Macro Economics All Chapter MCQ PDF

NATIONAL INCOME AND RELATED AGGREGATES ______________________________________________________________________________ ----------------------- 1. Output means _____________ unless stated otherwise. (A) Gross output at MP (B) Net output at MP (C) Gross output at FC (D) None of these 2. A variable which is measured during a period of time is called _____________variable. (A) Income (B) Stock (C) Expenditure (D) Flow 3. In a closed economy ___________ is are not included. (A) Foreign sector (B) Government (C) Households (D) Firms 4. Which of the following is not a component of domestic income? (A) Operating surplus (B) Compensation of employees (C) Net factor income from abroad (D) Mixed income 5. Which of the following is not considered of domestic income? (A) Profit (B) Wages (C) Rent (D) Gifts from abroad 6. __________produces goods and services for satisfactions of collective wants. (A) Households sector (B) Producing sector (C) External sector (D) Government sector 7. Value of output can be explained as: (A) Sales +change n stock (B) Sales-change in stock (C) Sales (D) None of these 8. The difference between gross capital formation and net capital formation is___________ (A) Net factor income from abroad (B) Depreciation (C) Business fixed investment (D) Change in stock 9. A growing country is the one whose (A) GNP is rising at current prices (B) GNP is constant at constant prices 1 (C) GNP is rising at constant prices (D) None of these 10. Which of the following will be treated as final goods? (A) Seeds used by a farmer in his field (B) Tyres purchased by a transport company (C) Unsold stock of a good lying with the seller (D) Computers purchased by a dealer 11. If factor cost is greater than market price, it means that (A) Indirect taxessubsidies (C) Indirect taxes =subsidies (D) None of these 12. Broker’s commission on sale/purchase of goods is included in national incole as: (A) It is a part of gross capital formation (B) It is a part of compensation of employees (C) It is an income earned from rendering productive services (D) None of these 13. Which of the following comes under domestic territory of India? (A) Branch of a foreign bank in India (B) Branch of an Indian bank in U.K. (C) Russian embassy in India (D) Office of World Bank in new Delhi 14. An Indian farmer produces wheat without incurring cost of inputs and sells for Rs.1,000 to a miler who grinds wheat into flour and sells for Rs. 1,200 to a baker. The baker sells bread to consumers for Rs. 1,600.Total value added is Rs. (A) 1,600 (B) 2,200 (C) 1,000 (D) 1,400 15. Which of the following concepts is used to differentiate between market price and factor cost? (A) Depreciation (B) Net indirect taxes (C) Net factor income from abroad (D) Net exports 16. The sum of net value at FC of all the producing units in domestic territory gives: (A) GDP at MP (B) GDP at FC (C) NDP at MP (D) NDP at FC 17. One of the following is an example of leakage from circular flow of income: (A) Savings by households (B) Government expenditure (C) Investment (D) Export payments 18. Net national disposable income is equal to (A) National income +NIT +Net current transfers from abroad (B) NNP at MP +Depreciation (C) GNP at FC+Net current transfers from ROW 2 (D) Personal disposal income +Net factor income from abroad 19. National income includes: (A) Factor income (B) Transfer income (C) Both (i) and (ii) (D) Neither (i) or (ii) 20. The difference between Private Income and Personal Income is __________ (A) Corporate tax (B) Corporate savings (C) Dividend (D) Corporate tax and corporate savings 21. Personal income – Personal disposable income =____________ (A) Corporate taxes (B) Corporate savings (C) Dividend (D) Corporate tax and corporate savings 22. In which type of economy is domestic income equal to national lincome? (A) Open economy (B) Closed economy (C) Both (i) and (ii) (D) Neither (i) nor(ii) 23. Domestic product is equal to : (A) National product +Net factor income from abroad (B) National product –Net factor income from abroad (C) National product /net factor income from abroad (D) National product * Net factor income from abroad 24. Value added refers to: (A) Production of durable goods (B) Output –intermediate consumption (C) Production of non-durable goods (D) Expenditure on intermediate goods 25. National income includes: (A) Old- age pension (B) Money sent by an NRI to his family (C) Transfer payment from rest of the world (D) None of these 26. Which of the following is not transfer payment? (A) Interest on national debt (B) Retirement pension (C) Old-age pension (D) Donations 27. Real national income means: (A) National income at current prices (B) National income at factor prices (C) National income at constant prices (D) National income at average price of past five years 28. Depreciation of fixed capital assets refer to______________. (A) Normal wear and tear 3 (B) Foreseen obsolescence (C) Normal wear and tear and foreseen obsolescence (D) Unforeseen obsolescence 29. National income is the sum of factor incomes accruing to : (A) Nationals (B) Economy territory (C) Residents (D) Both residents and non-residents ANSWER KEY 1. A 2. D 3. A 4. C 5. D 6. D 7. A 8. B 9. C 10. C 11. A 12. C 13. A 14. A 15. B 16. D 17. A 18. A 19. A 20. D 21. C 22. B 23. B 24. B 25. D 26. B 27. C 28. C 29. C 1. The economic variable which is measured at a given point of time is known as _____. (a) fixed inventory (b) flow variable (c) stock variable (d) None of the above 2. Continuous sectoral flow of goods and money in an economy is known as _____. (a) Real flow (b) Nominal flow (c) Circular flow (d) None of these 3. Continuous sectoral flow of goods and services in an economy is known as _____. (a) Real flow (b) Nominal flow (c) Circular flow (d) None of these 4. In a closed economy, firms depend on the households for the supply of _____. (a) goods and services (b) factors inputs (c) both (a) and (b) (d) None of these 5. Continuous sectoral flow of money in an economy is known as _____. (a) Real flow (b) Nominal flow (c) Circular flow (d) None of these 6. Identify flow variable from the following. (a) money in your wallet, right now (b) distance between Chennai and Delhi (c) money income during 2016-17 (d) None of these 7. identify stock variable from the following. (a) money in your wallet, right now 4 (b) capital formation during 2015-16 (c) change in money supply after November 8, 2016 (d) money income during 2016-17 8. Which of the following is best suited as an example of a normal resident of India? (a) US national working in WHO office in New Delhi (b) An Italian national working in IMF office in Mumbai (c) Ambassador of Zaire to India (d) Indian Representative to UN 9. _____ is the factor remuneration received by the households for providing their productiveservices to firms as workforce. (a) Rent (b) Wages (c) Interest (d) Profit 10. Which of the following correctly represents value at Market Price? (a) Factor cost + Net indirect taxes (b) Factor cost - Net indirect taxes (c) Factor cost + Indirect taxes (d) Factor cost - Indirect taxes 11. Which of the following correctly represents value at national income? (a) COE + OS + MISE + NFIFA (b) COE + OS - MISE + NFIFA (c) COE-OS-MISE + NFIFA (d) COE - OS - MISE - NFIFA 12. Which of the following correctly represents value of GNPFC? (a) COE + OS + MISE + NFIFA (b) COE + OS + MISE + NFIFA + Depreciation (c) COE + OS + MISE + NFIFA - Depreciation (d) COE + OS + MISE - NFIFA + Depreciation 13. Out of the following, which is the only macroeconomic variable? (a) Pricing decision by Maruti Suzuki. (b) Fall in the price of oil. (c) Measurement of the general price level. (d) Production of foodgrains in India. 14. Which one of the following is not a part of macroeconomics? (a) Demand analysis (b) Theory of investment (c) Theory of economic growth (d) Theory of income and employment 15. Rate of increase in per capita income depends upon (a) rise in national income. (b) fall in population. (c) rate of change in both (a) and (b). (d) All of the above. 16. A unit of TV is 5 (a) a single-use capital good. (b) a single-use consumer good. (c) a durable consumer good. (d) All of the above. 17. Which one of the following is not a stock variable? (a) Number of houses in Delhi as on 1 st January, 2017 (b) Change in the number of houses in Delhi during the last five years (c) Number of tenants in an area as on 31 st March, 2017 (d) Total value of investment by Reliance Industries as on 28th Feb, 2017 18. In a two-sector economy, the condition of equilibrium is: (a) I = S (b) l + G = S + T (c) I + G + X = S +T + M (d) C + I = l + S 19. Net national product at factor cost will generally be: (a) equal to national income. (b) less than national income. (c) more than national income. (d) None of the above 20. Subsidy implies (a) selling the product to the government at higher prices. (b) selling the product below the cost of production. (c) selling the product at loss. (d) selling the product at cost pius indirect taxes. 21. Which of the following is correct? (a) If national income rises, per capita income must also rise. (b) If population rises, per capita income must fall. (c) If national income rises, welfare of the people must rise. (d) None of the above. 22. GDPMP equals: (a) GDPFC + Net Indirect Taxes (b) NDPFC + Net Factor Income from Abroad (c) NNPMP - Net Indirect Taxes (d) Depreciation + NNPFC 23. Given the following data, the value of NNPMP is: GNPMP = Rs. 1,07,315 Depreciation = Rs. 6,625 NFIFA = Rs.153 Net Indirect Taxes = Rs. 5,000 (a) Rs. 1,00,537 (b) Rs. 1,00,690 (c) Rs. 88,353 (d) Rs. 91,205 6 24. Which of the following activities is not included in the national income? (a) Cooking for the family by a homemaker (b) Helping the daughter with her homework by a teacher (c) Cleaning the bookshelf by a student (d) All of the above. 