HALF YEARLY EXAMINATION
Introductory Macro Economics
i) Answer all the questions.
ii) Question no 1 contains very short answer questions of one mark each. Answer to each of these should be in one or two sentence.
iii) Question 2 to 9 are short answer type questions of 3 marks each. Answer to each of these should not exceeds 60 words.
iv) Questions 10 to 17 also short answer questions of 4 marks each. Answer to each of these should not exceed 70 words.
v) Questions 18 to 23 are long answer question of 6 marks each. Answer to each of these should not exceed 100 words.
a) What is value of import when balance of trade is (-) 400 crores and value of exports is 300 corers.
b) If disposable income is Rs.1000 and consumption expenditure is Rs. 750 find out A.P.S
Ans. A.P.S = S/Y saving = income – expenditure
= 250/1000 = ¼ =0.25 Ans.
c) If the value of M.P.C is 0.8 find out value of multiplier.
= 1/1-0.8 = 1/0.2 =5
d) What is plastic money ?
Ans. It is the most modern form money and it avoids the limitations of currency system. Examples are different types of credit cards.
e) Define current transfer.
Ans. Those payments, which are made from current income of the payer and added to the current income of the recipients.
f) Give two examples of capital expenditure.
Ans. Expenditure on currency printing and on social and community services.
g) A government budget shows a primary deficit of Rs. 4,400 corers the revenue expenditure on interest payment is Rs. 400 corers. How much is the fiscal deficit.
Ans. Primary deficit = Fiscal deficit- Interest payment
= Fiscal deficit = Primary deficit + Interest payments
= 4400 + 400 = Rs. 4,800 corers.
h).Why is payment of interest is a revenue expenditure?
And.Payment made by the government as an interest on outstanding debt do not cause any reduction in the liabilities of the government
2.Distinguish between secondary sector and territory sector.
Ans. Primary sector is that sector which exploits natural resources and produce goods and services. It includes all agricultural activities like forestry, mining, fishing, animal husbandry etc.. On the other hand secondary sector transforms one good in to another for creating more utility. It includes all the manufacturing units and it takes raw materials from primary sector.
3. Explain briefly the steps taken in estimating national income.
Under value added method there are following three steps in the measurement of national income
(a) Identification and classification of productive enterprises
We can classify the economy in to following three sections 1. Primary sector 2. Secondary sector 3. tertiary sector
(b) Estimation of net value added.
Under this steps the money value of the output of all the above sectors is estimated as
Gross value added = Value of output – Intermediate consumption
Net value added = Gross value added—indirect taxes + subsidies.
© Adding net factor income from abroad
Net factor income from abroad is added to net value added so that makes it
As national income. Symbolically:
National Income = Net value added + Net factor income from abroad.
4. Which of the following expenditure incurred are on intermediate products and which are on final products? You must state reasons for your answer
(a) Purchase of ticket for train journey by an individual.
(b) Purchase of eatable items by a firm.
(c) Purchase of a car by an employer for office use by his employees
Ans. (a) Purchase of ticket for train journey by an individual is final product because a consumer incurs this expenditure
(b) Purchase of eatable items by a firm is intermediate product because it
is used for further sale
(c) Intermediate product because car will be used for office employees.
5.Calculate Net Value Added at Factor Cost:
Items Rs, lakhs
a) Sales tax 25.00
b) Consumption of foxed capital 05.00
c) Closing stock 10.00
d) Corporate tax 15.00
e) Opening stock 20.00
f) Sales 540.00
g) Purchase of raw materials 140.00
Ans. 540+ 10-25-5-20-140= 360
- Calculate operating surplus:
a) Net value added at market price 100.00
b) Indirect taxes 10.00
c) Wages in cash 60.00
d) Employers contribution to social
Security schemes. 15.00
e) Subsidies 05.00
Ans.100-10-60-15+5 = Rs. 20 lakhs
- Which of the following expenditure incurred are on intermediate products and which are on final products
- Payment of school fees by households.
- Purchase of a bus by a school.
- Purchase of uniform for nurses by hospital.
Ans. 1. Payment of school fees by household is an expenditure on final products as these are consumption expenditure
2. Purchase of a bus by school is final product because expenditure because it is an investment expenditure
3.Purchase of uniform for nurses by a hospital is a final product because it is also coming under investment expenditure.
