CBSE Class 12 Economics Quick Revision Questions

Quick Revision Question and Answers for Low Achievers 

Question 1. What is opportunity cost?
Answer: Opportunity cost refers to the cost of the next best alternative foregone.
In simple words: It is the value of the best alternative choice that you give up when you make a decision.

Exam Tip: Always include the keywords "next best alternative foregone" to secure full marks in 1-mark questions.

Question 2. Define Marginal rate of transformation.
Answer: It is the amount of one good that must be given up to produce one additional unit of a second good. It is also known as marginal opportunity cost.
In simple words: MRT measures how much of one product you must sacrifice to gain one more unit of another product.

Exam Tip: Mention its alternative name (marginal opportunity cost) as examiners often look for it.

Question 3. Give two examples of Micro economic variables/ studies.
Answer:
a. Individual demand
b. Individual savings
In simple words: Microeconomics studies individual economic units rather than the whole economy.

Exam Tip: Keep examples brief and specific to single decision-making units.

Question 4. Why does an economic problem arise?
Answer: It is due to unlimited wants and limited resources.
In simple words: Economic problems happen because people have endless desires, but the world has only a limited amount of resources to fulfill them.

Exam Tip: Mention both core causes: unlimited wants and scarcity of resources.

Question 5. What is meant by inferior goods in economics?
Answer: Inferior goods refer to those goods whose demand decreases with a rise in the income of the consumer.
In simple words: When people earn more money, they stop buying cheap, low-quality goods and buy better ones instead.

Exam Tip: Highlight the inverse relationship between consumer income and demand for inferior goods.

Question 6. Define budget line.
Answer: Budget line shows all combinations of two goods that a consumer can buy with his income at a given price.
In simple words: It is a graphical line showing all possible bundles of two goods a person can afford to buy with their exact budget.

Exam Tip: Ensure you mention both "two goods" and "given income at given prices."

Question 7. What is a demand schedule?
Answer: It is a tabular representation of different quantities demanded at different levels of prices.
In simple words: It is a table showing how much of a product people are willing to buy at various prices.

Exam Tip: Use the term "tabular representation" for precision.

Question 8. Define normal goods.
Answer: Normal goods are those goods whose demand rises with an increase in the income of the consumer.
In simple words: As people get richer, they buy more of these goods.

Exam Tip: Note the direct positive relationship between income and demand.

Question 9. Define indifference curve.
Answer: It shows the various combinations of two goods which provide the same level of satisfaction to the consumer.
In simple words: A curve where every point gives the consumer equal happiness or satisfaction.

Exam Tip: Always state that all points on an indifference curve yield equal satisfaction.

Question 10. Define price elasticity of demand.
Answer: Price elasticity of demand refers to the degree of responsiveness of the quantity demanded to changes in price.
\(E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}\)
In simple words: It measures how much consumer demand changes when the price of the good changes.

Question 11. Define production function.
Answer: It refers to the functional relationship between inputs and outputs.
In simple words: It shows the maximum output that can be produced using various combinations of inputs.

Exam Tip: Emphasize "functional relationship between physical inputs and physical outputs."

Question 12. Define Marginal physical product.
Answer: It refers to the addition made to the total product by employing one additional unit of a variable factor.
In simple words: The extra output produced by hiring one more worker or machine.

Exam Tip: Use the acronym MPP and focus on the 'additional' output.

Question 13. Define revenue.
Answer: It refers to total money income from the sale of output.
In simple words: The total amount of money a firm receives from selling its goods.

Exam Tip: Distinguish clearly between revenue and profit (revenue is total receipts, profit is revenue minus cost).

Question 14. Define marginal revenue.
Answer: It refers to the addition made to the total revenue by selling one more unit of a commodity.
In simple words: The extra money earned by selling one additional unit of a product.

Exam Tip: Marginal always refers to the change caused by one additional unit.

Question 15. Why is the ATC greater than AVC?
Answer: ATC is greater than AVC because ATC includes AVC and AFC.
\(\text{ATC} = \text{AVC} + \text{AFC}\)
In simple words: Average Total Cost includes both average variable costs and average fixed costs, making it always higher than average variable cost alone.

Exam Tip: State the cost component formula to justify your answer clearly.

Question 16. Define fixed cost.
Answer: Fixed costs refer to costs which remain constant as output changes. For example: rent.
In simple words: Expenses that a business must pay even if it produces zero output.

Exam Tip: Always provide a classic example like factory rent or permanent staff salary.

Question 17. Define equilibrium price.
Answer: Equilibrium price refers to a price at which market demand and market supply are equal.
In simple words: The market price where the quantity buyers want to buy equals the quantity sellers want to sell.

Exam Tip: Mention that there is no excess demand or excess supply at this price.

Question 18. In which market form are the products differentiated?
Answer: Monopolistic competition.
In simple words: In markets like cosmetics or soap, companies sell products that are similar but slightly different in branding, packaging, or features.

Exam Tip: Product differentiation is the hallmark of monopolistic competition.

Question 19. In which market form is a firm a price taker?
Answer: Perfect competition.
In simple words: Under perfect competition, individual firms are too small to influence the market price, so they accept whatever price is set by the industry.

Exam Tip: Contrast this with monopoly or monopolistic competition where firms are price makers.

Question 20. Why is the demand curve under oligopoly indeterminate (uncertain)?
Answer: Demand curve is indeterminate because of price wars and interdependent reactions between the sellers.
In simple words: Because there are very few large firms, a price change by one firm causes rivals to react unpredictably, making it impossible to draw a fixed demand curve.

Exam Tip: Focus on firm interdependence and rival reactions.

Question 21. Define Macro Economics?
Answer: Macroeconomics studies the economy as a whole.
In simple words: It looks at big-picture economic issues like total national output, inflation, and unemployment.

Exam Tip: Use the phrase "economy as a whole" for complete accuracy.

Question 22. What is an Economic Territory?
Answer: It refers to the geographic area administered by a government within which there is free movement of goods, human resources, and capital.
In simple words: The economic zone of a country where people, money, and goods move freely without trade barriers.

Exam Tip: Include embassies and consulates abroad operated by the home country in broad national income contexts.

Question 23. Who is a normal resident?
Answer: A person or an institution who lives in a country and whose center of economic interest lies in that country is called a normal resident of that country.
In simple words: Someone who lives primarily in a country and earns and spends their money there.

Exam Tip: The key test for a normal resident is that their "center of economic interest" is located within the economic territory.

Question 24. Is transfer income included in national income? Why?
Answer: No, transfer income is not included because transfer income does not result in the production of goods and services.
In simple words: Payments like pocket money or old-age pensions are gifts or aid, not payments for work, so they are excluded.

Exam Tip: Emphasize that national income only counts factor incomes earned through productive services.

Question 25. What is meant by Cash Reserve Ratio (CRR)?
Answer: It is the percentage of net demand and time deposits that commercial banks are legally required to maintain with the central bank (RBI).
In simple words: A mandatory portion of customer deposits that banks must keep safely parked with the central bank.

Exam Tip: Always mention that CRR is kept with the central bank (as opposed to SLR which banks keep with themselves).

Question 26. What is meant by Bank rate?
Answer: It is the rate at which the central bank lends money to commercial banks.
In simple words: The interest rate charged by the central bank when commercial banks borrow money from it.

Exam Tip: Distinguish bank rate from repo rate (repo rate involves short-term loans against collateral, bank rate is typically longer-term discount rate).

Question 27. What is meant by double coincidence of wants?
Answer: It means that one person's desire to buy and sell must perfectly coincide with another person's desire to buy and sell.
In simple words: In a barter system, you can only trade if you have what the other person wants and they have what you want.

Exam Tip: Highlight that this is the biggest limitation of the barter system.

Question 28. What is legal tender money?
Answer: Money that is declared legally by the government as a valid medium of exchange to settle debts is called legal tender money.
In simple words: Cash and coins that nobody can legally refuse in payment for a transaction or debt.

Exam Tip: Mention the legal backing by the government.

Question 29. Define involuntary unemployment.
Answer: Involuntary unemployment refers to a situation in which people who are willing and able to work at the prevailing wage rate are unable to get work.
In simple words: People want to work at current wages, but no jobs are available for them.

Exam Tip: Emphasize "willing and able to work at the prevailing wage rate."

Question 30. What is the relationship between MPC and MPS?
Answer: Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) always add up to 1.
\(\text{MPC} + \text{MPS} = 1\)
In simple words: Every extra rupee of income earned is either spent (consumed) or saved.

Exam Tip: State the algebraic equation clearly to score full points.

Question 31. What is meant by excess demand (inflationary gap)?
Answer: Excess demand occurs when Aggregate Demand (AD) is greater than Aggregate Supply (AS) corresponding to full employment equilibrium.
\(\text{AD} > \text{AS} \text{ at full employment}\)
In simple words: When people want to buy more goods than the economy can possibly produce at full capacity, causing inflation.

Exam Tip: Always add "corresponding to full employment equilibrium" for macro accuracy.

Question 32. What is meant by deficient demand (deflationary gap)?
Answer: Deficient demand arises when Aggregate Demand (AD) is less than Aggregate Supply (AS) corresponding to full employment equilibrium.
\(\text{AD} < \text{AS} \text{ at full employment}\)
In simple words: When total spending in the economy is too low to purchase all the goods produced at full employment, leading to unemployment and recession.

Exam Tip: Contrast this directly with excess demand.

Question 33. What is meant by autonomous investment?
Answer: Investment which is made without depending on the profit level or income of the enterprise.
In simple words: Government or infrastructure investments made for public welfare rather than profit motives.

Exam Tip: Contrast autonomous investment with induced investment (which varies with income/profit).

Question 34. Define multiplier.
Answer: Multiplier is the ratio of change in income to the change in investment.
\(k = \frac{\Delta Y}{\Delta I}\)
In simple words: It shows how many times total income increases when initial investment increases.

Exam Tip: Write both the word definition and the formula \(k = \frac{1}{1 - \text{MPC}} = \frac{1}{\text{MPS}}\).

Question 35. Define government budget.
Answer: Government budget shows the estimated receipts and estimated expenditure of the government for one fiscal year.
In simple words: The annual financial statement of the government's planned earnings and spending.

Exam Tip: Use the words "estimated receipts" and "estimated expenditure" since it is a forecast for the coming year.

Question 36. Define revenue deficit in a government budget.
Answer: When the revenue expenditure of the government is greater than its revenue receipts, it is called revenue deficit.
\(\text{Revenue Expenditure} > \text{Revenue Receipts}\)
In simple words: When the government's regular day-to-day spending exceeds its regular day-to-day earnings.

Question 37. What is primary deficit?
Answer: Primary deficit is the difference between fiscal deficit and interest payments made by the government.
\(\text{Primary Deficit} = \text{Fiscal Deficit} - \text{Interest Payments}\)
In simple words: How much the government is borrowing currently, excluding past debts and their interest.

Exam Tip: A zero primary deficit means the government needs to borrow only to pay off interest on past loans.

Question 38. What is fiscal deficit?
Answer: When the total government expenditure is greater than total government receipts excluding borrowings, it is known as fiscal deficit.
\(\text{Fiscal Deficit} = \text{Total Expenditure} - \text{Total Receipts (excluding borrowings)}\)
In simple words: The total amount of money the government needs to borrow during the year.

