1.

3 MACRO ECONOMICS FOR BUSINESS DECISIONS

Module­1: Intr oduction to Economics & Macr o Economics

2 Mar ks
1.what do you mean by economics?
Economics refers to it is a science, which deals with the study of economic
Activities of the people, business units and that of the society.
According to Adam smith the father of economics defined ‘Economics as a
Science which studies about the production, distribution and consumption of
wealth’.

2.What do you mean by Macr o­economics?

Macro economics is the study or theory of aggregates of the economy, such as
Total employment, unemployment, national income, aggregate demand and
supply etc.
Macro economics is that branch of economics, which deals with the study of
aggregative or average behaviour of the entire system or economies.

3.State the objectives of Macr o economics. [Feb 2013]

Following ar e the objectives of Macr o economics
1.Full employment
2.Price stability
3.External Balance
4.Equitable distribution of income and

4. What do you mean by economic system?

Economic system refers to the orderly arrangement or the organisation pattern
Formed by a set of various institutions and bodies governing the economic
System i.e., production, distribution, exchange and growth in a country.

5.What is a Mixed Economy? [Feb 2010]

Mixed economy is an economic system which combines the good features of
Capitalism and socialism and which excludes the disadvantages of both
Capitalism and socialism.

6.Differ entiate between macr oeconomics and micr oeconomics. [Feb 2010]
Macr o economics:
Macro economics is the study or theory of aggregates of the economy, such as
Total employment, unemployment, national income, aggregate demand and
supply etc.
Micr o economics:
Micro economics deals with the analysis of small units of the economy such as
individual consumer, producer, or firm, wages, income, particular commodity
etc.

7.State the objectives of macr o economics. [J an 2008]

 Following ar e the objectives of Macr o economics:
1.Full employment
2.Price stability
3.External Balance
4.Equitable distribution of income and wealth
5.Increasing productivity

8.Define National Income. [Feb 2012 & 2013]

National Income refers to the aggregate money value of goods and services produced in a
country in a given period of time, generally a year. They include both material goods and
non­material goods i.e., services.
According to Marshall calls the National Dividend the money value of all these goods and
Services in known as National income.

9.Define fr ee mar ket economy. [Feb 2012]

Free market economy or capitalistic is a system of economic system in which the means
Of production such as land, building etc are owned and managed by private individuals and
Production takes place for private profit.
Capitalism is nothing but economic freedom. Every individual is free to start any business or
Choose any occupation within the limits of law of the country. It is also known as free
Enterprise economy.

10.What do you mean by Net National Pr oduct? [Feb 2010 & dec 2004]
It is the market value of all goods and services after deducting depreciation, repairs
And replacement charges from GNP. It refers to the value of net national output of the
Community produced during a year.
NNP=GNP­Depr eciation and r eplacement char ges

11.Give the meaning of Per Capita Income.

Per Capita Income refers to the average income per head of population in the country. If we
Divide the total national income by the total No. of people in the country, we get per
capita+Income i.e., income per head of population.

PCI=Total National Income

Total Population

5 Mar ks
1.Discuss the inter face of Macr o economics with Business and Industr y [Feb 2012 & 2013]
Business, trade, commerce and industry are different parts of macro economics.
 There is a very close relationship between macroeconomics, business and industry.
1.Natur e of economic system:
Different economic systems have different distinctive features which affects business
In a capitalist or market oriented economy, there is economic freedom and entrepreneurs
Have liberty to take their own independent decisions.
2.Gener al economic conditions:
The nature development and growth of trade and business depend on general economic
Conditions and environment existing in a country. One should know whether there are static
Or dynamic conditions etc
3.Str uctur e of the economy:
Structure of an economy indicates the way in which the economy is built up. One can study
Whether an economy is a developing or developed planned or unplanned etc.
4.Mar ket str uctur e:
Market structure refers to the number and size distribution of buyers and sellers in the
Market for a product or service. If there is perfect competition a firm has to compete with a
Very large number of sellers. It there is monopolistic competition it has to face both product
And price competition from a large number of sellers.
5.Gover nment policies:
Different government policies would affect business policies in a different manner. A
Government may follow a liberal controlled or a mixed policy to regulate and encourage
Business activities.
6.Population:
It is necessary to know whether population is regarded as an asset or a liability in a country.
The size , age ,sex and the rate of growth efficiency and nature of people would certainly
Determine the pattern of growth of the economy and individual business units.
7.Infr astr uctur e facility:
The success and performance of any business trade and industry mainly depends on the
Availability of infrastructure facilities like transport and communication power fuel
Marketing finance skilled and trained labour force etc in a country.
8.Technological development:
The nature and pattern of technological development would determine the spend and rate
Of progress of a business unit or a country.

2. What is National Income? What ar e the methods of measur ing national income?
National Income refers to the aggregate money value of goods and services produced in a
country in a given period of time, generally a year. They include both material goods and
non­material goods i.e., services.
According to Marshall calls the National Dividend the money value of all these goods and
Services in known as National income.

