ECONOMICS 2PUC

SESHADRIPURAM PRE-UNIVERSITY COLLEGE TUMAKURU

Dept. of Economics
II PUC Passing Package
I. Choose the correct answer. (Each question carries 1 mark)
1. The scarce resources of an economy have
a) Competing usages b) Single usages
c) Unlimited usages d) None of the above
2. Which of the following is an example of a microeconomic study?
a) National Income b) Consumer behaviour
c) Unemployment d) Foreign trade
3. Central problems of an economy includes
a) What to produce b) How to produce
c) For whom to produce d) All of the above
4. Traditionally, the subject matter of economics has been studied under the
following broad branches.
a)Micro & Macro Economics b) Positive & Normative
c) Deductive & Inductive d) None of the above
5. Utility is
a) Objective b) Subjective
c) Both a & b d) None of the above
6. The shape of an indifference curve is normally
a) Convex to the origin b) Concave to the origin
c) Horizontal d) Vertical
7. The consumption bundles that are available to the consumer depend on
a) Colour & Shape b) Price & Income
c) Income & Quality d) None of the above
8. The equation of budget line is
a) Px + P1x1 = M b) M = P0x0 + Px
c) P1x1 + P2x2 =M d) Y = Mx + C
9. The demand for these goods increases as income increases
a) Inferior goods b) Giffen goods
c) Normal goods d) None of the above
10. A vertical demand curve is
a) Perfectly Elastic b) Perfectly inelastic
c) Unitary Elastic d) None of the above
11. Ordinal Utility analysis expresses utility in
a) Numbers b) Returns
c) Ranks d) Awards

Lavanya GM. M.A., KSET., B.Ed. (Ph.D)

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12. The formula of the production function is

a) q = f (L,K) b) q = d (p)
c) y = f(x) d) None of the above
13. In the short run, a firm
a) Can change all the inputs b) Cannot vary all the inputs
c) Can keep the inputs fixed d) none of the above
14. The change in output per unit of change in the input is called.
a) Marginal product b) Average product
c) Total product d) Product
15. Cobb – Douglas production function is
a) q = (x, x) b) q = (x1, x2)
c) q = (x1ᵅ, x2ᵝ) d) q = (0)
16. TC =
a) TVC b) TFC
c) TFC + TVC d) AC + MC
17. The product in a perfect competition is
a) Heterogeneous b) Homogeneous
c) Luxury d) Necessary
18. The increase in total revenue for a unit increase in the output is
a) Marginal Revenue b) Average Revenue
c) Total Revenue d) Fixed Revenue
19. The firm’s profit is denoted by
a) ∑ b) Δ c) Ø d) 𝝅
20. When the supply curve is vertical the elasticity of supply is
a) es = 1 b) es > 1 c) es = 0 d) es = ∞
21. The revenue per unit of output of a firm is called as
a) TR b) MR d) AR d) None of the above
22. In perfect competition, buyers and sellers are
a) Price makers b) Price takers
c) Price analysts d) None of the above
23. A situation where the plans of all consumers and firms in the market match.
a) Inequilibrium situation b) Equilibrium situation
c) Maximisation situation d) Partial Equilibrium situation
24. As a result of increase in the number of firms there is an increase in supply, then supply
curve
a) Shifts towards left b) Shifts towards Right
c) Shifts towards both sides d) None of the above
25. The firms earn super normal profit as long as the price is greater than the minimum of
a) Marginal cost b) Total cost
c) Average cost d) Fixed cost

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26. The government imposes upper limit on the price of goods and services is called
a) Price ceiling b) Selling price
c) Price floor d) None of the above
27. The government imposed lower limit on the price of goods and service is called
a) Goods floor b) Service floor
c) Price floor d) None of the above
28. The individuals or institutions which take economic decisions are
a) Economic Variables b) Economists
c) Economic Agents d) None of the above
29. In 1936 British economist J.M. Keynes published his celebrated book
a) Wealth of nations
b) General theory of employment interest and money
c) Theory of Interest d) Theory of Employment
30. All the labourers who are ready to work will find employment and all the factories will be
working at their full capacity, this school of thought is known as
a) Modern thought b) Contemporary thought
c) Classical thought d) None of the above
31. The year of Great Depression
a) 1920 b) 1889
c) 1929 d) 2018
32. In a capitalist country production activities are mainly carried out by
a) Private enterprises b) Government authority
c) Planning authority d) None of the above
33. The study of National Income is related to
a) Micro Economics b) Macro Economics
c) Both Micro & Macro d) None of the above
34. NNP = GNP –
a) Deduction b) Depreciation
c) Investment d) None of the above
35. The value of GDP at the current prevailing prices is
a) Real GDP b) GDP at Factor cost
c) Nominal GDP d) NDP
36. By deducting undistributed profit from national income, we get
a) Personal Disposable Income b) Personal Income
c) Private income d) Subsidies
37. Measuring the sum total of all factor payments will be called
a) Product method b) Expenditure method
c) Income method d) None of the above