Exam Tip: Make sure to include "excluding borrowings" in the receipts formula.

Question 39. What is meant by foreign exchange rate?
Answer: Foreign exchange rate refers to the rate at which one currency is exchanged for another currency.
In simple words: The price of one country's currency expressed in terms of another country's currency (e.g., 1 USD = 80 INR).

Exam Tip: Define it simply as the external price of domestic currency.

Question 40. Name the two accounts in the balance of payments.
Answer:
a. Current account: It shows the imports and exports of goods and services and unilateral transfer payments.
b. Capital account: It shows transactions affecting the assets and liabilities of the government and private residents with the rest of the world.
In simple words: BOP is split into current transactions (trade and services) and capital transactions (loans and investments).

Exam Tip: Mention both accounts clearly with one defining characteristic each.

Question 41. Why is a production possibility curve concave?
Answer: It is due to increasing marginal opportunity cost.
In simple words: As you produce more of one good, you have to give up increasingly larger amounts of the other good because resources are not equally efficient in all uses.

Exam Tip: Concavity is directly tied to the law of increasing marginal opportunity cost.

Question 42. What is primary deficit?
Answer: Primary deficit = Fiscal deficit - Interest payments.
In simple words: The government's borrowing requirement minus the interest owed on old loans.

Exam Tip: Repeating key fiscal definitions ensures high retention and scoring.

Question 43. What is revenue deficit?
Answer: When revenue expenditure is more than revenue receipts.
In simple words: Day-to-day government expenses exceeding regular tax collections.

Exam Tip: Keep answers crisp and formula-based.

Question 44. A rise in the price of a good results in an increase in expenditure on it. Is its demand elastic or inelastic?
Answer: Inelastic, because there is a direct relation between price and total expenditure.
In simple words: If price goes up and you still spend more money on it overall, your demand is unresponsive (inelastic).

Exam Tip: Remember the rule: Price and Expenditure move in the same direction for inelastic demand, and opposite directions for elastic demand.

Question 45. What is consumption function?
Answer: The functional relationship between income and consumption is called consumption function.
\(C = f(Y)\)
In simple words: An equation showing how consumer spending changes as national income changes.

Question 46. What is saving function?
Answer: The relationship between income and saving is called saving function.
\(S = f(Y)\)
In simple words: An equation showing how household savings change as income levels rise or fall.

Exam Tip: Savings function is the counterpart to the consumption function.

Question 47. What is a Barter system?
Answer: Direct exchange of goods for goods is called a barter system.
In simple words: Trading goods directly for other goods without using money as a medium.

Exam Tip: Note that barter economy is also known as a C-C economy (Commodity-to-Commodity).

Question 48. Define APC?
Answer: APC = C / Y. The ratio of total consumption to total income is called Average Propensity to Consume (APC).
In simple words: The fraction of total income that people spend on consumption.

Exam Tip: Always state both the formula and the conceptual meaning.

Question 49. Define APS?
Answer: APS = S / Y. The ratio of total savings to total income is called Average Propensity to Save (APS).
In simple words: The fraction of total income that people choose to save.

Exam Tip: Remember that \(\text{APC} + \text{APS} = 1\).

Question 50. What is excess demand?
Answer: When AD > AS at the full employment level.
In simple words: Total spending exceeds total productive capacity at full employment.

Exam Tip: Specify the full employment context.

Question 51. What is deficient demand?
Answer: When AD < AS at the full employment level.
In simple words: Total spending falls short of full-employment output.

Exam Tip: Deficient demand causes deflationary gaps and unemployment.

Question 52. A rise in the income of the consumer X leads to a fall in the demand for that good by the consumer. What is the good X called?
Answer: Normal good? No, it is an inferior good.
In simple words: When you get richer and buy less of something, that item is an inferior good.

Exam Tip: Be careful with OCR text typos; negative income effect defines inferior goods.

Question 53. When demand for a good falls due to a rise in its own price, what is the change in demand called?
Answer: Contraction of demand.
In simple words: Moving upward along the same demand curve because the price went up.

Exam Tip: Distinguish between contraction of demand (price change) and decrease in demand (shift in curve).

Question 54. What happens when demand and supply curves don't intersect each other?
Answer: Economically non-viable industry.
In simple words: If consumers are not willing to pay what sellers need to cover costs, no market equilibrium exists.

Exam Tip: Use the economic term "non-viable industry."

Question 55. What is abnormal profit?
Answer: It is the profit earned over and above normal profit.
In simple words: Extra profit earned by a firm when total revenue exceeds both explicit and implicit costs (supernormal profit).

Exam Tip: Also referred to as economic profit or supernormal profit.

Question 56. What is break-even price?
Answer: It is the price at which firms make zero normal profit (where price equals average total cost).
In simple words: The price where total revenue exactly covers total costs, resulting in zero economic profit.

Exam Tip: Break-even occurs where \(P = \text{ATC}\).

Question 57. What is a cartel?
Answer: It is a group of firms which jointly sets output and price so as to exercise monopoly control.
In simple words: An illegal alliance of competing businesses that agree to fix prices and limit production.

Exam Tip: Cartels operate typically under oligopoly market structures.

Question 58. What are patent rights?
Answer: It is an exclusive license or right granted to a company or an individual to produce a particular product or use a particular technology.
In simple words: Legal protection preventing others from copying an invention.

Exam Tip: Patents create legal barriers to entry in monopoly or imperfect markets.

Question 59. What are advertising costs/persuasive advertising?
Answer: Expenditure incurred by a firm to persuade potential consumers to view their brands/products as different or better compared to other brands.
In simple words: Promotional spending designed to convince buyers that one brand is superior to competitors.

Question 60. What is induced investment?
Answer: It is a kind of investment which is profit-motivated in nature.
In simple words: Investment that increases when national income and profits go up.

Exam Tip: Contrast with autonomous investment which is independent of income.

Question 61. What is autonomous / public investment?
Answer: It is a kind of investment which is not profit-motivated.
In simple words: Government spending on public infrastructure, roads, and schools for social welfare.

Exam Tip: Autonomous investment curves are horizontal in Keynesian diagrams.

Question 62. What is a linear consumption function?
Answer: It is a consumption function which is given on the basis of a constant marginal propensity to consume.
\(C = \bar{C} + bY\)
Where \(\bar{C} = \text{autonomous consumption}\) and \(b = \text{marginal propensity to consume}\).
In simple words: A straight-line equation showing consumption growing at a steady rate as income rises.

Exam Tip: Memorize the linear consumption equation format.

Question 63. What is the relationship between APC and APS?
Answer: APC + APS = 1.
In simple words: The portion of income consumed plus the portion saved equals total income.

Exam Tip: Derived directly from \(Y = C + S\) divided throughout by \(Y\).

Question 64. What is the relationship between MPC and MPS?
Answer: MPC + MPS = 1.
In simple words: Every additional rupee earned is either spent or saved.

Exam Tip: Essential identity used in multiplier calculations.

Question 65. What is the relationship between multiplier and MPC?
Answer: The value of the multiplier varies directly with MPC.
\(k = \frac{1}{1 - \text{MPC}}\)
In simple words: Higher consumer spending leads to a higher income multiplier effect.

Exam Tip: Direct relationship means as MPC rises, multiplier (k) also rises.

Question 66. What is a multiplier?
Answer: It is the number by which the change in investment must be multiplied in order to determine the resulting change in income and output.
\(k = \frac{\Delta Y}{\Delta I} = \frac{1}{1 - \text{MPC}}\)
In simple words: The amplification factor by which an increase in investment boosts total national income.

Exam Tip: Always state both formulas for multiplier.

Question 67. What is fiscal deficit?
Answer: When Total Expenditure (\(\text{Revenue Expenditure} + \text{Capital Expenditure}\)) is greater than Total Receipts excluding borrowing (\(\text{Revenue Receipts} + \text{Non-debt Capital Receipts}\)).
In simple words: Total government borrowing needs.

Exam Tip: Ensure you explicitly exclude borrowings from receipts.

Question 68. What does fiscal deficit in government budget mean?
Answer: It means more borrowing on the part of the government.
In simple words: The government has spent more than its earnings and must take loans to cover the gap.

Exam Tip: Fiscal deficit equals government borrowing requirements.

Question 69. What is a deficit budget?
Answer: When expenditure of the government is more than its total receipts, it is called a deficit budget.
In simple words: A budget where government spending outstrips total income.

Exam Tip: Distinct from fiscal deficit, though related.

Question 70. What is a surplus budget?
Answer: When receipts of the government are more than its expenditure, it is called a surplus budget.
In simple words: A budget where government earnings exceed total spending.

Exam Tip: Useful for controlling inflation during boom periods.

Question 71. Why are borrowings treated as capital receipts?
Answer: Because they increase the liabilities of the government.
In simple words: Loans create an obligation to repay in the future, which is why they are capital receipts.

Exam Tip: Remember the two rules for capital receipts: create liability or reduce assets.

Question 72. Why is payment of interest treated as revenue expenditure?
Answer: Because it does not cause any reduction in the liability of the government or create any assets.
In simple words: Paying interest is a recurring operational expense that doesn't pay off the principal debt.

Exam Tip: Servicing debt (interest) is revenue expenditure, while repaying the principal is capital expenditure.

Question 73. What is a factor market?
Answer: It consists of markets for factors of production namely land, labour, capital, and organization.
In simple words: Markets where businesses buy or hire productive resources from households.

Exam Tip: Contrast with product markets.

Question 74. Define product market.
Answer: It consists of markets for final goods and services.
In simple words: Where consumers buy finished goods produced by firms.

Exam Tip: Pair with factor markets for circular flow explanations.

Question 75. What is the alternative name of microeconomics?
Answer: Price theory.
In simple words: Microeconomics is often called price theory because it studies how prices of individual goods and factors are determined.

Question 76. What is the alternative name of macroeconomics?
Answer: Income theory.
In simple words: Macroeconomics is known as income and employment theory.

Exam Tip: Direct counterpart to microeconomics.

Question 77. Why is change in stock considered a part of final expenditure?
Answer: Unsold stocks left with producers are assumed to be purchased by the producers themselves as investment expenditure.
In simple words: Inventories kept at the end of the year are treated as self-investment by businesses.

Exam Tip: Essential point for expenditure method numericals.

Question 78. The balance of trade shows a deficit of Rs. 300 crore. The value of exports is Rs. 500 crore. What is the value of imports?
Answer:
Balance of Trade = Exports - Imports
-300 = 500 - Imports
Imports = 500 + 300 = Rs. 800 crore.
In simple words: Since imports exceeded exports by 300 crore, imports equaled 500 + 300 = 800 crore.

Exam Tip: Watch out for signs when dealing with trade deficits.

Question 79. Why does an economic problem arise?
Answer: It arises due to:
1) Scarcity of resources.
2) Alternative uses of resources.
3) Unlimited wants.
In simple words: Limited resources with multiple uses facing endless human wants create economic problems.

Exam Tip: List all three core reasons for full marks.

Question 80. Define opportunity cost.
Answer: It is the cost of the foregone alternative.
In simple words: What you give up to get something else.

Exam Tip: Concise definitions work well for 1-mark items.

