Q.1. What is meant by excess demand in macroeconomics? ANSWER: When in an economy aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand.
Q.2 Define inflationary gap.
ANSWER:When in an economy aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand and the gap is called inflationary gap.
Q.3 Give the meaning of deficient demand.
ANSWER:When in an economy aggregate demand falls short of aggregate supply at full employment level, the demand is said to be as deficient demand.
Q.4 Define deflationary gap. [CBSE 2008] OR Give the meaning of deflationary gap. [CBSE 2010]
ANSWER:” When in an economy aggregate demand falls short of aggregate supply at full employment level, the demand is said to be deficient demand and the gap is called deflationary gap.
Q.5 State two measures by which a central bank can attempt to reduce the inflationary gap. ANSWER:
Increase in cash reserve ratio.
Increase in marginal requirement.
Q.6. What is the impact of increase in margin requirements? ANSWER: Increase in margin requirements discourages borrowings and decreases the aggregate demand.
Q.7 Give the meaning of full employment.[CBSE 2008] ANSWER: Full employment equilibrium refers to the situation where aggregate demand = aggregate supply and all those who are able to work and willing to work (at the existing wage rate) are getting work.
Q.8 Give the meaning of involuntary unemployment.[CBSE 2008, 09, Sample Paper 2010] ANSWER: Involuntary unemployment refers to a situation in which all able and willing persons to work at existing wage-rate do not find work. They are rendered unemployed against their wish. Hence, it is termed as involuntary unemployment.
Q.9 Is it necessary that equality between AD and AS is established at the full employment level? ANSWER: No, it is not necessary that full employment occurs when AD = AS. Equilibrium can be achieved at full employment level, under employment level or at over full employment level.
Q.10 What is meant by full employment equilibrium? ANSWER:Full employment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply at full employment level.
Q.11 What is underemployment equilibrium?[CBSE 2008] ANSWER:Underemployment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply below full employment level or when resources are not fully employed.
Q.12 What is the meaning of over full employment equilibrium? ANSWER: Over full employment level refers to a situation when equilibrium is attained, i.e., aggregate demand is equal to aggregate supply beyond the full employment level.
Short Answer Type Question:
Q.1 What are the reasons or causes for excess demand? ANSWER: The main reasons for excess demand are apparently the increase in the following components of aggregate demand:
Increase in household consumption demand due to rise in propensity to consume.
Increase in private investment demand because of rise in credit facilities.
Increase in public (government) expenditure.
Increase in export demand.
Increase in money supply or increase in disposable income.
Q.2 What are impacts or effects of excess demand on price, output, employment? ANSWER:
Effect on General Price Level: Excess demand gives a rise to general price level because it arises when aggregate demand is more than aggregate supply at a full employment level. There is inflation in economy showing inflationary gap.
Effect on Output: Excess demand has no effect on the level of output. Economy is at full employment level and there is no idle capacity in the economy. Hence output can’t increase.
Effect on Employment: There will be no change in the level of employment also. The economy is already operating at full employment equilibrium, and hence there is no unemployment.
Q.3 What are the reasons or causes for deficient demand? ANSWER: The main reasons for deficient demand are apparently the decrease in four components of aggregate demand:
Decrease in household consumption demand due to fall in propensity to consume.
Decrease in private investment demand because of fall in credit facilities.
Decrease in public (government) expenditure.
Decrease in export demand.
Decrease in money supply or decrease in disposable income.
Q.4 What are the impacts or effects of deficient demand on price (output) employment? ANSWER:
Effect on General Price Level:Deficient demand causes the general price level to fall because it arises when aggregate demand is less than aggregate supply at full employment level. There is deflation in an economy showing deflationary gap.
Effect on Employment: Due to deficient demand, investment level is reduced, which causes involuntary unemployment in the economy due to fall in the planned output.
Effect on Output: Low level of investment and employment implies low level of output.
Q.5 Explain the role of Government expenditure and Open Market Operation in reducing AD/excess demand. [CBSE 2004C, 06, CBSE 2011; A 11] ANSWER: (a) Government Expenditure:
Government has to invest huge amount on public works like roads, buildings, irrigation works, etc.
During inflation, government should curtail (reduce) its expenditure on public works like roads, buildings, irrigation works thereby reducing the money income of the people and their demand for goods and services.
(b) Open Market Operation:
It consists of buying and selling of government securities and bonds in the open market by central bank.
In a situation of excess demand leading to inflation, central bank sells government securities and bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving loans decreases, which will control excess demand.
Q.6 Differentiate between full employment and underemployment equilibrium. ANSWER:
Q.7 What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?[CBSE Sample Paper 2016] ANSWER:
Business and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal to the full value of the security. It always pays less value than the security.
So, the difference between the value of security and value of loan is called marginal requirement.
In a situation of deficient demand leading to deflation, central bank decreases marginal requirements. This encourages borrowing because it makes people get more credit against their securities.
Long Answer Type Question:
Q.1. Explain the concept of underemployment equilibrium with the help of a diagram. Show on the same diagram the additional investment expenditure required to reach full employment equilibrium.[CBSE 2004] OR Explain the meaning of underemployment equilibrium. Explain two measures by which full employment equilibrium can be reached. [A/2013 (Set-7)] ANSWER:
Underemployment equilibrium refers to a situation when equilibrium is attained i.e., aggregate demand is equal to aggregate supply below full employment level or when resources are not fully employed.
In the above diagram full employment level of national income is attained at point E, but due to deficient demand, aggregate demand shifts downward from AD to AD0 and hew equilibrium is attained at point E1; which is below full employment level. The aggregate demand shifts downward because of the following reasons. (i) Decrease in household consumption demand due to fall in propensity to consume. (ii) Decrease in private investment demand because of fall in credit facilities. (iii) Decrease in public (government) expenditure. (iv) Decrease in export demand. (v) Decrease in money supply or decrease in disposable income.
In order to achieve full employment equilibrium deficiency of demand must be corrected through additional investment expenditure. In the diagram deficiency of AD = AB. Thus, AB amount of additional investment is required to reach the level of full employment.
Q.2 Differentiate between inflationary gap and deflationary gap. Show deflationary gap on a diagram. Can this gap exist at equilibrium level? Explain. [CBSE, 2004, AI 2013] ANSWER: Yes, deflationary gap can exist at equilibrium level of income. In the below figure equilibrium is attained at a equilibrium point E,, when deflationary gap is EB.
Q.3 Explain the concept of Inflationary Gap. Explain the role of Repo Rate in reducing this gap. [CBSE 2015] Or What is meant by Repo Rate? How does the Central Bank use this measure to control inflationary conditions in an economy? [CBSE Sample Paper 2016] ANSWER:
Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at the level of full employment’. It is called inflationary because it leads to inflation (continuous rise in prices).
It can be explained with the help of following diagram:
(i) Repo rate is the. rate at which commercial bank borrow money from the central bank for short period by selling their financial securities to the central bank. (ii) These securities are pledged as a security for the loans. (iii) It is called Repurchase rate as this involves commercial bank selling securities to RBI to borrow the money with an agreement to repurchase them at a later date and at a predetermined price. (iv) So, keeping securities and borrowing is repo rate. (v) In a situation of excess demand leading to inflation, • Central bank raises repo rate that discourages commercial banks in borrowing from central bank as it will increase the cost of borrowing of commercial bank. • It forces the commercial banks to increase their lending rates, which discourages borrowers from taking loans, which discourages investment. • Again high rate of interest induces households to increase their savings by restricting expenditure on consumption. • Thus, expenditure on investment and consumption is reduced, which will control the excess demand.
Q.4 Explain the concept of Deflationary Gap and the role of ‘Open Market Operations’ in reducing this gap.[CBSE 2015] ANSWER:
Deflationary gap is the gap showing deficient of current aggregate demand over ‘aggregate supply at the level of full employment. It is called deflationary because it leads to deflation (continuous fall in prices).
It can be explained with the help of following diagram:
(i) Open Market Operation consists of buying and selling of government securities and bonds in the open market by central bank. (ii) In a situation of deficient demand leading to deflation,central bank purchases government securities and bonds from commercial bank. With the purchase of these securities, the power of commercial bank of giving loans increases, which will control deficient demand.
Q.5 What is ‘deficient demand’? Explain the role of ‘Bank Rate’ in removing it.[AI 2015] ANSWER:
When in an economy, aggregate demand falls short of aggregate supply at full employment level, the demand is said to be a deficient demand.
It can be explained with the help of following diagram:
(i) Bank rate is the rate of interest at which central bank lends to commercial banks without any collateral (security for purpose of loan). The thing, which has to be remembered, is that central bank lends to commercial banks and not to general public. (ii) In a situation of deficient demand leading to deflation, • Central bank decreases bank rate that encourages commercial banks in borrowing from central bank as it will decrease the cost of borrowing of commercial bank. • Decrease in bank rate makes commercial bank to decrease their lending rates, which encourages borrowers from taking loans, which encourages investment. • Again low rate of interest induces households to decrease their savings by increasing expenditure on consumption. • Thus, expenditure on investment and consumption increase, which will control the deficient demand.
Q.6 What is ‘excess demand’? Explain the role of ‘Reverse Repo Rate’ in removing it. [AI 2015] ANSWER:
When in an economy, aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand.
It can be explained with the help of following diagram:
(i) Reverse Repo Rate is the rate at which the central bank (RBI) borrows money from commercial bank. (ii) In a situation of excess demand leading to inflation, Reverse repo rate is increased, it encourages the commercial bank to park their funds with the central bank to earn higher return on idle cash. It decreases the lending capability of commercial banks, which controls excess demand.
Q.1 What happens to the level of national income when aggregate demand falls short of aggregate supply? ANSWER:
As we know that equilibrium level of national income is determined under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level i.e., where aggregate demand is equal to aggregate supply.
As is given in the examination problem that when aggregate demand falls short of aggregate supply, then national income will decrease as shown in the above mentioned diagram.
When AD < AS [At Y1], then there would be stockpiling and producers will produce less. National income will fall and as we know positive relationship exists between national income and consumption, so consumption will fall, which will thereby decrease the aggregate demand till we reach the equilibrium.
Q.2 What happens to the level of national income when aggregate supply falls short of aggregate demand? ANSWER:
As we know that equilibrium level of national income is determined under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level i.e., where aggregate demand is equal to aggregate supply.
As is given in the examination problem that when aggregate supply falls short of aggregate demand, then national income will increase as shown in the given diagram:
When AD > AS [At Y1], then production will have to be increased to meet the excess demand. Consequently, national income will increase. As we know that positive relationship exists between national income and consumption. So consumption will increase, which will thereby increase the aggregate demand till we reach the equilibrium.
Q.3 In an economy planned saving is greater than planned investment. Explain how the economy achieves equilibrium level of national income.[CBSE Sample Paper 2014, AI 04, CBSE 04, 05, 09] ANSWER:
It refers to the point that has come to be established under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level under this given condition. Therefore, AD = AS C + I = C + S I = C + S- C = S
As given in the examination problem, when planned saving is greater than planned investment, then national income will decrease as shown in the diagram.
When saving > investment [at Y1], then there would be stockpiling and producers will produce less. National income will fall and as we know positive relationship exists between national income and saving, then saving will start falling until it becomes equal to investment. It is here the equilibrium level of income is derived.
Q.4 If planned saving is less than planned investment, what changes will bring economy in equilibrium? ANSWER:
It refers to the point that has come to be established under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level under this given condition. Therefore, AD = AS C + I = C + S I=C+S-C=S
As given in the examination problem, when planned saving is less than planned investment, then national income will decrease as shown in the below diagram.
When, investment > saving [at Y1], then production will have to be increased to meet the excess demand. Consequently, national income will increase leading to rise in saving until saving becomes equal to investment. It is here that equilibrium level of income is established because what the savers intend to save becomes equal to what the investors intend to invest.
