Rachna Mam Economics Imp Question Part-2

60 MOST IMPORTANT EXAMINATION QUESTION
APT – Best Classes For 10th & 11th – 12th Commerce, CA-CS CALL: 9755557307
Macroeconomics (Total 40 Marks)

National income (10 marks)
1. Write components of NFIA.

Ans. Net factor income from abroad = Net compensation of employees + Net
income from property and entrepreneurship + Net retained earnings.
2. Explain circular flow of income in two sector economy.

Ans. Circular Flow of Income in a Two-Sector Economy
It is defined as the flow of payments and receipts for goods, services, and
factor services between the households and the firm sectors of the
economy.
3. Explain the limitation of GDP welfare.

Ans. GDP ignores the welfare component as the goods and services produced
may or may not add to the welfare to a society. For example, the production
of goods, like guns, narcotic drugs, high-end luxurious goods increase the
monetary value of production, but they do not add to the welfare of the
majority of population.
4. Explain problem of double counting and how it should be solved.

Ans. The counting of the value of a commodity more than once is called double-
counting. The problem of double counting leads to an overestimation of the
value of goods and services produced. Thus, the importance of avoiding
double-counting lies in avoiding overestimating the value of domestic
products.
For example, a farmer produces 5 kg of wheat and sells it for Rs. 400 in the
market to a flour miller.
A flour miller sells it for Rs. 600 to the baker.
The baker sells it in the form of bread to the shopkeeper for Rs. 800.
The shopkeeper sells the entire bread to the final consumer for Rs. 900.
Here, Value of Output = 400 + 600 + 800+ 900 = Rs. 2700
5. Write items excluded in the estimation of national income.

Ans. Some of the items that are not included in the measurement of National
Income are as follows:
 Services of housewives (Care Economy)
 Black money
 Capital gains
 Transfer payments
 Goods made for self-use
 Old goods
6. Write precautions regarding calculation of national income by product method,
income method and expenditure method.
Ans. Precautions that are taken while calculating national income by product
method.
(i) Sale and purchase of second-hand goods is not to be included.
(ii) The value of intermediate goods is not to be included as it may lead to
double counting.
(iii) Production for self-consumption should be included.
(iv) Value of services rendered by house-wives/ family members is not to be
included.
(v) Production from illegal activities is not to be included.
Precautions that are taken while calculating national income by Income

method.
(i) Transfer income should not be included .
(ii) Income from illegal activities should not be included.
(iii) Income from sale and purchase of financial transaction (shares, debenture
and bonds . etc.) ...
(iv) Income from sale of second hand good shall not be included because it leads
to problem of double counting.
Precautions that are taken while calculating national income by

expenditure method.
(i) Do not include expenditure on transfer payment.
(ii) Do not include expenditure on purchase of financial assets.
(iii) Do not include expenditure on purchase of second hand goods.
(iv) Do, not include expenditure on intermediate goods.
7. Write difference between:

(a) Real GDP and Nominal GDP
(b) Final goods and intermediate goods
(c) Stock and flow
Ans. (a) Difference between Real GDP and Nominal GDP
Basis Nominal GDP Real GDP
Value of all the goods and

Value of all the goods and
services produced by an
services produced by an
Meaning economy, its investments,
economy at current market
government spending’s and
prices.
exports.
The value of the total The value of the total
product is seen to be higher product appears low
GDP Data
because it does not reduce because inflation is reduced
inflation. in it.
Less reliable in comparison More reliable in comparison
Reliability
to Real GDP. to Nominal GDP.
Worth High Low

(b) Difference between Final goods and intermediate goods
Final Goods Intermediate Goods
Definition
Final goods are those goods that are Intermediate goods are referred to as
manufactured to be consumed those goods that are used for producing
directly by the consumer final goods
Nature
Final goods are finished goods Intermediate goods are goods that are
partly prepared and can be referred to
as unfinished goods or partly finished
goods
Uses
Final goods are available for Intermediate goods are available for
consumption or can be used for reselling by the firms for generating
capital formation profit
(c) Differences between stock and flow in the following lines.

Stock Flow
Definition
Stock is defined as a variable that is Flow is defined as a variable which is

measured at a particular point in time measurable over a period of time
Time Dimension
Stock does not have a time Flow has a time dimension attached
dimension attached with it with it
Nature
Stock is static in nature Flow is dynamic in nature
Money and Banking (6 marks)
8. What is meant by money supply? Discuss M1.

Ans. The money supply is the total amount of money—cash, coins, and balances
in bank accounts—in circulation. The money supply is commonly defined to
be a group of safe assets that households and businesses can use to make
payments or to hold as short-term investments.
M1 is the money supply that is composed of currency, demand deposits,
other liquid deposits—which includes savings deposits. M1 includes the
most liquid portions of the money supply because it contains currency and
assets that either are or can be quickly converted to cash.
9. Explain following functions of RBI:

(a) Lender of last resort
(b) Government's bank
(c) Banker's of Bank
(d) Bank of issue
Ans. (a) Lender of last resort
As a Banker to Banks, the Reserve Bank also acts as the 'lender of the last
resort'. It can come to the rescue of a bank that is solvent but faces temporary
liquidity problems by supplying it with much needed liquidity when no one
else is willing to extend credit to that bank.
(b) Government's bank
It issues loans and advances to the government and does buying and selling of
securities on behalf of government. It also advises the government to frame
monetary policy of the country to control the credit creation and money
market.
(c) Banker's of Bank
It acts as a bank of central clearance, settlements and transfers. As all
commercial banks have their accounts with the Central Bank, it can easily
settle claims of various commercial banks against each other by making debit
and credit entries in their accounts.
(d) Bank of issue
Central Bank has the sole authority for issue of currency in the country. In
India, RBI has the sole right of issuing paper currency notes (except one rupee
notes and coins, which are issued by the Ministry of Finance).
10. Explain credit control policy by RBI. (Control on deflation and inflation)
Ans. The methods of credit control adopted by the 'Central Bank' are:
1. Quantitative Methods of monetary policy includes those instruments
which focus on the overall supply of the money. It includes :-
A. Two Policy Rates:
Bank rate is the rate charged on the loans offered by the Central bank to the
commercial banks without any collateral. It is increased at the time of
inflation to reduce the money supply in the economy and vice versa.
Repo rate is the rate charged on the secured loans offered by the Central bank
to the commercial banks that includes collateral. It is increased at the time of
inflation to reduce the money supply in the economy and vice versa.
B. Two Policy Ratio:
Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial
banks must hold on daily basis as a percentage of their total deposits. SLR is
determined by the central bank and is a legal requirement to be fulfilled by
the commercial banks. It is increased at the time of inflation to reduce the
money supply in the economy and vice versa.
Cash Reserves Ratio (CRR) refers to the proportion of total deposits of the
commercial banks which they must have keep as cash reserves with the
central bank. The ratio is fixed by the central bank and is varied from time to
time to control the supply of money in the economy depending upon the
prevailing situation of inflation or deflation.
C. Open Market Operations:
Open market operation (OMO) is a monetary policy by the central bank in
which the bank deals in the sale and purchase of securities in the open
market to control the supply of money in the economy. By selling the
securities, the central bank soaks liquidity from the economy and by buying
the securities, the central bank releases liquidity.
2. Qualitative Methods of monetary policy includes those instruments which

focus on the selected sectors of the economy. It includes :-
A. Margin Requirement:
Margin requirement refers to the difference between the current value of the
security offered for loan (called collateral) and the value of loan granted. It is
a qualitative method of credit control adopted by the central bank in order to
stabilise the economy from inflation or deflation.
B. Rationing of Credit:
Rationing of credit refers to fixation of credit quotas for different business
activities which is introduced when the flow of credit is to be checked
particularly for speculative activities in the economy.
C. Moral Suasion:
The central bank makes the member bank agree through persuasion or
pressure to follow its directives which is generally not ignored by the
member banks. The banks are advised to restrict the flow of credit during
inflation and be liberal in lending during deflation.
11. Write types of Money. Explain process of money creation by commercial banks
with example.
Ans. The 4 different types of money as classified by the economists are commercial
money, fiduciary money, fiat money, commodity money. Money whose
value comes from a commodity of which it is made is known as commodity
money.
Commercial banks plays an important role of 'money creator' in the

economy. They have the capacity to generate credit through demand deposits.
These demand deposits make credit more than the initial deposits. The process
of money creation can be explained by taking an example;
Suppose a depositor deposits Rs.10,000 in his savings account of a bank XYZ,
which will become the demand deposits of the bank. Based on the assumption
that not all customers will turn up at the same day to withdraw their deposits,
banks maintains a minimum cash reserve of 10% of the demand deposits,
Rs.10,000. It lends the remaining amount of Rs.9000 in the form of credit to
other customers. This further creates deposits for the bank XYZ. With the cash
reserve of Rs.1000, the credit creation is worth Rs.10,000. So, the credit
multiplier is given by:
Credit multiplier = 1/10% =10