25. The responsibility of collecting data and preparing estimates relating to India's national income has been entrusted to the (a) NITI Aayog (b) National information Centre (NIC) (c) Central Statistical Organisation (CSO) (d) Indian Statistical institute (ISI) 26. Consumption expenditure + net domestic investment + net foreign investment equals. (a) net domestic expenditure (b) net national expenditure (c) gross domestic expenditure (d) gross national expenditure 27. Given the following data, (i) GDPMP = Rs. 406 (ii) NFIFA = Rs. (-) 3 (iii) Consumption of fixed capital = Rs. 39 (iv) NIT = Rs.43 The value of National Income would be: (a) Rs. 321 (b) Rs. 406 (c) Rs. 260 (d) Rs. 127 28. Which of the following is included in the national income of an economy? (a) Sales tax (b) Road construction (c) Financial help to earthquake victims (d) Services of a housewife 29. Which of the following does not constitute intermediate consumption? (a) Non-durable goods received in kind by the government as transfer payments (b) Painting of buildings (c) Expenditure on minor repairs of a building by producer households (d) Direct purchases made abroad by the government 30. GNP deflator is equal to Nominal GDP Real GDP (a) × 100 (b)Nominal GDP× 100 Real GDP Real GDP Change in Rate of Inflation (c)Change in Rate of Inflation× 100 (d) Real GDP × 100 31. Given the following data, the value of GNPMP is: GNPFC = Rs. 95,131; Indirect taxes = Rs. 14,709; Subsidies = Rs. 2,525 _____. 7 (a) Rs. 1,07,315 (b) Rs. 1,13,840 (c) Rs. 17,234 (d) Rs. 95,131 32. When will NNPFC be equal to NDPFC? (a) When depreciation is zero (b) When indirect taxes are equai to subsidies (c) When direct taxes are zero (d) When NFIFA is zero 33. Domestic factor income does not consist of which one of the following? (a) Compensation of employees (b) Operating surplus (c) Mixed income of self-employed (d) Value of intermediate goods 34. Which of the following is a negative externality caused to you, if you have a public park next to your house? (a) A clear better environment (b) More people poking in your house (c) Availability of fresh air (d) A place to relax 35. Which among the following is a public good? (a) Indian Railways (b) National Museum (c) Street lighting (d) DMS Milk ANSWERS 30. (C) 31. (c) 32.(a) 33.(b) 34 (b) 35.(c) 36.(a) 37.(d) 38.( (b) 39. (a) 40. (a) 41. (b) 42 (c) 43 (a) 44. (d) 45. (c) 46 (b) 47(a) 48 (a) 49.(b) 50. (d) ) GIVE REASON TYPE QUESTIONS (TRUE/FALSE) 1. Gross Domestic Product always excludes the value of intermediate goods. Tu 2. Air-frier in your kitchen is a durable consumer good. 3. The value of intermediate consumption is nothing but the gross total value of intermediate goods. 4. All capital goods are producer goods, but all producer goods are not capital goods. 5. Private final consumption expenditure refers to consumption expenditure by the households only. 6. Higher capital formation in an open economy is an indicator of growth of the economy. 7. Depreciation has nothing to do with the efflux of time. 8. Obsolescence, be it expected or unexpected, is a component of depreciation. 9. A new smartphone purchased by a father for his daughter is an example of final good. 10. LED lights imported by an importer are intermediate goods. 11. White Board, Projectors, A.C., furniture purchased by a coaching centre are examples of final goods. 8 12. Expenditure on maintenance of a building is an intermediate expenditure by a bank. 13. Expenditure on adding a floor to an existing factory building is an intermediate expenditure. 14. Imputed value of all goods and services produced for self-consumption is included in the estimation of national income. 15. Intermediate goods are not included in national income, only final goods are included. 16. Stocks always remain unchanged while flows may increase or decrease. 17. Subsidies are included in factor costs. 18. Transfer payments are not included in calculation of national income. 19. Transactions in second-hand goods are not included in national income. 20. Interest on consumer debt is not included in national income. 21. Expenditure on replacement of engine in a car owned by a corporate enterprise is intermediate consumption. 22. All gifts received by a government from foreigners are treated as intermediate consumption. 23. Expenditure on purchase of curtain cloth by Indian High Commission in London is treated as intermediate consumption. 24. Apple iPhone 7 is a durable final good for Mr. Rohit. 25. The value of intermediate goods may or may not be equal to the value of intermediate consumption in an economy. 26. All producer goods must be placed under the category of capital goods. 27. An economy with high capital formation is generally seen as progressing on the road of economic growth. 28. Depreciation may be caused by expected obsolescence and efflux of time. 29. National product income always be higher than domestic product income. 30. Transactions in second-hand goods or property not included in GNP. ANSWERS 1. True. This is because the value of intermediate goods is in fact a part of the value of final goods and any inclusion of such values again will lead to the problem of double counting. 2. True. The Air-frier in the kitchen of a consumer is an example of a durable consumer good as its life may be extended to a number of years and it is generally considered a high value good by a common household. 3. True. As intermediate consumption, by definition, is total expenditure by the producers on the purchase of non-factor inputs (intermediate goods). 4. True. Producer goods are defined as all those goods which are used in the production of other goods, whereas, capital goods are the fixed assets (like machinery, building, etc.) used by the producers in the production of goods and services. 5. False. It includes consumption expenditure by the households as well as non-profit private institutions serving households. 6. True. Investments or capital formation enhances the productive capacity of an economy and there is a well accepted positive correlation between the two. 7. False. Value of fixed assets go down even if they are not used even for a day but are a few days or months or years old. Also, estimated life is a dividing factor while estimating depreciation. 8. False. Only expected obsolescence is a component of depreciation. Any loss of value of fixed assets on account of any unexpected obsolescence is called capital loss and not depreciation. 9. True. New smartphone purchased by a father for his daughter is an example of final good as the final user of the phone is a member of the household and it is not purchased with any profit motive. 9 10. True. As the importer is aiming for the resale of the LED lights with a profit motive. 11. False. As these items purchased are used with the aim of generating income by the coaching centre, they would lie in the category of intermediate goods. 12. True. Since all the upkeep, repair and maintenance expenses incurred by any firm are treated as a part of intermediate consumption. 13. False. Any such capital expenditure is categorised as a final capital formation. 14. False. Imputed value of only goods produced for self-consumption is included in national income. It is possible to assign monetary value to these goods. But the imputed value of self-used services is not included in national income. It is not possible to assign any monetary value to them. 15. True. Intermediate goods ultimately only constitute a part of the final goods. Counting of intermediate goods would amount to double-counting of the same good at two stages of production, first as a part, and second as a part of the final product. 16. False. Flows add up to stocks. Outflows result in loss of stocks, while inflows add to the stocks. Therefore, stocks may rise or fail with outflows and inflows. 17. True. Subsidies accrue to the factors of production and are, therefore, included in factor costs. 18. True. Transfer payments do not add to the flow of goods and services and hence, are not included in national income. 19. True. Transactions in second-hand goods do not add to the current flow of goods and services. Hence, these are not included in national income. 20. True, interest on consumer debt is a transfer payment. Hence, it is not included in national income. 21. False. Although the expenditure on the new parts of the fixed assets is included in intermediate consumption, the conditions are that (i) the life of the new parts may be around one year or slightly more, and (ii) the value should be relatively small. Replacement of engine, thus, does not qualify for intermediate consumption. 22. False. Only those gifts which can be distributed among consumer households after some renovations and alterations are treated as intermediate consumption. 23. False. All direct purchases of goods and services made abroad by the government on current account for its embassies or consulates or for its own direct use abroad are treated as final consumption expenditure. 24. True. Apple iPhone 7 is a durable final good for any consumer who is purchasing for consumption purpose as it can be used for a given years and is of relatively high value. 25. False. The value of intermediate goods should be equal to the value of intermediate consumption as it refers to the monetary expenditure by the firms on the purchases of intermediate goods in a given year. 26. False. Producer goods may or may not be placed under the category of capital goods as they only cover the long-lasting fixed assets of the firms. 27. True. Generally, an economy with high capital formation is seen as progressing on the road of economic growth as it enhances the productive capacity of the economy which is a direct indicator of economic growth of the economy. 28. True. Depreciation may be caused by expected obsolescence and efflux of time also apart from normal wear and tear. However, any loss in the value of fixed assets resulting from unexpected obsolescence is termed as capital loss and not depreciation. 29. False. National product income will be higher than domestic product income only when there is a positive net factor income from abroad. 30. True. Transactions in second-hand goods or property are not included in GNP because these do not form a part of the current flow of goods and services in the economy. 10 TRUE OR FALSE QUESTIONS WITH ANSWERS 1. National income includes both factor incomes and transfer incomes. Ans. False because it includes factor incomes only. 2. Bread is always a consumer good. Ans. False Bread if used by a restaurant is an intermediate good but true if purchased by a household. 