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NATIONAL INCOME & RELATED

AGGREGATES
MULTIPLE CHOICE QUESTIONS
1. Which one of the following is final expenditure :
(a) Purchased computer by school.
(b) Purchased scooter by scooter dealer.
(c) Purchased vegetable by restaurant.
(d) Purchased milk by tea shop.
2. Which one of the following is flow variable.

(a) Capital formation (b) Change in inventory

(c) GDPMP (d) All of the above

3. When goods and services are produced in a year valued at current years prices is called
(a) Real GDP (b) GDP at constant prices
(c) National Product (d) GDP at current prices.
4. Which is correct?

(a) GNPmp > GDPmp when NFIA < 0.

(b) GNPmp > GDPmP when NFIA = 0.
(c) GNPmp > GDPmp when FIFA < FITA.
(d) GNPmp > GDPmp when NFIA > 0.

5. Which of the following is not a transfer payment?

(a) Indirect taxes (b) Subsidy
(c) Scholarship (d) None of the above.

6. When the value of a product is counted more than once then it is called double counting. As a result
national income is :
(a) Under-estimated (b) Over-estimated
(c) Correctly-estimated (d) None of the above.
7. Which is not a component of NFIA?
(a) Net compensation of employees.

(b) Net income from property and entrepreneurship.

(c) Net retained earnings of resident companies abroad.
(d) Net export.

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 8. Which one of the following is not a component of Gross Domestic Fixed Capital formation?
(a) Gross Public Investment
(b) Inventory investment
(c) Gross residential construction investment
(d) Gross business fixed investment

9. Which one of the following leakage?

(a) export (b) import

(c) investment (d) both (a) and (b)

10. A person (or an institution) who is normally resides in a country and whose centre of economic interest
lies in that country is called
(a) Non-resident (b) Normal resident
(c) Both (a) and (b) (d) None of the above.
Answers- 1a, 2b, 3d, 4d, 5d, 6b, 7d, 8b, 9b,10b

11. Those goods which satisfy human wants are called-

a) Consumer goods
b) Intermediate goods
c) Capital goods
d) None of these
Ans: a)

12. If NNP fc = 100, Indirect tax = 40 Subsidies= 20 then National Income=

a) 130
b) 100
c) 110
d) 150
Ans: b)

13. Value added is-

a) Value of output
b) Value of output –intermediate consumption
c) Sales + change in stock
d) Value of intermediate consumption
Ans: b)

14. Which of the following variable is flow-

a) Expenditure
b) Capital
c) Wealth
d) Distance between Delhi and Manali
Ans: a)
15. American embassy is a part of economic territory of -
a) America
b) India
c) Both
d) International Area
Ans: a)

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16. Wages and salaries are component of
a) Mixed Income
b) Operating surplus
c) Compensation of employees
d) None of these Ans: c)

17. Impact of externality is

a) positive
b) negative
c) either positive or negative
d) Neither positive or negative Ans: c)

18. Interest on National debt is included in

a) National Income
b) Domestic Income
c) GNP
d) Private Income Ans: d)

19. Personal Income will be equal to personal disposable income, when

a) Corporate Tax is 0
b) Personal Tax is 0
c) Excise duty is 0
d) Indirect Tax is 0 Ans: b)

20. Difference between net and Gross investment is

a) Depreciation
b) Net Indirect Tax
c) Net factor Income from abroad
d) None of these Ans: a)

21. GNP mp is equal to-

a) GNPfc+NIT
b) GDP fc+NFIA
c) GDPmp-NIT
d) GDPfc + IT – subsidy
Ans: a)

22. NDP fc=NDP mp when

a) Indirect taxes are zero
b) When subsidies are zero
c) When Net Indirect Taxes are zero
d) None of these
e) Ans: c)

23. Which out of the following is post tax income of the following
a) Private income
b) Personal Income
c) Personal disposable Income
d) None of these Ans: c)
24. Own produced goods used for satisfaction are called
a) Capital goods
b) Intermediate goods
c) Consumption Goods
d) Producer Goods Ans: c)

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25. GDP at current price is known as:
a) GNP at Nominal Prices
b) Real GDP
c) GDP at Factor prices
d) GDP at market price.
Ans: d)

26. Net capital formation causes

a) Increase in production capacity
b) Increase in depreciation
c) Increase in profits
d) Increase in cost
Ans: a)

27. Income of the family is the example of which variable

a) Stock
b) Flow
c) Both stock and flow
d) None of these
e) Ans: b)

28. Which of the following is not transfer payment

a) Interest on National debt
b) Retirement pension
c) Old age pension
d) Donations
Ans: b)

29. Real National Income is

a) National income at current prices
b) National income at factor prices
c) National income at constant prices
d) National income at average prices of last 10 years
Ans: c)

30. Problem of double counting can be avoided by

a) Final output method
b) Production method
c) Value added method
d) All of the above
Ans- (d)

31. Which of the following is not, by definition, equal to National income?

a.. National output b. National expenditure c. National product d. National wealth
Ans . D

32. Which of the following is a transfer payment?

a. Payment made to housewife
b. pocket allowance to children
c. maintenance allowance to old parents
d. All of above.
Ans .D

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33.The best method of computing national income is
a.Product method
b.Income method
c.Expenditure method
d.Combination of income and production method
Ans .D

34.Which of the following will directly increase the GNP ?

a.A rise in the market price
b.A surplus in budget
c.An increase in investment
d.A deficit in budget
Ans. C

35.While calculating personal income ,we have to deduct the following from
Private sector income:
a.Saving of private corporate sector and corporation tax
b.Consumption of fixed capital
c.Direct taxes paid by households
d.All of the above
Ans.A

36.The total income earned in any given year by the owners of productive resources is measured by
a.Personal income
b.Disposable income
c.Gross national product
d.National income
Ans. D

37. An example of double counting in national income would be

A. Wages of bus and train drivers
B.cotton output and cotton cloth output
C.electricity output and water output
D.tax receipts and earnings of Inland Revenue officials
Ans .b

38.The difference between GNP and GDP is equal to

a.gross domestic investment
b.Net foreign investment
c.net imports
d.NFIA Ans D

39.”Disposable income” does not include

a.Business transfer payments b.social security benefits
c.corporate dividends d.Personal income taxes
Ans.D

40.The smallest national income accounting aggregate is usually

a.Personal income
b.GNP
c.Personal Disposable Income
d.National Income Ans.C

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41.For the study of the long term growth of the economy we use
a.Real GNP
b.Transfer payments
c.per capita income
d.Disposable income
Ans. A

42. Interest on the national debt is included in

a.NNP b.GNP c.Personal income d.National income
Ans .C

43. Depreciation is the loss of value of

a. Capital assets
b.stocks
C.Intermediate goods
D.Final goods
Ans .A

44.The important leakages in the circular flow of income are as follows except one which ?
a.Savings
b.Imports
c.Government expenditure
d.Taxes
Ans. C

45. In a closed economy model one of the sectors below is not to be considered which?
a. Households
b.Firms
c.Government
d.Foreign trade
Ans.D

46. GNP is RS 600 crores and NNP is RS 475 crores: therefore depreciation is
a.RS 100
b.RS 175
c.RS 50
d. RS 125
Ans .D

47. NNP at market prices and NNP at factor costs will be equal when there is
a.No direct tax
b.No indirect tax
c.No subsidy
d.No indirect tax and no subsidy
Ans .D

48.The purchase of a new home is included in the GNP as a part of

a.capital consumption allowance
b.personal consumption expenditure
c.Investment
d.Personal saving
Ans .C

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49.A household in a two sector model is essentially a unit of
a.consumption
b.production
c.investment
d.none of the above
Ans.A
50.For a closed economy having no foreign trade which one of the following is correct ?
a.GDP=GNP b.GDP>GNP C.GDP<GNP D.GDP><GNP
Ans.A

51.National Income is the :

a.NNP at market price
b.NNP at factor cost
c.NDP at market price
d.NDP at factor price
Ans.B

52. In India, the main source of national income is

a. Primary sector
b. secondary sector.
c. tertiary sector
d. foreign sector
Ans .C

53. National income total reveals:

1. Production side of the economy
2. Distribution side of the economy
3. Expenditure side of the economy
Choose your answer from
A.1 only
B.2 only
c.1, 2 and 3
D.3 only
Ans .C

54. Which one of the following items is excluded in calculating national income?
A. Service of a rental TV set
b.RS 10,000/- won in a lottery
C.Rented residences
D.paid house work
Ans .B

55. Which one of the following represents the saving in the private corporate sector?
a. total profits of a company
b. Undistributed profits
c. Excess of income over expenditure
d. Dividends paid to shareholders
Ans. B

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 NATIONAL INCOME & RELATED
AGGREGATES - THEORY
BOARD QUESTIONS
Questions from Theory of NIA
Q1. Giving reason explain how the following should be treated in estimation of national income (6) 2015 O
i) Payment of interest by a firm to a bank:- Included – Treated as factor payment by the firm because the firm
borrows money for carrying out production and therefore included in National Income.
ii) Payment of interest by a bank to an individual:- Included- treated as a factor payment because bank borrows
for carrying out banking services and therefore included in NI.
iii) Payment of interest by an individual to a bank:- Not Included- because the individual borrows for
consumption and not for production.

Q2. Giving reason explain how should the following be treated in estimating GDP mp (3) 2014 D
i) Fee to mechanic paid by a firm :- Considered as factor income, so included.
ii) interest paid by an individual on car loan from a bank Not Included- because the individual borrows for
consumption and not for production.
iii) interest on purchasing a car for use by a firm: Treated as factor payment by the firm because the firm
borrows money for carrying out production and therefore included in National Income.

Q3. Is GDP a true index of economic welfare of the people? Give two reasons in support of your answer.(4) 2010, 2014
Ans: i) Composition of goods:- GDP includes all the final goods & services produced in a domestic territory of a
country without considering the fact that it is harmful or useful for human beings. Economy produces all sorts of
goods like cigarette, tobacco, liquor, harmful chemicals etc. Production of these goods are included in GDP, however
its production does not ensure welfare
ii)Increasing Pollution:- GDP does not measure the adverse effects of production on environment. Industries
create a lot of pollution, price of which is paid by all the living beings. Example: GDP is increased but it leads to
environmental degradation, global warming etc. cost of which is paid in the form of increasing medical bills, laundry
bills, expenditure on cooling system, water purifiers etc.

Q4. How should the following be treated in estimating NNPfc of a country? Give reason for your answer. (3) 2014
(i) Taking care of aged parents:- Not included as it is Noneconomic activity, no income is generated out of it.
(ii) Payment of corporate tax- Not included as it is a part of profit & profit is estimated before payment of tax,
so it is not separately added.
(iii) Expenditure on providing police services by the government- Included as it is a part of government final
consumption expenditure ( GFCE).
Q5. Giving reason categorise the following into stock & flow (4) 2013
i) Capital- Stock – it is measured at a point of time
ii) Saving- Flow- it is measured during a period of time iii) GDP- Flow iv) Wealth:- Stock

Q6. Give two examples of intermediate goods (1) O 2013 set1,2,3

Ans: i) Using HYV seeds, fertiliser, pesticides etc. by the farmer for agriculture. ii) using sugarcane in sugar mill.

Q7. Distinguish between real GDP and nominal GDP. Which is a better index of welfare of people and why?(4) 2013 O
Ans: NOMINAL GDP REAL GDP
GDP measured in terms of current GDP computed at constant prices (base
market prices is called nominal GDP. year price) is called real GDP
It shows real as well as monetary growth. It shows real growth
It reflects overestimated GDP due to It neutralises the effects of inflation from
inflation. GDP.
It is calculated by using formula It is calculated by using formula
value of output= Current year output x value of output= Current year output x base
current price years price

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.
Q8. Distinguish between stock and flows. Give two examples each. (4) O 2013 set1,2,3,2010

Q9. STOCK FLOW

Stock: - Quantity of an economic variable Flow: Flow is that quantity of an economic
which is measured at a particular point of variable, which is measured during the period
time. of time.

Stock has no time dimension. Stock is static Flow has time dimension- like per hr, per day
concept. etc.
Flow is a dynamic concept.
Stocks influences flow Flow influences stock
Population, Capital, Money supply, Property, National Income, saving rate, Investment,
wealth, water in a tank etc. change in money supply, Water flowing from
the tank etc.

Define consumption goods. (1) O 2012 set1

Ans: Consumption goods are those which are bought by consumers to satisfy their wants. Eg: Durable goods
car, television, radio etc. Non-durable goods and services like fruit, oil, milk, vegetable etc.

Q10. Define Capital Goods. (1) O 2013 set 2,3

Ans: Capital goods are those final goods, which are used and help in the process of production of other goods
and services. E.g.: plant, machinery etc.

Q11. Giving reason explain how should the following be treated in estimating national income : (4) 2012 O set2
i) Expenditure on fertilisers by a farmer – Not included as it is an intermediate good
ii) Purchase of tractor by a farmer – Included- as it is a capital good, it is an investment

Q12. Giving reason, explain how the following should be treated while estimating national income: (4) O 2012
i) Payment of excise duty by a firm : Not included- it is indirect tax & NI is calculated at factor cost
ii) Payment of interest by a firm : Included as firm will use the loan for production purpose.

Q13. Should the following be treated as final expenditure or intermediate expenditure?Givereason for your answer.
i) Purchase of furniture by a firm ; Capital good- so included
ii) Expenditure on maintenance by a firm: intermediate good – so not included (4) O 2012 set1

Q14. Define depreciation. (1) O 2011 set 1,3

Ans: Fall in the value of fixed capital like machinery, equipment, building etc. due to general wear & tear & expected
obsolescence is called as depreciation.

Q15. Explain how ‘nonmonetary exchanges’ are a limitation in taking GDP as an index of welfare?(3) O 2011, Set 1,3

Ans: In many developing nations, there is this issue that goods and services are traded through barter, i.e.
without any money. Such goods and services should be included in accounting of national income, but the
absence of data makes this inclusion difficult.

16. Give reasons, explain the treatment assigned to the following while estimating national income:
i)Family members working free on the farm owned by the family: Though they are not receiving any income but
total production will be added in the own account production & will be added in national income.
ii)Payment of interest on borrowings by general government: It is considered as transfer payment as government is
spending for consumption purposes, so the interest paid by govt. is not included in national income. (4) O 2011 set 1
i)Expenditure on maintenance of a building : Not included – it is intermediate consumption of capital good-
depreciation
ii)Expenditure on adding a floor to the building : Included as it is adding to the asset- it is capital formation(4)O
2011set 3

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17. Explain the basis of classifying goods into intermediate and final goods. Give suitable examples.
FINAL GOODS INTERMEDIATE GOODS
Final goods: Are those goods, which are used Intermediate goods are those goods, which are
either for final consumption or for investment. It used either for resale or for further production.
includes final consumer goods and final
production goods.
The goods are not used to satisfy their needs by The nondurable goods used as raw materials during
consumers or invested by producers. an accounting year or capital goods bought for
E.g. bread &milk purchased/used by consumers resale. E.g. bread purchased for making bread
Purchase of machinery by producer pakoras at a restaurant
Resale of goods by firm for profit making in an Resale of goods by firm for profit making is
accounting year is not possible. possible in an accounting year.
Final goods are included in estimation of national Intermediate goods are not included in the
income estimation of national income..
Value addition not required in future. Value addition required in future.

Q18. How will you treat the following while estimating national income of India? (6) 2010 D
i)Dividend received by an Indian from his investment in shares of a foreign company-Not included separately. It
is a part of profit & profit is calculated in National Income before the distribution of dividend.
ii)Money received by a family in India from relatives working abroad- Not included as it is a transfer payment,
no services are rendered against it.
iii)Interest received on loans given to a friend for purchasing a car –Not included as it is used for consumption
purpose.

Q19 Giving reason, classify the following into intermediate and final goods: (3) 2010 O
i) Machines purchased by a dealer of machines: Intermediate – it is for resale
ii) A car purchased by a household: Final – it is used for satisfying their needs.

Q20. How will you treat the following while estimating national income of India? Give reason for your answer. (6)
2010 O OR
i) Dividend received a foreigner from investment in shares of an Indian company- Not included separately. It is a
part of profit & profit is calculated in National Income before the distribution of dividend.
ii) Profits earned by a branch of an Indian Bank in Canada- Included as a part of factor income from abroad.
iii)scholarship given to Indian students studying in India by a foreign company- Transfer payment- not included-
no services are rendered by students against the payment.

Q21. How will you treat the following while estimating domestic factor income of India? Give reason for your
answer. (6) 2009 D
i) Remittances from non-resident Indians to their families in India- Not included- transfer payment
ii) Rent paid by the embassy of Japan in India to a resident Indian- Not included as the embassy of japan is the
domestic territory of japan, it is factor income from abroad, not included in Domestic factor income.
iii)Profits earned by branches of foreign bank in India: Included- Income earned within the domestic territory of the
country

Q22. Give the meaning of factor income to abroad and factor income from abroad. Also give an example of each. (3)
2009 O
Factor Income from abroad Factor income to abroad
Income earned by all the residents of a country from rest Income remitted by all the non residents living in the
of the world in the form of rent, interest, wages & profits country to rest of the world in the form of rent, interest,
wages & profits
Salaries of Indian employees working in the US embassy Salaries of an American working at Indian embassy
located in India. located in USA.
OR
Distinguish between domestic product and national product. When can domestic product be more than national
product?

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Domestic Product National Product

1. money value of all the final goods & services produced 1. Money value of all the final goods & services
wihin the domestic territory of a country is called as produced in a country in an accounting year is called as
domestic product. national income

2. It is totally a domestic concept which includes income 2. It deducts the income earned by the non residents in
earned by all the people with in the domestic territory of a the country which is remitted abroad, and added the
country, regardless of residents or non residents. factor income earned by residents of a country from
abroad.

3. It does not includes NFIA 3.It includes NFIA

Q23. While estimating national income, how will you treat the following? Give reason for your answer (6) 2009 O
i) Imputed rent of self occupied houses- Included as house is a capital good which generates income even if
the owner resides in his own house. An imputed value is estimated & added in the national income.
ii) Interest received on debentures: Included as it is a factor income.
iii)financial help received for flood victims- not included as it is a transfer payment.

Q24. Give reasons explain how the following are treated while estimating national income : (6) 2008 D
i) Payment of fees to a lawyer engaged by a firm: Not included as it is intermediate consumption. It is
services used in
production
ii) Rent free house to an employee by an employer: Included as it is wages & salaries in kind form.
iii) Purchase by foreign tourists: Included as it is export, & value of net export is included in GDP.

Q25. Giving reason, explain how the following are treated in estimating National Income: (6) 2008 O
i) Wheat grown by a farmer but used entirely for the family’s consumption-Included as it is own account
production.
ii) earning of the shareholders from the sale of shares- Not included as it is just financial transfer.
ii) Expenditure by govt. on providing free education – Included as it is Govt. final consumption expenditure

NUMERICALS - NATIONAL INCOME ACCOUNTING

Q1.Calculate National Income and Private Income. Solution 1:
(6) O 2015 NNPfc = (iv + ix) + ( i + viii + vii + vi + xii) – ii
i) Rent 200 = 700 + 100 + 200 + 150 + 20 + 30 + 50 – 10
ii) Net Factor Income to abroad 10 NNPfc = 1240 Cr.
iii) National Debt Interest 5
iv) Wages & Salaries 700 NDPfc = NNPfc – NFIA
v) Current Transfer from government 10 = 1240 – (-10) = 1250
vi) Undistributed profits 20
vii) Corporate Tax 30 Private sectors income = NDPfc – x
viii) Interest 150 = 1250 – 250 = 1000
ix) Social security contributions by employers
100 Private Income = Private sector’s income + iii- xi + v
x) NDP accruing to government 250 1000 + 5 – 5 + 10
xi) Net current transfer to ROW 5 Private income = 1010
xii) Dividends 50

Q2. If the Real GDP is Rs. 400 and Nominal GDP is Rs. Solution 2:- Real GDP = x 100
450, calculate price index (base=100)
400 = 450 /price index x 100 = 450 x 100 /400
Price index = 112.5

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Q3. Calculate ‘NNPfc’ and ‘Gross National Disposable Solution 3:
Income’ from the following :(6) O 2014 ( in Arab) NNPfc = ii + vi + iv + vii + viii - v
(i) Social security contributions by employees 90 = 800 + 100 + 300 + 500 + 400 + (- 50)
(ii) Wages and salaries 800 NNPfc = 2050
(iii) Net current transfers to abroad (–) 30
(iv) Rent and royalty 300 GNPmp = NNPfc + ix + x
(v) Net factor income to abroad 50 = 2050 + 200 + 250
(vi) Social security contributions by employers 100 = 2500
(vii) Profit 500 GNDI = GNPmp – iii
(viii) Interest 400 = 2500 – (-30 )
(ix) Consumption of fixed capital 200 GNDI = 2530
(x) Net indirect tax 250

Q4. Calculate ‘‘NVAfc’’(4) O C 2014 ( in Lakhs) Solution 4.