The money supply in the economy will increase by the amount (times) of credit
multiplier.
NUMERICAL EXAMPLE;
1. We will make some assumption;
(i) All banks are one unit.
(ii) All the transactions are made through banks.
2. Initial deposits are Rs.10,000 and the legal reserve requirement proposed by
the central bank is 10%.
Then,
Credit creation = Initial deposits × LRR/1
= 10,000/0.1
= Rs.1,00,000
As we know that, Money multiplier= 1/LRR, so
Money multiplier =1/0.1
which is MM=10 Times
So, the money multiplier is 10 times the initial deposits.
12. Explain money multiplier or credit creation.

Ans. The money multiplier is a phenomenon of creating money in the economy in
the form of credit creation. The money is created in the market based on the
fractional reserve banking system. It is also sometimes called monetary
multiplier or credit multiplier.
Formula of Money Multiplier
Mathematically, the concept of money multiplier can be represented with the
help of a formula which is a follows:
Money Multiplier = 1/LRR or 1/r
Aggregate demand and aggregate supply (12 Marks)
13. Explain components of aggregate demand and supply.

Ans. Aggregate Demand
Aggregate demand is a measurement of the total amount of demand for all
finished goods and services produced in an economy. Aggregate demand is
commonly expressed as the total amount of money exchanged for those goods
and services at a specific price level and point in time.
Components of Aggregate Demand
The Aggregate Demand of an economy is typically a sum of four components;
viz., Government Expenditure (G), Consumption Expenditure (C), Investment
Expenditure (I), and Net Export (X – M).
Aggregate Supply
In physical terms, aggregate supply refers to the total production of goods and
services in an economy. It is assumed that in short run, prices of goods do not
change and elasticity of supply is infinite.
Components of Aggregate Supply
Main components of aggregate supply are two, namely, consumption and saving.
A major portion of income is spent on consumption of goods and services and
the balance is saved. Thus, national income (Y) or aggregate supply (AS) is sum
of consumption expenditure (C) and savings (S).
14. Explain relationship between MPC MPS and K.

Ans. Relationship of K with MPC and MPS:
Since multiplier indicates the effects of change in investment (∆I) on change

in income (∆Y), therefore, K = ∆Y/∆I = ∆Y/∆Y/∆C. By dividing by ∆Y
Symbolically:
K = 1/1-MPC = 1/MPS
(i) There is direct relationship between K and MFC. If MPC is high, K will
also be high but if MPC is low, K will also be small.
(ii) There is inverse relationship between K and MPS. If MPS is high, K will
be low but if MPS is low, K will be high.
15. Explain derivation of saving and consumption curves.
Ans. In the diagram Cˉ+bY is the consumption curve.
The 45o line is the aggregate supply curve.
At point A, consumption = income i.e (Y=C)
Cˉ represents the autonomous consumption i.e consumption at zero level of
income.
Steps for derivation of supply curve from consumption curve as follows.
(i) Corresponding to Cˉ in the consumption function we have -Cˉ in the saving
function. That is, there are negative savings equal to autonomous consumption
at Y=0. This is represented by Son the negative axis in the lower panel.
(ii) At point B(Y=Cˉ). This implies that all the income is spent on consumption
expenditure. Thus, savings equal to zero. This is shown as S=0 in lower panel.
This point is also known as the Break-even point.
(iii) Beyond the break-even point, by connecting points S and Y we derive the
straight upward sloping saving curve.
(iv) SS is the required saving curve.
16. Explain working of investment multiplier with numerical example.

Ans. Investment multiplier refers to the number of time by which the increase in
output or income exceeds the increase in investment. It is measured as the
ratio between change in income and change in investment. For example
investment is increased by 1,000 crore rupees, now
Increase in Change in Change in
Particulars Income Consumption Saving
(Rs. Crores) (Rs. Crores) (Rs.
Crores)
Fist Round 1000 800 200
Second Round 800 640 160
Third Round 640 512 128
All other Rounds 2,560 2,048 512
Total 5,000 4,000 1,000
(a) In the multiplier process, increase in income in the first round is always equal
to additional investment. So, Increase in income in the first
round =Rs.1,000=Rs.1,000 crores.
(b) The saving off Rs. 200 crores indicates that increase in consumption will be Rs.
800 crores in the first round.
- additonal consumption of Rs. 800 crores out of an additional income of Rs.
1,000 indicates that 80% of income is spent, Le. MPC = 0.8. The values of
second and third round are calculated on the basis of this data.
(c) Total Increase in Income = Additional Investment x kxk. In the given case:
Multiplier (k)=11−MPC=11−0.8=5(k)=11−MPC=11−0.8=5
So, Total Increase in
Income =1,000×5=Rs.5,000 crores=1,000×5=Rs.5,000crores
(d) Total Increase in Consumption == Total increase in
Income ×× MPC =5,000 x 0.8=Rs.4,000 crores=5,000x0.8=Rs.4,000crores.
(e) Total Increase in Saving == Total Increase in Income −− Total Increase in
Consumption =5,000−4,000=1,000 crores=5,000−4,000=1,000crores.
(f) Values of All other Rounds' is calculated after subtracting the values of first,
second and third round from the total increase in income, consumption and
saving respectively.
17. How equilibrium of income is attend through saving and investment approach.
Ans. According to this approach of equilibrium, the equilibrium is reached only
when Investment(I) equals Savings(S) because at this level there is no
tendency for income and output to change.
In the diagram the equilibrium is at E where savings intersects investment
curve At this point, I=S.
When S is more than I , then the planned inventory would fall below the
desired level. To bring back the Inventory at the desired level, the producers
expand the output More output means more income. Rise in output means rise
in I and rise in income means rise in S. Both continue to rise till they reach E,
S=I.
When S is less than I, then the planned inventory rises above the desired level.
To clear the unwanted increase in inventory, firms plan to reduce the output
till S becomes equal to I.
So, equilibrium takes place only at point E, when S=I.
18. What is mean by inflationary gap and deflationary gap. Explain measures to
correct it.
Ans. Excess demand or inflationary gap is the excess of aggregate demand over and
above its level required to maintain full employment equilibrium in the
economy.
Deficient demand or deflationary gap refers to the situation when aggregate
demand is short of aggregate supply corresponding.
One measure of correcting inflationary and deflationary gaps is:
1) Margin requirement refers to the difference between the current value of
security offered for loan and the value of loan granted. During deficient
demand or deflation, the central bank decreases the margin in order to
increase the credit creation capacity of the commercial bank and as a result,
the money supply in an economy gets increased and the deficient demand or
deflationary gap is combated. Whereas, during inflationary gap the margin
requirement is increased by the central bank.
2) Increase in taxes: Government levies new taxes and enhances the rate of
prevailing ones.
3) Surplus budget policy: Government's expenditure should remain less than
its income.
19. How is the equilibrium level of income attained through AD and AS approach?
Ans. According AD and AS approach, the equilibrium is reached only when
aggregate demand (AD) equals aggregate supply (AS) because at this level
there is no tendency for income and output to change.
The equilibrium is where AD intersects 45 line. At this point, AD = AS.
When AD is more than AS , then the planned inventory would fall below the
desired level. To bring back the Inventory at the desired level, the producers
expand the output More output means more income. Rise in output means rise
in AS and rise in income means rise in AD. Both continue to rise till AD = AS.
When AD is less than AS, then the planned inventory rises above the desired
level. To clear the unwanted increase in inventory, firms plan to reduce the
output till AD becomes equal to AS.
So, equilibrium takes place only at point , where AD = AS.
20. How to control access demand and deficit demand?