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38. The main function of Money is

a) Saving b) Expenditure
c) Medium of exchange d) Investment
39. The Bank which acts as monetary authority of India.
a) RBI b) NABARD
c) RRB d) IDBI
40. The Banks which are a part of the money creating system of the economy are
a) Bankers b) Commercial Banks
c) RBI d) None of the above
41. The rate at which the RBI lends money to commercial banks against securities
a) Bank rate b) Repo rate
c) Reverse Repo rate d) None of the above
42. The important tool by which RBI influences money supply is
a) Open market operation b) Closed market operation
c) Money operation d) None of the above
43. Consumption which is independent of income is called
a) Induced consumption b) autonomous consumption
c) wasteful consumption d) past consumption
44. Value of MPC lies between
a) 1 and 2 b) 0 and 1 c) 2 and 4 d) 0 and 0.5
45. The point where ex – ante aggregate demand is equal to ex – ante aggregate supply will be
a) equilibrium b) disequilibrium
c) excess demand d) excess supply
46. Easy availability of credit encourages
a) saving b) investment
c) rate of interest d) None of the above
47. In the situation of excess demand
a) demand is less than the level of output
b) demand is more than the level of output
c) supply is less than the level of output
d) supply is more than the level of output
48. The Taxes on Individual and firms are
a) Direct Taxes b) Indirect Taxes
c) Fixed Taxes d) Non Tax Revenue
49. Duties Levied on goods produced with in the country
a) Service Tax b) Estate Duties
c) Excise Duties (Taxes) d) Customs duties
50. The Tax which acts as an automatic stabilizer
a) Qualitative income Tax b) Income Tax
c) Quantitative Tax d) Proportional income Tax

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51. Which of the following is an example of ‘Paper taxes’

a) Income Tax b) Excise Taxes
c) Wealth Tax d) Customs Taxes
52. When Demand exceeds the available output under conditions of high level of employment,
this may give rise to
a) Inflation b) Deflation
c) Stabilisation d) None of the above
53. The consumers and producers can choose between domestic and foreign goods, this market
linkage is called
a) Financial Market linkage b) Output Market linkage
c) Labour Market linkage d) None of the above
54. The exchange rate is determined by the market forces of demand and supply is called as
a) Fixed exchange rate b) Dirty floating exchange rate
c) Flexible exchange rate d) None of the above
55. The balance of payments (BOP) records these transactions between residents and the rest of
the world
a) Goods b) Services c) Assets d) All of the above
56. The rate at which the price of one currency in terms of foreign currency is called
a) Exchange control b) Interest rate
c) Foreign exchange rate d) None of the above.
57. In this standard all currencies were defined in terms of gold
a) Metal standard b) Silver standard
c) Gold standard d) None of the above

II. Fill in the blanks. (Each question carries 1 mark)

1. Scarcity of resources gives raise to Problem of choice.
2. In a centrally planned economy all important decisions are made by
Government.
3. A market is a set of arrangements where economic agents can freely exchange
their endowments or products with each other.
4. In reality, all economies are Mixed Economics.
5. Wants satisfying capacity of a commodity is Utility.
6. Two indifference curves never intersect each other.
7. As income increases, the demand curve for normal goods shift towards rightward.
8. The demand for a good moves in the opposite direction of its price.
9. Method of adding two individual demand curves is called horizontal summation.
10. In the long run, all inputs are varied.
11. Average product is defined as the output per unit of variable input.
12. Marginal product and Average product curves are inverse ‘U’ in shape.
13. SMC curve cuts the AVC curve at the minimum point of AVC curve from below.
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14. Isoquant is the set of all possible combinations of the two inputs that yield the
same maximum possible level of output.
15. Price taking behaviour is the single most distinguishing characteristic of perfect competitive
Market.
16. Unit Tax is a tax that the government imposes per unit sale of output.
17. For a price taking firm marginal revenue is equal to Market price.
18. The point of minimum AVC where the SMC curves cuts the AVC curves is called Shut
down point.
19. Opportunity cost of some activity is the gain forgone from the second best activity.
20. In a perfectly competitive market, equilibrium occurs when market demand equals market
supply.
21. If the supply curve shifts rightward and demand curve shifts leftward equilibrium price will
be decreasing.
22. Wage is determined at the point where the demand for labour and supply of labour curves
intersect.
23. In labour market households are the suppliers of labour.
24. Due to rightward shifts in both demand and supply curves he equilibrium price remains
unchanged.
25. It is assumed that, in a perfectly competitive market an invisible hand is at play.
26. Macro Economics tries to address situations facing the economy as a whole.
27. Sale of goods by the domestic country to the rest of the world is called Export.
28. The domestic country may sell goods to the rest of the world. These are called Exports.
29. Production Units will be called as firms.
30. Macro-economic policies are pursued by the state itself or statutory bodies like the RBI,
SEBI etc.
31. Stocks are defined at a particular point of time.
32. Final goods will not pass through any more stages of production.
33. Depreciation is an annual allowance for wear and tear of a capital good.
34. Inventory is a stock variable.
35. Pollution is an example for negative externalities.
36. The net contribution made by a firm is called its value added.
37. Economic exchanges without the use of money are referred to as Barter System.
38. Reserve Bank of India (RBI) is the only institution which can issue currency in India.
39. Government of India (Ministry of Finance) issues coins in India.
40. The principal motive for holding money is to carry out transactions.
41. M1 and M2 are known as Narrow money.
42. cY shows the dependence of consumption on income.
43. Savings is that part of income that is not consumed.
44. Average propensity to consume (APC) is the consumption per unit of income.
45. Investment is defined as addition to the stock of physical capital.

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46. Size of the multiplier depends on the value of Marginal Propensity to Consume (MPC).
47. I is a positive constant which represents the autonomous investment in the economy.
48. Non - paying users of public goods are known as free riders.
49. Financial year runs from 1st April to 31st March in India.
50. Taxes imposed on goods imported into and exported out of India are called customs duties.
51. The Government may spend an amount equal to the revenue it collects. This is known as
balanced budget.
52. Revenue deficit = Revenue expenditure – Revenue receipts.
53. Current Account is the record of trade in goods and services and transfer payments.
54. Capital account records all international transactions of assets.
55. The price of foreign currency in terms of domestic currency has increased and this is called
Depreciation of domestic currency.
56. Managed floating exchange rate is a mixture of a flexible and fixed exchange rate system.
57. The Bretton Woods conference held in the year 1944.