3. Depreciation may occur even when fixed assets are not in use. Ans. False because depreciation is loss of value of fixed capital goods in use due to their normal wear and tear. 4. Real GDP reflects the level of economic growth but nominal GDP does not. Ans. True because nominal GDP is affected by change in prices whereas real GDP is not affected. 5. Increase in stock of goods by a consumer increases the capital stock of a country. Ans. False as the goods are deemed to be consumed the moment they are purchased by a consumer. 6. Gross domestic capital formation is always greater than gross fixed capital formation, Ans. False the former can be less than the latter if change in stock is negative (-). 7. Income from exports is a part of net factor income from abroad. Ans. False because income from exports is a part of net exports and so a component of gross domestic product. 8. Real gross domestic product can be equal to nominal gross domestic product. Ans. True if price level in both the years concerned is the same. 9. Interest on national debt is included while estimating national income. Ans. False because borrowing by general government is treated for consumption purposes. 10. Services of a housewife are included in estimating national income. Ans. False because such services though productive cannot be valued in terms of money due to lack of data. So these are traditionally kept out of national income estimates. 11. A leakage is the amount of money which is withdrawn from its flow of money. Ans. True for example savings by households imply withdrawal from circular flow of money. 12. National income at current prices can increase even when quantum of goods and services produced during the year remains constant. Ans. True because increase in price level can cause an increase in national income at current prices without increase in quantum of goods and services produced. 13. Remittances by the NRls are a part of our national income. Ans. False because remittances by NRIs are transfer payments. 14. Capital formation includes capital goods only. Ans. False because change in inventory stock is also an important component of capital stock. MONEY AND BANKING 11 MULTIPLE CHOICE QUESTIONS (MCQS) WITH ANSWERS 1. ___________ is primary function of money. (A) Transfer of value (B) Medium of exchange (C) Store of value (D) Standard of deferred payment 2. Banks are able to create many times more than initial deposit through_________ (A) Secondary deposits (B) Advancing loans (C) Accepting deposits (D) Providing overdraft facility 3. Which of the following is the Central Bank in India? (A) State Bank of India (B) Punjab national bank (C) Reserve Bank of India (D) New Bank of India 4. Which of the following is the qualitative measure of credit control? (A) Coins (B) Currency (C) Cash reserve of banks (D) Demand deposits in banks 5. Which of the following is the quality measure of credit control? (A) Margin requirement (B) Cash Reserve Ratio (C) Bank rate (D) Open market operations 6. Which of the following statements is correct ? (A) Supply of money refers to stock of money held by public at a point of time (B) Supply of money is a flow variable (C) Supply of money includes cash reserve of banks (D) Supply of money refers to bank money 7. ____________ is the rate of interest charger by the Central Bank on loans given to commercial banks. (A) Bank rate(Repo rate ) (B) CRR (C) Statutory liquidity Ratio (D) Reserve Repo Rate 8. In order to reduce credit in the country ,Reserve Bank of India (A) Reduces Repo Rate (B) Buys securities in the open market (C) Sells securities in the open market (D) Adopts Moral Suasion 9. ___________ is the rate of interest at which banks park their surplus fund with RBI. (A) Cash Reserve Ratio (B) Reverse Repo Rate (C) Bank Rate (D) Legal Reserve Rate 12 10. The creation of ____________ is called credit creation. (A) Time deposits (B) Primary deposits (C) Secondary deposits (D) None of these 11. Initial deposits made by the people from their own resources are called ___________ (A) Time deposits (B) Secondary deposits (C) Primary deposits (D) None of these 12. ____________ is the ratio of bank deposits that a commercial bank must keep as reserve in cash with the Central Bank. (A) Statutory Liquidity Ratio(SLR) (B) Cash Reserve Ratio(CRR) (C) Bank Rate (D) Reserve Repo Rate 13. To reduce the supply of money in the economy, the Central Bank ______________ (A) Raises CRR (B) Lowers the Repo rate (C) Lowers the margin (D) Buys Govt. securities from the market 14. Which of the following conditions need to be fulfilled by a financial Institution to become a bank? (A) Advancing loans (B) Accepting deposits (C) Both (i) and (ii) (D) Neither (i) nor (ii) 15. _____________ is the main function of central Bank. (A) Notes issue (B) Credit creation (C) Accepting deposits front e public (D) None of these 16. Deposits which can be withdraw on demand by the depositors are called__________ (A) Time deposits (B) Savings deposits (C) Term deposits (D) Demand deposits 17. Full bodied money is that money whose money value and commodity value are: (A) Equal in the market (B) Declared as equal in the market (C) Declared as equal by RBI (D) Different in the market 18. Which of the following systems is followed by RBI for issuing currency? (A) Simple deposit system (B) Minimum reserve system (C) Proportionate system (D) Fixed fiduciary issue system 19. Demand deposit are: (A) Chequable deposits 13 (B) Non-chequable deposits (C) Deposits which can be withdraw on demand (D) Both (i) and (iii) 20. When face value of money is equal to intrinsic value of money, it is called: (A) Credit money (B) Full bodied money (C) Fiat money (D) Fiduciary money 21. ‘Medium of exchange’ function of money has solved the barter’s specific problem of : (A) Lack of double coincidence of wants (B) Lack of common measure of value (C) Lack of standard of deferred payment (D) Difficulty is storing wealth 22. Demand deposit include: (A) Savings account deposits and fixed deposits (B) Savings accountant deposits and current accountant deposits (C) Current accountant deposits and fixed deposits (D) All types of deposits 23. Credit creation by commercial banks is determine by: (A) CRR (B) SLR (C) Initial deposits (D) All the above ANSWER KEY 1. B 2. A 3. C 4. D 5. A 6. A 7. A 8. C 9. B 10. C 11. C 12. B 13. A 14. C 15. A 16. D 17. A 18. B 19. D 20. B 21. A 22. B 23. D 1. When the government prints and circulates more currency in the economic system, it may (a) bring down the general price level. (b) push up the general price level. (c) increase the supply of goods in the economy. (d) None of the above. 2. To fight deflation, the government should (a) increase income tax rate. (b) cut back its own expenditure. (c) stimulate investment by giving monetary and fiscal incentives. 14 (d) increase bank rate. 3. RBI does not perform which one of the following functions? (a) Maintains deposit accounts of public (b) Issues currency notes (c) Maintains foreign exchange accounts (d) Acts as banker to the state government. 4. In order to encourage investment in the country, the RBI may (a) reduce CRR. (b) increase CRR. (c) sell securities in the open market. (d) increase Bank Rate. 5. RBI needs to control the supply of credit in an economy because (a) credit is not a good sign of a healthy economy. (b) credit implies that commercial banks are operating beyond their resources. (c) credit may expose bank customers to unnecessary risks. (d) uncontrolled increase in credit may prove inflationary. 6. Find the odd one out among the following: (a) Bank rate (b) SLR (Statutory Liquidity Ratio) (c) Open market operations (d) Margin requirements. 7. If a bank maintains a cash reserve ratio of 5%, with a cash base of Rs. 1,000 crore, the bank creates a total credit of the value of (a) Rs. 5,000 crore. (b) Rs. 10,000 crore. (c) Rs. 20,000 crore. (d) Rs. 80,000 crore. 8. To curb inflation, the RBI should not be (a) raising the bank rate. (b) raising the repo rate. (c) raising the reverse repo rate. (d) purchasing government securities. 9. The effect of increase in CRR will be reduced or nullified if (a) Bank rate is reduced. (b) Securities are sold in the open market. (c) SLR is increased. (d) people do not borrow from non-banking institutions. 10. During depression, it is advisable to ______________________________. (a) lower bank rate and purchase securities in the market (b) increase bank rate and purchase securities in the open market (c) decrease bank rate and sell securities in the open market (d) increase bank rate and sell securities in the open market 11. Find the odd one out among the following: (a) Margin requirements (b) Bank rate (c) Variable reserve ratios (d) Open market operations. 12. Find the odd one out from the following: (a) Reserve Bank of India (b) Bank of England 15 (c) IDBI Bank (d) Federal Reserve Bank of the USA 13. Which of the following is not a unique feature of money? (a) Acceptability (b) Liquidity (c) Transactional (d) Ductility 14. Money supply bears _____ relation with the rate of inflation in the economy. (a) positive (b) inverse (c) proportional (d) no relation 15. Which of the following is not related to credit-creation process? (a) Uni Bank Model (b) Cash as essential feature (c) Constant LRR (d) Money Multiplier = Reciprocal of LRR. 16. Which of the following is not a limitation of credit creation? (a) Requirement of huge cash reserve by the country (b) Requirement of huge cash reserve by the commercial banks (c) Free from any control of Central Bank (d) Free from any impact from market/business conditions. 17. Which of the following is not a function of Central Bank? (a) Banker to Banks (b) Banker to Government (c) Sole Currency issuer (d) Lender to Public at large 18. Which of the following is not a quantitative technique of monetary policy? (a) Repo Rate (b) Margin Requirements (c) Bank Rate Policy (d) Open market Operations ANSWERS 1. (b) 2. (c) 3. (a) 4. (a) 5. (d) 6. (d) 7. (c) 8. (d) 9. (a) 10. (a) 11. (a) 12. (c) 13. (d) 14. (a) 15. (b) 16. (c) 17. (d) 18. (b) GIVE REASON TYPE QUESTIONS (TRUE/FALSE) State which of the following statements is true or false. Give reasons. 1. Money is a good servant but a bad master. 2. Commercial banks serve as conduit in the economy. 