Ans. These problems can be solved by bringing a change in the level of aggregate
demand in the economy. There are number of measures to control excess and
deficient demand.
Two main measures:
1. Change in Government Spending:
Government spending is an important component of aggregate demand. This
measure is a part of Fiscal Policy and is termed as ‘Expenditure Policy’ of the
Government. Government spends huge amount on public works like
construction of roads, flyovers, buildings, railway lines, etc. Changes in such
expenditure directly affect the level of AD in the economy and help to control
the situations of excess and deficient demand. For other measures of Fiscal
Policy, please refer Power Booster.
2. Change in Availability of Credit:
The Reserve Bank of India (RBI) is empowered to regulate the availability of
credit and money supply in the economy through its ‘Monetary Policy’. It is
policy of central bank to control money supply and credit creation in the
economy.
Monetary policy helps to control the situations of excess and deficient demand
through its following instruments:
(i) Quantitative Instruments:
These instruments aim to influence the total volume of credit in circulation.
Major instruments or measures are:
(a) Bank Rate,
(b) Open Market Operation, and
(c) Legal reserve requirements.
(ii) Qualitative Instruments:
These instruments aim to regulate the direction of credit.
Major qualitative instruments or measures are:
(a) Margin requirements,
(b) Moral suasion, and
21. Write difference between voluntary unemployment and involuntary

unemployment.
Ans. Distinguish between voluntary unemployment and involuntary unemployment.
What is the significance of this distribution?
Voluntary employment
 Voluntary employment is the situation when a worker who is able to
work is unemployed due to his own unwillingness.
 A person remains unemployment despite jobs being available.
Involuntary unemployment
 Involuntary unemployment is a situation where a person who is able and

willing to work is unable to get any work at the existing wage rate.
 The person is unemployed due to market conditions.
 The unemployment level in an economy is reflected by the degree of
unemployment.
 According to Keynes, it is due to the insufficiency of effective demand
which can be solved by increasing the aggregate demand by government
intervention.
Government budget (6 marks)
22. Write objectives of government budget.

Ans. Objectives of Government Budget
 Reallocation of resources – It helps to distribute resources, keeping in view
the social and economic advantages of the country. The factors that influence
the allocation of resources are:
 Allowance or Tax concessions – The government gives allowance and tax
concessions to manufacturers to encourage investment.
 Direct production of goods and services – The government can take the
production process directly if the private sector does not show interest.
 Minimise inequalities in income and wealth – In an economic system,
income and wealth inequality is an integral part. So, the government aims to
bring equality by imposing a tax on the elite class and spending extra on the
well-being of the poor.
 Economic stability – The budget is also utilised to avoid business fluctuations
to accomplish the aim of financial stability. Policies such as deficit budget
during deflation and excess budget during inflation assist in balancing the
prices in the economy.
 Manage public enterprises – Many public sector industries are built for the
social welfare of people. The budget is planned to deliver different provisions
for operating such business and imparting financial help.
 Economic growth – A country’s economic growth is based on the rate of
investments and savings. Therefore, the budgetary plan focuses on preparing
adequate resources for investing in the public sector and raising the overall
rate of investments and savings.
 Decrease regional differences – It aims to diminish regional inequalities by
implementing taxation and expenditure policy and promoting the installation
of production units in underdeveloped regions.
23. What is budgetary deficits? Explain implications of budgetary deficits.
Ans. A budgetary deficit is referred to as the situation in which the spending is
more than the income. Although it is mostly used for governments, this can
also be broadly applied to individuals and businesses.
In other words, a budgetary deficit is said to have taken place when the
individual, government, or business budgets have more spending than the
income that they can generate as revenue.
Types of Budget Deficits
There are three types of budget deficit. They are explained follows:
1. Fiscal deficit
2. Revenue deficit
3. Primary deficit
Fiscal Deficit
Fiscal deficit is defined as the excess of total expenditures over the total
receipts, excluding the borrowings in a year. In other words, this can be
defined as the amount that the government needs to borrow in order to meet
all expenses.
The formula for calculating fiscal deficit is as follows:
Fiscal deficit = Total expenditures – Total receipts excluding
borrowings
Impact of Fiscal Deficit
The following impacts of fiscal deficit should be kept in mind.
1. Unnecessary expenditure: A high fiscal deficit leads to unnecessary
expenditure done by the government that leads to potential inflationary
pressure on the economy.
2. Printing more currency by RBI for meeting the deficit, also known as
deficit financing, leads to the availability of more money in the market,
leading to inflation.
3. Borrowing more will hinder the future growth of the economy, as
most of the revenue will be utilised towards meeting debt payments.
Revenue Deficit
Revenue expenditure is defined as the excess of total revenue expenditure
over the total revenue receipts. In other words, the shortfall of revenue
receipts as compared to that of the revenue expenditure is known
as revenue deficit.
The formula for revenue deficit can be expressed as follows:
Revenue deficit = Total revenue expenditure – Total revenue receipts
Impact of Revenue Deficit
Revenue deficit has the following impacts on the economy.
1. Reduction in assets: For meeting the shortfall in the form of revenue
deficit, the government has to sell some assets.
2. It leads to the conditions of inflation in the economy.
3. A large amount of borrowing leads to a greater debt burden on the
economy.
Primary Deficit
Primary deficit is said to be the fiscal deficit of the current year subtracted by
the interest payments that are pending on previous borrowings. In other words,
the primary deficit is the requirement of borrowing without the interest
payment.
Primary deficit, therefore, shows the expenses that government borrowings are
going to fulfil while not paying for the income interest payment.
A zero deficit shows that there is a requirement for availing credit or borrowing
for clearing the interest payments pending.
The formula for the primary deficit is expressed as follows:
Primary deficit = Fiscal deficit – Interest payments

(a) Revenue and capital expenditure
(b) Revenue and capital receipts
(c) Revenue deficit and capital deficit
(d) Direct tax and indirect taxes
Ans. (a) Difference between Revenue and capital expenditure
Capital Expenditure Revenue Expenditure
Definition
Expenditure incurred for acquiring Expense incurred for maintaining

assets, to enhance the capacity of an the day to day activities of a
existing asset that results in business
increasing its lifespan
Tenure
Long Term Short term
Value Addition
Enhances the value of an existing Does not enhance the value of an

asset existing asset
(b) Differences between Capital Receipts and Revenue Receipts

Basis Capital Receipts Revenue Receipts
It is the income generated from It is the income generated

Meaning investing and financing from the business’s operating
activities. activities.
Nature Non-Recurring Recurring
Shown on the credit of profit

Shown on the liabilities side of
Shown and loss account or trading
the balance sheet.
account.
(c) Differences between fiscal deficit and Revenue deficit
Basis Fiscal Deficit Revenue Deficit
It is the excess of total

expenditure over total It is the excess of revenue
receipts/income, excluding expenditure over revenue
Meaning borrowings, in a fiscal year. income in a financial year.
Revenue Deficit indicates

Fiscal Deficit measures the government’s inability to
government’s total borrowing meet its recurring and
Indicator requirements. regular expenditures.
Fiscal Deficit shows the extent Revenue Deficit shows the

of government’s borrowing borrowing needs of the
when the interest on payment is government to manage its
Borrowing accounted for. budgetary expenditure.
(d) Differences between Direct Tax and Indirect Tax
Context Direct Tax Indirect Tax
Paid directly to the Paid to the government via