III. Match the following. (Each question carries 1 mark)

1. A B
1. Market economy a) Government (3)
2. Service of a Teacher b) Private ownership (1)
3. Centrally planned economy c) Skill (2)
4. Positive economics d) Evaluate the Mechanism (5)
5. Normative economics e) Functioning of Mechanism (4)

2. A B
1. Demand curve a) d(P) = a – bp (2)
2. Linear demand curve b) Downward sloping (1)
3. Unitary elasticity of demand c) Pen & ink (4)
4. Complementary goods d) A family of indifference curve (5)
5. Indifference map e) /ed/ = 1 (3)

3. A B
1. CRS a. ΔTC/ΔC (5)
2. SAC b. Long Run Average Cost (3)
3. LRAC c. Short Run Average Cost (2)
4. TFC + TVC = d. Constant Returns to scale (1)
5. SMC e. TC (4)

Lavanya GM. M.A., KSET., B.Ed. (Ph.D)

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4. A B
1. MR = a. Perfect information (5)
2. 𝜋 = b. Zero profit (4)
3. AR = c. ΔTR/ Δq (1)
4. Normal Profit d. TR – TC (2)
TR
5. Perfect competition e. (3)
Q

5. A B
1. Adam smith a. Attraction of new firms (4)
2. Price ceiling b. Operation of invisible hand (1)
3. Market equilibrium c. Lower limit on price (5)
4. Possibility of supernormal profit d. Upper limit on price (2)
5. Price floor e. QD = QS (3)

6. A B
1. Labour a) Non – Monetary exchange (5)
2. GDP b) Personal Disposable Income (4)
3. Inventory c) Gross Domestic Product (2)
4. PDI d) Stock variable (3)
5. Domestic Service e) Wages (1)

7. A B
1. SLR a. Government of India (2)
2. Circulation of coin b. Statutory Liquidity Ratio (1)
3. Money c. Broad money (4)
4. M3 and M4 d. Repo (5)
5. Repurchase agreement e. Medium of Exchange (3)

8. A B
1. Savings a) APC (Average Propensity to consume) (3)
2. Raw material b) C + I + cY (4)
3. Consumption per c) Intermediate good (2)
unit of income
4. Aggregate demand d) Leads to rise in the prices in the long run (5)
for final goods
5. Excess demand e) Y – C (1)

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9. A B
1. SDR a) Dirty floating (5)
2. Balance of payment b) Flexible exchange rate (4)
3. Balance of trade c) Paper gold (1)
4. Floating exchange rate d) Trade in goods (3)
5. Managed floating e) Trade in goods and services (2)

IV. Assignment and project oriented questions: (5 marks)

1. A Consumer wants to consume two goods. The price of Bananas is Rs.5 and the price of
Mango is Rs.10. The consumer income is Rs.40.
a) How much Bananas can she consumes if she spends her entire income on that good?
Ans: 8 Bananas (40/5)
b) How much Mangoes can she consumes if she spends her entire income on that good?
Ans: 4 Mangoes (40/10)

c) Is the slope of budget line downward or upward?

Ans: Slope of budget line is downward.

d) Are the bundles on the budget line equal to the consumer’s income or not?
Ans: Yes, the bundles on the budget line equal to the consumer’s income.

e) If you want to have more of Bananas you have to give up Mangoes. Is it true?
Ans: True, if we want to have more of Bananas we have to give up Mangoes.

2. Find the missing products in the following table.

Factor 1 TP MPL APL
0 0 0 0
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5

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3. Compute the total revenue, marginal revenue and average revenue schedules in the
following table when market price of each unit of goods is Rs. 10.
Quantity sold TR MR AR
0
1
2
3
4
5
6
Ans:
Quantity sold Market Price TR = p x q MR = TRn – AR = TR/q
(q) (p) TRn-1
0 10 0 0 0
1 10 10 x 1 = 10 10 – 0 = 10 10/1 = 10
2 10 10 x 2 = 20 20 – 10 = 10 20/2 = 10
3 10 10 x 3 = 30 30 – 20 = 10 30/3 = 10
4 10 10 x 4 = 40 40 – 30 = 10 40/4 = 10
5 10 10 x 5 = 50 50 – 40 = 10 50/5 = 10
6 10 10 x 6 = 60 60 – 50 = 10 60/6 = 10

5. Prepare a budget on monthly income and expenditure of your family.

Ans: The budget is a financial statement which includes anticipated income and anticipated
expenditure.
Budget for the Month of September – 2021
Income Expenditure
1.Father’s salary Rs. 60,000 1.Food Rs.15,000
2.Mother’s salary Rs. 20,000 2.Electricity Rs. 2,000
3.Rent from house Rs. 20,000 3.BWSSB Rs. 2,000
4.Income from others Rs. 20,000 4.Transportation Rs. 10,000
5.School fees Rs. 10,000
6.Newspaper Rs. 500
7.Mobile recharge Rs. 500
8. Milk Rs. 3000
9. Medicines Rs. 2000
10.Miscellaneous Rs. 5000
Total Rs.1,20,000 Total Rs. 50,000
This family has surplus budget as its income is more than expenditure.

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6. Name the currencies of any five countries of the following

USA, UK, Germany, Japan, China, Argentina, UAE, Bangladesh, Russia
Ans:
Countries Currency
USA US dollars
UK British Pound
Germany Euro
Japan Japanese Yen
China Chinese Yuan
Chinese Renminbi
Argentina Argentine Peso
UAE UAE Dirham
Bangladesh Bangladeshi Taka
Russia Russian Ruble

ONE MARK QUESTIONS

MICRO ECONOMICS
1. Why does the problem of choice arise?
Ans: The problem of choice arises because of limited resources and unlimited wants and
alternative uses of resources.
2. What is market economy?
Ans: The economy was operated by the private individual.
3. What do you mean by centrally planned economy?
Ans: A planned economy also called as socialistic economy. It is an economy where the economic
activities are controlled by the government.
Ex: China, North Korea, Russia, Vietnam
4. Give the meaning of micro economics.
Ans: Micro economics is the study of the economic actions of individuals and small group of
individuals.
5. What do you mean by positive economics?
Ans: The positive economics is the study of ‘what was’ and ‘what is’ under the given set of
circumstances. It is the functioning of mechanism.
6. What is normative economics?
Ans: The normative economics studies ‘what ought to be’. It explains about ‘what should be done
and what should not be done’. It evaluates the mechanism

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7. What is budget line?

