ECONOMICS

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 PASSING PACKAGE
PART -A
MICRO ECONOMICS
CHAPTER -1
INTRODUCTION
I Choose the correct answer. Each question carries one mark.
 The scarce resources of an economy have
a]Competing usages b] Single usages
c] Unlimited usages d] None of the above
Ans a]Competing usages
2) Which of the follwing is an example of micro economic study?
a] National Income b] Consumer Behaviour
c] Unemployment d] Foreign trade
Ans b] Consumer Behaviour
3) Which of the following is a Macro economic variable?
a] Individual demand b] Aggregate demand
c] Firms output d] Price of a good
Ans b] Aggregate demand
4) Central problems of an economy includes....
a] What to produce b] How to produce
c] For whom to produce d] All of the above
Ans d] All of the above
5) Traditionally, the subject matter of economics has been studied under the
following broad branches.
a] Micro and Macro Economics b]Positive and Normative
c] Deductive and Inductive d] None of the above
Ans a] Micro and Macro Economics
II Fill in the blanks. ( each questions carries one marks)
1) Scarcity of resources gives raise to ________
Ans Problems of choice
2) In a centrally economy all important decisions are made by _______
Ans Government
3) In reality all economics are_______
Ans Mixed Economies
III Match the following ( each question carries 1 mark)
1) Market economy a] Government
2) Service of a Teacher b] Private
3) Centrally Planned economy c] Skill
4) Positive economics d] Evaluate the mechanism
5) Normative Economics e] Functioning of Mechanism
Ans 1-b, 2-c, 3-a, 4-e, 5-d

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IV Answer the following questions in a sentence or a word
( each question carries one mark)
1) Why does the problem of choice arises?
Ans An economic problem arises because of limited resources and unlimited wants
and alternative uses of resources. To allocate limited resources to satisfy unlimited
wants the problem of choice
2) What is Market Economy?
Ans A market economy also known as capitalistic economy is that economy in which
the economic decisions are undertaken on the basis of market mechanism by the
private entrepreneurs. It functions on demand and supply conditions.
Example USA.
3) What do you mean by centrally planned economy?
Ans A planned economy also called as socialistic economy is that economy where the
economic activities are controlled by the central governments. Here the
Government takes decisions about the allocation of resources in accordance with
objectives to attain economic and social welfare. Example , Vietnam, Russia ,
China , North Korea etc.
4) Give the meaning of Micro Economics .
Ans Micro economics is the study of the economic actions of individuals and small
groups 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 deals with the scientific explanation of the working of the
economy.
6) What is Normative Economics ?
Ans The Normative economics studies ' what ought to be ' . It explains about ' what
should be and should not be done '.
V Answer the following in four sentences .( Each question carries 2 marks )
1) Mention the central problems of an economy.
Ans The central problems of an economy are as follows
a] What goods are to be produced and in what quantities?
b] How the goods are to be produce?
c]For whom the goods are to be produced?
2) Distinguish between Micro and Macro Economics .
Ans The micro and macro economics are distinguished on the following grounds.
Scope- Micro economics study in individual units so its scope is narrow.
Macro Economics study in aggregates , so its scope is wider.
Method of study- The Micro Economics follows slicing method as it studies
individual unit. The macro economics follows lumping method as it studies in
aggregates.

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3) Distinguish between Positive and Normative economics .
Ans Positve Economics Normative Economics
lThe Positve economics is the l The Normative economics studies ' what
study of ' what was' and ' what is ' ought to be '
under the given set of circumstances
lIt deals with the scientific explanation It explains about ' what should be and
l

of the working of the economy. should not be done '

Here we study how the different
mechanism function.
**********
PART -A
MICRO ECONOMICS
CHAPTER -1
THEORY OF CONSUMER BEHAVIOUR
I Choose the correct answer. Each question carries one mark.
 The equation of budget line is
a] PX+P1X1=M b] M=P0X0 + PX
c] P1X1+ P2X2=M d] Y= Mx+C
Ans c] P1X1+ P2X2=M
2) The demand for these goods increases as income increases.
a] Inferior goods b] Gliffen goods c] Normal goods d] None of the above
Ans c] Normal goods
3) A Vertical demand curve is
a] Perfectly elastic b] Unitary elastic c] Perfectly inelastic d] None of the above
Ans c] Perfectly inelastic
II Fill in the blanks (Each question carries one mark.)
1) Wants satisfying capacity of commodity is utility.
2) Two indifference curves never intersect each other.
3) As income increases , the demand curve for normal goods shifts towards
rightword.
4) The demand for a good moves in the opposite direction of its price .

III Match the following ( each question carries one mark)

1) Demand Curve Down wordslopping
2) Linear DEmand curve d(P)= a-bp
3) Unitary elasticity curve |ed| =1
4) Complementary goods Pen and ink
5) Indifference map A family of Indifference

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IV Answer the following questions in a sentence or a word
( each question carries one mark)
1) What is a 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 .
2) What do you mean Cardinal utility analysis?
Ans When the utility is measuredin numbers like, 1, 2, 3, 4.... it is called Cardinal utility
analysis.
3) Give the meaning of Marginal Utility.
Ans It is the additional utility derived by the consumer by consuming additional unit of
a commodity . Formula is MU= TUn- TUn-1
4) What is Utility?
Ans Utility refers to the want satisfying power of a commodity or a service.
5) Expand MRS.
Ans Marginal Rate of Substitution .
6) What do you mean by indifference curve?
Ans Indifference curve shows the different combinations of two products in which the
consumer gets equal satisfaction.
6) What is Demand?
Ans The Concept 'demand' refers to the quantity of a good or service that a consumer is
willing and able to purchase at various prices, during a period of time .
V Answer the following in four sentences .( Each question carries 2 marks )
1) What is MRS?
Ans MRS is the rate at which the consumer will substitute one product for another, so
that his total utility remains constant.
2) What are the differences between budget line and budgetset?
Ans Budget Line Budget Set
1)The locus of different combination 1)It is a collection of all
of the two goods which the bundles available to a consumer
consumer consumes and whose at the existing price at his given
price exactly equals his income level of income
2) It is alos known as Price line 2) It is also known as Opportunity set
3) What do you mean by inferior goods? Give example .
Ans The inferior goods are those goods for which the demand increases with the fall in
income of consumer and vice-versa . eg- low quantity goods .
Here income and demand for these goods move in opposite direction.
4) What is monotonic preference ?
Ans If a consumer prefers higher indifference curve which gives more level of
satisfaction then the lower indifference curve , it is called monotonic
preference.

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5) State the law of Demand.
Ans Law of demand states that "Other thing being equal, when price of the commodity
increases , demand for it falls and when price of the commodity decreases ,
demand for its rises".
There is a negative relation between demand for a commodity and its price .
6) Mention two different approaches which explain consumer behaviour.
Ans a] Cardinal utility analysis b] Ordinal utility analysis
7) What do you mean price elasicity of demand?
Ans Price elasticity of demand is a measure of the responsiveness of the demand for a
good to changes in its price .
Formula - Price elasticity of demand= Percentage change in demand
Percentage change in price
i.e Ped = x

VI Answer the following questions in about 12 sentences each

( each question carries 4 marks )
1) Write the differences between total utility and marginal utility.
Ans Total Utility Marginal Utility
1)It is the aggregate utility derived 1)It is the additional utiltity derived
by the consumer by consuming by the consumer by consuming
all the units additional unit
2) It refresents utility of all the 2) It represents the utility of a single
units consumed unit
3) It may be symbolically written as 3) It may be written as
TUn= U1+U2+U3+U4.....Un MUn = TUn - TUn-1
4)It increases in beginning and finally 4) From the beginning it decreases.
decreases.
Y Y
V V

TU

0 X 0 X
V
V

2) Briefly explain the budget set with the help of a diagram . MU

Ans The budget set is the collection of products that the consumer can buy with his
income at the prevailing market prices. It includes all the bundles (all possible
combination of two goods ) which the consumer can purchase with his given
level of income .
Let us assume 'M' as income of a consumer and let P1 and P2 be the prices
of banana and mango and X1 and X2 be their quantity purchased. Then consumes
budget can be written as P1X1+P2X2 M.

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 It means a consumer can purchase combinations of two goods equal to his
income and less than income only.
Consider for example - A consumer's income is Rs 20 and he will purchase two
goods X and Y. and Rs 5 will be the price per unit of each goods .
Then with his income Rs 20 the budget set includes combinations like (0,0)
(0,1) (0,2) (0,3) (0,4) ( 1,0) , (1,1), (1,2) , (1, 3) ( 2,0) ( 2,1) (2,2) ( 3,0) ( 3,1) and
( 4,0)
Out of thses combinations (0,4) ( 1,3) ( 2,2) ( 3,1) & ( 4,0) are combinations
equal to consumer's income .
and remaining combinations are combinations said above are combinations less
than consumers income . Y
As shown in the diagram
Budget set includes all M/P2

P1
combinations which are present

X1
Mangoes

+P
on budget line and below budget line.

2
X2
=M
TU
Budget set
0 X

V
M/P1
Bananas
3) Explain the indifference map with the diagram .
Ans A family of indifference curves is called as indifference map. It refers to a
set of indifference curves for two commodities showing different levels of
satisfaction .
The higher indifference curves shows higher level of satisfaction and
lower indifference curve represent lower satisfaction. A rational consumer always
chooses more of that product that offers him a higher level of satisfaction , which
is represented in higher indifference curve . It is also called " Monotonic
Preferences ."
The consumer's preferences over all the bundles can be represented by a
family of indifference curves as shown in the following diagram
In the given diagram we see the group of
Y
these indifference curves showing different
levels of satisfaction to the consumer.
The arrows indicates that bundles on
higher indifference curves are preferred
Mangoes
by the consumer to the bundles on l
ower indifference curves. IC
IC33
IC 2
IC 1
0 X
V

Bananas

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4) Write the differences between Substitutes goods and Complementary goods.
Substitute good Complementary goods
1)These are alternative goods 1) These are the goods which are
available to satisfy our wants consumed together.
2) If the price of a products increases 2) If the price of the products increases
demand for its substitutes also the demand for its complementary
increases. goods decreases.
3)Example for substitutes goods 3)Examples for complementary goods
are Tea, and coffee, Diesel and are Tea and sugar , shoe and socks
Petrol, electricity and solar etc. Pen and ink etc.
4)Here the demand curves shifts to 4) Here the demand curves shifts to
the right in case of prive rise left in case of price rise.
5) Price and demand moves in 5) Price and demand moves in
same direction. opposite direction .
5) Explain the differences between Normal and Inferior goods with examples.
Normal Goods Inferior Goods
1) These are the goods for which 1) These are the goods for which the
the demand increases with the demand decreases with the increase
income of consumer. in the income of consumer.
2) Example for noarmal goods are 2) Example for Inferior goods are
food, Electronic goods cloths, low quality goods like unbranded
luxury goods etc. products.
3) There is positive relationship 3) There is inverse relationship between
between income and demand. income and demand.
4) Here the demand curve shifts 4) Here the demand curves shifts
towards right when the income towards left when the income of
of consumer increases. consumer increases.
VII Answer the following questions in about 20 sentences each.
( Each question carries six marks )
1) Explain law of diminishing marginal utility with the help of a table and diangram .
Ans Law of Diminishing Marginal Utility is one among important laws which studies
consumers behaviour. This law was first given by a German economist H.H.
Gossen.
There fore, it is called Gossen's First Law. But later on this law was popularised by
Dr. Alfred Marshel.
Definition :- " The utility got from the consumption of additional units of a
commodity goes on decreasing when the consumption of other commodities are
constant."