- State the main objectives of budgetary policy.
Ans. The main objectives of budgetary policies are:
1..Success of planning:- The success of any planning lies on efficient budgeting of national recourses.
2..Optimum allocation of resources:- Through taxation and public expenditure programmers , Govt. can greatly affect the allocation of resources in different sectors on the basic of the performance.
3.. Equitable distribution of income and wealth is maintained through only the proper budgetary policies
4.. Promotion of economic growth and public welfare
5.. Price stability. Budgetary policies are very important to control inflation and deflation that is during deflationary time deficit budget and inflationary time surplus budget are very important.
- Distinguish between current transfer and capital transfer. Give one example each.
Ans.Current transfer and capital transfer can be distinguished as follows:
(a) sources:- Current transfer are made from current income of the payer whereas capital transfers are made from past saving and wealth.
(b) Uses:- Current transfers are used for current consumption expenditure whereas capital transfers are used for capital formation
(c) Nature;- current transfers are regular in nature and capital transfers are irregular in nature
Eg:- Donation ,subsidies for current transfer and different type of taxes for capital transfer.
- Describe the causes of disequilibrium in the Balance of Payment.
Ans. Following are the causes of disequilibrium in the balance of payments
a) Trade cycle:- Trade cycle causes cyclical disequilibrium. There are many causes for such a situation (a) boom (b) depression (c) different income elasticity and (e) price elasticity. These factors affect terms of trade, which create disequilibrium in the balance of payment.
b) Technological changes also can influences the balance of payment.
c) Political changes of a country can greatly influence the balance of payment.
d) Changes in the population of a country also can greatly influence the balance of payment.
- Classify public expenditure.
Ans. Public expenditure is classified into the following categories:
(a) Revenue expenditure and capital expenditure.
(b) Development and non development expenditure
(c) Plan expenditure and non-plan expenditure
- How is government final expenditure measured?
And.Govt. final consumption expenditure is estimated as the total expenditure incurred by govt. for producing various services such as health, education, defence etc.. to satisfy collective needs of the whole community
The value of govt. final consumption expenditure is the sum total of the following items:
(i) Compensation of employees paid by govt.
(ii) Goods and services purchased by the govt. from domestic market
(ii) Purchase from abroad.
- Explain any four precautions to be taken in estimating national income by expenditure method.
Ans. 1.Expenditure on second hand goods should not be included in aggregate expenditure as these have already been included
2. Expenditure on transfer payments made by govt. should be avoided it is not factor payment.
- 3. The intermediate expenditure is not included in national income so as
to avoid double counting.
- The expenditure on shares and bonds should not be included in national income but income in shares and bonds should be added.
- Define accommodating and autonomous items in balance of payment.
Ans. Autonomous items in the balance of payment refer to international economic transactions that take place due to some economic motive such as profit maximizations. These transitions are independent of the state of the country’s balance of payment
Accommodating items in the balance of payment refer to transaction that occurs because of other activity in the balance of payment, such as government financing.
- Explain briefly the way of avoiding double counting in the measurement of national income.
Ans. Following two ways can solve the problem of double counting:
(a) Final output method: Final goods are those goods, which are ready for sale or can’t be manufactured further. Value of final goods can be calculated by deducting value of intermediate goods from the value of output.
(b) Value added method: Value added refers to the difference between value of output and the value of intermediate consumption of each producing unit of the country. Sum total of value added by each unit refers to national income.
- Explain the concept of inflationary gap. Use diagram. What is its impact on output, price and employment?
- Explain the distinction between voluntary and compulsory transfer payment and give one example each.
And Transfer payments are payments received without any contribution to current output. Such payments may be voluntary or compulsory…
Voluntary transfers are made voluntary such as donation, gifts, scholarship, etc… whereas compulsory or forced transfers are paid by the people in the form of sale tax , excise duty.
- Calculate national income by (a) income and (b) expenditure methods:
a. Wages and salaries 500.00
b. Government final consumption expenditure 120.00
c. Royalty. 20.00
d. Interest 40.00
e. Households final consumption expenditure. 600.00
f. Change in stocks 10.00
g. Indirect taxes 100.00
h. Rent 50.00
- Final consumption expenditure of private non-profit
Institutions serving household. 30.00
j. Net domestic fixed capital formation. 60.00
k. Profit after tax. 100.00
l. Corporate tax 20.00
m. Net export. (-) 20.00
n. Subsidies. 30.00
o. N.F.Y.A. (-) 05.00
Ans: Income method;
= Rs. 725 crore
= Rs. 725 crore.