Ans: The line consists of all bundles of goods which cost exactly equal to the money income of
consumer is called budget line. It represents all bundles which costs entire income of consumer.
It slopes negatively.
8. What do you mean by cardinal utility analysis?
Ans: When the utility is measured in numbers like 1,2,3,4……., it is called as cardinal utility
analysis. It is advocated by Prof. Alfred Marshall.
9. Give the meaning of marginal utility?
Ans: Marginal utility is the additional utility derived by the consumer by consuming an additional
unit of a commodity. It represents the utility of single unit. It may be written as
MU = TUn – TUn-1
10. What is utility?
Ans: Utility refers to the want satisfying power of a commodity.
11. Expand MRS.
Ans: Marginal Rate of Substitution.
12. What do you mean by Indifference Curve?
Ans: Indifference curve shows the different combinations of two commodities in which the
consumer gets of satisfaction.
13. What is demand?
Ans: The quantity of a commodity that a consumer is willing to buy and is able to afford, given
prices of goods and consumer’s tastes and preferences is called demand. It include desire for a
commodity, ability to pay and willingness to pay.
14. What do you meant by Total product?
Ans: Total Product is the relationship between the variable input and output, keeping all other
inputs constant.
15. What is Average Product?
Ans: Average Product is defined as the output per unit of variable input. We calculate it as:
AP = TP/L
16. Give the meaning of Marginal Product.
Ans: Marginal Product is defined as the change in output per unit of change in the input when all
other inputs are held constant.
MP = ΔTP/ΔL OR MP = TPn - TPn-1
17. Write the meaning of cost function of the firm.
Ans: The cost function of the firm describes the least cost of producing each level of output, given
prices of factors of production and technology. It deals with the output and prices of factors of
production.
18. What is total fixed cost?
Ans: The cost that a firm incurs to employ fixed factors of production (inputs) is called as Total
Fixed Cost.

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19. What is average fixed cost?

Ans: Average fixed cost is the cost per unit of fixed input. It is obtained by dividing the values of
the Total fixed cost by output.
AFC = TFC/q
20. Define marginal revenue.
Ans: Marginal Revenue is defined as the increase in total revenue for a unit increase in the firm’s
output.
21. To which side does supply curve shift due to the technological progress?
Ans: Supply curve will shift to Right.
22. Write the formula to calculate average revenue.
𝑇𝑅
Ans: 𝐴𝑅 =
𝑄
23. What is normal profit?
Ans: The minimum level of profit that is needed to keep a firm in the existing business is defined
as normal profit. (OR)
The profit level that is just enough to cover the explicit costs and opportunity costs of the firm is
called the normal profit.
24. Give the meaning of super normal profit.
Ans: Profit that a firm earns over and above the normal profit is called the super normal profit.
25.Define market equilibrium.
Ans: Market equilibrium is a situation where market demand is equal to market supply.
26. What is equilibrium price?
Ans: The price at which equilibrium is reached is called equilibrium price.
27. What is price ceiling?
Ans: The government imposed upper limit on the price of a good or service is called price ceiling.
28. What is price floor?
Ans: The government imposed lower limit on the price that may be charged for a particular good
or service is called price floor.
29. Through which legislation, the government ensures that the wage rate of the labourers
does not fall below a particular level?
Ans: Minimum wage legislation.
MACRO ECONOMICS
1. Who are economic agents?
Ans: Economic agents are those individuals or institutions which take economic decisions.
Examples: Government, Corporation, Banks, consumers, producers etc.
2. What does classical school of thought say?
Ans: The classical school of thought says that all the labourers who are ready to work will find the
employment and all the factories will be working at their full capacity.
3. Give the meaning of imports.
Ans: When the economy buys goods from the rest of the world, they are called imports.

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4. Name the well-known work of Adam Smith.

Ans: “An Enquiry into the Nature and Cause of the Wealth of Nations” (1776) is the well-
known work of Adam Smith.
5. What do you mean by wage rate?
Ans: The sale and purchase of labour services at a price is called the wage rate.
6.What do you mean by final goods?
Ans: Final goods are those goods which are meant for final use and will not pass through any more
stages of production or transformations.
7. Expand CPI.
Ans: Consumer Price Index.
8. Expand GNPMP.
Ans: Gross National Product at Market Prices.
9. How do you get net value added?
Ans: We obtain net value added by deducting the value of depreciation from Gross value added.
10. Give the meaning of GDP.
Ans: Gross Domestic Product (GDP) is the market value of all final goods and services produced
within a domestic territory of a country measured in a year.
11. Give the meaning of Intermediate goods.
Ans: Intermediate goods are the goods used by other producers as material input. These are used
as raw material for production of other commodities. These are not final goods.
12. What is Depreciation?
Ans: Depreciation is a deduction made from the value of gross investment in order to
accommodate regular wear and tear of capital goods.
13. How do we get Personal Disposable Income?
Ans: The Personal Disposable Income is obtained by deducting personal tax payments and non –
tax payments from Personal Income.
14. Write the equation of GVA at market prices.
Ans: GVA at market prices = GVA at basic prices + Net product taxes.
15. What is GDP deflator?
Ans: GDP deflator is the ration of nominal GDP to real GDP.
GDP deflator = GDP/gdp
where, GDP is nominal Gross Domestic Product and
gdp is real Gross Domestic Product.
16. What do you mean by barter system?
Ans: The economic exchange without the use of money is called Barter system.
17. Give the meaning of money.
Ans: Anything that is commonly accepted as medium of exchange for goods and services and also
acts as a common measure of value is called as money.