(i) Sales 400
(ii) Change in stock (–) 20 NVAfc = sales + change in stock – Intermediate
(iii) Intermediate consumption 200 consumption – depreciation – NIT
(iv) Net indirect taxes 40 = 400 + (-20) – 200 – 30 – 40
(v) Exports 50 NVAfc = 110
(vi) Depreciation 3
Q5. Calculate national income: (6) O C 2014 ( in Crores) Solution 5.
(i) Net current transfer from rest of the world 30
(ii) Private final consumption expenditure 400 NNPfc = ii + vi + (iii + v) + vii –v – viii – ix
(iii) Net domestic capital formation 100
(iv) Change in stock 50 = 400 + 200 + 100 + 20 + 40 – 20 – 80 -10
(v) Depreciation 20 NNPfc = 650
(vi) Government final consumption expenditure 200
(vii) Net exports 40
(viii) Net indirect taxes 80
(ix) Net factor income paid to abroad 10 OR
Q6. Calculate personal disposable income : Solution 6.
( in Crores ) (6) O C 2014
(i) Net domestic product at factor cost PDI = i + ii + iii + viii – iv – v – vi
accruing to private sector 800 = 800 + 50 +70 + 20 – 200 – 40 – 30
(ii) National Debt interest 50
(iii) Current transfers from government 70 PDI = 670
(iv) Savings of private corporate sector 200
(v) Corporation tax 40
(vi) Direct taxes paid by households 30
(vii) Depreciation 60
(viii) Net factor income from abroad 20
Q7. Calculate sales from the following:(3)O2013 set1,2,3 Solution7: GVAmp = NVA fc + Dep + NIT
i) Subsidies 200 = 2000 +700 + ( 0 – 200)
ii) Opening stock 100 = 2500
iii) Closing Stock 600 GVAmp = Sales = change in stock – IC
iv) Intermediate consumption 3000 2500 = Sales + ( 600 – 100 ) – 3000
v) Consumption of fixed capital 700 2500 = Sales – 2500
vi) Profit 750 Sales = 5000
vii) NVA fc 2000 ( Ans: 5000)
Q8 Calculate GDPmp (6) O 2013 set 1,2,3 Solution 8 :
i) Compensation of employees 2000 NDPfc = COE + OS + MI
ii) Interest 500 = 2000 + (500+700 +800) +1500
iii) Rent 700 NDPfc = 5500
iv) Profit 800 GDPmp = NDPfc + Dep +NIT
v) Employer’s contribution to social security = 5500 + 100 +250
schemes 200 GDPmp = 5850
vi) Dividends 300
vii) Consumption of fixed capital 100
viii) Net Indirect Tax 250

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 ix) Net Export 70
x) Net Factor Income to abroad 150
xi) Mixed income of self employee 1500
(Ans:5850)

Q9. Calculate Gross National Disposable Income from the Solution 9:

following data: GNP mp = NDPfc + Depreciation + NIT + NFIA
i) Net Domestic Product at factor cost 3000 = 3000 + 200 + (300 -100) + ( - 150)
ii) Indirect Tax 300 = 3000 + 400 -150
iii) Net current transfer from abroad 250 = 3250
iv) Current transfer from govt. 100 GNDI = GNPmp + Net Current transfer from abroad
v) Net factor income to abroad 150 3250 +250
vi) Consumption of fixed capital 200 GNDI = 3500
vii) Subsidies 100 (Ans:3500)
. Q10. Find Net Value Added at MP (3) O 2012 set1 Solution 10: GVOmp = sales + change in stock
i)Depreciation 700 = (900 x 40) + (1000 – 800)
ii) Output sold ( units) 900 = 36000 + 200
iii) Price per unit of output 40 GVOmp =36200
iv) Closing Stock 1000 NVAmp = GVOmp – Intermediate consumption –
v) Opening Stock 800 depreciation
vi) Sales Tax 3000 = 36200 – 20000 – 700
vii) Intermediate cost 20,000 (Ans: 15,500) NVAmp = 15500
Q11. Calculate GVAfc : (3) 2012 O set 2 Solution 11 :
i) Units of output sold 1000 GVOmp = sales + change in stock
ii) Price per unit of output ( Rs) 30 = (1000 x 30) + ( 3000 – 2000)
iii) Depreciation 1000 = 30000 + 1000 = 31000
iv) Intermediate cost 12,000 GVAfc = GVOmp – IC - NIT
v) Closing Stock 3000 = 31000 – 12000 - 6000
vi) Opening stock 2000 GVAfc = 13000
vii) Excise duty 2500
viii) Sales tax 3500 (Ans:13000)
Q12. Find out ( a) National Income and (b) Net National Solution 12:
Disposable Income:(6) 2012 set 2 NNPfc = PFCE + GFCE + NDFCF + Ch in stock –
i) Factor income from abroad 15 Net imports – dep – NIT + NFIA
ii) PFCE 600 = 600 + 200 + 110 + (-10) +20 – 50 – 70 + (-10)
iii) Consumption of fixed capital 50 NNPfc = 840
iv) GFCE 200
v) Net Current Transfer to abroad (-) 5 NNDI = NNPmp + Net current transfer from abroad
vi) Net Domestic Fixed Capital Formation 110 = 840 + 70 + (-5)
vii) Net Factor Income to Abroad 10 NNDI = 915
viii) Net Imports (-) 20
ix) Net Indirect Tax 70
x) Change in stock (-) 10 (Ans: 840 & 915)
Q13 Find out Net Value Added at M P: (3) 2012 set 3 Solution 13:
i) Intermediate cost 10,000 GVOmp = sales + change in stock
ii) Change in Stock 1000 = 750 x 40 + 1000
iii) Output sold 750 = 31000
iv) Price per unit of output 40 NVAmp = GVOmp –Ic – dep
v) Import duty 2000 = 31000 – 10000 – 3000
vi) Consumption of fixed capital 3000 NVAmp = 18000
( Ans:18000)
Q14. Find (a) Net National Product at Market Price Solution 14:
(b) National Disposable Income (6) O2012 set3 NDPfc = COE + OS + MI
i) Wages and salaries 700 = 700 + 60 + 100 + 50 + 300 +400 = 1610
ii) Rent 100
iii) Net Current transfer to abroad 10 NNPmp = NDPfc + NFIA + NIT
iv) Net Indirect Tax 70 = 1610 + 20 + 70
v) Royalty 50 NNPmp = 1700

14
 vi) Profits 300 NNDI = NNPmp + Net current transfer from abroad
vii) Net Factor Income to abroad (-) 20 = 1700 + (-10)
viii) Consumption of fixed capital 120 NNDI = 1690
ix) ix) Social Security contribution by employers 60 GNDI = GNPmp + Net current transfer from abroad
x) Social security contributions by employees 40 = 1700 + 120 + (-10)
xi) Interest 400 GNDI = 1810
(Ans:1700, NNDI= 1690, GNDI= 1810)
Q15. Find Out i) GNPmp and ii) Net Current Transfer to Solution 15: GNPmp = PFCE + GFCE + NDFCF +
abroad: (6) O 2012 set 1 Ch. in stock + Net export + dep. + NFIA
i) PFCE 1000 = 1000 + 300 + 110 + (20-20) + 15+ 100 + 10
ii) Depreciation 100 GNPmp = 1535
iii) Net National Disposable Income 1500 NNDI = NNPmp + Net current transfer from abroad
iv) Closing stock 20 1500 = 1535 – 100 + X
v) GFCE 300 1500 = 1435 + X
vi) Net Indirect Tax 50 1500 – 1435
vii) Opening Stock 20 = 65
viii) NDFCF 110 Net current transfer from abroad = 65
ix) Net Exports 15
x) Net Factor Income to abroad(-) 10 (Ans:1535,-65)
Q16. Calculate (a) NDP fc and (b) Private income from Solution 16:
the following: (6) O 2011 set 1 NDP fc = wages & salaries + employer’s contribution
i) Domestic product accruing to govt. 300 crore Rs + rent + interest + corporate tax + undistributed
ii) Wages & salaries 1000 profits+ dividend
iii)Net current transfer to abroad (-) 20 = 1000 + 200 + 100 + 130 + 50 + 20 + 100
iv)Rent 100 NDPfc = 1600
v)Interest paid by the production units 130 Private sector’s income = NDPfc – Govt. sector’s
vi)National Debt Interest 30 income
vii)corporate tax 50 = 1600 – 300 = 1300
viii) Current transfer by govt. 40 Private income = Private sector’s income + NFIA +
ix)Contribution to social security schemes by employers National debt interest + net current transfer from
200 abroad + current transfer from government
x) Dividends 100 = 1300 + 0 + 30 + 20 + 40
xi) Undistributed profits 20 Private income = 1390
xii) Net factor income to abroad 0 (Ans: 1600, 1390)
Q17 . Calculate (a) GNP mp (b) Personal Disposable Solution 17:
Income from the following data: (6) O 2011 set3 NDPfc = COE + OS + MI
i) Net factor income to abroad 10 (Rs cr.) = 1200 + 300 + 500
ii) Private Income 1700 = 2000
iii)Operating surplus 300 GNPmp = NDPfc + dep + NIT + NFIA
iv)Corporation Tax 150 = 2000 + 100 + 250 + (-10)
v)Undistributed profit 30 GNPmp = 2340
vi)Mixed Income 500 PDI = Private income – corporate tax – undistributed
vii)consumption of fixed capital 100 profit – personal tax
viii) Personal taxes 200 = 1700 – 150 – 30 – 200
ix) Compensation of employees 1200 PDI = 1320
x) Net indirect tax 250
(Ans: 2340, 1320)
Q18 . From the following data, calculate ( a) GDP fc and Solution 18: Depreciation = GDCF - NDFCF + Ch. In
(b) Factor Income to abroad. (6) 2010 D OR stock = 300 – 200 + 50
i) Compensation Of employees 800 Depreciation = 50
ii) Profits 200 GDPfc = COE + OS + MI + Dep
iii) Dividends 50 = 800 + 150 + 100 + 200 + 50 GDPfc =
iv) GNP mp 1400 1300
v) Rent 150 GDPmp = GDPfc + NIT
vi) Interest 100 = 1300 + 120
vii) GDCF 300 GDPmp = 1420
viii) NDFCF 200 NFIA = GNP mp – GDPmp
ix) Change in Stock 50 = 1400 – 1420 = -20
x) Factor Income from abroad 60 NFIA = Factor income from abroad – factor income to

15
xi) NIT 120 abroad
(Ans: 1300, 80) -20 = 60 – FI to abroad
Factor income to abroad = 80

Q19. Calculate Net National Product at fc and Gross Solution 19: PDI = Personal income – personal tax
National Disposable Income from the following: 1000 = PI – 90 = 1090
i) Saving of non departmental enterprises 50 Personal Income = private income – viii) + v)
ii) Income from property & entrepreneurship accruing 1090 = Pvt Income – 30 – 10
to the govt. Admn. Dept. 70 1130 = Pvt Income
iii)Personal tax 90 Pvt income = pvt sector' income + NFIA + National
iv)National debt interest 20 debt interest + vi) + x)
v)Retained earnings of private corporate sector 10 1130 = pvt sector’s income + 0 + 20 + 40 + (-
vi) Current transfer payments by govt. 40 10)
vii)Consumption of fixed capital 60 1130 - 50 = 1080 = pvt sector’s income
viii) Corporate tax 30 NNPfc = 1080 + i) + ii)+ NFIA
ix) NIT 80 = 1080 + 50 + 70 +0
x) Net Current transfer from rest of the world (-)10 NNPfc = 1200
xi) Personal Disposable Income 1000 GNDI = GNPmp + net current transfer from abroad
(Ans: 1200, 1330) = 1200 + 60 + 80 + (-10)
GNDI = 1330
Q20. Calculate (a) GDPmp (b) Factor income from abroad Solution 20:
from the following data: (6) 2010 O Depreciation = GDCF – NDCF
i) Profits 500 = 700 +50 – 650 =100
ii) Exports 40 GDP mp = iii + vi+ vii+ i +dep + NIT
iii) Compensation of employees 1500 = 1500 + 300 +400 +500 + 100 + 0
iv) GNP fc 2800 GDPmp = 2800
v) Net current transfer from ROW 90 NFIA = GNPfc – GDPfc
vi) Rent 300 0 = 2800 – 2800
vii) Interest 400 NFIA = FI from ROW – FI to ROW
viii) Factor income to abroad 120 0 = X – 120
ix) NDCF 650 FA from ROW = 120
x) GDFCF 700
xi) Change in stock 50
(Ans: 2800, 120)
Q21. Calculate GNP fc from the following data by Solution 21:
i) income method ii) expenditure method(6) 2009 D Income Method
Items Rs. ( in crores) NDPfc = iv + v + viii + iii
i) PFCE 1000 800 + 250 + 150 + 400 = 1600
ii) NDCF 200 GNPfc = NDPfc + dep + NFIA
iii) Profits 400 = 1600 + 60 + (- 10)
iv) Compensation of employees 800 GNPfc = 1650
v) Rent 250
vi) GFCE 500 Expenditure Method
vii) Consumption of fixed capital 60 GDPmp = PFCE+ GFCE+ (NDCF + Dep) + Net
viii) Interest 150 export
ix) Net current transfer from rest of the world (-) 80 = 1000 + 500 + 260 + (-20) = 1740
x) NFIA (-) 10 GNPfc = GDPmp + NFIA – NIT
xi) Net Exports (-) 20 = 1740 + (-10) – 80
xii) Net Indirect Tax 80 = 1650
(Ans:1650)
Q22. From the following data calculate “ national Solution 22:
income” by Income & expenditure method. (6) 2009
O Income Method
i) Interest 150 NNPfc = vi + i + ii + v + vii
ii) rent 250 = 1000+ 150 + 250 +640 + 30 = 2070
iii)GFCE 600
iv)PFCE 1200 Expenditure Method
v) Profits 640 NNPfc = iii+ iv + xi + x + ix – dep – viii + vii
vi)Compensation of employees 1000 = 600 + 1200 + 340 + 50 + (- 40) – 50 – 60 +

16
 vii)NFIA 30 30
viii) NIT 60 = 2070
ix) Net Export (-) 40
x) Consumption of fixed capital 50
xi) NDCF 340
(Ans: 2070)
Q23. Calculate Value of output from the following data:- Solution 23:-
(3) 2008 D NVAfc = Value of output – IC –dep –NIT
i) NVA fc 100 laks 100 = x – 75 – 10 – (20 – 5)
ii) Intermediate consumption 75 X = 100 + 100
iii) Excise duty 20 Value of output = 200
iv) Subsidy 5
v) Depreciation 10
(Ans: 200)
Q24. Calculate ‘NDPfc’ and ‘Gross National Disposable Solution 24:-
Income’ from the following data: (6) 2008 D NDPfc = PFCE + GFCE + NDCF + Dep + Net Export
i) Net current transfer from abroad (-) 5 Cr. Rs – dep – NIT
ii) PFCE 250 = 250 + 50 + 30 +25 + (-10) – 25 – (20- 10)
iii)NFIA 15 NDPfc = 310
iv)GFCE 50 GNPmp = NDPfc +dep + NIT + NFIA
v) Depreciation 25 = 310 +25 + 10 + 15
vi) Net Export (-) 10 = 360
vii) Subsidies 10 GNDI = GNPmp + Net current transfer from abroad
viii) NDCF 30 = 360 + -(5)
ix) Indirect tax 20 GNDI = 355
(Ans: 310, 355)
Q25. Calculate NVAfc from the following data:- Solution 25:-
i) depreciation 20 Lakh Rs. NVA fc = iv+ vi – ii – i – (-iii) (3) 2008 O
ii) Intermediate cost 90 = 140 + (-10) -90 – 20 + 5
iii) Subsidy 5 = 140 – 120 + 5
iv) Sales 140 = 25
v) Exports 7
vi) Change in stock (-) 10
vii) Import of raw materials 3
(Ans: 25 )
Q26. Calculate ‘National Income’ and ‘Private Income’ Solution 26:-
from the following data:- (6) 2008 O NNPfc = ii + vii + ix+ iv – viii + x
i) Net current transfer to rest of the world 10 Cr Rs. = 600 + 100 + 70+ (-20) – 30 + 10 = 730
ii) PFCE 600 NDPfc = NNPfc – NFIA
iii) National Debt Interest 15 = 730 – 10 = 720
iv)Net Exports (-) 20 Pvt.sector’s income accruing from NDPfc = NDPfc –
v) Current transfer from govt. 5 vi)
vi) NDPfc accruing to govt. 25 Pvt.sector’s income accruing from NDPfc = 720- 25
vii)GFCE 100 = 695
viii) NIT 30 Private income = pvt. Sector’s income + i + iii + v + x
ix) NDCF 70 = 695 + (-10) + 15+ 5 +10 = 715
x)NFIA 10
(Ans: 730, 715)

17
 NATIONAL INCOME & RELATED AGGREGATES
HIGHER ORDER THINKING QUESTIONS

Q1.‘Machine purchased is always a final good’ do you agree? Give reason for your answer
Whether machine is a final good or it depends on how it is being used (end use). If machine is bought by a
household, then it is a final good. If machine is bought by a firm for its own use, then also it is a final good.
If the machine is bought by a firm for resale then it is an intermediate good. Example
 If a sewing machine is purchased by a tailor, then it is a fixed asset and to be considered as
capital good, but if it is purchased by a consumer it is a durable use of consumer goods.
 In the same way if a car is purchased by a taxi driver for business it is a capital good, but if it
is purchased by a consumer it is durable consumer goods.

Q2. Is circular flow of income unending?

Ans Yes, it is a regular and unending flow.

Q3. ‘Teritary sector mostly produces final gods’ comment.

Ans. True, because it produces services which are generally final goods.

Q4.. Why does an entrepreneur make a provision for consumption of fixed capital?
Ans .An entrepreneur makes a provision for the consumption of fixed capital with a view to replace the
worn out fixed assets.

Q5. ‘Unexpected obsolescence is an element of depreciation’. True or False. Explain with reason.
Ans. False .Only expected obsolescence is considered as an element of depreciation.
Loss of value of fixed assets owing to unexpected obsolescence is called capital loss .

Q6. All producer goods are capital goods.

Ans . False. Producer goods are those goods which are used in the production of other goods.
Capital goods only refer to fixed assets of the producers’ .therefore; all producer goods are not capital goods.

Q7. Write down the limitations of using GDP as an index of welfare of a country
Ans .Following are the limitations of using GDP as an index of welfare of a country:
1. Distribution of GDP is not taken into account.
2. Composition of GDP is not accounted for.
3. Non monetary exchanges remain unrecorded, to which extent GDP remains underestimated.
4. Externalities are not considered, even when these have considerable impact on social welfare.

Q8. When will the domestic income be greater than the national income?
Ans: When the net factor income from abroad is negative

Q9. Explain the meaning of non-market activities

Ans. Non marketing activities refer to acquiring of many final goods and services not through regular
market transactions. E.g. vegetable grown in the backyard of the house.

Q10. Explain that Domestic territory is bigger than the political frontiers of a country.
Ans: The Domestic territory of a nation is understood to be the territory lying within the political frontiers of
a country. But in the National income accounting the term domestic territory is used in a wider sense. Based
on freedom criterion, the scope of economic territory is defined to cover-

 Ships and aircrafts owned and operated by normal residents between two or more countries.
 Fishing vessels, oil and natural gas rigs and floating plate forms operated by the residents of

18
 a country in international waters where they have exclusive rights of operations.
 Embassies , consulates and military establishments of a country located abroad .

Q11. All producer goods are not capital goods?

Ans: Producer goods are those goods which are used in the process of production i.e. which are used in
production of other goods. Producer goods includes two types of goods:
 Single user producer goods- Goods used as raw material like coal, wood etc.
 Capital goods – they are used as fixed assets by the producers like plant and machinery
So ,it can be said that all capital goods are producer goods , but all producer goods are not
capital goods.

Q12. Explain components of Net factor Income from Abroad.

Ans: There are three components of NFIA

 Net Compensation of Employees- It is the difference between compensation received by

residents and compensation given to non-residents working within the domestic territory of
the country.
 Net Income from Property and entrepreneurship- it is equal to difference between the
income received by way of interest, rent and profits by the residents of a country and similar
payments made to rest of world.
 Net retained earnings of residents companies abroad- It is the difference between
undistributed profit received from abroad by residents companies and undistributed profit
paid to non-residents companies to abroad.

Q13. Why Real GNP is more important than nominal GNP?

Ans: Real GNP rise only when there is rise in physical output during a year. It is clear from the following
points-

 A country is interested in rise in physical output and not in monetary (Nominal GNP) as an
increase real GNP leads to rise in living standards.
 A rise real GNP reflects the economic growth whereas continues fall in it indicator of
recession.
 Real GNP eliminates the effect of change in prices.
 It is used for comparisons internationally or inside the country.

Q14. Should we treat subsidies as transfer payments?

Ans: No, subsidies should not be treated as transfer payments because value addition has already occurred.
In fact, subsidies tend to lower the market price of the goods produced. Subsidies are the part of NNP fc
which is why these are deducted from factor cost to equate it with Market Price.

Q15. Macroeconomics is the study of aggregates while microeconomics is not .Comment

Ans:-It is wrong that there is no aggregation in microeconomics, in microeconomics that we study the
concepts of Market demand which is aggregate of individual demand for a commodity. However the
difference lies in the degree of aggregation. While in microeconomics, aggregation is at an individual
household, individual industry or an individual market but on the other hand in macroeconomics aggregation
is done at the level of an economy as a whole.

Q16. Is net of exports (X-M) a part of net factor income from abroad?
Ans. No, it is not. Income from exports is a part of domestic income. Because, what we export is a part of
domestic product. .Import is just the opposite of exports .thus, net of exports is a component of domestic
product or expenditure on domestic product.

19
Q17. Name the various components of structure of an economy.
Ans 1.Household sector 2. Business sector 3.Govt sector 4. Rest of the world.

Q18. Do aggregate income is equal to aggregate expenditure and aggregate output?

Ans Yes .we can measure national income from any of these aspects, which will be equal to each other.

Q19. Why indirect taxes are not a part of national income?

Ans because national income is calculated on factor cost where as Net indirect tax make national income at
market price.

Q20. When GDP is equal to GNP?

