XII - Economics Surya

UNIT INTRODUCTION TO
1 MICRO ECONOMICS

BOOK EXERCISE QUESTIONS - MULTIPLE CHOICE QUESTIONS

PART - A
1. The branches of the subject Economics is
……….
a) Wealth and welfare
b) production and consumption
c) Demand and supply
d) micro and macro
2. Who coined the word ‘Macro’?
a) Adam Smith b) J M Keynes
c) Ragnar Frisch d) Karl Marx
3. Who is regarded as Father of Modern
Macro Economics?
a) Adam Smith b) J M Keynes
c) Ragnar Frisch d) Karl Marx
4. Identify the other name for Macro
Economics.
a) Price Theory b) Income Theory
c) Market Theory d) Micro Theory
5. Macro economics is a study of
___________________.
a) individuals b) firms
c) a nation d) aggregates
termed as_____________.
a) wholesale price index
b) Business Cycle
c) Inflation d) National Income
8. Identify the necessity of Economic policies.
a) to solve the basic problems
b) to overcome the obstacles
c) to achieve growth
d) all the above
9. Indicate the fundamental economic
activities of an economy.
a) Production and Distribution
b) Production and Exchange
c) Production and Consumption
d) Production and Marketing
10. An economy consists of
a) Consumption sector
b) Production sector
c) Government sector
d) All the above

6. Indicate the contribution of J M Keynes to 11. Identify the economic system where only
economics. private ownership of production exists.
a) Wealth of Nations b) General Theory a) Capitalistic Economy
c) Capital d) Public Finance b) Socialistic Economy
7. A steady increase in general price level is c) Globalised Economy
d) Mixed Economy

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12. Economic system representing equality in b) Private and Public

distribution is _________. c) Internal and External
a) Capitalism b) Globalism d) Firms and Government
c) Mixedism d) Socialism 20. The Circular Flow Model that represents
13. Who is referred as ‘Father of Capitalism’? an open Economy.
a) Adam Smith b) Karl Marx a) Two Sector Model
c) Thackeray d) J M Keynes b) Three Sector Model
14. The country following Capitalism is c) Four Sector Model
________________ . d) All the above
a) Russia b) America
Answers
c) India d) China
1 2 3 4 5 6 7 8 9 10
15. Identify The Father of Socialism. d c b b d b c d c d
a) J M Keynes b) Karl Marx 11 12 13 14 15 16 17 18 19 20
c) Adam Smith d) Samuelson a d a b b d b c a c
16. An economic system where the economic
PART - B
activities of a nation are done both by
the private and public together is termed Answer the following questions in one or
two sentences
as_____________.
a) Capitalistic Economy 21. Define Macro Economics.
b) Socialistic Economy
 The word ‘Macro’ is derived from the
c) Globalised Economy Greek word ‘Makros’ meaning ‘large’.
d) Mixed Economy
 Hence, Macro Economics is the study of
17. Quantity of a commodity accumulated at a the economy as a whole.
point of time is termed as ____________.  In other words, macro economics
a)production b) stock deals with aggregates such as national
c) variable d) flow income, employment and output.

18. Identify the flow variable.  Macro Economics is also known as

‘Income Theory’.
a) money supply
b) assets (Or)
c) income  Macro Economics is a branch of
d) foreign exchange reserves economics that studies the behavior and
performance of an economy as a whole.
19. Identify the sectors of a Two Sector
 Macroeconomics studies the behavior
Model. and performance of an economy as
a) Households and Firms a whole. It covers the functioning,
performance and growth of an economy.