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18. What is Time deposit?

Ans: These are the deposits in which money deposited is fixed for a period of time and cannot be
withdrawn before stipulated time. High rate of interest is paid. Interest rate depends on the
duration of money deposited.
19. What is Fiat Money?
Ans: Fiat Money is the money which does not have any intrinsic value. Intrinsic value is the value
of metal or paper which is equal to face value of coin or currency note.
20. Write the meaning of ‘High – powered Money’.
Ans: The currency issued by the central bank can be held by the public or by the commercial bank
is called high - powered money.
21. Expand CRR.
Ans: Cash Reserve Ratio.
22. What is Bank Rate?
Ans: The RBI can influence money supply by changing the rate at which it gives loans to the
commercial banks. This rate is called the bank rate in India.
23. Write the meaning of autonomous consumption.
Ans: The consumption which is independent of income is called as autonomous consumption.
24. Give the meaning of Marginal propensity to save (MPS).
Ans: MPS is the change in savings per unit change in income. It is denoted by ‘S’ and is equal to
1 – c. It implies that S + C = 1
25. Define Average Propensity to Save (APS).
Ans: Average Propensity to save is the saving per unit of income. It is obtained by dividing saving
by income i.e. s/y. where ‘s’ is saving and ‘y’ is income.
26. Write the meaning of full employment level of income.
Ans: Full employment level of income is that level of income where all the factors of production
are fully employed in the production process.
27. Mention two fiscal variables which influence aggregate demand.
Ans: The two fiscal variables which influence aggregate demand are as follows:
a) Tax
b) Government expenditure.
28. Write the formula of MPC.
∆𝐶
Ans: MPC = ∆𝑌
29. What are public goods?
Ans: Public goods are the goods and services provided by the government and which cannot be
provided by the market mechanism.
Ex: National defence, roads etc.
30. Who are ‘free – riders’?
Ans: Non paying users of public goods are known as free – riders.

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31. What do you meant by public provision?

Ans: Public provision means that they are financed through the budget and can be used without
any direct payment.
32. Give the meaning of progressive Tax.
Ans: Progressive Tax is the taxation system in which higher the income, higher is the tax rate and
lower the income, lower is the tax rate.
33. What are Revenue receipts?
Ans: Revenue receipts are those receipts that do not lead to a claim on the government. They
consist of Tax and Non – Tax revenues.
34. Write the meaning of capital receipts.
Ans: All those receipts of the government which create liability or reduce financial assets are
termed as capital receipts.
35. Give the meaning of Revenue expenditure.
Ans: Revenue expenditure is expenditure incurred for purposes other than the creation of physical
or financial assets of the central government. This expenditure is related to maintain government
departments and various services, interest payments, grants given to state governments etc.
36. Give the meaning of capital expenditure.
Ans: The capital expenditures are the expenses of government which result in creation of physical
or financial assets or reduction in financial liabilities. It includes expenditure on the acquisition of
land, building, machinery, equipment, investment in shares etc.
37. Expand FRBMA.
Ans: Fiscal Responsibility and Budget Management Act.
38. What is primary deficit?
Ans: Primary deficit is the fiscal deficit minus the interest payments.
Or
Gross primary deficit = Gross Fiscal deficit – Net interest liabilities.
39. What do you mean by open economy?
Ans: An open economy is one which interacts with rest of the world through various channels.
40. What is balance of payment?
Ans: The balance of payments is the record of the transactions in goods, services and assets
between residents of a country with the rest of the world for a specified period of time i.e., a year.
41. What is balance of trade?
Ans: Balance of trade is the difference between the value of exports and value of imports of goods
of a country in a given period of time.
42. What do you mean by fixed exchange rate?
Ans: Fixed exchange rate is an exchange rate between the currencies of two or more countries that
is fixed at some level. Under this system, the government fixes the exchange rate at a particular
level.

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43. Give the meaning of official reserve sale.

Ans: When the Reserve Bank of India sells foreign exchange when there is deficit balance of
payments, it is called official reserve sale.
44. Give the meaning of managed floating.
Ans: The managed floating exchange rate system is the mixture of a flexible exchange rate system
and a fixed exchange rate system. Here, the central banks intervene to buy and sell foreign
currencies in an attempt to moderate exchange rate movements whenever they feel that such
actions are appropriate.
TWO MARKS QUESTIONS
MICRO ECONOMICS
1. Mention the central problems of an economy.
Ans: The central problems of an economy are
1. What is produced and in what quantities?
2. How are these goods produced?
3. For whom are these goods produced?
2. Distinguish between Micro and Macro economics.
Ans:
Micro economics Macro economics
1. It studies in individual units. 1. It studies in aggregates.
2. Its scope is narrow. 2. Its scope is wider.
3. It follows slicing method as it studies 3. It follows lumping method as it studies in
individual unit. aggregates.

3. Distinguish between positive and normative economics.

Ans:
Positive Economics Normative Economics
1. It is the study of ‘what was’ and ‘what 1. It studies ‘what ought to be’
is’ under the given set of circumstances.
2. It deals with the scientific explanation 2. It explains about ‘what should be done
of the working of the economy. and what should not be done’
3. It is the functioning of mechanism. 3. It evaluates the mechanism.

4. What do you mean by production possibility set?

Ans: The collection of all possible combinations of the goods and services that can be produced
from a given amount of resources and a given stock of technological knowledge is called the
production possibility set.
5. What is opportunity cost?
Ans: An opportunity cost is the cost of having a little more of one good in terms of the amount of
the other good that has to be forgone. This is known as the opportunity cost of an additional unit
of the goods.