3. Accumulated foreign exchange reserves can be profitably employed in long-term investment projects. " 4. To reduce the volume of credit, bank rate should be reduced. 5. To reduce the volume of credit, CRR should be reduced. 6. To reduce the volume of credit, the Central Bank should purchase government securities. 7. Credit card is a form of money. 8. Central Bank increases Bank Rate in case of inflation. 9. Under deflation it is advisable to sell government securities. 10. Reverse Repo Rate is the rate at which RBI lends funds to the banks. 16 11. All the coins in India are minted by Government of India. ANSWERS 1. True. Money represents purchasing power over goods and services. That is, all transactions involve the use of money. Money is, therefore, useful only when more goods and services are produced. Without the additional supply of goods and services, the purchasing power of money (alls, i.e., inflation sets in. Therefore, money can simply serve as a servant; it cannot be an end in itself. 2. True. Commercial banks act as an intermediary between those persons who have surplus funds and those who need funds to meet their needs. Thus, the banks serve as an instrument to promote economic activity, employment and income. 3. False. A substantial part of these reserves arises because of portfolio investment These are highly volatile. These cannot be deployed in any source. That involves long-term liabilities. 4. False. Bank rate is the rate at which the Central Bank makes available finance to commercial banks. A rise in bank rate implies that the cost of money would go up. As a result, there would be less demand for credit. Therefore, to reduce the volume of credit, bank rate should be increased and not reduced. 5. False. CRR refers to the amount of cash that the commercial banks are required to keep as a proportion of their deposits with the Central Bank. A reduction in CRR means that the banks would be left with more cash, and hence their ability to create credit will increase. Conversely, if the CRR is raised, less cash will be available with commercial banks, and they will be in a position to create less credit. 6. False. When the Central Bank purchases securities from banks, it gives cash to banks. Banks are, therefore, in a position to create more deposits. Conversely, when it sells securities to commercial banks, it takes away cash from banks. Their ability to create credit gets reduced. 7. False. Credit card is not a form of money rather it Is a kind of loan by the issuing bank to the holder of the credit card, whereas debit card represents money. 8. True. Increasing Bank Rate will Increase the cost of credit and could dent the credit-creation process adversely. 9. False. Since under deflation, money supply Is generally low, therefore, it is advisable to buy government securities to pump in more currency into the system. 10. False. Reverse Repo Rate is the rate at which commercial banks park their funds with the Central Bank. 11 True. All the coins are minted by the Government of India. ------------------ TRUE OR FALSE QUESTIONS WITH ANSWERS 1. There is no common unit of value in barter system. Ans. True because there is lack of common measure (unit) of value in barter system. 2. Currency created by the Central Bank (RBI) is called bank money. Ans. False because currency created by RBI is called High-Powered Money. 3. Money supply is a flow concept. Ans. False because money supply is a stock concept as it is measured at a point of time. 4. Money is a liquid store of wealth. Ans. True as the value of perishable and durable goods can be stored in the form of money. 5. Reverse repo rate is the rate at which the Central Bank lends funds to banks. Ans. False Reverse repo rate is the rate at which banks park their surplus funds with RBI. 6. Money supply does not include money held by the government and banking system. Ans. True because money held by these institutions does not come into actual circulation. 7. Legal tender money has a legal sanction behind it by the government. Ans. True because no one can refuse to accept it as non-acceptance is an offence. 17 8. Legal Reserve Ratio (LRR) is that ratio of deposits which banks are legally bound to keep in the form of cash with themselves and with the Central Bank. Ans. True The percentage (ratio) of deposits that banks keep with themselves is called SLR and what the keep with Central Bank is called CRR. 9. Money as medium of exchange solves the barter’s problem of ‘lack of double coincidence of want’. Ans. True as goods can be sold for money to whoever wants it and bought from whoever wants to sell it. 10. Cash and coins are known as bank money. Ans. False as in day-to-day language, bank money refers to cheques and drafts. 11. RBI produces money while commercial banks increase the supply of money. Ans. True because commercial banks can only increase the supply of money by creating credit. 12. CRR and SIR are opposite of each other. Ans. False as both are complementary to each other. A fall in these ratios causes a fall in LRR. 13. Commercial banks play no role in the stock of money supply in the economy. Ans. False as the commercial banks add to the stock of money supply by creating credit. 14. Credit money is the money received as credit from banks. Ans. False because credit money is the money whose face value is more than its intrinsic (commodity) value. 15. Fiat money is the same as Fiduciary money. Ans. False as fiat money is the money backed by the order (fiat) of the government but fiduciary money is the money backed by mutual trust between the payer and the payee. 16. Money supply includes demand deposits of the people with the commercial banks. Ans. True because the demand deposits of the people with commercial banks is one of the components of money supply. 17. All financial institutions are treated as banking institutions. Ans. False because a financial institution can be termed as a bank only when it performs at least two functions, namely (i) accepting deposits and (ii) advancing loans. 18 DETERMINATION OF INCOME AND EMPLOYMENT -------------------- 1. Consumption function is the functional relationship between ____________ and ___________. (A) AD and AS (B) Consumption and AD (C) Consumption , National Income (D) National income and personal income 2. What does C/Y indicate? (A) Break-even point (B) MPC (C) APC (D) None of these 3. The ratio of change in consumption to change in income is called__________ (A) MPS (B) MPC (C) APC (D) APS 4. AD curve is a __________ (A) Positively sloped curve (B) Negatively sloped curve (C) Horizontal straight line parallel to x-axis (D) Vertical straight line parallel to y-axis 5. In a two –sector economy, components of aggregate demand(AD) are: (A) Consumption and investment (B) Government expenditure and investment (C) Domestic expenditure and exports (D) Government expenditure and private expenditure 6. If APC=0.7, then APS=____________ (A) 1 (B) 0.3 (C) 2.3 (D) None of these 7. _____________ refers to actual saving in an economy during a year. (A) APS (B) Ex- anti saving (C) Ex-post saving (D) MPS 8. Keynesian theory of employment is based on the assumption of (A) Short-run (B) Long-run (C) Full employment (D) None of these 9. Break point is achieved when (A) Consumption =Saving (B) Consumption =Investment (C) National income =consumption (D) National income>consumption 10. Which of the following represents Consumptions Function Equation? 19 (A) C = 𝐶̅ + by (B) S = -𝐶̅ + (1-b)y (C) K = 1/I-MPC (D) AD = C+I+G+(X-M) 11. When a planned savings exceed planned investment, the level of income and employment will tend to ___________. (A) Fall (B) Rise (C) Remain constant (D) None of these 12. When economy decides to save whole of its additional income, then value of K will be: (A) 0 (B) 1 (C) Infinity(∞) (D) None of these 13. What happens in the economy when AD Investments (c) Aggregate Demand = Aggregate Supply (d) Aggregate Demand > Aggregate Supply 6. Perfectly elastic under the classical economics denotes that there is (a) under-utilisation of resources in the economy. (b) excess capacity in the economy. (c) optimum utilisation of resources in the economy. (d) Both (b) and (c). 7. The equilibrium level of output/Income under Keynesian Economics is determined when (a) Y = A + bY (b) Y = A + bY - I (c) Y = A÷ bY (d) Y = A×bY 8. As per Keynesian Economics, The equilibrium level of income is determined at a level where: (a) Aggregate Demand is more than 45° line (b) Aggregate Demand is less than 45° line (c) Aggregate Demand-curve intersects 45° line (d) All of the above 9. If the expected flow of goods and services in the economy is less than their expected demand, then: (a) Aggregate Supply > Aggregate Demand (b) Aggregate Supply = Aggregate Demand (c) Aggregate Supply < Aggregate Demand (d) None of the above 10. At the equilibrium point when: ijjp 1,000 + 0.5Y and I = Rs. 200 crore, income will be: (a) Rs. 2,100 crore (b) Rs. 2,300 crore (c) Rs. 2,200 crore (d) Rs. 2,400 crore 11. When C = 2,200 + 0.7Y and I = Rs. 5,000 crore, equilibrium level of income will be: (a) Rs. 9,000 crore (b) Rs. 10,000 crore (c) Rs. 24,000 crore (d) Rs. 11,000 crore 12. Ex-ante investment means: (a) actual investment in the economy (b) planned Investment in the economy (c) planned savings in the economy (d) actual savings in the economy 13. Investment which varies directly with the level of Income Is known as: (a) independent investment '(b) autonomous Investment (c) induced investment (d) None of the above 14. Investment multiplier is defined as the rate of ………. change of with respect to a given change in ……….. (a) savings, investments (b) income, investment (c) investment, income (d) Investments, savings 15. There exists a positive relation between (a) Multiplier, MPC (b) Multiplier, savings (c) Multiplier, MPS (d) Multiplier, Investments 16. If initial investment increases by Rs. 400 crore, and income increases by Rs. 2,000 crore, the value of multiplier will be: (a) 5 times (b) 3 times (c) 4 times (d) 2 times 25 17. If MPC = 0.75, value of investment multiplier will be: (a) 2 times (b) 3 times (c) 4 times (d) 5 times 18. If MPS = 0, the value of investment multiplier is: (a) 0 (b) 1 times (c) co (d) 2 times 19. The value of investment multiplier lies between: (a) 0 and ∞ (b) 1 and ∞ (c) 0 and 1 (d) -1 and 1 20. If investment increases from 200 to 400 and ipcome increases from 800 to 14,000, the value of Investment Multiplier would be: (a) 1 times (b) 3 times (c) 2 times (d) 4 times 21. When the level of saving increases by 1,500, income increases by 3,000, the value of multiplier will be: (a) 2 times (b) 7 times (c) 4 times (d) 5 times ANSWERS 1. (d) 2. (b) 3. (a) 4. (b) 5. (c) 6. (d) 7. (a) 8. (c) 9. (a) 10. (d) 11. (a) 12. (b) 13. (c) 14. (b) 15. (a) 16. (a) 17. (c) 18. (c) 19. (b) 20. (b) 21. (a) CHAPTER 5 EXCESS DEMAND AND DEFICIENT DEMAND MULTIPLE CHOICE QUESTIONS (MCQs) 1. A situation corresponding to full employment of resources, where aggregate demand is equal to aggregate supply in the economy is called: (a) full employment equilibrium. (b) underemployment equilibrium. (c) equilibrium without excess capacity. (d) Both (b) and (c). 