Ans. When NFIA IS Zero.

Q21.. Is production kept for self consumption a part of domestic income?

Ans .Yes, because it is a part of current domestic output.

Q22. With every increase in the level of GDP, social welfare definitely increases in the economy.
Ans .False. If increase in the level of GDP is associated with higher level of income inequality, social
welfare may not increase.
Q23. Give one example of ‘externality” which reduces welfare of the people.

NATIONAL INCOME & RELATED

AGGREGATES
PRACTICAL APPLICATION
Ans. Pollutants dumped by steel factories in rivers pollute water and kill the fish in the river.

1. Calculate Value Added at factor cost from the following.

ITEMS Rs. CRORES
a. Purchase of raw materials 30
b. Depreciation 12
c. Sales 200
d. Excise tax 20
e. Opening stock 15
f. Intermediate consumption 48
g. Closing stock 10
Ans: Sales + ∆ in stock = value of output
200 + (cl. St – op. st)
200 + (10 -15) = 200 -5=195
Value of output – intermediate consumption
= value added at MP
195-48 = 147
V.A at FC = V.A at MP – Net indirect tax
147 – 20 = 127 crores

2. Calculate (a) Net National Product at MP, and (b) Gross National Disposable Income
ITEMS Rs. crores
a. Private final Consumption expenditure 200
b. Net indirect taxes 20
c. Change in stocks (--)15
d. Net current transfers from abroad (--)10
e. Govt. final consumption expenditure 50
f. Consumption of fixed capital 15

20
g. Net domestic capital formation 30
h. Net factor income from abroad 5
i. Net imports 10
Ans: (a) + (e) + (g) + (-i) = NDP MP
200 + 50+ 30 -10
280 -10 = 270 crores
NNP MP = NDP MP + NFIFA
270 + 5 = 275
NNP MP + 275 crores

GNDI = NNP PC + NFIFA + Net indirect taxes + Net current transfers from abroad + Depreciation
(consumption of fixed capital)
NNP MP – net in tax = 275 – 20 =255 crores
GNDI = 255 + 20 + 5 + (-10) + 15
= 295 – 10 = 285 crores
GNDI = 285 crores

3. Calculate Gross Domestic Product at Market Price by a) Production Method and (b) Income
Method
ITEMS Rs. crores
a. Intermediate consumption by
i) Primary sector 500
ii) Secondary sector 400
iii) Tertiary sector 400
b. Value of output by
i) Primary sector 1000
ii) Secondary sector 900
iii) Tertiary sector 700
c. Rent 10
d. Compensation of employees 400
e. Mixed income 550
f. Operating surplus 300
h. Net factor income from abroad (--)20
i. Interest 5
j. Consumption of fixed capital 40
k. Net indirect taxes 10

Ans: GDP MP by production method

(b) (i) + (ii) + (iii) – a (i) + (ii) + ( iii) = value added
(1000+ 900 + 700) – (500 -400-400)
2600 – 1300 = 1300 crores Value added at MP (GDP MP)

Income method
Compensation of employees + operating surplus + mixed income = NDP FC
= 400 + 300 + 550 = 1250 crores
GDP MP = NDP FC + conspn of fixed capital + net In. tax
= 1250+ 40 + 10
GDP MP =1300

4. Calculate Net National Disposable Income from the following data.

ITEMS Rs. crores
a. Gross domestic product at MP 1000
b. Net factor income from abroad (-) 20
c. Net indirect taxes 120

21
d. Consumption of fixed capital 100
e. Net current transfers from abroad 50
Ans: NNDI = GDP MP – consumption of fixed capital + Net FIFA + Net current transfer from abroad
= 1000- 100 + 50 + (-20)
= 880 + 50 = 930 crores

5. Calculate Gross National Disposable Income from the following.

ITEMS Rs. crores
a) National Income 2000
b) Net current transfers from rest of the world 200
c) Consumption of fixed capital 100
d) Net factor income from abroad (-) 50
e) Net indirect taxes 250
Ans: GNDI= (a) + (b) +(c) + (e)
= 2000 + 200 + 100 + 250 GNDI = 2550 crores

6. ESTIMATE NATIONAL INCOME BY

(a) EXPENDITURE METHOD (b) INCOME METHOD FROM THE FOLLOWING
DATA Rs. in crores
1. Private final consumption expenditure 210
2. Govt: final consumption expenditure 50
3. Net domestic capital formation 40
4. Net exports (-) 5
5. Wages & Salaries 170
6. Employer’s contribution 10
7. Profit 45
8. Interest 20
9. Indirect taxes 30
10. Subsidies 05
11. Rent 10
12. Factor income from abroad 03
13. Consumption of fixed capital 25
14. Royalty 15
Ans: National Income (NNP FC)
Expenditure Method
(1) + (2) + (3) + (4) = NDP MP
210 + 50 + 40 + (-5) = 295
NNP FC = NDP MP + factor Income from abroad – net Indirect tax ( Indirect tax – subsidy)
295 + 3 – (30 -5)
295 + 3 – 25
= 298 – 25 = 273
NNP FC= 273 crores
Income method:
(5) + (6) + (7) + (8) + (11) + (15)
170 + 10 + 45 + 20 + 10 + 15
= 270 (NDP FC)
NDP FC = NDP FC + FIFA
= 270 + 3= 273 crores

7. FROM THE FOLLOWING DATA CALCULATE

(a) NATIONAL INCOME (b) PERSONAL DISPOSIBLE INCOME.

1. Profit 500
2. Rent 200

22
3. Private income 2000
4. Mixed income of self-employed 800
5. Compensation of employers 1000
6. Consumption of fixed capital 100
7. Net factor income from abroad -(50)
8. Net retained earnings of private employees’ 150
9. Interest 250
10. Net exports 200
11. Co-operation 100
12. Net indirect tax 160
13. Direct taxes paid by houses hold’s 120
14. Employers contribution to social security scheme. 60
Ans: NNP FC (N. I) = (5) + (9) + (4) + (1) + (2)
1000 + 250+ 800 + 500 + 200
NDP FC = 2750 crores
NNP FC = NDP FC + (7)
= 2750 + (-50)
NNP Fc = 2700 crores
PDI = (3) – (8) – (11) – (13)
2000 – 150 – 100 -120
PDI = 2000 – 370 = 1630 crores

8. CALCULATE NATIONAL INCOME AND GROSS NATIONAL DISPOSABLE INCOME FROM

THE FOLLOWING DATA.
Net indirect tax 05
Net domestic fixed capital formation 100
Net exports (-) 20
Gov.: final consumption expenditure 200
Net current transfer from abroad 15
Private final consumption expenditure 600
Change in stock 10
Net factor from abroad 05
Gross domestic fixed capital formation 125

Ans: National Income (NNP FC)

= (4) + (6) + (2) + (7) + (3) = NDP MP
= 200 + 600 + 100 + 10 + (-20)
= 910 -20 = 890
NDP MP = 890 crores
NNP FC = NDP MP + (8) – (1)
= 890 + 5 -5
NNP FC = 890
Depreciation = (9) – (2)
125 – 100 = 25 crores
GNDI = NNP FC + Net Indirect Tax + Net Current transfers from abroad + depreciation
= 890 = 05+ 15 + 25
GNDI = 935 crores

9. CALCULATE NNP AT MARKET PRICE BY PRODUCTION METHOD AND INCOME

METHOD Crores
1. Inter mediate consumption
(a) primary sector 500
(b) Secondary sector 400

23
 (c) tertiary sector 300
2. Value of output of
(a) primary sector 1,000
(b) Secondary sector 900
(c) tertiary sector 700
3. Rent 10
4. Emoluments of employers 400
5. Mixed income 650
6. Operating surplus 300
7. Net factor income from abroad -20
8. Interest 05
9. Consumptive of fixed capital 40
10. Net indirect tax 10
Ans: NNP MP by production method
(2) Value of output – (1) Intermediate conspn = value added at MP
(2) a + b+ c – (1) a + b + c
1000 + 900 + 700 – 500 + 400 + 300
2600 – 1200
1400 = GDP MP
NNP MP = GDP MP – (9) + (7)
= 1400 – 40 + (-20)
NNP MP = 1340
Income Method:
NNP MP = (4) + (5) + (6) + (10) + (7)
= 400 + 650 + 300 + 10 + (-20)
NNP MP = 1350 + 10 – 20

10. CALCULATE GNP at FACTOR COST BY INCOME METHOD AND EXPENDITURE

METHOD. Rupees in crores
1. Private final consumption expenditure 1000
2. Net domestic capital formation 200
3. Profit 400
4. Compensation of employers 800
5. Rent 250
6. Gov.: final consumption expenditure 500
7. Consumption of fixed capital 60
8. Interest 150
9. Net current transfer from row (-)80
10. Net factor income from abroad (-)10
11. Net exports (-)20
12. Net indirect taxes 80
Ans: GNP FC by Income method
GNP FC = 4 + 3 + 5 + 8 + 10 + 7
800 + 400 +250 + 150 + (-10) + 60
GNP FC = 1650 crores
GNP FC by Expenditure Method
GNP FC = 1 + 2 + 6 + 10 + 11 -12 + 7
= 1000 + 200 + 500 + (-10) + (-20) -80 + 60
= 1700 -110 + 60
GNP FC = 1650 crores

24
11. CALCULATE PRIVATE INCOME AND PERSONAL DISPOSABLE INCOME
FROM THE FOLLOWING DATA
. Rupees in crores
1. National income 5050
2. Income from property and entrepreneurship to gov.
Administrative department 500
3. Saving of non-department public enterprises 100
4. Corporation tax 80
5. Current transfer from govt: administrative depart 200
6. Net factor income from abroad -50
7. Direct personal tax 150
8. Indirect taxes 220
9. Current transfer from Raw 80
10. Saving of private corporate sector 500

Ans: Private Income = 1 – 2- 3 + 5 + 9

5050 – 500 – 100 + 200 + 80
5430 – 500 = Private Income = 4930 crores
PDI = Private Income – 4 -10 -7
4930 -80 -500 -150
PDI = 4200 crores

12. Calculate private income

1. Income from domestic product accruing to private sector 250
2. Net current transfer from raw 40
3Net current transfer from govt: administrative dept 10
4. National debt interest 20
5. Net factor income from abroad 05
Ans: Private Income = 1 + 2+ 3 + 4 + 5
250 + 40 + 10 + 20 + 5
= 325 crores

13. CALCULATE NET NATIONAL DISPOSABLE INCOME AND PERSONAL INCOME FROM
THE FOLLOWING DATA
Rs. In crores
1. Net indirect taxes 90
2. Compensation of employers 400
3. Personal taxes 100
4. Operating surplus 200
5. Corporation profit tax 80
6. Mixed income of self-employed 500
7. National debt interest 70
8. Saving of non-departmental enterprises 40
9. Current transfer from govt 60
10. Income from property and entrepreneurship to govt administrative
Department 30
11. Net current transfer from RAW 20
12. Net factor income from abroad -50
13. saving of private corporate sector 20
Ans: NDPfc = (2) + (4) + (6)
400 + 200 + 500 = 1100 crores
NNDI = NDP fc + (12) + (1) + (11)
=1100 + (-50) + 90 + 20
NNDI = 1210 – 50 = 1160 crores

25
Personal Income
Ans:
Private Income = NDP FC –(8) – (10)
1160 -40 – 30=1090 crores
1090 + 7 + 9 +11 +12
1090 + 70 + 60 + 20 + (-50) = 1190 crores
Personal income = Private Income – Corporation Profit Tax – Savings of private corporate sectors
1190– 80 – 20= 1090 crores

14. CALCULATE FROM THE FOLLOWING DATA (A) PRIVATE INCOME (B) PERSONAL
INCOME (C) PERSONAL DISPOSABLE INCOME.
RS IN CRORES
1. Factor income from NDP accruing to private sector 300
2. Income from entrepreneurship and property
3. Accruing to govt administrative departmental 70
4. Savings of non-departmental enterprises 60
5. Factor income from abroad 20
6. Consumption of fixed capital 35
7. Current transfer from rest of the world 15
8. Corporation taxes 25
9. Factor income to abroad 30
10. Current transfer from govt governmental admi depart 40
11. Direct taxes paid by house hold 20
12. National dept interest 05
13. saving of private corporate sector 80
Ans Private Income = 1 + 5 + 7 -9 + 10 + 12
300 + 20 + 15 -30 + 40 + 05
Private Income = 350 crores
Personal Income = Private income – 8 – 13
= 350 – 25 – 80
Personal Income = 245 crores
PDI = Personal Income - 11
245 – 20
PDI = 225 crores

15. From the following data, calculate:

(a) Gross national Disposable Income
(b) Private Income
(c) Personal Disposable Income
(Rs. In Crores)
(1) Net national product at factor cost 700
(2) Indirect taxes 60
(3) Subsidies 10
(4) Consumption of fixed capital 40
(5) Income from property and entrepreneurship
Accruing to government administrative departments 50
(6) Current transfers from rest of the world 45
(7) Profits 100
(8) Direct tax paid by households 50
(9) Savings of private corporate sector 60
(10) Saving of non-departmental enterprises 25
(11) Current transfer from govt: administrative departments 70
(12) A factor income abroad 20

26
(13) Factor income to abroad 30
(14) Corporation tax 35
Ans GNDI = 1 + 2 -3 + 6 + 4
700 + 60 – 10 + 45 + 40= 805 -10 + 40 GNDI = 835 crores
b) Private Income = 1 – 5 -10 + 6 +11
700 – 50 -25 + 45 +70
Private Income = 740 crores
c) PDI = Private Income – 14 – 9 – 8
740 – 35 – 60 – 50
PDI = 594 crores

16. Calculate Gross National Disposable Income from the following data:
(Rs. In Crores)
(1) National income 2000
(2) Net current transfer from rest of the world 200
(3) Consumption of fixed capital 100
(4) Net factor income from abroad (-)50
(5) Net indirect taxes 250
Ans: GNDI = 1 + 5 + 2 + 3
2000 + 250 + 200 + 100
GNDI = 2550 crores

17. Calculate Net National Disposable Income from the Following Data:
(Rs. In Crores)
(1) Gross national product at factor cost 800
(2) Net current transfer from rest of the world 50
(3) Net indirect taxes 70
(4) Consumption of fixed capital 60
(5) Net factor income from abroad (-)10
Ans: NNDI = 1 + 2 + 3 -4
800 + 50 + 70 -60
= 860 crores
18. Calculate net value added at market price of a firm: -
ITEMS (Rs. IN THOUSAND)
i. Sale 700
ii. Change in stock 40
iii. Depreciation 80
iv. Net in direct taxes 100
v. Purchase of machinery 250
vi. Purchase of intermediate product. 400
Ans.: Net value added market price =(sales +change in stock)- Intermediate consumption-
depreciation =(700+40))-400-80
=740-480
=Rs. 260 thousands.
19. Calculate Gross value added at factor cost of a firm: -
ITEMS (Rs. IN LAKHS)
i. Value of output 300
ii. Change in stock 30
iii. Depreciation 20
iv. Net in direct taxes 30
v. Intermediate cost 200
vi. Export 15

27
 GVA fc= Value of output- intermediate consumption-NIT
=300-200-30
= Rs. 70 Lakhs.
20. Calculate personal disposable income from the given data: -
ITEMS (Rs. in crores )
Net current transferred from rest of the world. 3
Private income 200
. Personal taxes 30
National debt interest 5
Corporate profit tax 20
Undistributed profit. 10
Ans. Personal Disposable Income = Private Income-Undistributed profit.-Corporate profit tax-Personal
taxes
=200-10-20-30
= Rs. 140 Crores

21. Calculate personal disposable income from the given data: -

ITEMS (Rs. in crores )
i. Net current transferred from rest of the world. 15
ii. Net domestic product accruing to private sector. 500
iii. Net factor income from abroad. (-)10
iv. National debt interest 40
v. Corporate profit tax 55
vi. Undistributed profit of corporation 20
Ans.Personal Disposable Income=Net domestic product accruing to private sector+Net current
transferred from rest of the world.+National debt interest+Net factor income from abroad.-Corporate
profit tax-Undistributed profit of corporation-Personal tax
=500+15+40+-10-55-20-0
=Rs. 470 Crores

22. Calculate personal income from the given data: -

ITEMS (Rs. in crores )
i. Net current transferred from rest of the world. 25
ii. Net domestic product accruing to private sector. 600
iii. Net factor income from abroad. (-)10
iv. National debt interest 50
v. Corporate profit tax 65
vi. Undistributed profit of corporation 20

Ans. personal income=Net domestic product accruing to private sector+Net current transferred from
rest of the world.+National debt interest+Net factor income from abroad.-Corporate profit tax-
Undistributed profit of corporation
=600+25+50+-10-65-20
=675-95
= Rs.580 Cr.

28
 23. Calculate ' Personal income from the following data: -
ITEMS (Rs. IN LAKHS)
i. Retained earnings of private corporation. 20
ii. Miscellaneous receipts of government. 50
iii. Personal disposable income. 200
iv. Personal taxes 30
v. corporate profit tax 10

Ans. personal Income=Personal disposable income+Personal taxes+Miscellaneous receipts of

government
=200+30+50
=Rs. 280 Crores.

24. Calculate Gross National Disposable income and Personal income; -

ITEMS (Rs. IN Crores)
i. Net factor income from abroad. (-)50
ii. Net indirect taxes 110
iii. Current Transferred by the government 40
iv. Corporate taxes 60
v. Net domestic product at market price 800
vi. National debt interest 80
vii. NCT from abroad. 10
viii. Consumption of fixed capital 50
ix. Domestic product accruing to govt. 70
x. Retain earning of private corporation. 10

Ans.GNDI=NDP mp+NFIA+NCT from abroad.+ Depreciation

=800+-50+10+50 GNDI Rs.810 Crore
PI =NDP mp-NIT-Domestic product accruing to govt+Current Transferred by the government+NCT
from abroad.+National debt interest-Corporate taxes-Retain earning of Private Corporation.
=800-70+40+10+80-60-10
=930-140 =790 Cr.
25. Calculate Gross National Disposable income and Personal income; -
ITEMS (Rs. In Crores)
i. Net factor income from abroad. 50
ii. Indirect taxes 100
iii. Current Transferred by the government 30
iv. Corporate taxes 60
v. Net domestic product at factor cost 1020
vi. National debt interest 40
vii. NCT from abroad. (-) 20
viii. Personal tax 70
ix. Domestic product accruing to govt. 200
x. Undistributed profit of private corporation. 10
Ans. GNDI =NDPfc+NFIA+NIT+NCTrow+DEP
= 1020+50+100-20+0
= Rs. 1150 Crores

29
PDI =NDP fc-Domestic product accruing to govt.+Current Transferred by the government+National debt
interest+NCT from abroad.-Undistributed profit of private corporation-Corporate taxes- Personal tax
=1020-200+30+40-20-10-60-70
=1090-360
= Rs.730 crore
26. Calculate Gross National Disposable income and Personal income; -
ITEMS (Rs. IN Crores)
i. Net factor income from abroad. (-) 10
ii. Net indirect taxes 120
iii. Current Transferred by the government 30
iv. Corporate taxes 20
v. National income 900
vi. National debt interest 50
vii. NCT to abroad. 20
viii. Personal tax 40
ix. Domestic product accruing to govt. 90
x. Retain earning of private corporation. 10
Ans. GNDI=National income+NCT to abroad+Net indirect taxes+depreciation
=900+20+120+0
=Rs.1040crores
PDI =National income-Domestic product accruing to govt+Current Transferred by the
government+National debt interest+NCT to abroad.-Retain earning of private corporation-Corporate taxes-
Personal tax =900-90+30+50+20-10-20-40 =1000-160 = Rs.840 crores

27. From the following data, Calculate a. National Income b. Net National disposable income
ITEMS (Rs. IN Crores)
1. N C T from ROW 5
2. Private final consumption expenditure 300
3. N F income to abroad. 10
4. Govt. final consumption expenditure 100
5. Subsidies 20
6. Net domestic fixed capital formation. 80
7. Indirect taxes 70
8. Net export -40
9. Change in stocks 20
10. Current transfer from govt. 15
Ans- National income= Private final consumption expenditure+Govt. final consumption
expenditure+Net domestic fixed capital formation+Change in stocks+N F income to abroad.-(Indirect
taxes-Subsidies)+Net export
National Income = 300+100+80+20+10-50-40
= 510-90 = Rs.420 Cr.
NNDI= NationalIncome+NIT+NCT Row
=420+50+5 = Rs.475 Cr
28. From the following data, Calculate a. National Income b.Net National disposable income : -
ITEMS (Rs. IN Crores)
i. Compensation of employee 600
ii. Rent. 100
iii. Profit 80

30
iv. C F C 50
v. M I 200
Vi. Current transfer from government 25
vii. NFIA (-) 10
Viii . Interest 120
ix. N C T from ROW 20
x. N I T 110
National income=Compensation of employee+Rent.+Profit+Interest+M I+NFIA
=600+100+80+120+200-10 =Rs.1090 Cr
NNDI=National income +NIT+ NCT Row
=1090+110+20 = Rs.1220Cr
29. From the following data, Calculate a. National Income b. Private income : -
ITEMS (Rs. IN Crores)
i. N C T from ROW 10
ii. Private final consumption expenditure 600
iii. National debt interest 15
Iv. Net export (-) 20
v. C T from government. 5
Vi. Net domestic product at factor cost 25
accruing to government.
Vii. Government final consumption 100
expenditure
viii. Net indirect taxes, 30
ix. Net domestic capital formation, 70
x. Net factor income from abroad. 10
National Income=Private final consumption expenditure+Government final consumption
expenditure+Net domestic capital formation+Net export+Net factor income from abroad-Net indirect
taxes
=600+100+70-20+10-30 =770-50
=Rs.730 Cr.
Private Income=National Income-NIT-Net domestic product at factor cost accruing to government+N C
T from ROW+National debt interest+C T from government.
=730-30-25+10+15+5 = Rs.705 Cr.