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 This law can be explained with the help of a table as below.
Units of Organges Total Utility Marginal Utility
consumed TU(units ) MU (units)
1 12 12
2 18 6
3 22 4
4 24 2
5 24 0
6 22 2
As shown in the table above , if a consumer consumes oranges continuously one
after another, he gets lesser and lesser marginal utility.
As shown in the table consumer receives 12 units of marginal utility from the
consumption of first of orange. At this level Total utility is also 12 units. Since
his inetnsity of consumption decreases after the consimption of first unit of
oranges, he gets 6, 4, 2, units of MU with the consumption of second , third ,
fourth unit of orange.
If he continues to consume oranges after this, his marginal utility becomes
first zero and then it becomes negative .
Here when MU is zero TU will be maximum and when MU moves beyond X
arises TU will start decreasing.
Y
We can explain these law with the following diagram.
In the given diagram TU and MU are 28
Total Utility and Marginal Utility 24 TU
curves. As shown in the diagram, Utility 20
(TU & MU) 16
TU from the starting increases and
12
becomes constant at maximum level 8
and then decreases. 4
Where as MU curve from the starting it X
V

0 1 2 3 4 5 6 7
slopes downwards and attains negative ,when -4 MU
it moves beyond X axis. Here we can notice Units of oranges consumed
that when MU is zero TU is maximum.
When MU moves beyond X axis, TU starts decreasing .
In these way we can explain Law of DiminishingMarginal Utility.
2) Explain the features of Indifference curves with the help of diagram .
Ans Indifference curve is a curve which is got by joining different points
(combinations)of two goods which give same level of satisfaction .
The main features of Indifference curves are as follows.

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a] Indifference curves slopes downwards from left to right
This is the case because, the consumer in order to
have more of one product, he has to forgo some Y
units of other product.
This can be explained with the help of diagram below,
As long as the consumer is on the same Y3 A

Mangoes
indifferents curves, an increase in bananas
B
must be compensated by a fall in quantity of Y2
mangoes. (movement from A to C) That is why C
Y1 IC
Indifference curves slopes downward from left X

V
to right. X1 X2 X3
b] Higher indifference curves gives greater level of utility. Bananas
Higher indifference curve gives more satisfaction ot utility than the lower one .
This is another feature of indifference curves.
This can be explained with the following table and a diagram.
Combination Bananas Mangoes
A 1 10
B 2 10
C 3 10
Y

Let us consider the different combinations

of two goods bananas and mangoes A, B
and C. Here all the three combinations
Mangoes

consists same quantity of mangoes but A B C

Ccombination have more bananas than 10
A and B. There fore consumer prefers C IC3
combination on higher indifference IC3 than IC2
the lower ones, which givea greater level IC1
of utility. 0 1 X
V

2 3
Bananas
C]Two indifference curves never intersect each other-
If the two indifference curves intersect each other, they will give conflicting
results.This can be explained with the help of diagram.
Y
In the above diagram IC1 and IC2 are the
two indifference curves. They have intersected
each other at point A and at point A, consumer
Mangoes

A
gets equal satisfaction , but it is ubsurd.
Here on B and C points consumer gets B IC1
C IC2
different satisfaction., but it is not possible
to have different satisfaction levels on one 0 X
V

Bananas
indifference curve. Thus two indifference curves cannot intersect each other.
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3) Explain the optimal choice of consumer with the help of diagram.
Ans Indifference curve shows consumers choice and preference . Similarly budget
line shows his capacity to pay for it .
The main objective of a consumer is to get more satisfaction . To fulfill his
satisfaction he has to match his income with purchase of two goods .
That is know the optimal choice of consumer which gives equilibrium state with
more satisfaction, we have to intersect indifference curve with budget line.
Assumptions -
1) Income of a consumer is constant.
2) Consumer is a rational individual and prefers to get maximum satisfaction.
3) Consumer is aware of indifference map.
The consumer always tries to move to a point on the highest possible indifference
curve gives from budget set.
Thus the optimum point would be located on the budget line and here the
point on higher indifference curve equal to his income will give more
satisfaction than the other points.
Since consumer go for monotonic preference of prefering higher indifference
curve with his income levels , point A will become optimal choice of consumer.
Though points C and E meet budget line they cannot become optimal points.
Because they are on lower indifference curve.
Similarly point B is below budget line , this Y
cannot become optimal point.In the same way
point D is outside the budget line , consumer
P
cannot reach to that point, so it cannot become
optimal point. C
As shown in diagram point A
Mangoes

on IC2 indifference curve becomes optimal A IC

N IC 33
point. At this point consumer purchase ON B IC 2
amount of mangoes and OM level of Bananas IC
D 1
and attains equilibrium by getting maximum 0 M Q V X
satisfaction. Bananas

VIII Assignment and Project Oriented questions . ( 5 mark seach).

1) A consumer wants to consume two goods . The price of bananas is Rs 5 and price
of mangoes is Rs 10. If the income of the consumer is Rs 40, Answer the
following questions .
a] How many mangoes that a consumer can purchase with his entire income ?
b] How many mangoes that a consumer can purchase with his entire income ?
c] Slope of the budget line is downward or upward?
d] Are the bundles on the budget line equal to the consumer's income or not ?
e] If you want to have more of Bananas you have to give up Mangoes. Is it true?
Ans a]Consumer can purchase 8 bananas with his entire income .
b] Consumer can purchase 4 mangoes with his entire income.
c] Slope of the budget line is downward.
d] Yes bundles on the budget line are equal to the consumer's income .
e] Yes, if you want to have more of Bananas you have to give up mangoes.
**********
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 CHAPTER -3
PRODUCTION AND COSTS
I Choose the correct answer. Each question carries one mark.
 The formula of production function is
a] q= f(L, K) b] q= d c] Y= f(x) d] None of the above
Ans a] q= f(L, K)
2) In the short run a firm
a] can change all the inputs b] cannot vary all the inputs
c] can keep the input fixed d] None of the above
Ans b] cannot vary all the inputs
3) The change in output per unit of change in the input is called
a] Marginal product b] Average product
c]Total product d] product
Ans a] Marginal product
4) Cabb-Daglas production function is
a] q= ( X, X) b] ( X1, X2)
 
c] q= ( X 1 x X 2) d] q = (10)
 
Ans c] q= ( X 1 x X 2)
5) TC=
a] TVC b] TFC c] TFC + TVC d] AC + MC
Ans c] TFC + TVC
II Fill in the blanks (Each question carries one mark).
1) In the long run inputs are Variable.
2) Average product is defined as output per unit of variable input.
3) Marginal product and Average product curves are inversed U in shape.
4) SMC curve cuts, AVC curve at the minimum points of AVC curve from below.
5) ISO quant is the set of all possible combination of the two inputs, that yield the
same maximum possibel level of output.
III Match the following ( Each question carries one mark)
A B
1) CRS a]
2) SAC b] Long run average cost
3) LRAC c] Short run average costs
4)TFC + TVC d] Constant return to scale .
5) SMC e] TC
Ans 1)-d] , 2) -c] , 3) -b] , 4)- e], 5)- a]a]
IV Answer the following questions in a word , a sentence each
( Each question carries 1 mark).
1) What do you mean by Total product?
Ans The total volume of goods and services produced by a firm during a specified
period of time is called Total product.
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2) What is Average Product?
Ans The Average product refers to per unit of output produced with the help of
variable input .
3) Give the meaning of Marginal Product.
Ans The change in output per unit of change in input is called Marginal product.
4) What is Total Fixed cost?
Ans The cost which is incurred on fixed factor input of production.
5) What is Average Fixed cost?
Ans Average fixed cost refers to the total fixed cost per units of output.
V Answer the following questions in four sentences . ( each questions carries 2 marks )
1) What is Isoquants?
Ans Isoquants refers to that the locus of all possible combinations of 2 inputs which
results in the same maximum output level.
2) Give the meaning of the concepts shortrun and long run .
Ans Short run- It is the period of time in which a firm cannot varries all inputs .
Long run- It is the period of time in which a firm can varries all inputs .
3) Mention the types of Return to scale .
Ans 1) Increasing return to scale -IRS.
2) Constant Return to scale CRS
3) Decreasing Return to scale DRS.
4) What are the Long run costs?
Ans Long -run Average cost LRAC 2) Long run Marginal cost - LRMC
5) Name the short run costs.
Ans 1) Total Fixed costs 2) Total variable cost
3) Total cost 4) Average Fixed cost
VI Answer the following questions in 12 sentences.
( each question carries 4 marks )
1) Explain Isoquants with the help of a diagram .
Ans Isoquants refers to the locus of all possible combinations of 2 inputs
which results in the same maximum output level.
Explain with the diagram
In the above diagram on OX axis we
measure Capital. We have 3 Isoquants for Y
the 3 output levels, namely Iq1, Iq2 and Iq3.
According to the principles of MRTS, a
firm get same level of output only occures K1
when increasing units of one input are
Capital

offset with laser units of another input. K

IC
Iq 3
Example : As an example the same level of B Iq 2
output could achieved by a firm when Iq 1
CAPITAL inputs increase but LABOUR 0 L L L X
V

1 2 Labour
input decrease.