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6. What is production possibility frontier?

Ans: The production possibility frontier is a graphical representation of the combinations of two
commodities (Corn and Cotton) that can be produced when the resources of the economy are fully
utilized. It is also called as Production Possibility Curve also known as transformation curve.
7. What are the differences between budget line and budget set?
Ans: Budget Line Budget Set
1. It is the line consists of all bundles 1. It is a collection of all bundles
of goods which cost exactly equal to available to a consumer at the
the money income of consumer. existing price at his given level of
income.
2. It is also known as Price Line. 2. It is also known as Opportunity
Set.
8. What do you mean by inferior goods? Give example.
Ans: those goods whoes demand decreses with the increase in income of the consumer are called
inferior goods.
Ex: coarse cereals such as Pearl millet, finger millet, fox tail millet etc.
9. What is monotonic preferences?
Ans: A rational consumer always prefer more of the commodity that offers him a higher level of
satisfaction is called monotonic preferance.
For instance, the consumer, between any bundles say (x1, x2) and (y1, y2), if (x1,x2) has more
of at least one of the goods and no less of the other good compared to (y1,y2) then the consumer
prefers (x1,x2) to (y1,Y2). This is called monotonic preferences.
10. State the law of demand.
Ans: when other this remaining constant, if a price of a commodity increases quantity demand
decreases, price of a commodity decreases quantity demand increases is called law of demand.
11. Mention two different approaches which explain consumer behavior.
Ans: The two approaches which explain consumer behavior are:
a) Cardinal approach
b) Ordinal approach
12. What do you mean by price elasticity of demand?
Ans: Price elasticity of demand is defined as the percentage change in demand for the good divided
by the percentage change in its price.

Percentage change in demand for the good

Ped = Percentage change in the price of the good
ΔQ P
Ped = Q ΔP

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13. What is Isoquant?

Ans: An isoquant is the set of all possible combinations of the two inputs that yield the same
maximum possible level of output. Each Isoquant represents a particular level of output and is
labeled with that amount of output.
14. Give the meaning of the concepts of short run and long run.
Ans: Short run – The period in which out put can be changes by changing only variable factor is
called short run
Long run- The period in which out put can be changes by changing all the factors is called short
run
15. Mention the types of Returns to scale.
Ans: The types of returns to scale are:
a) Increasing Returns to Scale
b) Constant Returns to Scale
c) Decreasing Returns to Scale
16. Name the short run costs.
Ans: The short run costs are:
a) Total Fixed Cost (TFC) e) Average Variable Cost (AVC)
b) Total Variable Cost (TVC) f) Average Cost (AC)
c) Total Cost (TC) g) Marginal Cost (MC)
d) Average Fixed Cost (AFC)
17. What are long run costs?
Ans: In the long run, all inputs are variable. There are no fixed costs.
There are two long run costs namely:
a) Long run Average Cost
b) Long run Marginal Cost
18. Mention the conditions needed for profit by a firm under perfect competition.
Ans: For profits to be maximum, three conditions must hold at q0:
i. The price, P must be equal to MC (P = MC)
ii. Marginal Cost must be non – decreasing at q0.
iii. For the firm to continue to produce
a) In the short run, price must be greater than the average variable cost.
(P > AVC)
b) In the long run, price must be greater than the average cost.
(P > AC)
19. Give the meaning of shut down point.
Ans: The point of minimum AVC where the SMC curves cuts the AVC curves is called Shut down
point.
20. Write the meaning of opportunity cost with an example.
Ans: Opportunity cost of some activity is the gain foregone from the second best activity.

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Example: Suppose we have Rs.1000 which we decide to invest in our family business. If we do
not invest this money, will give us zero return or we can deposit it either Bank – 1 or Bank – 2 in
which case we get an interest at the rate of 10% or 5% respectively. So the maximum benefit that
we may get from other alternative activities is the interest from the bank. The opportunity cost is
investing the money in our family business is therefore the amount of forgone interest from the
Bank -1.
21. Mention the two determinants of a firm’s supply curve.
Ans: The two determinants of a firm’s supply curve are:
1. Technological Progress.
2. Input Prices.
22. Give the meaning of price elasticity of supply and write its formula.
Ans: Price elasticity of supply is the responsiveness of quantity supplied to change in the price of
the good.
Percentage change in quantity supplied
∆𝑄 𝑃
es = Percentage change in price (OR) es = ∆𝑃 X 𝑄

23. Define equilibrium price and quantity.

Ans: The price at which equilibrium is reached is called equilibrium price, whereas, the quantity
bought and sold at the equilibrium price is called equilibrium quantity.
24. How price is determined, when fixed number of firms exists in perfect competition?
Ans: Price is determined with the help of supply and demand forces when the number of firms is
fixed in perfect competition.
25. Write any two possible ways in which simultaneous shift of both demand and supply
curves.
Ans: The two possible ways are:
a. Both supply and demand curves shift rightwards.
b. Bothe supply and demand curves shift leftwards.
c. Supply shift rightwards and demand shift leftwards.
d. Supply shift leftwards and demand shift rightwards.

26. What is marginal revenue product of labour (MRPL)?

Ans: For each extra unit of labour, he/she gets an additional benefit equal to marginal revenue
time’s marginal product which is called Marginal Revenue Product of Labour (MRPL).
27. Distinguish between excess demand and excess supply.
Ans: If at a price, market supply is greater than market demand, we say that there is an excess
supply in the market at that price.
It market demand exceeds market supply at a price, it is said that excess demand exists in the
market at that price.

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28. How wage is determined in the labour market?

Ans: The wage rate is determined at the intersection of the demand and supply curves of labour
where the demand for and supply of labour balance.