30. From the following data (a) 'Net national product at factor cost' and Gross national disposable
income.
i. Gross domestic capital formation 210
ii. Change in stock (-0 30
iii. Private final consumption expenditure 3,000
iv. Government final consumption expenditure 1,000
v. Net export (-) 20
vi. N F I A (-) 10
vii. Net domestic fixed capital formation 200
Viii. N C T from ROW. 30
ix. Interest on public debt. 15
x. Personal tax 25
Xi. N I T 170
XII. Undistributed profit. 250

31
NNP fc=Private final consumption expenditure+Government final consumption expenditure+Net
export+Net domestic fixed capital formation+N F I A-N I T
=3000+1000+-20+200-10-170
=4200-200 =4000

GNDI=NNP fc+NIT+NCTRow+(Gross domestic capital formation-Net domestic fixed capital formation)

=4000+170+30+210-200
=Rs.4210 Cr.
NUMERICALS FOR PRACTICE

1. Calculate Net National Disposable Income From The Following Data:

(Rs. In Crores)
(i) Gross domestic product at market price 1,000
(ii) Net factor income from abroad (-)20
(iii) Net indirect taxes 120
(iv) Consumption of fixed capital 100
(v) Net current transfer from rest of the world 70

2. Calculate Gross National Disposable Income The Following Data:

(Rs. In Crores)
(i) National income (or NNPfc) 800
(ii) Net indirect taxes 100
(iii) Net factor income from abroad 30
(iv) Net current transfer from rest of the world 50
(v) Consumption of fixed capital 70

3. Calculate Gross National Disposable Income And net National Disposable Income from the
Following Data:
(Rs. In Crores)
(i) Consumption of fixed capital 30
(ii) Net national product at market price 240
(iii) Net Indirect taxes 40
(iv) Net current transfers from rest of the world (-)20
(v) Net factor income from abroad (-) 10

4.Find Out GNPMP, NDPFC And Gross National Disposable Income.

(Rs. In Crores)
(i) National income 520
(ii) Net factor income from abroad 10
(iii) Indirect taxes 40
(iv) Subsidies 10
(v) Consumption of fixed capital 50
(vi) Net current transfer received from abroad 20

5. Calculate NNPFC, net National Disposable Income and Gross National Disposable Income from
following data:
(Rs. In Crores)
(i) GNPMP 1000
(ii) Net Indirect taxes 100
(iii) Net current transfer received from rest of the world (-)20
(iv) Subsidies 25
(v) Consumption of fixed capital 50
(vi) Net factor income paid to the rest of the world (-)10

32
6. Find out (a) Personal Income and (b) Personal Disposable Income from following data:
(Rs. In Crores)
1. Private income 48,800
(ii) Interest on national debit 1,000
(iii) Net factor income from abroad 300
(iv) Corporate Savings 800
(v) Corporation tax 210
(vi) Personal income tax 540

7. From The Following Data Calculate: Private Income and (b) Personal disposable income.
(Rs. In Crores)
(i) Income from Domestic product accruing to the private sector 4,000
(ii) Savings of non-departmental public enterprises 200
(iii) Current transfer from government administrative departments 150
(iv) Savings of private corporate sector 400
(v) Current transfers from rest of the world 50
(vi) Net factor income from abroad (-) 4
(vii) Corporation tax 60
(viii) Direct Personal tax 140

8. Calculate (a) Personal Income (b) Personal Disposable Income from following data:
(Rs. In Crores)
(i) Income from property and entrepreneurship accruing to
Government administrative department 500
(ii) Savings of non-departmental public enterprises 100
(iii) Corporation tax 80
(iv) Income from Domestic product accruing to the private sector 4,500
(v) Current transfer from government administrative departments 200
(vi) Net factor income from abroad (-)50
(vii) Direct Personal tax 150
(viii) Indirect taxes 220
(ix) Current transfers from rest of the world 80
(x) Savings of private corporate sector 500

9. From the following data calculate National Income by (i) Income method and (ii) Expenditure
method.
(Rs. In Crores)
(i) Compensation of employees 1,200
(ii) Net factor income from abroad (-)20
(iii) Net indirect taxes 120
(iv) Profit 800
(v) Private final consumption expenditure 2,000
(vi) Net domestic capital formation 770
(vii) Consumption of fixed capital 130
(viii) Rent 400
(ix) Interest 620
(x) Mixed income of self- employed 700
(xi) Net exports (-)30
(xii) Government final consumption expenditure 1,100

33
10. From the following data, calculate Gross national product at Market Price by
(i) Income method. (ii) Expenditure method:
(Rs. In Crores)
(i) Mixed income of self-employed 400
(ii) Compensation of employees 500
(iii) Private final consumption expenditure 900
(iv) Net factor income from abroad (-)20
(v) Net indirect taxes 100
(vi) Consumption of fixed capital 120
(vii) Net domestic capital formation 280
(viii) Net exports (-)30
(ix) Profits 350
(x) Rent 100
(xi) Interest 150
(xii) Government final consumption expenditure 450

11. Calculate (a) National Income and (b) Gross National Disposable Income from the following data
(Rs. In Crores)
(i) Net factor income from abroad (-)20
(ii) Government final consumption expenditure 200
(iii) Subsidies 10
(iv) Private final consumption expenditure 800
(v) Net current transfers from the rest of the world 30
(vi) Net domestic fixed capital formation 100
(vii) Indirect taxes 80
(viii) Consumption of fixed capital 40
(ix) Change in stock (-)10
(x) Net exports (-)50

12. From the following data, calculate ‘gross value added at factor cost’
(Rs. In Crores)
(i) Sales 500
(ii) Change in stock 30
(iii) Subsidies 40
(iv) Consumption of fixed capital 60
(v) Purchases of intermediate products 350
(vi) Profit 70

13. From the following data, calculate: (a) National income, and (b) Personal disposable income
(Rs. In Crores)
(i) Compensation of employees 1,200’
(ii) Rent 400
(iii) Profit 800
(iv) Consumption of fixed capital 300
(v) Mixed income of self- employed 1,000
(vi) private income 3,600
(vii) net factor income from abroad (-)50
(viii) net trained earnings of private enterprises 200
(ix)interest 250
(x) net indirect taxes 350
(xi) net exports (-)60
(xii) direct taxes paid by households 150
(xiii) corporation tax 100

34
14. From the following data calculate national income by (a) Income method (b) Expenditure method.

(Rs. In cores)
(i) Private final consumption expenditure 2,000
(ii) Net capital formation 400
(iii) Change in stock 50
(iv) Compensation of employees 1,900
(v) Rent 200
(vi) Interest 150
(vii) operating surplus 720
(viii) Net indirect tax 400
(x) Employers’ contribution to social security schemes 100
(xi) Net exports 20
(xii) Net factor income from aboard (-)20
(xii) Government final consumption expenditure 600
(xvi) Consumption of fixed capital 100

15. Find gross national product at market price by income method and expenditure method.
ITEMS Rs. CRORES
a. Mixed income of the self-employed 400
b. Compensation of employees 500
c. Private final consumption expenditure 900
d. Net factor income from abroad (-)20
e. Net indirect taxes 100
f. Consumption of fixed capital 20
g. Net domestic capital formation 280
h. Net exports (--) 30
i. Rent 100
j. Interest 150
k. Government final consumption expenditure 450

NATIONAL INCOME & RELATED

AGGREGATES
VALUE BASED QUESTIONS

1. Explain how “externalities” are a limitation of the GDP as an indicator of welfare.

Ans: Externalities both positive and negative are the limitations of the GDP as an indicator of the
welfare, because GDP does not take them into account.
 Taking an example of introduction of metro rail , as an latest means of transport , reduces
transport cost, travel time of its commuters who have not directly contributed anything
towards its cost. Expenditure on its construction is included in GDP but not the positive
externalities flowing from it.
 Similarly , GDP does not take into account negative externalities. Taking an example of
factories producing goods , they exercise welfare on one hand but on the other hand create
pollution of air, water and noise, which in turn harms people , so as the pollution created by
the factories reduces welfare.
 Thus taking only GDP as an index of welfare overstates welfare. In this case welfare is
actually lesser indicated by GDP.
2. Discuss the significance of net capital formation.
Ans: Net capital formation enhances production capacity and the scale of production. It is the sign of
growth and development.

35
  Net capital formation helps to generate opportunities of employment. Accordingly,
unemployment is combated in countries like India.
 Net capital formation increases productivity of labour. It accelerates the pace of economic
growth.
3. Saving is both a virtue as well as vice. Explain How?
Ans:

 At the macro level saving is a virtue. But it may be vice at the macro level. If an individual
saves more, he accumulates more wealth. It enhances his ability to earn more.
 But at the macro level, if everyone starts saving more, demand for goods and services may
fall. It will adversely impact the inducement may shrink, driving the economy into
state of depression.
4. Explain the economic value of high component of net export (export –Import) in the total expenditure
on final goods and services.
Ans: High component of net export in the total expenditure on final goods and services is a sign of
higher exports than imports of the domestic Economy. It implies –

 That the inflow of foreign exchange is greater than the outflow of foreign exchange
 That the domestically produced goods are able to find markets abroad. So that deficiency
of demand no longer remains a hurdle in the growth process.
 That we are by the large, self-sufficient. Our imports are so limited that we don’t have to
depend much on other countries.
5. Compensation to flood victims is a good social security measure by the government. But why is it not
included in the estimation of National Income.
Ans:Because it does not generate income or product in the economy.

MONEY & BANKING

MULTIPLE CHOICE QUESTIONS

1. Barter refers to the system of:

(a) Mutual exchange *
( b) Exchange of goods for money
( c) Exchange of services for money
( d) None of these

2. Primary function of money is:

(a) Transfer of value
(b) Store of value
( c) Medium of exchange*
(d) All the above.

3. Amount deposited for a fixed period of time:

(a) Time deposits
( b) Current deposits
( c) Demand deposits

36
( d) Saving deposits

4. Money supply consists of:

(a)Currency
(b) Deposits
(c) Both currency and deposits*
(d) None of these

5. Which function of money is known as “Unit of account”?

(a) Medium of exchange
( b) Measure of value*
( c) Standard of deferred payments
(d) Store of value.

6. A commercial bank is a bank that:

(a) Accepts deposits
(b) Creates credit
(c) Gives short term loans
(d) All the above*

7. When RBI acts a banker to the Government, what does it do?

(a) It carries out government transactions.
(b) It advises on monetary and financial matters.
(c) It keeps account of the government.
(d) All the above.
8. Credit card issued by the banks
(a) Encourage spending
(b) Increase aggregate in the economy
(c) Both*

9. Amount deposited with a bank for a fixed period of time is called

(a) Time deposits*
(b) Current deposits
(c) Demand deposits
(d) Saving deposits

10. Credit creation means creation of

(a)Primary deposits
(b) Secondary deposits*
(c) Time deposits
(d) None of these.

11.The merit of issuing notes with RBI can be seen in

(a) Uniformity in note issue
(b) Stability in currency
(c) Control of credit
(d) All of the above*

37
12. Credit control means
(a) contraction of credit only
(b)extension of credit only
(c)extension and contraction of money supply
(d)none of these*

13. Which are is qualitative instrument of RBI?

(a) Cash Reserve Ratio
(b) Repo rate
(c) Moral suasion*
(d) Open market operation

14. Which is the legal tender money?

(a) Cheque
(b) Credit Card
(c) Rupees*
(d) Demand Draft

15. There is inflationary situation in India, what step RBI should take?
(a) Issuing more currency
(b) Increase in Bank rate*
(c) Decrease in CRR
(d) Decrease in SLR

16.Which one of the following deposits can be withdrawn from the bank at any time by the account holder?
a. Time deposit
b. Recurring deposit
c. Demand deposit d.None
17.Which out of the following is not included in the money supply of the country
a. stock of gold held with the Central bank
b. Coins and currency
c. Demand deposits
d. Time deposits

18.Credit creation is controlled by

a. Government
b. Central Bank
c. Commercial banks
d. None of the above

19. Issue of currency notes_________ the money supply

a. Increases
b. decreases
c. restricts
d. checks

20. Money under law to be accepted for all debts:

a. Bank money
b. credit money
c. Fiat money

38
d. Paper money

21. Fiat money includes

a. Currency notes
b. saving deposits at banks
c. currency notes and coins
d. all of them
22. Increase in CRR works as a signal to the commercial banks:
a. to maintain healthy reserves as vault cash
b. to be liberal in offering loans
c. to follow cheap money policy
d. none of these
23. The main aim of commercial banks is:
a. social welfare
b. to earn profits
c. to provide services to the people
d. none of these
24. Number of times the total deposits would be of the initial deposits is determined by:
a. cash reserve ratio
b. legal reserve ratio
c. statutory liquidity ratio
d. reserve deposit ratio
25. if recession is to be combated:
a.repo rate needs to be lowered
b.CRR needs to be lowered
c.both (a) and (b)
d. repo rate needs to be lowered and CRR needs to beraised

26. which of the following instruments deal with the qualitative credit control?
a. open market operation
b. Moral suasion
c. bank rate
d. none

27. Central bank grants loan to

a. General public
b. private companies
c. commercial banks
d. none of these

28.When marginal requirement is increased availability of credit in economy

a. increases
b. decreases
c. unchanged
d. none of these

29. The rate at which Central bank borrows money from commercial bank is:

39
 a. Legal reserve ratio
b. repo rate
c. Reverse repo rate
d. bank rate

30. Term deposits are those

a. against which no cheque can be issued
b. against which no interest is paid to the depositor
c. which are a part of M1 supply of money
d. none of these

31. M1 money does not include

a. currency held by the public
b. demand deposits with the bank
c. other deposits with RBI
d. saving deposits with post office

32. Which of the following is not the function of central bank

a. issue of currency
b. controller of credit
c. credit creation
d. banker to the government

MONEY& BANKING
ALL TYPES

Q1. Currency is issued by the central Bank, yet we say that commercial banks create money. Explain. How is this
money creation by commercial banks likely to affect the national income? Explain. (4) O 2015
Explain the process of money/Credit creation by commercial banks with help of numerical example.(4)O 2010
D 2010, O 2013
Ans: Money creation or deposit creation by the banks is determined by:-
i. The amount of the initial fresh deposit.
ii. The Legal Reserve Ratio (LRR): - It is legally compulsory for the banks to keep a certain minimum ratio of
deposits as cash. It has two components:-
a) Cash Reserve Ratio (CRR) – A part of total deposits of commercial bank is kept with central bank which is
called as Cash Reserve Ratio.
b) Statutory Liquidity Ratio (SLR)- Another part of total deposits of commercial bank is kept by bank itself in
cash is Statutory Liquidity ratio.
iii. It is assumed that all the money that goes out of banks is spent on consumption or investment & re deposited into
the bank.
It can be explained with the help of an example.
Let the LRR is 20% and there is a fresh deposit of Rs.10,000/-. As required the bank keeps 20% .i.e., Rs.2000/- as
cash and the bank lend the remaining Rs. 8000/- to the borrowers. As assumed those who receive payments put the
money back into the banks. The banks again keep 20% .i.e., Rs. 1600/- as cash and lend Rs.6400/-. The money goes to
multiplying in this way and ultimately leads to money creation is Rs.50,000.
Money multiplier/ Deposit multiplier =

40
Credit Creation = Initial deposit x
= 10,000 x
= 10,000 x 100/20
= Rs. 50,000
Q2. Explain the ‘Bankers Bank function’ of central bank. (6) O 2011 set1,3 (4) O 2014 , (4) O 2015 OR
Ans:
Commercial banks has to keep a certain proportion of its cash reserves with the RBI as Cash Reserve Ratio (CRR).
The central bank provides them with centralized clearing and remittance facility.
As the lender of the last resort when the commercial banks fail to meet their financial requirements from other
sources, they approach to the central bank for loans and advances. The central bank assists such banks through
discounting of approved securities and bills of exchange.
The central bank controls them by periodic inspection and returns filled by them.

Q3. Explain the ‘Bank of Issue’ function of central bank. (4) O 2012 set 3 (4) O 2015
Ans: The central bank has sole authority for the issue of currency in the country. All the currency notes (2, 5,10, 20,
50, 100, 500, and 1000) are issued by the RBI. One rupee note and all coins are issued by the govt. of India. But the
responsibility for putting them in circulation rest with the RBI.
All the currency issued by the central bank is its monetary liability.
Putting and withdrawing currency into and from circulation is also the job of the central bank.

Q4 Define money supply & explain its components. OR (4) D 2014

State the components of money supply. (1) D 2010, O 2013 set 1,2,3
Ans: Money supply refers to the total stock of money in circulation in an economy at a given point of time.
Components of money supply :-
There are two components of money supply.
1. Currency ( Coins & currency notes) held by the public (C)
2. Demand Deposits with commercial banks
Money supply = C + DD

Q5. Explain the “lender of last resort” function of central bank. (4) D 2014(3) D 2010, O 2012 set1 O 2013set 1,2,3
Ans: The central bank is under the obligation to provide funds to commercial banks as and when they require financial
help.
The aim is that no sound and genuine business transaction should be restricted or abandoned due to shortage of funds.
Commercial banks approach central bank as a last resort in distress.
The central bank advances necessary credit against eligible securities, subject to certain terms and conditions. Central
bank keeps the reserves of commercial banks so gives guarantee of solvency & never refuses to accommodate any
eligible bank and help them to meet emergencies.

Q6. Explain the significance of “store of value” function of money. OR (3) O 2012 set 2, (4) D 2014
Ans: Under barter system storing of value in terms of money. Money occupies less space in comparison with goods. It
is comparison with goods. It is durable and money is an asset and can be stored in future. Money helps people to
transfer their purchasing power from present to future. So, money is a way to store the value.

Q7. Explain the significance of “medium of exchange” function of money. (4) D 2014, (3) O 2008, O 2013 set1,2,3
Ans: Money serves as a medium of exchange or payments. Money helps in buying and selling of goods and services,
as it is commonly accepted as a medium of exchange.
Money has solved the problem of lack of double co-incidence of wants, found in the barter system.
Money reduces the time and energy spent in the barter system.
Money has made the exchange of goods easy.

Q8. Explain ‘Banker to the Government’ function of the central bank.(3) O 2010, (4) O 2012, (4) O 2013 , (4) O 2014 OR
Ans: The central bank acts as a bankers to the govt. both central as well as state govt. It carries out all the banking
business of the govt. and the govt. keeps its cash balances on current account with the central bank.
The central bank accepts receipts and makes payments for the govt. and carries out exchange, remittance and other
banking operations.
The central bank also provides short term credit to the govt.
The RBI has also the responsibility of managing the public debt.
The central bank also advices the govt. in banking and financial matters.

41
Q9. Explain the significance of the ‘Unit of Account’ function of money(4) O 2012 set 3 ((3) O 2014 OR
Ans: Money serves as a unit of value in which the value of all goods and services measured and expressed. The value
of each good and service is expressed as a price. This helps measuring in the exchange value of the commodities. The
problem of expressing of the value of each commodity in terms of other goods can be avoided. This function of money
makes possible of keeping business transactions.

Q10. Explain the significance of the ‘Standard of Deferred Payment’ function of money. (1) O 2012 set 1
Ans: Deferred payment refers to those payments which are made in future. Money as standard of deferred payment
has facilitated market transactions of buying, selling, pension, borrowing etc. When we borrowed money from
somebody in the present we have to return both the principle as well as interest amount at future date. It is easy to
make such payments in terms of money because their prices remain relatively constant compare to other commodities.

Q11. What are time deposits? (1) O 2014

Ans: Deposits which are fixed for a particular period of time, before which money will not be withdrawn. Higher rate
of interest is there on time deposits as compared to saving deposits.

Q12. What are demand deposits? (1) O 2012 set 2 2013, 2014 D
Ans: Deposits with the commercial banks which are withdraw able on demand by cheque or cash.

Q13 Explain the problem of double coincidence of wants. How has money solved it? (3) O 2013 set1
Ans: What a person desires to sell is exactly not the same as what other wishes to buy, in other words when both the
parties( buyer & seller) do not agree to exchange each other’s goods is called as the problem of double coincidence of
need.
The producer of wheat may want shoes in exchange he may find it difficult to get a person who is willing to take the
wheat. No exchange is possible if the double co-incidence of wants is not there.
Money solves this problem as producer of wheat can sell wheat & get money from which he can buy shoes. He
does’nt need to find a person who is ready to sell shoes & ready to buy wheat.

Q14. Explain the components of Legal Reserve Ratio. (4) O 2012 set 1,2
Ans: Legal reserve ratio is legally compulsory for the banks to keep a certain minimum ratio of deposits as cash. It has
two components:-
a) Cash Reserve Ratio (CRR) – A part of total deposits of commercial bank is kept with central bank which is
called as Cash Reserve Ratio.
b) Statutory Liquidity Ratio (SLR)- Another part of total deposits of commercial bank is kept by bank itself in
cash is Statutory Liquidity ratio.

Q15. What is Bank Money? (1) O 2012 set 3

Ans: Bank money means demand deposits with the commercial banks - Demand Deposits with commercial banks are
a part of Money supply. They are payable on demand & they can be drawn upon by cheque without any restriction

Q16. Define money (1) O 2011 set 1,3 O 2010

Ans: Anything which is legally authorised by the government, generally accepted by general public & performing the
functions of money as a medium, a measure, a standard & store is called as money.

