Macroeconomics second preboard

Q17. What do you mean by effective Demand?

Effective Demand is that level of aggregate demand which is required to maintain full employment level of output.
Q18. Why is repayment of loan considered as capital expenditure?
Repayment of loan leads to reduction in liabilities so it capital expenditure.

Q19. What can be the minimum value of investment multiplier?

Minimum value of multiplier is 1.

Q20. What does the deficit in Balance of Trade Indicate?

It indicates excess of imports of goods over exports of goods.

Q21. Define cash reserve ratio.

It is that part of deposits held by commercial banks which they have to maintain with RBI in the form of cash reserve.

Q22. Differentiate between autonomous items and accommodating items of Balance of Payment account.

Autonomous items are those items which are included in BOP due to some economic activity like profit making. These may be import or export.

These are also known as above the line items.

Autonomous items are those items which are included in BOP due to some other activity like making adjustments. These may be borrowings, errors and omissions.

These are also known as below the line items.



Q23. What do you mean by Revenue Deficit in Government Budget? How can it be reduced?

Revenue deficit in government budget is the difference between Revenue expenditure and revenue receipt.

RD = RE - RR

This can be reduced by discouraging expenditure on non productive activities and increasing revenue receipts may be through taxes.



Or

Explain the objective of Redistribution of Income of Government Budget.

Governments try to bring equal distribution of income and wealth through budget. This can be done by Taxing the income of rich people and subsidizing the needs of poor people. It will reduce the purchasing power of rich and increase the purchasing power of poor people.. This way the gap between rich and poor can be reduced.





Q24. Determine Gross national disposable income.

(in cr)

NDPfc 550

Net current transfers from rest of the world 50

Current transfers from government administrative deptt. 20

Net Indirect Tax 35

Consumption of fixed capital 10

Net factor Income from abroad (-15)

Exports 25



GNDI =GNPmp+ Net current transfers from rest of the world

GNDI = NDPfc+Depriciation + NFIFA+ NIT+ NCTrow

GNDI = 550+10+(-15) +20+ 50

GNDI = 615 cr

Q25. State any three sources of demand for foreign exchange.

(i) To purchase god and services in foreign countries

(ii) To Invest in foreign countries

(iii) To Import

(iv) To send a Gift abroad

To speculate in the foreign currencies.

Q26. How money has overcome the problem of lack of double coincidence of wants. Explain briefly.

Double coincidences of wants means mutual fulfillment of wants. This was a rare phenomenon in barter system due to lack of double coincidences. There was no common unit for medium of exchange. To carry out trade a lot of time was got wasted in searching. Money has solve this problem as in money we can measure the value of all the goods and services. We can also buy those goods and services. There is no need to search for trading partner. There is well established market system due to money. Anything which is sellable can be exchanged with money.

Q27. In an Economy MPC is 4 times of MPS.Determine the change in Income if Investment in the Economy is increased by Rs 4000 Cr.

MPC=4MPS

MPC+MPS= 1 ; PUTING

4MPS+MPS= 1

5MPS= 1

MPS=1/5

MPS= .2 and MPC=.8

K=1/MPS ; k =1/.2 ; K = 5

Change in income= K x change in investment

Change in income= 5x 4000 = 20000 cr

Q28. Explain how open market operations are used to control money supply in the economy by central bank.

Open market operation means buying and selling of government securities by central bank from commercial banks and public in open market. This is quantitative method adopted by central bank to control money supply.

During inflation central bank sell securities to commercial bank and public, as a result money supply in the economy reduces and inflation can be contained.

During depression central bank buys securities so funds moves from central bank to commercial banks and public. Money supply in the economy increases and lack of demand can be curbed.

Q29. Distinguish between Revenue Expenditure and Capital Expenditure. Give two examples of each.

Revenue expenditure

1.It does not lead to creation of assets and reduction in liabilities.

2. Examples -paying of salaries, payment of interest, Expenditure on maintenance of law and order.

Capital Ependiture

It leads to creation of assets or reduction in liabilities.