Following ar e the methods of measur ing the national income:

1. Receipts or income method:
Under this method we add up the incomes of all the factors of production in the form of
Rent, wages, interest and profit. The various incomes which we have to add up are given
Below:
a. Incomes received by all the individuals in the form of rent, wages, interest and profit.
b. Income of all business firms in the form of undistributed profits and depreciation
allowances
c. Income of the government in the form of taxes and profits from government enterprises.
2. Expenditur e Method:
Under this method the sum of all the consumer expenditure government expenditure
And the net expenditure on capital goods is taken as the national income. The various
Expenditures which we have to add up are given below:
a. Expenditure of all private individuals on consumption i.e., private consumption
Expenditure
b. Expenditure of all business firms, renewals replacements and new investments i.e.,
Domestic private investment expenditure
c. Export surplus or net balance of payments in foreign trade.

3. Inventor y Method:
It is also known as product method or census method. Under this method the market
Values of all final goods and services produced in a country in a given year or added up.
The sum total of all these values is called gross national product. We deduct from it the
Depreciation of plant and machinery used in the process of production in order to arrive
At the net national product.

3. Explain the main types of Economic system. [J une 2008]

Meaning of economic system:
Economic system is a system of resolving the basic problems of what, how, and For whom to
produce
There are three main types of economies or economic systems they are:
1.Centrally planned economy or socialist economy
2.Market economy or capitalist economy
3.Mixed economy

1. Centr ally planned economy or socialist economy:

In a centrally planned economy or command economy or socialist economy where all the
economic activities are controlled by the central government rather than the private
business people.
In such economies the government takes decisions about allocation of resources and the
government decides what to produce, How to produce, and what prices are to fixed.
Profit maximization is not the major consideration in the centrally planned economies.
Those goods and services will be produced which the government finds as most useful for
its society.
The countries like­North Korea, Cuba, China and Vietnam etc follow a centrally planned
economic system.

2. Mar ket economy or capitalist economy:

It is an economic system in which all factors of production are privately owned, operated
and Production takes place for the sake of profit.
In a market economy, private individuals own the factors of production. Hence profit is the
sole Motive and there will be no inference by the government in the economic activities of
the economy.
The countries like­Japan, America, Australia etc follow a market economic system
 3. Mixed economy:
A mixed economy is the economy where there will be existence of both private and public
Sectors exist side by side.
The mixed economy is a golden mixture of both capitalism and centrally planned economy.
In such economics some areas of economic activities are the sole responsibility of
government, while all other area are open to the private sector.
India is the better example for the mixed economy.

4.Explain the difficulties encounter ed in computation of national income. [Feb 2013]

1.Common difficulties of all countr ies
A. Difficulty of defining the nation:
National income means the total income of the nation but national income does not
Include only the income produced within the country but also the income earned in
Other countries by way of shipping freight, interest, insurance, banking etc,.
B .Existence of non­monetized sector :
The existence of the non monetized sector is one of the difficulties faced in the collection
of statistical data in the calculation of national income. If all goods and services produced
Are to be taken into account. And all of them must be exchanged for money. But part
Of the goods and services may not be exchanged for money.
C.Income for for eign fir ms in the countr y:
The other difficulty is in respect of the treatment of income arising out of activities
Of the foreign firms in a country.

2.Special difficulties of under developed countr ies:

A. Pr evalence of bar ter system:
The prevalence of barter system is a great difficulty in the calculation of a national income.
In an underdeveloped country like India, many transactions take place without the use of
Money. A large part of the output produced is either consumed at home of bartered.
B. Lack of occupational specialization:
In many of the underdeveloped countries occupational specialization as not become
Complete. Many people are engaged in more then one occupation for earning livelihood
Ex:An individual may be working as a clerck in a govt.office he may be getting some
Additional income from his farm and small grocery shop.
C .Pr evalence of un or ganized sector :
The prevalence of the un organized sector of production in a backward economy
In another difficulty in the calculation of national income.
D. Lack of statistical data:
The accurate adequate and reliable data regarding the value and the volume of the
Goods and services produced or not available in a backward countries.

5.What is National Income? What ar e the concepts of National Income?

National Income refers to the aggregate money value of goods and services produced in a
country in a given period of time, generally a year. They include both material goods and
non­material goods i.e., services.
According to Marshall calls the National Dividend the money value of all these goods and
Services in known as National income.
1.Gr oss domestic pr oduct (GDP):
GDP is the aggregate money of the final goods and services produced by residents
Non­residents in the domestic territory of a country during an accounting year.
 Symbolically GDP=C+I+G+X­M
The following are the components of GDP:
a.Total value of final cosumer goods and services produced and cousumed during the
year (C)
b.Total value of all capital assets added during the year (I)
c.Total amount of money spend on buying all kinds of goods and services by the govt.
in a year (G)
d.Total value of net exports, i.e., exports­imports.
2.Net domestic pr oduct (NDP):
It refers to the market value of all final goods and services turned out in a economy during
A given period of time after making allowance for depreciation charges.
NDP=GDP­Depr eciation char ges
3.Gr oss National Pr oduct (GNP):
It is the total market value of all final goods and services produced in a country during
A year before deducting the depreciation and replacement charges.
4.Net National Pr oduct (NNP):
It is the market value of all goods and services after deducting depreciation, repairs and
Replacement charges from GNP.
NNP=GNP­Depr eciation and r eplacement char ges.
5.National income at factor cost (NI):
It refers to the income received in the form of rent, wages, interest and profit by the
Factors of production during a year.
NI=NNP­Indir ect taxes +subsidies
6.Per sonal income (PI):
It is a concept of a national income refers to the sum total of income received by the
Community in a given year. It therefore excludes social security contributions of individuals,
Corporate income taxes and profits retained by companies . However includes transfer
Payments like unemployment allowance, old age pension subsidies, etc.
PI=NI­(Social secur ity contr ibution cor por ate income tax r etained pr ofits)
+Tr ansfer payments)
7.Disposable per sonal income (DPI):
The PI accruing to individuals or households is not available consumption purposes. A part
Of the PI as to be paid to the govt. by way of personal direct taxes.
DI=PI­Per sonal dir ect taxes
8.Per capita income (PCI):
Per Capita Income refers to the average income per head of population in the country. If we
Divide the total national income by the total No. of people in the country, we get per
capita+Income i.e., income per head of population.
PCI=Total National Income
Total Population