Meaning government intermediary
Levied
on Profits and income Goods and services
Individuals, HUFs and End-consumers of products, goods

Taxpayer businesses and services.
Directly depends on income

Tax Rate and profits Same for everyone
Balance of payments and foreign exchange rate (6 marks)
25. Write types of foreign exchange rates. How to exchange rate determine in
flexible exchange rates system.
Ans. Types of Foreign Exchange Rates
The three types of exchange rates are:
1. Fixed Exchange Rate
2. Flexible Exchange Rate System
3. Managed Floating Exchange Rate
Under this system, the exchange rate for the currency is fixed by the forces of
demand and supply of different currencies in the foreign exchange market. This
system is also called the Floating Rate of Exchange or Free Exchange Rate. It is
so because it is determined by the free play of supply and demand forces in the
international money market.
Exchange rate determine in flexible exchange rates system:
Under the Flexible Exchange Rate system, there is no intervention by the
government.
It is called flexible because the rate changes with the change in the market
forces.
The exchange rate is determined through interactions of banks, firms, and other
institutions that want to buy and sell foreign exchange in the foreign exchange
market.
The rate at which the demand for foreign currency is equal to its supply is called
the Par Rate of Exchange, Normal Rate, or Equilibrium Rate of Foreign Exchange.
26. Give three impacts of demand and supply on foreign exchange rate.
Ans. Impacts of demand and supply on foreign exchange rate:
Impacts of demand:
Exchange rate of foreign currency is inversely related to the demand. When
price of a foreign currency rises, it results into costlier imports for the country.
As imports become costlier, the demand for foreign products also reduce. This
leads to reduction in demand for that foreign currency and vice-versa.
Impacts of supply:
The supply of foreign currency is directly proportional to the price of foreign
exchange. When the price of a foreign currency falls, it leads to cheaper imports
and costlier exports as it leads to appreciation of domestic currency. The
exporters are discouraged due to costlier exports. This results lesser inflow or
supply of foreign currency in the economy. As a result supply of foreign
exchange decreases from OQ2 to OQ1
27. Explain managed floating rate.

Ans. Managed Floating Exchange Rate
It is the combination of the fixed rate system (the managed part) and the
flexible rate system (the floating part), thus, it is also called a Hybrid System. It
refers to the system in which the foreign exchange rate is determined by the
market forces and the central bank stabilizes the exchange rate in case of
appreciation or depreciation of the domestic currency.
Under this system, the central bank acts as a bulk buyer or seller of foreign
exchange to control the fluctuation in the exchange rate. The central bank sells
foreign exchange when the exchange rate is high to bring it down and vice versa.
It is done for the protection of the interest of importers and exporters.
For this purpose, the central bank maintains the reserves of foreign exchange so
that the exchange rate stays within a targeted value.
If a country manipulates the exchange rate by not following the rules and
regulations, then it is known as Dirty Floating.
However, the central bank follows the necessary rules and regulations to
influence the exchange rate.
28. Write any two merits and demerits of fixed and flexible exchange rate.
Ans. Advantages and disadvantages of fixed exchange rates
Advantages of fixed exchange rates
 Certainty - with a fixed exchange rate, firms will always know the
exchange rate and this makes trade and investment less risky.
 Absence of speculation - with a fixed exchange rate, there will be no
speculation if people believe that the rate will stay fixed with no
revaluation or devaluation.
 Constraint on government policy - if the exchange rate is fixed, then the
government may be unable to pursue extreme or irresponsible macro-
economic policies as these would cause a run on the foreign exchange
reserves and this would be unsustainable in the medium-term.
Disadvantages of fixed exchange rates
 The economy may be unable to respond to shocks - a fixed exchange rate
means that there may be no mechanism for the government to respond
rapidly to balance of payments crises.
 Problems with reserves - fixed exchange rate systems require large
foreign exchange reserves and there can be international liquidity
problems as a result.
 Speculation - if foreign exchange markets believe that there may be a
revaluation or devaluation, then there may be a run of speculation.
Fighting this may cost the government significantly in terms of their
foreign exchange reserves.
 Deflation - if countries with balance of payments deficits deflate their
economies to try to correct the deficits, this will reduce the surpluses of
other countries as well as deflating their own economies to restore their
surpluses. This may give the system a deflationary bias.
Advantages and disadvantages of floating exchange rates

Advantages of floating exchange rates
 Protection from external shocks - if the exchange rate is free to float,
then it can change in response to external shocks like oil price rises. This
should reduce the negative impact of any external shocks.
 Lack of policy constraints - the government are free with a floating
exchange rate system to pursue the policies they feel are appropriate for
the domestic economy without worrying about them conflicting with
their external policy.
 Correction of balance of payments deficits - a floating exchange rate
can depreciate to compensate for a balance of payments deficit. This will
help restore the competitiveness of exports. There is a link to Figure 1
below which illustrates the operation of the automatic adjustment
mechanism under a floating exchange rate system.
Disadvantages of floating exchange rates
 Instability - floating exchange rates can be prone to large fluctuations in
value and this can cause uncertainty for firms. Investment and trade may
be adversely affected.
 No constraints on domestic policy - governments may be free to pursue
inappropriate domestic policies (e.g. excessively expansionary policies) as
the exchange rate will not act as a constraint.
 Speculation - the existence of speculation can lead to exchange rate
changes that are unrelated to the underlying pattern of trade. This will
also cause instability and uncertainty for firms and consumers.
29. Explain components of current account and capital account in Balance of

payments.
Ans. There are three components to the current account –
Current Account
Trade balance The value of goods and services that Australian residents
export less those that they import.
Primary The income that Australian residents earn from, less that they
income pay to, the rest of the world from working (e.g. wages) and
balance from financial investments (e.g. dividends)
Secondary Consists of two parts:
Current Account
income  The income that Australian residents earn from, less that
balance they pay to, the rest of the world from the government (e.g. tax
payments and refunds).
 Current transfers: transactions between Australian
residents and the rest of the world where one party provides
something to be consumed by another party without receiving
anything in return (e.g. emergency food aid).
There are two components to the capital account –
Capital Account
Capital transfers Transactions where one party has transferred

ownership of something to another party without
receiving anything specific in return. For example:
forgiveness of debt (so that the borrower no longer
has to pay back what they borrowed)
conditional grants for capital projects (e.g. foreign aid
to build roads, dams and schools)
transfer of assets between residents and non-
residents.
Acquisition/disposal Transactions that involve intangible assets (e.g.

of non-produced, non- brand names, copyrights and trademarks) and rights
financial assets to use land or water (e.g. for mining or fishing).

(a) Autonomous and accommodating transactions of balance of payment
(b) Devaluation and Depreciation of domestic currency
(c) Balance of trade and balance of payment
(d) Current account and Capital account
Ans. (a) Difference between autonomous and accommodating transactions of
balance of payment
Autonomous transaction Accommodating transaction
Autonomous transaction refer Accommodating transaction for
to those international economic to those international economic
transactions that ate undertaken with transactions that are to correct the
the disequilibrium in the autonomous
the sole motive of earning profit. item.
They are also called 'above the line They are also called' below the
items' in BOP line items in BOP.
They depend on the BOP status of a
country, as they are compensating
They are independent of the BOP status short-term capital transactions that are
of a country. undertaken to correct the
disequilibrium in the autonomous
items.
(b) Differentiate between devaluation and depreciation.
Devaluation Depreciation
Devaluation refers to the fall in the value Depreciation is the fall in the value of
of domestic currency in relation to a domestic currency in relation to a foreign
foreign currency as planned by the currency, it is the free play of the forces
government. of demand and supply of foreign
In devaluation it is government which exchange in foreign exchange market the
reduces the value of domestic currency government has no role in it.
in terms of the foreign currency.
Devaluation is a desired fall in the value Depreciation may cause undesired fall.
of a rupee.
The objective of devaluation is to Depreciation may result in current
promote export and to curb import. account deficit and fiscal deficit.
(c) Difference between Balance of trade and balance of payment
Balance of trade Balance of payments
Definition
Balance of trade or BoT is a financial Balance of payment or BoP is a
statement that captures the nation’s financial statement that keeps track of
import and export of commodities all the economic transactions by the
with the rest of the world. nation with the rest of the world.
What does it deal with?
It deals with the net profit or loss that It deals with the proper accounting of
a country incurs from the import and the transactions conducted by the
export of goods. nation.
Fundamental Difference
Balance of trade (BoT) is the Balance of payments (BoP) is the