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2) Explain the Total product, Average product and Marginbal Product with the
examples.
Ans Total product- It is refers to the aggregate output produced with the help of
variable inputs during a particular period. It is obtained by adding the Marginal
products contributed by each factor. TP= MPs.
Average Product: Average product is defined as the output per unit of variable
input. We calculate it as AP =
Marginal Product:The change in output per unit of change in the input is called
Marginal product. We calculate it as MP.
The concepts Total products , Average Factor TPL APL MPL
product and marginal product can be 0 0 0 0
explained following below table. 1 10 10 10
2 24 12 14
3 40 13.33 16
4 50 11.2 6
5 56 11.2 6
6 57 9.5 1
3) Write a brief note on Returns to scale .
Ans The law of returns to scale explain the physical relationship between Input and
output in the long run. It explain the behaviour of output when quantities of all
input are changed in same proportion.
Stages of returns to scale .
1) Increasing returns to scale : When the output increases by a greater
proportion than the proportion on increase in all the inputs it is called
Increasing returns . Ex. If 5% increase in the inputs by firm results in 10%
increase in outputs .
2) Constant returns to scale : When output increases by the same proportion as
that of increase in inputs , it is called constant returns to scale .
Ex:- If 5% increase in the inputs by firm results in 5% increases in outputs .
3) Diminishing Returns to scale :- When output increases
less than the proportion of input it is
Y
called Diminishing return to scale.
Ex- If 5% increase in inpute results
in only 2% increase in output. R C
According to this diagram MP
1) From Point I to R is is IRS.
2) From point R to C it is CRS. I D
3) From point C to D it is DRS. 0 X
V

Inputs
4) Explain the Long run costs.
Ans All the factors are variable in the long run. Here there is no TFC and AFC in
the long run. The two major costs in the long run are as follows.

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 a] Long run Average cost - LRAC b] Long run Marginal cost LRMC
Long run average cost (LRAC) defined as cost per unit of output, LRAC =
Long run Marginal cost ( LRMC) is the change in total cost per unit of change
in output. Y

ACC to above diagram .

1) In the stage of IRS , both LRMC LRMC
IC2
and LRAC decreases.

Cost
2) In the stages of CRS , both LRMC LRAC
and LRAC reach to minimum.
3) In the stages of DRS , both LRMC
and LRAC increases. 0 X

V
4) LRMC curve cuts the LRAC from  IRS  CRS  DRS 
below at its minimum point. Quantity of Outputs
5) Both LRMC and LRAC curves are U shaped in long run.
5) The following table gives the total product (TPL) find the corresponding APL
and MPL.
TPL 0 15 35 50 40 48
L 0 1 2 3 4 5
Ans The formulas which are using for calculating APL and MPL.
L TP AP MP The formulas which are using for calculating
0 0 0 0 AP and MP
TP
1 15 15 15 1) AP= TP
L
2) MP = L
2 35 17.5 20 TP= change in total product
3 50 16.6 15 L= change in labour input
4 40 10 -10
5 48 9.6 8
The formulas which are using for calculating AP and MP

1) APL =

2) MP=

VII Answer the following questions in 20 sentences. ( each questions carries 6 marks )
1) Explain the various short run costs.
Ans The various short-run costs are explained following below.
1) Total Fixed Cost : TFC
TFC is refer to the total money expenses incurred on all the fixed factors in the
shortrun. Ex- Expenses on Machineries , Plant, Building etc. TFC remain constant at
all levels of output.
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 2) Total Variable Cost TVC
TVC is refer to the total money expenses on the variable inputs in the short run.
Ex- Expenses on Raw-materials , Fuel, Wages of daily Labours etc.
TVC changes at all the levels of output.
3) Total Cost : TC
It is the aggregate money expenditure incurred on both Fixed and Variable inputs .
TC include TFC and TVC. Therfore TC= TFC + TVC
4)Average Fixed Cost-
It is the fixed cost per of output. There was inverse relationship between AFC and
TFC
5)Average Variable Cost- AVC
It is a variable cost per unit of output . It can be calculated by dividing the TVC by
the Total units of output.
6)Average Cost-AC
It is the cost per unit of output produced. It is obtained by dividing TC by the total
output produced.
7) Marginal Cost MC
It is an additional cost incurred to produce an additional output.
MC= TCn- TC n-1 OR MC
2) Explain the law of variable proportions with the help of diagram.
This law operates in short run period . According to this law, a producer can enhance
the output by increasing only one variable input by keeping other factor inputs
fixed. Stages of the LVP-
1) Increasing Returns - In this stage Total product (TP) increases at an increasing rate.
At the same time AP and MP increases but not like TP.
2) Diminishing Returns - In this stage TP continues to increase at diminishing rate .
because in this stage both MP and AP starts decrasing with the increase in Inputs .
3)Negative Returns - In this stage the TP
and AP all be falling but they are positive .
But MP is negative and cross the OX axis .
Explain with diagram Y
In the above diagram , factor input like
labour is measured in OX axis and TP, AP TP
and MP are measured on OY axis . MP
and TP
According to this diagram AP
1) In the first stage TP, AP and MP are increasing
2) In the second stage Tp increases at diminishing
rate . But MP and AP start falling AP
X
3) In the third stage TP, AP and MP are falling 00
V

Input (Labour)
and Mp becomes negative. MP

- 15 -
3) A firm SMC is shows in the following table . TFC is 100. Find TVC, TC, AVC and
SAC scheduls of the firm .
Q 0 1 2 3 4 5 6
SMC - 500 300 200 300 500 800

Ans Q SMC TFC TVC TC AVC SAC

0 - 100 0 100 - -
1 500 100 500 600 500 600
2 300 100 800 900 400 450
3 200 100 1000 1100 333.33 366.66
4 300 100 1300 1400 325 350
5 500 100 1800 1900 360 380
6 800 100 2600 2700 433.33 450
Following formulas are used to derive above values
1) TC n = MC +TC n-1 2) TVC = TC- TFC

3) AVC = 4) SAC =
VIII Assignment and project oriented questions .
Find the missing products in the following table.
Factor TP MP AP
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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 CHAPTER -4
THE THEORY OF FIRM UNDER PERFECT COMPETITION
I Choose the correct answer. Each question carries one mark.
 In a Perfect competition each firm produces and sells.
a]Heterogeneous product b] Homogeneous products
c] Luxury product d] Necessary goods
Ans b] Homogeneous products
2) The increase in total revenue for a unit increase in out put is
a] Marginal Revenue b] Average revenue c] Total revenue d] fixed revenue
Ans a] Marginal Revenue
3) The firm’s profit is denoted by
a]  b]  c] d] 
Ans d] 
4) When the supply curve is verticle the elasticity of supply is
a] es=1 b]es > 1 c]es=0 d] es< 1
Ans c] es =0
5) The revenue per unit of output of a firm is called as
a]TR b]MR c] AR d] None of the above
Ans c] AR
II Fill in the blanks. ( each questions carries one marks)
1) Price taking behaviour is the single most distinguished characteristics of Perfect
Competition Market.
2) Unit tax is a tax that the government imposes per unit sale of output
3) For a price taking firn Marginal Revenue is equal to AR and Price .
4) The point of minimum AVC where the SMC curves cuts the AVC curves is called
Shut down point.
5) Opportunity cost of some activity is the gain forgone from the second best
activity.
III Match the following ( each question carry one mark)
1) A B
1) MR= Perfect Information
2) Zero point
3) AR
4) Normal profit TR - TC

5) Perfect Competition
Ans 1.c 2.d, 3.e, 4.b, 5.a

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IV Answer the following questions in a sentence or a word.
( Each question carries 1 mark).
1) Define Marginal Revenue.
Ans Additional Revenue earned by selling of additional unit of a commodity.
2) To which side does supply curve shifts due to technological progress?
Ans To The Right side
3) Write the formual to calculate average revenue

Ans AR =
4) What is Normal Profit?
Ans Zero profit situation , where TR= TC
5) Give the meaning of Super Normal Profit .
Ans Profit over and above the Normal profit.

V Answer the following questions in about four sentences .

( each question carries 2 marks )
1) Mention the conditions needed for profit by a firm under Perfect Competition
conditions .
Ans a] P=MC 2) MC must not be decreasing
3) In short run P  AVC in long run P AC .
2) Give the meaning of Shut down point.
Ans The point at which SMC curve of a firm cuts the minimum point of AVC curve is
called Shut Down Point. Any point above this point indicates positive production
and any point below this indicates no production.
3) Write the meaning of opportunity cost with an example.
Ans The cost of the next best alternative sacrificed is called opportunity cost.
Example : The farmer can grow paddy or wheat in his field . If he decides to grow
paddy. The income of wheat must be added to the cost of paddy.
4) Mention the two determinants of firms supply curve .
Ans Technological progress and Input prices.
5) Give the meaning of price elasticity of supply and write its formula.
Ans The responsiveness of supply to change in price is called price
Q P
elasticity of supply. es = P x Q

VI Answer the following questions in about 12 sentences each

( each question carries 4 marks )
1) Write a short note on profit maximisation of a firm under the following conditions,
1) P=MC 2) MC must be non decreasing at q0?
Ans For profit maximisation, the firm has to fulfill following conditions .
1) P= MC 2) Mc must be non decreasing at q0.
3) In short run P AVC and in long run P AC
In a Perfect competitive firm profit maximisation is possible at the level of output

- 18 -
 where MR=MC. For a Perfect Competitive firm MR=P so P=MC
For a perfect competitive firm profit maximisation is possible where MC is
increasing up to the price level.
2) Explain the determinants of a firms supply curve .
Ans The firms supply curve is a part of its Marginal cost curve. So any factor that
affects the firm’s marginal cost curve of course a determinants of its supply curve .
They are
1) Technological progress- Technological progress shifts the supply curve of the firm
to the right side . It increases the production.
2) Input prices - Input prices shifts the supply curve of the firm to the left side .
It decreases the production.
3) Explain the features of Perfect Competition.
Ans Market situation in which there are large number of buyers and sellers who buy and
sell homogenious products at a uniform price is called Perfect Competition Market.
The features of Perfect Competition market.
1) Large number of buyers and sellers 2) Homogeneous price
3) Uniform price 4) Free market entry and exit of firms
5) Price taking behaviour 6) Perfect market knowledge to buyers and sellers
4) Write about shut down point. Normal profit and Break even point.
Ans Shut down point- The point at which SMC curve of a firm cuts the minimum point
of AVC curve is called Shut down point. Any point above this point indicates
positive production and any point below this indicates no production.
Normal Profit - A situation where the firm’s total cost is equal to the total revenue
earned is called Normal profit. It is a no loss and no profit situation. It is the
minimum profit needed for the firm to continue in the business.
Break Even point- The point on the supply curve at which a firm earns only normal
profit is called break even point of the firm. It is no loss no profit point.
VII Answer the following questions in about 20 sentences each.
( Each question carries six marks )
1) Explain the short run supply curve of a firm with the help of a diagram .
Ans The supply curve of a firm shows the level of output of a firm supply at different
market prices .
In the short run, the firm will produce and
supply at the market price which is greater Y 1 SMC
s b
than or equal to AVC. ( P AVC). V
V
Supply
If the price is less than AVC then the AVC
curve
PRICE & COST

firm will not supply. This is explained in a

P2 P=AR
the following diagram.
In the diagram at the market price
P1 which is less than minimum
AVC, then the firm will not produce. P1 P=AR
Its production is zero.
At the price P2 which is greater than X X1
V

Output Q
V

AVC then . The firm will produce Q level

Y
- 19 -
 of output.
The short run supply curve is the raising part of SMC curve which is from
and above the AVC. In the diagram ab is short run supply curve. It is sloping
upward which indicates positive relation between price and supply.
2) Explain the Total revenue and Average revenue of a firm under perfect competition
with the help of diagram .
Ans Total revenue (TR) is the revenue received by selling of all produced units.
Total Revenue (TR)= P( price ) x Q ( quantity)
In Perfect Competition price remains constant Total revenue is determined
by the number of units sold. Increase in units sold increasesTotal revenue. So TR
curve is upward sloping straight line .