12 Mar ks:
1.What ar e the var ious economic systems? Explain the essential featur es of each one of
them. Which economic system do you pr efer and why? [Feb 2012 & 2013]
Economic system is a system of resolving the basic problems of what, and For whom to produce
There are three main types of economies or economic systems they are:
1.Centrally planned economy or socialist economy
2.Market economy or capitalist economy
3.Mixed economy
 1. Centr ally planned economy or socialist economy:
In a centrally planned economy or command economy or socialist economy where all the
economic activities are controlled by the central government rather than the private
business people.
In such economies the government takes decisions about allocation of resources and the
government decides what to produce, How to produce, and what prices are to fixed.
Profit maximization is not the major consideration in the centrally planned economies.
Those goods and services will be produced which the government finds as most useful for
its society.
The countries like­North Korea, Cuba, China and Vietnam etc follow a centrally planned
economic system.
The following ar e the featur es of Socialism:
1.planning
2.Economic equality
3.Social welfar e
4.Eliminaiton of competition

2. Mar ket economy or capitalist economy:

It is an economic system in which all factors of production are privately owned, operated
and Production takes place for the sake of profit.
In a market economy, private individuals own the factors of production. Hence profit is the
sole Motive and there will be no inference by the government in the economic activities of
the economy.
The countries like­Japan, America, Australia etc follow a market economic system.
The following ar e the featur es of Capitalism:
1.Pr ivate pr oper ty
2.Fr eedom of enter pr ises
3.Pr ofit motive
4.Fr eedom of contr act
5.Pr ice mechanism
6.Indir ect r ole of the gover nment

3. Mixed economy:
A mixed economy is the economy where there will be existence of both private and public
Sectors exist side by side.
The mixed economy is a golden mixture of both capitalism and centrally planned economy.
In such economics some areas of economic activities are the sole responsibility of
government, while all other area are open to the private sector.
India is the better example for the mixed economy.
Module­2: Consumption, Saving & Investment Functions

2 Mar ks:
1.Give the meaning of consumption.
It means the satisfaction of human wants by using goods and services.
In other words consumption is the art of satisfying the demand of the people at particular
Level of income.

2.what is meant by consumption function? [Feb 2013,2010]

The consumption function or propensity to consume refers to income consumption
Relationship. It is a functional relationship between two aggregates i.e., total consumption
 And gross national income. Symbolically the relationship represented as: C=F(Y)
Where C=Consumption F=Functional relationship Y=Income.

3.State the types of consumption function.

Types of consumption function:
1.Linear consumption function
2.Non­Linear consumption function

4.What is aver age pr opensity to consume?

The relationship between income and consumption is measured by the average and marginal
Propensity to consume. The APC explains the relationship between total consumption and
Total income.
APC= Total consumption
Total Income

5.What is mar ginal pr opensity to consume? [J an 2008]

Marginal propensity to consume may be defined as the incremental change in consumption
As a result of a given increment in income.
It refers to the ratio of the change in consumption to the change in the level of income.
MPC= Change in Total Consumption
Change in Total Income

6. what is meant by Saving function?

It is defined as the excess of income over expenditure. It refers to the surplus over
Consumption expenditure. There is a direct relationship between saving and income.
S=F(Y)

7. What do you under stand by aver age pr opensity to save?

It is just opposite of APC. It is the ratio of total savings to total income. The following
Is used to calculate APS.
APS=% of Total savings
% of Total income

8.What is macr o economic equilibr ium? [Feb 2012]

Macro equilibrium for an economy in the short run is established when aggregate Demand
intersects with short­run aggregate supply.

9.What do you under stand by mar ginal pr opensity to save ? [Feb 2013,2010]
It is just opposite of MPC. It is a ration of change in savings to a change in income.
It refers to the increment caused by a given increment in income. The following formula is to
Find out MPS.
MPS= % of Change in Total savings
% of Change in Total income

10.Give the meaning of Investment Function.

It means purchase of shares, debentures and bonds etc. In this case there is transfer of rights
Or titles from one person to another person.
In other words investment means part of the aggregate income which is used for the creation
Of new structures, new capital equipment, machines, building etc that helps in the
Production of final goods and services in an economy.
11. Mention the Kinds of Investment.
Kinds of Investment:
1.Private investment
2.Public Investment
3.Foreign Investment
4.Induced Investment
5.Autonomous Investment

12.Define Multiplier . Give an example. [Feb 2013,2010]

It may be defined as a ratio of change in income to a change in investment.
It shows by how many times the effect of an initial change in investment is multiplied by
Causing changes in consumption and finally in the aggregate income.
K= % of income
% of investment

13.Define par adox of thr ift. [Feb 2012]

The paradox of thrift explains that an attempt to increase the individual savings would lead to
a fall in the total savings of the community.
According to Keyne’s it refers to increase the level of national output, income and
Employment people have to spend more instead of saving more.