Question 81. What does a rightward shift of PPC indicate?
Answer: It indicates economic growth and an increase in resources or technological progress.
In simple words: Growth in the country's productive capacity.

Exam Tip: Rightward shift = Growth; Leftward shift = Destruction/Depletion of resources.

Question 82. What does a leftward shift of PPC indicate?
Answer: It indicates a reduction or degradation of society's productive capacity and resources.
In simple words: A shrinkage in the economy's ability to produce goods.

Exam Tip: Distinguish shifts from movements along the PPC curve (unutilization vs. capacity change).

Question 83. What is production function?
Answer: The technological relationship between inputs and outputs of a firm is called production function.
In simple words: How inputs are transformed into outputs.

Exam Tip: Use the word "technological" or "physical" relationship.

Question 85. What is a government budget?
Answer: It is an estimate of receipts and expenditure of the government in an accounting year.
In simple words: The government's financial plan for the year.

Exam Tip: Maintain accuracy in terminology (accounting year / fiscal year).

Question 86. What is a fixed exchange rate?
Answer: It is the rate of exchange which is officially fixed by the government or central bank.
In simple words: An exchange rate pegged at a specific value by government authority.

Question 87. What is a flexible exchange rate?
Answer: It is the rate of exchange determined freely by the market forces of demand and supply of foreign exchange.
In simple words: Exchange rates driven entirely by market demand and supply without government intervention.

Exam Tip: Also known as floating exchange rate.

Question 88. What is foreign exchange rate?
Answer: It is the rate at which one currency can be exchanged for another.
In simple words: The external value or price of domestic currency in terms of foreign currency.

Exam Tip: Keep definitions sharp and direct.

Question 89. What is balance of trade?
Answer: It is the difference between the value of exports and imports of visible items (goods) of a country.
In simple words: Net trade value of physical goods exported versus imported.

Exam Tip: Remember BOT covers goods only, not services.

Question 90. What is balance of payments?
Answer: It is a systematic record of all economic transactions between the residents of a country and the rest of the world during an accounting year.
In simple words: The comprehensive ledger of all financial flows in and out of a country.

Exam Tip: BOP includes current account, capital account, and official reserve transactions.

Question 91. What is marginal rate of transformation / marginal rate of substitution / marginal opportunity cost?
Answer: It is the ratio of units of one good sacrificed to produce one more unit of another good.
In simple words: The amount of one product you give up to get an extra unit of another.

Exam Tip: These terms represent trade-offs on production and indifference curves.

Question 92. Define market supply.
Answer: It refers to the sum of outputs of all producers of a good at various prices during a given period of time.
In simple words: Total supply of a product from all sellers combined in the market.

Exam Tip: Sum of individual supplies equals market supply.

Question 93. Define marginal cost.
Answer: It is the change in total cost resulting from producing one more or less unit of output.
\(MC_n = TC_n - TC_{n-1}\)
In simple words: The extra cost incurred by producing one additional unit.

Exam Tip: Marginal cost is independent of total fixed costs in the short run.

Question 94. Define marginal revenue.
Answer: It is the change in total revenue resulting from selling one more or less unit of a commodity.
\(MR_n = TR_n - TR_{n-1}\)
In simple words: The extra income earned by selling one more item.

Exam Tip: Fundamental concept for producer equilibrium.

Question 95. Which cost may exist even when output is zero?
Answer: Fixed cost.
In simple words: Expenses like rent and insurance must be paid even if production drops to zero.

Exam Tip: TFC does not change with output level.

Question 96. Draw unitary elasticity of supply.
Answer:
A straight-line supply curve passing through the origin has unitary elasticity (\(E_s = 1\)).
In simple words: A supply curve starting directly from the bottom-left origin represents proportional changes in price and quantity.

Exam Tip: Any straight line supply curve intersecting the origin has an elasticity of exactly 1.

Question 97. When is there a surplus in the balance of trade?
Answer: When exports > imports (when export value exceeds import value).
In simple words: When a country sells more goods abroad than it buys from abroad.

Exam Tip: Trade surplus means positive net exports of goods.

Question 98. When is there a deficit in the balance of trade?
Answer: When imports > exports.
In simple words: When a country buys more foreign goods than it sells abroad.

Exam Tip: Trade deficit = Imports greater than exports.

Question 99. Define cost.
Answer: It refers to the money expenditure incurred on the production of a given amount of a commodity.
In simple words: Total financial outlays required to produce goods.

Exam Tip: Distinguish between money cost and economic cost (which includes implicit costs).

Question 100. What induces new firms to enter an industry?
Answer: Abnormal profit (supernormal profits) induces new firms to enter an industry.
In simple words: High profits attract new competitors into the market.

Exam Tip: Entry of new firms drives abnormal profits down to zero in long-run perfect competition.

Question 101. What happens to the equilibrium of a commodity if there is a decrease in its demand and an increase in its supply?
Answer: The equilibrium price will definitely decrease, while the effect on equilibrium quantity is ambiguous depending on the magnitude of shifts.
In simple words: Less demand combined with more supply drives market prices down.

Exam Tip: Draw simultaneous shifts in demand and supply curves to verify price drops.

Question 102. What is involuntary unemployment?
Answer: It refers to a situation when persons are willing and able to work at a given wage rate but are unable to get work.
In simple words: People want jobs at current wages but cannot find employment.

Exam Tip: Core macro indicator of labor market slack.

Question 103. What is voluntary unemployment?
Answer: It refers to a situation when persons are not willing to work at the prevailing market wage rate, although work is available.
In simple words: People choosing not to work at current wages.

Exam Tip: Voluntary unemployed workers are excluded from official unemployment rate calculations.

Question 104. Give two sources of non-tax revenue.
Answer: Escheats, special assessments, income from public enterprises, fees, and fines.
In simple words: Government earnings from services, profits of public companies, and penalties rather than taxes.

Exam Tip: Memorize at least two clear examples like license fees or fines.

Question 105. Why is entertainment tax an indirect tax?
Answer: Because its burden can be shifted to others.
In simple words: The cinema hall pays the tax to the government, but passes the burden onto customers via higher ticket prices.

Question 106. What is CRR?
Answer: It is the ratio of bank deposits that commercial banks must keep with the central bank.
In simple words: Percentage of deposits parked mandatorily with the central bank.

Exam Tip: Used as a quantitative monetary policy tool.

Question 107. What is bank rate?
Answer: It is the rate of interest at which the central bank gives loans and advances to commercial banks.
In simple words: Central bank lending rate to commercial banks.

Exam Tip: Raising bank rate restricts credit creation.

Question 108. Define change in demand.
Answer: When change in demand occurs due to factors other than price (shift in demand curve), it is called change in demand.
In simple words: Entire demand curve shifts due to income, taste, or related goods prices.

Exam Tip: Shift in curve = Change in demand; Movement along curve = Change in quantity demanded.

Question 109. Define change in quantity demanded.
Answer: When change in demand occurs due to price alone (movement along the same demand curve), it is called change in quantity demanded.
In simple words: Sliding up or down the same demand curve because the price changed.

Exam Tip: Price-driven changes cause movements along the curve.

Question 110. Define utility.
Answer: Want-satisfying power of a commodity is called utility.
In simple words: The psychological satisfaction a consumer gets from consuming a good.

Exam Tip: Utility is subjective and varies from person to person.

Question 111. Define marginal utility.
Answer: It is the change in total utility resulting from consuming one more or less unit of a commodity.
\(MU_n = TU_n - TU_{n-1}\)
In simple words: The extra satisfaction gained from consuming one more unit.

Exam Tip: MU decreases as consumption increases (Law of Diminishing Marginal Utility).

Question 112. What is meant by the term "price taker" in the context of a firm?
Answer: It means that the firm does not have any control over the price and it has to follow the market price determined by the industry.
In simple words: Individual firms must sell at the prevailing market price and cannot set their own prices.

Exam Tip: Characteristic feature of perfect competition.

Question 113. What is the price elasticity of supply of a commodity whose straight-line supply curve passes through the origin forming an angle of 45 degrees / 75 degrees?
Answer: Unitary elastic (\(E_s = 1\)) when passing through the origin regardless of the angle.
In simple words: Any straight-line supply curve originating from the zero point has an elasticity of 1.

Exam Tip: Origin pass-through guarantees unitary elasticity.

Question 114. If MPC and MPS are equal, what is the value of multiplier?
Answer:
Given \(\text{MPC} = \text{MPS}\) and \(\text{MPC} + \text{MPS} = 1\)
Therefore, \(\text{MPC} = \text{MPS} = 0.5\) or \(\frac{1}{2}\)
Multiplier \(k = \frac{1}{\text{MPS}} = \frac{1}{0.5} = 2\)
In simple words: If people split their income equally between spending and saving, the multiplier value is 2.

Exam Tip: Show step-by-step substitution of MPS into the multiplier formula.

Question 115. What is meant by SLR (Statutory Liquidity Ratio)?
Answer: It is the ratio of total demand and time deposits of commercial banks which they must keep in the form of specified liquid assets with themselves.
In simple words: A mandatory percentage of deposits that banks must keep as liquid cash or gold in their own vaults.

Question 116. What will be the effect of a rise/fall in bank rate on money supply?
Answer: A rise in bank rate will reduce money supply, while a fall in bank rate will increase money supply.
In simple words: Higher lending rates make loans expensive, slowing down money growth; lower rates boost borrowing and money supply.

Exam Tip: Inverse relation between bank rate and money supply.

Question 117. If planned savings are greater/smaller than planned investment, what will be its effect on inventories?
Answer: If planned savings > planned investment, inventories will increase. If planned savings < planned investment, inventories will decrease.
In simple words: If people save more than businesses invest, unsold goods pile up in warehouses, raising inventories.

Exam Tip: Core macroeconomic adjustment mechanism.

Question 118. Define money.
Answer: "Money is what money does." Alternatively, money is anything accepted as a medium of exchange and acting as a store of value.
In simple words: Anything widely accepted for buying goods and storing wealth.

Exam Tip: Mention both medium of exchange and store of value functions.

Question 119. How is TVC derived from MC?
Answer: \(\text{TVC} = \sum \text{MC}\)
In simple words: Total variable cost is the sum of all marginal costs for each unit produced.

Exam Tip: Summation of MC yields TVC.

Question 120. Define revenue of a firm.
Answer: It is the sale receipts or money receipts from the sale of a product.
In simple words: Total cash collected from selling goods.

Exam Tip: Keep definitions concise and accurate.

Question 121. What is average cost?
Answer: It is the cost per unit of output.
\(\text{AC} = \frac{\text{TC}}{Q}\)
In simple words: Total cost divided by the number of units produced.

Exam Tip: Mention the division formula.

Question 122. Define tax.
Answer: It is a compulsory payment made by households and firms to the government without direct quid pro quo benefits.
In simple words: Mandatory financial payments to the government.

Exam Tip: Emphasize "compulsory payment."

Question 123. In which form of market is the demand curve more elastic and why?
Answer: Demand curve is more elastic under monopolistic competition because of the availability of close substitutes.
In simple words: When many similar brands exist, consumers easily switch if prices rise.

Question 124. Define production possibility curve (PPC).
Answer: PPC shows various combinations of a pair of goods which can be produced with given resources and technology fully and efficiently utilized.
In simple words: A curve showing maximum possible output combinations for an economy.