difference that is obtained from the difference between the inflow and
export and import of goods. outflow of foreign exchange.
Type of transactions included
Transactions related to goods are Transactions related to transfers,

included in BoT. goods, and services are included in
BoP.
(d) Difference between Current Account and Capital Account
Current Account Capital Account
Definition
The current account mainly focuses The capital account mainly focuses
on recording the export and import on recording the trading of foreign
of merchandise along with any assets and liabilities during a year by
unilateral transfers that are a country.
completed within the year by a
country.
Implication
The current account reflects the total The capital account reflects the net
net income of a country within a change in the ownership of national
year. assets of a country within a year.
Transaction
The current account mainly focuses The capital account mainly focuses
on the receipts and disbursements on the sources and utilisation of
related to the cash and non-capital capital.
items.
Components
The main components within a The main components within a

current account are as follows: capital account are as follows:
 Export and import of goods and  Foreign direct investment
services  Portfolio investment
 Investment income and  Loans by the government of one
 Current transfers country to another
Indian economic development (Total 40 Marks)
Indian economy (12 marks)
Indian economy on eve of Independence
31. What are the main reasons for stagnation in agriculture sector during Colonial
rule.
Ans. Under the colonial rule, India was basically an agrarian economy, employing
nearly 85% of its population. Nevertheless, the growth of the agriculture sector
was meager. The following are the causes explaining stagnancy in Indian
agriculture sector during the colonial rule:
1. Introduction of Land Revenue System
This was due to prevalence of various systems of Land Settlement,
particularly Zamindari system. This system was introduced by Lord
Cornwallis in Bengal in 1793. Under this system, the zamindars(owners of
land) were required to pay very high revenue (lagaan) to the British
government, which they used to collect from the peasants (landless labourers,
who were actually cultivating). The zamindars were mainly concerned with
extracting high revenues from the peasants but never took any steps to
improve the productivity of the land. This resulted in low agricultural
productivity and worsened the peasants economically.
2. Forceful Commercialisation
Initially before the British rule, the farmers were practicing conventional
subsistence farming. They used to grow crops like rice and wheat for their
own consumption. But afterwards, in order to feed British industries with
cheap raw materials, the Indian farmers were forced to grow commercial
crops (like indigo required by British industries to dye textiles) instead of
food crops (like rice and wheat). This led to the commercialisation of Indian
agriculture. This commercialisation of Indian agriculture not only increased
the burden of high revenues on the poor farmers but also led India to face
shortage of food grains, resources, technology and investment. Therefore,
Indian agriculture remained backward and primitive.
3. Lack of Irrigation Facilities and Resources
Besides the above factors, Indian agricultural sector also faced lack of
irrigation facilities, insignificant use of fertilisers, lack of investment, frequent
famines and other natural calamities, etc. that further exaggerated the
agricultural performance and made it more vulnerable.
32. Why decline of handicraft industry affected the Indian economy? comment.
Ans. Decline of handicraft industry affected the Indian economy:
 Agriculture was commercialized during the British period to Cater to the needs of
the British industries for raw materials.
 Some of the important raw materials that were supplied from India were cotton,
jute, groundnut, and sugarcane.
 The farmers were paid high for the production of the cash crops but this did not
improve the economic condition of the farmers.
 It was because they had to produce more cash crops than the food crops.
 These cash crops ultimately were used by the British industries.
 Most of the population in India during the British period was dominated by the
occupation of agriculture.
 Still there were some Indian industries that produced certain special products and
enjoyed the worldwide reputation.
 India was then very renowned for its handicraft industries.
 under the British rule like agriculture India could not develop a good industrial
base.
 The country faced a poor state of the industrial sector during the Colonial rule.
 The Indian handicraft Industries was systematically destroyed by the British
government.
 they did not allow the modern industrial base to come up.
 The motive behind the decline of the handicraft industry in India was to get the
raw materials from India at cheap rates that were used by the modern industries in
Britain.
 The finished products from Britain industries were then sold in the Indian market
at Higher prices.
33. Explain features of agriculture sector, foreign trade and industrial sector during
British rule.
Ans.
Features of Indian Agriculture on the Eve of Independence
 Fragmented Land Ownership
 Outdated Technology
 Low Productivity
 Feud Amongst Landowners and Cultivators
Features of Indian Agriculture on the of industries during the British rule:
 Inadequate capital accumulation;
 Mobilisation of unproductive investment;
 Undue preference for quick-return yielding commerce and trading activities of
the Indian capitalist classes; and
 Concentration of entrepreneurship in the hands of a few small sections of
Indians.
The main features of international trade during the British rule are as follows:
 Exporter of Primary Products and Importer of Finished Goods
 Britain's Monopoly controls
 Surplus Trade but only to Benefit Britishers
34. Explain demographic profile during British rule.

Ans. India’s Demographic Profile
A demographic condition during the British rule exhibited the following
features of stagnant and backward Indian economy:
Low literacy ● The overall literacy level was less than 16% which
rate increased to 74.04% in 2011.
● Out of this, the female literacy level was negligible, about
7%.
Low ● At the time of independence, the people used to spend 80%

standard of to 90% of their income on basic necessities, i.e., food, clothes,
living and shelter.
● This was not adequate for the satisfaction of their needs.
● Some parts of India were severely affected by severe
famines and millions died.
● The worst famine in India was the Bengal famine of 1943
when three million people died.
High birth ● Birth rate: It refers to the number of children being born
and death per thousand in a year.
rate ● Death rate: It refers to the number of people dying per
thousand in a year.
● Both birth rate and death rate were very high.
Poor health ● There was a lack of public health facilities for the majority
facilities of the population.
● As a result, there were widespread water and air-borne
diseases.
High infant ● It refers to the number of infants dying before reaching the
mortality age of one year per 1,000 live births.
rate ● Lack of adequate public health facilities, the occurrence of
frequent natural calamities, and famine resulted in
widespread poverty and high infant mortality rate.
● It was quite alarming, about 218 per thousand.
Low life ● It refers to the average life of a person.

expectancy ● It was very low for around 32 years.
Indian economy (1950-90)
35. Explain import substitution under industrial reform.

Ans. Import substitution is a strategy under trade policy that abolishes the import of
foreign products and encourages production in the domestic market. The
purpose of this policy is to change the economic structure of the country by
replacing foreign goods with domestic goods.
Post-independence India adopted the policy of import substitution by
imposing heavy tariffs on import duty. The industrial policy that the country
endorsed was linked to the trade policy. In the first seven Five-Year plans,
trade in India was distinguished by the inward-looking trade strategy. This
strategy is known as import substitution, which aims to boost domestic
production and shield domestic products from international competition.
36. Explain progress made in international trade after independence.