- Explain the concept of Multiplier diagrammatically. How is it related to marginal propensity to save? Proof mathematically.
- Explain any six precautions, which must be taken while estimating Factor Income.
Ans. Following are the precaution which must be taken while calculating factor income:-
a) Transfer payments of income like old age pension, scholarship, Unemployment allowance, are unilateral payments which must nit be included factor income
b) Income from illegal activities like black marketing, robbery, coreption, etc.is not included in factor income
c) Income from the sale of second hand goods is not included in factor income
d) Sale of shares and bonds are not included in factor income, these transactions do not relate to a flow of goods and services.
e) Windfall gains like lotteries or capital gains are not included factor income because these are effortless income.
f) Indirect taxes are commodity taxes, which raise market price of the commodity. Therefore, it becomes a part of G.N.P at market prices, are not in factor income.
- (i) Calculate net disposable income from the following data:
(a) National Income 9,85,000.00
(b) Indirect taxes 35,650.00
(c) Subsidies 3,000.00
(d) Capital Consumption Allowance 25,000.00
(e) Net current transfer from rest of the world. 12,000.00
(f) Net capital transfers from rest of the world. 10,000.00
Ans: Net disposable Income = N.I + indirect taxes- subsidies+ Net capital transfer
(ii) State the components of factor income to find out national income.
What is added and deducted to it? Why?
- Explain with the help of diagram, how equilibrium level of income is determined by A.D and A.S.
Balance of payment is always balances. Explain it.
Ans. Balance of payments is the summary statement of total economic transaction of a country with the rest of the world. It is constructed on the principle of double entry book keeping. It has two sides: Credit on left side and debit on right side. When a payment is received from a foreign country, it is a credit transaction while payment to a foreign country is a debit transaction.
The League of Nations classified all the items included in the balance of payments into two parts, a) Current A/c b) capital A/c and both are adjusted by certain double entry book-keeping methods.
Since we use double entry book-keeping in balance of payment technically we can say that balance of payment is always balances.
- Will the following be included in Gross National Product? Give reasons for your answer:
- i. Profits earned by a foreign company inIndia.
- ii. Money received from sales of shares.
- iii. Salary paid to Americans working in Indian embassy inAmerica.
- iv. Money received from sale of old house.
- v. Scholarship received by a student.
- vi. Remittance from abroad.
a) Profit earned by a foreign company in India:- No, because it is foreign company and not a resident company
b) Money received from sales of shares;- No, because it is only a transfer of ownership and no production activity is involved .
c) Salary paid to Americans in working in Indian embassy inAmerica:- No, because the are the residents ofAmericaand will not contribute to national income ofIndia.
d) Money received the sale of old house:- No, because goods produced in the previous time period can’t included in G.N.P.
e) Scholarship received by a student:- No, because they are transfer receipts and transfer receipts are not included in G.D.P.
f) Remittance from abroad:-No, because they are transfer receipts.
From the following information calculate G.N.PFC by (a) income method (b) expenditure.
a) Factor income from abroad 10.00
b) Compensation of employees 150.00
c) Net domestic capital formation 50.00
d) Private final consumption expenditure. 220.00
e) Factor income to abroad 15.00
f) Change in stock 15.00
g) Employer’s contribution to social security schemes. 10.00
h) Consumption of fixed capital 15.00
i) Interest 40.00
j) Exports 20.00
k) Imports 25.00
l) Indirect taxes 30.00
m) Subsidies 10.00
n) Government final consumption expenditure. 85.00
o) Profit 100.00
Ans: G.N.PFC by income method
= Compensation of employees + Consumption of fixed capital + Interest + Profit + N.F.Y.A
= 150+15+40+100 + (-5) = Rs.300
G.N.PFC by expenditure:-
= Net domestic capital formation + Consumption of fixed
capital + Private final consumption exp. + Govt. final
Consumption exp.+ N.F.Y.A + Net export – Indirect taxes+
= 50+15+220+85+(10-15) +(20-25)-30+10 =Rs.340.