Exam Tip: Mention full and efficient utilization of resources.

Question 125. Is import of machinery recorded in current or capital account?သမ
Answer: It is recorded in the current account because it is treated as a purchase of physical goods (visible trade).
In simple words: Machinery imports count under visible merchandise trade in the current account.

Question 126. Can GDP be greater than GNP?
Answer: Yes, GDP can be greater than GNP if Net Factor Income from Abroad (NFIA) is negative.
\(\text{GNP} = \text{GDP} + \text{NFIA}\)
In simple words: If foreigners earn more inside our country than our citizens earn abroad, GDP exceeds GNP.

Exam Tip: Negative NFIA makes GDP > GNP.

Question 127. Can GNP be greater than GDP?
Answer: Yes, GNP can be greater than GDP if Net Factor Income from Abroad (NFIA) is positive.
In simple words: If our citizens earn more abroad than foreigners earn here, GNP exceeds GDP.

Exam Tip: Positive NFIA makes GNP > GDP.

Three or Four Marks Questions (3M/4M)

Question 1. Explain the central problems of an economy.
Answer:
a) What to produce? It refers to which goods and services are to be produced and in what quantities based on consumer preferences and resource availability.
b) How to produce? It refers to the choice of production techniques—whether labor-intensive or capital-intensive—to minimize costs.
c) For whom to produce? It refers to the distribution of national income and wealth among different sections of society.
In simple words: Every economy must decide what goods to make, how to make them efficiently, and who gets to buy them.

Exam Tip: List all three central problems clearly with a one-line explanation each.

Question 2. Explain the problem of How to Produce.
Answer: It refers to the choice of methods of production, i.e., whether labor-intensive or capital-intensive techniques are to be adopted, keeping in mind factor availability and cost minimization.
In simple words: Choosing between using more workers or more machines to produce goods at the lowest cost.

Exam Tip: Contrast labor-intensive (using more workers) with capital-intensive (using more machines).

Question 3. Explain Production Possibility curve with the help of a diagram.
Answer: Production Possibility Curve (PPC) is a curve showing alternative production possibilities of two goods with given resources and technology. If all resources are devoted to commodity B, maximum units are produced with zero commodity A. Producing more of one good requires sacrificing units of the other due to scarcity.
In simple words: A graph showing trade-offs between producing two different goods.

Exam Tip: Draw axes labeled with Commodity A and Commodity B, showing a downward-sloping concave curve.

Question 4. Explain the relationship between Total utility and Marginal utility.
Answer:
a) TU increases at a diminishing rate when MU is positive and declining.
b) TU is at its maximum when MU is zero.
c) When MU becomes negative, TU starts declining.
In simple words: As long as extra satisfaction (MU) is positive, total happiness rises; when extra satisfaction drops below zero, total happiness falls.

Exam Tip: Tabulate or bullet-point these three distinct phases for maximum marks.

Question 5. State the Properties of Indifference Curve.
Answer:
1. Indifference curves slope downward from left to right.
2. Indifference curves are convex to the origin.
3. Two indifference curves never intersect each other.
4. A higher indifference curve gives more satisfaction than a lower indifference curve.
In simple words: IC curves slope down, bulge inward, never cross, and higher curves mean more happiness.

Exam Tip: List all four standard properties clearly.

Question 6. State the Law of Diminishing marginal utility.
Answer: As a consumer goes on consuming more and more units of a commodity, the additional satisfaction derived from each extra unit goes on falling.
In simple words: The more you consume of something, the less exciting each extra unit becomes.

Exam Tip: State the law formally before giving examples.

Question 7. State any three causes of decrease in demand / leftward shift in demand curve.
Answer:
a) Decrease in income of the consumer.
b) Fall in the price of substitute goods.
c) Rise in the price of complementary goods.
In simple words: Less income, cheaper substitutes, or costlier complements will cause people to buy less, shifting demand left.

Exam Tip: Group causes logically into income and related good price changes.

Question 8. State any three causes of Increase in demand / rightward shift in demand curve.
Answer:
a) Increase in the income of the consumer.
b) Rise in the price of substitute goods.
c) Fall in the price of complementary goods.
d) Favorable change in tastes and preferences.

In simple words: More income, costlier substitutes, cheaper complements, or better preferences shift demand right.

Exam Tip: Provide at least three distinct determinants.

Question 9. At price of Rs. 20 per unit, the quantity demanded is 300 units. Its price falls by 10% and its quantity demanded rises by 60 units. Calculate price elasticity.
Answer:
Percentage change in price = 10% (Given)
Initial Quantity (\(Q\)) = 300 units
Change in Quantity (\(\Delta Q\)) = 60 units
Percentage change in quantity demanded = \(\frac{\Delta Q}{Q} \times 100 = \frac{60}{300} \times 100 = 20\%\)
Price Elasticity (\(E_d\)) = \(\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}\)
\(E_d = \frac{20}{10} = 2\)
Since \(E_d > 1\), elasticity is greater than unity (elastic demand).
In simple words: Demand is elastic because a 10% price drop resulted in a 20% demand increase.

Exam Tip: Always state the final conclusion regarding whether demand is elastic or inelastic.

Question 10. Draw a straight-line demand curve and show on it points at which \(E_d > 1\), \(E_d < 1\), and \(E_d = 1\).
Answer:
1. Upper segment of the demand curve above the midpoint represents elastic demand (\(E_d > 1\)).
2. Exact midpoint of a linear demand curve represents unitary elasticity (\(E_d = 1\)).
3. Lower segment below the midpoint represents inelastic demand (\(E_d < 1\)).
In simple words: Using point elasticity, the top half is elastic, the middle is unitary, and the bottom half is inelastic.

Exam Tip: Use the lower segment over upper segment geometric formula explanation if required.

Question 11. State the law of demand with the help of a schedule and diagram.
Answer: Law of demand states that there is an inverse relationship between the price of a commodity and its quantity demanded, assuming all other factors remain constant (ceteris paribus). When price falls, demand rises, and vice versa.
In simple words: People buy more when prices drop and less when prices rise.

Exam Tip: Always mention "ceteris paribus" (other things remaining equal).

Question 12. State the relationship between Average Product and Marginal Product.
Answer:
1. When MP > AP, AP is rising.
2. When MP = AP, AP is at its maximum.
3. When MP < AP, AP is falling.
In simple words: Marginal product pulls average product up when it is higher, and drags it down when it is lower.

Exam Tip: Mention the intersection point where MP cuts AP from above at AP's maximum.

Question 13. What are the reasons for diminishing returns to a factor?
Answer:
A. Over-utilization of fixed factors: As more units of variable factor are combined with fixed factors, fixed factors get overstressed.
B. Imperfect factor substitution: Variable factors cannot substitute infinitely for fixed factors.
In simple words: Fixed resources get overcrowded and less efficient as you add too many workers.

Exam Tip: Mention both over-utilization and imperfect factor substitution.

Question 14. Distinguish between Fixed cost and Variable cost.
Answer:
1. Fixed cost does not change with output levels; variable cost changes directly with output.
2. Fixed cost can never be zero at zero output; variable cost is zero when output is zero.
3. Example of fixed cost: Rent; Example of variable cost: Raw material expenses.
In simple words: Fixed costs stay constant whether you produce or not; variable costs grow as production increases.

Exam Tip: Tabulate your differences for clear presentation.

Question 15. Explain the relationship between Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC).
Answer:
1. When MC < AVC and ATC, both AVC and ATC are falling.
2. MC cuts AVC and ATC at their respective minimum points.
3. When MC > AVC and ATC, both AVC and ATC are rising.
In simple words: Marginal cost pulls average costs down when lower, and pushes them up when higher.

Exam Tip: Highlight that MC intersects AVC and ATC at their lowest points.

Question 16. Draw TFC, TVC, and TC in a single diagram.
Answer:
TFC is a horizontal straight line parallel to the X-axis. TVC starts from the origin and slopes upward. TC starts from the TFC intercept on the Y-axis and runs parallel to TVC, maintaining a vertical distance equal to TFC.
In simple words: Fixed cost is flat, variable cost starts at zero, and total cost is TVC shifted upward by TFC.

Exam Tip: Ensure TC curve starts from the Y-axis above zero at the TFC level.

Question 17. Give the relationship between Total Revenue (TR) and Marginal Revenue (MR).
Answer:
1. When MR is positive, TR increases at a diminishing rate.
2. When MR is zero, TR is at its maximum.
3. When MR is negative, TR starts declining.
In simple words: As long as extra revenue is positive, total revenue grows; when extra revenue turns negative, total revenue shrinks.

Exam Tip: Use bullet points mapping MR values to TR behavior.

Question 18. State the law of supply with the help of a schedule and diagram.
Answer: Other things remaining constant, there is a direct relationship between the price of a commodity and its quantity supplied—higher price means more supply and vice versa.
In simple words: Producers supply more goods when prices go up to make higher profits.

Question 20. As the price of peanut packets increases by 5%, the quantity supplied rises by 8%. What is elasticity of supply?
Answer:
\(E_s = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}\)
\(E_s = \frac{8\%}{5\%} = 1.6\)
Since \(E_s > 1\), the supply is elastic.
In simple words: Supply is elastic because the percentage change in supply is greater than the percentage change in price.

Exam Tip: State clearly whether supply is elastic, inelastic, or unitary.

Question 21. What will be the price elasticity of supply at any point on a straight-line curve if: 1) supply curve intersects X-axis in its negative range, 2) supply curve intersects X-axis in its positive range, 3) supply curve passes through the origin?
Answer:
1) Intersects X-axis in negative range: \(E_s > 1\) (elastic).
2) Intersects X-axis in positive range: \(E_s < 1\) (inelastic).
3) Passes through origin: \(E_s = 1\) (unitary elastic).
In simple words: Where the supply line intercepts the X-axis determines its elasticity category.

Exam Tip: Memorize these three geometric rules for supply elasticity.

Question 22. List the three main features of oligopoly.
Answer:
A. Few large sellers in the market.
B. Price rigidity and high interdependence.
C. Firms sell homogeneous or differentiated products.
In simple words: Dominated by a few giant firms whose decisions affect each other directly.

Exam Tip: Interdependence is the core characteristic of oligopoly.

Question 23. State any three features of Monopoly.
Answer:
1. A single seller.
2. No close substitutes available.
3. Complete barriers to entry for new firms.
In simple words: One dominant company controls the entire market with no competition.

Exam Tip: Emphasize absence of substitutes and entry barriers.

Question 24. How is equilibrium price determined in a perfect competition market?
Answer: Equilibrium price is determined where market demand equals market supply (\(\text{Demand} = \text{Supply}\)), represented by the intersection of the demand and supply curves.
In simple words: The exact price where buyer and seller intentions match completely.

Exam Tip: Mention market forces of demand and supply.

Question 25. Explain the effect of an increase in demand of a commodity on its equilibrium price and quantity.
Answer: An increase in demand shifts the demand curve to the right while supply remains constant. This creates excess demand at the old price, driving both equilibrium price and equilibrium quantity upward.
In simple words: Higher demand pushes both prices and sales volume up.

Exam Tip: Rightward shift in demand = Higher price and higher quantity.