Ans. Following points show the progress of India's foreign trade:
(i) Volume of foreign trade: India's foreign trade witnessed tremendous increase
during the planning period.
(ii) Composition of foreign trade: The following points bring about the changes in
the composition of foreign trade:
(a) The share of agricultural sector has fallen.
(b) Share of conventional items of India's exports such as jute, tea, foodgrains
and minerals has fallen.
(c) The percentage share of manufactured goods in the volume of trade
increased due to the growth in the industrial sector.
(iii) Direction of Foreign Trade: Presently, our major trading partners are UAE,
China, Switzerland, Singapore, Australia, Iran, Hong Kong, Korea, Indonesia, UK,
Japan, and Belgium. This is in sharp contrast to the scenario at the time of
independence, when our international trade was confined largely to the UK,
USA and Commonwealth countries.
Liberalization, privatization and Globalization

37. Explain reforms under liberalization
Ans. Reforms under Liberalisation
 Deregulation of the Industrial Sector
 Financial Sector Reforms
 Tax Reforms
 Foreign Exchange Reforms
 Trade and Investment Policy Reforms
 External Sector Reforms
 Foreign Exchange Reforms
 Foreign Trade Policy Reforms
38. Write good and bad impacts of LPG.

Ans. The positive and negative effects of LPG are:
Positive effects:
1. The rate of GDP increased.
2. Industrial production was encouraged
3. Helped in curbing the fiscal deficit
4. Inflation rates reduced
Negative effects:
1. Agricultural sector was ignored
2. The growth process was uneven
3. The economic disparity between rich and poor increased
Current challenges facing Indian economy (20 marks)
Rural development
39. Why is agriculture diversification required? Write types of agriculture

diversification.
Ans. Agricultural diversification is one of the essential components of economic
growth. It is the stage where traditional agriculture is transformed into a
dynamic and commercial sector by shifting the traditional agricultural product
mix to high standard products, which has a high potential in stimulating
production rate. Here, agricultural diversification is supported by a change in
technology or consumer demand, trade or government policy, and by
transportation, irrigation, and other developments of infrastructure.
Two aspects of Diversification
 The change in the cropping pattern
 The transformation of the manpower from agricultural work to other
associated activities like poultry, livestock, fisheries, etc., and also of the non-
agriculture sector
For rural people, diversification, or focusing on associate activity, is important
because it gives them an opportunity to earn extra income and overcome poverty.
Types of Diversification
40. What are the institutional and non institutional source of rural credit
Ans. INSTITUTIONAL SOURCES
(i) Co-operative Credit Societies: The cheapest and the best source of rural
credit in India is definitely the co-operative finance. In India the active
primary agricultural credit societies (PACS) cover nearly 86 per cent of
the Indian villages and account for nearly 36 per cent of the total rural
population of the country.
(ii) Government: Another important source of agricultural credit is the
Government of our country
(iii) Land Development Banks: Land development banks are advancing long
term co-operative credit for 15-20 years to the farmers against the
mortgage of their lands for its permanent improvement, purchasing
agricultural implements and for repaying old debts
(iv) Commercial Banks: In the initial period, the commercial banks of our
country have played a marginal role in advancing rural credit. In 1950-51,
only 1 per cent of the agricultural credit was advanced by the commercial
banks.
NON-INSTITUTIONAL SOURCES
(i) Money Lenders: These moneylenders were supplying a major portion of
agricultural credit (69.7 per cent in 1951-52) and indulged into malpractice like
manipulation of accounts and charged exorbitant rate of interest on their loan
often 24 per cent and over. Due to all these factors the share of moneylenders in
total farm credit has declined sharply from 69.7 per cent in 1951-52 to 36.1 per
cent in 1971 and then to only 16.1 per cent in 1981 and then to 7.0 per cent in
1995-96.
(ii) Traders and Commission agents: Traders and commission agents are also
advancing loan to the agriculturist for productive purposes before the maturity
of crops and then force the farmers to sell their crops at very low prices and
charge heavy commission. This type of loans is mostly advanced for cash crops
(iii) Relatives: Cultivators are also normally borrowing fund from their own
relatives in times of their crisis both in terms of cash or kind. These loans are a
kind of informal loans and carry no interest and are normally returned after
harvest.The importance of this source of farm credit is also declining as its
share of agricultural credit has already declined from 14.2 per cent in 1951-52
to 8.7 per cent in 1981 and then to 3.0 per cent in 1995-96.
(iv) Landlords: In India, small as well as marginal farmers and tenants are also
taking loan from the landlords for meeting their financial requirements. This
source has been following all the ill-practices followed by money-lenders,
traders etc.
41. What measures taken by the government of India to improve agriculture
marketing?
Ans. Measures taken by government to improve agriculture marketing-
 The initial step was to regulate the market and plan a clean, transparent
and simple marketing strategy. This regulation helped both the farmers
and the consumer. But it still needs to realize the full potential of rural
markets.
 The second measure was the procurement process like transportation
facilities, warehouse, cold storage, godowns, and the processing unit.
However, the current infrastructure is inadequate to adhere to the
growing demand and therefore needs to be improved.
 The third aspect is to decide on the fair price for the product. In the past,
it has been a set back due to the unequal coverage of farmer members and
the absence of a suitable link between marketing, processing cooperatives,
and inefficient financial management. Example of a successful cooperative
is the Gujarat milk cooperative which transformed the social and
economic landscape of Gujarat.
 The last one is policies such as.
1. Guarantee of Minimum Support Prices (MSP) for agricultural
products
2. Storage of surplus stocks of wheat and rice by Food Corporation of
India (FCI)
3. Distribution of food staples and sugar through PDS
All these measures were penned down to guard the income of the farmers
and procuring agriculture products in the subsidized rate to the
underprivileged. However, in spite of government interference in agriculture
marketing, private traders still dominate the agricultural markets.
42. Explain:
(a) NABARD
(b) Self-help groups
(c) Horticulture
(d)Organic farming
Ans. (a) NABARD- NABARD was set up in 1982 as an apex body to coordinate the
activities of all institutions involved in rural credit.
The main functions of NABARD are
(i) To grant long-term loans to the State Government for subscribing to the
share capital of cooperative societies.
(ii) To take the responsibility of inspecting cooperative banks, Regional Rural
Banks (RRBs) and primary cooperative societies.
(iii) To promote research in agriculture and rural development.
(iv) To serve as a refinancing agency for the institutions providing finance to
rural and agricultural development.
(v) To help tenant farmers and small farmers to consolidate their
landholdings.
(b) Self- help groups- Self-help Groups (SHGs) are informal associations of
people who come together to find ways to improve their living conditions. They
are generally self-governed and peer-controlled.
People of similar economic and social backgrounds associate generally with the
help of any NGO or government agency and try to resolve their issues, and
improve their living conditions.
(c) Horticulture- Horticulture an art of production, utilisation and

improvement of horticultural crops, such as fruits and vegetables, spices and
condiments, ornamental, plantation, medicinal and aromatic plants.
Horticulture plays a major role in the economy by generating employment,
providing raw material to various food processing industries, and higher farm
profitability due to higher production and export earnings from foreign
exchange.
(d) Organic farming- Organic farming can be defined as an agricultural process

that uses biological fertilisers and pest control acquired from animal or plant
waste. Organic farming was actually initiated as an answer to the environmental
sufferings caused by the use of chemical pesticides and synthetic fertilisers. In
other words, organic farming is a new system of farming or agriculture that
repairs, maintains, and improves the ecological balance.
43. Explain challenges in agriculture marketing.

Ans. Main Defects of Agricultural Marketing in India:
 Lack of Output Quality:
 Absence of Grading:
 Inadequate Storage and Warehousing Facilities:
 Lack of Adequate Transport Facilities:
 Lack of Information:
 A Long Chain of Intermediaries:
 Unethical Practices:
 Multiplicity of Charges:
44. Explain rural development is essential for Indian economic development. Do

you agree with above statement? support your answer with valid reason.
Ans. Yes, I agree with this statement. In India more than 70% of the population in
India is engaged in agriculture. Out of the whole population 1/3rd of the rural
population lives in poverty. Rural areas lack better sanitation facilities, better
education, electricity, easy and simple credit facilities etc.
Human capital formation

45. What are the sources of human capital formation.
Ans. The sources of Human capital formation are-
1. Expenditure on Education
2. Expenditure on Health
3. Migration
4. On-the-job Training
5. Expenditure on Information
46. Write difference between human capital and human development.