5 Mar ks
1.Explain the par adox of thr ift. [Feb 2013,2010]
According to Keynes an act of savings on the part of one individual would reduce the savings
Capacity of others. Further he says that an increase in individual savings does not lead to an
Increase in the communities savings.
The paradox of thrift explains that an attempt to increase the individual savings would lead to
a fall in the total savings of the community. This is because of the simple reason that one
man’s expenditure is another man’s income. When an individual saves more, he contains not
only his expenditure but reduce the income of others. Thus higher savings would lead to
lower consumption, demand, production, income and employment in an economy.
Keynes consequently stressed that an individual instead of saving more should aim at
Spending more to increase the level of national output income and employment people have
To spend more instead of saving more.

2.What is mar ginal pr opensity to consume? Suggest the measur es to impr ove it. [Feb 2012]
Marginal propensity to consume may be defined as the incremental change in consumption
 As a result of a given increment in income.
It refers to the ratio of the change in consumption to the change in the level of income.
MPC= Change in Total Consumption
Change in Total Income
Measur es to r aise Pr opensity to Consume:
Keynes pointed out some measures to raise the propensity to consume.
1. Income re­distribution
2. Increased wages
3. Credit facilities
4. Advertisement
5. Social security measures
6. Development of the means of transport
7. Urbanization.

3.Explain consumption function. What is its impact on savings and investment?[Feb 2010]
The consumption function or propensity to consume refers to income consumption
Relationship. It is a functional relationship between two aggregates i.e., total consumption
And gross national income. Symbolically the relationship represented as: C=F(Y)
Where C=Consumption F=Functional relationship Y=Income.
Its impact on savings and investment:
Consumption, savings, investment are the major macroeconomic variables. Through they are
Independent and separate concepts, and have separate meanings, all of them are
Interrelated and interconnected to each other. Each one of the concept influence the other
One and in turn get influenced by the other.
National output is the result of combined and co­operative efforts put in by all factor inputs.
In the process of national production, factor inputs render their services in the form of land,
Labor Capital and organization and earn incomes in the form of rent, wages, interest and
profits. When they earn income, they create demand for various goods and services.
People buy different goods and services for their consumption. Consumption leads to
Satisfaction of wants.

4.Explain the Keynes psychological law of consumption.

The fundamental law of consumption which forms the basis of the consumption function.
He wrote the fundamental psychological law upon which we are entitled to depend with
Great confidence both a prior form our knowledge of human and from the detailed facts of
Experience and on the average to increase their consumption as their income but not by as
The increase in their income.

Pr opositions of the law:

1. When income increases, consumption expenditure also increases but but by a smaller
amount. The reason is that as income increases, our wants are satisfied side by side.
2. The increased income will be divided in some proposition between consumption
expenditure and saving.
3. Increase in income always leads to an increase in both consumption and saving this
means that increased income is unlikely to lead either to fall in consumption and saving than
before because as income increases consumption also increases but but by a smaller amount than
before which leads to an increase in saving.

Assumptions:
1. It assumes a constant psychological and institutional company
2. It assumes the existence of Normal conditions
3. It assumes the existence of a Laissez­Fair capitalist economy

12 Mar ks:
1.Define multiplier . Br ing out the significance and limitations of multiplier . [Feb 2012]
It may be defined as a ratio of change in income to a change in investment.
It shows by how many times the effect of an initial change in investment is multiplied by
Causing changes in consumption and finally in the aggregate income.
K= % of income
% of investment

Significance of Multiplier :
 It is a major tool of macroeconomic theory focusing on investment as the significant
element in increasing the level of employment.
 It summarizes the working of the entire Keynesian model.
 It is a valuable guide to public investment policy.
 It is helpful for framing a suitable full employment policy.
 It describes how income is generated in an economic system like a stone causing ripples
in a lake.
 It is used for explaining expansion in different fields of economic of activities
 It helps to understand how equality between saving and investment is brought about. An
increase in income leads t increase in income. Consequently, saving also increases and becomes
to equal investment.

Limitations of the multiplier :

1.Availability of consumer goods
Multiplier works satisfactory if the volume of goods and services in which the additional
Income may be spent are available in plenty.
2.Maintenance of investment:
In order to realize the full value of K it is necessary that the various increments in
Investment be repeated at regular intervals.
3.Net incr ease in Investment:
In order to get the full value of K there should be a net increase in investment.
4.No changes in size of MPC:
In the process of income generation their should not be any change in the value of MPC in
The middle.
5.No investment fr om induced consumption:
In multiplier theory we analyze only the impact of investment on consumption.
6.No time gap between successful expenditur e on consumption:
If there is a gap between receipt of income and expenditure even in the short run the full
Value of the K cannot be realized because as MPC falls the size of the K also declines.
7.Existence of a closed economy:
If there is foreign trade between different countries, the value of K may be restricted by the
 Amount of excess of imports over exports.