Question 26. What happens to equilibrium price when increase in demand is equal to increase in supply?
Answer: The equilibrium price remains unchanged, but the equilibrium quantity increases.
In simple words: If demand and supply grow by the exact same amount, prices stay stable while trade volume expands.

Exam Tip: Equal shifts in demand and supply cancel each other out on price.

Question 27. Difference between Micro and Macro economics.
Answer:
1. Micro studies individual economic units; Macro studies the economy as a whole.
2. Micro focuses on resource allocation; Macro focuses on economic growth and total employment.
3. Micro is called Price Theory; Macro is called Income Theory.
In simple words: Micro looks at trees (individual markets); Macro looks at the forest (entire economy).

Exam Tip: Tabulate differences clearly.

Question 28. Explain the circular flow of Income in a two-sector model.
Answer: In a two-sector model consisting of households and firms, households provide factor services to firms, and firms make factor payments. Households spend their entire income buying final goods from firms, creating a continuous circular flow of money and goods without leakages.
In simple words: Money flows in a continuous loop between households and businesses.

Question 29. Explain briefly the income approach to measure national income.
Answer:
1. Identify and classify producing enterprises across sectors.
2. Estimate factor incomes: Compensation of Employees, Operating Surplus (Rent, Interest, Profit), and Mixed Income.
3. Sum these factor incomes to get \(NDP_{fc}\).
4. Add Net Factor Income from Abroad (NFIA) to arrive at National Income (\(NNP_{fc}\)).
In simple words: Add up all wages, rents, interests, profits, and mixed incomes generated in the country, plus foreign income.

Exam Tip: State the components of factor income explicitly.

Question 30. Explain the following terms: a) Business fixed investment, b) Inventory investment, c) Residential construction investment, d) Public investment.
Answer:
a) Business Fixed Investment: Spending by businesses on new plants and equipment.
b) Inventory Investment: Net change in inventories of raw materials, semi-finished, and finished goods.
c) Residential Construction Investment: Spending on building housing units.
d) Public Investment: Capital formation undertaken by the government (roads, hospitals, schools).
In simple words: Capital spending categorized by who makes it and what type of asset is created.

Exam Tip: Provide clear one-line descriptions for each sub-part.

Question 31. Name the components of aggregate demand (AD). Explain any one of them.
Answer:
Components of AD: \(\text{AD} = C + I + G + (X - M)\)
Where \(C\) = Consumption, \(I\) = Investment, \(G\) = Government spending, \((X - M)\) = Net exports.
Explanation of Consumption (\(C\)): Household spending on goods and services, which forms the largest component of aggregate demand.
In simple words: Total spending in an economy comes from households, businesses, government, and foreign trade.

Exam Tip: Write the full AD equation first before explaining any component.

Question 32. Distinguish between APC and MPC. The value of which of them can be more than one and when?
Answer: APC is total consumption divided by total income (\(C/Y\)), while MPC is change in consumption divided by change in income (\(\Delta C / \Delta Y\)). APC can be greater than one when consumption exceeds income (funded by past savings or borrowing).
In simple words: Average consumption can surpass income if people spend more than they earn, but extra spending from extra income is always less than 1.

Exam Tip: Highlight that APC can exceed 1, but MPC cannot exceed 1.

Question 33. Explain the relationship between MPC and MPS.
Answer:
Since income is either consumed or saved: \(Y = C + S\)
Dividing by \(\Delta Y\): \(\frac{\Delta Y}{\Delta Y} = \frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y}\)
\(1 = \text{MPC} + \text{MPS}\)
In simple words: Every extra rupee earned is split between consumption and saving, so their marginal proportions add up to 1.

Exam Tip: Show the derivation starting from \(\Delta Y = \Delta C + \Delta S\).

Question 34. What is consumption function? Explain using suitable diagram.
Answer: Functional relationship between consumption and disposable income (\(C = f(Y)\)). The consumption curve starts above zero on the Y-axis due to autonomous consumption and slopes upward, intersecting the 45-degree income line at the break-even point.
In simple words: A graph showing how consumer spending increases steadily as household income rises.

Exam Tip: Mention autonomous consumption intercept on the vertical axis.

Question 35. What is Break-Even point? Explain with the help of saving function.
Answer: Break-even point is the level of income where consumption equals income and saving is equal to zero (\(S = 0\)). On a saving function graph, it is where the saving curve intersects the horizontal X-axis.
In simple words: The income level where people neither save nor borrow—they spend everything they earn.

Exam Tip: Break-even occurs where \(S = 0\) or \(Y = C\).

Question 37. What is inflationary gap? Explain with diagram.
Answer: Inflationary gap is the excess of aggregate demand over aggregate supply at the full employment level (\(\text{AD} > \text{AS}\)). It creates upward pressure on prices without increasing real output.
In simple words: The distance between actual aggregate demand and full-employment output demand, causing inflation.

Exam Tip: Clearly label the inflationary gap distance on your Keynesian cross diagram.

Question 38. What are impacts of deficient demand or deflationary gap on the level of income, output, employment, and prices?
Answer:
- Income level will fall.
- Output level will fall.
- Employment level will reduce.
- Price level will fall.
In simple words: Deficient demand triggers recessions, causing job losses, lower production, and falling prices.

Exam Tip: List all four macroeconomic variables: Income, Output, Employment, and Prices.

Question 39. What will be the impact on income/output and price of excess demand (Inflationary gap)?
Answer: Real output and employment cannot increase because the economy is already at full employment. Therefore, excess demand creates upward pressure on prices, increasing nominal income while real output stays constant.
In simple words: Since factories are already running at full capacity, extra spending only causes inflation, not extra goods.

Exam Tip: Emphasize that real output remains unchanged while nominal values rise due to inflation.

Question 40. Explain the fiscal measures to correct the situation of deficient demand and excess demand.
Answer:
Deficient Demand: Increase government expenditure and decrease taxes to boost disposable income and aggregate demand.
Excess Demand: Decrease government expenditure and increase taxes to curb purchasing power and aggregate demand.
In simple words: Governments spend more and tax less during recessions, and do the opposite during inflations.

Exam Tip: Group fiscal tools into government spending and taxation.

Question 41. What is monetary policy? What monetary measures can be adopted to control the situation of excess demand?
Answer: Monetary policy is the central bank's policy to control interest rates and credit conditions. To control excess demand, the central bank adopts measures such as raising interest rates, increasing CRR and SLR, and selling government securities in open market operations.
In simple words: Central bank actions to make borrowing costlier and reduce money supply during inflation.

Exam Tip: Mention both quantitative and qualitative credit control instruments.

Question 42. Distinguish between planned and actual saving and investment.
Answer: Planned (ex-ante) saving and investment refer to what households and firms intend to save and invest, which may differ due to different decision-makers. Actual (ex-post) saving and investment always equal each other as an accounting identity due to inventory adjustments.
In simple words: What people plan to save might differ from investment plans, but actual tallied savings and investments always balance out.

Exam Tip: Use terms ex-ante (planned) and ex-post (actual).

Question 43. Differentiate between full employment equilibrium and underemployment equilibrium.
Answer: Full employment equilibrium occurs when aggregate demand equals aggregate supply at full employment capacity. Underemployment equilibrium occurs when AD equals AS before full employment is reached, leaving involuntary unemployment in the economy.
In simple words: Equilibrium can happen even when factories are idle and workers are unemployed.

Exam Tip: Highlight the presence or absence of involuntary unemployment.

Question 44. What are drawbacks of the barter system?
Answer:
1) Lack of double coincidence of wants.
2) Absence of a common unit of account or measure of value.
3) Difficulty in storing value or wealth.
4) Impossibility of subdivision of goods.
In simple words: Trading goods directly is hard because you need matching desires, no standard pricing unit, and poor storage for wealth.

Exam Tip: List all four classic limitations of barter.

Question 45. Explain the primary functions of money.
Answer:
A. Medium of Exchange: Money acts as an intermediary for goods and services transactions, eliminating double coincidence of wants.
B. Measure of Value / Unit of Account: Money serves as a common denomination in which prices of all goods and services are expressed.
In simple words: Money makes buying easy and provides a common price tag for everything.

Exam Tip: Distinguish primary functions from secondary/contingent functions.

Question 46. Explain the secondary or subsidiary functions of money.
Answer:
A. Standard of Deferred Payments: Facilitates future payments and credit transactions.
B. Store of Value: Allows wealth to be saved conveniently without spoilage.
C. Transfer of Value: Enables easy transfer of purchasing power across locations.
In simple words: Money lets people borrow for the future, save wealth safely, and move funds easily.

Exam Tip: List deferred payments, store of value, and transfer of value.

Question 47. Write the six agency functions of the Commercial Bank.
Answer:
1) Transfer of funds
2) Collection of funds and dividends
3) Purchase and sale of securities
4) Payment of bills and insurance premiums
5) Acting as executors and trustees of wills
6) Dealing in foreign exchange
In simple words: Services banks perform on behalf of their customers like paying bills or managing investments.

Exam Tip: Bullet-point all six agency services clearly.

Question 48. How does the bank rate control credit?
Answer: By raising the bank rate, the central bank increases borrowing costs for commercial banks. Commercial banks pass this on by raising lending rates to the public, discouraging loans and reducing credit creation.
In simple words: Making loans more expensive stops people and businesses from borrowing excessively.

Question 49. Write any three objectives of a government budget.
Answer:
i) To achieve economic growth.
ii) To reduce inequalities in income and wealth.
iii) To achieve economic stability.
In simple words: Budgets aim to grow the economy, bridge the rich-poor gap, and prevent inflation or recession.

Exam Tip: Focus on growth, redistribution, and stability.

Question 50. Explain the basis of classifying government receipts into revenue receipts and capital receipts.
Answer: Revenue receipts neither create liabilities nor reduce government assets (e.g., taxes). Capital receipts either create liabilities or reduce government assets (e.g., borrowings, disinvestment).
In simple words: Regular earnings that don't create debt are revenue receipts; loans or asset sales are capital receipts.

Exam Tip: Use the two-part test: liability creation and asset reduction.

Question 51. Distinguish between direct tax and indirect tax.
Answer:
1. Direct tax burden falls on the same person; indirect tax burden can be shifted to others.
2. Direct taxes are levied on income/property; indirect taxes are levied on goods and services.
3. Example of direct tax: Income tax; Example of indirect tax: GST / Sales tax.
In simple words: Direct taxes are paid directly by you to the government; indirect taxes are hidden in product prices.

Exam Tip: Emphasize tax incidence shifting.

Question 52. Define revenue receipts. Write the groups in which they are classified.
Answer: Receipts which neither create a liability nor lead to a reduction in assets are called revenue receipts. They consist of:
1) Tax Revenue
2) Non-Tax Revenue
In simple words: Government income from taxes and fees that does not involve borrowing or selling assets.

Exam Tip: Classify into tax and non-tax revenue.

Question 53. Distinguish between Revenue expenditure and Capital expenditure.
Answer:
1. Revenue expenditure does not result in the creation of assets; capital expenditure results in asset creation or liability reduction.
2. Revenue expenditure is recurring and short-term; capital expenditure is non-recurring and long-term.
3. Example of revenue expenditure: Salary payments; Example of capital expenditure: Building highways.
In simple words: Day-to-day operational spending is revenue expenditure; building permanent infrastructure is capital expenditure.