Ans. The following points of differences between human capital and human
development can be discussed
Basis of Human Capital Human Development
Difference
Concept Human capital is a Human development is a

comparatively narrow comparatively broader concept
concept
Central It considers that health and It considers that health and

theme education are the best education help in the overall
means to improve the development of the individual, as a
productivity of the labour healthy individual with proper
force education can take decisions that
will help them lead a happy and
healthy life
Welfare In case of human capital, Human development considers that

health and education are human welfare is increased by
not useful as long as they do having good health and proper
not result in improved education even if they do not result
productivity in any improvements in productivity
47. Explain any three major components of human capital formation.

Ans. Major components of human capital formation:
 Expenditure on Education
The most effective way of enhancing and enlarging the productive workforce
in the country is the expenditure done on strengthening the education
system. It is considered as the best source of human capital formation.
 Expenditure on Health
Another important source of human capital formation is Health. A worker
who is not well will certainly affect the productivity. Various forms of health
expenditures are, making available clean and safe drinking water, preventive
and curative medicines etc.
 Expenditure on Information
Information related to the labour market and other markets like education,
health can be attained by paying to acquire information. For example,
information regarding salaries is available for different markets.
48. Explain indicators of human development index.

Ans. The three indicators or factors that represent the different aspects of life
include the following:
 Longevity: The human’s longevity is measured by life expectancy at birth.
The life expectancy at birth means how many years a newly born person
is expected to survive in this world. This indicated the element of health
in the Human Development Index.
 Education: It is measured by the expected years of schooling life of a
child at the school entry age and the mean years of schooling of the adult
population.
 Mean years of schooling: It determines the average number of years of
total schooling adults (aged 25 years and above) have received.
 Expected Years of Schooling: It estimates the number of years of
schooling that a child of school entrance age can expect to get if the
present age- specific enrolment rates survive through the child's life by
country.
 Standard of Living: The standard of living of people is measured by
Gross National Income per capita adjusted for the price level of the
country.
49. Explain main problems of human capital formation in India.

Ans. The main problems of human capital formation in India are as follows:
(i) Rising Population: Rapidly rising population adversely affects the
quality of human capital in underdeveloped and developing countries like
India. It reduces per head availability of existing facilities like sanitation,
employment, drainage, water system, housing, hospitals, education, food
supply, nutrition, roads, electricity, etc.
(ii) Brain Drain: Migration of highly skilled labour to foreign countries is
termed as 'brain drain'. This slows down the process of human capital
formation in the domestic economy.
(iii) Inefficiencies in Planning: There is inefficient planning in less
developed countries where no efforts have been made either to raise the
standard of education at different stages or to maintain the demand and
supply of technical labour force. It is a reflection on the wastage of human
power and human skill.
(iv) Long-term Process: The process of human development is a long-term
policy because skill formation takes time. The process which produces
skilled manpower is slow. This also lowers our competitiveness in the
international market of human capital.
(v) High Poverty Levels: A large proportion of the population lives below
the poverty line and do not have access to basic health and educational
facilities. A large section of society cannot afford to get higher education
or expensive medical treatment for major diseases.
50. Explain importance and challenges of educational sector in India.
Ans. Importance of Education: -
1. Develops people’s values, aptitudes, knowledge and skills.
2. Greater participation of people in the process of economic growth and
development.
3. Increases level of understanding, efficiency and productivity of people.
4. Enables people to make better life choices.
5. Stimulates cultural and creative faculties.
Challenges in education:
(i) Low rural access level
(ii) Widening gulf between access level of rich and poor.
(iii)Bridging gender gap in enrolment and school retention.
(iv) Challenge of raising quality standards.
(v) Degree oriented education.
Employment growth and problems

51. Explain formal and informal sectors. write condition of worker in each sector.
Ans. Formal Sector- All public and private sector establishments which employ 10
or more hired workers comprise the formal sector. Government exercises
control over this sector by passing necessary acts and formulating rules and
regulations.
Workers working in this sector are entitled to social security benefits. The
workers working in informal sector have a right to form trade unions.
Formal sector offers better pay scales to its workers. Workers working in
formal enjoy job security. They cannot be dismissed without giving them a due
and/or compensation.
Informal Sector- All establishments which employ less than 10 workers

comprise the informal sector. Government has no control over this sector.
Except for the Minimum Wages Act, no other act is applicable on this sector.
The workers working in informal sector do not enjoy any such right.
The pay scales in the informal sector are comparatively low. Workers working
in this sector are not entitled to social security benefits. Workers working in
informal sector do not enjoy job security. They can be dismissed without a
notice and no compensation is offered to them.
52. Explain measures to remove problem of unemployment in India.
Ans. Following are the measures to solve the unemployment problem
(i) The government should try to control the population, so that the number
of new entrants to the workforce can be reduced.
(ii) The education system of India need to be reformed to address the
problem of unemployment. The emphasis in education should shift from
theory to practical.
(iii) Agricultural activities should be diversified into fisheries, cattle rearing,
horticulture, etc. to generate income and employment opportunities.
(iv) The government should take necessary steps to develop cottage and small
industries, both in the rural, as well as, urban areas. These industries are
labour intensive and employ more labour, per unit of capital.
53. Explain:
(a) Casualization and informalization of workforce.
(b) Labour supply and Labour force
Ans. (a) Casualization of workforce refers to a situation when the percentage of
casually-hired workers in total workforce tends to rise over time.
Informalisation of workforce is defined as situation where percentage of
workforce in the formal sector tends to decline and that in the informal sector
tends to rise.
(b) Labour supply refers to the amount of labour that are willing to offer
corresponding to a particular wage rate. It changes in response to change in
wage rate. On the other hand, labour force refers to the number of people who
are able to work and willing to work at the existing wage rate.
54. Explain types of Unemployment and its causes.
Ans. Types of Unemployment
 Rural Unemployment- Agriculture forms the mainstay of the rural

population. But not enough employment is available for all those living in the
rural areas. This leads to unemployment, which can take three forms open,
seasonal and disguised.
 Open Unemployment- This refers to the situation in rural areas where

people who are willing and actually able to work cannot find any work.
 Disguised Unemployment- This particularly plagues the Indian agrarian
scenario. In this case, more workers than required are engaged on the farm,
where not all of them are actually productively contributing to creating
output. Thus, the marginal physical productivity of many workers is zero. This
happens when almost the entire family engages in farm production.
 Seasonal Unemployment- The case with this is that workers remain out of
work for a particular season. For example, workers hired only for the harvest
season remain unemployed for the remaining part of the year. Or, if the
industry itself is seasonal, workers naturally remain unemployed during the
off-season.
Causes of unemployment-
1. Slow rate of economic growth.

2. High population growth rate
3. Over dependence on technology
4. Lack of adequate fund allocation.
Environment and sustainable development