2.Explain the major featur es of consumption and savings function. [J an 2008]

Meaning of consumption function:
The consumption function or propensity to consume refers to income consumption
Relationship. It is a functional relationship between two aggregates i.e., total consumption
And gross national income. Symbolically the relationship represented as: C=F(Y)
Where C=Consumption F=Functional relationship Y=Income.

Featur es of consumption function:

1. It shows a functional relationship between income and
consumption and it is a psychological concept.
2. Keynes psychological law of consumption is the basis
for propensity to consume.
3. Propensity to consume of the poor people is higher than
that of the rich.
4. There is a direct relationship between propensity to
consume and employment.
5. It is suitable in the short run but in the long run it
changes as the factors determining it also changes.
6. At zero level of income, consumption expenditure is
autonomous and is independent of income

Featur es of savings function:

1. Pr ecaution
2. For esight
3. Calculation
4. Impr ovement
5. Independence & Enter pr ise

1.Pr ecaution: To build up a reserve to face unforeseen contingencies

2.For esight : To provide reserves for old age, family education, maintenance of dependent
3.Calculation: To enjoy interest and enjoy capital gains
4.Impr ovement: To enjoy higher standard of living in future
5.Independence: To enjoy power to do things independently
6.Enter pr ise: To have funds to carry out speculative or business projects

3.What is Consumption function? Explain the factor s deter mining of consumption

function.
Meaning:
The consumption function or propensity to consume refers to income consumption
Relationship. It is a functional relationship between two aggregates i.e., total consumption
And gross national income. Symbolically the relationship represented as: C=F(Y)
Where C=Consumption F=Functional relationship Y=Income.

Factor s deter mining of consumption function:

 (A)Subjective factor s:
 The motive of precaution
 The motive of foresight
 The motive of calculation
 The motive of improvement
 The motive enterprise

(B)Objective factor s:
 Distribution of national income
 Fiscal policy
 Money income
 Real income
 Price and wage level
 Changes in tastes and fashion
 Changes in expectations
 The level of consumer indebtedness
 Liquid assets
 Social and life insurance
 Rate of interest
 Business policies of corporations
 It helps to explain the concept of underemployment
equilibrium

Module­3: MONEY, BANKING, PUBLIC DEBT

2 Mar ks:
1.Define Money.
According to G. Crowther defines money as “anything that is generally acceptable as a means
Of exchange and at the same time acts as measure and as a store of value”.
According to this definition, money is medium of exchange, a measure of value and a store of
Value.

2.Distinguish between Monetar y policy and Fiscal policy. [Feb 2013]

Monetar y policy:
Monetary policy deals with all those monetary and non­monetary measures and decisions
That affect the total money supply and circulation in an economy.
Fiscal policy:
Fiscal policy refers to the policy of the government as regards taxation, public borrowings and
Public expenditure with specific objectives in view. These objectives produce desirable effect
 and undesirable effects on the national income, production, employment and general price
level.

3.Define Monetar y policy. [Feb 2013]

Monetary policy deals with all those monetary and non­monetary measures and decisions
That affect the total money supply and circulation in an economy.
According to harry G. Johnson monetary policy is a policy employing the central banks
control
Of the supply of money as an instrument for achieving the objectives of general economic
Policy.

4.What ar e the objectives of Monetar y Policy?

Objectives of Monetar y Policy:
1. High rate of growth
2. Full employment
3. Price stability
4. Exchange rate stability
5. Healthy balance in balance of payment

5.What ar e the var ious tools of Monetar y Policy?

Var ious tools of Monetar y Policy:
1.Quantitative Method:
 Bank rate policy
 Open market operations
 Variable reserve ratio
2.Qualitative Method:
 Rationing of credit
 Regulation of consumer credit
 Direct action
 Deficit financing

6.Define Fiscal policy.

Fiscal policy refers to the policy of the government as regards taxation, public borrowings and
Public expenditure with specific objectives in view. These objectives produce desirable effect
and undesirable effects on the national income, production, employment and general price
level.

7.Mention the objectives of fiscal policy. [Feb 2010]

Following ar e the objectives of fiscal policy:
 Full employment
 Economic stability
 Increasing the rate of investment
 Reducing inequalities in income
 Reducing unemployment and underemployment
 Controlling inflationary tendencies

8.What ar e the var ious tools of Fiscal policy?

Instr uments of Fiscal policy:
1. Budget analysis
2. Public revenue
3. Taxation
4. Public debt or public borrowing
5. Deficit financing

9.What is financial inter mediation? [J an 2008]

The term financial intermediaries include all kinds of organizations which intermediate and
Facilitate financial transactions of both individuals and corporate customers.
It refers to all kinds of financial institutions and investing institutions which facilitate
financial
Transaction in financial markets.

10.What is macr o economic equilibr ium? [Feb 2012]

Macro economic equilibrium for an economy in the short run is established when aggregate
Demand intersects with short­run aggregate supply.

11.What do you mean by public debt?

The borrowings of the government from the public is called as Public Debt.
Sources of public debt:
1. Internal debt
2. External debt

12.What is r epo and r ever se r epo r ate? [Feb 2012]

Repo r ate:
The rate which at the RBI lends money to commercial banks is called repo rate. It is an
Instrument of monetary policy. Wherever banks have any shortage of funds they can borrow
From the RBI.