Q.5 Discuss relationship between MPC and multiplier. [AI 2006] ANSWER:
If we put maximum value of MPC, i.e., 1, we get maximum value of multiplier, i.e., ∞.
As against it, if we put minimum value of MPC, i.e., 0, we get the minimum value of multiplier, i.e. 1.
So, positive relationship exists between MPC and multiplier. It means when MPC increases, the multiplier also increases and vice-versa.MPC↑→K↑
Q.6 Discuss relationship between MPS and multiplier. [CBSB 1994C, AI 1997] ANSWER:
If we put minimum of MPS i.e. 0, we get maximum value of multiplier, i.e., ∞.
As against it if we get maximum value of MPS, i.e., 1, if we get minimum value of multiplier, i.e.,1.
Hence, inverse relationship exists between MPS and multiplier. It means if MPS increases, the multiplier decreases and vice-versa. MPS↑→K↓
Q.7 c = 50 + 0.5Y is the consumption function; where C is consumption expenditure and Y is national income and investment expenditure is 72000 in an economy. Calculate: (i) Equilibrium level of national income. (ii) Consumption expenditure at equilibrium level of national income.[CBSE 2013 (Set III)] ANSWER:
Equilibrium level of national income (Y) At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Or, Y = 50 + 0.5Y + 2,000 [C = 50 + 0.5Y] 0.5Y = 2,050 Y = Rs 4,100
Consumption expenditure at equilibrium level of national income. Putting value of national income of 4,100 in consumption function, we get: C = 50 + 0.5 x 4,100 C = Rs 2,100 (a) Equilibrium level of national income = 74,100. (b) Consumption expenditure at equilibrium level of national income = Rs 1740
Q.8 In an economy, C = 200 + 0.75 Y is the consumption function, where C is consumption expenditure and Y is national income and investment expenditure is Rs 4000 in an economy.Calculate Equilibrium level of national income and consumption expenditure.[AI 2013 (Set II)] ANSWER:
Equilibrium level of national income (Y) At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Or, Y = 200 + 0.75 Y + 4,000 [C = 200 + 0.75 Y] 0.25 Y = 1,200 Y = Rs 16,800
Consumption expenditure at equilibrium level of national income. Putting value of national income of 16,800 in consumption function, we get; C = 200 + 0.75 x 16,800 C = Rs 12,800 (a) Equilibrium level of national income = Rs 16,800; (b) Consumption expenditure at equilibrium level of national income = Rs 12,800
Q.9 From the following data about an economy, calculate (a) equilibrium level of national income and (b) total consumption expenditure at equilibrium level of national income. (i) C = 200 + 0.5 Y is the consumption function, where C is consumption expenditure and Y is national income. (ii) Investment expenditure is 1500.[AI 2013 (Set III)] ANSWER:
Equilibrium level of national income (Y) At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Or, Y = 200 + 0.5 Y + 1500 [C = 200 + 0.5 Y] 0.5 Y = 1,700 Y = Rs 3400
Consumption expenditure at equilibrium level of national income. Putting value of national income of 3400 in consumption function, we get; C = 200 + 0.5 x 3400 C = Rs 1900 (a) Equilibrium level of national income = Rs 3400. (b) Consumption expenditure at equilibrium level of national income = Rs 1900
Q.10 Calculate equilibrium national income from the following data: [AI 2013, C (Set I)] (i) Consumption expenditure at zero income = Rs 60 (ii) Marginal propensity to consume = 0.9 (iii) Investment = Rs 100 ANSWER:Equilibrium level of national income (Y) At Equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Y =C¯ + b Y + I Or, Y = 60 + 0.9 Y + 100 [C = 60 + 0.9 Y] 0.1 Y = 160 Y = Rs 1600
Q.11 Given consumption function C = 100 + 0.75 Y (where C = -consumption expenditure and Y = national income) and investment expenditure Rs 1,000, calculate: (i) Equilibrium level of national income; (ii) Consumption expenditure at equilibrium level of national income. [CBSE 2009] ANSWER:
Equilibrium level of national income (Y) At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Or, Y = 100 + 0.75 Y + 1,000 [C = 100 + 0.75 Y] 0.25 Y = 1,100 Y = Rs 4,400
Consumption expenditure at equilibrium level of national income. Putting value of national income of 4,400 in consumption function, we get; C = 100 + 0.75 x 4,400 C = Rs 3,400 (a) Equilibrium level of national income = Rs 4,400; (b) Consumption expenditure at equilibrium level of national income = Rs 3,400
Q.12 In an economy the consumption function is C = 500 + 0.75 Y, where C is consumption expenditure and Y is income. Calculate the equilibrium level of income and consumption expenditure when investment expenditure is Rs 5,000.[CBSE Foreign 2010 (I)] ANSWER:
Equilibrium level of national income (Y) At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Or, Y = 500 + 0.75 Y + 5,000 [C = 500 + 0.75 Y] 0.25 Y = 5,500 Y = Rs 22,000
Consumption expenditure at equilibrium level of national income. Putting value of National Income of 22,000 in consumption function, we get; C = 500 + 0.75 x 22,000 C = Rs 17,000 Equilibrium level of income = Rs 22,000; Consumption expenditure at equilibrium level of income = Rs 17,000.
Q.13 Suppose that consumption equals C = 100 + 0.75 Y, and investment equals I = Rs 50 and Y = C + I. Find; (i) The equilibrium level of income (ii) The level of consumption at equilibrium, and (iii) The level of saving at equilibrium. ANSWER:
Y = C + I Y = 100 + 0.75 Y + 50 Y – 0.75 Y = 150 0.25
C = 100 + 0.75 600 = Rs 550
S = Y – C = 600 – 550 = Rs 50
Q.14 Find national income from the following data: [CBSE 2012]Autonomous consumption = Rs 100 Marginal propensity to consume = 0.80 Investment = Rs 50 ANSWER:As given in the examination problem, Autonomous consumption or C =150 Autonomous investment or I = Rs 50 MPC or b = 0.80 So, AD = C + I = C + bY + I = 100 + 0.8 Y + 50 = 150 + 0.8 Y As we know that the equilibrium level of national income in two sector model is determined where, AS = AD Y = 150 + 0.8Y Y – 0.8Y = 150 Y(1—0.8) = 150 Y=15020 =Rs 750
Q.15 An economy is in equilibrium. Find Marginal Propensity to Consume from the following: [CBSE 2015] National Income = 2000 Autonomous Consumption = 400 Investment Expenditure = 200 ANSWER:Autonomous consumption or C = Rs 400 Equilibrium level of income or Y = Rs 2000 MPC or b = ? At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Y = C + bY + I 2000 = 400 + b(2000) + 200 2000 – 600 = b(2000) 1400 = b(2000) MPC(b) = 0.7
Q.16 An economy is in equilibrium. Calculate the Investment Expenditure from the following: [AI 2015] National Income = 800 Marginal Propensity to Save = 0.3 Autonomous Consumption =100 ANSWER: Autonomous consumption or C = Rs 100 Equilibrium level of income or Y = Rs 800 MPS = 0.3 MPC or b = 1 – MPS = 0.7 At equilibrium, Y = C + I [AD = AS = Y and AD = C + I] Y = 100 + 0.7Y + I 800 = 100 + 0.7(800) + I 800 = 100 + 560 + 1 I = 140
Q.17 As a result of increase in investment by Rs 125 crore national income increases by Rs 500 crore. Calculate marginal propensity to consume.[CBSE 2008] ANSWER:Multiplier k =ChangeinIncome(ΔY)ChangeinInvestment(ΔI)=500125=4 We also know that Multiplier (k) =11−MPCor4=11−MPC or or 4 — 4 MPC = 1 or MPC = 3/4 = 0.75
Q.18 As a result of increase in investment national income increases by Rs 600 crore. If marginal propensity to consume is 0.75, calculate the increase in investment. [CBSE 2008] ANSWER:Multiplier (k) =11−MPC=11−0.75=10.25=4 We also know that k =ChangeinIncome(ΔY)ChangeinInvestment(ΔI) 4=600ChangeinInvestment(ΔI) Hence, change in investment(ΔI) =Rs 150 crore Increase in investment = Rs 150 crore
Q.19 If marginal propensity to consume is 0.9, what is the value of multiplier? How much investment is needed if national income increases by Rs 5,000 crore? [CBSE 2008] ANSWER: Multiplier (k) =11−MPC=11−0.9=10.1=10 We also know that k =ChangeinIncome(ΔY)ChangeinInvestment(ΔI) 10=k=5000ChangeinInvestment(ΔI) Hence, change in investment (ΔI) = Rs 500 crores Multiplier (k) = 10; Increase in investment = Rs 500 crore
Q.20 An increase of Rs 250 crore in investment in an economy resulted in total increase in income of Rs 1,000 crore. Calculate the following: (a) Marginal propensity to consume (MPC), (b) Change in saving, (c) Change in consumption expenditure, (d) Value of multiplier. [CBSE Sample Paper 2008] ANSWER:Multiplier k =ChangeinIncome(ΔY)ChangeinInvestment(ΔI) =1000250=4 We know that Multiplier (k) =11−MPCor4=1MPC−1 4-4MPC=1 MPC=3/4=0.75 MPC=ChangeinConsumption(ΔC)ChangeinIncome(ΔY) 0.75= ChangeinConsumption(ΔC)1000 So, change in consumption expen¬diture (C) = Rs 750 crore Change in Saving = Change in Income – Change in Consumption Expenditure So, Change in Saving = Rs 1,000 crore – Rs 750 crore = Rs 250 crore (a) Marginal propensity to consume = 0.75 (b) Change in saving = Rs 250 crore (c) Change in consumption expenditure = Rs 750 crore (d) Value of multiplier = 4
Long Answer Type Question:
Q.1 Why must aggregate demand be equal to aggregate supply at the equilibrium level of income and output? Explain with the help of a diagram. Or [CBSE 2006] Explain how is equilibrium level of income and employment established through AD and AS? Or Explain determination of equilibrium level of income using consumption plus investment approach. Use diagram. [CBSE 2008] ANSWER:
It refers to the point that has come to be established under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level under this given condition where Aggregate Demand= Aggregate Supply.
If due to some disturbance, we divert from that position, the economic forces will work in such a manner so as to drive us back to the original position, i.e., aggregate demand is equal to aggregate supply.
In the above mentioned figure, at point P, income = consumption, which is known as to be a break-even point. The equilibrium level of national income is attained at point E, where aggregate demand = aggregate supply.
If due to some disturbance we divert from our position, like when AD > AS [at Y2], then, production will have to be increased to meet the excess demand. Consequently, national income will increase. As we know positive relationship exists between national income and consumption, so consumption will increase, which will thereby increase the aggregate demand till we reach the equilibrium.
As against it, when AD < AS [at Y1], then there would be stockpiling and producers will produce less. National income will fall and as a result consumption will start falling, which will thereby reduce the aggregate demand till we reach the equilibrium.
Q.2 Explain the meaning of equilibrium level of income and output using saving and investment approach. Use a diagram. ANSWER:
It refers to the point that has come to be established under the given condition of aggregate demand and aggregate supply, and has tendency to stick to that level under this given condition where Aggregate Demand (AD) = Aggregate Supply (AS). AD = AS CONSUMPTION(C) + Investment(I) = CONSUMPTION(C) + Saving(S) I = S
If due to some disturbance, we divert from that position, the economic forces will work in such a manner so as to drive us back to the original position, i.e., Saving is equal to Investment.
In the above figure, the equilibrium level of national income is attained at point E, where saving = investment which is derived from a point where S = I.
