business. The periods of business prosperity alternate with the
periods of adversity. Every boom is followed by a slump and vice versa. These
fluctuations in the business activities are known as trade cycle or Business Cycle.

19
• According to KEYNES, "Trade cycle composed of periods of bad trade
characterized by falling prices and high unemployment percentages while a period of
good trade characterized by rising prices and high employment percentages.

• According to J.R.HICKS, "Trade cycle represents fluctuations in the real national

income of an economy. Such fluctuations occur because of economic growth,
changes in labour force, inventions and innovations, capital accumulation and
natural resources.

• According to HEBELER, Business cycles are just the names of prosperity and
adversity, good trade and bad trade".

• A Dictionary of Economics and Commerce defines as. "The tendency of business

activity to fluctuate regularly between boom and depression".

• In simple words, the business fluctuations are termed as business cycle or trade
cycle.
Wage Iterative Stages / Segments of Business Cycle
.
The business cycle is furnished with four phases. They are as under:
1).DEPRESSION
In this phase the business is at its lowest ebb and depression is prevailing all around.
The lucky ones who are employed get very low wages. The general purchasing
power of the community being very low. The economic activities are prey to
slackness. The demand of goods and services shrink. The production of both
consumer goods and producer's goods reach at very low level. The business settles
down at a new equilibrium point at a low level of prices, cost and profit.

The main features of depression are as under:

1. The volume of productions and trade shrinks.

2. Unemployment increases.
3. Over all prices fall.
4. Profit and wages fall.
5. The income of the community reaches at lowest level.
6. The rate of interest decreases.
7. In the stock market the rates of shares and securities reaches at lowest stage.
8. Aggregate expenditure and the effective demand come down.
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9. Circulation of money contracts.
10. National income falls down.

2).Recovery
The depression does not last forever. Economy gradually converts into recovery. The
depression contains in Itself the germs of recovery. The depression has lasted for
some time and rays of hope appear in the business activities. Final demand for goods
increases. In order to meet this increased demand investment and employment also
increases. In this phase all the activities starts increasing.

The features of recovery are as under:

1. volume of production and trade starts increasing.

2. The level of employment and income steadily increases.
3. Stock exchange business goes up.
4. Investment and saving stimulates.
5. Rate of interest begins to increase.
6. National income and per capita income starts moving upward.
7. The expectations of the entrepreneurs improve and business conditions develop.
8. Circulation of money expands.

3).BOOM/PEAK
The recovery converts into Boom or Prosperity. The revivals or investment in one
industry leads to a revival in another. The wages paid to workers in one industry
create demand for goods produced by others. With the general revival of demand,
prices show an upward trend. The businessman's income takes forward jump. Profit
margins are thus widened. Optimism grows and spreads for everywhere. Every body
is busy in making money in this phase. This phase of trade cycle last for a number of
years.

The characteristics of this phase are as follows:

1) A large volume of Production and trade.
2).High rate of employment.
3) Overall rising prices.
4) High level of real investment.
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5) A large expansion of credit and borrowing.
6) High profits.
7) Handsome wages.
8) High National income.
9) Aggregate demand is at its highest level. In short during boom the operation of
the economy reaches at its highest stage.

4). CONTRACTON
The boom does not last forever. The germs of sluggishness develop during the
period of prosperity. The banks had advanced loans excessively so they tighten their
policy of advancing loans. On the other hand the firms who have produced a lot have
to sold at low prices due to surplus. The volume of investment decreases. Desire for
liquidity increases all around. Businessmen stop ordering further equipments and
materials. The failure of one firm creates difficulties for those with whom it has
business connections. This phase of business cycle is known as the crisis. So crisis is
the period of suffering for a businessman.

The features of this phase are as under:

1) Aggregate expenditure and effective demand starts moving down ward.
2) Profit, employment rate and output starts to decrease.
3) New investment stops.
4) Rate of interest starts to decrease.
5) Demand for loans shrinks. starts to decrease.
7) Business activities shrink.

Q# 2 Difference between commercial banks and central bank?

CENTRAL BANK VERSUS COMMERCIAL BANK

c) Ownership: Commercial bank is owned by public. Central bank is usually owned
by government.
d) Dealing: Commercial banks are usually owned by general public Central bank
does not deal with general public
e) Competition: Commercial banks compete among themselves. Commercial banks
directly deal with general public. Central bank does not compete with
commercial banks
f) Note issue: Central bank has authority of note issue Commercial banks have no
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 such authority
g) Foreign exchange:
Central bank is custodian of foreign exchange reserves. Commercial banks are
only dealers in foreign exchange
h) Customers:
Central bank acts as banker to government and banks Commercial banks act
as banker to general public.
i) Evening banking: Central bank does not offer evening banking facilities
Commercial banks offer evening banking facilities.
j) Clearing house:
Central bank acts as clearing house for commercial banks Commercial banks
do not perform such function
k) Overseas branches: Central bank does not have branches in other countries.
Commercial banks have branches in other countries.
l) Money market: Central bank is the leader of money market Commercial banks
are members of money market.
m) Advisor: Central bank acts as advisor to government Commercial banks act as
advisor to general public
n) Profit: Central bank do not work for profit Commercial bank works for profit.