2. In case of equilibrium below the full employment condition (a) AS > AD and resources are fully utilised. (b) AD > AS and resources are not fully utilised, (c) AD = AS but resources are not fully utilised, (d) None of the above. 3. Problem of unemployment is the problem of (a) voluntary unemployment. (b) involuntary employment. (c) involuntary unemployment. (d) None of the above. 4. Deficient demand refers to a situation when: (a) AD > AS (corresponding to full employment level). (b) AD < AS (corresponding to full employment level). (c) AS > AD (corresponding to underemployment level). 26 (d) AD = AS (corresponding to underemployment level). 5. Excess demand in an economy may give birth to (a) deflationary gap. (b) excess capacity. (c) inflationary gap. (d) low level of employment. 6. Desired AD less than its full employment level to sustain such demand is called (a) inflationary gap. (b) excess demand. (c) deficient demand. (d) effective demand. 7. Inflationary gap in an economy may exist at a situation when: (a) Aggregate Demand (Expected) > Aggregate Demand (Full employment). (b) Aggregate Demand (Expected) < Aggregate Demand (Full employment). (c) Aggregate Demand (Expected) ≤ Aggregate Demand (Full employment). (d) Aggregate Demand (Expected) ≥ Aggregate Demand (Full employment). 8. Aggregate demand in an economy may rise due to (a) increase in exports. (b) decrease in consumption expenditure. (c) increase in imports. (d) Increase in taxes. 9. Fiscal policy is maintained by (a) NITIAayog. (b) Supreme Court of India. (c) Government of India. (d) Reserve Bank of India. 10. The policy which rectifies the situations of excess and deficient demand changing money supply in the economy is known as: (a) fiscal policy. (b) budgetary policy. (c) monetary policy. (d) None of the above. 11. In order to correct the situation of deficient demand, (a) cost of credit should be reduced. (b) cost of credit should be raised. (c) taxes to be raised. (d) None of the above. 12. Which of the following can be used to correct inflationary gap under Monetary Policy? (a) Increase in taxation (b) Cut in the cost of credit (c) Cut in government expenditure (d) None of the above. ANSWERS 1. (a) 2. (b) 3. (c) 4. (b) 5. (c) 6. (b) 7. (a) 8. (a) 9. (c) 10. (b) 11 (a) 12. (b) GIVE REASON TYPE QUESTIONS (TRUE/FALSE) 27 1. In macroeconomics, aggregate demand refers to planned purchase of goods and services during a year. 2. Aggregate Demand is measured not as the sum total of goods but as the sum total of planned expenditure on the goods during an accounting year. 3. The government makes collective consumption expenditure in a three-sector economy. 4. Minimum level of expenditure is dependent on the level of income in the economy. 5. Aggregate Demand curve (indicating aggregate expenditure at different levels of income) slopes downward from left to right. 6. Exports in an open economy indicate demand for foreign goods. 7. When exports = Rs. 40,000 crore and imports = Rs. 50,000 crore, value of net exports will be equal to Rs. 10,000 crore. 8. When income is zero, consumption is also zero. 9. Consumption depends on investment in the economy. 10. When consumption function is: C = 50 + 0.6Y, C-line starts from the point of origin. 11. When consumption function is: C = 40 + 0.7/, saving will be equal to -40 when Y = 0. 12. Saving function would be linear in case Marginal Propensity to Save is found to be constant 13. Marginal Propensity to Consume is the ratio between total consumption (C) and total income (Y). 14. Value of average propensity to consume can be done. 15. Marginal Propensity to Consume + Marginal Propensity to Save = 1. 16. The value of marginal propensity to consume can be greater than one. 17. The value of average propensity to save can be negative. 18. Average Propensity to Save can be greater than one. 19. Marginal Propensity to Consume or Marginal Propensity to Save can be negative. 20. The value of marginal propensity to save can never be negative. 21. Average propensity to save is always greater than zero. 22. When the value of average propensity to save is negative, the value of marginal propensity to save will also be negative. 23. There are no exports in a closed economy. ANSWERS 1. True. Aggregate Demand is the sum total of expenditure that the people plan or desire to incur on the purchase of goods and services produced in the economy during an accounting year. 2. True. Because it is not possible to add up physical quantities of the goods and services planned to be purchased by the people. Accordingly, Aggregate Demand is measured in terms of planned expenditure on the goods and services during an accounting year. 3. True. Collective consumption expenditure refers to public consumption expenditure or consumption expenditure on behalf of the society as a whole. 4. False. Minimum level of expenditure is independent of the level of income in the economy. 5. False. Aggregate Demand curve (indicating aggregate expenditure at different levels of income) slopes upward from left to right. This is because expenditure is positively related to income. 6. False. Exports in an open economy indicate demand for goods produced in the domestic economy. 7. False. We know that, Net exports = Exports – Imports When exports = Rs. 40,000 crore and Imports = Rs. 50,000 crore 28 Net exports = (Rs. 40,000 - Rs. 50,000) crore = (-) Rs. 10,000 crore 8. False. When income is zero, consumption is not zero. Because, there is always some minimum level of consumption in the economy even when income = 0 (zero). 9. False. Consumption (C) depends on income (V) in the economy. Higher level of Y often leads to higher level of C 10. False. When consumption function is: C = 50 + 0.6/, C-line starts from the Y-axis because 50 in the equation points to minimum level of consumption even when income (Y) = 0. 11. True. When Y = 0, autonomous consumption (c) is 40. At zero level of Y, saving (5) is equal to the negative expression of c. Hence, when c = 40, S will be equal to -40. 12. True. Saving function would be linear in case MPS is constant. This is because a linear saving function is a straight line saving function. The slope of a straight line is constant. And the slope is indicated by MPS. Constant MPS implies constant slope and therefore, a straight line linear saving function. 13. False. MPC is the ratio between change in total consumption (ΔC) and change in total income (ΔY). ΔC MPC = ΔY 14. True. Value of average propensity to consume (APQ can be done. It happens when consumption isequal C to income. Thus,(Y)= 1 when C = Y. 15. True. We know that ΔC ΔS MPC =ΔYand MPS =(ΔY) ΔC ΔS MPC + MPS =ΔY+(ΔY) ΔC+ΔS = ΔY ΔY = (∵∆Y = ΔC + ΔS) ΔY or, MPC + MPS =1 16. False. The value of marginal propensity to consume cannot be greater than one. It is because change in consumption cannot be greater than change in income. 17. True. The value of average propensity to save (APS) can be negative. It happens when: Consumption > Income or, when: APC > 1. S 18. False. Because APS is the ratio between total saving and total income (APS = Y).Total savingcannot be greater than total income during an accounting year. Saving is just a part of income. So, we can say that if APS > 1 then S must be greater than Y, in which case C must be negative. This can never happen. 19. False. Neither MPC nor MPS can ever be negative. This Is because MPC is the ratio between additional consumption (ΔC) and additional income (ΔY). Likewise, MPS is the ratio between additional saving (ΔS) and additional income (ΔY). ∆C The ratio(∆Y)refers to slope of C-function which is always positive (because of positive relationshipbetween ∆S C and Y). Likewise, the ratio(∆Y)refers to slope of S-function which is always positive(because of positive relationship between S and Y). 20. True. Marginal propensity to save is the ratio between additional saving and additional income which is always positive because of positive relationship between saving and income. 21. False. Average propensity to save is not always greater than zero. It can be negative in situations when saving is negative or when consumption is greater than income. 29 22. False. The value of average propensity to save (APS) is negative when consumption is greater than income but this does not mean that marginal propensity to save (/WPS) will also be negative. In fact, MRS is never negative because it is the ratio between ΔS and ∆Y and ΔS can never be negative, as a component of Δ/. 23. True. A closed economy is the one which has no economic relations with the rest of the world. Accordingly, there are no exports in this economy. 1. Ex-post saving and ex-post investment are equal at the point of equilibrium level of income. 2. Equilibrium level of output under Keynesian Economics refers to that level of output where Aggregate Demand = Aggregate Supply. 3. When Aggregate Demand < Aggregate Supply, producers suffer the burden of undesired/unplanned inventories. 4. If Aggregate Demand is more than Aggregate Supply, gradually the Aggregate Supply would adjust at Equilibrium. 5. In an economy, the equilibrium level of Income Is Rs. 10,000. The autonomous consumption is Rs. 2,000 and the investment expenditure is Rs. 3,000. Marginal propensity to consume in this economy will be 025. 6. In an economy, the investment expenditure Is Rs. 100 crore and the consumption function is: C = 20 + 0.7Y. The economy Is in equilibrium at an income level Rs. 400 crore. 