If due to some disturbance we divert from our position like when investment > saving [at Y2], then production will have to be increased to meet the excess demand. Consequently, national income will increase leading to rise in saving until saving becomes equal to investment. It is here that equilibrium level of income is established because what the savers intend to save becomes equal to what the investors intend to invest.
As against it, when saving > investment [at Y1], then there would be stockpiling and producers will produce less. National income will fall and as a result saving will start falling until it becomes equal to investment. It is here the equilibrium level of income is derived.
Q.3 Explain the working of investment multiplier with the help of a numerical example. Or [CBSE 2005] Explain with the help of a numerical example how does increase in investment in an economy affect its level of income? Or Explain the dynamic multiplier. Or Explain the income propagation process due to change in investment. Or Explain the process of working of the ‘investment multiplier with the help of a numerical example. [CBSE Sample Paper 2014] ANSWER: The process of investment multiplier is as under:
It can be illustrated with the help of a simple example. We know that one man’s expenditure is another man’s income.
Suppose, the government of a country spends Rs 100 crore on building roads. National income of the country automatically rises by Rs 100 crore in Round 1.
Now suppose MPC is 0.5, people working in the investment industry will spend Rs 50 crore on new consumption goods.
The consumer goods industry will have an extra income of Rs 50 crore. Assume the MPC for the whole society is 0.5, people working in these consumer goods industry would again spend 50% of their additional income of Rs 50 crore (which works out to be 25 crore) on more consumer goods.
These Rs 25 crore will, thus, become the income for others. This will continue till total increase in income becomes k times the increment of investment.
The process of income generation has been shown in the following table:
Q.1 Explain the components of aggregate demand. Or State components of AD. Describe any one.[CBSE 1995, 96, 96C, 97C, 2005C, 06, 09] ANSWER: The components of aggregate demand are:
Private (or Household) consumption demand (a) The total expenditure incurred by all the households of the countiy on their personal consumption is known as private consumption expenditure. (b) Consumption demand depends mainly on disposable income and propensity to consume.
Private investment demand (a) Private investment demand refers to the demand for capital goods by private investors. (b) It is addition to the existing stock of real capital assets such as machines, tools, factory-building etc. (c) Investments demand depends upon marginal efficiency of capital (Marginal efficiency of investment) and interest rate. (d) Investment is of two types, Autonomous Investment and Induced investment, but in Keynes theory investment assumed to be Autonomous.
Government demand for goods and services (a) In a modem economy, the government is an important buyer of goods and services. (b) The government demand may be on account of public needs for roads, schools, hospitals, power, irrigation etc, for the maintenance of law and order and for defence.
Demand for net export (X – M) (a) Net export represents foreign demand for goods and services produced by an economy. (b) When exports exceed imports, net exports is positive and when imports exceed, net exports is negative. (c) Exports and imports of a country are influenced by a number of factors such as foreign trade policy, exchange- rate, prices and quality of goods etc. Thus, aggregate demand consists of these four types of demand. AD = C + I + G + (X – M)
Q.2Explain the distinction between ‘autor mous investment’ and “induced investment’. [CBSE 2013 (C)] ANSWER:
Q.3 Briefly state the concept of consumption function. Explain with schedule and diagram. [CBSE 2008; AI 08, 09] ANSWER: (i) Consumption function expresses functional relationship between aggregate consumption and national income. Thus, consumption (C) is a function of income (Y). C = F (Y) Where, C = Consumption F = Function Y = Disposable income (ii) It can be explained with the help of the following schedule and diagram: The above schedule and diagram shows Keynes’ Psychological law of Consumption, which states that as income increases consumption expenditure also increases but increase in consumption is smaller than the increase in income.
Q.4 With the help of consumption schedule or curve bring out meaning of break-even point. ANSWER: Break-even point refers to that point in the level of income at which consumption is just equal to income. In other words, whole of income is spent on consumption and there is no saving. Below this level of income, consumption is greater than income but above this level, income is greater than consumption. It can be explained with the help of following schedule and diagram:
In the above imaginary house hole schedule of consumption and saving, at annual income level of Rs 60,000, consumption is Rs 60,000 and in consequence there is no saving. This is break-even point. In the above diagram, when Consumption (C) = National Income(Y), savings are zero. This is known as break-even point. This is shown by point E in the diagram. Thus break even point indicates a point where consumption becomes equal to income or consumption curve cuts the income curve.
Q.5 What is APC? How is it calculated?[AT 1991; CBSE 92 C, 2004] ANSWER: The ratio of aggregate consumption expenditure to aggregate income is known as average propensity to consume. It indicates the percentage (or ratio) of income which is being spent on consumption. It is worked out by dividing total consumption expenditure (C) by total income (Y). APC=C/Y
Q.6 Distinguish between APS and MPS. The value of which of these two can be negative and when? [CBSE 2004, 2011] ANSWER: APS can be negative, when at low level of income consumption exceeds income, savings are negative which make the APS negative. It can be explained with the help of the following schedule:
Q.7 Differentiate between APC and APS and tell which of them is negative. ANSWER: APS can be negative. When at low level of income consumption exceeds income, savings are negative and make the APS negative. It can be explained with the help of the following schedule.
Q.8 Differentiate between APC and MPC. ANSWER:
Q.9 Explain saving function with the help of schedule and diagram. [AI 2008] ANSWER: (i) Propensity to save (or saving function) shows the functional relationship between aggregate savings and income.S=f(Y) In other words, the part of income which is not spent on current consumption is known as saving. By deducting consumption expenditure (C) from income (Y), we get saving (S). S = Y – C
Long answer Type Question:
Q.1 Draw a straight line consumption curve. From it derive the saving curve. Explain the process of derivation on the diagram, show: (i) The income level at which APC =1. (ii) The income level at which APS is negative. [CBSE Sample Paper 2014] Or Outline the steps taken in deriving saving curve from the consumption curve. Use diagram. [CBSE 2012] Or Draw on a diagram a straight line Consumption curve for an economy. From it derive the saving curve, explaining the method of derivation. Show a point on the consumption curve at which APS = 0? ANSWER: To explain the below figure we define the following two terms. (i) Consumption function: Consumption function expresses functional relationship between aggregate consumption and national income. It can be expressed as:[Math Processing Error] =C+bY [Math Processing Error] where =[Math Processing Error] =Autonomous consumption, b= marginal propensity to consume. (iii) Figure B is derived from figure A. In Figure A at point [Math Processing Error] consumption is equal to national income, which is known as break-even point. At point P, APC = 1 because consumption is equal to income at this point. (iv) Corresponding to point P, we derive the point [Math Processing Error]in figure B where Saving is equal to zero. At point [Math Processing Error]APS =0. After point P in figure A, national income is greater than consumption,i.e., positive saving, which has shown in figure B, after point [Math Processing Error], where savings are positive. (v) Before point P in figure A consumption is greater than income, i.e., negative saving or dis-saving, which has been shown in figure B before point [Math Processing Error] where savings are negative.
Q.2 Draw on a diagram a straight line savings curve for an economy. From it derive the consumption curve, explaining the method of derivation. Show a point on the consumption curve at which APC =1? [CBSE 2006] ANSWER: To explain the above figure we define the following two terms.
(iii) Figure B is derived from A. In Figure A at point P saving = 0. Corresponding to point P, we derive the point P: in figure B where income = consumption. Point Pj is known as to be break-even point and at this point only APC = 1. (iv) After point P in figure A savings are positive, which has been shown in figure B, after point Pt where Income is greater than consumption, i.e., positive saving. (v) Before point P in figure A savings are negative which has shown in figure B before point Pi; where consumption is greater than income, i.e., negative saving or dis-saving.
Q.1Explain the functions of a commercial bank? ANSWER|:Deleted from syllabus.
Q.2 What is money multiplier? How will you determine its value? What ratios play an important role in the determination of the value of the money multiplier? [3-4 Marks] ANSWER|:
When the primary cash deposit in the banking system leads to multiple expansion in the total deposits, it is known as money multiplier or credit multiplier.
The value of Money Multiplier =1LRR where LRR = Legal Reserve Ratio.
Legal Reserve Ratio: It is the minimum ratio of deposits legally required to be kept by the commercial banks with themselves and with the central bank.
So, there are two ratios which play an important role in the determination of the value of the money multiplier. They are: (a) Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total deposits, which it is required to keep with the central bank. (b) Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time liabilities, which commercial banks are required to maintain with themselves.
Q.3 What are the instruments of monetary policy of RBI? How does RBI stabilize money supply against exogenous shocks? ANSWER:
Principal instruments of Monetary Policy or credit control of the Central Bank of a country(RBI) are broadly classified as: (a) Quantitative Instruments, • Bank Rate • Repo rate • Reverse Repo rate • Open Market Operations (OMO) • Varying Reserve Requirements (fa) Qualitative Instruments • Imposing margin requirement on secured loans • Moral Suasion • Selective Credit Controls (SCCs)
RBI stabilize money supply against exogenous shocks in the following manner: (a) Bank Rate (Discount Rate) • Bank rate is the rate of interest at which central bank lends to commercial banks without any collateral (security for purpose of loan). The thing, which has to be remembered, is that central bank lends to commercial banks and not to general public. • In a situation of excess demand leading to inflation, > Central bank raises bank rate that discourages commercial banks in borrowing from central bank as it will increase the cost of borrowing of commercial bank. > It forces the commercial banks to increase their lending rates, which discourages borrowers from taking loans, which discourages investment. > Again high rate of interest induces households to increase their savings by restricting expenditure on consumption. > Thus, expenditure on investment and consumption is reduced, which will control the excess demand. • In a situation of deficient demand leading to deflation, > Central bank decreases bank rate that encourages commercial banks in borrowing from central bank as it will decrease the cost of borrowing of commercial bank. > Decrease in bank rate makes commercial bank to decrease their lending rates, which encourages borrowers from taking loans, which encourages investment. > Again low rate of interest induces households to decrease their savings by increasing expenditure on consumption. > Thus, expenditure on investment and consumption increase, which will control the deficient demand. (b) Open Market Operations (OMO) • It consists of buying and selling of government securities and bonds in the open market by central bank. • In a situation of excess demand leading to inflation, central bank sells government securities and bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving loans decreases, which will control excess demand. • In a situation of deficient demand leading to deflation, central bank purchases government securities and bonds from commercial bank. With the purchase of these securities, the power of commercial bank of giving loans increases, which will control deficient demand. (c) Imposing margin requirement on secured loans • Business and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal to the full value of the security. It always pays less value than the security. • So, the difference between the value of security and value of loan is called marginal requirement. • In a situation of excess demand leading to inflation, central bank raises marginal requirements. This discourages borrowing because it makes people gets less credit against their securities. • In a situation of deficient demand leading to deflation, central bank decreases marginal requirements. This encourages borrowing because it makes people get more credit against their securities. (d) Moral Suasion • Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central banks to commercial banks to cooperate with general monetary policy of the central bank. • In a situation of excess demand leading to inflation, it appeals for credit contraction. • In a situation of deficient demand leading to deflation, it appeals for credit expansion.
Q.4 Do you consider a commercial bank ‘Creator of money’ in the economy? Or Explain the process of money creation/deposit creation/credit creation by the commercial banking system. Giving a numerical example, explain the process of money creation by commercial banks.
How do commercial banks create deposits? Explain. Explain the credit creation role of commercial banks with the help of a numerical example. Or Explain briefly the working of money multiplier. ANSWER:Yes, commercial bank acts as a ‘Creator of money’ in the economy. It can be explained with the help of Credit creation process:
Let us assume that the entire commercial banking system is one unit. Let us call this one unit simply “banks’. Let us also assume that all receipts and payments in the economy are routed through the banks. One who makes payment does it by writing cheque. The one who receives payment deposits the same in his deposit account.