Q17. Define Statutory Liquidity Ratio. (1) O 2011 set 1,3

Ans: A proportion of total deposits of commercial bank is mandatory by law to be kept with bank itself in cash is
called as Statutory Liquidity Ratio.

Q18. Explain the lending function of commercial bank. (4) O 2008

Ans: A commercial bank accepts deposits from the general public. A part of deposits are kept with the central bank
which is called as cash reserve ratio. Another proportion of bank deposits are kept with the bank itself in cash form
which is known as statutory liquidity ratio. Rest part of deposits can be lent by the banks.

Q19.. Define Bank Rate. (1) D 2009

Ans: Rate of interest at which central bank lends to commercial banks is called as bank rate.

Q20. State any three points of distinction between Central Bank and Commercial Bank. (3) D 2009
Ans:

42
 Central Bank Commercial Bank
Central bank is an apex financial institution which Commercial Bank work under central bank which accepts
controls & regulates monetary system & all the financial deposit from public & gives loan & advances to the
institutions of the country. borrowers.
It deals with commercial banks & financial organisations Commercial bank directly deals with the public.
of the country. It doesn’t deals with public directly.
Central bank uses many tools to regulate & control credit. Commercial bank create credit in the economy.

Q21. State the four functions of money. Explain any one of them. (4) D 2009
Ans: i) Medium of exchange
i) Measure of value
ii) Standard of deferred payments
iii) Store of value
Standard of deferred payment:- Deferred payment refers to those payments which are made in future. Money as
standard of deferred payment has facilitated market transactions of buying, selling, pension, borrowing etc. When we
borrowed money from somebody in the present we have to return both the principle as well as interest amount at
future date. It is easy to make such payments in terms of money because their prices remain relatively constant
compare to other commodities.

Q22. What is meant by Cash Reserve Ratio. (1) O 2009

Ans: A part of deposits are to be deposited by the com. bank to the central bank which is called as cash reserve ratio.

Q23. State three main functions of a bank. Explain any one of them. (3) O 2009
Ans: 1. Medium of Exchange 2. Money as a unit of value 3. Standard of deferred payment
4. Store of value: - Under barter system storing of value in terms of money. Money occupies less space in
comparison with goods. It is comparison with goods. It is durable and money is an asset and can be stored in future.
Money helps people to transfer their purchasing power from present to future. So, money is a way to store the value.

Q24. What is a central bank? (1) D 2008

Ans: Central bank is an apex financial organisation which regulates & controls amount of money & credit in the
economy.

Q25. What is a commercial bank? (1) O 2008

Ans: Any financial institution which accepts deposit from the public & gives loan & advances is called as Commercial
bank

MONEY & BANKING

HOTS

1. Which of the following is a bank?

i) Post office saving banks (ii) LIC (iii) UTI (iv) IDBI.
Post office saving banks are not banks in the sense that even though they accept deposits from the public but do
not advance loans to others.
(ii),(iii) and (iv) LIC, UTI and IDBI are not banks in the sense that even though they do not accept cheque able
deposits but advance loans to others.

2. State why businessmen mostly want to open current account in the bank?
The business men mostly want to open current account in the bank because the deposits in current accounts are
payable on demand. They can be drawn upon by cheque without any restriction. The banks offer overdraft
facility on these deposits to the business men.

3. Name the institution which acts as a custodian of nation’s foreign exchange reserves?
Central Bank is an institution which acts as custodian of nation’s foreign exchange reserves.

43
4. Money acts as a yardstick of standard measure of value to which all other things can be compared.
Discuss it.
Ans. Money serves as a measure of value in terms of unit of account. Measurement of value was the main
difficulty of the barter system. Introduction of money has removed this difficulty. It acts as a yardstick of
standard measure of value to which all other things can be compared.” Money measures the value of
everything or the prices of all goods and services can be expressed in terms of money. This function of
money also enables the trading firms to ascertain their costs, revenues, profits and losses.

5. The central bank acts as lender of last resort. How?

Ans. The central bank also acts as lender of last resort for the other banks of the country. It means that if a
commercial bank fails to get financial accommodation from anywhere, it approaches the central bank as a
last resort. Central bank advances loan to such a bank against approved securities. As a lender of the last
resort, central bank exercises control over the entire banking system of the country.

6. Central bank performs the function of a clearing house. How?

Ans. Every bank keeps cash reserves with the central bank. The claims of banks against one another can be
easily and conveniently settled by simple transfers from and to their account. Supposing, Bank A receives a
cheque of Rs 10,000 drawn on Bank B and Bank B receives a cheque of Rs. 15000 drawn on Bank A. The
most convenient method of settling or clearing their mutual claims is that Bank A should issue a cheque
amounting to Rs 5000 in favour of Bank B, drawn on central Bank. As a result of this transference, a sum of
Rs 5000 will be debited to the account of Bank A and credited to the account of B. There is not need of cash
transactions between the banks concerned. It facilitates cash transaction across the entire banking system, it
also reduces requirement of cash reserves of the commercial banks.

MONEY & BANKING

VALUE BASED QUESTIONS
1. How do demand deposits of commercial banks function as money, when they are neither coins nor the
notes in hand ? Give your views.
Ans: Demand deposits of banks serve as bank. By drawing cheques against them, they can be used to make
payments for exchange of goods and services.

2. What type of losses a depositor has to bear if he withdraws his fixed deposit before the due date of
maturity ?
Ans: A depositor will lose interest if he withdraws his fixed deposits before due date.

3. What will be the effect of a fall in CRR on money supply? What will be the effect of a rise in SLR on
money
supply ? What will be the effect of a rise in bank rate on money supply?
Ans: (i) With a fall in CRR, the availability of credit increases and as a result the supply of money increases.
(ii) With a rise in SLR, the availability of credit decreases and as a result the supply of money decreases.
(iii) With a rise in bank rate, the availability of credit decreases and as a result the supply of money
decreases.

4.Out of the Bank rate policy and open market operations, which will you prefer in India?
Ans: The bank rate policy should be preferred by the RBI because the policy of open market operations cannot
be used effectively in our country.

5. Why should be the top most role of the Central Bank in a developing economy like India?
Ans: To adopt measures like expansion, promotion and strengthen the banking and financial structures.

44
6. Suppose all the customers of a commercial bank demand for their deposits at the same time then how does
Central bank help the Commercial bank in this situation?
Ans: Central Bank helps as “Lender of last resort”. It gives financial accommodation to the commercial bank a)
By rediscounting its bills of exchange and promissory notes b) By providing loans against its securities. Thus it
saves commercial banks from financial crisis.

7. When barter system was in use, a merchant had to incur cost in the absence of money. What were those costs?
Ans: a) Search cost, which is the cost of searching a person, to exchange goods and b) Disutility of waiting,
which means cost of equivalent to wastage of time period spent on finding out required person.

8 Although increase in money supply is an effective measure to control economic depression, yet it creates
burden of borrowing in an economy. Explain two measures to control economic depression in such a situation.
Ans: Decrease in Bank rate, Decrease in SLR and purchase of Government securities by RBI.

9. RBI has reduced CRR from 4.25% to 4%. Will this help in controlling inflation in India?
Ans: It increases the lending capacity of commercial banks. This adds to inflationary pressure in the economy.

10. Why is Central Bank sole authority for the issue of currency in the country?
Ans: i) It ensures uniformity in note circulation,
ii) It builds up public faith in the currency system
iii)It enables government to control money supply through RBI

11. How can ‘Jan –Dhan Yojna’ can be used as instrument to increase supply of money by the commercial
banks?
Ans: People will deposit more, so banks will be able to create more credit & increase quantity of money in
the market.
DETERMINATION OF INCOME & EMPLOYMENT

MULTIPLE CHOICE QUESTIONS

1. Out of the following, which can have value more than one?
a) MPC
b) APC
c) APS
d) MPS Ans: b

2. Which of the following is not a component of aggregate demand in a two-sector economy?

a) Net exports
b) Government expenditure
c) Consumption
d) Both (a) and (b) Ans: d

3. Break-even point is achieved when?

a) National income=consumption
b) Consumption=saving
c) Consumption=investment
d) National income>consumption Ans:a

45
4. AD curve is a?
a) Horizontal straight line parallel to the X-axis
b) Positively sloped curve
c) Negatively sloped curve
d) Vertical straight line parallel to Y-axis Ans: b

5. Aggregate supply and ______________are always equal.

a) National income
b) Aggregate demand
c) Marginal propensity to save
d) Average propensity to consume Ans:a

6. Consumption function is the functional relationship between _____________and__________.

a) Consumption, aggregate demand
b) Consumption, national income
c) Aggregate demand ,aggregate supply
d) National income, private income Ans:b

7. Tick the wrong option:

a) APC can be more than 1
b) APC can be equal to 1
c) APC rises with increase in income
d) APC can never be 0 Ans:c

8. __________refers to actual saving in a economy during a year.

a) Ex-ante saving
b) APS
c) MPS
d) Ex-post saving Ans:d
9. Which of the following is not true about AD in a two-sector economy?
a) AD=consumption+saving
b) AD curve starts from some point above the origin
c) AD=consumption+investment
d) AD curve has a positive slope Ans : a

10. Which of the following fact is correct about MPC?

a) Value of MPC varies between 0 and 1
b) MPC of poor is more than that of rich
c) MPC falls with successive increase in income
d) All of these Ans : d

11. Which of these is a component of aggregate demand

a) Private consumption expenditure
b) Investment expenditure
c) Government expenditure
d) All of these Ans : d

46
12. Which of the following can have a negative value?
a) APC
b) MPC
c) MPS
d) APS Ans : d

13. AD curve starts:

a) Form the origin
b) Point below the origin
c) Point above the origin
d) None of these Ans : c

14. If investment falls to zero, national income does not fall to zero because of:
a) Autonomous consumption
b) Induced investment
c) Autonomous investment
d) Multiplier Ans : a

15. At equilibrium level

a) Consumption=investment
b) Aggregate demand=saving
c) Saving=investment
d) Consumption=saving Ans : c

16. If MPC is 0.6 the investment multiplier will be

a) 1.67
b) 2.5
c) 6
d) 4 Ans : b

17. The maximum value of multiplier is____________when the value of MPC is_______
a) Infinity zero
b) Infinity one
c) One infinity
d) None of these Ans : b

18. When planned saving is less than planned investment it indicates a situation when
a) AD<AS
b) AD=AS
c) AD>AS
d) None of these Ans : c

19. If MPS=MPC then value of multiplier is

a) Infinity
b) One
c) Two
d) Equal to MPC Ans : d

47
20. AD curve is representred by_________curve in the income dertermination analysis
a) Consumption=saving+invenment
b) Consumption+saving
c) Saving+invesnment
d) Consumption+investment Ans : d

21. Multiplier is ____________ related to MPC.

a) Directly
b) Not
c) Indirectly
d) Rarely Ans : a

22. When economy decides to save the whole of its additional income then value of investment
multiplier will be
a) 1
b) Indeterminate
c) 0
d) Infinity Ans : a

23. ---------------refers to a situation when AD is equal to AS beyond the full employment level.
a) Full employment equilibrium
b) Over full employment equilibrium
c) Underemployment equilibrium
d) None of these Ans : b

24. The slope of S-line is indicated by____________.

a) MPC
b) MPS
c) 1- MPC
d) Both (b) and (c) Ans : d

25. If saving function of an economy is given as:S=-40=0.4(Y) then MPC is.

a) 1
b) 0.4
c) 0.6
d) None of these Ans : c

26. --------------is exercised through discussion letters and speeches to banks.

a) Moral suasion
b) Selective credit control
c) Margin requirement
d) open market operation Ans : a
27. which of the following is not the reason for excess demand?
a) Fall in the propensity to consume
b) Reduction in taxes
c) Increase in investment
d) Deficit financing Ans : a

48
28. Increase in cash reserve ratio will lead to
a) Fall in aggregate demand
b) Rise in aggregate demand
c) No change in aggregate demand
d) None of these Ans : a

29. The gap by which actual aggregate demand exceeds the aggregate demand exceeds the aggregate
demand required to establish full employment equilibrium is known as___________.
a) Deficient demand
b) Deflationary gap
c) Inflation gap
d) Excess demand Ans : c

30. Change in government spending is a part of:

a) Monetary policy
b) Fiscal policy
c) Either (A) or(B)
d) Neither (A)or(B) Ans : b

31. _____________refers to the situation when aggregate supply falls short of aggregate demand
corresponding to full employment level of ouput in economy.
a) Deficient demand
b) Excess demand
c) Inflationary gap
d) Deflationary gap Ans : b

32. Excess demand leads to

a) Increase in the level of employment
b) Decrease in the level of employment
c) No change in the level of government
d) None of these Ans : c

33. Deficient demand indicates

a) Under employment equilibiurm
b) Over full employment equilibirium
c) Full employment equilibrium
d) None of these Ans : a
34. Monetary policy is the policy of __________ to control money supply and credit in the economy
a) Central government
b) Central bank
c) Both (A) &(B)
d) None of these Ans : b
35. During excess demand central bank _____________the margin
a) Decrease
b) Increase
c) Removes
d) Does not change Ans : b

49
 DETERMINATION OF INCOME & EMPLOYMENT

ALL TYPES
THEORY QUESTIONS
Q1. What is ‘aggregate Demand’ in macroeconomics? (1) 2015 set1 O
Ans: Aggregate demand refers to total demand for all the final goods and services in the economy. It is also defined as
total amount of money which all the sections (Household, Government, firm) are ready to spend on purchase of goods
and services produced in an economy during a given period. Thus Aggregate demand is synonyms with aggregate
expenditure.

Q2. What is deficient demand? Explain the role of Bank Rate in removing it (1) 2008 O(1) 2010 D (6) 2015 set1/ (6)O 2012
Ans: Deficient demand exists when aggregate demand for a level of output is less than full employment level. In other
words, deficient demand exists when aggregate demand falls short of aggregate supply at full employment level. It is a
level of demand which is insufficient to eliminate involuntary unemployment. Deficient demand gives rise to a
deflationary gap.
Role Of Bank Rate in removing it :- Bank rate is the rate of interest at which the central bank of a country gives
credit to commercial banks. For controlling deficient demand, the central bank should decrease the bank rate. A
decrease in bank rate reduces the market rate of interest as a result credit becomes cheap. Accordingly, the demand for
credit increases and aggregate demand is increased and the problem of deficient demand can be solved. OR

What is excess demand? Explain the role of Reverse Repo Rate in removing it.
Ans: Excess demand exists when aggregate demand exceeds aggregate supply at full employment level. Excess
demand gives rise to inflationary. This situation leads to inflationary tendencies or rise in prices.
Role of Reverse repo Rate : Reverse Repo rate is the rate at which the RBI borrows money from commercial banks .
Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash.
It is also a tool which can be used by the RBI to drain excess money out of the banking system.

Q3. Define inflationary gap. (1)2008, 2009 D, 2010O (1) 2014 O

Ans: It is a situation of excess demand when aggregate demand exceeds aggregate supply at full employment level.
In this situation Aggregate demand AD curve shifts upwards & thus there is a gap inflationary. Gap. This situation
leads to inflationary tendencies or rise in prices.

Q4. When is an economy in equilibrium? Explain with the help of Saving and Investment functions. Also explain the
changes that take place in an economy when the economy is not in equilibrium. Use diagram. (6) 2014 set1 o OR
What changes will take place to bring an economy in equilibrium if
i)Planned savings > planned investment ii) Planned savings < planned investment. (6) 2009 D

Ans: DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME, OUTPUT & EMPLOYMENT:

According to Keynes equilibrium level of Income & employment is determined at a point where aggregate demand &
aggregate supply are equal. Symbolically equilibrium condition is given as :
AD = AS
C+ I = C + S
I=S
Aggregate Demand : The total monetary expenditure on all the final goods & services by all the consumers in the
economy is called as aggregate demand.
It is the sum of consumption, Investment, government demand & demand for Net exports, however for the
simplification of further analysis Ad is considered as consumption & investment demand. Aggregate demand curve is
graphically shown
Investment curve is straight line horizontal to x axis, because according to Keynes level of investment remain constant
at all levels of income during short period.
AD curve is obtained by adding investment & consumption curve, which is positively sloping curve.

50
 AD = C + I
Aggregate Supply : All the final goods & services which are produced in a country in an economy is aggregate
Supply. It is equal to National Income of the economy, which is either consumed or saved.
AS = C + S

The equilibrium level of income and output is that level at which Aggregate Demand & aggregate Supply are equal.
At this level of Income planned saving and planning investment are also equal.

ADJUSTMENT MECHANISM WHEN SAVING IS NOT EQUAL TO INVESTMENT:- The two unstable
situations are:-

At an income level OY’, S > I , This means that households aggregate expenditure is less than output. As a result
inventories increase. Firms, seeing a build up of unplanned inventories start cutting production, and hence output,
income and savings fall. This process continues till planned savings and planned investment are equal. At an income
level OY2, S < I This means that aggregate expenditure is more than output. Firms, seeing a depletion of planned
inventories step up production, and hence output and income increase. Savings increase. This process continues till
planned savings and planned investment are equal.

Q5. Outline the steps required to be taken in deriving the Consumption Curve from the given Saving Curve. Use
diagram.
Ans: Reverse of Q 14.

Q6. Tax rates on higher income group have been increased. Which economic value does it reflect ? Explain. (4) 2014
set1 O
Ans: i) Reducing inequality – Government has progressive system of direct taxes in which tax rates increases as the
income increases. This reduces inequality of income. It brings equality among people of the country.
iii) Helps in establishing Socialistic Pattern of society in the country as it is the main objective described in the
constitution of India.
Q7. What is involuntary Unemployment ? (1) 2009 D,O, 2008 D (1) 2014 Dset1
Ans: Involuntary Unemployment is a situation where people are eligible & willing to work but fail to find work.

Q8. Government raises its expenditure on producing public goods. Which economic values does it reflect? Explain(4)
2014 D set1
Ans: Value – i) Welfare ,
ii)Providing goods & services to general public which are for collective consumption like construction of
roads, street lighting, health , education etc.
iii)It makes things affordable for the general public.

51
 iv)To maintain national & strategic values like law & order, defence etc.
Q9. Explain national income equilibrium through AD & AS. Use diagram. Also explain the changes that take place in
an economy when the economy is not in equilibrium. (6) 2014 D set2 OR
Explain determination of equilibrium level of income using ‘C+I’ approach. Use diagram. (4) 2008 D
OR
Explain determination of equilibrium level of income using ‘saving & investment’ approach. Use diagram.

Ans: equilibrium level of Income & employment is determined at a point where aggregate demand & aggregate
supply are equal. Symbolically equilibrium condition is given as :
AD = AS
C+ I = C + S
I=S
Aggregate Demand : The total monetary expenditure on all the final goods & services by all the consumers in the
economy is called as aggregate demand.
It is the sum of consumption, Investment, government demand & demand for Net exports, however for the
simplification of further analysis Ad is considered as consumption & investment demand. Aggregate demand curve is
graphically shown
Investment curve is straight line horizontal to x axis, because according to Keynes level of investment remain constant
at all levels of income during short period.
AD curve is obtained by adding investment & consumption curve, which is positively sloping curve.
AD = C + I
Aggregate Supply : All the final goods & services which are produced in a country in an economy is aggregate
Supply. It is equal to National Income of the economy, which is either consumed or saved.
AS = C + S

The equilibrium level of income and output is that level at which Aggregate Demand & aggregate Supply are equal.
At this level of Income planned saving and planning investment are also equal.

ADJUSTMENT MECHANISM: any deviation from this equilibrium with the given AD & AS will be unstable. Two
unstable situation: If AD > AS ii) If AD < AS

e = equilibrium where AD = AS
i) If AD > AS the situation is shown by OY’ income where AD
is AY’ & AS is BY’ i.e. AD> AS. The economy will face
inflation. Price rise will bring abnormal profits, so production &
so income will rise from OY’ to OY. The stability of the
equilibrium will be restored at point e where AD = AS
ii) If AD < AS the situation is shown by OY1 income where
AD is DY1 & AS is CY1 i.e. AD< AS. The economy will face
recession. Price fall will slow the production & so income will
fall from OY1 to OY. The stability of the equilibrium will be
restored at point e where AD = AS

52
Q10.What one step can be taken through market to reduce the consumption of a product harmful for health? (1) 2013
set1,2
Ans: Increase indirect taxes on these products.

Q11. What is meant by under-employment equilibrium? Explain 2 measures to achieve full employment equilibrium
(6) 2013 set1
Ans: Under employment equilibrium is a state of equilibrium where all the resources are not fully employed.
According to Keynes, underemployment equilibrium is a normal situation for the economy. Underemployment
equilibrium arises due to deficiency of aggregate demand. In the diagram, OY1 is the equilibrium level of income and
OY is the full employment level of income. Point E is an underemployment equilibrium because at this point
equilibrium level of income OY1 which is less than full employment level of income OY .

Two methods to achieve full employment-

i) Increasing investment & AD by more Government expenditure
ii) Reducing Bank rate CRR, SLR, margin requirement & follow cheap money policy
Q12. Distinguish between inflationary & deflationary gap. State 2 measure to correct it. (6) 2013 set2
Ans:
Inflationary Gap Deflationary gap
AD > AS at full employment AD < AS at full employment
Aggregate Demand Increases – Supply falls short of Aggregate demand falls – situation of over
demand production
Price rises, so investors are motivated to invest Price falls – depressing environment for investors
production, income & employment increases production, income & employment falls
Two measures to correct it
Fiscal policy measures;
i) Public Expenditure:- Government reduces public expenditure at the time of inflation , so that excess
purchasing power of people can be reduced & thus excess demand can be curtailed. During deflation
government incurs more expenditure so that people have extra money to increase AD.
ii) Policy of direct taxes: Government increases direct taxes to reduce extra purchasing power of the people
to control inflation & reduces direct taxes to provide extra money to people during deflation.