1
Y1  Y
r V r
e TR e
v v
e e AR=P
n n
u u
e. e.
X X
-output X1 -output X1

Y Y

In the diagram TR is total revenue curve. It is upward sloping straight line .

Average revenue (AR) is the revenue earned per unit of output sold. AR = TR Q
In Perfect Competition , Average revenue is equal to the market price.
AR =P. So AR -line and price line are same. It is a horizontal line parallel to
X- axis. In the diagram AR is Average revenue line parallel to X-axis.
3) Explain Market supply curve with the help of a diagram.
Ans A graphical representation of market supply schedule is called market supply curve.
It is obtained by horizontal summation of individual supply curves .
Market Supply = Firm 1 suppy + Firm 2 supply...
Let us assume there are only two firm is in theeconomy. They are Firm-1 and
Firm -2. The Firm -1 at P1 price will produce and supply Q1 Quantity of output.
Firm-2 at P2 price will produce and supply Q2 quantity of output. The horizontal
summation of these two firms supply will obtain us market supply.
Marklet Supply- Firm -1 Supply + Firm 2 Supply
= Q 1 + Q2
= Q3
This is illustrate in the following diagrams.

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 S1 S2 SM
Price
P2
S2
P1 S1 SM
Q1

V
Q2
Q1+Q2=Q3
(a) _________ Quantity _______ (c)
(b)
In the diagram (a) S1S1 is the supply curve of Firm-1
In the diagram (b) S2S2 is the supply curve of Firm -2
In the diagram (c) SM SM is market supply curve. It is obtained by horizontal
summation of two supply curves.
4) Assignment and Project Oriented question. Each question carries 5 marks.
Compute the total revenue , Marginal revenue and average revenue schedules in
the following table when the market price of each unit of goods is Rs 10.
TR
Quantity sold TR MR AR AR = Q
0
1
2
3
4
5
6

Ans Quantity sold TR MR AR

0 0 0 0 TR= P x Q
1 10 10 10 MR = TRn- TRn-1
2 20 10 10
3 30 10 10 AR = TR
4 40 10 10 Q
5 50 10 10
6 60 10 10

For Blind students : Explain the meaning of TR, MR and AR.

TR Total Revenue - Revenue earned by selling of all the units produced is called
total revenue (TR). TR= P x Q
MR Marginal Revenue - Additional revenue earned by selling of additional unit is
called Marginal revenue (MR). MR - TRn -TRn-1
AR Average revenue - Revenue per unit of output is called Average revenue (AR).

**********
- 21 -
 PART-B
MACRO ECONOMICS
CHAPTER -1
INTRODUCTION
I Choose the correct answer. Each question carries one mark.
 The individuals or institutions which take economic decisions are____
a]Economic variables b] Economic Agents
c] Economists d] None of the above
Ans b] Economic Agents
2) In 1936 British economist J.M. Keynes published his celebrated book
a] Wealth of Nations b] Theory of Interest
c] General theory of employment. interest and Money.
d] Theory of Employment
Ans c] General theory of employment. interest and Money.
3) 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] Classical thought
c] Contemporary thought d] None of these
Ans b] Classical thought
4) The year of Great Depression
a] 1920 b] 1889 c] 1929 d] 2018
Ans c] 1929
5) In a capitalist country production activities are mainly carried out by
a] Private enterprises b] Planning authority
c] Government authority d] None of the above
Ans a] Private enterprises
II Fill in the blanks. ( each questions carries one marks)
1) Macro economics tries to address situation facing the economy as a whole .
2) A part of the revenue is paid out as rent for the service rendered by land.
3) The domestic country may sell goods to the rest of the world.
These are called exports.
4) Production units will be called as firms .
5) Macro economic policies are pursued by the state itself or statutory bodies like RBI
SEBI etc.
III Answer the following questions in a sentence or a word
( each question carries one mark)
1) Who are Economic agents?
Ans Economic agents are those individuals or institutions which take economic
decisions. They can be consumers, producers, government Corporation Banks etc.
2) What does classical school of thought say?

- 22 -
Ans The classical school of thought says that all the labourers who are ready to work will
find 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.
4) Name the well known work of Adam Smith.
Ans An Enquiry into the Nature and Cause of the Wealth of Nations .
5) What do you mean by wage rate?
Ans The price paid for purchase of labour services is called wage rate .
IV Answer the following questions in four sentences .
( each question carries 2 marks )
1) What are the features of capitalistic economy?
Ans The important features of a capitalist of economy are as follows
- There is private ownership of means of production.
-Production takes place for selling the output in the market.
- There is sale and purchase of labour services at a price which is called wage rate.
- A typical capitalist enterprise has one or several entrepreneurs and exercise control
over major decisions.
The entrepreneurs may themselves supply the capital needed or they may borrow the
capital
2) Name and write the meaning of two kinds of trade in external sector.
Ans The two kinds of trade in external are Export and Imports. A country may sell goods
to the restof the world Exports, A country may buy goods from other countries,
imports.
3) Who are the macro economic decision makers?
Ans 1) The Reserve Bank of India. 2) Security exchange Board of India.
3) Government , 4) Other Financial Institutions.
4) Mention factors of production
Ans 1) Land 2) Labour 3) Capital 4) Organisation

**********
PART-B
MACRO ECONOMICS
CHAPTER -2
NATIONAL INCOME ACCOUNTING
I Choose the correct answer. Each question carries one mark.
 The study of National Income is related to _____
a]Micro Economics b] Macro Economics
c]Both Micro and Macro d] None of the above
Ans b] Macro Economics
2) NNP=GNP-
a]Deduction b] Depreciation c] Investment d] None of the above
Ans b] Depreciation

- 23 -
3) The value of GDP at the current prevailing prices is
a] Real GDP b] GDP at factor cost c] Nominal GDP d] NDP
Ans c]Nominal GDP
4) 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
Ans c] Income method
II Fill in the blanks. (each questions carries one marks)
1) Final goods will not pass through any more stages of production.
2) Depreciation is an annual allowance for wear and tear of a capital good.
3) Pollution is an example for negative externalities .
4) The net contribution made by a firm is called its value added.
5) A part of revenue is paid out as rent for the service rendered by land .
III Match the following.(each question carries one mark)
A B
1) Labour a] Non-Monetary exchange
2) GDP b]Personal disposable income
3) PDI c]Stock variable
4) Domestic service d]Gross Domestic product
5) Inventary e] Wages
Ans 1-e, 2-d, 3-b, 4-a, 5-c
IV Answer the following questions in a sentence or word.
( each question carries 1 mark)
1) What do you mean by final goods?
Ans Those goods which do nnot undergo any further transformation in the production
process is called final goods.
2) Expand CPI
Ans Consumer Price Index
3) Expand GNPMP
Ans Gross National Product at market price .
4) Give the meaning of GDP.
Ans Aggregate value of goods and services produce with in the domestic territory of a
country is called GDP.
5) What is Depreciation?
Ans It is a deduction made from the value of gross investment in order to accommodate
regular wear and tear of capital goods.
6) 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.

- 24 -
V Answer the following questions in four sentences (each question carries 2marks)
1) What are the four factors of production? Mention their rewards.
Ans Land - Rent , Labour - wages , Capital - Interest, Organisation- Profit
2) Distinguish between stock and flow. Give example .
Ans Stock Flow
It is that quantity of economic It refers to that quantity of economics
variable which is measured at a variable measured over a period of
particular point of time time
Example- capital, inventary, wealth Examples- Investment, salary,
Foreign exchange , reserves etc. National income etc.
3) What is the difference between Consumer goods and Capital goods ?
Consumer Goods Capital Goods
These are the goods which These are the durable goods which
are purchased for consumption are used in the production process
by ultimate consumers.
Examples Food, Cloths, Examples - Machinery, tools ,
Mobile phones etc. implements etc.
4) Mention three methods of measuring GDP. (National Income).
Ans The three methods of measuring GDP are
a] Product or value added method , b]Expenditure method c) Income method
5) What do you mean by Externalities? Mention its two types .
Ans Externalities refer to the benefits (or) harms a firm (or) an individual causes to
another for which they are not paid (or) penalized. They do not have any market in
which that can be bought and sold. The two types of externalities are
a] Positive Externalities b] Negative Externalities.
6) Write the difference between Nominal and Real GDP.
Ans The total money value of goods and services produced in a country during a year
expressed at the current prices is called Nominal GDP.
The National Income expressed in terms of a base year price index is called
Real GDP.
VI Answer the following questions in 12 sentences.
( each question carries 4 marks )
1) Explain the circular flow of Income of an economy.
Ans The circular flow of Income of an economy can be explained with the help of
following Assumption.
a] Existence of two sectors that is household sector and Firms.
b] Households are the owners of the factors of production.
c] Households receive income by selling the factor services .
d] There are no savings .
e] The firms produce goods to the households.
f] The economy is a closed economic system The circular flow of income in a
simple economy can be illustrated with the help of following chart.
- 25 -
 Spending