Suppose initially people deposit Rs 1000. The banks use this money for giving loans. But the banks cannot use the whole of deposit for this purpose. It is legally compulsory for the banks to keep a certain minimum fraction of these deposits as cash. The fraction is called the Legal Reserve Ratio (LRR). The LRR is fixed by the Central Bank.
Let us now explain the process, suppose the initial deposits in banks is Rs 1000 and the LRR is 10 percent. Further, suppose that banks keep only the minimum required, i.e., Rs 100 as cash reserve, banks are now free to lend the remainder Rs 900. Suppose they lend Rs 900. What banks do to open deposit accounts in the.names of the borrowers who are free to withdraw the amount whenever they like. Suppose they withdraw the whole of amount for making payments.
Now, since all the transactions are routed through the banks, the money spent by the borrowers comes back into the banks into the deposit accounts of those who have received this payment. This increases demand deposit in banks by Rs 900. It is 90 per cent of the initial deposit. These deposits of Rs 900 have resulted on account of loans given by the banks. In this sense the banks are responsible for money creation. With this round increase in total deposits is now Rs 1900 (=1000 + 900).
When banks receive new deposit of ?900, they keep 10 per cent of it as cash reserves and use the remaining Rs 810 for giving loans. The borrowers use these loans for making payments. The money comes back into the accounts of those who have received the payments. Bank deposits again rise, but by a smaller amount of Rs 810. It is 90 per cent of the last deposit creation. The total deposits now increase to Rs 2710 (=1000 + 900 + 810). The process does not end and continues till total deposit creation comes to ? 10000, ten times the initial deposit as shown in the table below.
Q.5 What role of RBI is known as ‘Lender of last Resort’? [3 Marks] ANSWER:
As banker to the banks, the central bank acts as the lender of the last resort.
In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances.
The central bank assists such banks through discounting of approved securities and bills of exchange.
Short Answer Type Question:
Q.1Explain issue of currency function of Central Bank. Or Explain the “Bank of Issue Function” of the central Bank. ANSWER:
The central bank has the sole monopoly to issue currency notes. Commercial banks cannot issue currency notes. Currency notes issued by the central bank are the legal tender money.
Legal tender money is one, which every individual is bound to accept by law in exchange for goods and services and in the discharge of debts.
Central bank has an issue department, which is solely responsible for the issue of notes.
However, the monopoly of central bank to issue the currency notes may be partial in certain countries.
For example, in India, one rupee notes and all coins are issued by the government and all other notes are issued by the Reserve Bank of India.
Q.2 Explain banker to the government function of a Central Bank.[CBSE 2013, 06C; AI 08; 10] Or Explain “Government’s Bank” function of Central Bank.[CBSE 2015] ANSWER: As a banker to the government, the central bank performs same functions as performed by the commercial banks to their customers.
It receives deposits from the government and collects cheques and drafts deposited in the government account.
It provides cash to the government as resumed for payment of salaries and wages to their staff and other cash disbursements.
It makes payments on behalf of the government.
It also advances short term loans to the government.
It supplies foreign exchange to the government for repaying external debt or making other payments.
Q.3 Explain the “banker’s bank ’ function of a central bank.[Al 2015, 2007, 11, CBSE 13, Al] ANSWER:Central bank acts as the banker to the banks in three ways :
custodian of the cash reserves of the commercial banks;
as the lender of the last resort; and
as clearing agent.
As a custodian of the cash reserves of the commercial banks, the central bank maintains the cash reserves of the commercial banks. Every commercial bank has to keep a certain percent of its cash reserves with the central bank by law.
As Lender of the Last Resort. (a) As banker to the banks, the central bank acts as the lender of the last resort. (b) In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances.
The central bank assists such banks through discounting of approved securities and bills of exchange. (c) As Clearing Agent (i) As the custodian of the cash reserves of the commercial banks, the central bank acts as the clearing house for these banks. (ii) Since all banks have their accounts with the central bank, the central bank can easily settle the claims of various banks against each other simply by book entries of transfers from and to their accounts. (iii) This method of settling accounts is called Clearing House Function of the central bank.
Q.4 What is Legal Reserve Ratio? Explain its components. [AI 2013, C (Set 1)] ANSWER:
Legal Reserve Ratio: It is the minimum ratio of deposits legally required to be kept by the commercial banks with themselves and with the central bank.
It’s components are: (a) Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total deposits, which it is required to keep with the central bank. (b) Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time liabilities, which commercial banks are required to maintain with themselves.
Long Question type Answer:
Q.1(i) What is meant by Cash Reserve Ratio? How does it increase the money Supply in the economy? (ii) What is meant by Open Market Operation? How does it reduce the money supply in the economy?[CBSE Sample Paper 2014][(3 + 3)] ANSWER:
Cash Reserve Ratio: (a) It refers to the minimum percentage of a bank’s total deposits, which it is required to keep with the central bank. Commercial banks have to keep with the central bank a certain percentage of their deposits in the form of cash reserves as a matter of law. (b) For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is ?100 crore, it will have to keep Rs 10 crore with the central bank. (c) To increase Money supply in an economy, cash reserve ratio (CRR) falls to 5 per cent, the bank will have to keep Rs 5 crore with the central bank, which will increase the cash resources of commercial bank and increasing credit availability in the economy, which will increase the money supply in an economy.
Open Market Operation: (a) It consists of buying and selling of government securities and bonds in the open market by central bank. (b) To reduce Money Supply in an economy, central bank sells government securities and bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving loans decreases, which will reduce the money supply in an economy.
Q.1 What is Barter system? What are its drawbacks? [3 Marks] ANSWER: Barter system of exchange is a system in which goods are exchanged for goods. It’s Drawbacks are:
Lack of double coincidence of wants.
Lack of divisibility.
Difficulty in storing wealth.
Absence of common measure of value.
Lack of standard of deferred payment.
Q.2 What are the main functions of money? How does money overcome the shortcoming of a barter system? Or Explain the problem of double coincidence of wants faced under barter system. How has money solved it? ANSWER:
“Money is a matter of the following four functions: A medium, a measure, a standard, a store”.
Money has overcome the short¬coming of a barter system in the following manner: (a) Medium of exchange • Under barter system, there is lack of double coincidence of wants. • With money as a medium exchange individuals can exchange their goods and services for money and then use this money to buy other goods and services according to their needs and conveniences. • A buyer can buy goods through money and a seller can sell goods for money. (b) Measure of value • Under barter system, there was no common measure of value. Money has also solved this difficulty. • As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods. • Money works as a common denominator into which the values of all goods and services are expressed. • When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them. (c) Store of value • Under barter system it is very difficult to store wealth for future use. • Most of the goods are perishable and their storage requires huge space and transportation cost. • Wealth can be conveniently stored in the form of money. • Money can be stored without loss in value. • Money can easily be stored for future use. (d) Standard of deferred payments • Under barter system, transactions on deferred payments are not possible. • With money, the debtors make a promise that they will make payments on some future dates. In those situations money acts as a standard of deferred payments. • It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.
Q.3 What is transaction demand for money? How is it related to the value of transactions over specified period of time? ANSWER:Deleted from syllabus.
Q.4 Why is speculative demand for money inversely related to the rate of interest? ANSWER:Deleted from syllabus
ANSWER:The alternative definitions of money supply in India can be the four measures of money supply. They are explained as under: Measures of M1 include:
Currency notes and coins with the public (excluding cash in hand of all commercial banks) [C]
Demand deposits of all commercial and co-operative banks excluding inter-bank deposits. (DD), Where demand deposits are those deposits which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.
Other deposits with RBI [O.D] M1 = C + DD + OD Where, Other deposits are the deposits held by the RBI of all economic units except the government and banks. OD includes demand deposits of semi-government public financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International Monetaiy Fund, the World Bank, etc.
Measures of M2
M1[C + DD + OD]
Post office saving deposits
Measures of M3
M1
Time deposits of all commercial and co-operative banks. Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
Measures of M4
M3
Total deposits with the post office saving organization (excluding national savings certificates).
Q.5What is a ‘legal tender’? What is ‘fiat money’? ANSWER:
Legal tender: (a) Legally, money is anything proclaimed by law as a medium of exchange. (b) Paper notes and coins (together called currency) is money as a matter of law. (c) Nobody can refuse its acceptance as medium of exchange.
FIAT Money: It is defined as a money which is under the ‘FIAT’ (order/authority) of the government to act as a money.
Q.6 What is High powered money? ANSWER: It is money produced by the RBI and the government. It consists of two things:
currency held by the public and
Cash reserves with the banks.
Very Short Answer type Question:
Q.1 Define Barter system. ANSWER: Barter system of exchange is a system in which goods are exchanged for goods.
Q.2 What is meant by double coincidence of wants? ANSWER:Double coincidence of wants means that goods in possession of two different persons must be useful and needed by each other.
Q.3 Define Money. ANSWER:Money is something which is generally acceptable as a medium of exchange and can be converted into other assets without loosing its time and value.
Q.4What is the basic characteristic of money? ANSWER:Durability and weight.
Q.5What is the legal definition of money? ANSWER:Legally, money is anything proclaimed by law as a medium of exchange. Paper notes and coins (together called currency) is money as a matter of law.
Q.6 Define money supply.[CBSE Foreign 2004, 2031] ANSWER:The stock of money held by the public at a point of time, in an economy, is referred to as the money supply. Money supply is a stock concept.
Q.7What items are included in the M3 measure of money supply? ANSWER:
M3(currency notes and coins with public + demand deposits of commercial and co-operative banks + other deposits with RBI),
Time deposits of all commercial and co-operative banks.
Q.8 State two components of money supply. [CBSE Sample Paper 2010] Or State the components of money supply. Or [CBSE 2010] What is included in money supply?[CBSE 2010C, 2011] ANSWER:Currency notes and coins with public + demand deposits with the banks.
Q.9 Define demand deposits.[CBSE 2013, Set I, HOTS ] ANSWER:Demand deposits are those deposit which can be withdrawn by the depositor at any time by means of cheque. No interest is paid on such deposits.
Q.10 What are time deposits in banks?[AI 2013, C Set I] ANSWER:Time deposits are the deposits which can not be withdrawn before the expiry of the stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
Q.11 State the components of supply of money. [AT 2013 Set I] ANSWER:
Coins and currency notes with public.
Demand deposits with banks.
Short Answer Type Question:
Q.1 Explain the ‘medium of exchange’ function of money.[CBSE Delhi 2014, AI 2013] ANSWER:
Money when used as a medium of exchange helps to eliminate the basic limitation of barter trade, that is, the lack of double coincidence of wants.
Individuals can exchange their goods and services for money and then can use this money to buy other goods and services according to their needs and convenience.
Thus, the process of exchange shall have two parts: a sale and a purchase.
The ease at which money is converted into other goods and services is called “liquidity of money”.
Q.2 Explain the ‘ Unit of account’ function of money. [CBSE 2004C; AI 2007] ANSWER:
Another important function of money is that it serves as a common measure of value or a unit of account.
Under barter economy there was no common measure of value in which the values of different goods could be measured and compared with each other. Money has also solved this difficulty.
As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things can be compared.” Money measures the value of economic goods.
Money works as a common denominator into which the values of all goods and services are expressed.
When we express the values of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.
Q.3 Explain Standard of deferred payments function of money.[CBSE Delhi 2004 C, 2007, 2012, Sample Paper 2013] ANSWER:
Credit has become the life and blood of a modem capitalist economy.
In millions of transactions, instant payments are not made.
The debtors make a promise that they will make payments on some future date. In those situations money acts as a standard of deferred payments.
It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.
Q.4 Explain Store of value function of money.[CBSE 2006, 2006C, 2007; AI 2007, 2013 C, Sample Paper 2013] ANSWER:
Wealth can be conveniently stored in the form of money. Money can be stored without loss in value.