Q13. Explain all the changes that will take place in an economy when AD is not equal to AS. (6) 2013 set3
Ans: There are two situations when equilibrium with the given AD & AS will be unstable. Two unstable situation:
If AD > AS ii) If AD < AS

53
 e = equilibrium where AD = AS
i) If AD > AS the situation is shown by OY’ income where AD
is AY’ & AS is BY’ i.e. AD> AS. The economy will face
inflation. Price rise will bring abnormal profits, so production &
so income will rise from OY’ to OY. The stability of the
equilibrium will be restored at point e where AD = AS
ii) If AD < AS the situation is shown by OY1 income where
AD is DY1 & AS is CY1 i.e. AD< AS. The economy will face
recession. Price fall will slow the production & so income will
fall from OY1 to OY. The stability of the equilibrium will be
restored at point e where AD = AS

Q14. Outline the steps taken in deriving saving curve from the consumption curve. Use diagram. (3) O 2012, 2013 :
Ans: Steps to derive saving curve from consumption curve: - For deriving saving curve we need to get two points
i)At zero level of income minimum level of consumption is autonomous consumption denoted by O C . Vertical
distance of OC is equal to negative saving OS’. Hence saving curve starts from the point S’.
ii) another point is obtained by drawing the perpendicular from the intersection point of Consumption & Income
curve. We get the point E’ where Saving is zero.
iii) By joining two points S’ & E’ & extending it towards right, we get saving curve.

Q15. Explain ‘excess demand’ in macro economics. Also explain the role of OMO in correcting it. (4+2) O
2012 set1O
Ans: Excess demand as per Ans no 2.
Role of OMO :- sale & purchase of securities in the open market is called as Open market operations. During
excess demand RBI starts selling securities in the market so that money in the market is absorbed from the market.
Role of legal reserve ratio in reducing it. (6) 2012 set2 :- OR
Explain the deflationary gap. Also explain the role of margin requirements in reducing it.

Q16. Explain the distinction between voluntary & involuntary unemployment. (3) O 2011 set 1,3

Voluntary Unemployment Involuntary Unemployment

It is a situation where those who are not willing to do It is a situation where people are eligible & willing to
work although suitable work is available to them i.e. they work but fail to find work.
are unemployed of their own will.
These people are not included in the work force of the These people are included in the work force of the
country. These people are not considered as unemployed country. These people are considered as unemployed in
in Economics Economics

Example: House wives Example: Person having engineering & still unemployed

54
Q17 Explain the role of the following in correcting the inflationary gap in an economy:
i) Legal Reserves ii) Bank Rate (6) O 2011 set1,3 OR

Q18. Explain the role of the following in correcting the deflationary gap in an economy:
i) Open Market Operations ii) Margin Requirement

Q19. Give the meaning of Ex-ante savings. (1) 2010 D

Ans: Ex-ante saving refers to amount of savings which household intended or planned to save at different levels of
income in the economy.

Q20. What is Ex-ante aggregate demand? (1) 2010 O

Ans: Ex ante aggregate Demand refers to the total amount of money which all the sections (Household, Government,
firm) are expected to spend on purchase of goods and services produced in an economy during a given period.

Q21. Give meaning of aggregate supply. (1) 2009 O, 2008 O

Ans: All the final goods & services which are produced in a country in an economy is Aggregate Supply. It is equal to
National Income of the economy, which is either consumed or saved. The curve is positively sloped starting from
origin AS = C + S

Q22. Explain Consumption function with the help of schedule & diagram. (6) 2008 O OR
Ans: The functional relationship between Income & Consumption is called as Consumption Function. In other words
the part of income which is consumed is propensity to consume. Symbolically:
C = f (Y) whereas C = consumption
Y = income & f = functional relationship.
According to Keynes, If Income increases consumption also increases but less than increase in income. This is called
as psychological law of consumption.
The relationship can be expressed in the terms of an equation:
C = c + bY
C = consumption
c = autonomous consumption – minimum level of consumption when income is zero. c > 0 ( assumed to be
positive)
b = Marginal Propensity to consume MPC = 0<b<1
Y = Income of consumer

Above diagram shows a positively sloped line from origin is Income line which shows C = DI Consumption curve is
upward sloping originating from y axis showing positive relationship between Income & consumption. oc is
autonomous consumption. Up to OY level of income C > Y so either consumption will be from past savings
or borrowings. Consumption curve rises at the slope b. At point E income & consumption are equal at OY
level of income . As income increases consumption also increase but not at the rate income increases, so
savings also increase.
Explain Saving function with the help of a schedule & diagram.
It refers to the functional relationship between saving and national income. The part of income which is not consumed
but saved is propensity to save.
S = f (Y) where S = saving, Y = Income, f = functional relationship
According to Keynes If Income rises, saving also rises & vice versa. Equation

55
 S=Y–C
= Y – ( c + bY)
= Y - c – bY
S=-c+(1–b)Y
c = It is amount of savings done when income is zero
Y = level of income, s = saving , 1 – b = 1 – MPC

C is consumption curve & upward sloping curve making 45o angle from origin is showing C/DI = 1 ( whole income
is consumed)
Point E = break even point i.e. Income = consumption & saving = zero
A perpendicular is to be drawn from the point getting E’ on x axis showing S= 0
Oc = autonomous consumption ( consumption when income is zero) i.e. = negative savings
which can be marked as OS’. By joining the two points ( S’ & E’ ) we get saving curve.
We know that Y = C + S
Up to point Y , C > Y thus savings are negative
At point E , C = Y so saving is zero
After point Y C < Y so saving is positive.

NUMERICALS – DETERMINATION OF INCOME & EMPLOYMENT

Q1. An economy is in equilibrium. Calculate the Solution Q1: At equilibrium : AD = AS OR C+ I = Y
marginal propensity to save from the following: (4) (c+ b Y) + I = Y
O 2015 set 2 (100 + b. 1000) + 120 = 1000
National Income = 1000 ,Autonomous Consumption = 1000 -220 = 1000 b
100 ,Investment =120 b= 780/ 1000 = 0.78
MPS = 1 – 0.78 ( MPC+MPS =1) MPS = 0.22
Q2. Calculate Marginal Propensity to Consume from Solution Q 2: Y = C + I by putting the value we get
the following data about an economy which is in 2000 = C + 100 , C = 2000 -100 = 1900
equilibrium : (4) O 2014 C = c + bY
National income = 2000, Autonomous consumption 1900 = 200 + b 2000
expenditure = 200, Investment expenditure = 100 1900 -200 /2000 = b = 0.8 MPC = 0.8
Q3. Calculate MPC from the following data about an Solution Q3: We know that Y = C + I By putting value
economy which is in equilibrium we get 1500 = C + 100 , C = 1500 -100 = 1400
National Income = 1500, Autonomous consumption C = c + b Y by putting value 1400 = 300 + b 1500
expenditure = 300, Investment expenditure =100 1400 -300 / 1500 = b = 0.73 MPC = 0.73

56
Q4. Calculate autonomous consumption expenditure Solution Q 4. We know that C = c + bY , by putting
from the data about an economy which is in value we get 1100 = c + 0.8 x 1200 (MPC = 1 – 0.2)
equilibrium.(4)D 2014 set2 1100 – 960 = 140 c = 140
National Income = 1200, MPS = 0.2 , investment exp.
= 100
Q5. Calculate investment expenditure from the Solution Q 5. We know that C = c + bY , by putting
following data about an economy which is in value
equilibrium: (4) D 2014 set1 C = 200 + 0.75 x 1000 = 950
National Income = 1000, MPS = 0.25, c = 200 We also know that Y = C + I
1000 = 950 + I I = 50

Q6. From the data given below calculate i) Investment Solution Q 6. We know that C = c + bY , by putting
expenditure ii) Consumption expenditure value We get C = 500 + 0.4 x 5000, C = 2500
a)Equilibrium level of Income 5000 , b) autonomous Y=C+I
consumption 500 c) MPC 0.4 (6) O 2013 set1 5000 = 2500 + I , I = 2500
Q7. In an economy C=200+ 0.75Y where C is Solution Q 7. Y = C + I, Y = 200 + 0.75 Y + 4000
consumption expenditure Y is income . Investment 0.25 Y = 4200
expenditure is 4000. Calculate equilibrium level of Y = 4200 / 0.25 , Y = 16800
income and consumption expenditure. (6) O 2013 set2 C = 200 + 0.75 x 16800 , C = 12800
Q8. From the following data calculate a) equilibrium Solution Q 8. At equilibrium AD = AS or C + I = Y
level of income b) total consumption expenditure at 200 + 0.5 Y + 1500 = Y
equilibrium level of national income. i) C= 200+ 0.5Y 1700 = 0.5Y , Y = 3400 putting the value of Y in the eq.
is consumption function ii) Investment is 1500. (6) O C = 200 + 0.5 x 3400 , 200 + 1700, C = 1900
2013 set3
Q9. Find consumption expenditure from the following: Solution Q 9. C = c + bY ,
National Income = Rs. 5000, Autonomous consumption = 1000 + 0.8 x 5000
= Rs 1000, MPC = 0.80 (3) O 2012 set 1 = 1000 + 4000 C = 5000
Q10. Find National Income from the following : c = Solution Q 10. Y = C + I, Y = 100 + 0.8 Y + 50
Rs 100 , MPC= 0.8 , Investment = Rs 50 0.2 Y = 150 Y = 750
(3)O2012 s 2
Q11. Find investment from the following : Income = Solution Q 11. C = c + bY = 50 + 0.8 x 800 C = 690
Rs 800, Autonomous Consumption = Rs 50, MPC= 0.8 Y = C + I , 800 = 690 + I I = 110
(3)O 2012 set 3
Q12. In an economy MPC is 0.75. Investment Solution Q 12. K = = = 4
expenditure in the economy increases by Rs 75 cr.
Calculate ∆Y.(3) O 2011 K= or ∆ Y = K . ∆I = 75 x 4 = 300 ∆Y = 300
Q13. As a result of increase in investment by Rs. 60 cr, Solution Q 13. K = K= =4
National Income rises by Rs. 240 cr. Calculate MPC
(3) O 2011 set 3 , 4- 4 MPC = 1 ,3 = 4 MPC ,= ¾ = 0.75 = MPC

Q14. State whether the following statements are true or

false. Give reasons for your answer; (4) SolutionQ14. i)MPC + MPS = 1, MPC > MPS ,0.6+ 0.4
2010 D =1
when MPC = 0.6, K = 1/ 1- 0.6 = 2.5 = K
i) When MPC is greater than MPS, the value of when MPC = 0.8, k = 1/1- 0.8 = 5 = K
investment multiplier will be greater than 5. when MPC = 0.9, K = 1/1- 0.9 = 10 = K
The statement is true but not always. If MPC is 0.8 or
ii) The value of MPS can never be negative. more than multiplier will be > 5.
ii)True as the value of ∆S can never be negative.
MPS = ∆S / ∆Y , If value of ∆Y is 100, minimum value
of ∆S can be ‘0’ so it can’t be negative.
Q15. In an economy 75% of the increase in income is Solution Q 15. MPC = 0.75
spent on consumption. Investment is increased by Rs. K= = =4
1000 cr. Calculate:
i) Total increase in Income ii) Total increase in K= , 4 = , ∆Y = 4000
consumption expenditure. (6) 2010 D MPC = ∆C/∆Y , 0.75 = ∆C / 4000 ∆C = 3000
Q16. Give reasons, whether following statements are Solution Q 16. i) False when MPC = 0 , K= =1
true or false: (4) 2010 O
ii)False , Value of APS can be less than 0 when saving is
i) When MPC is zero, the value of investment
negative. APS = S/Y, if Income is 100 & consumption is

57
multiplier will be zero. ii) Value of APS can never be 120, saving is -20 thus APS is negative.
less than zero.
Q17. In an economy the equilibrium level of income is Solution Q 17. MPC + MPS =1 MPC = 0.75 & MPS =
Rs. 12,000 cr. The ratio of MPC and MPS is 3:1. 0.25
Calculate the additional investment needed to reach a K= = =4
new equilibrium level of income of Rs.20,000 cr.
(6) 2010 O K= ,4 = = 2000 ∆I = 2000
Q18. What can be the minimum value of investment Solution Q 18. K= Minimum Value of MPC = 0
multiplier? (1) 2009
D So K= =1 Minimum Value of K = 1

Q19. Complete the following table:- (3) Solution Q 19.

2009 D Income Saving Consumpti MPC APS =
Income 0 20 40 60 on ∆C/∆ S/Y
Saving -12 -6 0 6 Y
MPC 0 -12 12 - -
APS 20 -6 26 0.7 0.6
40 0 40 0.7 0
60 6 54 0.7 0.1
Q20. Given consumption function C= 100 + 0.75 Y ( Solution Q 20. Y = C + I , Y = 100 + 0.75 Y + 1000
where C = consumption expenditure and Y = national 0.25 Y = 1100 , Y = 1100/0.25 = 4400, Y = 4400
income) and investment expenditure Rs.1000, C = c + bY ,
calculate: i) Equilibrium level of national income ii) 100 + 0.75 x 4400 = 100 + 3300
Consumption expenditure at equilibrium level of C = 3400
national income. (6) 2009 D
Q21. Complete the following table: Solution Q21. (3) 2009 O
Income 0 100 200 300 Income Saving MPC APS
Saving -90 =∆C/∆ = S/Y
MPC 0.6 0.6 0.6 Y
APS 0 -90 0.6 -
100 -50 0.6 -0.5
200 -10 0.6 -0.1
300 30 0.6 0.3
Q22. In an economy S= -50 + 0.5 Y is the saving Solution Q22. Y = C + I Or Y = Y –S + I
function ( S = saving and Y= national income) & Y = Y – ( 50 + 0.5 Y ) + 7000 = Y
investment expenditure is 7000. Calculate; i) 0.5 Y = 7050 , Y = 7050/0.5 , Y = 14100
Equilibrium level of national income ii) Consumption S = -50 + 0.5 x 14100 , -50 + 7050 S = 7000
expenditure at equilibrium level of national income. Y=C+S, C=Y–S
(6) 2009 O OR = 14100 - 7000 = 7100 C = 7100
Q23From the following information about an economy, Solution Q 23. Y = C + I Putting the value
calculate i) its equilibrium level of national income, and Y = 200 +0.9 Y + 3000 , 3200 = 0.1 Y , Y = 32000
ii) saving at equilibrium level of national income. C = 200 + 0.9 x 32000 ,
Consumption function: C= 200 + 0.9Y (where C= = 200 + 29800 = 30000 C = 30000
consumption expenditure and Y= national income)
Investment expenditure I = 3000.
Q24. As a result of increase in investment by Rs. 125 Solution Q 24. K = K= , K=4
cr. national income increases by Rs. 500 cr. Calculate
MPC. (4) 2008 D K= , 4= 4 ( 1-x ) =1, 4 – 4x – 1
4-1 = 4x , 3 /4 = x , MPC = 0.75

58
 DETERMINATION OF INCOME & EMPLOYMENT

HIGH ORDER THINKING QUESTIONS

Q. 1 Can consumption exceed income? If yes, what is the saving then?
Ans. Yes, when income is zero or less than subsistence level of consumption . Saving is –ve.

Q.2 How much new income will be generated in an economy with an increase in investment by Rs. 200
and when two-third of rise in income spent on consumption.
Ans. 600 Rs .

Q.3 Why can the value of MPC be not greater than 1?

Ans. It is because change in consumption can never be greater than change in income.

Q.4 Does an excess of AD over AS always imply a situation of inflationary gap?

Ans. No. Inflationary gap occurs only when AD>AS corresponding to full employment level of
employment.

Q.5 What happens in an economy, when credit availability is restricted and credit is made costlier?
Ans. Aggregate demands falls

Q.6 What happens if AD>AS prior to full employment level of employment?

Ans. It is a state of disequilibrium in economics. When AD>AS , producers have to cater to demand out of
their existing stock of goods , implying that the desired level of stocks will decrease. It implies greater
production & therefore there is increase in AS .This process continues till equilibrium is struck between AD
and AS.

Q.7 In poor countries like India , people spend a high percentage of their income so that APC and
MPC are high . Yet , value of multiplier is low . Why?
Ans. Working of the multiplier process is based on one fundamental assumption: that there exists, excess
capacity in the economy , so that whenever consumption expenditure rises (implying increase in demand )
there is a corresponding increase in production (implying increase in income ) . But poor countries like
India, lack in production capacity. Accordingly, whenever demand increases (in terms of increase in
consumption expenditure), there is increasing pressure of demand on the existing output (implying inflation
or rise in prices) rather than the increase in output or income.

Q.8 Show a point on the consumption curve at which APC= 1.

Ans. APC = C/Y =1 is possible if C=Y, i.e. Consumption is equal to Income.

Q.9 In what respect foreign trade will be useful in removing the adverse economic effects of deficient
demand?
Ans. Export increases the demand for goods and services produced in the domestic territory and is helpful to
reduce deficient demand. 39

Q.10 Calculate consumption expenditure at the income level of Rs.1000 crores, if autonomous
consumption is Rs. 80 crores. And 20% of additional income is saved.
Ans. MPS = 0.2 SO , MPC =0.8
C=c + bY (c = autonomous consumption)
C= 80+ 0.8 * 1000=Rs. 880 crores

Q11. Does an excess of AD over AS always imply a situation of inflationary gap? Explain.

59
Ans: Yes when AD is more than aggregate Supply people demand more & supply is inadequate to fulfil the
demand , so price rises.

Q12. What happens if AD > AS prior to the full employment level of output?
Ans: Production, income & employment will increase. It leads to development in the country.

Q13. State whether the following statement are true or false. Give reasons for your answer
(a) When investment multiplier is 1, the value of MPC is zero.
Ans: true as K = 1/ 1-MPC = 1/1-1 = 0
(b) The value of average propensity to save can never be greater than 1.
Ans: APS = S / Y , The part of income which is saved is APS, so it can not be greater than 1.

Q14. Value of average propensity to save can never be less than zero. Explain.
Ans: False, As saving can be negative, when consumption is more than income, APS can be less than zero.

DETERMINATION OF INCOME & EMPLOYMENT

VALUE BASED QUESTIONS

Q1. We know that value of investment multiplier directly depends upon MPC. More MPC means
more value of investment multiplier. It leads to more generation of national income Why does under
developed economy underdeveloped even though there is more MPC? Explain.
Ans: Under developed economies have expenditure on fulfilling the minimum needs for the people for the
country, so much is not left for investment further.

Q 2. ‘Inflation is unjust, deflation is inexpedient but out of these two deflation is worst . Do you agree
Give reasons.
Ans: Inflation means price rise. When price rises, goods & services becomes unaffordable to the poor ,
salaried & middle class, so it is unjust.
On the other hand inflation is beneficial to the investors, producers creditors etc. As prices are rising,
investors motivate to invest more, so production, income & employment increases.
Whereas deflation is worst as it slows the whole economy. Prices are falling , so people were not ready to
invest, production & income decreases & people are retrenched, so unemplymentincreases. So deflation is
worst.

Q 3. Indian economy is in the grip of rising prices. What values are violated here? Explain any two
measures to control the situation.
Ans: values that are violated here
i) Welfare of people specially poor & deprived
ii) Things become unaffordable
Measures to control the situation
(i) Rising prices can be controlled by reducing government expenditure, especially non-development
expenditure such as expenditures on public administration, defence and subsidies on non-merit
goods and other wasteful expenditure.
(ii) Monetary policy measures such as increase in cash reserve ratio, mopping of excess liquid reserves
with the banks through open market operations by the central bank so as to reduce the availability
of credit and as a result rising prices can be controlled.

Q4. RBI has reduced CRR, SLR & bank rate during the recession period, what values are being
promoted by the government?

60
Ans: Reducing CRR, SLR & bank rate will reduce interest rate of the commercial banks. It will make the
loans cheaper, so people will be motivated to invest more. It will boost the economic growth
Values: Economic growth, providing cheap credit , Fulfilling the requirements

GOVERNMENT BUDGET
MULTIPLE CHOICE QUESTIONS
1. One of the following is not a direct tax:
(a) VAT
(b) Corporate tax
(c) Income tax
(d) Health tax

Ans.: (a)

2. Fiscal Deficit –Interest payments:

(a) Revenue Deficit
(b) Budget Deficit
(c) Primary Deficit
(d) None of these

Ans.: (c)

3. Loans to state government and union territory Government are a part of:
(a) Revenue Receipts
(b) Capital Receipts
(c) Capital expenditure
(d) Plan Revenue expenditure

Ans.: (c)

4. Those receipts of the government which create liabilities or reduce assets are called :
(a) Revenue receipts
(b) Capital receipts
(c) Forfeitures
(d) Escheat

Ans.: (b)

5. What will be the effect of a deficit budget on the level of aggregate demand?
(a) Aggregate demand increases
(b) Aggregate demand decreases
(c) Aggregate demand remains constant
(d) None of these

Ans.: (a)

6. Which of the following is not the objective of government budget

61
 (a) Reallocation of resources
(b) Economic stability
(c) To increase money supply
(d) Economic growth

Ans.: (c)

7. Administrative revenue includes:

(a) Fines and penalties
(b) Dividends
(c) Commercial revenue
(d) Loans from abroad

Ans.: (a)

8. Primary deficit in a budget will be zero when:

(a) Revenue deficit is zero
(b) Net interest payments to be made by government are zero
(c) Fiscal deficit is zero
(d) Any of the above

Ans.: (b)

9. Which of the following is a capital receipt?

(a) Loan from world bank
(b) Recovery of loans
(c) Both are capital receipts
(d) None of the above

Ans.: (c)

GOVERNMENT BUDGET
BOARD QUESTIONS
Q1.Primary deficit in a government budget is (1) 2015 O
a) Revenue Expenditure – Revenue Receipts
b) Total Expenditure – Total Receipts
c) Revenue Deficit – Interest Payment
d) Fiscal Deficit – Interest Payments
Ans; d)
Q2. Direct tax is called direct because it is collected directly from; (1) 2015 O
a) The producers on goods produced
b) The sellers on goods sold
c) The buyers of goods
d) The income earners
Ans: d)
Q3. Explain how the government can use the budgetary policy in reducing inequalities in incomes. (6) 2015 O
Ans: Through its budgetary policy government uses fiscal instruments of taxation and subsidies with a view of
improving the distribution of income and wealth in the economy.
 A government reduces the inequality in the distribution of income and wealth by imposing higher rates of
direct taxes on the rich under progressive system of taxation.