Q # 3 Define Commercial banks. What are functions of commercial

banks?
Functions of Commercial Banks
Primary Functions

1. Accepting Deposits:
- Demand Deposits: Money deposited in accounts like current accounts, which can
be withdrawn without notice.
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 - Time Deposits: Fixed deposits or savings deposits, which earn interest over time
and are withdraw able after a specific period.

2. Providing Loans and Advances:

- Loans: Long-term financial assistance provided to businesses and individuals,
secured against collateral.
- Advances: Short-term credit facilities like cash credit, overdrafts, or bill
discounting.

3. Credit Creation:
- Banks create credit by using a portion of the deposits to lend money to
borrowers, effectively multiplying the money supply.

Secondary Functions

1. Transfer of Money:
- Facilitation of domestic and international fund transfers through methods like
cheques, demand drafts, NEFT, RTGS, and SWIFT.

2. Issue of Credit Money:

- Issuing credit instruments such as credit cards, loans, and advances to meet
financial needs.

3. Financing Foreign Trade:

- Providing credit facilities such as letters of credit, export-import loans, and bank
guarantees to support international trade.

4. Investment of Funds:
- Investing surplus funds in government bonds, securities, and debentures to earn
additional income.

5. Foreign Exchange Dealing:

- Enabling currency exchange for travelers, exporters, and importers, and
managing currency risk through derivatives.

6. Underwriting:
- Acting as underwriters by guaranteeing the subscription of shares, debentures, or

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bonds during their issuance.

7. Status Report:
- Providing status reports about the financial standing of their customers to third
parties.

8. Offshore Banking:
- Offering financial services in foreign markets to attract investments or provide tax
advantages.

Agency Functions

1. Collection of Cheques:
- Collecting cheques, drafts, and bills on behalf of customers and crediting the
proceeds to their accounts.

2. Collection of Income:
- Collecting dividends, interest on securities, or rent for their clients.

3. Payment of Expenses:
- Managing payments such as utility bills, insurance premiums, and subscriptions
for customers.

4. Dealer in Securities:
- Buying and selling shares, bonds, and other securities on behalf of customers.

5. Acting as Trustees:
- Managing wills, trusts, and estates for clients as trustees or executors.

6. Safe Custody:
- Offering lockers for secure storage of valuables such as jewelry, documents, and
bonds.

7. Correspondent Banking:
- Facilitating transactions between banks in different regions or countries.

8. Haj Applications:

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 - Assisting customers with financial and administrative processes for the Haj
pilgrimage.

9. Zakat Management:
- Calculating, deducting, and managing Zakat payments in compliance with Islamic
finance principles.

Utility Functions

1. Letter of Credit:
- Issuing letters of credit to guarantee payment in international trade transactions.

2. Providing Information:
- Offering financial advice and market information on investments and government
policies.

3. Government Loan:
- Assisting in issuing government loans and bonds to the public for development
projects.

4. Locker Facility:
- Providing secure lockers for storing valuables like jewelry and documents.

5. Performance Bond:
- Issuing performance bonds to guarantee the fulfillment of contractual obligations.

6. Share Application:
- Facilitating share application and allotment during public issues of shares or
debentures.

7. Relief Function:
- Providing financial relief and aid distribution services during natural disasters or
crises.
Q # 4 Define Zakat. what is difference between zakat and tax?

Definition of Zakat
Zakat is a form of obligatory charity in Islam, which is levied on eligible Muslims who

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possess a certain amount of wealth. The purpose of Zakat is to purify one's wealth
and soul, as well as to help the poor and needy.

Purpose of Zakat

1. Purify wealth: Zakat is believed to purify one's wealth by removing the portion
that is due to the poor.
2. Help the poor: Zakat is used to help the poor, needy, and vulnerable members of
society.
3. Promote economic growth: Zakat can help stimulate economic growth by
redistributing wealth and promoting investment.

key differences between Zakat and tax, explained in more detail:

1. Purpose
- Zakat: The primary purpose of Zakat is to purify one's wealth and soul, as well as to
help the poor and needy. It is a way for Muslims to give back to their community and
demonstrate their compassion and generosity.
- Tax: The primary purpose of tax is to fund public goods and services, such as
infrastructure, education, and healthcare. Tax revenue is used to support the
government's activities and provide essential services to citizens.

2. Eligibility
- Zakat: Zakat is obligatory for Muslims who possess a certain amount of wealth,
known as Nisab. The Nisab is typically defined as a minimum amount of wealth, such
as cash, gold, or silver.
- Tax: Tax is compulsory for all individuals and businesses within a country,
regardless of their income or wealth level. Tax laws and regulations vary by country,
but most countries require citizens and businesses to pay taxes on their income,
profits, or wealth.

