CBSE Class 12 Economics Introduction To Micro Economics VBQs Set 02

Objective Type Questions (Remembering & Understanding based Questions)

A. Multiple Choice Questions

Choose the correct option:

Question. Macroeconomics is concerned with:
(a) the level of output of goods and services in the economy
(b) the general level of prices
(c) GDP growth
(d) All of the options
Answer: (d) All of the options

Question. Study of general price level is a subject matter of:
(a) microeconomics
(b) macroeconomics
(c) both (a) and (b)
(d) None of the options
Answer: (b) macroeconomics

Question. Aggregation is involved in:
(a) microeconomics
(b) macroeconomics
(c) both (a) and (b)
(d) None of the options
Answer: (c) both (a) and (b)

Question. Economic agents include:
(a) government
(b) consumers
(c) producers
(d) All of the options
Answer: (d) All of the options

Question. Which of the following statements is associated with general equilibrium analysis?
(a) Equilibrium in the market of gold ornaments
(b) Equilibrium across all markets in the economy
(c) Equilibrium price of a good in the competitive market
(d) None of the options
Answer: (b) Equilibrium across all markets in the economy

B. Fill in the Blanks

Choose appropriate word and fill in the blank:

Question. Aggregate demand is not a ________ variable. (micro/macro)
Answer: micro

Question. ________ is related to the economy as a whole. (Microeconomics/Macroeconomics)
Answer: Macroeconomics

Question. Study of price behaviour in India will come under the preview of ________. (microeconomics/macroeconomics)
Answer: macroeconomics

Question. Monetary and fiscal policies of the government are a part of ________ analysis. (microeconomic/macroeconomic)
Answer: macroeconomic

Question. From the viewpoint of economy, saving leads to ________ in aggregate demand. (rise/fall)
Answer: fall

Question. Allocation of resources is the central issue in ________. (microeconomics/macroeconomics)
Answer: microeconomics

Question. Determination of overall level of output is the central issue in ________. (microeconomics/macroeconomics)
Answer: macroeconomics

C. True or False

State whether the following statements are True or False:

Question. Microeconomics studies the problem of scarcity and choice at the level of economy as a whole.
Answer: False

Question. General equilibrium relates to macroeconomics.
Answer: True

Question. Output of a firm is not a macro variable.
Answer: True

Question. Aggregation is involved only in macroeconomics.
Answer: False

Question. If an individual saves more, he adds to his future prosperity. However, if an economy saves more, it may be driven towards future poverty.
Answer: True

Question. What is logical at the macro level may not be true at the micro level.
Answer: True

Question. A profit-maximising firm is not an economic agent.
Answer: False

D. Matching the Correct Statements

Question. From the set of statements given in Column I and Column II, choose the correct pair of statements:
Column I
(a) General equilibrium
(b) Commodity market
(c) Microeconomics
(d) Problem of unemployment in India
(e) Macroeconomics
Column II
(i) Microeconomics
(ii) Partial equilibrium
(iii) Total output and employment are taken as constant
(iv) A microeconomic activity
(v) Study of price behaviour of a firm
Answer: (c) Microeconomics—(iii) Total output and employment are taken as constant

Question. Identify the correct sequence of alternatives given in Column II by matching them with respective items in Column I.
Column I
(a) Macro
(b) National income
(c) Partial equilibrium
(d) Microeconomics
(e) Determination of overall level of output
Column II
(i) Limited degree of aggregation of economic variables
(ii) Central issue of macroeconomics
(iii) Means large
(iv) Equilibrium in one market
(v) A macroeconomic variable
Answer: (a)—(iii), (b)—(v), (c)—(iv), (d)—(i), (e)—(ii)

E. 'Very Short Answer' Objective Type Questions

Question. Define macroeconomics.
Answer: Macroeconomics is the study of economic relationships, economic problems or economic issues at the level of economy as a whole, like the problem of inflation or of unemployment.

Question. Define microeconomics.
Answer: Microeconomics is the study of economic relationships, economic problems or economic issues at the level of an individual like a consumer, or a producer.

Question. Give two examples of macroeconomic studies.
Answer: (i) Study of price behaviour in India, and (ii) Study of unemployment in India.

Question. Give two examples of microeconomic studies.
Answer: (i) Study of consumer behaviour: consumer equilibrium & law of demand, and (ii) Study of price determination in the commodity market.

Question. Give two examples of macroeconomic variables.
Answer: (i) Aggregate supply, and (ii) Aggregate demand.

Question. What is meant by economic agents?
Answer: Economic agents are the individuals or institutions who take economic decisions.

Reason-based Questions (Comprehension of the Subject-matter)

Read the following statements carefully. Write True or False with a reason.

Question. Study of the problem of unemployment in India is considered a microeconomic study.
Answer: False. Problem of unemployment in India is an economic issue at the level of economy as a whole, hence considered as macroeconomic study.

Question. Aggregation is involved only in macroeconomics.
Answer: False. The difference lies in the degree of aggregation. While in microeconomics, aggregation is done at the level of an individual household, an individual industry or an individual market, in macroeconomics, aggregation is done at the level of an economy as a whole.

Question. Monetary and fiscal policies of the government are a part of macroeconomic analysis.
Answer: True. Both these policies are related to issues of growth and development at the level of the economy as a whole.

Question. Aggregate demand in macroeconomics is identical with market demand in microeconomics.
Answer: False. Aggregate demand is the sum total of demand for all the goods and services in the economy whereas market demand refers to demand for a particular commodity in the market.