62
  Government gives subsidies to the poor and spending more on the welfare of the poor.
 Government spends money to give incentive to the producers who are investing in backward areas.
 It will reduce income of the rich and raises the living standard of the poor. Thus, it leads to equitable
distribution of income.
 Expenditure on special anti poverty and employment schemes and public distribution system may increase the
living standard of the poor.

Q4. Define fiscal deficit. (1) 2014 O

Ans: : It is excess of the government total expenditure over the government total receipts net of the borrowings during
a fiscal year.
Fiscal deficit = fiscal government total expenditure – fiscal government total receipts (net of the borrowing).

Q5. Is the following a revenue receipt or a capital receipt in the context of government budget and why? (3) 2014 O
(i) Tax receipts
(ii) Disinvestment
Ans: (i) Tax receipts are revenue receipts as they are regular in nature & they neither increase liability nor reduce
assets.
(ii)Disinvestment- capital receipts as it reduce assets.
Q6. Tax rates on higher income group have been increased. Which economic value does it reflect? Explain.(4)2014O
Ans: Government has progressive system of taxation in which tax rates increase as income increases. The economic
value it reflects are:
i) Reducing inequality of income- reducing gap between rich & poor.
ii) To reduce concentration of economic power in few hands.
iii) Using this extra money from the rich & helping poor.

Q7. Give two examples of non-tax revenue receipts. (1) 2014 C

Ans: i) Commercial revenue is the revenue receipt by the government by selling the goods and services produce by
the government agencies for example:- railways, post, telegraph and electricity.
ii) Administrative revenue: The revenue that arises on account of administrative funds of government like fees,
fines, penalties for features escheat.

Q8.Distinguish between current account and capital account of the balance of payments account on the basis of its
components (3) 2014 C
Ans:
Current Account Capital Account
It includes all the receipts & expenditure which are It includes all the receipts & expenditure which are
regular in nature irregular in nature & given in lump sum.
It includes all the receipts which does not reduce assets & It includes all the receipts which reduce assets & all the
all the expenditures which does not add any assets. expenditures which add any assets.
It includes all the receipts which does not increase It includes all the receipts which increase liability & all
liability & all the expenditures which does not reduce any the expenditures which reduce liability.
liability.

Q9. Is the following revenue expenditure or capital expenditure in the context of government budget? Give reason.
i)Expenditure on collection of taxes. (3) 2014 D
ii)Expenditure on purchasing computers.
Ans: i) Exp. On collection of tax- revenue expenditure as it is a regular expenditure & it neither reduce liability nor
increase any assets.
ii)expenditure on purchasing computers- capital expenditure as it increases assets.
Q10. Government raises its expenditure on producing public goods. Which economic value does it reflect? Explain.
(4) 2014 D
Ans: Government spends money on providing public goods for the following values:
i) Welfare :- To help the poor people & provide goods & services to the poor.
ii) To make essential goods affordable for the poor people & provide goods & services to the people free or
at less price. Example Public Distribution System.

63
 iii) To provide the goods & services for collective consumption which are economical for the whole country
& individual provision would be costly like law & order, public transport, street lighting etc.

Q11. Give two examples of indirect tax. (1) 2013 set1

Ans: Sales Tax & excise duties

Q12 What is government budget? (1) 2014 D(1) 2013 set1 2008
Ans: Government budget is a statistical statement of the estimated receipts and estimated expenditure of government
during the period of the financial year.

Q13 Distinguish between revenue deficit & fiscal deficit. (3) 2013 set1
Ans:
Revenue Deficit Fiscal Deficit
It is the excess of government revenue expenditure over It is excess of the government total expenditure over the
the government revenue receipts during a fiscal year / government total receipts net of the borrowings during a
financial year. fiscal year.

Revenue deficit = revenue expenditure – revenue receipts Fiscal deficit = fiscal government total expenditure –
fiscal government total receipts (net of the borrowing).
It indicates the inability of the government to meet the Fiscal deficit indicates the total borrowing requirements
regular and recurring expenditure of the government. of the government

Q14 Explain any one objective of government budget. (3) 2013 set 1
Explain the role of government budget in allocation of resources. (3) 2012 set2, 2010
Ans: Reallocation of resources: Through its budget policy the government of the
country directs the allocation of resource in a manner that there will be balance between the goals of profit
maximization and social welfare.
Production of socially useful goods like electricity is encouraged through subsidies to encourage investment
government can give tax concession.
Production of goods which are injurious to health or harmful for the society may be discouraged through heavy
taxation just like cigarettes, whisky, liquor etc.

Q15. Define Tax. (1) 2012 set2

Ans: Tax is a legal and compulsory payment imposed by the government

Q16. Distinguish between revenue exp. and capital expenditure in a govt. budget. Give examples (3) 2013,2008
Ans:
Revenue Expenditure Capital expenditure
Revenue expenditures are that expenditure of the Capital expenditures are those expenditure of the
government which neither creates the assets nor reduce government which either creates the assets or reduce the
the liability of the government liability of the government.

Example: Payments of salary of employees, interest Example: Repayment of borrowing, construction of

payment etc. schools, hospitals etc.

It is recurring in nature. It is non-recurring in nature.

Q17. Explain the concept of revenue deficit in govt. Budget. What does it indicate? (3) 2012 set2 (1) 2010,2008
Ans: It is the excess of government revenue expenditure over the government revenue receipts during a fiscal year /
financial year.
Revenue deficit = revenue expenditure – revenue receipts
It indicates the inability of the government to meet the regular and recurring expenditure of the government.
The government has to make up this deficit from capital receipts i.e. borrowing or disinvestment it either leads to
increase the liability or reduce the assets.

64
Q18. Define Indirect Tax (1) 2012 set3
Ans: Indirect tax is the tax which is collected through certain transactions & liability to pay a tax is on one person and
the burden of that tax falls on the final consumer it is termed as indirect taxes. Example: Sales taxes, service tax, VAT.

Q19. Explain the role of government budget in reducing income inequality (3) 2012 set3
How can a government budget help in reducing inequalities of income? Explain. (3) 2009 D

Ans: Through its budget government uses fiscal instruments of taxation and subsidies with a view of improving the
distribution of income and wealth in the economy.
A government reduces the inequality in the distribution of income and wealth by imposing taxes on the rich and
giving subsidies to the poor and spending more on the welfare of the poor.
It will reduce income of the rich and raises the living standard of the poor. Thus, it leads to equitable distribution of
income.
Expenditure on special anti poverty and employment schemes and public distribution system may increase the living
standard of the poor.

Q20.Explain the concept of primary deficit in the govt. Budget. What does it indicate? (3) 2012 set3 (1) 10 D
Ans: It is the difference between the fiscal deficit and interest payment during a fiscal year.
Primary deficit = fiscal deficit – interest payment
It includes the amount of borrowings require to meet expenditure other than interest payment.

Q21.Explain the role of government budget in bringing economic stability. (3) O 2012 set 1
Ans: Government budget is used to prevent business fluctuations of inflation and deflation to achieve the objective of
economic stability i.e. high level of employment and price stability.
The government aims to control the different phases of business cycle i.e. recession, depression, recovery and boom.
Policies of surplus budget during inflation and deficit budget during deflation helps to maintain stability of prices in
the economy.
Economic stability leads to more investment and increases the growth rate and development.

Q22 Explain the concept of fiscal deficit in the govt. Budget. What does it indicate? (3) O 2012 set1(4) 2008
Ans: It is excess of the government total expenditure over the government total receipts net of the borrowings during a
fiscal year.
Fiscal deficit = fiscal government total expenditure – fiscal government total receipts (net of the borrowing).
Fiscal deficit indicates the total borrowing requirements of the government.
Borrowing not only involves repayment of loan but also require payment of interest.
If government borrows from RBI prints new currency it increases the money supply and creates inflationary pressures.
If government borrows from rest of the world its raises it dependence on other countries.

Q23 Define direct tax (1) O2012 set1

Ans: Tax which is collected from the person on whom it is imposed is called as direct tax. Example Income tax,
corporate tax.

Q24. Explain the ‘ redistribution of income’ objective of a govt. Budget. (4) O 2011 set 1,3 2010 D
Ans: Through its budget government uses fiscal instruments of taxation and subsidies with a view of improving the
distribution of income and wealth in the economy.
A government reduces the inequality in the distribution of income and wealth by imposing taxes on the rich and
giving subsidies to the poor and spending more on the welfare of the poor.
It will reduce income of the rich and raises the living standard of the poor. Thus, it leads to equitable distribution of
income.
Expenditure on special anti poverty and employment schemes and public distribution system may increase the living
standard of the poor.

65
Q25
From the following data about a government Solution:-
budget find (a) revenue deficit, (b) Fiscal deficit (c) Revenue Deficit = v – (i + iii) = 80 – 57 = 23 arab Rs
primary deficit: (4)O2011set1,3 Fiscal Deficit = total borrowing
i) Tax revenue 47 arab Rs Fiscal Deficit = 32 arab Rs.
ii) Capital receipts 34 Primary Deficit = Fiscal deficit- Interest payments
iii) Non Tax revenue 10 Primary deficit = 32 – 20 = 12 arab Rs.
iv) Borrowings 32
v) Revenue Expenditure 80
vi) Interest payments 20

Q26. Distinguish between: (4) 2010 D 2012, 2009(3) 2008 D

a) Capital receipt and revenue receipts b) Direct and indirect tax.
Ans:a)
Revenue Receipts Capital Receipts

Receipts that neither reduce assets nor increase Receipts that either reduce assets or increase
liabilities liability.

It includes tax & non tax revenue like income tax Recovery of loans. Borrowings & disinvestment
sales tax

It is a regular receipts It is irregular in nature

b)
Direct Tax Indirect Tax
Tax which is collected directly from whom it is Tax which is collected indirectly through some
imposed. transactions.
Ex. Income tax, corporate tax, wealth tax Ex. Sales tax, excise duty
Collected for reducing inequality of income Purpose of making some lines of production more or
less attractive.

Q27. Q. Distinguish between:- (4) 2010 O

a) Capital expenditure and revenue expenditure b) Fiscal deficit and primary deficit.
Ans: same as Q 13 & Q16.

Q28. Why is repayment of loan a capital expenditure? (1) 2009 D

Ans: As it reduces the liability.

Q29. Why taxes received by the government not capital receipts? (1) 2009 O
Ans: regular receipts, it neither create liability nor reduce assets.

Q30. Give meaning of revenue deficit, fiscal deficit and primary deficit. (3) 2009 O
Ans: Revenue deficit: It is the excess of government revenue expenditure over the government revenue receipts
during a fiscal year / financial year.
Revenue deficit = revenue expenditure – revenue receipts
Fiscal deficit: It is excess of the government total expenditure over the government total receipts net of the
borrowings during a fiscal year.
Fiscal deficit = fiscal government total expenditure – fiscal government total receipts (net of the borrowing).
Primary deficit: It is the difference between the fiscal deficit and interest payment during a fiscal year.
Primary deficit = fiscal deficit – interest payment

Q31. Explain any two objectives of a government budget. (4) 2009 O (1) 2008 D
Explained in above questions

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 GOVERNMENT BUDGET
HIGH ORDER THINKING QUESTIONS

Q1: Classify the following items into revenue expenditure and capital expenditure. Give reasons for
your answers.

(i) Free supply of stationery to the students by the government

(ii) Economic assistance according to ladli scheme
(iii) Expenditure on the construction of computer laboratory in school by the government
(iv) Expenditure on mid-day meal given to student by the government
Ans:
(i) It is a revenue expenditure since it neither creates an asset nor reduces liabilities of government.
(ii) It is a revenue expenditure since it neither creates an asset nor reduces liabilities of government.
(iii) It is a capital expenditure since it creates assets of the government.
(iv) It is a revenue expenditure since it neither creates an asset nor reduces liabilities of government.

Q2. There has been consistent rise in price of fruits and vegetables .Which measure of government
budget will you support to reduce the prices of these commodities

Ans.: Prices of fruits and vegetables can be reduced by providing subsidies and tax concessions to the
producer of fruits and vegetables. Government should also provide fruits and vegetables at subsidized rate to
the consumers through public distribution system.

Q3. Budget deficit creates disequilibrium in every economy but in developing countries like India why
does the government depend on it.?

Ans.: Per-capita income in developing countries in India is comparatively low, so the tax receipts of the
government are not sufficient to incur heave expenditure for the development of the economy. Therefore the
government is compelled on budget deficit ,which is financed through borrowings at home, abroad and from
central bank.

Q4. Does public debt impose a burden. Explain.

Ans.: Public debt is not always a blessing. Excessive use of it creates a lot of crisis in the economy such as,

(i) Hampers economic development of the country:

Loans are easily borrowed but it is very difficult to repay them. Government imposes more taxes
which brings instability and it is an obstacle in the economic development in the country.

(ii) Poses threat to political freedom:

Foreign loans and assistance lead to deep conflict among countries. The friction among countries
challenges the political freedom.
(iii) Proves a burden on common man:
Loans taken for unproductive purposes are a burden on common man in the form of higher taxes.
(iv) Leads to extravagant spending:
Public debt leads to unplanned spending. This provides incentive to the government to implement
the schemes that requires excessive expenditure.

67
 (v) Results in drain of national wealth:
Repayment of foreign loans results in drain of wealth out of the country.

Q5. Should we rely exclusively on direct taxes for mobilizing tax revenue because indirect taxes are
inequitable ?Comment.

Ans.: We cannot depend solely on direct taxes because they are progressive in nature and there is possibility
of tax evasion. But indirect taxes are proportional in nature and are generally imposed on goods which each
and every individual purchases. So direct and indirect taxes are important for providing funds for investment
and for other social welfare causes.

Q6. Levy of taxes on all commodities without caring for the impact on the common man is not
desirable. Comment .

Ans.: Indirect taxes such as sales tax and excised duty fall heavily on the shoulders of common man. This
means they are inequitable. Therefore in such a situation tax basket should be mixture of direct and indirect
taxes.

Q7. It is not only difficult but impossible to tax all those who should be taxed in India. Why?

Ans.: Due to lack of necessary information and disclosures required, tendency of the people to avoid taxes
and lack of efficient implementation machinery, it is not possible to tax all those who should be taxed .

Q8. In the country’s budget for the year 2013-14 the finance minister proposed to raise the excise duty
on cigarettes. He also proposed to increase income tax on people earnings 1crore per annum. Is the
government’s objective only to earn revenue? What possible welfare objective can you think of these
proposals?

Ans.:

(i) Firstly raising excise duty on cigarettes makes cigarettes costlier and discourages smoking. Less
smoking have positive influence on health and raises welfare of the people.
(ii) Secondly raising income tax on incomes above Rs.1 crore will help in reducing inequalities in
income.
(iii) Thirdly extra revenue is raised from these , and if spent on health on education of the poor will
do the welfare of the poor.

Q9. Regulation of prices incase of agricultural products are not only desirable but necessary
explain.

Ans.:

(i) As we know agricultural production depends on natural factors like rainfall climate etc. These
natural factors create a situation of drought or surplus production.
(ii) In such a situation for helping farmers in case of drought the government should fix the price
lower than the market price (price ceiling) and incase of surplus production the government
should fix the price higher than the market price(price floor)
(iii) Surplus or shortages should be met by the government from its buffer stock operation through
public distribution system.(PDS) such as ration shops or fare price shops.

Q10.Why is tax not a capital receipt?

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Ans.: Tax is not a capital receipt because it neither leads to creation of liability nor to reduction in assets. In fact, a
tax is a revenue receipt.

Q11. Why are the borrowings by the Government as capital receipts?

Ans.: Borrowings by the Government are capital receipts because they create liabilities or reduce assets. The
Government is under obligation to return the amount along with interest.

Q12. Why is repayment of loan a capital expenditure?

Ans.: Repayment of loan is treated as a capital expenditure because it reduces the liabilities of the Government.

Q13. Why is recovery of loans treated as a capital receipt?

Ans.: Recovery of loans is treated as a capital receipt because it leads to decline in financial assets of the
Government.

Q14. Why interest is received categorized as revenue receipt?

Ans.: Interest received is a revenue receipt because it does not create any liability nor it leads to reduction in
assets.

Q15. Why are receipts from taxes categorized as revenue receipts?

Ans.: Receipts from taxes are categorized as revenue receipts because they do not create liabilities nor reduction
in assets.

GOVERNMENT BUDGET
VALUE BASED QUESTIONS
Q1. If you are appointed as the finance minister of country, which type of taxes will you impose?

Ans. : There is really nothing to choose between direct taxes and indirect taxes as such. Both of them have
their relative merits and demerits.

Direct taxes and indirect taxes are not substitute for each-others. They are complimentary to each other

Objectives of taxation are common to both types of taxes. These are : (i) to raise resources for the
government ,(ii) to raise the rate of investment in the country through the curtailment of consumption, and
(iii) to raise the incremental saving ratio.

 Indirect taxes reach all sections of the society, direct taxes are generally proportional.
 Direct taxes can be highly progressive, indirect taxes are generally proportional.
 Indirect taxes can be easily used to influence the consumption of specific commodities, direct taxes
cannot be thus used.

In short, it is necessary to strike a balance between direct taxes and indirect taxes as a source of tax revenue.
In India, presently, about 65 % of tax revenue is collected by way of indirect taxes and 35% by way of direct
taxes.

Q2. Explain the basis of classifying government receipts into revenue receipts and capital receipts.
Which type of these receipts are borrowings by government and why?

69
Ans.: The basis of categorizing government receipts into revenue receipts and capital receipts : whether or
not a receipt leads to (i) creation of liabilities or (ii) reduction of assets. If yes, it is a capital receipt. If no,
then it is a revenue receipt.

 Capital receipts are receipts that either create a liability or reduces asset.
 Revenue receipts are receipts that neither create any liability nor reduce any asset.

Borrowing by government is a capital receipt because it leads to reduction in liability.

Q3. What is the basis of classifying government expenditure into ‘Revenue Expenditure’ and ‘Capital
Expenditure’? Which of these types of expenditure is payment of salaries of government employees
and why?

Ans.: The basis of classifying government expenditure into revenue expenditure and capital expenditure is :
whether or not an expenditure leads (i) creations of assets or (ii) reduction in liabilities. If yes, it is a capital
expenditure. If no, it is revenue expenditure.

 Any expenditure by the Central Government that either creates an asset or reduces a liability is
categorized as capital expenditure.
 Any expenditure by the Central Government that neither creates asset nor reduces liability is
categorized as revenue expenditure.

Payment of salaries to government employees is a revenue expenditure since it neither creates an asset nor
reduces a liability.

Q4. Categorise the following into revenue expenditure and capital expenditure. Give reasons in
support of your answer

(i) Repayment of loan with interest

(ii) Grants to state governments for creations of assets
(iii) Investment in shares
(iv) Subsidies
(v) Construction of school building
Ans.:
(i) Repayment of principal amount of loan is a capital expenditure because it reduces liability of
government but interest amount will be revenue expenditure because it neither creates any assets
nor reduce liability.
(ii) It is a revenue expenditure because it neither creates any asset nor reduces liability of central
government.
(iii) It is a capital expenditure because it increases asset of the government.
(iv) It is revenue expenditure because it neither creates any asset nor reduces liabilities
(v) It is a capital expenditure because it creates assets of government.
Q5. What is a basis of classification of taxes into direct tax and indirect tax? Explain the value behind
its imposition.

Ans.: Basis of classification of taxes into direct and indirect taxes : whether the burden of the tax can be
shifted to others or not. If it cannot be shifted it is a direct tax. If burden of the tax can be shifted it is a
indirect tax.
 Direct tax is a tax whose impact (liability to pay) an incidence (actual burden) lie on the same person
for e.g. Personal income, tax, corporation tax etc.

70
 Value : Reducing the inequality of income
 Indirect tax is a tax whose impact(liability to pay) and incidence (actual burden) lie on the different
person. For e.g. Sales tax ,excise tax etc.
Value : To make some lines of production more or less attractive for producers.

Q6. Giving reasons classify the following into direct and indirect tax

(i) Wealth tax

(ii) Value added tax
(iii) Corporation tax
Ans.:
(i) It is a direct tax because its impact (liability to pay) and incidence (actual burden) fall on the
same person. Its burden cannot be shifted .
(ii) It is an indirect tax because its impact (liability to pay) and incidence ( actual burden) lie on
different persons.
(iii) It is a direct tax because its impact and incidence fall on the same person (company). Its burden
cannot be shifted.

Q7. What is debt trap?

Ans.: It is a vicious circle set where in the government takes more loan to repay earlier loans.