Savings are secured and can be used whenever there is a need.
In this way, money acts as a bridge between the present and the future.
Money means goods and services. Thus, money serves as a store of value.
It is also known as asset function of money.
Q.5 Explain the problem of double coincidence of wants faced under barter system. How has money solved it? 2013 ANSWER:
Under barter system, there is lack of double coincidence of wants.
With money as a medium exchange individuals can exchange their goods and services for money and then use this money to buy other goods and services according to their needs and conveniences.
A buyer can buy goods through money and a seller can sell goods for money.
Q.1 Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain. ANSWER: The sum of final expenditures in an economy must be equal to the income received by all the factors of production taken together (final spending on final goods, it does not include spending on intermediate goods). This follows from the simple idea that the revenues earned by all the firms put together must be distributed among the factors of production as salaries, wages, profits, interests earning and rents.
Q.2 What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added of a firm. ANSWER: Planned Inventory. It refers to changes in the stock inventories that have occurred in a planned way. In a situation of planned inventory accumulation, firm will plan to raise its inventories. Unplanned Inventory. It refers to changes in the stock of inventories that have occurred in an unexpected way. In a situation of unplanned inventory accumulation, due to unexpected fall in sales, the firm will have unsold stock of goods. Value added of a firm (GVA) = Gross value of output produced by the firm – Value of intermediate goods used by the firm. OR GVA = Value of sales by the firm + Value of change in inventories – Value of intermediate goods used by the firm
Q.3 Write down the three identities of calculating the GDP of a country by the three methods. Also, briefly explain why each of these should give us the same value of GDP. ANSWER: National Income = National Product = National Expenditure. Each one will give the same result. The only difference is that with product methods, NI is calculated at production or creation level with income Method NI is measured at distribution level, and with expenditure method NI is measured at disposal level.
Q.4 Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was (-) Rs 1,500 crores. What was the volume of trade deficit of that country? ANSWER: Budget deficit. It measures the amount by which the government expenditure exceeds the tax revenue earned by it. Budget Deficit = G – T. Trade deficit: It measures the amount of excess expenditure over the export revenue earned by the country. Trade Deficit = M – X Given G – T = (-) Rs 1500 crore Investment – Saving = Rs 2000 crore Trade deficit = [I – S] + [G – T] = [2000]+ [-1500] = Rs 500 crore.
Q.5 Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation. ANSWER: National Income (or NNPFC) = GDPmp- Depreciation + Net factor income from abroad – [Indirect Taxes-Subsides] 850 = 1100 – Depreciation +100- 150 Depreciation = 1100+ 100- 150-850 Depreciation = Rs 200 Crore
Q.6 Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms / government, or by the firms / government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households? ANSWER: Personal disposable income = Personal income – Personal tax – miscellaneous receipts of government 1200 = Personal Income – 600 – 0 Personal Income = 1800 Crore Private Income = Personal income + retained earnings + corporate tax = 1800 + 200 + 0 = 2000 Crore Private income = NNPFC (National income) – NDPFC of government sector + Value of transfer payment 2000 = 1900 – 0 + Value of transfer payment Value of transfer payment =100 Crore
Q.7 From the following data, calculate Personal Income and Personal Disposable Income. ANSWER: Private Income = NDPFC – NDPFC of government sector + NFIA + Transfer Income + net interest receive from household (Interest Received by Households – Interest Paid by Households) = (i) – 0 + (ii) + (vii) + [(v) – (vi)] = 8000 + 200 + 300 + (1500 – 1200) = 8800 Crore Personal Income = Private income – Undistributed profit – Corporation tax = 8800 – (iii) – (ii) = 8800 – 1000 – 500 = 7300 Crore Personal Disposable Income = Personal income – Personal tax = 7300 – (viii) = 7300 – 500 = 6800 Crore
Q.8 In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income
Personal Income = NNPFC-Retained Earnings = 420 – 220 = Rs 200
Personal Disposable Income = Personal Income – Income Tax = 200 – 20 = Rs 180 Crore
Q.9 The value of the nominal GNP of an economy was Rs 2,500 crores in aparticular year. The value of GNP of that countiy during the same year evaluated at the prices of the same base year was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Did the price level rise between the base year and the year under consideration? ANSWER: GNP deflator = Nominal GNP/Real GNP x 100 = 83.3% No, the price level did not rise between the base year and the year under consideration. In fact, it fell.
Q.10 Write down some of the limitations of using GDP as an index of welfare of a : countiy. OR Explain how distribution of gross domestic product is its limitation as a measure of economic welfare.
OR Explain how ‘distribution of gross domestic product’ is a limitation in taking domestic product as an index of welfare. [CBSE Delhi 2011] OR Can gross domestic product be used as an index of welfare of the people? Give two reasons. OR Explain Per Capita Real GDP as Indicator of Economic Welfare. OR Explain any four limitations of using GDP as a measure/index of welfare of a country. ANSWER: Per Capita Real GDP can be taken as indicator for economy. But by itself is not an adequate indicator. There are many reasons behind this. These are:
Many goods and services contributing economic welfare are not included in GDP Or Non-Monetary exchanges. (a)There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc. (b)These are left on account of non availability of data and problem in valuation. (c)It is generally agreed that these items contribute to economic welfare. (d)So, if we depend only on GDP, we would be underestimating economic welfare.
Though externalities are not taken into account in GDP, they affect welfare. (a)When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities. (b)Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare. (c)GDP does not take into account these externalities. (d)For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP. (e)Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare In this case, welfare is much less than indicated by GDP.
Change in the distribution of income (GDP) may affect welfare. (a)All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income. (b)At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall. (c)It means that the inequality in the distribution of income may increase or decrease. (d)If it increase it implies that rich become more rich and the poor become more poor. (e)Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich. (f) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).
All products may not contribute equally to economic welfare. (a)GDP includes different types of products, like food articles, houses, clothes, police services, military services, etc. (b)Some of these products contribute more to the welfare of the people, like food, clothes, houses, etc. Other products like police services, military services etc. may comparatively contribute less and may not directly affect the standard of living of the people. (c)Therefore, how much is the economic welfare would depend more on. the types of goods and services produced, and not simply how much is produced. (d) It means that if GDP rises, the increase in welfare may not be in the same proportion.
Contribution of some products may be negative (a)GDP includes all final products whether it is milk or liquor. (b)Milk may provide both immediate and ultimate satisfaction to consumers On the other hand, liquor may provide some immediate satisfaction, but because of its harmful effects on health it may lead to decline in welfare. (c)GDP include only the monetary values of the products and not their contribution to welfare. (d)Therefore, economic welfare depends not only on the volume of consumption but also on the type or goods and services consumed.
Very short answer type:
Q.1 Define ‘depreciation’. ANSWER: Depreciation is an expected decrease in the value of fixed capital assets due to its general use.
Q.2 When is the net domestic product at market price less than the net domestic product at factor cost? ANSWER:When net indirect taxes are negative i.e., subsidies are more than indirect taxes
Q.3Why does gross domestic product at factor cost more than the net domestic product at factor cost? ANSWER:Gross domestic product at factor cost includes depreciation while net domestic product at factor cost does not include depreciation.
Q.4 When will GDP of an economy be equal to GNP? ANSWER:GDP and GNP will be equal when the ‘net factor income from abroad’ is zero.
Q.5 When will the domestic income exceed the national income? ANSWER:When the net factor income from abroad is negative.
Q.6If NDPFC is Rs 1,0000 crores and NFIA is (-) Rs 500 crores, how much will be the national income? ANSWER:National Income = 10000 + (-500) = Rs 9500 Crore
Q.7 If the domestic factor income is Rs 50,000 crores and the national income is Rs 45,000 crores, how much will be the net factor income from abroad? ANSWER:Net factor income from abroad = 45,000 – 50,000 = (-) Rs 5000 Crore
Q.8 Mention the three methods of measuring national income. ANSWER:
Value added method
Income method
Expenditure method.
Q.9 Calculate the disposable income, if personal income is Rs 30,000 and the rate of income tax is 10%. ANSWER:Disposable Income = 30,000 – (10% of 30,000) = ?27,000
Q.10 In which type of economy, domestic income will be equal to national income? ANSWER:Closed economy.
Q.11What is the value added method of measuring national income? ANSWER:Value added method is the method that measures the national income by estimating the value added by each producing enterprises within the domestic territory of the country in an accounting year.
Q.12 When is value of output equal to value added? ANSWER:Value of output is equal to value added if there are no intermediate costs.
Q.13What aggregate do we get when we add up the gross value added of all the producing sectors of an economy? ANSWER:Gross domestic product at market price.
Q.14What is the rationale for not taking into account the value of intermediate goods in the measure of GDP? ANSWER:To avoid the problem of double counting.
Q.15 If compensation of employees in a firm constitutes 65% of net value added at factor cost of a firm, find the proportion of operating surplus. ANSWER:100% – 65% = 35% (assuming mixed income is zero).
Q.16What is nominal gross domestic product? [CBSE Delhi 2011] ANSWER:When gross domestic product (GDP) of a given year is estimated on the basis of price of the same year, it is called nominal GDP.
Q.17Define primary sector.[CBSE AI2013,] ANSWER:It is the sector that produces goods by exploiting natural resources like land, water, forests, mines, etc. This sector includes agricultural and allied activities, fishing, mining and quarrying.
Q.18Define secondary sector. ANSWER:It is called manufacturing sector also. Enterprises in this sector transform one type of commodity into another type of commodity. For example: leather goods from leather, flour from wheat, sugar from sugarcane, etc.
Q.19 Define tertiary sector. ANSWER:It is known as service sector also. Enterprises in this sector produce services only. Examples are banking, transport, communications etc.
Short Answer Type Question:
Q.1 Distinguish between domestic product and national product. When can domestic product be more than national product? OR Differentiate between Domestic Income (NDPFC) Vs National Income (NNPFC). ANSWER:
Domestic product will be greater than national product when net factor income from abroad is negative.
Q.2 Differentiate between Gross Domestic Product at Market Price Vs National Income. ANSWER:
Q.3 Differentiate between National Income at constant price and national income at current price? ANSWER:
Q.4 Distinguish between real and nominal gross domestic product. Or Discuss any two differences between GDP at constant prices and GDP at current Prices.[CBSE Sample Paper 2016] ANSWER:
Q.5 Explain how ‘externalities’ are a limitation of taking gross domestic product as an index of welfare. ANSWER:
When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.
Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare.
GDP does not take into account these externalities.
For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP.
Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare. In this case, welfare is much less than indicated by GDP.
Q.6 Explain how “Non-Monetaiy exchanges’ are a limitation in taking gross domestic product as an index of welfare. ANSWER:
There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc.
These are left on account of non¬’ availability of data and problem in valuation.
It is generally agreed that these items contribute to economic welfare.
So, if we depend only on GDP, we would be underestimating economic welfare.
Q.7 Explain how distribution of ‘Gross Domestic Product’ is a limitation in taking gross domestic product as an index of welfare. ANSWER:
All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income.
At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall.
It means that the inequality in the distribution of income may increase or decrease.
If it increase it implies that rich become more rich and the poor become more poor.
Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich.
Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).
Q.8 State the various components of the income method that are used to calculate national income. ANSWER:
Compensation of employees: The amount earned by employees from their employer, whether in cash or in kind or through any other social security scheme is known as compensation of employees.
Operating Surplus: It is the sum of income from property and income from entrepreneurship.