Goods and Services

A B
V V holds
Firms House
D V C
Factor payments
Factor service

In the above chart, the uppermost arrow, going from the households to the
firms , represents the spending by the households to buy goods and services
produced by the firms. The second arrow going from the firms to the households
is the counterpart of the arrow above.It stands for the goods and services which
are flowing from the firms to the households. Thus the two arrows on the top
represent the goods and services market. The arrow above represents the flow of
payment for the goods and services, the arrow below represents the flow of goods
and services .
The two arrows at the bottom of the diagram similarly represent the factors of
the production market. The lower most arrow going from the households to the firms
symbolizes the services that the households are rendering to the firms using these
services the firms are producing the output. The arrow above this, going from the
firms to the households , represents the payments made by the firms to the house
holds for the services provided by the households.
2) Write a note on Externalities .
Ans Uninternational concequences of an economic action of a person (or) a firm that
accures to another person (or) firm is called Externalities.
These are two types of externalities
a] Positive Externalities b] Negative Externalities
a] Positive Externalities - The externalities which are increases welfare of the
individuals and society is called Positive Externalities .
Ex- Let us imagine that there is chemical fertilizer industry. It produces the
chemical fertilizers required for agriculture. The output of the industry is taken for
counting GDP of an economy.
b] Negative Externalities - The externalities which are decrease welfare of the
individuals and society is called Negative Externalities .
Ex- While carrying out the production the chemical fertilizer industry may also be
polluting the near by river. This may cause harm to the people who use the water of
the river. Hence their health will be affected. Pollution also may kill fish and other
organisms of the river. As a result, the fishermen of the river may lose their livelihood.
3) Explain the examples of Planned accumulation and deccumulation of inventories .
Ans Inventories are the unsold goods , unused raw materials(or) semi-finished goods
which a firm carries from a year to the next year. Change in inventories may be

- 26 -
 planned or unplanned. A planned change in inventories is the change in the stock of
inventories which has occured in a planned way. The planned accumulation and
decumulation of inventaries are explained with example as follows.
Suppose a firm wants to increase the inventories from 200 T shirts to 400 T
shirts during the year . Expecting sales of 2000 T shirts during the year. The firm
produces 2000 + 200 =2200 T shirts. If the sales are actually 2000 T shirts, the firm
ends up with a rise of inventories . The new stock of inventories is 400 T shirts.
which was planned by the firm . This is planned accumulation of inventories.
On the other hand, if the firm had wanted to reduce the inventories from 200
to 50, then it would produce 2000- 150= 1850T shirts. This is because it plans to
sell 150 T shirts out of the inventory of 200 T shirts it started with . Then the
inventory at the end of the year becomes 200-150=50 T shirts. Which the firm wants.
If the sales turnout to be 2000T shirts as expected by the firm, the firm will be left
with the planned reduced inventory of 50 T shirts. These the two examples of planned
accumulation and planned decumulation of inventories.
VII Answer the following questions in 20 sentences :
( Each question carries six marks )
1) Explain the Macro Economic identities .
Ans National Income is an important concept of Macro economics . There are various
aggregates or identities of National income. Each aggregate has a specific meaning
method of measurement and use. The various identities of National Income are
Gross Domestic product(GDP)- The aggregate value of final goods and services
produced with in the country during a year is called Gross Domestic product. The
concept of GDP dose not consider the value of goods and services produced by the
nationals working in foreign countries.
Thus GDP= C+I+G+X-M
Net Domestic product( NDP)- The aggregate money value of all final goods and
services produced within the country less depreciation is called NDP, when
depreciation allowence is subtracted from GDP we get NDP . Hence
NDP= GDP- depreciation cost
Gross National Product[GNP]- The aggregate money value of all final goods and
services produced by a country in a year including net income from abroad is called
GNP. Thus GNP = GDP + Net factor income from abroad.
Net National Product[ NNP]-The aggregate money value of all final goods and
services produced by country in a year minus depreciation cost is called NNP.
NNP = GNP - Depreciation cost
Personal Income (PI)- The sum of the income that are actually received by house
hold from all the sources is called personal income. Therefore personal income is
that part of national income of a country which is received by people or househols.
Thus P.I. = National Income - Undistributed Corporate Profits- Net Interest +
Payment made by the households - Corporate tax+ Transfer payment to the household
from the government and the firms .
- 27 -
 Personal disposable Income ( PDI)- If we deduct the personal tax payments and
Non-tax payments from personal Income we get personal disposable income .
Therefore PDI= PI- Personal tax payments - Non tax payments
Net National Product at factor cost- (NNPFC)- The NNP t factor is the sum of
income earned by all factors in the production in the form of wages, profits rent and
interset etc. belong to a country during a year
NNPFC= NNp at market prices - Indirect taxes + Subsidies.
2) Explain a numerical example to show that all the three methods of estimating GDP
gives us the same answer.
Ans While calculating National Income we use three methods . But all methods give
same results . This can be explain with the following example.
Ex- There are two firms A and B suppose A uses no raw materials and produces
cotton worth Rs 50. A sells its cotton to firm B, who uses its to produce cloth. B
sells the cloth produced to consumers for Rs 200.
1)GDP in the phase of product or the value added method -
Here the value added = Sales - Intermediate goods
Thus VAA= 50-0=50
VAB= 200 -50 = 150
GDP= VAA + VAB
50 + 150
GDP = 200
GDP distribution for firms A and B

Particulars Firm A Firm B

Sales 50 200
Intermediate Consumption 0 50
Value added 50 150
2)GDP in the phase of disposition or The Expenditure Method -
Under this method , GDP is the sum of final expenditure or expenditures on goods
and services for end use. In the above case the final expenditure is expenditure by
consumer on cloth. Therfore GDP=200
3)GDP in the phase of Distribution or Income Method -
Under this method , GDP is obtained by adding factor payments. Let us imagine firm
A and B again. Firm A Rs 50 received gives Rs 30 as wages and keeps the remaining
Rs 20 as its profits . Similarly firm gives Rs 100 as wages and keeps Rs 50 as
profits. It can be stated in the following table .
Particulars Firm A Firm B Total
Wages 30 100 130
Profits 20 50 70
Now the GDP by Income method = Total of factor payments which is equal
to total wages received and total profits earned.
- 28 -
 Thus GDP= Wages + profits
GDP = 130 + 70
= 200
Thus all the three methods of estimating GDP give us the same answer.
**********
CHAPTER -3
MONEY AND BANKING
I Choose the correct answer. Each question carries one mark.
 The main functions of money is ______
a] Savings b] Medium of exchange c] Expenditure d] Investment
Ans b] Medium of exchange
2) The bank which acts as monetary authority of India
a] RBI b] NABARD c]RRB d] IDBI
Ans a] RBI
3) 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
Ans b] Commercial Banks
4) The rate at which the RBI lends money to commercial banks against securities____
a]Bank rate b] Reporate c] Reverse Reporate d] None of the above
Ans a]Bank rate
5) The important tool by which RBI influences money supply is ___
a] Open Market Operations b] Money Operations
c] Closed Market Operation d] None of the above
Ans a] Open Market Operations
II Fill in the blanks . ( Ecah carries one mark)
1) Economic exchanges without the use of money are referred to as Barter System.
2) RBI is the only institution which can issues currency in India.
3) Government of India issues coins in INdia.
4) M1 and M2 are known as Narrow money.
III Match the following (each question carries one mark)
1) A B
1) SLR a] Government of India
2) Circulation of coin b] Statutory Liquidity ratio
3) Money c] Broad Money
4) M3 and M4 d] Repo
5) Repurchase agreement e] Medium of Exchange
Ans 1-b, 2-a, 3-e, 4-c, 5-d
IV Answer the following questions in a sentence or a word.
( Each question carries 1 mark).
1) What do you mean by barter system ?
Ans The economic exchanges without the mediation of money is called Barter system.
- 29 -
2) Give the meaning of Money.
Ans Anything that is commonly accepted as a medium of exchange for goods and
services and also acts as a measure of value is called Money.
3) What is Fiat Money?
Ans Money with no intrinsic value is called Fiat money.
4) 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.
5) Expand CRR.
Ans Cash Reserve Ratio.
6) What is Bank rate ?
Ans Bank rate is the rate at which the RBI gives loans to the Commercial Banks .
V Answer the following questions in about four sentences .
( each question carries 2 marks )
1) Mention any two functions of money.
Ans The two functions of money are 1) Medium of exchange 2) Measure of value
2) Give the meaning of CRR and SLR.
Ans A certain portion of total deposits of a commercial bank which it has to keep with
the RBI in the form of cash reserve if called CRR. A certain portion of total deposits
of a commercial bank which it has to keep with itself in the form of cash reserve is
called SLR.
3) State the credit control instruments of RBI.
Ans There are two instruments of RBI to control credit
1) Quantitative techniques-
a] Bank rate b] Open Market operations c] Reserve ratios ( CRR and SLR)
2) Qualitative techniques
a] Margim requirements b] Credit rationing c] Moral suasion
4) Mention the two motives of demand for money.
Ans a] The transaction motive b] The speculative motive
VI Answer the following questions in 12 sentences.
( each question carries 4 marks )
1) “Money acts as a convenient unit of account”. Explain this system with the
example .
Ans Money also acts as a convenient unit of account. The value of all goods and
services can be expressed in monetary units. When we say that the value of a certain
wristwatch is Rs 500, we mean that the Wristwatch can be exchanged for 500 units
of money, where a unit of money is rupee in this case. If the price of a pencils
Rs 2 and that of a pen is Rs. 10, we can calculate the relative price of a pen with
respect to a pencil, viz, a pen is worth 10 2=5 pencils. The same notion can be
used to calculate the value of money itself with respect to other commodities . In the
above example a rupee is worth 12 = 0.5 pencil or 110 = 0.1 pen. Thus if prices
of all commodities increase in the price in the terms of moneyl,the value of money
- 30 -
 in terms of any commodity must have decreased in the sense that a unit of money
can now purchase less of any commodity. We call it a deterioration in the purchasing
power of money.
2) Briefly explain the functions of RBI.
Ans RBI is the supreme and also central Bank of India. It was established in April 1935.
Today the RBI plays an important role in the development strategies of the
governmen of India. The functions of RBI are as follows
a] Printing and issuing currency notes - It has complete authority of printing and
issuing currency notes in the country. RBI issue all denominations of currency
notes ( Rs 2, 10, 20, 50, 100, 200, 500 and Rs 2000) except one rupee note . Which is
issued by Finance ministry. Government of India . The minimum reserve system of
note issue was followed by RBI after 1956.
b] Controller of Credit - The credit provided by all commercial banks is controlled
by RBI. RBI implements both Quantitative and qualitative techniques to control the
credit generated by commercial banks . The quantitative measures to control credit
are bank rate policy, Open market operations , Cash reserve ratio Etc.
3) Controls Money Market- RBI is the leader of Money market. All the activities
and complements of money market like commercial banks and financial institutions
are controlled and directed by RBI.
4) Lender of Last resort- RBI provides financial assistance to commercial banks
like giving credit discounting bills, giving advances etc. during their financial
crisis and helps the banks as a lender of last resort.
3) Write a note on Legal definition of Money.
Ans The total stock of money in circulation among the public at a particular point of
time is called Money Supply. The legal definitions of money are defined as
follows.
M1= CU+ DD ( CU currency notes held by the public , DD is net demand deposits
of the public held by the banks )
M2= M1 + Savings deposits with post office savings banks .
M3= M1+ Net time deposits of Commercial banks
M4= M3 + Total deposits with post office savings organisation .
M1 and M3 are narrow money. M3 and M4 are broad money
4) Write the meaning of transaction Motive and speculative motive of demand for
money.
Ans Transaction Motive- Transaction motive demand for money refers to holding money
to carry out transactions. If we receive our income weekly and make payments on
the first day of every week. We need not hold any cash balance through out the rest
of the week. But our expenditure patterns do not normally match our receipts.
People earn incoms at discrete points in time and spend it continuously throughout
the interval.
The transaction demand for money is represented as follows. MdT= K.T.