MACRO ECONOMICS
1. What are the features of capitalist economy?
Ans: The features of capitalist economy are as follows:
a) There is private ownership of means of production.
b) decision making by the private individuals,
c) high level of profit motive
d) price mechanism guides all the decisions.
2. Name and write the meaning of two kinds of trade in external sector.
Ans: The two kinds of trade in external sector are
a) Exports: The domestic country may sell goods to the rest of the world.
b) Imports: When the economy buys goods from the rest of the world.
3. Who are the macroeconomic decision makers?
Ans: The macroeconomic decision makers are the State itself or statutory bodies like the Reserve
Bank of India (RBI), Securities and Exchange Board of India (SEBI) and similar institutions. Each
such body will have one or more public goals to pursue as defined by law or the Constitution of
India itself.
4. What are the four factors of production? Mention their rewards.
Ans: The four factors of production are:
a. Land - Rent
b. Labour - Wages
c. Capital - Interest
d. Organization - Profit
5. Distinguish between stock and flow with the example.
STOCK FLOW
1.It is that quantity of economic variable 1. It refers to that quantity of economic
which is measured at a particular point of variable which is measured over a period
time. of time.
2. Examples: capital, inventory, wealth, 2. Examples: net investment, salary,
foreign exchange reserves etc. National income etc.

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6. What is the difference between consumer goods and capital goods?

CONSUMER GOODS CAPITAL GOODS
1.Consumer goods are the goods which 1. Capital goods are the durable goods
are purchased for consumption by which are used in the production process.
ultimate consumers.
2. Examples: food, clothes, services like 2. Examples: machinery, tools,
recreation etc. implements etc.

7. Mention 3 methods of measuring GDP (National Income).

Ans: The three methods of measuring GDP are:
a) Product method or value-added method
b) Income method
c) Expenditure method
8. What do you mean by externalities? Mention its two types.
Ans: Externalities refer to the benefits or harms a firm or an individual cause to another for which
they are not paid or penalized. They do not have any market in which they can be bought and sold.
The two types of externalities are:
a. Positive externalities
b. Negative externalities.
9. Write the equation of GDPMP and GDPFC.
Ans: The equation of GDPMP and GDPFC are as follows:
GDPMP = C + I + G + X – M
GDPFC = GDPMP – Net Indirect Taxes (NIT)
10. Write the difference between nominal and real GDP.
NOMINAL GDP REAL GDP

1. It is the value of GDP at current 1. It is evaluated at constant set of prices

prevailing prices. i.e., by keeping base year’s price index.
2. It is not reliable. 2. It is reliable.
3. It does not give real picture of economic 3. It gives real picture of economic
development of a country. development of a country.

11. Mention any two functions of money.

Ans: The two functions of money are
i) Medium of exchange
ii) Measure of value
12. Give the meaning of CRR and SLR.
Ans: The RBI decides a certain percentage of deposits which every bank must keep as reserves.
This is done to ensure that no bank is over lending. This is a legal requirement and is binding on
the banks. This is called the CRR (Cash Reserve Ratio).

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Apart from the CRR, banks are also required to keep some reserves in liquid form in the short
term. This ratio is called SLR (Statutory Liquidity Ratio).
13. State the credit control instruments of RBI.
Ans: There are two instruments of RBI to control credit. They are:
i) Qualitative techniques –Bank rate, Open market operations, CRR and SLR.
ii) Qualitative techniques –Credit rationing, margin requirements, moral suasion,
publicity, direct action and issue of directives.
14. Mention the two motives of demand for money.
Ans: The two motives of demand for money are as follows:
i) The Transaction Motive
ii) The Speculative Motive.
15. How does bank rate influence money supply?
Ans: The RBI can influence money supply by changing the rate at which it gives loan to the
commercial bank. This rate is called the bank rate in India.
By increasing the bank rate, loans taken by commercial banks become more expensive. This
reduces the reserves held by the commercial bank and hence decreases money supply.
A fall in the bank rate can increase the money supply.
16. What role of RBI is known as ‘Lender of Last Resort’?
Ans: When commercial banks need more funds in order to be able to create more credit, they may
go to market for such funds or go to the Central Bank. Central Bank provides them funds through
various instruments. This role of RBI, that of being ready to lend to banks at all times is another
important function of the central bank, and due to this central bank is said to be the ‘Lender of Last
Resort’.
17. Write the meaning of excess demand and deficient demand.
Ans: If the equilibrium level of output is more than the full employment level, it is due to the fact
that the demand is more than the level of output produced at full employment level. This situation
is called excess demand.
If the equilibrium level of output is less than the full employment of output, it is due to fact that
the demand is not enough to employ all factors of production. This situation is called deficient
demand.
18. Give the meaning of investment multiplier and write its formula.
Ans: The ratio of the total increment in equilibrium value of final goods output to the initial
increment in autonomous expenditure is called the investment multiplier.
∆𝑌 1 1
The investment multiplier = ∆𝐴 = 1−𝑐 = 𝑆
19. Give the meaning of Paradox of thrift.
Ans: If all the people of the economy increase the proportion of income they save, the total value
of savings in the economy will not increase – it will either decline or remain unchanged. This
result is known as the Paradox of Thrift.

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20.Write the difference between Public provision and Public production.

Ans: The difference between public provision and public production are as follows:
Public Provision Public Production

1. A set of facilities financed by the government 1. When the goods produced directed by the
through its budget. government, it is called public production.
2. These are used without any direct payment. 2. These are used with direct payment.