Question. 'Save more' is always a virtue.
Answer: False. Saving is a virtue at the micro level but not necessarily at the macro level. Because, greater saving implies lesser expenditure, lesser demand and therefore lower inducement to invest.

Question. Problem of scarcity and choice ceases to exist at the macro level when resources of the entire nation are pooled together.
Answer: False. Even if resources of the entire nation are pooled together, these continue to be scarce in relation to the aggregate demand of the economy.

HOTS & Applications

Question. Macroeconomics is the study of aggregates while microeconomics is not. Comment.
Answer: It is wrong to state that there is no aggregation in microeconomics. It is in microeconomics that we study concepts like market demand which is the aggregate of individual demand for a commodity. However, the difference lies in the degree of aggregation. While in microeconomics, aggregation is done at the level of an individual household, an individual industry or an individual market, in macroeconomics, aggregation is done at the level of an economy as a whole.

Question. What is true at the micro level may be a paradox at the macro level? Explain with an example.
Answer: What is true at the micro level may not be true at the macro level. This is the meaning of paradox. Example: Saving is a virtue for an individual. If he saves more, he accumulates more wealth and therefore enhances his ability to earn more. But at the macro level, if everyone starts saving more, demand for goods and services may decline to the extent that there is no inducement to invest. Consequently, income and production level may reduce.

Question. Do you think that the general price level is of any relevance at the micro level?
Answer: General price level is a macro issue. But it is of great significance at the micro level. An individual producer would always monitor the trend path of the general price level. If prices are rising, business expectations are high. It induces investment. If, on the other hand, prices are falling, business expectations turn to be sluggish. Inducement to invest is hurt. Accordingly, investment is reduced.

Analysis & Evaluation

Question. What may happen if savings are encouraged in an economy?
Answer: Increased savings are not good for the economy because (in absence of increased investment) they cause a fall in the level of AD (aggregate demand), because of which the level of employment or output may fall. However, if increased savings are mobilised and converted into capital formation they become instrumental in the growth of economy by boosting the level of employment or output or income.

Question. What do you think is the significance of macroeconomic agents in the economy? Support your answer with example.
Answer: Macroeconomic agents refer to the institutions as decision-makers in the economy. RBI (Reserve Bank of India) is an example of macroeconomic agent in India. The RBI plays a significant role in monitoring the supply of money in the economy. Excess supply of money may lead to inflation while deficient supply may lead to deflation. By regulating the supply of money, the RBI combats the situations of inflationary and deflationary gaps in the economy.

NCERT Questions (With Hints to Answers)

Question. What is the difference between microeconomics and macroeconomics?
Answer: (i) Microeconomics studies economic issues or economic problems at the level of an individual—an individual firm, an individual household or an individual consumer. On the other hand, macroeconomics studies economic issues or economic problems at the level of an economy as a whole. (ii) Allocation of resources to different uses is the central issue in microeconomics. On the other hand, determination of the level of output and employment is the central issue in macroeconomics. (iii) There is a smaller degree of aggregation in microeconomics. Example: We study output behaviour of an industry which is aggregate of all the firms producing a particular commodity. On the other hand, there is a larger degree of aggregation in macroeconomics. Example: We study national output which is aggregate of output of all the producing units in the economy.

Question. Describe the Great Depression of 1929.
Answer: It was precisely in 1929 that great depression affected developed economies of the capitalistic world. Its impact continued almost for the entire decade of 30's. During that worldwide depression, there was a persistent fall in the level of employment and output. In USA, unemployment shot up from 3% to 25% between the period 1929-33. Fall in employment was accompanied with a fall in GDP. Between the period 1929-33, GDP in USA fell by about 33%.

DOs and DON'Ts

• Do not ever conclude that there is no aggregation of economic units in microeconomics (or that, there is aggregation of economic units only in macroeconomics). There is aggregation of economic units in microeconomics as well, though to a limited extent. Thus, when we study equilibrium of the industry (or market equilibrium), we are focusing on aggregation of the firms.
• Do not ever consider a situation as good or bad both at the micro and macro levels. What is good at the micro level may not be good at the macro level. Thus, an individual producer may find production of liquor as more profitable business than the production of clean domestic fuel. But at the level of the economy as a whole, the government may discourage the production of liquor through heavy taxation, and encourage the production of clean domestic fuel through subsidy.

Ability Zone: Emergence of Macroeconomics as a Separate Branch of Economics

Great Depression of 1930's is a landmark event that led to the emergence of macroeconomics as a separate branch of economics. It does not mean that the concept of macroeconomics did not exist prior to this event. But, macroeconomics (prior to the Great Depression) was considered more like an extension of microeconomics: it did not exist as a separate (or specialised) branch of economics. Of course, there was a reason to it:

It was believed by the (classical) economists that the principles of microeconomics were enough to explain the behaviour of the economy as a whole. The argument runs like this:

• Microeconomics teaches us that (in pursuit of self-interest) every individual (in a market economy or a free economy) maximises his satisfaction with his given income.
• Maximisation of individual satisfaction (or welfare) implies the maximisation of welfare of all the individuals in the economy. It implies maximisation of social welfare.
• If social welfare is maximised, the scarce resources in the economy must have been optimally utilised.
• Microeconomics further teaches us that in a free economy (or under perfect competition), all markets tend to be in a state of equilibrium. Thus, in the labour market \( S_L = D_L \) (supply of labour = demand for labour). It is a situation of full employment.