7. National income increases with an increase in the level of autonomous investment. 8. Ex-ante investment is the unplanned investment. 9. Saving and investment are always equal. 10. When MPS = 0, the value of Investment multiplier is also zero. 11. Value of multiplier will be infinity if MPC = 1. 12. Value of investment multiplier varies between one and infinity. 13. If due to increase in investment from 1,000 to 2,000, income increases by 4,000, the value of MPS will be equal to 0.4. ANSWERS 1. False. Equilibrium level of income is determined when ex-ante saving (S) = ex-ante investment (0+ 2. True. Equilibrium level of output refers to that level of output where Aggregate Demand = Aggregate Supply as well as Savings = Investments. 3. True. When Aggregate Demand < Aggregate Supply, the producers carry undesired/unplanned inventories, actual stocks are greater than desired stocks with the producers. 4. True. If the flow of goods and services is less than the demand, then the existing stocks of the producers would be sold at higher price pushing the producers to produce more and Aggregate Supply would become equal to Aggregate Demand. 5. False. Marginal propensity to consume in this economy will be 0.50. Y = (c+ bY) + l 10,000 = 2,000 + b (10,000) + 3,000 b (10,000) = 5,000 5,000 1 b =10,000=2= 0.5 MPS = (1 - b) = 1-0.5 = 0.5 6. True. The economy is in equilibrium at an income level of Rs. 400 crore. 30 Y = (c+ bY) + l Y = 20 + 0.7Y+100 0.3Y = 120 120 Y = 0.3 = Rs. 400 crore 7. True. As per the principle of Investment multiplier. 8. False. Ex-ante investment is the planned investment of the economy in a fiscal year. 9. False. Only ex-ante saving (S) and ex-ante investment (I) are always equal. 1 10. False. Marginal propensity to save (MPS) and multiplier are negatively related, i.e., K = MPS. 1 ∴ K =0=∞. 1 1 1 11. True. We know that; K =1−MPC=1−1=0= ∞ 12. True. Value of investment multiplier varies between one and infinity. The minimum value of investment multiplier is 1 and the maximum value of investment multiplier is ∞. 1 1 as k =MPSIf MPS = 0 =0=∞ 1 if MPS = 1 =1= 1 13. False. Change in final Income ∆Y 4,000 We know that K =(Change in initial Investments )=( ∆I )=1,000= 4 times 1 also, K =MPS 1 1 or MPS =K=4= 0.25. GIVE REASON TYPE QUESTIONS (TRUE/FALSE) 1. Under the situation of full employment equilibrium, there is no unutilised capacity in the economy. 2. Full employment implies there is no involuntary unemployment in the economy. 3. The problem of unemployment refers to a situation of voluntary unemployment. 4. In a situation of excess demand, there is underemployment in the economy. 5. Excess demand refers to the situation when AD > AS, corresponding to full employment in the economy. 6. Excess demand raises the real value of the output. 7. General Price level decreases in a situation of inflationary gap in an economy. 8. Excess demand can be corrected by decreasing the government expenditure. 31 9. Reserve Bank of India sells government securities in the open market to correct the situation of inflationary gap. 10. Bank Rate is reduced to correct the situation of deficient demand. ANSWERS 1. True. Full employment equilibrium refers to that situation when AS = AD corresponding to fuller utilisation of resources. 2. True. Full employment is defined as a situation of no involuntary unemployment in the economy. 3. False. The problem of unemployment under Keynesian Economics refers to the condition of involuntary unemployment, i.e., when people who are able to work and are willing to work at the prevailing wage rate, not getting work. 4. False. In case of excess demand, equilibrium between desired AD and desired AS is determined at a higher level of income at full employment in the economy. 5. True. Excess demand refers to the situation when aggregate demand (AD) Is greater than the aggregate supply (AS) corresponding to full employment in the economy. 6. False. Excess demand increases the nominal value of the output in the economy. 7. True. Inflationary gap is the excess of AD over and above its level required to maintain full employment equilibrium in the economy. It puts additional pressure on the existing resources working at full employment. Thus, prices rise but output cannot Increase. 8. True. Excess demand can be rectified by reducing government expenditure as it will lead to a reduction in aggregate demand. 9. True. RBI sells government securities in the open market to correct the situation of inflationary gap as it reduces money supply in the economy. 10. True. Reduction in bank rate will increases the demand for credit thereby increasing consumption and investment expenditure leading to increase in aggregate demand. DETERMINATION OF INCOME AND EMPLOYMENT ______________________________________________________________________________ ----------------------- TRUE OR FALSE QUESTIONS WITH ANSWERS 1. The value of APS can never be greater than 1. Ans. True because savings can never be more than national income. 2. When MPC> MPS, the value of investment multiplier (K) will be greater than 5. Ans. False if MPC> 0.5 but not greater than 0.8. True if MPC is greater than 0.8. 3. Value of APS can never be less than zero. Ans. False as value of APS can be less than zero when consumption is more than income. 4. Savings and investment are always equal. Ans. False because savers and investors are different people who save and invest with different motives. 5. There is inverse relationship between MPS and investment multiplier. Ans. True suppose MPS = 1/3, then K – 1 / 1/3 =1 x 3/1 = 3 6. An economy is only in equilibrium where there is full employment. Ans. False as equilibrium can occur with full employment, underemployment and over full employment. 7. Inflationary gap is measured by deficient demand. Ans. False because inflationary gap is measured by excess demand. 8. Both inflation and deflation are evils but inflation is worse. Ans. False of the two evils deflation is the worse because it has no end. 9. Repo rate of interest is paid by a commercial bank and Reverse Repo rate is paid by RBI. 32 Ans. True when commercial banks get loans from RBI and when commercial banks park their surplus funds with RBI. 10. In Keynesian model, short period equilibrium is discussed with reference to constant (fixed) price level. Ans. True because of the assumption that AS is perfectly elastic due to existence of excess capacity of the economy. 11. Ex-post investment is greater than ex-ante investment. Ans. True because ex-post investment includes undesired change in stock whereas ex-ante investment does not. 12. Deflationary gap can be corrected by increasing the level of AD. Ans. True as it is the deficiency of AD which causes deflationary gap. 13. Underemployment equilibrium indicates excess supply in the economy. Ans. True because AD is less than what is needed for full employment of resources implying existence of excess capacity. 14. Break-even point is struck when saving is equal to zero. Ans. True because at break-even point Consumption = Income and so saving 0 15. Consumption (C) is positively related to Income (Y) but C is not zero when V is zero. Ans. True because at zero level of income, a minimum level of consumption is necessary for survival. 16. Autonomous increase in investment produces autonomous increase in income. Ans. False whereas investment is autonomous, increase in income is induced through increase in expenditure. 17. Equilibrium beyond the level of full employment does not cause a rise in level of output. Ans. True because the economy is already at the full employment and there is no idle capacity in the economy. CHAPTER 6 GOVERNMENT BUDGET AND THE ECONOMY ________________________________________________ ----------------------- 1. A government budget is an annual statement of ________ during a fiscal year. (A) Estimate receipts and expenditure 33 (B) Actual receipts and expenditure (C) Revenue receipts and expenditure (D) Capital receipts and expenditures 2. Which one of the following is not an objective of government budget? (A) Reduction of poverty and unemployment (B) Reallocation of resources (C) Economic growth (D) Maintaining law and order 3. Direct taxes are ____________ (A) Imposed on every member of the society (B) Helpful in reducing inequalities of income (C) Inflationary in nature (D) Helpful in reducing consumption of harmful commodities 4. The receipts of the government which create liabilities or reduce assets are called __________ (A) Capital receipts (B) Revenue receipts (C) escheat (D) Fees and fines 5. Which of the following is not an indirect tax? (A) Sales tax (B) Corporate tax (C) Value added tax (D) Excise duty 6. Which of the following is a characteristics feature of tax? (A) Penalty for breaking traffic rules (B) Compulsory or legal payment (C) Payment for special payment (D) Direct payment for purchase of goods 7. Fiscal deficit –interest payment =____________ (A) Revenue deficit (B) Budget deficit (C) Primary deficit (D) None of these 8. Borrowings are equivalent to ____________ (A) Primary deficit (B) Fiscal deficit (C) Revenue deficit (D) None of these 9. What is repayment of loan? Choose one option. (A) Capital receipt (B) Revenue receipt (C) Capital expenditure (D) Revenue expenditure 10. Loans to state government are a part of ____________ (A) Capital expenditure (B) Revenue expenditure (C) Revenue receipt (D) Capital receipt 34 11. Which of the following statements is not true for fiscal deficit? A fiscal deficit: (A) Represents the borrowing of the government (B) Is the difference between total expenditure and total receipts of the government (C) Is the difference between total expenditure and total receipts other than borrowing (D) Increase the future liability of the government 12. Revenue deficit is equal to : (A) Total expenditure –capital expenditure (B) Fiscal deficit –interest payment (C) Revenue expenditure-revenue receipts (D) Total expenditure-revenue –revenue expenditure 13. A government expenditure budget shows primary deficit of Rs. 4400 crore. The government expenditure on the interest payment is Rs. 400 crore. How much is the fiscal deficit? (A) Rs. 4800 (B) Rs. 4000 (C) Rs.4600 (D) None of these 14. What will be the effect of a deficit