Exam Tip: Focus on asset creation and recurring nature.

Question 54. Write a note on plan and non-plan expenditure of the government with examples.
Answer: Plan expenditure refers to estimated spending on implementing official economic plans and development projects (e.g., funding infrastructure in five-year plans). Non-plan expenditure refers to routine administrative spending on government functioning (e.g., salaries, pensions, defense).
In simple words: Spending on developmental projects is plan expenditure; routine government upkeep is non-plan expenditure.

Exam Tip: Distinguish developmental plan outlays from routine non-plan administrative expenses.

Question 55. Distinguish between developmental and non-developmental expenditure.
Answer:
1. Developmental expenditure relates directly to economic and social development; non-developmental expenditure covers essential general government services.
2. Developmental expenditure contributes directly to national product; non-developmental expenditure provides general administrative or defense support.
3. Example of developmental: Education and health spending; Example of non-developmental: Defense and food subsidies.
In simple words: Spending that directly builds the economy versus spending on basic government administration and defense.

Exam Tip: Contrast social/economic building with administrative upkeep.

Question 56. State four main sources of demand for foreign currency.
Answer:
1. To purchase goods and services from other countries (imports).
2. To send gifts and grants abroad.
3. To purchase financial assets or invest abroad.
4. To speculate on the value of foreign currencies.
In simple words: People demand foreign currency to import goods, travel, invest overseas, or speculate.

Question 57. State three main sources of supply of foreign currencies into the domestic economy.
Answer:
1. Exports of goods and services to foreign countries.
2. Foreign direct and portfolio investments into the domestic country.
3. Remittances and transfers from abroad.
In simple words: Foreign currency enters through our exports, foreign investments, and money sent home by citizens working abroad.

Exam Tip: Contrast supply sources (exports, inflows) with demand destinations (imports, outflows).

Question 58. Differentiate between balance of payments and balance of trade.
Answer:
1. Balance of trade records only visible items (goods); Balance of payments records both visible and invisible items (goods and services) plus capital transfers.
2. Balance of trade is a narrower concept (part of BOP); Balance of payments is a comprehensive wider record.
3. Balance of trade can be in deficit, surplus, or balanced; Balance of payments in totality must always balance.
In simple words: BOT covers goods only, while BOP covers all international economic transactions and always balances overall.

Exam Tip: Emphasize that BOT is a subset of BOP.

Question 59. Explain the components of capital account.
Answer: Capital account records international transactions affecting assets and liabilities. Main components include:
1) Private transactions (individual assets/liabilities)
2) Official transactions (government borrowing and lending)
3) Portfolio investment (buying shares/bonds without control)
4) Direct investment (FDI - acquiring physical assets with control)
In simple words: Tracks cross-border loans, investments, and asset ownership changes.

Exam Tip: List private, official, portfolio, and direct investments.

Question 60. Differentiate between autonomous and accommodating items.
Answer:
1. Autonomous items are international economic transactions undertaken for profit motives, independent of BOP status (above-the-line items).
2. Accommodating items are transactions undertaken to correct BOP imbalances, such as official reserve movements (below-the-line items).
In simple words: Regular business transactions happen autonomously, while official central bank interventions balance out any deficits.

Exam Tip: Mention above-the-line (autonomous) versus below-the-line (accommodating) terminology.

Question 61. Explain any four precautions to be taken in estimating national income by expenditure method.
Answer:
i) Do not include expenditure on intermediate goods to avoid double counting.
ii) Do not include expenditure on second-hand goods since their value was counted when new.
iii) Do not include expenditure on financial assets (shares/bonds) as they represent mere paper claims.
iv) Include imputed value of self-consumed output and owner-occupied houses.
In simple words: Avoid double counting by excluding intermediate items, second-hand sales, and paper shares, while including self-consumption.

Exam Tip: State all four core expenditure method precautions clearly.

Question 62. Explain the steps taken in estimating N.I. by product/value added method.
Answer:
i) Classify all producing units into primary, secondary, and tertiary sectors.
ii) Estimate value of output (\(\text{Sales} + \text{Change in Stock}\)).
iii) Estimate intermediate consumption.
iv) Calculate Gross Value Added (\(GVA_{mp} = \text{Value of Output} - \text{Intermediate Consumption}\)).
v) Deduct depreciation to get Net Value Added (\(NVA_{mp}\)).
vi) Deduct Net Indirect Taxes to get \(NDP_{fc}\).
vii) Add NFIA to reach National Income (\(NNP_{fc}\)).
In simple words: Group industries, calculate value added per sector, subtract costs and taxes, and add foreign income.

Exam Tip: Outline the step-by-step transition from GVA to National Income.

Question 63. Calculate the Gross Domestic Product at market price (\(GDP_{mp}\)) from the given data.
Answer:
Using expenditure method components:
Private final consumption expenditure = 500
Government final consumption expenditure = 200
Gross Domestic Fixed Capital Formation + Change in Stock = (\(210 + 90\)) = 300
Net Exports (Exports - Imports) = \(25 - 40 = -15\)
\(GDP_{mp} = 500 + 200 + 300 + (-15) = \text{Rs. } 1035 \text{ Crores}\).
In simple words: Sum private consumption, government spending, total capital formation, and net exports.

Question 64. Write down some of the limitations of using GDP as an index of welfare of a country.
Answer:
i) Distribution of GDP: High GDP may concentrate wealth in a few hands, leaving general welfare low.
ii) Composition of GDP: Production of harmful goods like weapons increases GDP without increasing societal welfare.
iii) Non-monetary exchanges: Barter and household services improve welfare but are omitted from GDP.
iv) Externalities: Pollution lowers quality of life while industrial output raises GDP.
In simple words: GDP measures total economic production, but ignores inequality, environmental damage, and quality of life.

Exam Tip: Mention income distribution, externalities, and non-monetary transactions.

Question 65. Explain any four functions of money.
Answer:
(i) Medium of exchange: Facilitates smooth transactions without barter limits.
(ii) Measure of value: Serves as a common pricing unit.
(iii) Store of value: Allows savings to be held safely over time.
(iv) Standard of deferred payments: Simplifies future loans and credit contracts.
In simple words: Money acts as a medium of trade, price yardstick, savings store, and credit standard.

Exam Tip: List primary and secondary functions comprehensively.

Question 66. Explain the process of money creation by commercial banks.
Answer: Commercial banks create credit manifold through initial deposits and the Legal Reserve Ratio (LRR).
Total money creation = \(\text{Initial Deposit} \times \frac{1}{\text{LRR}}\)
Example: If LRR is 20% (0.2) and initial deposit is Rs. 10,000, total money created = \(10000 \times \frac{1}{0.2} = \text{Rs. } 50,000\).
In simple words: Banks keep a fraction of deposits as reserves and lend out the rest, setting off a multiplier chain of credit creation.

Exam Tip: Show the money multiplier formula with a clear numerical example.

Question 67. Explain any four functions of a central bank.
Answer:
(i) Monopoly of note issue: Sole authority for issuing currency.
(ii) Banker to the government: Manages government accounts and public debt.
(iii) Banker's bank and supervisor: Holds reserves and provides clearing house facilities.
(iv) Lender of last resort: Provides emergency financial help to commercial banks.
In simple words: The central bank prints money, banks for the government, regulates commercial banks, and rescues troubled banks.

Exam Tip: Highlight note issue and lender of last resort roles.

Question 68. What is bank rate policy? How does it operate as a method of credit control?
Answer: Bank rate is the interest rate charged by the central bank on loans to commercial banks. Raising the bank rate makes borrowing costly, forcing commercial banks to raise lending rates for the public, which curtails credit creation and dampens inflation.
In simple words: Raising central bank lending rates makes loans expensive across the economy, slowing down credit growth.

Exam Tip: Explain the transmission mechanism from central bank to commercial banks to the public.

Question 69. What are open market operations? What is its effect on availability of credit?
Answer: Open market operations refer to the buying and selling of government securities by the central bank. Selling securities absorbs commercial bank reserves and reduces credit availability; buying securities injects liquidity and expands credit.
In simple words: Selling bonds reduces bank lending capacity; buying bonds increases it.

Exam Tip: Relate bond sales/purchases directly to commercial bank reserve contraction/expansion.

Question 70. What is the investment demand function?
Answer: Investment demand function shows the inverse relationship between the rate of interest and investment demand. Higher interest rates lower investment because borrowing becomes expensive relative to expected returns.
In simple words: Businesses invest less when interest rates are high and more when rates are low.

Exam Tip: Emphasize the inverse relation between interest rates and investment.

Question 71. What is deficient demand in an economy? What is its impact on output, employment, and price?
Answer: Deficient demand occurs when AD falls short of AS at full employment. Impact: Output falls, employment reduces due to cutbacks in production, and prices tend to fall.
In simple words: Low spending leads to recessions, layoffs, idle factory capacity, and falling prices.

Exam Tip: Link deficient demand directly to unemployment and recessionary output gaps.

Question 72. What is fiscal policy? What possible fiscal policy measures can be taken with respect to expenditure and income to correct excess demand and deficient demand?
Answer: Fiscal policy is the government's budgetary policy regarding taxation and public spending to combat economic gaps.
- To correct excess demand: Reduce government expenditure and raise taxes.
- To correct deficient demand: Increase government expenditure and reduce taxes.
In simple words: Adjusting government spending and taxes to cool down inflation or stimulate lagging economies.

Exam Tip: Clearly separate measures for excess demand versus deficient demand.

Question 73. Explain the concept of deflationary gap. Explain any two measures by which a Central Bank can attempt to reduce the gap.
Answer: Deflationary gap is the shortfall in aggregate demand below the full employment level. Two central bank measures to reduce it:
1. Lowering the Bank Rate: Makes borrowing cheap, expanding credit and aggregate demand.
2. Buying Government Securities (Open Market Operations): Injects purchasing power into the banking system, expanding credit.
In simple words: Cutting interest rates and buying bonds injects money into the economy to boost spending during recessions.

Exam Tip: Explain both bank rate cuts and open market purchases.

Question 76. Define govt. budget. Explain briefly any three of its objectives.
Answer: Government budget is an annual financial statement showing estimated receipts and expenditures. Three key objectives:
(i) Redistribution of income and wealth through progressive taxation and welfare subsidies.
(ii) Reallocation of resources to balance public welfare and private profit motives.
(iii) Economic stability to prevent business cycles, inflation, and depression.
In simple words: An annual spending plan designed to promote growth, reduce inequality, and stabilize the economy.

Exam Tip: Focus on redistribution, resource allocation, and economic stability.

Question 77. What is a tax? Explain with suitable examples the basis of classifying taxes into direct and indirect taxes.
Answer: Tax is a compulsory financial payment imposed by the government. Classification is based on incidence and burden shifting:
- Direct taxes: Incidence and burden fall on the same person (e.g., Income tax).
- Indirect taxes: Incidence is on one person but burden is shifted to another (e.g., GST / Sales tax).
In simple words: Mandatory government levies that are either paid directly out of your income or hidden inside product prices.

Exam Tip: Emphasize burden shifting as the core classification criterion.