3. Example: Free education, mid day meals etc. 3. Example: Electricity, water supply etc.

21. Who are ‘Free riders’? Why are they called so?
Ans: Non paying users of public goods are known as free – riders. They are called so because,
consumers will not voluntarily pay for what they can get for free and for which there is no exclusive
title (ownership) to the property being enjoyed.
22. Distinguish between surplus budget and deficit budget.
Ans:
Surplus Budget Deficit Budget
1. Here, the tax collection of government 1. Here, the government’s expenditure exceeds
exceeds its required expenditure. its revenue.
2. It is generally made by developed countries. 2. It is generally made by developing
countries.
3 It is a negative implication in terms of 3. It is a positive implication in terms of
welfare of the society. welfare of the society.
23. Why public goods must be provided by the Government?
Ans: In order to understand why public goods need to be provided by the government, we must
understand the difference between private goods and public goods.
- The benefits of public goods are available to all and are not restricted to one consumer.
Example public goods like public park or measures to reduce air pollution, the benefits will
be available to all whereas private goods say chocolates, will not be available to others.
- In case of private goods anyone who does not pay for the goods can be excluded from
enjoying its benefits. But, in public goods, there is no feasibility way of excluding anyone
from enjoying the benefits of the good.
Hence, public goods must be provided by the Government.
24. Mention the non – tax revenues of the Central Government.
Ans: The non – tax revenues of the central government consists of
a. Interest receipts on account of loans by the central government.
b. Dividends and profits on investments made by the government.
c. Fees and other receipts for services rendered by the government.
d. Grants – in – aid from foreign countries and international organizations.

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25. Why the proportional income tax acts as automatic stabilizer?

Ans: The proportional income tax, acts as an automatic stabilizer because, it makes disposable
income and consumer spending less sensitive to fluctuations in GDP. When GDP rises, disposable
income also rises but by less than the rise in GDP because a part of it is siphoned off as taxes. This
helps to limit the upward fluctuation in consumption spending.
During a recession when GDP falls, disposable income falls less sharply and consumption does
not drop as much as it otherwise would have fallen had the tax liability been fixed. This reduces
the fall in aggregate demand and stabilizes the economy.
26. Mention the three linkages of open economy.
Ans: The three linkages of open economy are as follows:
1. Output market linkage
2. Financial Market linkage
3. Labour market linkage.
27. What is the difference between current account and capital account?
Ans: The difference between current account and capital account is as follows:

Current account Capital account

1.It is the record of trade in goods and 1.It is the record of all international
services and transfer payments. transactions of assets.

2.It consists of factor and non-factor 2.It includes money, stocks, bonds,
incomes apart from gifts, remittances government debt etc.
and grants.

28. When do surplus and deficit arise in Capital Account?

Ans: Surplus in capital account arises when the capital inflows are greater than capital outflows.
Deficit in capital account arises when capital inflows are lesser than capital outflows.
29. What are the types of balance of trade?
Ans: 1. Balanced balance of trade
2. Surplus balance of trade
3. Deficit balance of trade:
30. Why do people demand foreign exchange?
Ans: People demand foreign exchange rate because of the following reasons:
• To purchase goods and services from other countries.
• To send gifts abroad
• To purchase financial assets abroad.
31. What is foreign exchange rate?
Ans: Foreign exchange rate is the price of one currency in terms of another currency. It links the
currencies of different countries and enables comparison of international costs and prices.
For example, if we need to pay Rs.68 for 1 dollar, then the exchange rate is Rs.68 per dollar.

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FOUR MARKS QUESTIONS

1. The following table gives TP schedule of labour. Find the corresponding average
product and marginal product
TP 0 15 35 50 40 48
L 0 1 2 3 4 5

Ans: L TP AP MP
0 0 0 0
1 15 15 15
2 35 17.5 20
3 50 16.67 15
4 40 10 -10
5 48 9.6 8

2. Write a table to show the impact of simultaneous shifts in equilibrium.

The simultaneous shifts can happen in four possible ways:

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3. Write the chart of the Government budget.

4. Write the chart of components of current account.

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5. Write the chart of components of capital account.

SIX MARKS QUESTIONS

1. A firm's SMC schedule is shown in the following table. The total fixed cost of the
firm is Rs 100/-. Find the TVC, TC, AVC and SAC schedules of the firm.
Q 0 1 2 3 4 5 6
TC - 500 300 200 300 500 800
Ans:

Q SM TFC TV TC AVC SAC

C C
0 - 100 - 100 - -
1 500 100 500 600 500 600
2 300 100 800 900 400 450
3 200 100 1000 1100 333.33 366.67
4 300 100 1300 1400 325 350
5 500 100 1800 1900 360 380
6 800 100 2600 2700 433.33 450

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2. Suppose the demand and supply curves of wheat are given by

𝒒𝑫=𝟐𝟎𝟎−𝑷 and 𝒒𝑺=𝟏𝟐𝟎+𝑷
a) Find the equilibrium price
b) Find the equilibrium quantity of demand and supply
c) Find the quantity of demand and supply when P > equilibrium price
d) Find the quantity of demand and supply when P < equilibrium price.
Ans:
Demand for wheat. Qd = 200-P and supply of wheat Qs= 120+ P
Here Qd= quantity demanded, Qs=quantity supplied and P= price of wheat per kg in
rupees.
At equilibrium Qd=Qs
qD(p) = qS(p)
200 –p = 120 + p
200 – 120 = P + P
80 = 2P
80
P=
2
P = 40
Equilibrium price is 40.
Now substituting this value of price, we can get the equilibrium quantity of demand and supply
qD = 200 – p qS = 120 + p
= 200 – 40 = 120 + 40
= 160 = 160
So, at equilibrium price ‘40’ q = 160 and q = 160 i.e., qD = qS
D S

If the price is greater than 40, then there will be excess supply. (ES)
Suppose P = 45
qD = 200 – p qS = 120 + p
= 200 – 45 = 120 + 45
= 155 = 165
S
q >q D

If the price is less than 40, then there will be excess demand. (ED)
Suppose P = 25
qD = 200 – p qS = 120 + p
= 200 – 25 = 120 + 25
= 185 = 145
D
q >q S

************

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