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 Where T is the total value of transactions in the economy over unit period and K is a
position fraction.
Speculative motive - Some people hold cash to invest on shares, debentures , gold
immovable properties etc. The speculative demand for money refers to the demand
for money that people hold as idle cash to speculative with the aim of earning capital ,
gains and profits . The speculative demand for money can be written as follows
r = Rate of interest r max= Maximum rate of interest
r min = Mimimum rate of interest.
d r max -r
M s= r- r min
MD= MdT+ MdS
VII Answer the following questions in 20 sentences ;
1) Explain the functions of Money and how does money overcome the short comings
of Barter system .
Ans Anything that is commonly accepted as a medium of exchange for goods and
services and also acts as a measure of value is called money. The functions of
money are as follows.
1) Medium of exchange - The fundamental functions of money is to serves as a
medium of exchange . It facilitates exchange of goods for money. It has solved the
problems of barter system. Money has become a circulating material between
buyers and sellers.
2) Measure of value - The Money acts as a common measure of value. The value
of all goods and services measures and expressed in terms of the money. It facilitates
the maintenance of accounts and it makes goods and services comparable in terms
of price .
3)Store of Value - Money is used as a store of value. People can save part of their
present income and hold the same for future . Money solves one of the deficiencies
of barter system that is difficult to carry forward one’s wealth under the barter
system .
4)Standard of deferred payments - All the credit transactions are expressed in terms
of money. The payment can be delayed or postponed. So money can be used for
delayed settlement of dues or financial commitments.
5) Transfer of Value - Money acts as a transfer of value from person to person and
from place to place . As a transfer of value , money helps us to buy goods ,
properties or anything from any part of the country or the world. Further money
earned in different places can be brought or transferred to anywhere in the world.
6) Provides Liquidity and Uniformity
Money provides liquidity to all kinds of assests both movable and immovable .
Money can be converted into any type of assets and all assets can be converted into
money.

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2) Write the story of Goldsmith Lala on the process of deposit and loan (credit) creation
by commercial banks.
Ans Once there was a Goldsmith named Lala in a village . In this village , people used
gold and other precious metals in order to buy goods and services . These metals
were acting as money people in the village started keeping their gold with Lala for
safe keeping. In return for keeping their gold, Lala issued paper receipts to people
of the village and charged a small fee from them . Slowly overtime , the paper receipts
issued by Lala began to circulate as money. This means that instead of giving gold
for purchasingwheat, some would pay for wheat or shoes or any other good by
giving paper receipts issued by Lala.Thus the paper receipts started acting as money
since everyone in the village accepted these as a medium of exchange .
Let us imagine that Lala had 100kgs of gold deposited by different people and
he had issued receipts corresponding to 100kgs of gold. At this time Ramu comes
to Lala and asks for a loan of 25 kgs of gold.Now Lala can decide that everyone
with gold deposits will not come to withdraw their deposits at the same time and so
he may as well give the loan to Mr. Ramu and charge him for it. If Lalagives the
loan of 25 kgs of gold, Ramu could also pay Mr. Ali 25 kgs of gold and Ali could
keep the 25kgs of gold with Lala in returns for a paper receipt. In effect , the paper
receipts acting as money, would have increased to 125 kgs now, It seems that Lala
has created money out of thin air. The modern banking system works precisely the
way Lala behaves in this example.
VIII Assignmentand Project Oriented questions .
1) Write a note on Demonetisation.
Ans The withdrawal of a coin, note or precious metal from use are legal tender is called
demonetisation.
Steps taken by the government for Demonetisation .- Old currency note of Rs 500
and Rs 1000 were no longer legal tender. New currency notes in the demonetisation
of Rs 500 and Rs 200 were launched.
The public were advised to deposite old currency notes in their bank account till
31-12-2016, without any declaration and upto 31-3-2017 with the RBI declaration
Further to avoid a complete breakdown and scarcity of cash government allowed
exchanged of Rs 4000 old currency notes with new currency restricting to a person
per day.
Appreciation of Demonetisation - It improved tax compliance as a large number of
people were bought in the tax ambit.
The savings of individual were channelized into the formal financial system .
Demonetization helps in curbing blank money, reducing tax evasion and corruption
will decrease
Criticism of Demonetisation -
There were long queues outside banks and ATM centres.
There was acute shortage of currency notes and had adverse effect on Economic
activities.
**********
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 PART-B
MACRO ECONOMICS
CHAPTER 4
DETERMINATION OF INCOME AND EMPLOYMENT
I Choose the correct answer. Each question carries one mark)
1) Consumption which is independent of income is called
a] Induced consumption b] Autonommous consumption
c] Waterful consumption d] part consumption
Ans- Autonomous consumption .
2) Value of MPC lies between
a] 1and 2 b] 0 and 1 c] 2 and 4 d] 0 and 0.5
Ans b] 0 and 1
3) Easy availability of credit encourages
a] savings b] Investment c] rate of interest d] None of the above
Ans b] Investment
II Fill in the blanks . ( Ecah carries one mark)
1) Savings is that part of income that is not consumed.
2) Investment is defined as addition to the stock of physical capital .
III Match the following .
A B
1) Savings a] Intermediate goods
2) Raw material b] Leads to rise in the prices in the long run .
3) Excess Demand c] Y -C
Ans 1-c, 2-a, 3-b
IV Answer the following questions in a sentence or a word .
( each question carries one mark)
1) Write the meaning of autonomous consumption .
Ans The consumption which is independent of income is called as autonomous
consumption
2) Write the formula of MPC
Ans MPC =C
V Answer the following questions in four sentences
( each question carries 2 marks )
1) 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 levels. 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 demand is not enough to employ all factors of production. This
situation is called deficient demand.

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2) Give the meaning of investment multiplier. Write its formula.
Ans Investment multiplier is the ratio of the total increment in equilibrium value of final
goods output to the initial increment in autonomous expenditure. Its formula is
investment Multiplier.
3) Give the meaning of paradox of thrift.
Ans If all the people of the economy increase the proportion of income they save , total
value of savings in the economy will not increase it will either decrease or remain
unchanged. This result is known as the paradox of Thrift.
VI Answer the following questions in 12 sentences.
( each question carries 4 marks )
1) Briefly explain Consumption function.
Ans The functional relationship between consumption and income is called
consumption function.
The simplest consumption function assumes that the consumption changes at a
constant rate as income changes . Of course, even if income is zero, some
consumption still take place. Since this level of consumption is independent of
income , it is called autonomous consumption. We can describe this function as
C= C + cY Here C is the consumption expenditure by households, C is autonomous
consumption and cY is Induced consumption.
The consumption which is independent of income is called as autonomous
consumption.
The consumption which is dependent on income is called as induced
consumption .
The relationship between consumption and income can be explain by MPC
and APC
MPC ( Marginal propensity to consume)
It is the change in consumption per unit change in income. Its formula is
MPC= =C
APC(Average propensity to consume)
It is the ratio between total consumption expenditure and total income at given level
of income . Its formula is APC =
2) Explain the investment function with the help of graph.
Ans The relationship between investment and autonomous investment is called
investment function.
In a two sector model, there are two sources of final demand. The first is
consumption and the second is investment. The investment function was shown as
I =
Graphically , this is shown as a horizantal line at a height equal to above the
horizantal axis
 In this model, I is autonomous which mean ,
C,I
it is the same no matter whatever is the
V
level of income .

I =

V
VII Answer the following questions in 20 sentences .
( each question carries six marks )
1) Explain the multiplier mechanism .
Ans Investment multiplier is the ratio of the total increment in equilibrium value of final
goods output to the initial increment in autonomous expenditure . It can be explain
by multiplier mechanism.
The total value of the final gfoods output is distributed among different factors of
production, rent to land , wages to labour, interest to capital etc. Thus the sum of
aggregate factor payments ie , National Income , is equal to the aggregate value of
the output of final goods .
Example - If the value of the extra output 10 is distributedamong various factors of
production, the income of the economy also goes by 10. When income increases by
10, consumption expenditure goes up by 10, since people spend 0.8 fraction of their
additional income on consumption. Hence in the next round , aggregate deamand in
the economy goes up by (0.8) 10 and there again emerges an excess demand equal
to 10 so on .
It can be calculate by this manner.
Increase Income = = 10 + (0.8) 10+ (0.8)210+(0.8)3..........
Increase Income = 10 + {1+ (0.8) + (0.8)2 + ( 0.8) 3...... }

Increase income Y= = = 50
0

Investment multiplier =

**********
 ©*l




ECONOMICS

WORK BOOK
 PASSING PACKAGE
PART -A
MICRO ECONOMICS
CHAPTER -1
INTRODUCTION
I Choose the correct answer. Each question carries one mark.
 The scarce resources of an economy have
a]Competing usages b] Single usages
c] Unlimited usages d] None of the above
Ans
2) Which of the follwing is an example of micro economic study?
a] National Income b] Consumer Behaviour
c] Unemployment d] Foreign trade
Ans
3) Which of the following is a Macro economic variable?
a] Individual demand b] Aggregate demand
c] Firms output d] Price of a good
Ans
4) Central problems of an economy includes....
a] What to produce b] How to produce
c] For whom to produce d] All of the above
Ans
5) Traditionally, the subject matter of economics has been studied under the
following broad branches.
a] Micro and Macro Economics b]Positive and Normative
c] Deductive and Inductive d] None of the above
Ans
II Fill in the blanks. ( each questions carries one marks)
1) Scarcity of resources gives raise to ________
Ans
2) In a centrally economy all important decisions are made by _______
Ans
3) In reality all economics are_______
Ans
III Match the following ( each question carries 1 mark)
1) Market economy a] Government
2) Service of a Teacher b] Private
3) Centrally Planned economy c] Skill
4) Positive economics d] Evaluate the mechanism
5) Normative Economics e] Functioning of Mechanism
Ans

-2-
IV Answer the following questions in a sentence or a word
( each question carries one mark)
1) Why does the problem of choice arises?
Ans

2) What is Market Economy?