3. Rate
- Zakat: Zakat is typically calculated as 2.5% of eligible wealth. However, the
calculation can vary depending on the type of wealth and the individual's
circumstances.
- Tax: Tax rates vary depending on the type of tax, the individual's circumstances,
and the country's tax laws. Tax rates can range from a few percent to over 50% of
income or wealth.
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4. Payment Method
- Zakat: Zakat is typically paid directly to the poor and needy, or through a registered
Zakat organization.
- Tax: Tax is typically paid to the government through various channels, such as pay-
as-you-earn (PAYE) systems, tax returns, or withholding tax.

5. Voluntary vs. Compulsory

- Zakat: Zakat can be paid voluntarily, but it is obligatory for eligible Muslims.
Muslims who possess a certain amount of wealth are required to pay Zakat as a way
of fulfilling their religious obligations.
- Tax: Tax, on the other hand, is compulsory for all individuals and businesses within
a country. Tax laws and regulations require citizens and businesses to pay taxes on
their income, profits, or wealth.

6. Administration
- Zakat: Zakat is typically administered by Islamic organizations or charities, which
collect and distribute Zakat funds to the poor and needy.
- Tax: Tax, on the other hand, is administered by government agencies, such as tax
authorities or revenue departments, which collect and manage tax revenue.

7. Exemptions
- Zakat: Zakat exemptions vary depending on the individual's circumstances and the
type of wealth. For example, some Islamic scholars exempt certain types of wealth,
such as primary residences or essential items, from Zakat.
- Tax: Tax exemptions also vary depending on the country's tax laws and regulations.
For example, some countries exempt certain types of income, such as charitable
donations or retirement savings, from tax.

8. Penalties
- Zakat: Failure to pay Zakat can result in spiritual penalties, such as sin or guilt, as
well as social penalties, such as loss of reputation or community respect.
- Tax: Failure to pay tax can result in financial penalties, such as fines or interest
charges, as well as legal penalties, such as prosecution or imprisonment.

Q # 5 Explain Quantitative tools of Monetary Policy?

Quantitative tools of monetary policy refer to the various techniques used by central
banks to control the money supply and influence economic activity. These tools are
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used to implement monetary policy decisions, which aim to promote economic
growth, stability, and low inflation. Here are some key quantitative tools of
monetary policy:

1. Open Market Operations (OMO)

OMO involves the central bank buying or selling government securities on the open
market to increase or decrease the money supply. When the central bank buys
securities, it injects money into the economy, and when it sells securities, it absorbs
money from the economy.

2. Reserve Requirements
Reserve requirements refer to the minimum percentage of deposits that commercial
banks must hold in reserve, rather than lending them out. By increasing or
decreasing reserve requirements, the central bank can influence the amount of
credit available in the economy.

3. Discount Rate
The discount rate is the interest rate at which commercial banks borrow money from
the central bank. By increasing or decreasing the discount rate, the central bank can
influence the cost of borrowing for commercial banks and, in turn, the cost of
borrowing for households and businesses.

4. Liquidity Adjustment Facility (LAF)

LAF is a tool used by the central bank to manage liquidity in the economy. It involves
the central bank providing loans to commercial banks at a predetermined interest
rate, usually for a short period.

5. Repo and Reverse Repo Rates

Repo (repurchase agreement) and reverse repo rates are used by the central bank to
manage liquidity in the economy. Repo involves the central bank selling securities to
commercial banks with an agreement to repurchase them at a later date, while
reverse repo involves the central bank buying securities from commercial banks with
an agreement to sell them back at a later date.

6. Statutory Liquidity Ratio (SLR)

SLR is the minimum percentage of deposits that commercial banks must invest in
government securities and other approved securities. By increasing or decreasing

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the SLR, the central bank can influence the amount of credit available in the
economy.

7. Credit Ceiling
A credit ceiling is a limit imposed by the central bank on the amount of credit that
commercial banks can extend to certain sectors or industries. By imposing credit
ceilings, the central bank can control the flow of credit in the economy.

8. Margin Requirements
Margin requirements refer to the minimum percentage of the value of a security
that must be deposited by an investor when buying on margin. By increasing or
decreasing margin requirements, the central bank can influence the level of
speculation in the economy.

9. Moral Suasion
Moral suasion refers to the use of persuasion and guidance by the central bank to
influence the behavior of commercial banks and other financial institutions. The
central bank may use moral suasion to encourage commercial banks to lend more to
certain sectors or industries.

10. Credit Guarantee Schemes

Credit guarantee schemes involve the central bank providing guarantees to
commercial banks for loans extended to certain sectors or industries. By providing
credit guarantees, the central bank can encourage commercial banks to lend more
to these sectors.

These quantitative tools of monetary policy are used by central banks to regulate the
money supply, interest rates, and credit availability in the economy. By using these
tools, central banks can influence economic activity, promote economic growth, and
maintain price stability.

Q # 6 Give characteristics of different stages of a Trade Cycle?

Answer is same as 1st question.

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