Question 78. Distinguish between revenue expenditure and capital expenditure with examples.
Answer: Revenue expenditure creates no assets and reduces no liabilities (e.g., salaries, pensions). Capital expenditure creates assets or reduces liabilities (e.g., constructing roads, bridges).
In simple words: Routine operational expenses vs. long-term asset building investments.

Exam Tip: Provide distinct examples for each.

Question 79. What is meant by fiscal deficit? What are its implications?
Answer: Fiscal deficit is the excess of total expenditure over total receipts excluding borrowings. Implications:
(i) Leads to massive debt burdens and future repayment liabilities.
(ii) Generates inflationary pressures.
(iii) Increases foreign dependency.
(iv) Hampers long-term economic growth.
In simple words: Borrowing gaps cause heavy debt burdens, inflation, and foreign dependence.

Exam Tip: List both definition and at least three negative economic implications.

Question 80. Explain how foreign exchange rate is determined under a flexible exchange rate system. Use diagram.
Answer: Under a flexible exchange rate system, equilibrium exchange rate is determined where market demand for foreign exchange equals supply of foreign exchange. Graphically, it is the intersection point of downward-sloping demand and upward-sloping supply curves.
In simple words: Currency exchange rates are set naturally where foreign currency demand matches supply.

Exam Tip: Draw demand and supply curves intersecting at the equilibrium exchange rate.

Question 81. Give the meanings of (i) fixed exchange rate, (ii) flexible exchange rate, (iii) managed floating.
Answer:
(i) Fixed exchange rate: Pegged and officially maintained by the government.
(ii) Flexible exchange rate: Freely determined by market demand and supply forces.
(iii) Managed floating: Determined by market forces with central bank intervention to prevent extreme currency fluctuations.
In simple words: Exchange rates are either government-pegged, purely market-driven, or managed via central bank interventions.

Exam Tip: Define all three exchange rate systems clearly.

Question 82. Distinguish between current account and capital account of balance of payments account. Mention any two transactions of capital account.
Answer: Current account records trade in goods, services, and unilateral transfers. Capital account records international transactions affecting assets and liabilities. Two capital account transactions: 1) Foreign Direct Investment (FDI), 2) External commercial borrowings.
In simple words: Current account tracks trade and services; capital account tracks investments and loans.

Question 83. Distinguish between visible and invisible items in the BOP. Give one example of each.
Answer: Visible items refer to physical goods exported and imported (e.g., Tea, Machinery). Invisible items refer to non-physical services rendered or received internationally (e.g., Shipping, Banking services).
In simple words: Tangible goods you can touch vs. intangible services.

Six Marks Questions (6M)

Question 1. Explain the effect of the following on quantity demanded: A. Income of the consumer, B. Price of related goods.
Answer:
A. Income of consumer:
- Normal goods: Direct relationship (rise in income increases demand).
- Inferior goods: Inverse relationship (rise in income decreases demand).
B. Price of related goods:
- Substitute goods: Direct relationship (rise in price of tea increases demand for coffee).
- Complementary goods: Inverse relationship (rise in price of cars decreases demand for petrol).
In simple words: Consumer demand shifts based on whether incomes rise and how substitute or complementary product prices change.

Exam Tip: Structure your 6-mark answer by dividing it cleanly into Income effects (Normal vs Inferior) and Related goods effects (Substitutes vs Complements).

Question 2. State the causes of increase in demand and explain any two of them.
Answer: Causes include rising consumer income, increase in prices of substitute goods, fall in prices of complementary goods, and favorable tastes. Detailed explanation of two:
1. Increase in consumer income: Higher income boosts purchasing power, allowing consumers to buy more goods at the same price, shifting demand right.
2. Rise in substitute goods price: When a substitute becomes expensive, consumers switch to the given good, driving up its demand.
In simple words: More income or costlier substitutes cause consumers to buy more of a product.

Question 3. Define equilibrium price and explain its determination with the help of diagram and schedule.
Answer: Equilibrium price is the price where market demand equals market supply. At prices above equilibrium, excess supply causes competition among sellers, lowering the price. At prices below equilibrium, excess demand causes competition among buyers, raising the price. Equilibrium settles where demand equals supply.
In simple words: Market forces automatically push prices to the exact point where buyers and sellers agree.

Exam Tip: Include a schedule, diagram, and the market adjustment process (excess demand / excess supply chain reactions) to secure full marks.

Question 4. Explain the implication of the following features of monopolistic competition: A) Differentiated products, B) Freedom of entry and exit of firms.
Answer:
A) Differentiated products: Products differ in branding, design, and packaging. Implication: Each firm enjoys some degree of monopoly power and can influence its product price.
B) Freedom of entry and exit: Firms face no barriers entering or leaving the industry. Implication: In the long run, firms earn only normal profits and cannot sustain supernormal profits.
In simple words: Unique product branding gives firms partial price control, while easy market entry prevents long-term monopoly profits.

Question 5. With the help of a diagram, explain the effect of a decrease in demand of a commodity on its equilibrium price and quantity.
Answer: A decrease in demand shifts the demand curve to the left while supply remains constant. This creates excess supply at the initial price, triggering price cuts by sellers. As price falls, quantity supplied contracts until a new lower equilibrium price and quantity are established.
In simple words: Lower demand creates a surplus, forcing sellers to lower both prices and production volumes.

Question 6. Explain the Law of Variable Proportions with the help of a schedule and diagram.
Answer: The law states that as more units of a variable factor (labor) are combined with fixed factors (land/capital), total physical product (TPP) initially increases at an increasing rate (Stage I), then at a diminishing rate (Stage II), and finally declines (Stage III). Correspondingly, marginal physical product (MPP) rises, falls to zero, and turns negative.
In simple words: Adding more workers initially boosts output efficiently, but eventually leads to overcrowding and falling productivity.

Exam Tip: Clearly delineate the three stages (I, II, and III) based on MPP behavior (positive, zero, negative).

Question 7. Explain the consumer's equilibrium in case of two commodities using the Indifference Curve approach.
Answer: Consumer equilibrium occurs at the point where the budget line is tangent to the highest possible indifference curve. At this tangency point:
\(\text{MRS} = \frac{P_x}{P_y}\)
Additionally, the indifference curve must be convex to the origin.
In simple words: Consumers maximize happiness where their budget line touches the highest possible indifference curve.

Exam Tip: Mention both conditions: tangency condition (\(\text{MRS} = P_x/P_y\)) and convexity condition.

Question 8. Explain the producer's equilibrium with the help of the MC and MR approach.
Answer: A producer is in equilibrium when profits are maximized. Conditions for producer equilibrium:
1. \(\text{MR} = \text{MC}\)
2. \(\text{MC}\) must be rising after the equilibrium output level (or MC curve cuts MR from below).
In simple words: Producers maximize profit where the extra revenue from the last item equals its extra production cost, provided costs are rising.

Exam Tip: State both conditions clearly; failing to mention that MC must be rising loses marks.

Question 10. From the following data, calculate National Income by (a) Income Method, (b) Expenditure Method.
Answer:
(a) Income Method:
Compensation of Employees = 800
Profit = 500
Rent = 200
Interest = 150
Mixed Income = 630
\(NDP_{fc} = 800 + 500 + 200 + 150 + 630 = 2280\)
\(NNP_{fc} (\text{National Income}) = NDP_{fc} + \text{NFIA} (20) = \text{Rs. } 2300 \text{ Cr}\).

(b) Expenditure Method:
Private Final Consumption Expenditure = 1200
Govt. Final Consumption Expenditure = 800
Net Domestic Capital Formation = 500
Net Exports = -30
\(NDP_{mp} = 1200 + 800 + 500 + (-30) = 2470\)
\(NNP_{mp} = 2470 + 20 ( \text{NFIA} ) = 2490\)
\(NNP_{fc} = NNP_{mp} - \text{Net Indirect Tax} (190) = \text{Rs. } 2300 \text{ Cr}\).
In simple words: Both methods yield the exact same national income of Rs. 2300 crores.

Exam Tip: Double-check that both methods reconcile to the exact same final national income value.

Question 11. Calculate \(GDP_{mp}\) by (a) Product Method and (b) Income Method.
Answer:
(a) Product Method:
Value of Output = \(1000 (\text{Primary}) + 900 (\text{Secondary}) + 700 (\text{Tertiary}) = 2600\)
Intermediate Consumption = \(500 + 400 + 300 = 1200\)
\(GVA_{mp} = 2600 - 1200 = 1400 \text{ Cr} = GDP_{mp}\).

(b) Income Method:
Compensation of Employees (400) + Mixed Income (650) + Operating Surplus (300) = \(NDP_{fc} = 1350\)
\(GDP_{fc} = NDP_{fc} + \text{Depreciation} (40) = 1390\)
\(GDP_{mp} = GDP_{fc} + \text{Net Indirect Tax} (10) = \text{Rs. } 1400 \text{ Cr}\).
In simple words: Product and income methods both arrive at a GDP of Rs. 1400 crores.

Question 12. In an economy, aggregate demand is less than aggregate supply. Is the economy in equilibrium? If not, explain the changes that will bring the economy into equilibrium.
Answer: No, the economy is not in equilibrium. When AD < AS, producers face unsold inventory piling up. To clear unsold stock, producers cut back on production and factor employment. This reduces national income until aggregate demand equals aggregate supply, restoring equilibrium.
In simple words: Unsold goods force businesses to cut production and lay off workers until spending matches output.

Exam Tip: Explain the involuntary inventory accumulation and subsequent output cutback mechanism.

Question 13. Explain the equilibrium level of income with the help of savings and investment function. If planned savings exceed planned investment, what changes will bring about equality between them?
Answer: Equilibrium income occurs where planned savings equal planned investment (\(S = I\)). If planned savings exceed planned investment (\(S > I\)), households are spending less than businesses produce. Unsold goods accumulate, forcing producers to cut output and income until savings drop to equal investment.
In simple words: If people save more than firms invest, goods pile up and national income falls until balance is restored.

Question 14. Discuss the fiscal and monetary measures taken by the government to correct disequilibrium between AD and AS.
Answer:
Fiscal Measures:
- Inflation (\(\text{AD} > \text{AS}\)): Raise taxes and reduce public expenditure.
- Deflation (\(\text{AD} < \text{AS}\)): Lower taxes and increase public expenditure.
Monetary Measures:
- Inflation: Raise bank rates, increase CRR/SLR, and sell government securities.
- Deflation: Lower bank rates, reduce CRR/SLR, and buy government securities.
In simple words: Combine tax and spending adjustments with central bank interest rate and reserve policy to stabilize aggregate demand.

Exam Tip: Structure your answer clearly under Fiscal Policy (tax/spending) and Monetary Policy (bank rate/CRR/OMO).

Question 15. Will the following be included in the National Income of India? Give reasons.
1) Salaries paid to non-resident Indians working in Indian Embassy in America. No, because it is part of factor income to abroad / foreign embassy income.
2) Profits earned by an Indian bank from its branches abroad. Yes, included as part of factor income from abroad.
3) Scholarships given by Govt. of India. No, excluded because it is a transfer payment.
In simple words: Exclude foreign embassy salaries and government scholarships; include foreign branch profits.