Mixed Income: Income of own account workers (like farmers, doctors, barbers, etc.) and unincorporated enterprises (like small shopkeepers, repair shops) is known as mixed income. Note: (i) To estimate amount of factor payments made by each producing unit. (ii) To add all factor incomes/payments within domestic territory to get domestic income, i.e., NDPFC. NDPFC = Compensation of employees + Operating Surplus + Mixed Income
Net factor income from Abroad(NFIA): NFIA is the difference between income earned by normal residents from rest of the world and similar payments made to Non residents within the domestic territory. Addition of NFIA to NDPFC to get NY, i.e., NNPpc. NNPFC = NDPFC + NFIA
Q.9 Define double counting. How can the problem of double counting be avoided? ANSWER:If a single transaction is recorded twice or more than twice in the calculation of national income, then it is known as double counting. The problem of double counting is solved by value added method. Theoretically to avoid double counting there may be two alternative ways:
Final Product Approach
Value Added Approach
Final Product Approach: According to this, value of only final products, i.e. which go for final consumption or capital formation should be included. But in practical application of this approach double counting still creeps in as every producer treats the product he sells as final whereas the same might have been used as intermediate product by the buyer.
Value Added Approach: Value added method is most effective in avoiding double counting. According to this, instead of taking value of final goods, only value added at each stage of production by a producing unit is taken. Value added of a firm by subtracting intermediate consumption from value of output.
Long Answer Type Question:
Q.1Calculate GNP at FC from the following data by
income method, and
expenditure method. [CBSE 2002]
ANSWER:
NDPFC = Compensation of employees (Wages and salaries + Employer’s contribution towards social security scheme) + Operating Surplus + Mixed Income = [(i) + (viii)] + (iii) + (ii) = [800 + 100] + 600 + 160 = 900 + 600 + 160 = 1660 Crore GNPFC = NDPFC + Depriciation (Gross capital formation – Net capital Formation) + Net Factor Income from abroad = 1660 + [(H) – (nil) + (6c)] = 1660 + [330-300] + (-20)] = 1660 + 30 – 20 = 1670 Crore
GDPMP = Government final consumption expenditure (Public final consumption expenditure) + Private final consumption expenditure + Gross domestic Capital formation + Net export (Export – Import) = (xiii) + (xii) + (v) + [(x) – (xi)] = 450 + 1000 + 330 + [30 – 60] = 1750 Crore . GNPFC = GDPMP + Net factor income from abroad – Net Indirect Tax = 1750 + (be) – (xiv) = 1750 + (- 20) – 60 = 1750 – 20 – 60 = 1670 Crore
Q.2 Calculate “Gross National Product at Factor Cost” from the following data by (a) Income method, and (b) Expenditure method ANSWER:NDPFC = Compensation of Employees + Operating Surplus( profit + Rent + Interest + Mixed Income = (iv) +[(iii) + (v) + (viii)] + 0 = 800 + [400 + 250 + 150] = 800 + 800 = 1600 Crore GNPFC = NDPFC + Depreciation (Consumption of fixed Capital) + Net factor Income from abroad = 1600 + (vii) + (x) = 1600 + 60 + (-10) = 1650 Crore GDPMP = Government final consumption expenditure + Private final consumption expenditure + Gross domestic capital formation (Net domestic capital formation + consumption of fixed capital) + Net export = (x) + (i) + [(ii) + (vii)] + (xi) = 500 + 1000 + [200 + 60] + (- 20) = 500 + 1000 + 260 – 20 = 1740 Crore GNPFC = GDPMP + Net factor income from abroad – Net Indirect Tax = 1740 + (x) – (xii) = 1740 + (-10] – 80 = 1650 Crore
Q.3 From the following data, calculate (a) Gross Domestic Product at Factor Cost and (b) Factor Income To Abroad: ANSWER: (a) NDPFC = Compensation of employees + Operating surplus (Profit + Rent + Interest) + Mixed income = (i) + P) + (v) + M] + 0 = 800 + [200 + 150 + 100] = 800 + 450 = 1250 Crore Note: Gross domestic capital formation = Net fixed capital formation + Depreciation + Change in stock (vii) = (viii) + Depreciation + (ix) 300 = 200 + Depreciation + 50 Depreciation = 300 – 250 = 50 GDPFC = NDPFC + Depriciation = 1250 + 50 = 1300 Crore (b) GNPMP = GDPFC + NFIA (Factor income from abroad – Factor income paid to abroad) + Net indirect tax (iv) = 1300 + [(x) – Factor income paid to abroad] + (xi) 1400 = 1300 + (60 – Factor income paid to abroad) + 120 1400 = 1480 – Factor income paid to abroad Factor income paid to abroad = 1480 – 1400 = 80 Crore
Q.4 Calculate (a) Private Income and (b) Gross Domestic Product at Factor Cost: ANSWER:Personal Disposable Income = Personal income – Direct taxes paid by households – Miscellaneous receipts of government (xi) = Personal Income – (iv) – (i) 200 = Personal income – 30 – 5 Personal Income = 235 Arab Private Income = Personal Income + Retained profits (Savings of private corporate sector) + Corporate Tax = 235 + (iii) + (ii) = 235 + 10 + 20 = 265 Arab „ Private income = NNPFC – Income from Domestic Product Accruing to Public Sector (Income from Property and Entrepreneurship accruing to government Administrative Departments + Saving of Non Departmental Enterprises) + National Debt interest + Current transfers from Government + Net Current transfers from rest of the world , 265 = NNPFC – [(x) + (ii)] + (viii) + (ix) + (vii) ] 265 = NNPFC – (12 + 3) + 15 + 8 + 4 NNPFC = 265 + 15 – 27 = 253 Arab GDPFC = NNPFC + Consumption of fixed capital – Net factor income from abroad = 253 + (xii) – [-(v)] = 253 + 11 + 6 = 270 Arab
Q.5 Calculate (a) Private Income and (b) National Income: ANSWER:Personal Disposable Income =Personal Income – Direct Taxes paid by households – Miscellaneous receipts of Government (i) = Personal Income -(v)- (iii) 120 = Personal income – 15 – 4 Personal Income =139 Arab (Billion) Private Income = Personal Income + Undistributed profits of private sector + Corporate Tax = 139 + (vii) + (vi) = 139 + 3 + 6 = 148 Arab Private income = NNPFC – Income from Domestic Product Accruing to Public Sector (Income from Property and Entrepreneurship accruing to Government Administrative Departments + Saving of Non-Departmental Enterprises) + National Debt interest + Current transfers from government + Net Current transfers from rest of the world 148 = NNPFC – [(ii) + (ix)] + (viii) + (xi) + (iv) , 148 = NNPFC-(5+ 15) + 16 + 2+ 10 NNPFC = 148 + 20 – 28 = 140 Arab
Q.6 Find out Gross National Product at Market price and Net National Disposable Income from the following: ANSWER:GDPMP = Government final consumption expenditure+Private final consumption expenditure + Gross domestic Capital formation (Net domestic Fixed capital formation + consumption of fixed capital + Change in stocks (closing stock – opening Stock) + Net Export = (vi) + (ii) + {(ix) + (vii) + [(iv) – (i)]} + (-viii) = 300+ 1000+ {150+ 30 + [40-50]}+ (-20) = 300 + 1000 + 170 – 20 = 1450 Arab GNPMP = GDPMP + Net factor income from abroad = 1450 + (-v) = 1450 +[- (-10)] = 1460 Arab NNPFC = GNPMP – consumption of fixed capital – net indirect tax = 1460 – (vii) – 0 = 1460 – 30 = 1430 Arab NNDI = NNPFC + NIT + Net current transfer from rest of the world (abroad) = 1430 + 0 + (-iii) = 1430 + (-5) = 1425 Arab
Q.1 Describe the five major sectors in an economy according to the macroeconomic point of view.[3-4 Marks] ANSWER: An economy may be’ divided into different sectors depending on the nature of study.
Producer sector engaged in the production of goods and services.
Household sector engaged in the consumption of goods and services. Note: Households are taken as the owners of factors of production.
The government sector engaged in activities like taxation and subsidies.
Rest of the world sector engaged in exports and imports.
Financial sector (or financial system) engaged in the activity of borrowing and lending.
Q.2 What are the four factors of production and remunerations to each of these called? [ 1 Mark] ANSWER:
Q.3 What are the important features of a capitalist economy? [3-4 Marks] ANSWER:Features of capitalist economy are:
Private ownership of land and capital.
Profit is the only motive.
Free play of the market forces of demand and supply.
Government looks after growth, stability and social justice in the economy.
Q.4 Describe the Great Depression of 1929. [3-4 Marks] ANSWER:The Great Depression took place in 1929 which adversely affected the developed economies of Europe and North America. It continued for 10 years. There was extreme fall in aggregate demand due to fall in income, which led to a vicious circle of poverty.
Q.5 Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank. [3-4 Marks] ANSWER: Net investment is a flow whereas capital is a stock. Amount of water in a tank at a particular point of time is a stock concept, whereas amount of water flowing into it is a flow concept.
Very Short Answer Type:
Q.1 What is meant by circular flow of income? ANSWER: It refers to flow of money income or the flow of goods and services across different sectors of the economy in a circular form.
Q.2 What are the three phases of circular flow of income? ANSWER:Production Phase, Distribution Phase and Disposition Phase.
Question 3. Give the meaning of factor income. Ans: Income earned by factor of production by rendering their productive services in the production process is known as Factor Income.
Q.4 What is meant by transfer income? ANSWER:Income received without rendering any productive services is known as Transfer Income.
Q.5 Out of factor income and transfer income which one is a unilateral concept? ANSWER:Transfer income.
Q.6 Define current transfers.[CBSE 2003] ANSWER:Transfers made from the current income of the payer and added to the current income of the recipient (who receive) for consumption expenditure are called current transfers
Q.7 Define capital transfers. ANSWER:Capital transfers are defined as transfers in cash and in kind for the purpose of investment to recipient made out of the wealth or saving of a donor.
Q.8 What is the meaning of final goods? ANSWER:These are those which are used for:
Personal consumption (like bread purchased by consumer household), or
Investment or capital formation (like building, machinery purchased by a firm)
Q.9 What is meant by intermediate goods? ANSWER: These are those, which are used for:
Further processing (like sugar used for making sweets), or
Resale in the same year (If car purchased by a car dealer for resale).
Q.10 What is meant by consumption goods? ANSWER:Consumption goods are those goods which satisfy the wants of consumers directly.
Q.11Define capital goods. ANSWER:Capital goods are defined as all goods produced for use in future productive processes.
Q.12 Give an example of a person who is staying abroad for a period more than one year and still he is treated as normal resident of India. ANSWER:An Indian working in Indian Embassy in the USA will be treated as normal resident of India.
Short Answer Type Question:
Q.1 Explain the basis of classifying goods into intermediate and final goods. Give suitable examples. Or [CBSE 2010] Distinguish between intermediate products and final products. Give examples. ‘ [CBSE 2009] ANSWER:
Q.2 Define consumption goods and what are its categories. ANSWER:Consumption goods are those which satisfy the wants of the consumers directly. For example, cars, television sets, bread, furniture, air-conditioners, etc. Consumption goods can further be subdivided into the following categories:
Durable goods: These goods have an expected life time of several years and of relatively high value. They are motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen equipments, computers, communication equipments etc.
Semi-durable goods: These goods have an expected life time of use of one year or slightly more. They are not of relatively great value. Examples are clothing, furniture, electrical appliances like fans, electric irons, hot plates and crockery.
Non-durable goods: Goods which cannot be used again and again, i.e., they lose their identity in a single act of consumption are known as non durable goods. These are food grains, milk and milk products, edible oils, beverages, vegetables, tobacco and other food articles. goods which satisfy the human wants directly. They cannot be seen or touched, i.e., they are intangible in nature. These are medical care, transport and communications, education, domestic services rendered by hired servants, etc.
Q.3 Define capital goods and its categories. Or Define ‘capital goods’.[CBSE Foreign 2011] ANSWER:
Capital goods are defined as all goods produced for use in future productive processes.