budget on aggregate demand? (A) AD decreases (B) AD increases (C) AD remains constant (D) None of these 15. Identify the correct statement. (A) Indirect taxes are imposed on production ,sale of goods and services (B) A government budget is an annual statement of actual receipts and actual payments (C) Revenue deficit is related to only revenue expenditure (D) Primary deficit shows total borrowings requirements of the government 16. The government budget has a revenue deficit. This gets financed by; (A) Borrowing (B) Disinvestment (C) Tax revenue (D) Indirect taxes (A) A and D (B) C and D (C) A and B (D) C and A 17. Borrowing in government budget is: (choose the correct alternative) (A) Revenue deficit (B) Fiscal deficit (C) Primary deficit (D) Deficit in taxes 18. The non-tax revenue in the following is______________ (A) Export duty (B) Import duty (C) Dividend (D) Excise 19. Primary deficit in a government budget is _____________ (A) Revenue expenditure –Revenue receipts (B) Total expenditure-Total receipts 35 (C) Revenue deficit –Interest payment (D) Fiscal deficit-Interest payment 20. Direct tax is called direct because it is collected directly from _____________ (A) The producer on goods produced (B) The sellers on goods sold (C) The buyers of goods (D) The income earners 21. Fiscal deficit equals _____________ (A) Indirect payment (B) Borrowings (C) Interest payment less borrowing (D) Borrowing less interest payments 22. Primary deficit equals____________ (A) Borrowings (B) Interest payments (C) Borrowing less interest payments (D) Borrowing and interest payments both 23. Identity which of the following statements is true? (A) Fiscal deficit is difference between planned revenue expenditure and planned revenue receipts (B) Fiscal deficit is difference between total planned expenditure and total planned receipts (C) Primary deficit is the difference between total planned receipts and interest payments (D) Fiscal deficit is sum of primary deficit and interest payment ANSWER KEY 1. A 2. D 3. B 4. A 5. B 6. B 7. C 8. B 9. C 10. A 11. B 12. C 13. A 14. B 15. A 16. C 17. B 18. C 19. D 20. D 21. B 22. C 23. D 1. The responsibility of fiscal policy lies with (a) the government. (b) the central government, (c) the commercial banks. (d) the stock exchanges. 2. Fiscal deficit in a budget is measured as (a) Total expenditure minus total revenue. (b) Total expenditure minus total capital receipts. (c) Total expenditure minus total revenue receipts. (d) Total expenditure minus sum of total revenue receipts and total non-debt creating capital receipts. 3. Which of the following is not a non-tax revenue receipt? (a) Interest receipts (b) External grants (c) Dividends and profits (d) Proceeds of disinvestment. 4. Which of the following is not a direct tax? 36 (a) GST (b) Corporate tax (c) Income tax (d) Health tax. 5. Administrative revenue includes which of the following? (a) Fines and penalties (b) Dividends (c) Commercial revenue (d) Loans from abroad. 6. Revenue expenditure does not include which of the following? (a) Subsidies (b) Interest on government loans (c) Public administration (d) Investment expenditure by PSUs. 7. The difference between the revenue receipts and revenue expenditure of the government is known as (a) revenue deficit. (b) budget deficit. (c) fiscal deficit. (d) primary deficit. 8. If you are Given the following data of a hypothetical Economy, (i) Total budgeted expenditure Rs. 1,000 crore (ii) Total budgeted revenue receipts Rs. 700 crore (iii) Proceeds of Disinvestment Rs. 150 crore (iv) Loans Rs. 150 crore Then, the fiscal deficit equals (a) Rs. 150 crore. (b) Rs. 300 crore. (c) Rs. 700 crore. (d) Rs. 1,000 crore. 9. Primary deficit in a budget will be zero when (a) revenue deficit is zero. (b) net interest payments are zero. (c) fiscal deficit is zero. (d) Any of the above. 10. Fiscal deficit equals (a) total expenditure - total receipts. (b) total expenditure - revenue receipts. (c) total expenditure - capital receipts. (d) total expenditure - (revenue receipts + non-debt creating capital receipts). 11. Total expenditure on national defence in India is categorised as (a) revenue expenditure. (b) capital expenditure. (c) partly revenue expenditure and partly capital expenditure. (d) confidential. ANSWERS 1. (a) 2. (d) 3. (d) 4. (a) 5. (a) 6. (d) 7. (a) 8. (a) 9. (b) 10. (d) 11. (c) GIVE REASON TYPE QUESTIONS (TRUE/FALSE) 1. Public expenditure is not a vital part of government budget. 37 2. Tax rebates can ensure stimulation of savings and investment in an economy. 3. Keeping a check on inflation is entirely a monetary policy discretion. 4. Progressive taxation reduces inequality of income and wealth. 5. Tax is never a compulsory payment. 6. Capital Receipts are those receipts which are regular and recurring in nature. 7. Fiscal deficit is always a matter of worry for the government. ANSWERS 1. False. Government expenditure is an essential part of fiscal structure of an economy. 2. True.Tax rebates generally stimulates savings and investments in an economy as it leads to increase in purchasing power. 3. False. Controlling inflation is a key feature of fiscal policy as well monetary policy. Government has to ensure the objective of stabilising the prices prevailing in the economy. 4. True. Progressive taxation means putting on higher taxes on richer class and vice versa. Since taxation is directly proportional to income level, it leads to ensuring equitable distribution of income. 5. False. By definition Tax is unilateral (one sided) compulsory payment made by households and firms to the government. Any evasion of taxation may lead to criminal charges against the household or the firm. 6. False. Capital receipts by definition are those receipts which either create some liability or reduces some assets. Such receipts are never routine/regular/recurring in nature. 7. False. Fiscal deficit over and above the acceptable limits (2.5% - 3%) may be a matter of worry for the government. 11. Select the correct alternative answer. (a) ………. is one of the capital expenditure items of the government budget (i) Payment of pension (ii) Payment of subsidies on production (iii) Purchasing of shares (iv) Grants (b) ………. is one of the revenue expenditure items of the government budget (i) Payment of interest (ii) Purchase of building (iii) Purchase of machinery (iv) Loans granted to a state government. (c) ………. is an example of direct tax? (i) Excise duty (ii) Wealth tax (iii) Entertainment tax (iv) Sales tax (d) ………. is an example of an Indirect tax. (i) Wealth tax (ii) Income tax (iii) Customs duty 38 (iv) Corporation tax (e) ………. is one of the tax revenue components of the government budget (i) Export duty (ii) Dividend (iii) Interest (iv) Fees (f) ………. indicates the borrowing requirements of the government. (i) Primary deficit (ii) Revenue deficit (iii) Fiscal deficit (iv) Budgetary deficit 12. Is entertainment tax an example of indirect tax? Give reason in support of your answer. 13. If for a government, fiscal deficit is Rs.3,25,500 crore and interest payments are Rs.57,500 crore. How much is the primary deficit? 14. If for an economy the government budget shows a primary deficit of Rs.42,400 crore and the interest payments liability is Rs. 7,300 crore. How much is the fiscal deficit? 15. State the concept of Primary Deficit. GOVERNMENT BUDGET AND THE ECONOMY ______________________________________________________________________________ ----------------------- TRUE OR FALSE QUESTIONS WITH ANSWERS 1. Government budget is a statement of actual receipts and expenditure of the government. Ans. False Government budget is a statement of expected receipts and expenditure of the government. 2. Indirect taxes are not convenient to realise. Ans. False Indirect taxes are easy to realise since they are included in the prices of commodities. 3. Payment of salaries to the government employees is a capital payment. Ans. False Payment of salaries is a revenue payment. 4. Revenue budget is an account of assets and liabilities of the government. Ans. False Revenue budget comprises current revenue receipts and expenditure met from such revenue. 5. Primary deficit is the difference between revenue deficit and interest payment. Ans. False Primary deficit is the difference between fiscal deficit and interest payment. 6. Fiscal deficit is always greater than revenue deficit. Ans. True Fiscal deficit is the difference of overall expenditure (revenue and capital expenditure) and overall receipts (revenue and capital receipts). Clearly, this makes fiscal deficit greater than revenue deficit. 7. Expenditure made on establishment of Metro Rail line in Delhi is a capital expenditure. Ans. True This expenditure has created assets. 8. Increase in fiscal deficit does not affect primary deficit. Ans. True because primary deficit is equal to fiscal deficit minus interest payment. 9. Fiscal deficit in the economy will be zero if there is no provision for borrowing in the budget. Ans. True Fiscal deficit is, in fact, equal to borrowing. 39 CHAPTER 7 BALANCE OF PAYMENTS MULTIPLE CHOICE QUESTIONS (MCQs) BALANCE OF PAYMENTS ______________________________________________________________________________ 40 ----------------------- MULTIPLE CHOICE QUESTIONS (MCQS) WITH ANSWERS 1. Which of the following items is entered on the credit side of B0P account? (A) Investment from abroad (B) Import of goods (C) Gifts paid to foreigners (D) Repayment of foreign loan 2. An account indicating a systematic record of all economic transactions between residents of a country and residents of foreign countries during a period of account is called ___________Account. (A) Balance of Trade (B) Balance of Payment (C) Government budget (D) None of these 3. Current account of BoP records (A) Exports and import of goods (B) Exports and import of services (C) Unilateral transfers from and to foreigners (D) All of these 4. There is__________ relationship between exchange rate and supply of foreign exchange. (A) a direct (B) an inverse (C) no (D) both (i) and (ii) 5. Outflow of foreign exchange is recorded on the ___________sides. (A) credit (B) debit (C) either (I) or (ii) (D) neither (I) nor (ii) 6. Which of the following is a component of capital account of BoP? (A) Export and import of goods (B) Export and import of services (C) Unilateral transfers (D) Sale of assets to foreigners 7. Which of the following is included in balance of trade? (A) Shipping (B) Insurance (C) Imports of goods (D) Unilateral transfers 8. Transactions that take place to cover deficit or surplus are called ___________transactions. (A) accommodating (B) autonomous (C) current account (D) above the line 9. The balance of trade shows a deficit of 500 crore. The value of exports is Rs. 700 crore. Find the value of imports. (A) Rs. 700 crore (B) Rs.1200 crore (C) Rs.900crore (D) Rs. 200 crore 10. Which of the following is a source of demand for foreign currency? 