CBSE Class 12 Economics Determination of Income And Employment VBQs

DETERMINATION OF INCOME AND EMPLOYMENT

1. ―Investment demand includes financial investment like purchase of shares from secondary market‖. Do you agree?

Ans: The term investment here refers to real investment, not the financial investment. Real investment is concerned with the increase in stock of capital assets such as machines, tools, equipment, inventories and also fixed assets. Therefore investment demand does not include financial investments.

2. If in an economy seasonal-unemployment exists with voluntary unemployment, is it a situation of full employment?

Ans: Yes, it is a situation of full employment. Full employment is a situation in which there is no involuntary unemployment. If seasonal unemployment exists, they can be absorbed in alternative employment opportunities.

3. If disposable income increases what happens to household consumption expenditure?

Ans: Household consumption expenditure has a tendency to increase with the increase in disposable income, but at lesser rates than the rate of increase of income.

4. Rising inflation is a matter of corners for the Govt. in India. Suggest four measures to control inflation?

Ans: (i) Increase in the bank rate.

(II) Increase in reserve ratio

(III) Increase in taxation

(IV) Increase in margin requirement.

5. Assume that in India general price level is falling. Suggest four measures to raise the price level?

Ans: (a) Decrease in tax rates

(b)Increase in public expenditure

(c) Reduction in bank rate

(d)Decrease is reserve ratio

6. ―MPC falls with successive increase in the level of income‖. It is true always?

This may be true if there is equitable distribution of income. But, if there is unequal distribution of income the MPC will be high for a poor person as he needs to spend more to fulfill his requirements.

Important Questions for Class 12 Economics Determination of Income and Employment

Question. Explain various instruments of monetary policy to control excess demand/ inflationary gap.
Ans. Monetary policy refers to the policy used by central bank to control and regulate money supply and credit in the economy. It includes following instruments: –

a) Quantitative instruments
(i) Bank rate: It is the rate at which central bank lends to commercial banks or discounts first class bills and securities of commercial banks for long-term needs.
In the situation of excess demand, central bank increase bank rate. It will further increase interest rate by commercial bank, so credit will become costlier and it will discourage the people to borrow from commercial banks. As a result, excess demand can be controlled.
(ii) Open market operations: It refers to buying and selling of government securities by central bank in open market. In the situation of excess demand, central bank sells government securities to commercial banks. So, it will decrease availability of funds available for credit with the banks, and it will result contraction of credit and thereby reduce AD of goods and services.
(iii) Capital Reserve Ratio(CRR): It is the percentage of total deposits which commercial bank has to keep with central bank in the form of reserves.
In the situation of excess demand, central bank increases CRR. It means bank must keep more percentage of deposits with central bank as reserve. So, it will decrease the capacity of commercial banks for credit. Thus, contraction of credit will help in controlling excess demand.
(iv) Statutory Liquidity Ratio(SLR): It is the percentage of total deposits which a commercial bank must keep with itself in the form liquid assets.
In the situation of excess demand, central bank increases SLR. It means more percentage of bank deposits has to keep by the bank itself. Thus, availability of funds for credit will decrease. So, contraction of credit will control excess demand.

b) Qualitative instruments
(i) Marginal requirement: It is the difference between value of securities offered against loan and amount of loan sanctioned.
In the situation of excess demand, central bank increases marginal requirement. It means less amount of loan will be sanctioned against the security offered to bank. So, it will result contraction of credit and helps to control excess demand.
(ii) Moral suasion: It refers to written or oral instruction given by central bank to commercial banks either for expansion or contraction of credit. In the situation of excess demand, central bank may compel commercial banks to reduce availability of credit.

Question. What do you mean by full employment equilibrium?
Ans. Full Employment Equilibrium refers to that situation when AD=AS at full employment. At this level, all economic resources are fully utilized with zero involuntary unemployment.

Question. What do you mean by deficient demand in macroeconomics?
Ans. Deficient Demand- In an economy when AD is less than AS at full employment, then it is called deficient demand.
Thus, it is the situation when current aggregate expenditure is less than full employment output level.
Deflationary gap- In the situation of deficient demand, the gap between current AD and AS at full employment level is called deflationary gap.
Thus, it is the amount by which AD is less than required AD to attain full employment level.

Question. Explain the derivation of saving curve from given linear consumption curve.
Ans. Saving refers to that part of income which is not spent on consumption. Thus, it is the excess of income over the consumption. Consumption and savings are complimentary to each other. Derivation of saving curve from linear consumption curve is explained as below: –

* Income curve is shown by 45˚ line and linear consumption curve is given by upward sloping as directly related to income level and starts from positive value of y-axis due to autonomous consumption.
* At income level zero, saving is negative value of autonomous consumption as shown by ‘a’ in the lower panel of the diagram.
* When income and consumption curve intersect each other i.e. point ‘M’ i.e. both are equal, then savings will be equal to zero shown by point ‘M₁’.

* At income level OY₂, saving will be equal to ΔS. By joining three points, i.e. S, M₁ and T, we get saving curve.

Question. What is excess demand in macroeconomics?
Ans. In an economy when AD is more than AS at full employment level, it is called excess demand. Thus, it is a situation where current aggregate expenditure exceeds full employment output level.
Inflationary gap: In the situation of excess demand, the gap between current AD and AS at full employment level is called inflationary gap. In other words, it is the excess of current AD over the full employment output level.