Ans

3) What do you mean by centrally planned economy?

Ans

4) Give the meaning of Micro Economics .

Ans

5) What do you mean by positive economics ?

Ans

6) What is Normative Economics ?

Ans

V Answer the following in four sentences .( Each question carries 2 marks )

1) Mention the central problems of an economy.
Ans

2) Distinguish between Micro and Macro Economics .

Ans

-3-
3) Distinguish between Positive and Normative economics .
Ans

PART -A
MICRO ECONOMICS
CHAPTER -1
INTRODUCTION
I Choose the correct answer. Each question carries one mark.
 The equation of budget line is
a] PX+P1X1=M b] M=P0X0 + PX
c] P1X1+ P2X2=M d] Y= Mx+C
Ans
2) The demand for these goods increases as income increases.
a] Inferior goods b] Gliffen goods
c] Normal goods d] None of the above
Ans
3) A Vertical demand curve is
a] Perfectly elastic b] Unitary elastic
c] Perfectly inelastic d] None of the above
Ans

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

1) Wants satisfying capacity of commodity is
2) Two indifference curves never each other.
3) As income increases , the demand curve for normal goods shifts towards

4) The demand for a good moves in the direction of its price .

III Match the following ( each question carries one mark)

1) Demand Curve Down wordslopping
2) Linear DEmand curve d(P)= a-bp
3) Unitary elasticity curve |ed| =1
4) Complementary goods Pen and ink
5) Indifference map A family of Indifference

-4-
IV Answer the following questions in a sentence or a word
( each question carries one mark)
1) What is a budget line ?
Ans

2) What do you mean Cardinal utility analysis?

Ans

3) Give the meaning of Marginal Utility.

Ans

4) What is Utility?
Ans
5) Expand MRS.
Ans
6) What do you mean by indifference curve?
Ans

6) What is Demand?
Ans

V Answer the following in four sentences .( Each question carries 2 marks )

1) What is MRS?
Ans

2) What are the differences between budget line and budgetset?

Ans

3) What do you mean by inferior goods? Give example .

Ans

4) What is monotonic preference ?

Ans

-5-
5) State the law of Demand.
Ans

6) Mention two different approaches which explain consumer behaviour.

Ans
7) What do you mean price elasicity of demand?
Ans

VI Answer the following questions in about 12 sentences each

( each question carries 4 marks )
1) Write the differences between total utility and marginal utility.
Ans

2) Briefly explain the budget set with the help of a diagram .

Ans

-6-
\

3) Explain the indifference map with the diagram .

Ans

-7-
4) Write the differences between Substitutes goods and Complementary goods.
Substitute good Complementary goods

5) Explain the differences between Normal and Inferior goods with examples.
Normal Goods Inferior Goods

VII Answer the following questions in about 20 sentences each.

( Each question carries six marks )
1) Explain law of diminishing marginal utility with the help of a table and diangram .
Ans

-8-
2) Explain the features of Indifference curves with the help of diagram .
Ans

-9-
a] Indifference curves slopes downwards from left to right

b] Higher indifference curves gives greater level of utility.

C]Two indifference curves never intersect each other-

- 10 -
 3) Explain the optimal choice of consumer with the help of diagram.
Ans

VIII Assignment and Project Oriented questions . ( 5 mark seach).

1) A consumer wants to consume two goods . The price of bananas is Rs 5 and price
of mangoes is Rs 10. If the income of the consumer is Rs 40, Answer the
following questions .
a] How many mangoes that a consumer can purchase with his entire income ?
b] How many mangoes that a consumer can purchase with his entire income ?
c] Slope of the budget line is downward or upward?
d] Are the bundles on the budget line equal to the consumer's income or not ?
e] If you want to have more of Bananas you have to give up Mangoes. Is it true?
Ans

- 11 -
 CHAPTER -3
PRODUCTION AND COSTS
I Choose the correct answer. Each question carries one mark.
 The formula of production function is
a] q= f(L, K) b] q= d c] Y= f(x) d] None of the above
Ans
2) In the short run a firm
a] can change all the inputs b] cannot vary all the inputs
c] can keep the input fixed d] None of the above
Ans
3) The change in output per unit of change in the input is called
a] Marginal product b] Average product
c]Total product d] product
Ans
4) Cabb-Daglas production function is
a] q= ( X, X) b] ( X1, X2)
 
c] q= ( X 1 x X 2) d] q = (10)
Ans
5) TC=
a] TVC b] TFC c] TFC + TVC d] AC + MC
Ans
II Fill in the blanks (Each question carries one mark).
1) In the long run inputs are .............
2) .................is defined as output per unit of variable input.
3) Marginal product and Average product curves are ..................... in shape.
4) SMC curve cuts, AVC curve at the .................... points of AVC curve from below.
5) .................is the set of all possible combination of the two inputs, that yield the
same maximum possibel level of output.
III Match the following ( Each question carries one mark)
A B
1) CRS a]
2) SAC b] Long run average cost
3) LRAC c] Short run average costs
4)TFC + TVC d] Constant return to scale .
5) SMC e] TC
Ans

IV Answer the following questions in a word , a sentence each

( Each question carries 1 mark).
1) What do you mean by Total product?
Ans
- 12 -
2) What is Average Product?
Ans

3) Give the meaning of Marginal Product.

Ans
4) What is Total Fixed cost?
Ans
5) What is Average Fixed cost?
Ans
V Answer the following questions in four sentences . ( 2 marks )
1) What is Isoquants?
Ans

2) Give the meaning of the concepts shortrun and long run .

Ans

3) Mention the types of Return to scale .

Ans

4) What are the Long run costs?

Ans
5) Name the short run costs.
Ans

VI Answer the following questions in 12 sentences.

( each question carries 4 marks )
1) Explain Isoquants with the help of a diagram .
Ans

- 13 -
2) Explain the Total product, Average product and Marginbal Product with the
examples.
Ans

3) Write a brief note on Returns to scale .

Ans

4) Explain the Long run costs.

Ans

- 14 -
5) The following table gives the total product (TPL) find the corresponding APL
and MPL.
TPL 0 15 35 50 40 48
L 0 1 2 3 4 5
Ans

VII Answer the following questions in 20 sentences. ( each questions carries 6 marks )

1) Explain the various short run costs.

Ans

- 15 -
2) Explain the law of variable proportions with the help of diagram.
This law operates in short run period . According to this law, a producer can enhance
the output by increasing only one variable input by keeping other factor inputs
fixed. Stages of the LVP-
1) Increasing Returns - In this stage Total product (TP) increases at an increasing rate.
At the same time AP and MP increases but not like TP.
2) Diminishing Returns - In this stage TP continues to increase at diminishing rate .
because in this stage both MP and AP starts decrasing with the increase in Inputs .
3)Negative Returns - In this stage the TP
and AP all be falling but they are positive .
But MP is negative and cross the OX axis . Y
Explain with diagram
In the above diagram , factor input like
labour is measured in OX axis and TP, AP TP TP
and MP are measured on OY axis . MP
According to this diagram and AP
1) In the first stage TP, AP and MP are increasing AP
2) In the second stage Tp increases at diminishing rate .
But MP and AP start falling 00
X
Input (Labour)
3) In the third stage TP, AP and MP are falling MP
and Mp becomes negative .
d TVC, TC, AVC and SAC scheduls of the firm .

- 16 -
 Q 0 1 2 3 4 5 6
SMC - 500 300 200 300 500 800

Ans

VIII Assignment and project oriented questions .

Find the missing products in the following table.
Factor TP MP AP
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

CHAPTER -4
THE THEORY OF FIRM UNDER PERFECT COMPETITION
I Choose the correct answer. Each question carries one mark.
 In a Perfect competition each firm produces and sells.
b]
2) The increase in total revenue for a unit increase in out put is
a]
3) The firm’s profit is denoted by
d]
4) When the supply curve is verticle the elasticity of supply is
c]
5) The revenue per unit of output of a firm is called as
c]

- 17 -
II Fill in the blanks. ( each questions carries one marks)
1) Price taking behaviour is the single most distinguished characteristics of ––––––––
–––––––––
2) ––––––––– is a tax that the government imposes per unit sale of output
3) For a price taking firn Marginal Revenue is equal to –––––––––
4) The point of minimum AVC where the SMC curves cuts the AVC curves is called
–––––––––
5) ––––––––– cost of some electricity is the gain forgone from the second best
activity.

III Match the following ( each question carry one mark)

1) A B
1) MR=
2) TR - TC

3) AR
4) Normal profit Zero point
5) Perfect Competition Perfect Information
IV Answer the following questions in a sentence or a word.
( Each question carries 1 mark).
1) Define Marginal Revenue.
Ans
2) To which side does supply curve shifts due to technological progress?
Ans
3) Write the formual to calculate average revenue
Ans

4) What is Normal Profit?

Ans
5) Give the meaning of Super Normal Profit .
Ans
V Answer the following questions in about four sentences .
( each question carries 2 marks )
1) Mention the conditions needed for profit by a firm under Perfect Competition
conditions .
Ans

2) Give the meaning of Shut down point.

Ans

- 18 -
3) Write the meaning of opportunity cost with an example.
Ans

4) Mention the two determinants of firms supply curve .

Ans
5) Give the meaning of price elasticity of supply and write its formula.
Ans

VI Answer the following questions in about 12 sentences each

( each question carries 4 marks )
1) Write a short note on profit maximisation of a firm under the following
conditions , 1) P=MC 2) MC must be non decreasing at 90?
Ans

2) Explain the determinants of a firms supply curve .

Ans

3) Explain the features of Perfect Competition.