Rever se r epo r ate:

It is the rate at which the RBI borrows money from commercial banks is called Reverse repo
rate. Banks are always happy to lend money to the RBI since their money are in safe hands
with good interest.

13.Give the meaning of r ole of cr edit.

The modern banks create credit to increase the supply of money the way of collecting
Deposits from the public and then it will lend to the leading people.
Banks create deposits in two ways:
1. Primary or passive deposits
2. Active or Derivative deposits

14.What do you mean by Financial mar kets?

Financial markets refers to the institutional arrangements for dealings in financial assets
And credit instruments of different types such as currency, cheques, bank deposits, bills,
Bonds etc
It is also refers to those arrangements which facilitate buying and selling of financial assets
Claims and services.

15.What do you mean by selective cr edit contr ol? [Feb 2012]

 Selective methods are those methods, which regulate uses of credit. They are called as
Quantitative methods as they help in selecting particular sectors to develop much faster
And discouraging other sectors.
Following ar e the impor tant selective contr ols ar e as follows:
1. Fixation of margin requirements on secured loans
2. Regulation of consumer credit
3. Rationing of credit
4. Control through Derivatives
5. Direct action
6. Publicity

16.What is public deficit? What ar e its types.

It is the estimated expenditure is more than the estimated receipts, then the budget is
Called deficit budget.

Types of budget deficit:

1. Revenue deficit
2. Budget deficit
3. Fiscal deficit
4. Primary deficit

17.What do you mean by capital expenditur e?

It refers to the expenditure incurred by the central government for creating permanent
Revenue yielding assets. It includes the capital expenditure incurred on the development
Of industries, Agriculture, Transport and communication, irrigation, power plants etc

18.What ar e financial assets? Give two examples. [J an 2008]

Assets in the form of stocks, bonds, rights, certificates, bank balances etc., is called as
Financial assets.
Example: stocks, bonds, bank deposits etc.

5 Mar ks:
1.Enumer ate the var ious tools of monetar y policy.
Meaning:
Monetary policy deals with all those monetary and non­monetary measures and decisions
That affect the total money supply and circulation in an economy.
According to harry G. Johnson monetary policy is a policy employing the central banks control
Of the supply of money as an instrument for achieving the objectives of general economic
Policy.
Following ar e the var ious tools of Monetar y policy: [Feb 2012]
1.Quantitative Method
2.Qualitative Method

1.Quantitative Method:
 Bank rate policy
 Open market operations
 Variable reserve ratio

2.Qualitative Method:
 Rationing of credit
 Regulation of consumer credit
 Direct action
 Deficit financing

2.What is Fiscal Policy? What ar e its objectives? [J an 2008, Feb 2010]

Meaning:
Fiscal policy refers to the policy of the government as regards taxation, public borrowings and
Public expenditure with specific objectives in view. These objectives produce desirable effect
and undesirable effects on the national income, production, employment and general price
level.
Objectives of Fiscal Policy:
1.Full employment:
The main objective of the fiscal policy was defined as the achievement of full employment.
2.Economic stability:
Economic stability requires the absence of sharp cyclical movements i.e., booms and
Depressions to ensure such stability, a country’s cyclical fiscal policy is recommended.
3.Incr easing the r ate of investment:
Since the level of employment and income are very low in developing in tax rates.
4.Encour aging a socially optimum patter n of investment:
The developing countries can use fiscal policy measures to direct investment in those fields
Which are most desirable form the point of view of the society.
5.Reducing inequalities in income:
There are extreme inequalities in income and wealth in developing countries. While the
Majority of the people struggle hard t make both ends.

6.Reducing unemployment and under employment:

Fiscal policy can be used as a measure t tackle the problem of unemployment and
Underemployment in developing countries public expenditure programme can play a
Specific role in this.
7.Contr olling inflationar y tendencies:
Because of the need to implement large scale industrialization programmes in the face of
Scarcity of resources, the developing countries are often led to depend more and more
Of deficit financing.

3.Define Money. What ar e its functions?

Meaning:
According to G. Crowther defines money as “anything that is generally acceptable as a means
Of exchange and at the same time acts as measure and as a store of value”.
According to this definition, money is medium of exchange, a measure of value and a store of
Value.
Functions of Money:
1.Primary functions
2.Secondary functions
3.Contingent functions
1.Pr imar y functions:
 Medium of exchange
 Measure of value
2.Secondar y functions:
 Store of value
 Standard of deferred payments
 Transfer of value
 3.Contingent functions:
 Distribution of national income
 Making capital more productive
 Basis of credit
 Equalization of marginal utility and marginal productivity
 Help to the government

4.What ar e the functions of centr al bank? Explain the methods of cr edit contr ol.
Functions of centr al bank:
 Regulator of currency
 Banker, fiscal agent and advisor to the government
 Custodian of cash reserves of commercial banks
 Custody and management of foreign exchange reserves
 Lender of the last resort
 Clearing house for transfer and settlement
 Control of credit
Methods of cr edit contr ol:
1.Quantitative Method:
 Bank rate policy
 Open market operations
 Variable reserve ratio
2.Qualitative Method:
 Rationing of credit
 Regulation of consumer credit
 Direct action
 Deficit financing

12 Mar ks: [Feb 2012, Feb 2013]

1.”Fiscal Policy r efer s to the policy of the gover nment r egar ding public r evenue, public
Expenditur e and public debt” . Elucidate.
Meaning of Fiscal policy”
Fiscal policy refers to the policy of the government as regards taxation, public borrowings and
Public expenditure with specific objectives in view. These objectives produce desirable effect
and undesirable effects on the national income, production, employment and general price
level.