For example, All the durable goods like cars, trucks, refrigerators, buildings, air crafts, air-fields and submarines used to produce goods and services for sale in the market are a part of capital goods.
Stocks of raw materials, semi finished and finished goods lying with the producers at the end of an accounting year are also a part of capital goods.
Some more examples of capital goods are machinery, equipment, roads and bridges.
These goods require repair or replacement over time as their value depreciate over a period of time.
Q.4 Distinguish between consumption goods and capital goods. Which of these are final goods? [CBSE Delhi 2010] ANSWER:
Q.5 Differentiate between Current transfers and Capital Transfers. ANSWER:
Q.1An index number which accounts for the relative importance of the items is known as (i) weighted index (ii) simple aggregative index (iii) simple average of relatives ANSWER: (i) An index number becomes a weighted index when the relative importance of items is taken care of weighted index is the weighted average of different goods.
Q.2In most of the weighted index numbers the weight pertains to (i) base year (ii) current year (iii) both base and current year ANSWER: (i) In general, the base period weight is preferred in calculating the weighted index number but as per Laspeyre’s method it uses the base year quantity as weight, Paache uses current year quantities as weight and Fisher’s Index Method uses both base and current year quantities.
Q.3 The impact of change in the price of a commodity with little weight in the index will be (i) small (ii) large (iii) uncertain ANSWER: (i) An equal rise in the price of an item with little weight will have lower implications for the overall change in the price ;ndex than that of an Item with more weight.
Q.4 A consumer price index measures changes in (i) retail prices (ii) wholesale prices (iii) producers’prices ANSWER: (i) Consumer Price Index (CPI), also known as the cost of living index, measures the average change in retail prices which show the most accurate impact of price rise on the cost of living of common people.
Q.5 The item having the highest weight in consumer price index for industrial workers is (i) food (ii) housing (iii) clothing ANSWER: (i) As weight and Fisher’s index method uses both base and current year quantities. Food is given around 57% weight in CPI for industrial workers as it constitutes the major proportion of their total consumption.
Q.6 QIn general, inflation is calculated by using (i) wholesale price index (ii) consumer price index (iii) producer’s price index ANSWER: (i) The WPI is widely used to measure the rate of inflation. The weekly inflation rate is given by XtXt1Xt−1×100 where X, and Xt-1 to the WPI for the (t)th and (t- 1)th weeks.
Q.7 Why do we need an index number? ANSWER: Index number enables us to calculate a single measure of change of a large number of items. The index numbers are needed for the general and specific purpose they are
Measurement of Change in the Price Level or the Value of ‘ Money Index number measures the value of money during different periods of time as well as we can use it to know the Impact of the change in the value of money on different sections of society. It can be worked out to correct the inflationary and deflationary gaps in the system.
Information of Foreign Trade Index of export and import provides useful information regarding foreign trade which helps in formulating the policies of export and import.
Calculating Real Wages CPI are used in calculating the purchasing power of money and real wage as follows
Purchasing power of money = 1/Cost of living index
Real wage = (Money wage/Cost of living index) × 100
Measuring and Comparing Output Index of Industrial Production (IIP) gives us a quantitative figure about the change in production in the industrial sector and thus helps in comparing industrial output in different periods. Similarly, agricultural production index provides us an estimate of the production index provides us an estimate of the production in agricultural sector.
Policy Making of Government With the help of index numbers government determines the minatory and fiscal prey and take nassery steps to develop the country.
Indicating Stock Prices Sensex and NIFT are index numbers of share prices on BSE and NSE respectively. They serve as a useful guide for investors in the stock market. If the sensex and nifty are rising, investors have positive expectations about the future performance of the economy and it is an appropriate time for investment.
Q.8 What are the desirable properties of the base period? ANSWER: Base period should have the following properties
The base year should be a normal period and periods in which extraordinary events have occurred should not be taken as base periods as they are not appropriate for general comparisons.
Extreme values should not be selected as base period.
The period should not be too far in the past as comparison with current period cannot be done with such base year as policies, economic and social conditions change with time.
Base period should be updated periodically.
Q.9 Why is it essential to have different CPI for different categories of consumers? ANSWER: The Consumer Price Index (CPI) in India is calculated for different categories as under
CPI for industrial workers.
CPI for urban non-manual employees.
CPI for agricultural labourers.
The reason behind calculation of three different CPIs is that the consumption pattern of the three groups (i.e., industrial workers, urban non-manual workers and agricultural labourers) differs significantly from each other. Therefore, to assess the impact of the price change on the cost of living of the three groups, component items included in the index need to be given different weights for each of the group. This necessitates the calculation of different CPI for different categories of consumers.
Q.10 What does a consumer price index for industrial workers measure? ANSWER: Consumer price index for industrial workers measures the average change in retail prices of a basket of commodities which an industrial worker generally consumes. Consumer price index for industrial workers is increasingly being considered the appropriate indicator of general inflation, which shows the most accurate impact of price rise on the cost of living of common people.
The items included in CPI (Consumer Price Index) for industrial workers are food, pan, supari, tobacco, fuel and lighting, housing, colthing, and miscellaneous expenses with food being accorded the highest weight. This implies that the food price changes have a significant impact on the CPI.
Q.11What is the difference between a price index and a quantity index? ANSWER: The difference between a price index and a quantity index is as follows
Price index numbers measure and allow for comparison of the prices of certain goods while quantity index number measure the changes in the physical volume of production, construction or employment.
Price index numbers are more widely used as compared to quantity index numbers.
Price index is known as unweighted index number while quantity index number is known was weighted index numbers.
Q.12 Is the change in any price reflected in a price index number? ANSWER: No, the change in any price is not reflected in a price index number. Price index numbers measure and permit comparison of the prices of certain goods included in the basket being used to compare prices in the base period with prices in the current period. Moreover, an equal rise in the price of an item with large weight and that of an item with low weight will have different implications for the overall change in the price index.
Q.13 Can the CPI number for urban non-manual emplyees represent the changes in the cost of living of the President of India? ANSWER: The CPI for the urban non-manual employees cannot represent the changes in the cost of living of the President of India. This is because the consumption basket of an average non-manual employee does not consist of the items that would be a part of the consumption basket of the President of India.
Q.14The monthly per capita expenditure incurred by workers for an industrial centre during 1980 and 2005 on the following items are given below. The weights of these items are 75, 10, 5, 6 and 4 respectively. Prepare a weghted index number for cost of living for 2005 with 1980 as the base. ANSWER:
Q.15 Read the following table carefully and give your comments. ANSWER: Index of Industrial Production Base 1993-94 The following conclusions can be made by analysing the above table
Manufacturing industry has the highest weight of 79.58% in Index of Industrial Production (IIP) while mining and quarrying and electricity industries account for 10.73% and 10.69% respectively.
Manufacturing Industry has registered the highest growth among all industrial sectors in both the years 1996-97 and 2003-04.
Mining and quarrying has registered the lowest growth rate in both the years.
The General Index shows that industrial increased by 30.8% in 1996.-97 as compared to 1993-94 and by 89% in 2003-04.
Q.16 Try to list the important items of consumption in your family. ANSWER: (This is a general example. You can use the actual consumption items in your family). The following items constitute the total consumption needs for a family
Food
Clothing
House-Rent/EMI of Housing loan
Education
Electricity
Entertainment and recreation
Miscellaneous expenses
Q.17 If the salary of a person in the base year is ? 4,000 per annum and the current year salary is ? 6,000 by how much should his salary rise to maintanin the same standard of living if the CPI is 400? ANSWER: Base CPI = ₹ 100 Current CPI = ₹400 Base Year Salary = ₹ 4,000 Current Year Salary = ₹ 6,000 When Base CPI is ₹100, then the salary is = ₹ 4,000 Current salary equivalent to base year salary = (Base year salary/100) × CPI of current year When Current CPI is ₹ 400, then the salary should be = 4,000100×400 = ₹ 16,000 100 Thus, his salary should be X 16,000 to maintain his purchasing power. Therefore, in the current year his salary should increase by ₹ 16,000 – ₹ 6,000 = ₹ 10,000 so as to maintain the same level of living in the current year as that of the base year.
Q.18The consumer price index for June, 2005 was 125. The food index was 120 and that of other items What is the percentage of the total weight given to food? ANSWER: Let the total weight = 100 W1 denotes weight of food W2 denotes weight of other items So, Multiplying both sides of Eq. (i) by 135 and subtracting Eq. (ii) from (i) we get So, W1 = 100015 = 66.67 Substituting the value of in the Eq. (i), we get W1 + W2 = 100 or 6667 + W2 = 100 W2 = 33.33 Therefore, percentage of total weight given to food is 66.67% and other items 33.33%.
Q.19 An enquiry into the budgets of the middle class families in a certain city gave the following information What is the cost of living index of 2004 as compared with 1995? ANSWER: Cost of Living Index = 134.50 Thus, the price rose by 34.50% during 1995 and 2004.
Q.20 Record the daily expenditure quantities bought and prices paid per unit of the daily purchases of your family for two weeks. How has the price change affected your family? ANSWER: This is a practical exercise. Record the daily expenditure, quantities bought and prices paid per unit of the daily purchases of your family for two weeks and try to analyse if quantities purchased decrease with rise in price of the respective items and also note if the percentage change in quantity brought about by a percentage change in price differ for different types of items.
Q.21Given the following data Source Economic Survey, Government of India 2004-2005 (i) Calculate the inflation rates using different index numbers. (ii) Comment on the relative values of the index numbers. (iii) Are they comparable? ANSWER: (i) (a) Inflation using CPI of Industrial Workers
(b) Inflation using CPI of Non-maunal Employees (c) Inflation using CPI of Agricultural Labourers
(d) Inflation using WPI (ii) The inflation rate calculated using CPI industrial worker with the base year 1982 is the highest and inflation rate calculated using WPI with the base year 1993-94 is the least. (iii) No the index number are not comparable because of the following reasons
Base periods for CPI of industrial workers, urban non-manual workers, agricultural labourers and WPI are different.
Commodities and their weightage in different index number may be different.
Q.1The unit of correlation coefficient between height in feet and weight in kgs is (a) kg/feet (b) percentage (c) non-existent ANSWER: (c) Correlation coefficient (r) has no unit. It is a pure number. It meansss units of measurement are not part of r.
Q.2The range of simple correlation coefficient is (a) 0 to infinity (b) minus one to plus one (c) minus infinity to infinity ANSWER: (b) The value of the correlation coefficient lies between minus one and plus one, -1 ≤ r ≤ 1. If the value of r is outside this range it indicates error in calculation.
Q.3 If rXY is positive the relation between X and Y is of the type (a) when Y increases X increases (b) when Y decreases X increases (c) when Y increases X does not change ANSWER: : (a) If r is positive the two variables move in the same direction. e.g., when the price of coffee rises, the demand for tea also rises as coffee is a substitute of tea. Therefore, the r between price of coffee and demand for tea will be positive.
Q.4 If rXY = 0, the variable X and Y are (a) linearly related (b) not linearly related (c) independent ANSWER: (b) If rXY = 0, it means the two variables are uncorrelated and there is no linear relation between them. However, other types of relation may be there and they may not be independent.
Q.5 Of the following three measures which can measure any type of relationship? (a) Karl Pearson’s coefficient of correlation (b) Spearman’s rank correlation (c) Scatter diagram ANSWER: (c) The scatter diagram gives a visual presentation of the relationship and is not confined to linear relations. Karl Pearson’s coefficient of correlation and Spearman’s rank correlation are strictly the measures of linear relationship.
Q.6If precisely measured data are available the simple correlation coefficient is (a) more accurate than rank correlation coefficient (b) less accurate than rank correlation coefficient (c) as accurate as the rank correlation coefficient ANSWER: (a) Rank correlation should be used only when the variables cannot be measured precisely, generally it is not as accurate as the simple correlation coefficient as all the information concerning the data is not utilised in this.