Ans

4) Write about shut down point. Normal profit and Break even point.
Ans

- 19 -
VII Answer the following questions in about 20 sentences each.
( Each question carries six marks )
1) Explain the short run supply curve of a firm with the help of a diagram .
Ans

2) Explain the Total revenue and Average revenue of a firm under perfect competition
with the help of diagram .
Ans

- 20 -
3) Explain Market supply curve with the help of a diagram.
Ans

4) Assignment and Project Oriented question. Each question carries 5 marks.

Compute the total revenue , Marginal revenue and average revenue schedules in
the following table when the market price of each unit of goods is Rs 10.
Quantity sold TR MR AR
0
1
2
3
4
5
6

Ans
- 21 -
 PART-B
MACRO ECONOMICS
CHAPTER -1
INTRODUCTION
I Choose the correct answer. Each question carries one mark.
 The individuals or institutions which take economic decisions are____
a]Economic variables b] Economic Agents
c] Economists d] None of the above
Ans
2) In 1936 British economist J.M. Keynes published his celebrated book
a] Wealth of Nations b] Theory of Interest
c] General theory of employment. interest and Money.
d] Theory of Employment
Ans
3) 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] Classical thought
c] Contemporary thought d] None of these
Ans
4) The year of Great Depression
a] 1920 b] 1889 c] 1929 d] 2018

- 22 -
Ans
5) In a capitalist country production activities are mainly carried out by
a] Private enterprises b] Planning authority
c] Government authority d] None of the above
Ans
II Fill in the blanks. ( each questions carries one marks)
1) Macro economics tries to address situation facing the economy –––––––––
2) A part of the revenue is paid out as –––––––––for the service rendered by land.
3) The domestic country may sell goods to the rest of the world.
These are called–––––––––
4) –––––––––––––– will be called as firms .
5) ––––––––––––––policies are pursued by the state itself or statutory bodies like RBI
SEBI etc.
IV Answer the following questions in a sentence or a word
( each question carries one mark)
1) Who are Economic agents?
Ans
decisions. They can be consumers, producers, government Corporation Banks etc.
2) What does classical school of thought say?
Ans

3) Give the meaning of imports.

Ans
4) Name the well known work of Adam Smith.
Ans
5) What do you mean by wage rate?
Ans
IV Answer the following questions in four sentences .
( each question carries 2 marks )
1) What are the features of capitalistic economy?
Ans

2) Name and write the meaning of two kinds of trade in external sector.
Ans

- 23 -
3) Who are the macro economic decision makers?
Ans

4) Mention factors of production

Ans

PART-B
MACRO ECONOMICS
CHAPTER -2
NATIONAL INCOME ACCOUNTING
I Choose the correct answer. Each question carries one mark.
 The study of National Income is related to _____
a]Micro Economics b] Macro Economics
c]Both Micro and Macro d] None of the above
Ans
2) NNP=GNP-
a]Deduction b] Depreciation c] Investment d] None of the above
Ans
3) The value of GDP at the current prevailing prices is
a] Real GDP b] GDP at factor cost c] Nominal GDP d] NDP
Ans
4) 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
Ans
II Fill in the blanks. (each questions carries one marks)
1) –––––––––goods will not pass through any more stages of production.
2) –––––––––is an annual allowance for wear and tear of a capital good.
3) Pollution is an example for––––––––– externalities .
4) The net contribution made by a firm is called its –––––––––
5) A part of revenue is paid out as ––––––––– for the service rendered by land .
III Match the following.(each question carries one mark)
A B
1) Labour a] Non-Monetary exchange
2) GDP b]Personal disposable income
3) PDI c]Stock variable
4) Domestic service d]Gross Domestic Income
5) Inventary e] Wages
Ans

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IV Answer the following questions in a sentence or word.
( each question carries 1 mark)
1) What do you mean by final goods?
Ans

2) Expand CPI
Ans
3) Expand GNPMP
Ans
4) Give the meaning of GDP.
Ans

5) What is Depreciation?
Ans

6) How do we get personal disposable income ?

Ans

V Answer the following questions in four sentences (each question carries 2marks)
1) What are the four factors of production? Mention their rewards.
Ans
2) Distinguish between stock and flow. Give example .
Ans

3) What is the difference between Consumer goods and Capital goods ?

Consumer Goods Capital Goods

4) Mention three methods of measuring GDP. (National Income).

Ans

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5) What do you mean by Externalities? Mention its two types .
Ans

6) Write the difference between Nominal and Real GDP.

Ans

VI Answer the following questions in 12 sentences.

( each question carries 4 marks )
1) The circular flow of Income of an economy can be explained with the help of
following Assumption.

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2) Write a note on Externalities .
Ans

3) Explain the examples of Planned accumulation and deccumulation of inventories .

Ans

VII Answer the following questions in 20 sentences :

( Each question carries six marks )
1) Explain the Macro Economic identities .
Ans

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2) Explain a numerical example to show that all the three methods of estimating GDP
gives us the same answer.
Ans While calculating National Income we use three methods . But all methods give
same results . This can be explain with the following example.
Ex- There are two firms A and B suppose A uses no raw materials and produces
cotton worth Rs 50. A sells its cotton to firm B, who uses its to produce cloth. B
sells the cloth produced to consumers for Rs 200.
1) GDP in the phase of product or the value added method -
Here the value added = Sales - Intermediate goods
Thus VAA= 50-0=50
VAB= 200 -50 = 150
GDP= VAA + VAB
50 + 150
GDP = 200
GDP distribution for firms A and B
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 Particulars Firm A Firm B
Sales 50 200
Intermediate Consumption 0 50
Value added 50 150
2) GDP in the phase of disposition or The Expenditure Method -
Under this method , GDP is the sum of final expenditure or expenditures on goods
and services for end use. In the above case the final expenditure is expenditure by
consumer on cloth. Therfore GDP=200
3) GDP in the phase of Distribution or Income Method -
Under this method , GDP is obtained by adding factor payments. Let us imagine firm
A and B again. Firm A Rs 50 received gives Rs 30 as wages and keeps the remaining
Rs 20 as its profits . Similarly firm gives Rs 100 as wages and keeps Rs 50 as
profits. It can be stated in the following table .
Particulars Firm A Firm B Total
Wages 30 100 130
Profits 20 50 70
Now the GDP by Income method = Total of factor payments which is equal
to total wages received and total profits earned.
Thus GDP= Wages + profits
GDP = 130 + 70
= 200
Thus all the three methods of estimating GDP give us the same answer.
CHAPTER -3
MONEY AND BANKING
I Choose the correct answer. Each question carries one mark.
 The main functions of money is ______
a] Savings b] Medium of exchange c] Expenditure d] Investment
Ans
2) The bank which acts as monetary authority of India
a] RBI b] NABARD c]RRB d] IDBI
Ans
3) 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
Ans
4) The rate at which the RBI lends money to commercial banks against securities____
a]Bank rate b] Reporate c] Reverse Reporate d] None of the above
Ans
5) The important tool by which RBI influences money supply is ___
a] Open Market Operations b] Money Operations
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 c] Closed Market Operation d] None of the above
Ans
II Fill in the blanks . ( Ecah carries one mark)
1) Economic exchanges without the use of money are referred to as ––––––––––––––
2) –––––––––is the only institution which can issues currency in India.
3) –––––––––––––––––– issues coins in INdia.
4) M1 and M2 are known as –––––––––––––––––––
III Match the following (each question carries one mark)
1) A B
1) SLR a] Government of India
2) Circulation of coin b] Statutory Liquidity ratio
3) Money c] Broad Money
4) M3 and M4 d] Repo
5) Repurchase agreement e] Medium of Exchange
Ans
IV Answer the following questions in a sentence or a word.
( Each question carries 1 mark).
1) What do you mean by barter system ?
Ans
2) Give the meaning of Money.
Ans

3) What is Fiat Money?

Ans
4) Write the meaning of High Powered Money.
Ans

5) Expand CRR.
Ans
6) What is Bank rate ?
Ans
V Answer the following questions in about four sentences .
( each question carries 2 marks )
1) Mention any two functions of money.
Ans
2) Give the meaning of CRR and SLR.
Ans

3) State the credit control instruments of RBI.

Ans

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4) Mention the two motives of demand for money.
Ans
VI Answer the following questions in 12 sentences.
( each question carries 4 marks )
1) “Money acts as a convenient unit of account”. Explain this system with the
example .
Ans

2) Briefly explain the functions of RBI.

Ans

3) Write a note on Legal definition of Money.

Ans

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4) Write the meaning of transaction Motive and speculative motive of demand for
money and liquidity trap.
Ans

VII Answer the following questions in 20 sentences ;

1) Explain the functions of Money and how does money overcome the short comings
of Barter system .
Ans

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2) Write the story of Goldsmith Lala on the process of deposit and loan (credit) creation
by commercial banks.
Ans

VII Assignmentand Project Oriented questions .

1) Write a note on Demonetisation.
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Ans

PART-B
MACRO ECONOMICS
CHAPTER 4
DETERMINATION OF INCOME AND EMPLOYMENT
I Choose the correct answer. Each question carries one mark)
1) Consumption which is independent of income is called
a] Induced consumption b] Autonommous consumption
c] Waterful consumption d] part consumption
Ans-
2) Value of MPC lies between
a] 1and 2 b] 0 and 1 c] 2 and 4 d] 0 and 0.5
Ans
3) Easy availability of credit encourages
a] savings b] Investment c] rate of interest d] None of the above
Ans

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II Fill in the blanks . ( Ecah carries one mark)
1) Savings is that part of income that is –––––––––
2) ––––––––– is defined as addition to the stock of physical capital .
III Match the following .
A B
1) Savings a] Intermediate goods
2) Raw material b] Leads to rise in the prices in the long run .
3) Excess Demand c] Y -C
Ans
IV Answer the following questions in a sentence or a word .
( each question carries one mark)
1) Write the meaning of autonomous consumption .
Ans

2) Write the formula of MPC

Ans

V Answer the following questions in four sentences

( each question carries 2 marks )
1) 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 levels. This situation is called excess demand .

2) Give the meaning of investment multiplier. Write its formula.

Ans

3) Give the meaning of paradox of thrift.

Ans

VI Answer the following questions in 12 sentences.

( each question carries 4 marks )
1) Briefly explain Consumption function.
Ans

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2) Explain the investment function with the help of graph.
Ans

VII Answer the following questions in 20 sentences .

( each question carries six marks )
1) Explain the multiplier mechanism .
Ans
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