Q8. Revenue deficit is the real deficit and not the fiscal deficit. How?
Ans.:
(i) Fiscal deficit is defined as excess of total expenditure over total receipts (revenue and capital
receipts) excluding borrowing .
(ii) Another words, it is equal to borrowings and borrowing are just an act of the government which
may be finance interest payments of the government also.
(iii) While Revenue deficit takes into account current interest payment obligations of the government
not connected to the actual activities.
(iv) Thus revenue deficit is more important than fiscal deficit.

Q9. Are fiscal deficits necessarily inflationary ?

Ans.:
(i) Fiscal deficits are not necessarily inflationary.
(ii) As we know Fiscal deficit shows borrowing requirement of the government .
(iii) If we borrow when there is situation of underemployment of the economy i.e. in a situation of
deficient demand, then it is not inflationary because in situation of deficient demand output is held
back because of lack of demand.
(iv) A high fiscal deficit is accompanied by higher demand and greater output which is not inflationary .
(v) On other hand, if we borrow at the full employment level then it is inflationary in nature.

A high fiscal deficit (borrowing) is accompanied by higher prices because aggregate demand is greater than
aggregate supply at the full employment which is always inflationary.
Q10. Between direct and indirect tax, which should be used more for equitable distribution of income
and why?

Ans: - Direct tax as it is progressive in nature

Q11. What is a Zero PRIMARY deficit budget?

71
Ans: - It means that the Government has to borrow only for making interest payments of the previous years,
and that there are no fresh borrowings.

Q12. What will be the effect of reduction of subsidies on fiscal deficit?

Ans: - It will reduce the Revenue expenditure and hence fiscal deficit will also be reduced

Q13. There has been a consistent rise in the price of fruits and vegetables in India. Which measure of
the budget will help to reduce the price?

Ans: - Public Distribution system, measures against hoarding

Q14. Public goods are provided by the government, is it necessary?

Ans: - Public goods are those goods and services for which consumption by some individuals, do not reduce
the amount available to others. Example parks, roads. People receive benefits from public good but do not
pay for them. Such a good can be produced only by government

BALANCE OF PAYMENT

MULTIPLE CHOICE QUESTIONS

1. BOT refers to balance of exports and imports of :

(a) Visible Items*
(b) Invisible Items
(c) Both
(d) None
2. Unilateral Transfers are a part of:
(a) Capital Account
(b) Current Account
(c) Balance of trade Account
(d) Balance of Payment Account and Current Account*

3. The Exchange rate determined by the free play of the forces of demand and supply of foreign exchange is
(a)Flexible exchange Rate*.
(b) Fixed Exchange Rate.
(c) Floating Exchange rate
(d) None.

4. If price of 1 US Dollars has fallen from Rs. 56 to RS. 52. The Indian Currency has :
(a) Depreciated
(b) Appreciated*
(c) Devalued
(d) None

5. The Exchange Rate officially declared by the government is :

72
 (a) Managed Floating
(b) Flexible Exchange Rate
(c) Fixed Exchange Rate*
(d) None.

BALANCE OF PAYMENT
BOARD QUESTIONS
Q1. Other things being the same, when in a country the market price of foreign currency falls, national income is
likely to: (1) O 2015
a) Rise
b) Fall
c) Rise or fall
d) To remain unaffected
Ans:
Q2. What are fixed and flexible exchange rates? (3) O 2015
Ans: Fixed exchange rate is the rate which is officially declared in any other currency by the government or central
bank. It is fixed for a particular period. Like 1 $ = 55 Rs.
Flexible exchange rate is the exchange rate determined by the forces of demand and supply of foreign exchange in
the market it is influenced by the market forces.

Q3. Where is ‘Borrowing from abroad’ recorded in the BOP account? Give Reasons. (3) O 2015
Ans: Capital account, as it increases liability of the country.
It is not a regular payment, it is paid in lump sum amount.

Q4. Explain the meaning of Managed Floating Exchange Rate. (3) O 2015 (1) O 2012 set2
Ans: Managed floating exchange rate is a mixture of a flexible exchange rate and a fixed exchange. It refers to a
system in which foreign exchange rate is determined by the market forces of demand and supply.

Q5. Give meaning of Balance Of Trade (1) D 2014

Ans: Balance of trade refers to difference between the amounts of exports and imports of visible items (goods).

Q6. Define Externalities. Give an example of negative externality. What is the impact on welfare? (3) D 2014
Ans: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which it is not paid (or
penalised)
Example : Polluting river by an oil refinery Or any other relevant example.
Impact : Reduces welfare through negative effect on health

Q7. Explain the meaning of Balance of Payment Deficit. (3) D 2014

Ans: Deficit in the BOP occurs when autonomous foreign exchange receipts fall short of autonomous foreign
exchange payments. Autonomous transactions are those which are not influenced by other transactions in the BOP.

Q8. Recently government has doubled the import duty on gold. What impact it is likely to have on foreign exchange
rate & how? (3) D 2014
Ans: Increasing import duty on gold will make imports of gold costly. It will reduce demand for import of gold and
consequently of foreign exchange. Supply of foreign exchange remaining unchanged, price of foreign exchange is
likely to fall.

Q9. Define foreign exchange rate. (1) O 2014(1) O 2012 set1

Ans: Foreign exchange rate is that rate at which currency of one country is exchanged with the currency of other
country for example: Rs.60 is equal to 1 $ = 1/60 dollar.

73
Q10. What are externalities ? Give an example of a positive externality and its impact on welfare of the people.(3) O 2014
Ans: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which it is not paid (or
penalised)
Example : Maintaining greenery by planting more trees by a chemical plant owner.
Impact : increases welfare by effectively controlling pollution, which has positive effect on health

Q11. Distinguish between ‘autonomous’ and ‘accommodating’ Balance of Payments transactions. (3) 2010 O(3) O 2014
Ans: AutonomousTransactions: are independent of all other transactions in the BOP.
These transactions are not influenced by the foreign exchange position of the country.
Exports, imports etc are some examples.
Accommodating Transactions: are undertaken to cover deficit or surplus in the
autonomous transactions.Therefore,their magnitude is determined by the autonomous transactions.

Q12. Foreign exchange rate in India is on the rise recently. What impact is it likely to have on exports and how?(3) O
2014
Ans: When price of foreign currency rises it makes exports cheaper. This leads to rise in demand for exports. As a
result supply of foreign currency rises.

Q13. How does central bank bring down foreign exchange rate? (1) F 2013
Ans: The central bank can bring down foreign exchange rate by bringing in more foreign currency out of its reserves
in the foreign exchange market. By increasing supply of foreign exchange foreign exchange rate can come down.
(Any other individual response with suitable justification should also be accepted even if there is no reference
to the text)

Q14. Distinguish between Current account & Capital account of BOP account. (3) F 2013
Ans: The current account records transactions relating to income and expenditure, i.e. imports and exports, incomes,
and transfers.
They are regular in nature.
The capital account records transactions involving changes in foreign exchange assets and liabilities, like borrowing
and lending, foreign investment, etc.
They are irregular & transacted in lump sum amount.

Q15. What are the sources of demand for foreign exchange? (3) F 2013
Ans:
(i) Importers
(ii) Tourists going abroad
(iii) Investments abroad.

Q16. Explain the effect of appreciation of domestic currency on imports. (3) O 2013
Ans: Appreciation of domestic currency means lower price of foreign currency in terms of domestic currency. This
increases the price of domestic goods for foreign buyers. This means imports become cheaper. As a result the demand
for imports may rise. Example: 1$ = 60 Rs is changed to 1$ = 55 Rs. It is appreciation of domestic currency & now
importing 1 dollar good has become cheaper so import will increase.

Q17. Distinguish between BOT & Balance on current account. (3) O 2013
Ans:
Balance Of Trade Balance Of Payment
Balance of trade refers to difference between the amounts Current account of BOP records all those transaction
of exports and imports of visible items (goods). relating to exports and imports or goods and services and
unilateral transfers during a financial year.
It includes only visible items (goods). It includes visible , invisible items & universal transfers
It is a narrow concept and a component of balance of It is a wider concept.
payment.

Q18. How can increase in foreign direct investment affect the price of foreign exchange? (1) O 2013 set1

74
Ans: FDI increases the supply of foreign exchange which reduces the price of foreign exchange.

Q19. Give meaning of foreign exchange and foreign exchange rate. Give reason, explain the relation between foreign
exchange rate and demand for foreign exchange. (6) O 2012 set1
Ans: Foreign exchange refers to any currency other than the domestic currency. 1
Foreign exchange rate is the rate at which one currency can be converted into another currency. 1
Suppose foreign exchange rate falls, it means that imports etc have become cheaper
because people now have to pay less for imports. As a result demand for imports etc. rises. This leads to increase in
demand for foreign exchange. Similarly if exchange rate rises, the demand for foreign exchange falls. 4
(No diagram required)

Q21. Explain the distinction between autonomous and accommodating transactions in BOP. Also explain the concept
of BOP deficit in this context. (6) O 2012 set2
Ans: AutonomousTransactions: are independent of all other transactions in theBOP.
These transactions are not influenced by the foreign exchange position of the country.
Exports, imports etc are some examples.
Accommodating Transactions: are undertaken to cover deficit or surplus in the
autonomous transactions. Therefore, their magnitude is determined by the autonomous transactions.
Deficit in BOP is determined only by the autonomous transactions.
When autonomous foreign exchange payments exceed autonomous foreign exchange receipts, the excess is called
BOP deficit.

Q22.What is flexible exchange rate system? (1) O 2012 set3, D 2008

Ans: Flexible exchange rate system is the exchange rate system in which exchange rate is determined by the forces of
demand and supply of foreign exchange in the market it is influenced by the market forces.

Q23. Give two sources each of demand & supply of foreign exchange. Giving reason explain the relation between
foreign exchange rate and supply of foreign exchange. (6) 2012 set3
Ans: Sources of demand of foreign exchange
1. To purchase goods and services from other countries i.e. import.
2. To send a gift abroad.
Sources of supply of foreign exchange
1. Foreigners purchasing home countries goods and services through exports.
2.Direct foreign investment in the domestic country.
Relationship between foreign exchange rate and supply of foreign exchange.
There is a direct relation between foreign exchange rate and supply of foreign exchange higher the exchange rate,
higher the supply of foreign exchange and lower the exchange rate, lower the supply of foreign exchange.
Suppose the price of US $ in India falls from Rs.50 to Rs.40it means earlier USA people could buy Rs.50 worth of
good from India by giving one dollar. Now they can buy only Rs.40 worth of good from India. Indian goods become
costlier for USA. Therefore USA buys less of Indian goods this reduces the supply of dollar to India.

Q24. What is foreign exchange? (1)O 2011set1,3

Ans: Foreign exchange refers to any currency other than the domestic currency.

Q25. Which transactions determine the balance of trade? When is balance of trade in surplus? (3) O 2011 set1
Ans: Balance of trade refers to difference between the amounts of exports and imports of visible items (goods).
It includes only visible items (goods).
BOT = Export – Import
Balance of trade is in surplus when exports are more than imports or BOT is positive.

Q26. When price of a foreign currency falls, the demand for that foreign currency rises. Explain, why?
(3)O2011set1,3 (3) O 2008 OR
Giving two examples, explain why there is a rise in demand for a foreign currency when its price falls (3)2010 O

Ans: There is an inverse relation between foreign exchange rate and demand for foreign exchange higher foreign
exchange rate the lower the demand for foreign exchange and lower the foreign exchange rate and higher the demand

75
for foreign exchange. Suppose the price of US dollar in India falls from Rs. 50 to Rs. 40. It means that earlier Indian
people have to give Rs.50 to buy one dollar worth of goods from USA. Now they have to give Rs. 40 for the same
good. It means Indian goods have become cheaper for Indian people. Thus the demand for foreign exchange will
increase.
Q27. When price of a foreign currency falls, the supply of that foreign currency also falls. Explain, why?
(3)O2011set1,3 (3) D 2008
Ans: There is a direct relation between foreign exchange rate and supply of foreign exchange higher the exchange rate,
higher the supply of foreign exchange and lower the exchange rate, lower the supply of foreign exchange.
Suppose the price of US $ in India falls from Rs.50 to Rs.40it means earlier USA people could buy Rs.50 worth of
good from India by giving one dollar. Now they can buy only Rs.40 worth of good from India. Indian goods become
costlier for USA. Therefore USA buys less of Indian goods this reduces the supply of dollar to India and vice versa

Q28. Distinguish between balance of trade and balance of payments. (3) O 2009 , O 2008 (3) O 2011 set 3
Ans:
BALANCE OF TRADE (BOT) BALANCE OF PAYMENT (BOP)
BOT is the difference between the amounts of exports It is complete statement of all the payments received from
and imports of visible items (goods). abroad & all the payments remitted to abroad.

It includes all the visible items which are tangible & have It includes all visible, invisible items, transfer payments,
physical existence. capital transactions etc.
It is a part of BOP, so it is narrow concept It is wider concept which includes BOT.
Q29. State two sources of supply of foreign exchange. (1) D 2010
1. Ans: Foreigners purchasing home countries goods and services through exports.
2. Direct foreign investment in the domestic country.

Q30. Distinguish between depreciation & devaluation of domestic currency. (3) D 2010
DEPRECIATION DEVALUATION
Depreciation of currency means there is a fall in the value Devaluation of currency means there is a fall in the value
of domestic currency in terms of foreign currency in the of domestic currency in terms of foreign currency in the
flexible exchange rate system. fixed exchange rate system.
Depreciation of currency is dome automatically by the Devaluation is done by the government.
demand & supply of currency
No government interference is found in the depreciation. No role of market forces, it is deliberately done by the
government.

Q31. State two sources of demand for foreign exchange? (1) 2010 O
Ans: 1.To purchase goods and services from other countries i.e. import.
2. To send a gift abroad.

Q32. List the items of the current account of balance of payments account. Also define‘balance of trade’. (3) D 2009
1..Exports and imports of goods (merchandise transactions or visible trade - exports of tea, jute etc and imports of
computer, petroleum etc.
2. Exports and imports on services: Invisible transaction these include transaction in services such as travel,
banking, insurance etc.
3. Unilateral or unrequired transfers to and from abroad: Unilateral transfers refers gift, donation personal
remittances and other one way transactions

Q33. Explain any two merits each of flexible foreign exchange rate and fixed foreign exchange rate. (4) O 2009
Explain the meaning and two merits of fixed foreign exchange rate. (4) D 2009 OR
Ans: Merits of fixed exchange rate i) It gives stability ii) no speculation
Demerits of fixed exchange rate
i) producers & investors do not find motivation to invest & get abnormal profits.
ii) situations are controlled by the government.

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 Merits of flexible exchange rate system
i) investors & producers are motivated to invest as they get opportunity to get more profits.
ii) Foreign exchange rate is free to change as per the market forces.
Demerits of flexible exchange rate system :
i) No stability
ii) speculative activities are promoted.
Q34. State components of current account of balance of payment account. (3) D 2008
Ans: Components of current account
1. Exports and imports of goods (merchandise transactions or visible trade): These includes exports and imports
of goods only payments for imports of goods is recorded on the debit side and the receipt from exports is
recorded as on credit side for example: exports of tea, jute etc and imports of computer, petroleum etc.
2. Exports and imports on services: Invisible transaction these include transaction in services such as travel,
banking, insurance etc. Payments of these services are recorded on the negative side (debit) and receipts on
the positive side (credit).
3. Unilateral or unrequired transfers to and from abroad: Unilateral transfers refers gift, donation personal
remittances and other one way transactions receipts of unilateral transfers from rest of the world is shown on
the credit side and unilateral transfers to rest of the world on the debit side.

Q35. What is fixed exchange rate system? (1) O 2008

Ans: Fixed exchange rate is the rate which is officially declared in any other currency by the government or central
bank. It is fixed for a particular period. Like 1 $ = 55 Rs

BALANCE OF PAYMENT
HIGH ORDER THINKING QUESTIONS

Q1.Ten US dollars are exchanged for five hundred Indian rupees. What is the exchange rate for Indian
currency?
$1 = 500/10 = Rs.50, i.e., $1 = Rs. 50

Q2. If $9 are needed to buy £2, what is the exchange rate for USA dollar?
£1 = 9/2 = $4.5, i.e., £1 = $4.5.

Q3. If the value of exports of goods of a country is Rs. 1,000 crores and the value of imports of goods is Rs.
1,200 crores, how much will be the trade balance ( or balance of trade )?
Balance of trade = value of exports – value of imports
= 1,000 – 1,200.
= Rs. – 200 crores

Q4. A country’s balance of trade is Rs. 75 crores. Value of imports of goods is Rs. 100 crores. How much is
the value of exports of goods?
Balance of trade = value of exports – value of imports
75 = value of exports – 100.
Q5. What does a change from Rs. 52 = $ 1 to Rs. 56 = $ 1 indicate?
Ans. Indian rupee depreciate in terms of $.

Q6. Why are autonomous items called „above the line ` items?
Ans. Because autonomous items are recorded in BOP as first items before calculating surplus or deficit.

Q7. Is import of machinery recorded in current account or capital account?

Ans. Since import of machinery is import item , it is recorded in current account.

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Q8. Why foreign currency/exchange is needed?
Ans. i) To purchase of goods and services from other countries.
ii) To send a gift abroad.
iii) To purchase financial assets in a particular country and
iv) To speculate on the value of foreign currencies.

Q9. What are the factors responsible for inflow of foreign currency?
Ans. i) foreigners purchasing home country goods and services through exports.
ii) Foreigners investment in home country through joint ventures and through financial market operation.
iii) Foreign currencies flow into the economy due to currency dealers and speculators

Q10 When exchange rate of foreign currency falls it’s supply also falls. Explain how?
Ans. When exchange rate falls, experts become less profitable hence supply of foreign currency through
exports falls.

Q11. When exchange rate of foreign currency falls, its demand rises. Explain how?
Ans. When exchange rate falls, imports become cheaper, demand for imports rises and so rises the demand
of foreign exchange to purchase more imports.

Q12 What will be the value of imports, if the net imports are Rs 160 cr and the value of exports are Rs
400 crores.
Ans. Balance of Trade = Exports- Imports
Imports= Exports – Balance of trade= 400-(-160) = 560
Or Imports = Exports + net imports = 400+160 = 560 Ans: Rs 560 crores

Q13. If BOP of a country is Rs (-) 100 cr and total payment are Rs 500 cr. Find out its total receipts.
Ans. Balance of Payment = Total receipts - Total payments
Total receipts = Total Payment + BOP
= 500 + (-100) = 500-100=400 Ans Rs 400 crores

Q14. Find the primary deficit if fiscal deficit is Rs 15,000 crores and interest payment is Rs 4,000 Cr.
Ans:- Primary deficit= Fiscal deficit- Interest Payment
=15,000-4,000 = Ans. Rs. 11,000 crores

Q15. Balance of payments always balances. Discuss it.

Ans. Balance of payments is always balanced. A negative balance on the current account is equated with
positive balance in the capital account. The monetary authorities may finance a deficit by depleting their
reserves of foreign currencies or by borrowing from the IMF etc. Hence BOP is always in balance.

Q16. Should a current account deficit be always a cause for alarm? Explain.
Ans. If the increase in current account deficit indicates rise in investment , then it will increase future output
, so it is not a cause of alarm but it is a cause of worry if the increase in current account deficit reflects
smaller savings or large budget deficit because it indicates higher government or private consumption.

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 BALANCE OF PAYMENT
VALUE BASED QUESTIONS
1. What is the likely effect of depreciation or devaluation of a currency of the countries’ foreign trade ? 1
Ans: Depreciation of a currency, namely :
(i) encourages exports from a country and
(ii) discourages imports from the rest of the world

2. India is suffering from the problem of Current Account Deficit (CAD). How is it met or financed ? 3
Ans: Current Account Deficit (CAD) in balance of payments occurs when the sum of receipts of foreign
exchange on account of trade in visible and invisible is less than the sum of payments of foreign
exchange on account of trade in visibles and invisibles.
A CAD implies that a country has contracted to spend more foreign exchange than it has been able to
earn during the year.
A CAD can be financed by different sources :
(i) A country may use a part of its gold stocks and make payments to foreigners by means of gold.
(ii) A country may draw upon the reserves of foreign currencies and foreign securities.
(iii) A country may borrow foreign exchange from different officials and private sources.
(iv) It may mobilise foreign exchange by attracting deposits from foreigners and investment of capital by
foreigners.

3. If inflation is higher in country A than in country B and the exchange rate between the two countries is
fixed, what is likely to happen to trade balance between the two countries ? 3
Ans: If inflation is higher in country A than in country B, and the exchange rate between the two countries
is fixed, the trade balance of country A will be deficit while that of country B will be surplus. In case of
inflation in country A and prices of country B remaining constant, imports of country A will rise or exports
of country A will decline. As a result, trade balance of country A will be unfavourable and trade balance
of country B will be favourable.

4. Suppose balance of payment of current account of India in a year was (–) 2579 million US$, whereas
balance on its capital account was 8409 million $, how will it affect the foreign exchange reserve of
India ? 3
Ans; Since surplus of balance on capital accounts (8409 million US $) exceeds deficit 2579 million US$)
there will be addition of 5830 million US$ to the foreign exchange reserves of India (8409 – 2579
= 5830 million US$)

5. Is rising reserve of India’s foreign exchange a sign of rising production activity in the economy?
Explain.
Ans: A current account deficit need not be a cause for alarm. Current account deficit should be compared
with the rise in investment (and increase in capital stock). There is less causes to worry if the increase in
current account deficit reflects a rise in investment because it will increase future output. On the other
hand, there is a cause to worry if the increase in current account deficit reflects smaller saving or a larger
budget deficit because it indicates higher private or government consumption

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