(1) Public Revenue:

It refers to the incomes of the government.
Sour ces of r evenue of the centr al gover nment:
The sources of the central government may classified into Tax r evenue and Non­tax r evenue

Tax r evenues:
It refers to the revenues collected by the government in the form of Taxes.
Types of tax r evenues:
1.Tax on commodities
Central excise duties, customs duties, service tax
2.Tax on income
Income tax, corporate tax, interest tax
 3.Tax on pr oper ty
Wealth tax, gift tax
Non­tax r evenues:
a.profits earned by industrial and commercial enterprises owned by the central government
b.profits earned by Indian railways
c.profits earned by posts and telegraphs
d.profits earned by the reserve bank of india

(2)Public expenditur e:
It refers to the expenditure incurred by the central government for creating permanent
Revenue yielding assets. It includes the capital expenditure incurred on the development of
Industries, Agriculture, Transport and communication, irrigation, power plants etc.

(3)Public debt:
The borrowings of the government from the public is called public debt.
Components of public debt:
1.Internal debt: It refers to money borrowed by the government of india from individuals and
Institutions within the country
2.External debt: It refers to the borrowing of the government of india from foreign countries
And from international financial institutions
3.Other liabilities: It include outstanding against the various small savings schemes, provident
Funds, deposits under the compulsory deposits schemes, reserves funds of railways and
Post and telegrams.

2.Discuss br iefly the pr incipal methods adopted by a centr al bank to contr ol cr edit.
[Feb 2010, Feb 2013]

Meaning of centr al bank:

A central bank is the highest banking and monetary institution of a country. In other words
It is the leader of all other banking and monetary institutions found in a country. As it
Occupies a central position in the banking structure of a country, it is called central bank.

Pr incipal methods adopted by a centr al bank to contr ol cr edit:

In the course of the development of central banking, certain principles have been developed
1. A central bank is always inspired by the spirit of service to the nation. Its primary
consideration is national welfare. Profit­seeking is only a secondary consideration for a central
bank.
2. It is considered with the maintenance of the monetary and financial stability in the
country.
3. A central bank should remain free from political influence. It should not allow itself to be
dominated by the ideology of a particular political party.
4. It should work in close co­operation with the government. There should be perfect co­
operation between the central bank and the government, because the government is the ultimate
authority for formulating the monetary policies required for the solution of the economic
problems of the country.

Objectives of centr al bank as the contr ol of cr edit:

1.To stabilize the internal price level
2.To stabilize the role of foreign exchange
 3.To protect the outflow of gold
4.To meet business cycles
5.To have growth with stability

Module­4: ECONOMIC GROWTH, BUNISESS CYCLES

AND ECONOMIC STABILITY
2 Mar ks:
1.Define economic gr owth. [J an 2008]
It refers to increase in a country’s real output of goods and services over a long period of
Time. In other words economic growth measures by the increase in the amount of goods and
Services produced In a country.

2.Distinguish between economic gr owth and economic development.

Economic gr owth:
 It means only increase in output of goods and services
 It is a quantitative concept
 It is mainly related to developed economies
 It is a narrow concept
 It does not consider the distribution of income
Economic development:
 It means increase in output of goods and services due to technological and institutional
changes
 It is a qualitative concept
 It is the main objective of developing economies
 It is a wider concept
 It considers the distribution of income
3.Wht is meant by capital output r atio? [Feb 2010,2012,2013]
Capital output ratio is one of the important technique of economic planning. It explains the
Relationship between changes in investment and corresponding changes in output.
In other words capita output ration may be defined as the relationship of investment in a
Given economy or industry for a given time period to the output of that economy or industry
For a similar time period.

4.What do you mean by Inflation?

Inflation refers to increase in product prices and decrease in money value.
Increase in prices with additional characteristics or conditions.
In other words inflation is too much money chases to the few goods.

5.What do you mean by deflation?

Deflation is just opposite to inflation. It is where the value of money is rising or the prices are
Falling. When the inflation rate is negative, the economy is in a deflationary period .
Deflation a downward movement In the average level of prices.

6.What is cash r eser ve r atio?

A cash reserve ratio(CRR) is the percentage of bank reserves to deposits and notes. The cash
reserve ratio is also known as the cash asset ratio or liquidity ratio.

7.What is business cycle? [Feb 2010,2012,2013]

The term business cycle or trade cycle refers to fluctuations in economic activity that occurs
More or less in regular time sequence in all capitalist societies. The business cycle is nothing
But upward and downward of economic activity, going one after another in a cyclical way.
In other words business cycle is associated with sweeping fluctuations in economic activities
Such as production, price, income, employment, exports, imports etc.

9.What ar e the five phases of business cycle?