Q.7 Why is r preferred to covariance as a measure of association? ANSWER: Both, correlation coefficient and covariance measure the degree of linear relationship between two variables, but correlation coefficient is generally preferred to covariance due to the following reasons
The correlation coefficient (r) has no unit.
The correlation coefficient is independent of origin as well as scal
Q.8 Can r lie outside the -1 and 1 range depending on the type of data? ANSWER: No the value of the correlation coefficient lies between minus one and plus one, -1 ≤ r ≤ 1. If the value of r is outside this range in any type of data, it indicates error in calculation.
Q.9 Does correlation imply causation? ANSWER: No, correlation measures do not imply causation. Correlation measures co-variation and not causation. Correlation does not imply cause and effect relation. The knowledge of correlation only gives us an idea of the direction and intensity of change in a variable when the correlated variable changes. The presence of correlation between two variables X and Y simply means that when the value of one variable is found to change in one direction, the value of the other variable is found to change either in the same direction (i.epositive change) or in the opposite direction (i.e., negative change), in a definite way.
Q.10 When is rank correlation more precise than simple correlation coefficient? ANSWER: Rank correlation is more precise than simple correlation coefficient in the following situations
When the Measurements of the Variables are Suspect e.g., in a remote village where measuring rods or weighing scales are not available, height and weight of people cannot be measured precisely but the people can be easily ranked in terms of height and weight.
When Data is Qualitative It is difficult to quantify qualities such as fairness, honesty etc. Ranking may be a better alternative to quantification of qualities.
When Data has Extreme Values Sometimes the correlation coefficient between two variables with extreme values may be quite different from the coefficient without the extreme values. Under these circumstances rank correlation provides a better alternative to simple correlation.
Q.11Does zero correlation mean independence? ANSWER: No, zero correlation does not mean independence. If there is zero correlation (rXY = 0), it means the two variables are uncorrelated and there is no linear relation between them. However, other types of relation may be there and they may not be independent.
Q.12 Can simple correlation coefficient measure any type of relationship? ANSWER: No, simple correlation coefficient can measure only linear relationship.
Q.13 List some variables where accurate measurement is difficult. ANSWER: Accurate measurement is difficult in case of
Qualitative variables such as beauty, intelligence, honesty, etc.
It is also difficult to measure subjective variables such as poverty, development, etc which are interpreted differently by different people.
Q.14 Interpret the values of r as 1, -1 and 0. ANSWER:
If r = 0 the two variables are uncorrelated. There is no linear relation between them. However, other types of relation may be there and hence the variables may not be independent.
If r= 1 the correlation is perfectly positive. The relation between them is exact in the sense that if one increases, the other also increases in the same proportion and if one decreases, the other also decreases in the same proportion.
If r = -1 the correlation is perfectly negative. The relation between them is exact in the sense that if one increases, the other decreases in the same proportion and if one decreases, the other increases in the same proportion.
Q.15 Why does rank correlation coefficient differ from Pearsonian correlation coefficient? ANSWER: Rank correlation coefficient differs from Pearsonian correlation coefficient in the following ways
Rank correlation coefficient is generally lower or equal to Karl Pearson’s coefficient.
Rank correlation coefficient is preferred to measure the correlation between qualitative variables as these variables cannot be measured precisely.
The rank correlation coefficient uses ranks instead of the full set of observations that leads to some loss of information.
If extreme values are present in the data, then the rank correlation coefficient is more precise and reliable.
Q.16 Calculate the correlation coefficient between the heights of fathers in inches (X) and their sons (Y). ANSWER: Note Answer: printed in NCERT is incorrect.
Q.17 Calculate the correlation coefficient between X and Y and comment on their relationship. ANSWER:
As the value of r is zero, so there is no linear correlation between X and Y.
Q.18Calculate the correlation coefficient between X and Y and comment on their relationship. ANSWER: As the correlation coefficient between the two variables is + 1, so the two variables are perfectly positive correlated.
Q.1A measure of dispersion is a good supplement to the central value in understanding a frequency distribution. Comment. ANSWER: Dispersion is the extent to which values in a distribution differ from the avarage of the distribution. Knowledge of only average is insufficient as it does not reflect the quantum of variation in values.
Measures of dispersion enhance the understanding of a distribution considerably by providing information about how much the actual value of items in a series deviate from the central value, e.g., per capita income gives only the average income but a measure of dispersion can tell you about income inequalities, thereby improving the understanding of the relative living standards of different sections of the society. Through value of dispersion one can better understand the distribution.
Thus a measure of dispersion is a good supplement to the central value in understanding a frequency distribution.
Q.2Which measure of dispersion is the best and how? ANSWER: Standard Deviation is considered to be the best measure of dispersion and is therefore the most widely used measure of dispersion.
It is based on all values and thus provides information about the complete series. Because of this reason, a change in even one value affects the value of standard deviation.
It is independent of origin but not of scale.
It is us’eful in advanced statistical calculations like comparison of variability in two data sets.
It can be used in testing of hypothesis.
It is capable of further algebraic treatment.
Q.3Some measures of dispersion depend upon the spread of values whereas some calculate the variation of values from a central value. Do you agree? ANSWER: Yes, it is true that some measures of dispersion depend upon the spread of values, whereas some calculate the variation of values from the central value. Range and Quartile Deviation measure the dispersion by calculating the spread within which the value lie. Mean Deviation and Standard Deviation calculate the extent to which the values differ from the average or the central value.
Question 4. Q.4In town, 25% of the persons earned more than ₹ 45,000 whereas 75% earned more than 18,000. Calculate the absolute and relative values of dispersion. ANSWER: 25% of the persons earned more than ₹ 45,000. This implies that upper quartile Q3 = 45,000 75% earned more than 18,000. This implies that lower quartile Q1 =18,000 Absolute Measure of Dispersion = Q3 – Q1 = 45,000 – 18,000 = 27,000 Relative Measure of Dispersion Co-efficient of Quartile Deviation
Q.5 The yield of wheat and rice per acre for 10 districts of a state is as under Calculate for each crop, (i) Range (ii) QD (iii) Mean’Deviation about Mean (iv) Mean Deviation about Median (v) Standard Deviation (vi) Which crop has greater variation? (vii) Compare the value of different measures for each crop. ANSWER: (i) Range (a) Wheat Highest value of distribution (H) = 25 Lowest value of distribution (L) = 9 Range = H – L = 25 – 9 = 16 (b) Rice Highest value of distribution (H) = 34 Lowest value of distribution (L)=12 Range = H – L = 34 – 12 = 22 (ii) Quartile Deviation (a) Wheat Arranging the production of wheat in increasing order 9, 10, 10, 12, 15, 16, 18, 19, 21, 25 Q1 = N+14th item = 10+14th item = 114th item = 2.75th item = Size of 2nd item + 0.75 (size of 3rd item – size of 2nd item) = 10 + 0.75(10 – 10) = 10 + 0.75 × 0 = 10 Q3 = 3(N+1)4th item = 3(10+1)4th item = 334th item = 8.25th = Size of 8th item + 0.25 (size of 9th item – size of 8th item) = 19 + 0.25(21 – 19) = 19 + 0.25 × 2 = 19 + 0.50 = 19.50 Quartile Deviation = Q3−Q12=19.50−102=9.502 = 4.75 (b) Rice Arranging the data of production of rice 12, 12, 12, 15, 18, 18, 22, 23, 29, 34 item Q1 = N+14th item = 10+14th item = 2.75 th item = Size of 2nd item + 0.75 (size of 3rd item – size of 2nd item) = 12 + 0.75(12 – 12) = 12 + 0.75 × 0 = 12 = 8.25th item = Size of 8th item + 0.25 (size of 9th item – size of 8th item) = 23 + 0.25(29 – 23) = 23 + 0.25 × 6 = 23 + 1.5 = 24.5 Quartile Deviation = Q3−Q12=24.5−122=12.502 = 6.25
(iii) Mean Deviation about Mean (a) Wheat
(b) Rice
(iv) Mean Deviation about Median (a) Wheat
(b) Rice
(v) Standard Deviation (a) Wheat
(b) Rice
(vi) Coefficient of Variation (a) Wheat CV =σX¯¯¯¯¯×100=5.0415.5×100 = 32.51 (b) Rice CV =σX×100=7.1619.5×100 = 36.71 Rice crop has greater variation as the coefficient of variation is higher for rice as compared to that of wheat. (vii) Rice crop has higher Range, Quartile Deviation, Mean Deviation about Mean, Mean Deviation about Median, Standard Deviation and Coefficient of Variation.
Q.6In the previous question, calculate the relative measures of variation and indicate the value which , in your opinion, is more reliable. ANSWER: (i) Coefficient of Range (a) Wheat
The coefficient of variation is more reliable than all other measures.
Q.7A batsman is to be selected for a cricket team. The choice is between X and Y on the basis of their scores in five previous scores which are Which batsman should be selected if we want, (i) a higher run-getter, or (ii) a more reliable batsman in the team? ANSWER: Batsman X
(i) Average of Batsman X is higher than that of Batsman Y, so he should be selected if we want a high scorer. (ii) The Batsman Y is more reliable than Batsman X. This is because the coefficient of variation of Batsman X is higher than that of Batsman Y.
Q.8To check the quality of two brands of light bulbs, their life in burning hours was estimated as under for 100 bulbs of each brand. (i) Which brand gives higher life? (ii) Which brand is more dependable? ANSWER: For Brand A For Brand B
(i) The average life of bulb of Brand B is comparatively higher than that of Brand A. (ii) The bulbs of Brand B are more dependable as CV of Brand B is lesser than CV of Brand A. Q.9 Average daily wage of 50 workers of a factory was ₹ 200 with a Standard Deviation of ₹ 40. Each worker is given a raise of ₹ 20. What is the new average daily wage and standard deviation? Have wages become more or less uniform? ANSWER: N = 50 x¯¯¯ = 200 σ = 40 Average wage = Total wages Number of workers 200 = Total wages 50 So, total wages = 200 × 50 = ₹ 10,000 Now, increase in wage rate = ₹20 Total raise = 50 × 20= ₹ 1,000 Total wage after raise = ₹ 10,000 + 1,000 = ₹ 11,000 New average wage = New total wages Number of workers =11,00050 = ₹220 Thus, Mean increases by the amount of increase in wage of each worker as the absolute increase was equal for all. Standard Deviation will remain the same that is ₹40 as Standard Deviation is independent of origin and hence addition of equal amount in all the values will not cause any change in the Standard Deviation. Uniformity of wages can be seen by coefficient of variation. Previously, the coefficient of variation was CV = σX¯¯¯¯¯×100 = (40/200) × 100 = 20 The new coefficient of variation after wage increase is given by CV = σx×100 = (40/220) × 100 = 18.18 This shows that wages have become more uniform now as the new CV is lower.
Q.10If in the previous question, each worker is given a hike of 10% in wages, how are the Mean and Standard Deviation values affected? ANSWER: Average wage = ₹ 200 Hike in wages = 10% Since arithmetic mean is not independent of scale, the mean will also increase by 10%. = 10100×200 = ₹ 20 Hence, the new Mean will be 200 + 20 = ₹ 220 Standard Deviation is also not independent of scale, hence, the Standard Deviation will also increase by 10% Initial Standard Deviation = ₹ 40 So, New Standard Deviation = ₹40 +10% of 40 = ₹ (40 + 4) = ₹ 44
Q.11Calculate the Mean Deviation using Mean and Standard Deviation for the following distribution. ANSWER:
Q.12The sum of 10 values is 100 and the sum of their squares is 1090. Find out the coefficient of variation. ANSWER:
