Sky High Institute: Important Eco Sem 5

For Any Enquiry or to join any
course in our institute feel free

to contact
Ph: 8777203495
Sky High
Institute
Important Eco
Sem 5
Sky High Institute

/skyhighinstitute /skyhighinstitute_shi @skyhighinstitute6362
ECONOMICS IMPORTANT
Q. What is Economics?
Ans: According to Adam Smith economics is the science which studies human behavior as a
relationship between ends and scarce means which have alternative uses.”
Q. Branches of economics?
Ans. ACCORDING to RAGNAR FRISCH (1933)there are two branches of economics:
Micro(MIKROS) and Macro(MAKROS) Economics.
Micro means SMALL whereas Macro means LARGE.
Micro deals with individual whereas Macro deals with as a whole.
Micro has a NARROW concept whereas Macro has a WIDER concept.
Micro is also known as PRICE THEORY whereas Macro is also known as INCOME
THEORY.
Q. What are the types of economics on the basis of free movement of labour and capital
with other countries in the world?
Ans. OPEN and CLOSED economics:
AN OPEN economics is involved in export and import of goods and services with other
nation whereas Closed economics is not involved in export and import of goods and services
of goods and services with the other nations.
AN OPEN economics borrows and lends whereas CLOSED economics neither borrows
nor lends
AN OPEN economy gives and take foreign aids and loan whereas CLOSED economics
is RIGID.
AN OPEN economy consists of C+I+G+(X-M) whereas CLOSED economy consists of
C+I+G.
Q. What are the difference between stock and flow?
Ans: STOCK is a STATIC concept whereas flow is a DYNAMIC concept.
STOCK has no TIME dimension FLOW has a TIME dimension.
Stock refers to any quantity that is measured at a particular point in time, while flow is
referred to as the quantity that can be measured over a period of time.
Both the stock and flow are interdependent on each other.
Q. IMPORTANT AGGREGATES of NATIONAL INCOME?
Ans: a) GDP at fc e) GDP at mp
To get admission in new batch or to enquire about any course feel free to
contact us @ 8777203495
b) GNP at fc f) GNP at mp
c)NNP at fc g) NNP at mp
d)NDP at fc h) NDP at mp
Q. What is national income?
Ans: National income means the value of goods and services produced by a country during a
financial year. Thus, it is the net result of all economic activities
Q. What do you mean by circular flow of income?
Ans: The circular flow means the unending flow of production of goods and services,
income, and expenditure in an economy. It shows the redistribution of income in a circular
manner between the production unit and households.
There are two flows 1. REAL FLOW and 2. MONEY FLOW
Real flows refer to the flow of the actual goods or services, while money flows refer to the
payments for the services (wages, for example) or consumption payments.
The circular flow model demonstrates how money moves from producers to households and
back again in an endless loop. In an economy, money moves from producers to workers as
wages and then back from workers to producers as workers spend money on products and
services.
Q. What do you mean by per capita income?

Ans: Per Capita Income is a metric used to determine the amount of money earned per
individual in a nation or geographical area. You'll get PCI of a specific geographical location
by dividing a population's total income by that area's population.
Q. Measurement of national income?
Ans. There are three ways of measuring the National Income of a country. They are from the
income side, the output side and the expenditure side. Thus, we can classify these
perspectives into the following methods of measurement of National Income.
METHODS of measuring national income:
contact us @ 8777203495
1.Product Method
2.Income Method
3.Expenditure Method
1.PRODUCT METHOD
Under this method, we add the values of output produced or services rendered by the
different sectors of the economy during the year in order to calculate the National Income.
In this method, we include only the value added by each firm in the production process in the
output figure.
Hence, we use the value-added method. The value-added output of all the sectors of the
economy is the GNP at factor cost.
However, this method is unscientific as it adds the value of only those goods and services that
are sold in the market or are available for sale in the market.
2.INCOME METHOD
Under this method, we add all the incomes from employment and ownership of assets before
taxation received from all the production activities in an economy.
Thus, it is also the Factor Income method. We also need to add the undistributed profits of
the private sector and the trading surplus of the public sector corporations.
However, we need to exclude items not arising from productive activities such as sickness
benefits, interest on the national debt, etc.
3.EXPENDITURE METHOD
This method measures the total domestic expenditure of the economy. It consists of two
elements, viz. Consumption expenditure and Investment expenditure.
Consumption expenditure includes consumption expenditure of the household sector on
goods and services and consumption outlays of the business sector and public authorities.
Investment expenditure refers to the expenditure on the making of fixed capital such as Plant
and Machinery, buildings, etc.
Q. What are the difficulties of measurement of national income?
Ans: Following are the difficulties in estimating the National Income
a) Conceptual difficulties
b) Statistical difficulties
A. Conceptual difficulties
1. It is difficult to calculate the value of some of the items such as services rendered for
free and goods that are to be sold but are used for self-consumption.
2. Sometimes, it becomes difficult to make a clear distinction between primary,
intermediate and final goods.
contact us @ 8777203495
3. What price to choose to determine the monetary value of a National Product is always
a difficult question?
4. Whether to include the income of the foreign companies in the National Income or not
because they emit a major part of their income outside India?
B. Statistical difficulties
1. In case of changes in the price level, we need to use the Index numbers which have
their own inherent limitations.
2. Statistical figures are not always accurate as they are based on the sample surveys.
Also, all the data are not often available.
3. All the countries have different methods of estimating National Income. Thus, it is not
easily comparable.
Q. How are GDP and GNP different from each other?
Ans: GDP is the value of goods and services produced within a country's borders, by citizens
and non-citizens in a financial year. GNP measures the value of goods and services produced
by only a country's citizens but both within and outside the country’s borders.
Q. What are the concept of GDP, GNP, NDP, NNP?
Ans: GDP Gross Domestic Product
It is the total value of final goods and/ or services produced in the boundary of a country in
one financial year (01st April to 31st March)
Production done by foreign nationals in an economy is calculated in GDP if it is done within
the geographical boundary.
It is calculated at market price and is defined as GDP at market prices.
Different elements of the GDP are:
• Wages and salaries
• Interest
• Rent
• Undistributed profits
• Depreciation
• Mixed-income
• Direct taxes
• Dividend
GDP = Consumption + Government Expenditure + Investment + Exports – Imports
Net Domestic Product (NDP)
contact us @ 8777203495
• NPD is the value we get when depreciation is subtracted from the Gross Domestic
Product.
• Depreciation refers to the wear and tear occurring in the process of production.
NDP = GDP – Depreciation
Gross National Product (GNP)
• It is the value of final goods and/ or services produced by the citizens of a country
within a financial year.
• GNP is calculated by adding the income from abroad in GDP and subtracting the
income going out of the economy from the GDP.
• It includes the net income arising in a country from Foreign Trade. Four main
elements of the GNP are:
• Consumer goods and services
• Gross private domestic income
• Income arising from abroad
• Goods produced or services rendered
GNP = GDP + (X-M), where X = Income from foreign and M = Income to Foreign
Net National Product (NNP)
• It is calculated by subtracting depreciation from the Gross National Product.
NNP = GNP – Depreciation.
SOME IMPORTANT CONCEPT KEEP IN YOUR MIND:
Factor Cost
• It is the total cost incurred during processes of production, eg. raw materials costs,
wages, rent, capital cost, etc.
Market Price
• Market Price is the price at which a product is sold in the market. It includes the cost
of production like wages, input prices, profits, rent, interest, etc.
• Market price also comprises the taxes imposed by the government and the subsidies
provided by the government for the producers.
Gross Value Added (GVA)
In this section, let us understand a few important formulae related to Gross Value Added
(GVA)
• GVA at basic prices = GVA at factor cost + (production taxes less production
subsidies)
contact us @ 8777203495
• GDP at market prices = GVA at basic prices + Product taxes – Product subsidies
• Basic Price = Factor cost + Production taxes – Production subsidy
• Market Price = Basic price + Product taxes – Production subsidy
• Market Price = Factor cost + Net indirect taxes (Net indirect taxes = indirect taxes –
subsidy)
Calculation of GDP
The Gross Domestic Product is calculated through Nominal GDP, Real GDP, and GDP
Deflator. Let us see about each of the methods of calculating GDP in detail as below:
Nominal GDP
• When the GDP is calculated at current prices is known as Nominal GDP.
• It is not inflation-adjusted.
Real GDP
• When GDP is calculated at the base year prices are known as Real GDP.
• It is Inflation adjusted
• Note: Present base year for GDP calculation is 2011-12
GDP Deflator
• GDP Deflator establishes the relationship between nominal and real GDP.
• It also shows the effect of inflation on the value of production.
GDP = Nominal GDP/ Real GDP x 100
Q.What is central bank ? Function of Central Bank?
Ans: A central bank is a public institution that is responsible for implementing monetary
policy, managing the currency of a country, or group of countries, and controlling the money
supply.
The functions of a central bank can be discussed as follows:
1. Currency regulator or bank of issue
2. Bank to the government
3. Custodian of Cash reserves
4. Custodian of International currency
5. Lender of last resort
6. Clearing house for transfer and settlement
7. Controller of credit
8. Protecting depositors interests
contact us @ 8777203495
The above mentioned functions will be discussed in detail in the following lines.
Currency regulator or bank of issue: Central banks possess the exclusive right to manufacture
notes in an economy. All the central banks across the world are involved in issuing notes to
the economy.
This is one of the most important functions of the central bank in an economy and due to this
the central bank is also known as the bank of issue.
Earlier all the banks were allowed to publish their own notes which resulted in a disorganised
economy. To avoid this situation the government around the world authorised the central
banks to function as the issuer of currency, which resulted in uniformity in circulation and
balanced supply of money in the economy.
Bank to the government: One of the important functions of the central bank is to act as the
bank to the government. The central bank accepts deposits and issues funds to the
government. It is also involved in making and receiving payments for the government.
Central banks also offer short term loans to the government in order to recover from bad
phases in the economy.
In addition to being the bank to the government, it acts as an advisor and agent of the
government by providing advice to the government in areas of economic policy, capital
market, money market and loans from the government.
In addition to that, the central bank is instrumental in formulation of monetary and fiscal
policies that help in regulation of money in the market and controlling inflation.
Custodian of Cash reserves: It is a practice of the commercial banks of a country to keep a
part of their cash balances in the form of deposits with the central bank. The commercial
banks can draw that balance when the requirement for cash is high and pay back the same
when there is less requirement of cash.
It is for this reason that the central bank is regarded as the banker’s bank. Central bank also
plays an important role in the credit creation policy of commercial banks.
Custodian of International currency: An important function of the central bank is to maintain
a minimum balance of foreign currency. The purpose of maintaining such a balance is to
manage sudden or emergency requirements of foreign reserves and also to overcome any
adverse deficits of balance of payments.
Lender of last resort: The central bank acts as a lender of last resort by providing money to its
member banks in times of cash crunch. It performs this function by providing loans against
securities, treasury bills and also by rediscounting bills.
This is regarded as one of the most crucial functions of the central bank wherein it helps in
protecting the financial structure of the economy from collapsing.
Clearing house for transfer and settlement: Central bank acts as a clearing house of the
commercial banks and helps in settling of mutual indebtedness of the commercial banks. In a
clearing house, the representatives of different banks meet and settle the inter bank payments.
contact us @ 8777203495
Controller of credit: Central banks also function as the controller of credit in the economy. It
happens that commercial banks create a lot of credit in the economy that increases the
inflation.
The central bank controls the way credit creation by commercial banks is done by engaging
in open market operations or bringing about a change in the CRR to control the process of
credit creation by commercial banks.
Protecting depositors interests: Central bank also needs to keep an eye on the functioning of
the commercial banks in order to protect the interests of depositors.
Q. What is commercial bank and what are the function of it?
Ans: A commercial bank is a kind of financial institution that carries all the operations related
to deposit and withdrawal of money for the general public, providing loans for investment,
and other such activities. These banks are profit-making institutions and do business only to
make a profit.
The two primary characteristics of a commercial bank are lending and borrowing. The bank
receives the deposits and gives money to various projects to earn interest (profit). The rate of
interest that a bank offers to the depositors is known as the borrowing rate, while the rate at
which a bank lends money is known as the lending rate.
Function of Commercial Bank:
The functions of commercial banks are classified into two main divisions.
(a) Primary functions
Accepts deposit : The bank takes deposits in the form of saving, current, and fixed deposits.
The surplus balances collected from the firm and individuals are lent to the temporary
requirements of the commercial transactions.
Provides loan and advances : Another critical function of this bank is to offer loans and
advances to the entrepreneurs and business people, and collect interest. For every bank, it is
the primary source of making profits. In this process, a bank retains a small number of
deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand
loans, overdraft, cash credit, short-run loans, and more such banks.
Credit cash: When a customer is provided with credit or loan, they are not provided with
liquid cash. First, a bank account is opened for the customer and then the money is
transferred to the account. This process allows the bank to create money.
(b) Secondary functions
Discounting bills of exchange: It is a written agreement acknowledging the amount of money
to be paid against the goods purchased at a given point of time in the future. The amount can
also be cleared before the quoted time through a discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current account to
overdraw up to the given limit.
contact us @ 8777203495
Purchasing and selling of the securities: The bank offers you with the facility of selling and
buying the securities.
Locker facilities: A bank provides locker facilities to the customers to keep their valuables or
documents safely. The banks charge a minimum of an annual fee for this service.
Paying and gathering the credit : It uses different instruments like a promissory note, cheques,
and bill of exchange.
Q. How RBI control on Credit?
Quantitative Measures of Credit Control

These tools control the cost and quantity (volume) of credit.
(1) Reserve Ratios
• Cash Reserve Ratio – Banks have to keep a certain minimum percentage of their total
deposits (demand deposits + time deposits) with the RBI, that minimum percentage is called
CRR. A change in CRR affects the credit creation capacity of the commercial banks.
An increase in CRR results in less liquid cash deposits with the commercial banks and a fall
in the value of deposit multiplier which reduces the volume of credit in the economy and a
decrease in CRR results in more liquid cash available with the banks and rise in the value of
deposit multiplier which increases the volume of credit.
• Statutory Liquidity Ratio – All banks are required to maintain a minimum percentage of
their total deposits as liquid assets in form of cash, gold or securities with themselves known
as SLR.
A change in SLR has the same effect on volume of credit as in the case of change in CRR.
(2) Open Market Operations
Buying and selling of government securities by the RBI in the open market is called open
market operations.
When RBI buys government securities the volume of credit increases and when securities are
sold the volume of credit decreases. When commercial banks make payment to the RBI for
securities bought, their cash reserves reduce which leads to a reduction in their ability to
contact us @ 8777203495
create credit. This makes advancing loans to consumers difficult for commercial banks as
they have limited funds. This leads to contraction of credit in the economy.
(3) Policy Rates
• Bank Rate Policy – It is the policy under which RBI influences the volume of credit in the
economy by manipulating the bank rate.
Bank rate is the rate at which RBI lends money to the commercial banks. It the interest rate
charged by the RBI when advancing loans to commercial banks against bills of exchange,
commercial papers etc. An increase in bank rate is likely to increase all other market rates,
which leads to contraction of credit while a decrease in bank rate leads to expansion of credit.
When RBI increases the bank rate, the commercial banks are discouraged from taking loans
as now they have to pay a higher interest rate on loans from central bank then before. The
commercial banks in turn start charging higher interest rate from consumers (traders and
businesses) seeking loans which increases the cost of credit. The high cost of credit
discourages consumers to take loans. This reduces the volume of credit in the economy. The
opposite happens when the bank rate is decreased.
• Liquidity Adjustment Facility – Under this facility, RBI provides liquidity to scheduled
commercial banks and primary dealers or absorbs excess liquidity on an overnight basis
against approved government securities.
The interest rate at which RBI provides liquidity to banks under Liquidity Adjustment
Facility is known as Repo rate.The interest rate at which RBI absorbs excess liquidity of
banks is known as Reverse Repo Rate.
An increase in repo rate increases the cost of credit for commercial banks and leads to a
reduction in amount of credit created in the economy. The increase in reverse repo rate has
the opposite effect on credit creation.
• Marginal Standing Facility – Under this facility the commercial banks can borrow
additional money from the RBI on overnight basis up to a certain limit of their Statutory
Liquidity Reserve (SLR) (currently 2% of net time and demand deposits)at an penal interest
rate(currently 0.25% above repo rate).
An increase in MSF has the same effect on credit as in case of increase in Bank Rate or Repo
rate.
Qualitative Measures of Credit Control
These tools control the use and direction (flow) of credit.
(1) Credit Rationing – Credit rationing is controlling the amount of credit available for certain
industrial sectors in order to ensure that all sectors get adequate amount of credit. Under this
method RBI fixes ceiling (maximum limit) on loans and advances for specific categories,
which the commercial banks cannot exceed.
(2) Moral Suasion – Moral suasion is the method by which RBI persuades and convinces the
commercial banks to undertake certain actions which are in the economic interests of the
contact us @ 8777203495
country. Under this method the RBI requests and persuades the commercial banks to work in
cooperation with the central bank in implementing its credit and monetary policies.
(3) Changing Margin Requirements – Under this method the RBI prescribes margin
requirements that commercial banks have to maintain on securities against which loans are
provided to customers. RBI sets different margin requirements for different types of
securities. A change in margin requirements influences the flow or direction of credit. An
increase in margin requirements; decreases the flow of credit while a decrease leads to an
increase in flow of credit.
(4) Regulating Consumer Credit – Consumer credit refers to loans taken by people for
purchase of goods and services. RBI regulates the total volume of credit that may be extended
to customers by the commercial banks and fixes a minimum time period for repayment or
increases down payment required for specific categories to influence the flow of credit in a
particular direction.
(5) Direct Action – When all the methods mentioned above prove ineffective in controlling
credit, RBI takes a direct action by laying down specific rules and regulations under which
the commercial banks will operate. A strict action is taken against banks that refuse to follow
the directions of the RBI.
Q. How commercial Bank create credit?
Ans: Bank deposits are the basis for credit creation. Bank deposits are of two types as
follows:
a. Primary Deposits-
A bank accepts cash from the customers and opens a deposit in his or their name. This is
called a primary deposit and this does not mean a credit creation.
These deposits are simply converted into deposit money from currency money. These
deposits form the basis for credit creation.
b. Secondary or Derivative Deposits-
A bank grants loans and advances. Instead of giving cash to the borrower, the bank opens a
deposit account in his or her name. This is called the secondary or derivative deposit.
Every loan creates a deposit and the creation of a derivative deposit means the creation of the
credit.
Money and Credit Multiplier: The money multiplier refers to how an initial deposits can
lead greater increase in the total money supply. For example, if the commercial bank gain
deposits of RS. 1 million and this leads to a final money supply of RS. 10 million. The money
multiplier is 10.
The banking system can make multiple expansion of deposits. The process of credit creation
is based on the following assumptions,
(a) There are several commercial bank in the country
(b) Each bank maintain a reserve rate of 10%
(c) The demand for cash by the non-bank public is fully satisfied
contact us @ 8777203495
(d) Each bank trues to give loans equal to its excess reserves
(e) There is sufficient demand for loans
(f) The ratio of interest charged by the bank while granting the loan remains the same
Let us suppose that bank A has an excess reserve of RS. 100. On the basis of excess reserve
of RS. 100 bank A creates derivative deposit of RS. 100 in the process of giving loans. Let us
suppose that the entire amount of RS. 100 is deposited with Bank B as primary deposit. Bank
B will keep RS. 10 as reserve and RS. 90 will be excess reserve of Bank B. bank B will give
loan by creating derivative deposits of RS. 90. Let us suppose that the borrowers of Bank B
withdraw RS. 90 from their deposit accounts. This process will continue indefinitely and the
total amount of deposit created by the banking system as a whole on the basis of initial
excess reserve of Bank A is given by the sum of the G.P. services i.e. till LRR = Initial
Deposit
Q. Liquidity performance theory of demand for money/ Discuss the ke Keynesian

theory of demand for money.
Liquidity preference means the demand for money to hold the desire of public to hold cash
and his well known book the general theory of employment interest and money keynes
propounded a theory of demand for money which occupies an important place in his
monetary theory.
Ans) Demand for money or motives for liquidity preference keynes theory:In liquidity
preference theory the demand side the special one. Here money is synonyms to liquidity and
its reference to hard cash in hand and short term demand deposit keynes mention three
different motives for cash holding this motivies are as follow:-
1.Transaction motive: Refers to demand for money for conducting day to day transactions.
This motives can be looked at from perspective of consumers who wants income to meet
their household expenditure (income motive) and from the perspective of businessmen who
requires money to carry on their business activities (business motives) The transaction
motive relates to demand for money to meet the current transactions of individuals and
business units. The income which a person gets, is not continues where as, expenditure is
continues. So, to bridge the gap between receipt of income and its expenditure , people hold
cash.
2.Precautionary motive: It refers to the desire of people to hold cash balances for unforceen
contingencies . people wish to hold some money to provide for the risk of unforeseen events
like sickness, accidents etc the amount of money held under this motive, depends on the
nature of individuals and on the conditions in which he lives.
3.Speculative motive:- Speculative motive of the people relates to the desire to hold once
resources in liquidity form in order to take advantage of market movements regarding the
future changes in the rate of interest (or bond prices ).The notion of holding money for
speculative motive was a new and revolutionary keynesian Idea. The cash held under these
motive is used to make speculative gains by dealing in bonds whose price fluctuate.
contact us @ 8777203495
Demand Pull And Cost Push Inflation
Demand pull inflation: Demand pull inflation is an inflation created by the pressure of excess
demand in the market. If there is an excess of demand over supply, price lends to increase
under the pressure of excess demand .if aggregate demand exceed supply there will be an
upward pressure on the aggregate price level. This type of inflation is called demand pull
inflation.
Causes Of Demand Pull Inflation:-
1) Increase in population: Increas in population raise the number of consumers in the

market. This and turn , raises demand for goods.
2) Money supply: Increase in money supply by the RBI raises the money in circulation which
in turn raises the demand for goods.
3) Increase in disposal Income of the consumer: When common man has more money at his
disposal, he will demand more goods.
4) government spending: when the government spends more freely, price go up.
5) A growing economy: when consumer feel confident, they will spend more, take on more
debt by borrowing more. This leads to a steady increase in demand, which means higher
prices.
6) Asset inflation: A certain rise and exports, which translate to undervaluation of involved
currency.
Cost push inflation:-
Cost push inflation: Cost push inflation occurs when there is a fall in level of supply.
Producers falls it's supply due to fall in profit. Profit falls due to rise in cost of production in
the other words cost push inflation refers to the rise in price due to increase in the cost of
production. Other words, cost push inflation refers to rise in price due to increase in the cost
of production. (Here was here we assumes that there is no change in the level of demand).
Causes Of Cost Pull Inflation;-
1) Increase in the cost of raw materials: An increase in the cost of raw materials used for the
production of a product is the one of major reasons of cost push inflation.
2) Higher taxes: An increase in indirect taxation. Higher VAT and exercise due to will rise
the price of goods.
3) Imported inflation: Devaluation of the currency would result in higher prices of the
imported goods.
contact us @ 8777203495
4) Profit push inflation: If firms gain increased monopoly power, there are in a position to
push up prices to make more profit.
5) Higher price of commodities: A rise in the price of oil would lead to higher petrol prices
and higher transport cost. All form would see some rise and cost. As the most important
commodity higher oil price often lead to cause push inflation.
6) Higher wages : Wage increase cause inflation because the cost of producing goods and
services goes up as companies pay their employees more.
7) Natural disaster: Natural disaster like floods ,earthquakes ,fires or tornadoes causes
unexpected damage to a production facility and results in a shut down or partial disturbance
of the production chain higher production cost are likely to follow.
Q. Difference between demand pull inflation and cost pull inflation
Basis Demand Pull Inflation Cost Push Inflation
i) Employment It always occurs in full It always occurs less then full
employment situation employment situation.
ii) Origine It arises due to emergence of It arise due to rise in the cost.
excess demand
iii) Impact on output Here total output remains Here total output is falls.
constant
iv) Nature Here the demand rises but Here the cost rises but the
cost remains the same demands remains the same.
V) Anti inflationary policy Fiscal and monetary policies Fiscal and monetary policies
are able to check it are not able to check
Vi) Reason for rise in price Here excess is the factor Here rise in cost is the factor
which induces rise in the which pushes above the price
price level.
contact us @ 8777203495
Q. What do you mean by unemployment. What are its types?

ANS: A situation where a person actively searches for employment but is unable to find work
OR
A situation in which the person is capable of working both physically and mentally at
the existing wage rate , but does not get a job to work .
TYPES OF UNEMPLOYMENT ARE AS FOLLOWS:
1.Open unemployment: open unemployment refers to a situation in rural areas where people
who are willing and actually able to work cannot find any work.
2.Disguised unemployment: It refers to a situation where more workers are engaged than
required in which some worker have zero marginal productivity so their removal will not
affect the volume of total production, overcrowding in agriculture due to rapid growth of
population and lack of alternative job opportunities may be cited as the main reasons for
disguised unemployment in India.
3.Seasonal unemployment: It is unemployment that occurs during certain seasons of the year.
In some industries and occupations like agriculture, holiday resort, ice factories etc.
Production activity takes place only in some seasons, so they offer employment for only a
certain period of time in a year people engaged in such type of activities may remain
unemployed during the off season.
4.Casual unemployment : When a person is employed on a day to day basis for a contractual
jobs and have to leave it once the contract terminates.
5.Chronic unemployment: Chronic unemployment means prolonged unemployment in the
economy i..e CHRONIC UNEMPLOYMENT is caused due to the long term unemployment
persisting in the economy. This type of unemployment is mostly suffered by underdeveloped
nations.
6.Educated unemployment: It is a situation which arises when a large number of educated
people(i..e people who are capable of working and willing to work) are jobless or unable to
secure a job.
contact us @ 8777203495
7.Technological unemployment: This type of unemployment takes place every time

technology upgrades and the existing work force are unable to cope up with the new
technology (If the skills required to meet the new technology do not match the existing skill
sets of the employed workers and they cannot adopt, they become unemployed) OR, modern
technology brings capital intensive requires less labourers and contributes to this kind of
unemployment.
8.Structural unemployment: This type of unemployment arises due to drastic changes in the
economic structure of a country. These changes may affect either the supply of a factor or
demand for a factor of production. STRUCTURAL UNEMPLOYMENT is a natural outcome
of economic development, technological advancement and innovation that are taking place
rapidly all over the world in every sphere.
Fiscal and monetary policy:-
Fiscal policy: Fiscal has been derived from 'fisk' means public treasury or government funds.
Which deals with the revenue and expenditure policy of the government . To the budgetary
policy of the Government of any country. The principal tools of fiscal policy are government
expenditure(G) and taxes (T) imposed by the government.
Objectives of fiscal policy:-
1) Fostering growth in the long run:- Objective of fiscal policy is to foster growth of the
economy in the long run, to attain the maximum possible growth by the making
optimum use of the nation resources.
2) Maintaining price stability:- It also aim at maintaining stable price level. Maintaining
a moderate level of inflation is a priority of government policies price stability is
important to stabilize welfare and also to maintain in the growth.
3) Full employment :- The various tools of fiscal policy such as budget, taxation, public
expenditure, public works and public Debt can go a long way for maintaining full
employment with out inflationary and deflationary forces in underdeveloped
economies.
4) Optimum allocation of resources:- An important aspect of fiscal policy is to ensure
optimum allocation of the resources of the economics. Through the physical tools the
government tries to ensure that the resources are utiliese in a manner that ensures
well being of the entire society and does not leave any section of the society deprived.
5) Reduce inequality:-with growth and development, the welfare state also attend to
build a society that has more equitable distribution of wealth and opportunities. Fiscal
tools are thus directed to reduce inequality
Monetary policy:-
Monetary policy:- the refers to the policy through which Central Bank of India (RBI)
controls supply of the money availability of the money the cost of money or the rate of
interest in order to attain a set of objective focusing on growth and stability of the economy .
Through monitor policy Central Bank impact credit supply and the economy and check
inflation.
contact us @ 8777203495
Objective of monetary policy:-

1) economic growth and full employment:-it aims at foresting long term growth of the
economy
2) Price stability:- The primary objective of monetary policy is to maintain a stable price
level in the economic since monetary policy instrument are aimed at direct control of
the money market , it is a more effective tool in controlling in flation.
3) Maintaining stable exchange rate:- Policy instrument are applied to maintain stability
of the currency of the country. Through most of the countries follow a floating
exchange rate system, when the value of exchange rate fluctuate to a large extend
monitor instruments are applied to such abnormal movement.
4) Objective of monetary:-
i) economic growth and full employment:-it aims at foresting long term growth of the
economy.
ii) Price stability:- the primary objective of monetary policy is to maintain a stable price level
in the economic since monetary policy instrument are aimed at direct control of the money
market , it is a more effective tool in controlling in flation.
iii) Maintaining stable exchange rate:-policy instrument are applied to maintain stability of
the currency of the country. Through most of the countries follow a floating exchange rate
system, when the value of exchange rate fluctuate to a large extend monitor instruments are
applied to such abnormal movement.
Instruments of monetary policy:
i) Quantitive Instruments : the instruments which controls the quantity of money in an
economic are known as quantitative.The quantity instruments are as follows:-
ii) Bank Rate :-The rate at which Central Bank if loan to the commercial bank for a long
period of time is known as bank rate.
iii) Repo rate :-central bank gives loan to commercial bank for a short period of time is
known as repo rate.
iv) Reverse repo :- the rate at which commercial bank gives loan to Central Bank for a short
period of time is known as reverse repo rate.
v) Cash reserve ratio:- It is the percentage of money which the bank(commercial) has to keep
with the Central Bank of India in form of cash.
vi) Statuary liquidity ratio:- SLR is minimum percentage of deposit that a commercial bank
has to maintain in form of liquid cash, gold or others qualities. This are not reserved with the
RBI but with the commercial bank themselves. The SLR is fixed by the RBI
7)Marginal standing facility (MSF):- It is a provision made by the RBI which schedule
commercial bank and obtain liquidity overnight, if interbank liquidity completely dries up.
This is a facility for emergency through which bank obtains at the MS every which is the rate
higher than the repo rate.
contact us @ 8777203495
8) Open market operation:-OMO refers to the sale and purchase of Government and other
improve securities by the central bank and the money and capital markets.
Qualitative instrument:-
Includes all those instrument which influence the allocation of money in an economy. It
includes the Following:-
i)Margin requirement:-It refers to the difference between the current value of the security
offers for a loan (called collateral) value of loan granted
ii) Rationing of the credit:-it is a method by which the central bank fix the limit the
maximum amount of loans and advances in certain cases for fixed ceiling for specific
categories of loans and advances.
iii)Moral suasain:- Third Central Bank nearly uses its moral influence on the commercial
bank. It includes the advice suggestions request and persuasion within the commercial bank
to corporate with the central bank
iv)Direct action :- If the commercial bank do not follow the policy of the central bank has
the only recourse to direct action
Measures of money supply:-
Measures of money supply:- the supply of money and any country refers to the stock of
money help by the public at the at any particular point of firm. So money is a stock concept.
Money supply is a total amount of money cash coins and balances in the bank accounts in
circulation.
Measures of the supply of money are mentioned below:-
a)M1=rupee note and coins with the public(C) + demand deposits with commercial bank
(DD) + other deposits with reserve Bank(OD)
b)M2 =M1+ postal savings Bank deposit (psbp)
c)M3= M1 +(Net) time deposit with commercial bank s. Which is supposed to be much
broader than M1 measure of money supply the net time deposit of the public with
commercial banks are also treated
d)M4=M3+deposits with the post office saving(excluding National savings certificate)Or M1
does PSBD+ TD. In India, M1 and M2 are considered as narrow money while and M3 and
M4 are treated as broad money. However from the following view point of liquidity of an
asset M1 is a supposed to be most important liquid and M4 is supposed to be least liquid.
ISLM MODEL OF IS and LM curve IS Curve :-
IS Curve represents different combinations of rate of interest and levels of national income
which will keep the product market in equilibrium. with a fall of rate of interest the planned
investment will increase which will cause upward shift in aggregate demand function (C+I)
resulting in good market equilibrium at a higher rate of national income.The lower rate of
interest the higher will be the equilibrium level of national income. First, the IAS Curve is
contact us @ 8777203495
the low of those combination of rate of interest and the level of national income at which
goods market is in equilibrium.
Features of IS:-
1)IS shows the combination of r and y which will keep the product market in the
equilibrium.
2)IS is negatively sloped
3) all the points on IS curve represents product market equilibrium
4) any point to the left of IS is characterized by the excess demand for commodity and any
point to the right of IAS is characterized by the excess supply of command
5)If C,I,G rises or t falls, then i s will shift right word and vice versa
• Assumptions
1) consumption is a positive function of disposal income.
2) investment is an inverse function of rate of interest.
3) purchase is autonomous and technology given it is not related to income and rate of
interest.
4) is a closed economy.
5) savings is a positive functions of the income.
6) is a positive functions of income.
Derivation of IS curve:-
contact us @ 8777203495
With the increase in planned investment,the aggregate demand curve shift upward to the new
position C+ I, in figure 6.3 and the goods market in equilibrium at oy level income oy is
plotted against the rate of interest OR1 with futher lowering of rate of interest to oR2 to the
plan investment increase to OI to
With the further rise in planned investment the AD curve in figure (6.2) shifts uppward to the
new position C+I2 corresponding to which goods market in the equilibrium at oy2 level of
income. There for in figure (6.3). The equilibrium income over 2 is shown against the interest
rate or 2.
By joining points A,B,D representing various interest income combinations at which goods
market is in equilibrium we obtain the IAS Curve. It will be observed that the IS curve is
downward sloping(i .e has negative slope) which implies that when rate of interest decline
,the equilibrium level of national income increases.
Sifts in IS curve:-
contact us @ 8777203495
a) business taxes:- If taxes will increase, produces the prefer to invest less. Investment
will fall then the curve will shift leftward and similarly , if taxes will decrease
producers prefer to invest more investment will rise then go will shift rightward.
b) Government expenditure:- Government their increase spending it causes rightward in
IS curve or if the government decrease their spending it causes leftward in IS curve.
c) consumer saving rate:- If consumer decide to save more than consumers spending decline
which reduce the production and IS curve left .And if consumers decide to save less than the
consumer spending increases it reduce the production and the IS curved shift right.
D) change inn exports:- increase we will see the highest curve shift right and if expose
decreases we will see the IS curve shift left.
LM CURVE
The LM curve , L denotes liquidity and M denotes money, is a graph of combination of real
income(y) and the real interest rate (r) , such that the money market is in equilibrium(i.e, real
money supply = real money demand)
contact us @ 8777203495
In macro economics, the LM curve is the liquidity preference and money supply curve ,and
its shows the relationship between real output and interest rates.
(Money demand is the function of transactive and speculative motive)

There is a positive relationship between rate of interest and demand of money
rate of interest increases, then demand for money increases.
The supply of money remains.
• Md (Y0)= MS at point E0 where interest rate is ORo and quantity Q is decided as
money market equilibrium in figure 6.6
• Suppose demand for money increases to Md (Y1) then rate of interest will also
increases two OR1 and we get a new equilibrium that is E1 In figure 6.6, the money
supply remains constant.
• If again demand for money increases to Md (Y2) to the rate of interest will increase to
OR2 and we get new equilibrium E2 figure 6.6 also their money supply remains
constant.
• In figure 6.6 we see at Yolevel of income interest-rate R , we get a point A where
money demand = money supply
• Similarly we get point B at Y1 level of income interest rate R where money demand =
money supply figure 6.6.
• At Y2 level of income interest-rate, R2 to be get a point C above Md = Ms Fig, 6.6
• When we join points A, B, C, we get LM curve
Features of LM curve
1)LM curve shows the combination of R and Y which will keep the money market in the
equilibrium
contact us @ 8777203495
2)All the point on the LM curve represent the money market equilibrium.
3)LM curve is positively sloped.
4)Any point to the left of the LM curve is characterized by excess supply of money and any
point to the right of the LM curve is characterized by excess demand for money
5) If money supply rise , it will shiftward and viceversa
Assumption
1)Money supply is enogenously given and unrelated to R
2)Money demand has 2 components – transaction demand K and speculative demand L
3)Transaction demand is positive function of income
4)Speculative demand for money is aqn inverse function of rate of interest.
A. Change in money supply

Is central bank decided to increase money supply, (nominal money supply) then LM curve
shifts right
If central bank decide to decrease money supply, nominal money supply, then LM curve
shifts left
B. Change in money demand (due to change in price)
If the price level rises the demand for money rises, then the LM curve shifts left
If the price level declines the demand for money, Falls then the LM curve shifts right
contact us @ 8777203495
Inflationary Gap with Diagram

According to Keynesian Theory,
When the economy reaches full employment level, output cannot be
increased further and hence the increase in Aggregate Demand (AD) beyond this point adds
to rise in prices only and no increase in output.
Thus, inflationary gap refers to the excess demand
situation in the full employment level in an economy when, AD>AS
We can illustrate the inflationary gap in terms of Fig 2.1.

We know that the equilibrium in an economy is established when the aggregate demand (AD)
is equal to the aggregate supply (AS) . Aggregate demand is constituted with consumption
expenditure (C), investment expenditure (I) and government expenditure (G). We also know
that as Keynesian assumption, consumption is a linear function ( i.e. consumption when
income is Zero ) started from a point along the vertical axis. Investment and Government
expenditure are autonomous and exogenously given; so they are represented by horizontal
straight lines. By adding, C, I and G we get AD wave. Now we have drawn the aggregate
supply curve (AS) which is the 45° straight line from the Origin There AD and AS intersect
each other, at point E. Point E is also Known as the equilibrium point. The associated income
OY is known as equilibrium income or output of the economy.
contact us @ 8777203495
Now, we consider an economy which in spite of utilising all its resources to the fullest
extent, is unable to produce OY units of output. By fully utilizing all its resources, let the
economy produce OY1 which is less output than OY. Thus, clearly for that particular
economy OY1 is the full employment output OY, AD(FY1) is > AS(GY1).
Thus at OY1 , there is an excess demand of FG. This FG is known as the inflationary gap.
Thus the excess demand emerged at the full employment level in an economy is known as the
inflationary gap. This excess demand is responsible for rise in the general price level.
Determinants of Equilibrium Level of Income
According to Keynesian Theory an economy is in equilibrium,
When Aggregate Demand (AD) = Aggregate Supply (AS)
AD = AS …….. Equilibrium (i)
AD = C + I …..... Equilibrium (ii)
AS = C + S ……… Equilibrium (iii)
For equilibrium (i) , (ii) & (iii)
C+I=C+S
I=S - Equilibrium (iv)
Two approaches for determinants of Equilibrium level :-
1. Aggregate Demand , Aggregate Supply ( AD = AS ) Approach
2. Savings and Investment ( S = I ) Approach
AD – AS Approach
Assumptions :-
(a) There is no government sector
(b) There is no foreign sector
(c) It is also assumed that total amount of investment in the economy is constant at all
level of income
(d) Price level is also constant
(e) Analysis in short run production function
contact us @ 8777203495
E is the equilibrium point because at this point, the level of desired spending on
consumption & Investment exactly equals the level of output
If AD > AS
• When AD is more than AS, it means that consumer and firms together would be
buying more goods than firm wiling to produce
• As a result, planned inventory would fall below the desired level
• To bring inventory back to desired level, firm would increase the output &
employment until equilibrium is achieved
IF AD < AS
• When AD < AS, it means that consumer and firms together would be buying less
goods than firm willing to produce
• As a result, planned inventory would rise
• To clear unwanted increase inventory firm would plan to decrease the output &
employment until equilibrium is achieved
S – I Approach
According to this approach, the equilibrium level of income is determined at a level,

when planned saving is equal to planned Investment S=I
( write assumptions, same as in AD = AS approach )
E is the equilibrium point where planned savings = planned investment , OY is the
equilibrium level of national income which is determined.
IF S > I
contact us @ 8777203495
• If S>I, it means that household are not consuming as much as firms expected them
to
• As a result inventory would rise above the desired level
• To clear unwanted increase in inventory firm would plan to reduce the production
till saving & investment become equal
IF S < I
• If S<I, it means that household are consuming more than what firm expected them to
• As a result inventory would fall below the desired level
• To bring back inventory, firm would plan to increase production till saving &
investment becomes equal
APS , APC , MPS , MPC

Average Propensity to Consume (APC) -> APC is the ratio of Consumption expenditure
and Income
If consumption expense is given by ‘C’ and the national income is given by ‘Y’ then
APC = C/Y
Marginal Propensity to Consume (MPC) -> It refers to the change in consumption
expenditure due to change in national income.
MPC = ∆C/ ∆Y
Where,
C = Consumption Expenditure
Y = National Income
contact us @ 8777203495
∆ = It denotes change
Average Propensity to Save (APS) -> It is the ratio of savings and income
APS = S/Y
Where,
S = Savings
Y = National Income
Marginal Propensity to Save (MPS) -> It refers to the change in savings due to change in
income
MPS = ∆S/∆Y
Where,
S = Savings
Y = National Income
∆ = Change in
Relationship between APC and APS

Average Propensity to Consume (APC) = C/Y
Average Propensity to Save (APS) = S/Y
C+S = Y
C+S = 1
Where, C = consumption, S = savings, Y = income
We assume Income (Y) = 1
1/1-APC = APS
1/1-APS = APC
Relationship between MPC and MPS

Marginal Propensity to Consume (MPC) = ∆C/∆Y
Marginal Propensity to Save (MPS) = ∆S/∆Y
contact us @ 8777203495
∆C + ∆S = ∆y
Where, ∆C= change in consumption, ∆S= change in savings, ∆Y= change in income
Dividing both side of the equations by ∆Y we got
∆C/∆Y + ∆S/∆Y = ∆Y/∆Y Or,
Or, MPC + MPS = 1 MPC = ∆C/∆Y
MPS = 1 – MPC MPS = ∆S/∆Y
MPC = 1 – MPS MPC = 1/1-MPS OR
MPS = 1/1-MPC
When MPC rises (falls) MPS must fall (rise) in such a manner that their sum becomes equal
to one
Nature / Characteristics
APS
• APS can never be 1 or more than 1 : As saving can never be equal to or more than
national income
• APS can be 0 : At Break Even point APS is zero as savings are zero
• APS can be negative or less than 1 : At income levels which are lower than the
break-even point, APS can be negative as there will be dis-savings in the economy
• APS rises with increase in income : APS rises with increase in income because the
proportion of income saved keeps on increasing
MPS
• MPS varies between 0 and 1
i. If the entire additional income is saved i.e. ∆C=0 then MPS=1
ii. If the entire additional income is consumed i.e. ∆S=0 then MPS=0
In normal situation, value of MPS varies between 0 and 1
6. Nature / Characteristics
APC
i. APC is more than 1 : As long as consumption is more than national income; i.e. ,
before the break-even point, APC>1
ii. APC=1 : At the break-even point, consumption is equal to national income, i.e.
APC=1
iii. APC is less than 1 : Beyond/after the break-even point, consumption is less than
national income. As a result, APC<1
contact us @ 8777203495
iv. APC falls with increase in income : APC falls continuously with increase in
income because the proportion of income spent on consumption keeps on
decreasing
v. APC can never be zero : In an economy consumption can never be zero so, APC
can never be zero
MPC
• Value of MPC between 0 and 1 : We know, incremental income is either spent on
consumption or saved for future.
i. If the entire additional income is consumed i.e. ∆S=0 then MPC=1
ii. If entire additional income is saved i.e. ∆C=0, then MPC=0
In normal situation, value of MPC varies between 0 and 1.

• MPC of poor is more than that of rich : It happens because poor people spend a
greater percentage of their increased income on consumption as most of their basic
needs remain unsatisfied
• MPC falls with successive increase in income : It happens because as an economy
becomes richer, it has the tendency to consume smaller percentage of each
increment to its income
High – Powered Money

High Powered Money refers to the most liquid component of money supply in the
economy
The important components which determine high power money are as follows:-
a. Currency with the public
b. Other deposits with RBI
c. Cash with Banks
d. Bankers Deposits with RBI
High Powered Money (H) includes currency with Public (C) important reserves of
Commercial Banks (RR) and other reserves (ER)
(Reserves that bank maintained with the Central Bank)
Thus we get the equation,
H = C+RR+ER
OR
H = C+R (where R=Reserves)
Sources of HPM are as follows :-
1. Claims of Reserve Bank of India
contact us @ 8777203495
2. Government’s Currency Liabilities to the Public

3. Not Foreign Exchange Assets of Reserve Bank
4. Net Non-Monetary Liabilities of Reserve Bank
contact us @ 8777203495

Sky High Institute: Important Eco Sem 5

Uploaded by

Copyright:

Available Formats

You might also like

Sky High Institute: Important Eco Sem 5

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sky High Institute: Important Eco Sem 5

Uploaded by

Copyright:

Available Formats

For Any Enquiry or to join any

course in our institute feel free

Sky High Institute

Q. What do you mean by per capita income?

Quantitative Measures of Credit Control

Q. Liquidity performance theory of demand for money/ Discuss the ke Keynesian

Demand Pull And Cost Push Inflation

Causes Of Demand Pull Inflation:-

1) Increase in population: Increas in population raise the number of consumers in the

Cost push inflation:-

Q. What do you mean by unemployment. What are its types?

7.Technological unemployment: This type of unemployment takes place every time

Objective of monetary policy:-

(Money demand is the function of transactive and speculative motive)

A. Change in money supply

Inflationary Gap with Diagram

We can illustrate the inflationary gap in terms of Fig 2.1.

According to this approach, the equilibrium level of income is determined at a level,

APS , APC , MPS , MPC

Relationship between APC and APS

Relationship between MPC and MPS

In normal situation, value of MPS varies between 0 and 1

In normal situation, value of MPC varies between 0 and 1.

High – Powered Money

2. Government’s Currency Liabilities to the Public

You might also like