Question 16. While estimating National Income, how will you treat the following? Give reasons.
1) Imputed rent of self-occupied house: Included (treated as factor payment for housing services rendered to oneself).
2) Interest received on debentures: Included (part of interest factor income).
3) Financial help received by flood victims: Not included (transfer payment).
4) Old age pension: Not included (transfer payment).
In simple words: Include imputed rent and debenture interest; exclude flood aid and old-age pensions.

Question 17. What precautions are to be taken while calculating national income by income method and value added method?
Answer:
Income Method Precautions:
1. Exclude transfer payments.
2. Exclude illegal incomes (smuggling, gambling).
3. Exclude capital gains and second-hand goods sales.
4. Include imputed rent and self-consumed output.
Value Added Method Precautions:
1. Exclude intermediate goods to prevent double counting.
2. Exclude second-hand goods transactions.
3. Include self-consumption output.
In simple words: Avoid double counting and illegal transactions, while capturing imputed values and factor incomes.

Question 18. Distinguish between: a. Intermediate goods and final goods, b. Net domestic product and Gross national product, c. Factor income and transfer income.
Answer:
a. Intermediate goods are used for further production within the production boundary; final goods are used for final consumption.
b. NDP excludes depreciation and domestic territory limits; GNP includes depreciation and net factor income from abroad.
c. Factor income is earned by rendering productive services; transfer income is received without any productive service.
In simple words: Differentiate based on production stages, depreciation/foreign factors, and productive work vs. gifts.

Exam Tip: Tabulate all three comparisons clearly.

Question 19. Give an outline of the steps involved in the estimation of National Income with the help of Income Method.
Answer:
First step: Identify and classify producing enterprises into primary, secondary, and tertiary sectors.
Second step: Estimate factor incomes (Compensation of Employees, Rent & Royalty, Profit, Interest, Mixed Income) to arrive at Net Domestic Income (\(NDP_{fc}\)).
Third step: Add Net Factor Income from Abroad (NFIA) to \(NDP_{fc}\) to obtain National Income (\(NNP_{fc}\)).
In simple words: Classify sectors, sum up factor incomes to get domestic income, and add foreign income for national income.

Exam Tip: Mention the three distinct operational steps in sequence.

Question. What is opportunity cost?
Answer: Opportunity cost refers to the cost of the next best alternative foregone.

Question. Define Marginal rate of transformation.
Answer: It is the amount of one good that must be given to produce one additional unit of a second good. It is also known as marginal opportunity cost.

Question. Give two examples of Micro economic variables/ studies.
Answer: a. Individual demand
b. Individual savings

Question. Why does an economic problem arise?
Answer: It is due to unlimited wants and limited resources.

Question. What is meant by inferior goods in economics?
Answer: Inferior goods refer to those goods whose demand decreases with rise in income of the consumer.

Question. Define budget line.
Answer: Budget line shows all combinations of two goods that a consumer can buy with his income at a given price.

Question. What is a demand schedule?
Answer: It is a tabular representation of different quantities demanded at different levels of prices 8. Define normal goods.
Normal goods are those goods whose demand rises with increase in income of consumer.

Question. Define indifference curve.
Answer: It shows the various combinations of two goods which provide same level of satisfaction to the consumer.

Question. Define price elasticity of demand.
Answer: Price elasticity of demand refers to the degree of responsiveness of the quantity demanded to changes in price.
Ed = ΔQ/ΔP X P/Q

Question. Define production function.
Answer: It refers to the functional relationship between inputs and outputs.

Question. Define Marginal physical product.
Answer: It refers to the addition made to the total product

Question. Define revenue.
Answer: It refers to total money income from the sale of output

Question. Define marginal revenue.
Answer: It refers to the addition made to the total revenue.

Question. Why is the ATC greater than AVC
Answer: ATC is greater than AVC because ATC includes AVC and AFC

Question. Define fixed cost.
Answer: Fixed costs refer to cost which remains constant as output changes. For e.g.: rent

Question. Define equilibrium price.
Answer: Equilibrium price refers to a price at which market demand and market supply are equal.

Question. In which market form the products are differentiated.
Answer: Monopolistic competition

Question. In which market form a firm is a price taker?
Answer: Perfect competition

Question. Why is demand curve under oligopoly indeterminate (uncertain)?
Answer: Demand curve is indeterminate because of price war between the sellers.

Question. Define Macro Economics?
Answer: Macro economics studies the economy as a whole.

Question. What is an Economic Territory?
Answer: It refers to the area of a country where there is free movement of goods, human resources and capital.

Question. Who is a normal resident?
Answer: A persons or an institution who lives in a country and whose centre of interest lies in that country is called a normal resident of that country.

Question. Is transfer income included in national income? Why?
Answer: No, because transfer income does not result in the production of goods and services.

Question. What is meant by Cash Reserve Ratio (CRR)?
Answer: It is the percentage of net deposits of the commercial bank which are maintained by the RBI

Question. What is meant by Bank rate?
Answer: It is the rate at which the central bank lends money to the commercial bank.

Question. What is meant by double coincidence of wants?
Answer: It means that one person‘s desire to buy and sell must coincide with the other person‘s desire to buy and sell.

Question. What is legal tender money?
Answer: Money that is declared legally as a medium of exchange by the government is called legal tender money.

Question. Define involuntary unemployment.
Answer: Involuntary unemployment refers to a situation in which people who are willing to work are unable to get work

Question. What is the relationship between MPC and MPS?
Answer: MPC + MPS = 1

Question. What is meant by excess demand (inflationary gap)?
Answer: Excess demand occurs when AD is greater than AS at the level of full employment equilibrium

Question. What is deficient demand (deflationary gap)?
Answer: Deficient demand arise when AD is less than AS at the level of full employment equilibrium

Question. What is meant by autonomous investment?
Answer: Investment which is made without depending on the profit of the enterprise.

Question. Define multiplier.
Answer: Multiplier is the ratio of change in income to the change in investment 
Multiplier (k) = ΔY/ΔI

Question. Define government budget.
Answer: Government budget shows the estimated receipts and estimated expenditure of the government for one year.

Question. Define revenue deficit in government budget.
Answer: When the revenue expenditure of the government is greater than the revenue receipts it is called revenue deficit Revenue expenditure > Revenue receipts

Question. What is primary deficit?
Answer: Primary deficit is the difference between fiscal deficit and interest payments made by the government Primary deficit = Fiscal deficit – Interest payments

Question. What is fiscal deficit?
Answer: When the total government expenditure is greater than total government receipts excluding borrowing it is known as fiscal deficit.
Fiscal deficit = Total Government Expenditure – Total Government Receipt (excluding borrowings)

Question. What is meant by foreign exchange rate?
Answer: Foreign exchange rate refers to the rate at which one currency is exchanged for another currency

Question. Name the two accounts in the balance of payments
Answer: a. Current account: It shows the imports and exports of goods and services and transfer payments
b. Capital Account: It shows the assets and liabilities of the government

Question. Why a production possibility curve is concave?
Answer: It is due to increasing marginal opportunity cost.

Question. What is primary deficit?
Answer: Primary deficit= fiscal deficit – interest payment.

Question. What is revenue deficit?
Answer: When revenue expenditure is more than revenue receipts.

Question. A rise in the price of a goods, results in an increase in expenditure on it. Is its demand elastic or inelastic?
Answer: Inelastic because there is direct relation between price and expenditure.

Question. What is consumption function?
Answer: The relationship between income and consumption is called consumption function.

Question. What is saving function?
Answer: The relationship between income and saving is called saving function.

Question. What is Barter system?
Answer: Exchange of goods for goods is called barter system.

Question. Define APC?
Answer: APC= C/Y.The ratio of income to consumption is called APC.

Question. Define APS?
Answer: APS=S/Y .The ratio of income to saving is called APS.

Question. What is excess demand?
Answer: When AD>AS at the full employment level.

Question. What is deficient demand?
Answer: When AD<AS at the full employment level.

Question. A rise in the income of the consumer X leads t a fall in the demand for that good by the consumer .What is the good X called?
Answer: Normal good.

Question. When demand for good falls due to rise in its own price. What is the change in demand called?
Answer: Contraction of demand.

Question. What happens when demand and supply curve don‟t intersect each other?
Answer: Economically non –viable industry.

Question. What is abnormal profit?
Answer: It is the profit earned over and above normal profit.

Question. What is break- even price?
Answer: It is the price at which firms make zero normal profit.

Question. What is cartel?
Answer: It is a group of firms which jointly sets output and price so as to exercise monopoly control.

Question. What are patent rights?
Answer: It is an exclusive license or right granted to a company or an Individual to produce a particular product or use a particular technology.

Question. What are advertising costs/persuasive advertising?
Answer: When the expenditure incurred by a find to persuade the potential consumer to present their brands/products as different/ better compared to other brands/products is known as advertising costs/persuasive advertising.

Question. What is induced investment?
Answer: It is a kind of investment which is profit motive in nature.

Question. What is autonomous /public investment?
Answer: It is a kind of investment which is not profit motivated.

Question. What is linear consumption function?
Answer: It is a consumption function which is given on the basis of constant marginal propensity to consume.
C=c+bY
Where c =autonomous consumption
B=marginal propensity to consume.

Question. What is the relationship between APC and APS?
Answer: APC+APS=1.

Question. What is the relationship between MPC and MPS?
Answer: MPC+MPS=1.

Question. What is the relationship between multiplier and MPC?
Answer: The value of multiplier varies directly with MPC.
K=1/1-MPC.

Question. What is multiplier?
Answer: It is the no. by which change in investment must be multiple in order to determine the resulting change in income and output.

Question. What is fiscal deficit?
Answer: When TE(RE+CE)>TR(RR+CR)of the govt.,excluding borrowing. It is called fiscal deficit .

Question. What does fiscal deficit in govt. budget mean?
Answer: It means more borrowing on the part of the govt.

Question. What is deficit budget?
Answer: When expenditure of the govt. is more than its receipts, it is called deficit budget.

Question. What is surplus budget?
Answer: When receipts of the govt. are more than its receipts, it is called surplus budget.

Question. Why borrowing treated as capital receipts?
Answer: Because it increases the liability of the govt.

Question. Why payment of interest treated as revenue expenditure?
Answer: Because it does not cause any reduction in liability of govt.

Question. What is factor market?
Answer: It consists of factors of production namely land, labour, capital and organization.

Question. Define product market?
Answer: It consists of final goods and services.

Question. What is the alternative name of micro economics?
Answer: Price theory

Question. What is the alternative name of macro economics?
Answer: Income theory.

Question. Why is change in stock is considered a part of final expenditure?
Answer: Unsold stocks left with producers are assumed as purchased by the producers themselves.
That is why it is treated as investment expenditure by the producers.

Question. The balance of trade shows a deficit of Rs 300 crore.The values of exports are Rs 500 crore. What is the value of imports?
Answer: Since Balance of trade=Export-Import
300=500-Import
Import=300+500=800crore

Question. Why does an economic problem arises?
Answer: It arises due to
1) Scarcity of resources.
2) Alternative uses of resources.
3) Unlimited wants and limited resources.

Question. Define opportunity cost?
Answer: It is the cost of foregone alternative.

Question. What was rightward shift of PPC indicate?
Answer: It indicates growth of resources.

Please refer to the link below for CBSE Class 12 Economics Quick Revision Questions