56. Explain:
(a) Functions of pollution control board
(b) Ozone depletion
(c) Global warming
(d) Land degradation
(e) Biodiversity
Ans. (a) Functions of Pollution control board are as follows-
 Planning different programs in order to prevent and control water and air
pollution.
 Organizing various training programs for the people involved in activities
related to prevention, improvement and control of water and air pollution.
 Organisation of a wide spread mass awareness programme through mass
media on the prevention, control and abatement of water and air
pollution.
 Collection, compilation and publication of statistical and technical reports
related to water and air pollution. These records are used to develop
precautionary actions to control and reduce pollution.
 Preparation of manuals and guidelines related to treatment and disposal
of sewage and industrial effluents and also for stack gas cleaning devices.
(b) Ozone layer depletion is the thinning of the ozone layer present in the
upper atmosphere. This happens when the chlorine and bromine atoms in
the atmosphere come in contact with ozone and destroy the ozone
molecules. One chlorine can destroy 100,000 molecules of ozone. It is
destroyed more quickly than it is created. Chlorofluorocarbons or CFCs
are the main cause of ozone layer depletion. These are released by
solvents, spray aerosols, refrigerators, air-conditioners, etc. The
molecules of chlorofluorocarbons in the stratosphere are broken down by
ultraviolet radiations and release chlorine atoms. These atoms react with
ozone and destroy it.
(c) Global warming is the phenomenon of a gradual increase in the
temperature near the earth’s surface. This phenomenon has been
observed over the past one or two centuries. This change has disturbed
the climatic pattern of the earth. However, the concept of global warming
is quite controversial but the scientists have provided relevant data in
support of the fact that the temperature of the earth is rising constantly.
There are several causes of global warming, which have a negative effect
on humans, plants and animals. These causes may be natural or might be
the outcome of human activities. In order to curb the issues, it is very
important to understand the negative impacts of global warming.
(d) Land degradation is defined as the reduction or loss of the biological or
economic productivity and complexity of rainfed cropland, irrigated
cropland, or range, pasture, forest or woodlands resulting from natural
processes, land uses or other human activities. Land degradation is due to
the activities of human hands which loses all the fertility and quality
of soil. This is very dangerous to nature which causes further disasters.
Causes of land degradation
Listed below are few causes of land degradation
 Soil pollution
 Soil Erosion
 Overgrazing
 Extraction of minerals at a repeated stage
 Drought
(e) Biodiversity describes the richness and variety of life on earth. It is the
most complex and important feature of our planet. Without biodiversity,
life would not sustain. The term biodiversity was coined in 1985. It is
important in natural as well as artificial ecosystems. It deals with nature’s
variety, the biosphere. It refers to variabilities among plants, animals and
microorganism species.
Biodiversity includes the number of different organisms and their relative
frequencies in an ecosystem. It also reflects the organization of organisms
at different levels.
Biodiversity holds ecological and economic significance. It provides us
with nourishment, housing, fuel, clothing and several other resources. It
also extracts monetary benefits through tourism. Therefore, it is very
important to have a good knowledge of biodiversity for a sustainable
livelihood.
57. Write steps to be taken attending sustainable development.

Ans. Steps involved in attaining sustainable development in India are outlined below:
(i) Population Control - Limiting the human population to a level within the
carrying capacity of the environment is the first step to be followed for
attaining sustainable development as the population is exerting tremendous
pressure in terms of demand for resources which is more than the
absorptive capacity of the environment leading to an environmental crisis.
(ii) Efficient Utilisation of Resources - Technological progress and
industrialisation should be input efficient and wastage of resources should
be minimised by proper utilisation. This will help to produce more with
lesser amount of resources and thus depletion of resources will be slower.
(iii) Control of Over Extraction - Rate of extraction of renewable resources
should not be exceed the rate of regeneration so that they are extracted on a
sustainable basis.
(iv) Control of Depletion - Rate of depletion of non-renewable resources should
not exceed the rate of creation of renewable substitutes so that
environmental crisis does not emerge and resources are available for the
future generations.
(v) Pollution Control - Pollution in all forms has a negative environmental
impact which has a high opportunity cost. Hence, control of pollution is a
must to maintain the quality of natural resources such as air and water for
sustainable development.
(vi) Use of Non-Conventional Energy - India is hugely dependent on thermal and
hydropower plants to meet its power needs which have adverse
environmental impacts. Wind power and solar rays are cleaner and greener
energy sources which should be explored on a large scale by developing
technological devices along with non-conventional sources like nuclear
energy.
Comparative development strategies of India Pakistan and China (8 Marks)
58. Explain similarities and dissimilarities of development strategies of India

Pakistan and China.
Ans. India and Pakistan both have followed a similar developmental strategy. The
main similarities between the developmental strategies can be summed up as:
i. India and Pakistan both have started their developmental programmes
based on economic planning soon after their independence in 1947.
ii. Both the countries relied on the public sector for initiating the process of
growth and development.
iii. Both of them have followed the path of mixed economic structure
involving the participation of both the state as well as the private sector.
iv. Both of them introduced economic reforms at the same time to
strengthen their economies.
59. Explain "the great leap forward campaign"

Ans. GLF Campaign was initiated in 1958, which aimed at industrializing the country
on a massive scale.
1. People were encouraged to set up industries in their backyards.
2. Severe draught caused havoc in China killing about 30 million people.
3. When Russia had conflict with China, it withdrew its professionals who
had been earlier been sent to China to help in the industrialisation
process.
60. Compare demographic profile of India Pakistan and China.
Ans. Demographic profile of India Pakistan and China:
 Population- China (1303.7M) is the most populous country in the world
and India (1103.6M) is the second most populous country. Population of
Pakistan is very less (162.4M people). Growth Rate of Population: China's
growth rate of population is lowest (1%) as compared to India (1.7%) and
Pakistan (2.5%).
 Density of Population: Density of Population of China is the lowest (138
persons per sq km) as compared to India (358 persons per sq km) and
Pakistan (193 persons per sq km).
 Sex Ratio: Sex ratio is lowest in Pakistan with 922 females per 1000
males. In India and China, the corresponding figures are 933 and 937.
 Urbanisation: Organisation is high in both Pakistan (33.4%) and
China (36.1%). In India, only 28% of its people live in Urban Area.

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Rachna Mam Economics Imp Question Part-2

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60 MOST IMPORTANT EXAMINATION QUESTION

Macroeconomics (Total 40 Marks)

1. Write components of NFIA.

2. Explain circular flow of income in two sector economy.

3. Explain the limitation of GDP welfare.

4. Explain problem of double counting and how it should be solved.

5. Write items excluded in the estimation of national income.

Precautions that are taken while calculating national income by Income

Precautions that are taken while calculating national income by

7. Write difference between:

Value of all the goods and

Worth High Low

(c) Differences between stock and flow in the following lines.

Stock is defined as a variable that is Flow is defined as a variable which is

Stock is static in nature Flow is dynamic in nature

8. What is meant by money supply? Discuss M1.

9. Explain following functions of RBI:

2. Qualitative Methods of monetary policy includes those instruments which

Commercial banks plays an important role of 'money creator' in the

Credit multiplier = 1/10% =10

12. Explain money multiplier or credit creation.

13. Explain components of aggregate demand and supply.

14. Explain relationship between MPC MPS and K.

Since multiplier indicates the effects of change in investment (∆I) on change

16. Explain working of investment multiplier with numerical example.

20. How to control access demand and deficit demand?

21. Write difference between voluntary unemployment and involuntary

 Involuntary unemployment is a situation where a person who is able and

Government budget (6 marks)

22. Write objectives of government budget.

23. What is budgetary deficits? Explain implications of budgetary deficits.

24. Write difference between:

Expenditure incurred for acquiring Expense incurred for maintaining

Long Term Short term

Enhances the value of an existing Does not enhance the value of an

(b) Differences between Capital Receipts and Revenue Receipts

It is the income generated from It is the income generated

Nature Non-Recurring Recurring

Shown on the credit of profit

(c) Differences between fiscal deficit and Revenue deficit

Basis Fiscal Deficit Revenue Deficit

It is the excess of total

Revenue Deficit indicates

Fiscal Deficit shows the extent Revenue Deficit shows the

Context Direct Tax Indirect Tax

Paid directly to the Paid to the government via

Individuals, HUFs and End-consumers of products, goods

Directly depends on income

Balance of payments and foreign exchange rate (6 marks)

27. Explain managed floating rate.

Advantages and disadvantages of floating exchange rates

29. Explain components of current account and capital account in Balance of

Secondary Consists of two parts:

Capital transfers Transactions where one party has transferred

Acquisition/disposal Transactions that involve intangible assets (e.g.

30. Write difference between:

Autonomous transaction Accommodating transaction

(c) Difference between Balance of trade and balance of payment

Balance of trade Balance of payments

What does it deal with?

Balance of trade (BoT) is the Balance of payments (BoP) is the

Type of transactions included

Transactions related to goods are Transactions related to transfers,

(d) Difference between Current Account and Capital Account