Payment of borrowed amount, construction of dam ,buying of machinery

Or

Categorise the following into capital receipt and revenue Receipt giving reasons

(i) Selling of shares of Public sector undertaking by government

(ii) Recovery of old loan by central government from state government

(iii) Income tax collected by government

(iv) Grants by foreign government

Sol.

(i) Capital receipt-It leads to reduction in assets.

(ii) Capital receipt-It leads to reduction in assets.

(iii) Revenue receipt-It neither leads to reduction in assets nor results in creation of liabilities.

(iv) Revenue receipt-It neither leads to reduction in assets nor results in creation of liabilities.


Q30. Determine the equilibrium level of Income, output and employment in the economy with the help of Saving and investment approach with the help of diagram. Explain what happens when Planned saving is not equal to planned investment.

In an economy equilibrium is determined where aggregate demand is equal to aggregate supply.


AS=AD

C+ S= C +I

So S=I

So equilibrium is determined where planned saving is equal to planned investment.

Economy is in equilibrium at on level of out put at this level of out put planned saving is equal to planned investment.

S>I When planned saving is more than planned investment it mean households are refraining from consumption. It will result in unwanted stock of unsold goods with firms. The real investment of the firm will increase. The firms will respond to this situation by reducing output by reducing employment till AS becomes equal to ADat this level planned savings are equal to planned investment.





Q31. Determine Private Income, Personal Income and personal disposable income.

Items in Cr

Net Current transfers from rest of the world 60

Net domestic product at market price 1720

Net indirect tax 20

Savings of non deptt enterprises 100

Factor income received from abroad 20

Factor income paid to abroad 40

Corporation tax 50

Net retained earnings of private corporate sector 120

Miscellaneous receipt of government administrative dements 150

Income of government from property and entrepreneurship 200

Direct taxes paid by households 30

Consumption of fixed capital 15

Current transfers from government administrative departments 50

Sol.

Private Income =Part of NDPfc accruing to private sector+ NFIFA+ Current transfer from government administrative deptt+ Net current transfer from Rest of the world+ Interest on Public Debt



Part of NDPfc to private sector = NDPfc –Part of NDPfc to Government



Part of NDPfc to private sector = (1720 -20)-(100 +200)

= 1400

Private Income= 1400+ (-20)+ 50+ 60+ 80

=1570 Cr

Personal Income= Private income- corporation Tax- Net retained earning of private corporate sector

= 1570- 50-120

=1400

Personal disposable income= Personal income- direct tax paid by households- Misc receipts of government administrative deptt.

PDI= 1400- 30-150

=1220 cr



Q32. Explain the problem of double counting with the help of an example. Suggest two methods of overcoming it.

Problem of double counting may arise when we estimate national income by value added method. It means taking the value of goods and services more than once in the estimation of national income. This problem may arise when we take the output of all the firm as final output without considering the fact that output of one firm may be input for other.

Example-

IT can be overcome by two ways-:

Final output- It can be solved by taking the value of only final goods which are available for direct use.

Value added at each step of production-: If we take value added at each step of production then this problem can be solved.



Or

Explain the expenditure method of estimating national Income. Why exports are added and imports are excluded.

In expenditure method we assume that expenditure on final goods and services is equal to final goods and services produced.

To determine national income firm expenditure method first of all final expenditure and gross domestic capital formation is determined. The various constituents are

Private final consumption expenditure-: It is consumption expenditure of households on the purchase of final goods and services.

Government final consumption expenditure-: It is consumption expenditure of Government on the purchase of final goods and services.

Gross domestic capital formation-: It is the sum of gross business fixed investment, gross residential construction, gross public investment and change in stock.



Net exports -: It is the difference between exports and imports.

After adding all the constituents gross domestic product at market price is determined.

If factor income received from rest of the world is added and factor income paid to rest of the world is excluded gross national income at market price is determined.



Exports are the goods which are produced in the domestic territory so they are included and imports are the goods which are not produced in the domestic territory so these are excluded.