Following ar e the five phases of business or tr ade cycle:
1. Depression
2. Recovery
3. Full employment
4. Boom
5. Recession

10.Mention the four wheels of economic gr owth.

The four wheels of economic gr owth ar e:
1.Human resources: It includes labour supply, education, discipline and motivation.
2.Natural resources: It includes land, minerals, fuels and environmental quality.
3.Capital formation: It includes machines, factories and roads.
4.Technology: It includes science, engineering, management and entrepreneurship.

11.What is meant by gr owth and stability?

Gr owth:
The various aspects of growth are increase in output, capacity to produce resources,
Consumption, in the aggregate, per capita, per unit or input or per main hour etc
Stability:
 Stability means lowness of unemployment and absence of either sharp or cumulative
Movements of general level of prices.

12.Diffr entiate between inflation and deflation. [Feb2010]

Inflation:
Inflation refers to increase in product prices and decrease in money value.
Deflation:
Deflation is just opposite to inflation. It is where the value of money is rising or the prices are
Falling.
5 Mar ks:
1.Expain the r ole of Financial Inter mediar ies in Economic Gr owth. [Feb 2013]
Meaning of Economic Gr owth:
It refers to increase in a country’s real output of goods and services over a long period of
Time. In other words economic growth measures by the increase in the amount of goods and
Services produced In a country.
The Role of Financial Inter mediar ies in Economic Gr owth:
There are important contributions banks and other financial intermediaries on the economy.
This process can be seen when we examine how the economy is affected when there are
banking crisis.

Latin Amer ica pr ovides as extr emely fer tile test­bed:

There are two important ways financial intermediaries can contribute to growth by examining
The models of new growth theory in the Schumpeter’s view.
Schumpeter ’s view: Schumpeter made the first articulated statement about how financial
Transactions take central stage in economic growth.
He talked about the central role of the financial intermediaries. His vision of the financial
Intermediary did not entail a person who makes marginal changes. He saw them as agents
Of change that bring in new methods of production. Thus, the private role of a financial
Intermediary was supported to bring in radial changes by combination of different activities.

2.What ar e the deter minants of economic gr owth? [Feb 2012, J an

2008]
Meaning of economic gr owth:
It refers to increase in a country’s real output of goods and services over a long period of
Time. In other words economic growth measures by the increase in the amount of goods and
Services produced In a country.
Following ar e the factor s deter mining of economic gr owth:
1.Human r esour ces: Labour inputs consist of quantities of workers and skills of the work
force.
2.Natur al r esour ces:
The second important factor of economic growth is natural resources. The natural
Resources are land, oil and gas, forests, water, mineral resources without natural
resources, country cannot developed in all respects.
3.Capital r esour ces:
According to classical economist the main factor which helped capital formation, was the
Accumulation of capital profits made by the business community constituted the major
Part of the savings of the community and what was saved was assumed to be invested.
4.Technology and innovation:
Technology advance has been a vita fourth ingredient in the rapid growth of standard of
 Living.
5.Enter pr eneur ship and innovation:
One of the key tasks of economic development is promoting an entrepreneurial spirit.
A company cannot without a group of owners or managers willing to undertake risks etc.
6.Non­economic factor s: Non economic factors include social and political factors.
a.political factor s:
which include political sovereignty of the country
b.Social and cultur al factor s:
Each society has certain social institutions which have a strong bearing on economic
Development.

12 Mar ks:
1.How do you differ entiate between economic gr owth and economic development?
Explain the factor s deter mining the economic gr owth. [Feb 2013]
Meaning of economic gr owth:
It refers to increase in a country’s real output of goods and services over a long period of
Time. In other words economic growth measures by the increase in the amount of goods and
Services produced In a country.
Differ ence between economic gr owth and economic development.
Economic gr owth:
 It means only increase in output of goods and services
 It is a quantitative concept
 It is mainly related to developed economies
 It is a narrow concept
 It does not consider the distribution of income
Economic development:
 It means increase in output of goods and services due to technological and institutional
changes
 It is a qualitative concept
 It is the main objective of developing economies
 It is a wider concept
 It considers the distribution of income
Following ar e the factor s deter mining of economic gr owth:
1.Human r esour ces: Labour inputs consist of quantities of workers and skills of the work
force.
2.Natur al r esour ces:
The second important factor of economic growth is natural resources. The natural
Resources are land, oil and gas, forests, water, mineral resources without natural
resources, country cannot developed in all respects.
3.Capital r esour ces:
According to classical economist the main factor which helped capital formation, was the
 Accumulation of capital profits made by the business community constituted the major
Part of the savings of the community and what was saved was assumed to be invested.
4.Technology and innovation:
Technology advance has been a vita fourth ingredient in the rapid growth of standard of
Living.
5.Enter pr eneur ship and innovation:
One of the key tasks of economic development is promoting an entrepreneurial spirit.
A company cannot without a group of owners or managers willing to undertake risks etc.
6.Non­economic factor s: Non economic factors include social and political factors.
a.political factor s:
which include political sovereignty of the country
b.Social and cultur al factor s:
Each society has certain social institutions which have a strong bearing on economic
Development. In India the institutions of caste, joint families, non­materialistic attitude of
The people and their fatalism based on the philosophy of karma, have been some of the
Serious impediments to economic development.

NOTES PREPARED BY:

S.TRILOK, K.G.F