41 (A) Foreign tourists visiting India (B) Exports of goods and services (C) Imports of goods (D) (iv) All of these 11. When receipts of foreign exchange are less than payments of foreign exchange, then B0P is: (A) deficit (B) surplus (C) balanced (D) none of these 12. Under flexible exchange rate system, exchange rate is determined (A) by the government (B) by market forces of demand and supply (C) by Central Bank of a country (D) none of these 13. Balance of payment is a (A) flow (B) stock (C) both (I) and (ii) (D) neither (I) nor (ii) 14. Devaluation which means fall in value of domestic currency in terms of foreign currency takes place in ________ (A) Flexible Exchange Rate regime (B) Fixed Exchange Rate regime (C) both (I) and (ii) (D) neither (I) nor (ii) 15. A change from Rs. 60 =1$ to 62 = 1$ indicates that has ____________ (A) appreciated (B) depreciated (C) neither (I) nor (ii) (D) either (I) or (ii) 16. The net value of balance of visible trade, invisible trade and of unilateral transfers is __________ (A) Balance of capital account (B) Balance of current account (C) Balance of trade (D) Balance of payments 17. Demand curve of foreign exchange is (A) downward sloping (B) upward sloping (C) vertical straight line parallel to Y-axis (D) horizontal straight line parallel to X-axis 18. Indian rupee is appreciated in terms of British pound because of (A) falling demand of pounds (B) shortage of pounds 42 (C) more supply of Indian rupees (D) less demand for Indian rupees 19. ______________refers to the difference between exports and imports of visible items. (A) Balance of payments (B) Balance of trade (C) both (I) and (ii) (D) neither (I) nor (ii) 20. Export of goods and services raises the__________ of foreign exchange. (A) demand (B) supply (C) both (I) and (ii) (D) neither (I) nor (ii) 21. BoP is measured as: (A) difference between invisible items of exports and imports (B) difference between visible items of exports and imports (C) difference between internal and external flow of gold (D) difference between all receipts and payments of foreign exchange 22. BoP is in disequilibrium when (A) current account balance + capital account balance is not equal to zero (B) current account balance + capital account balance is some positive number (C) current account balance + capital account balance is negative number. (D) All of these 23. Which of the following transactions is/are recorded in the current account of BoP? (A) import and export of goods and services (B) transfer from one country to another. (C) Both(a)and(b) (D) None of these 24. Other things remaining the same, when in a country market price of foreign currency falls, national income is likely: (A) to rise (B) to fall (C) to rise and fall both (D) Not affected 25. Other things remaining unchanged, when in a country, price of foreign currency rises, national income is _____________: (A) Likely to rise (B) Likely to fall (C) Likely to rise and fall both (D) Not affected 26. Foreign exchange transactions dependent on other foreign exchange transactions are called __________ : (A) Current account transactions (B) Capital account transactions (C) Autonomous transactions (D) Accommodating transactions 27. Foreign exchange transactions which are independent on other transactions in the Balance of Payments Account are called: (A) Current transactions 43 (B) Capital transactions (C) Autonomous transactions (D) Accommodating transactions 28. A company located in India receives a loan from a company located abroad. How is this transaction recorded in India’s BoP account? (A) Credit side of current account (B) Debit side of current account (C) Credit side of capital account (D) Debit side of capital account ANSWER KEY 1. A 2. B 3. D 4. A 5. B 6. D 7. C 8. A 9. B 10. C 11. A 12. B 13. A 14. B 15. B 16. B 17. A 18. A 19. B 20. B 21. D 22. C 23. A 24. B 25. A 26. D 27. C 28. C 1. __________ is a systematic record of all the economic transactions between one country and restof the world. (a) Balance of Trade , (b) Balance of Transactions (c) Budget (d) Balance of Payments 2. Dr. Manjeet Singh is an NRI, settled in Canada. He deposits $1 million with a bank in India. This would be treated as a (a) credit entry in capital account. (b) credit entry in current account. (c) debit entry in capital account. (d) debit entry in current account. 3. External deficit of an economy refers to (a) fiscal deficit. (b) current account deficit in BoP. (c) revenue deficit. (d) trade deficit. 4. If you are given the following data, (i) Total exports of merchandise Rs. 1,000 crore (ii) Total imports of merchandise Rs. 1,200 crore (iii) Total exports of invisibles Rs. 100 crore (iv) Total imports of invisibles Rs. 100 crore Then, balance of trade would be (a) Surplus of Rs. 100 crore (b) Deficit of Rs. 100 crore (c) Surplus of Rs. 200 crore (d) Deficit of Rs. 200 crore 5. In Q. 4, the current account on balance of payments shows 44 (a) a deficit ofRs. 200 crore. (b) a surplus of Rs. 200 crore. (c) a deficit of Rs. 100 crore. (d) a surplus of Rs. 100 crore. 6. In Q. 4, the capital account must have (a) a credit balance ofRs. 200 crore. (b) a debit balance of Rs. 200 crore. (c) a credit balance ofRs. 300 crore. (d) a debit balance ofRs. 100 crore. 7. In Q. 4, if a country's capital account shows a credit balance of Rs. 300 crore its foreign exchange reserves will (a) fall. (b) increase. (c) remain unaffected. (d) swing either way. 8. If at a given point of time, the rate of exchange of $ 1 = Rs. 60 has changed into $1 = Rs. 50, we will say that (a) the rupee has appreciated. (b) the rupee has revalued. (c) the rupee has devalued. (d) the dollar has appreciated 9. If at a given point of time, the exchange value of dollar changes from $1 = Rs. 60 to $1 = Rs. 65, we cannot say precisely that (a) the rupee has devalued. (b) the rupee has appreciated. (c) the rupee has depreciated. (d) All of the above. 10. Which of the following events can be expected to occur as a response to an expansion of exports of India? (a) Appreciation of rupee (b) Depreciation of dollar (c) Depreciation of rupee (d) All of the above. 11. If rupee is getting depredated fast and is considered undesirable by the government the RBI may be advised to (a) sell dollars in the foreign exchange market. (b) purchase dollars in the foreign exchange market. (c) print more currency notes. (d) raise tariffs on imports. 12. If in an effort to control depreciation of rupee the RBI puts more dollars in the supply, it may lead to greater inflation, caused by (a) increase in money supply in the economy. (b) reduced availability of goods due to increased exports. (c) reduced availability of goods due to reduced imports. (d) All of the above. 13. If a country carries a deficit in its current account, such a deficit can be financed by (a) printing of new currency. (b) raising the rate of corporate taxes. (c) restricting imports. (d) borrowing foreign exchange from an international source. 14. Long-term concessional development assistance is generally provided by (a) IMF. (b) WTO. (c) IBRD. (d) IDA. 45 15. Which of the following statements is correct with regard to external sector in the post-reform period? (a) Quantitative restrictions have been imposed on a number of tradeable items. (b) Quantitative restrictions have been removed from most of the items except a few goods. (c) The tariff walls have been further raised. (d) Foreign investment is now being discouraged. ANSWERS 1. (d) 2. (a) 3. (b) 4. (d) 5. (a) 6. (a) 7. (b) a (a) 9. (b) 10. (c) 11. (a) 12. (d) 13. (d) 14. (d) 15. (b) GIVE REASON TYPE QUESTIONS (TRUE/FALSE) Giving reasons, state which of the following statements is true or false: 1. Faced with an adverse balance of payments, the government should drastically devalue rupee. 2. Portfolio investment by foreigners in our country is a very lucrative source of foreign capital inflow. 3. Domestic growth suffers when MNCs invest in our country. 4. Trade surplus and current account deficits may coexist. 5. Depreciation of a currency encourages exports while it discourages imports. 6. Depreciation of a currency has the same effect on exports as devaluation of currency. ANSWERS 1. False. This will not only destabilise the domestic economy but will also adversely affect the external sector. 2. False. Volume may be high but its permanence is questionable. 3. False. MNCs contribute to income generation. 4. True. Trade surplus is obtained when the value of exports of a country during a year exceeds the value of imports of goods during that year. Current account is calculated by summing up the trade account and the account of invisibles. Current account would be in deficit if the following situation arises: Value of trade surplus < Value of deficit on account of invisibles 5. True. By depreciation of a currency we mean a fall in the value of domestic currency in relation to foreign currencies. It means two things: (a) The value of foreign currency in terms of our currency goes up. Therefore, the foreigners can purchase more goods with the same amount of money in our market. Our exports will be encouraged. (b) Since foreign currency has become costlier, we will have to pay more if we want to purchase goods from abroad. As a result, our imports will be discouraged. 6. True. Both 'depreciation' and 'devaluation' mean the same, i.e., a fall in the value of domestic currency in relation to foreign currencies. But the term 'depreciation'is used when the currency is on a free float. The term 'devaluation' is used when the currency is on a fixed exchange rate system. 46

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