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 XII - Economics Surya
22. Define the term ‘Inflation’.
 Inflation refers to steady increase in
general price level.
 Estimating the general price level
by constructing various price index
numbers such as Wholesale Price Index,
Consumer Price Index, etc, are needed.
23. What is meant by an ‘Economy’?
 The term economy has been defined
by A. J. Brown as, “A system by which
people earn their living.”
(Or)
 J. R. Hicks defined as, “An economy is a
cooperation of producers and workers
to make goods and services that satisfy
the wants of the consumers.”
(Or)
 an economy is referred to any system
or area where economic activities are
carried out. Each economy has its own
character. Accordingly, the functions or
activities also vary.
24. Classify the economies based on status
of development.
i. Developedeconomies
ii. Underdevelopedeconomies
iii. Undevelopedeconomies
iv. developing economies
25. What do you mean by Capitalism?
 Adam Smith is the ‘Father of Capitalism’.
 Capitalistic economy is also termed as a
free economy (Laissez faire, in Latin) or
market economy where the role of the
government is minimum and market
determines the economic activities.
(Or )
3 Chapter 1 : Chapter Wise Abstract
 The system where the means of
production are privately ownedand
market determines the economic
activities.
26. Define ‘Economic Model’.
 A model is a simplified representation
of real situation.
 Economists use models to describe
economic activities, their relationships
and their behaviour.
 A model is an explanation of how the
economy, or part of the economy, works.
27. ‘Circular Flow of Income’ - Define.
 The circular flow of income is a model
of an economy showing connections
between different sectors of an economy.
 It shows flows of income, goods and
services and factors of production
between economic agents such as
firms, households, government and
nations.
 The circular flow analysis is the
basisof national accounts and
macroeconomics.
PART - C
Answer the following questions in
about a paragraph
28. State the importance of Macro
Economics.
i. There is a need to understand the
functioning of the economy at the
aggregate level to evolve suitable
strategies and to solve the basic
problems prevailing in an economy.
ii. Understanding the future problems,
needs and challenges of an economy
 XII - Economics
as a whole is important to evolve
precautionary measures.
iii. Macro economics provides ample
opportunities to use scientific
investigation to understand the reality.
iv. Macro economics helps to make
meaningful comparison and analysis of
economic indicators.
v. Macro economics helps for better
prediction about future and to
formulate suitable policies to avoid
economic crises, for which Nobel Prize
in Economic Sciences is awarded.
29. Describe the different types of economic
systems.
Economic System refers to the manner
in which individuals and institutions are
connected together to carry out economic
activities in a particular area.
It is the methodology of doing economic
activities to meet the needs of the society.
There are three major types of economic
systems. They are:
1. Capitalistic Economy (Capitalism),
2. Socialistic Economy (Socialism)and
3. Mixed Economy (Mixedism)
 Capitalism and socialism are two
extreme and opposite approaches.
 In capitalism, there is total freedom
and private ownership of means of
production.
 In socialism, there is no freedom for
private and there is public ownership of
means of production.
 Mixedism denotes the Co-existence of
capitalism and socialism.
30. Outline the major merits of capitalism.
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1. Automatic Working: Without
any government intervention, the
economy works automatically.
2. Efficient Use of Resources: All
resources are put into optimum use.
3. Incentives for Hard work: Hard work
is encouraged and entrepreneurs get
more profit for more efficiency.
4. Economic Progress: Production and
productivity levels are very high in
capitalistic economies.
5. Consumers Sovereignty: All
production activities are aimed at
satisfying the consumers.
6. Higher Rates of Capital Formation:
Increase in saving and investment leads
to higher rates of capital formation.
7. Development of New Technology: As
profit is aimed at, producers invest on
new technology and produce quality
goods.
31. Indicate the demerits of socialism.
1. Red-Tapism and Bureaucracy:
As decision are taken by government
agencies, approval of many officials and
movement of files from one table to
other takes time and leads to red tapism.
2. Absence of Incentive:
The major limitation of socialism is
that this system does not provide any
incentive for efficiency. Therefore,
productivity also suffers.
3. Limited Freedom of Choice:
Consumers do not enjoy freedom of
choice over the consumption of goods
and services.
4. Concentration of Power:
The State takes all major decisions. The
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 XII - Economics Surya

private takes no initiative in making 33. Distinguish between Capitalism and

economic decisions. Hence, the State is Globalism.
more powerful and misuse of power can

Difference
also take place.

Basis of
32. Enumerate the features of mixed Capitalism Globalism
economy.
1. Ownership of Property and Means of
Adam Smith The term

Term coined by
Production
is the ‘Father coined by
The means of production and properties of Capitalism’ Manfred D
are owned by both private and public.
(1776). Steger (2002)
Public and Private have the right to
Capitalistic to denote the
purchase, use or transfer their resources.
economy is also new market
2. Coexistence of Public and Private termed as a free ideology of
Sectors economy (Laissez globalisation
In mixed economies, both private and faire, in Latin) or
public sectors coexist. Private industries market economy
undertake activities primarily for profit.
The system An economic
Meaning

Public sector firms are owned by the

where the means system where
government with a view to maximize
social welfare.
of production are the economic
privately owned activities of a
3. Economic Planning and market nation are inter
The central planning authority prepares determines connected
the economic plans. National plans are the economic and inter
drawn up by the Government and both activities. dependent
private and public sectors abide. In general,
on each other
all sectors of the economy function
nation.
according to the objectives, priorities and
The role of the Connects
Feature

targets laid down in the plan.

government nations
4. Solution to Economic Problems
is minimum together
The basic problems of what to produce, and market through
how to produce, for whom to produce determines international
and how to distribute are solved through
the economic trade and
the price mechanism as well as state
activities. aiming
intervention.
at global
6. Freedom and Control development.
Though private has freedom to own This ideology
resources, produce goods and services and is also termed
distribute the same, the overall control as ‘Extended
on the economic activities rests with the Capitalism’.
government.

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 XII - Economics
34. Briefly explain the two sector circular
flow model.
There are only two sectors namely,
household sector and firm sector.
(i) Household Sector: The household sector
is the sole buyer of goods and services, and
the sole supplier of factors of production,
i.e., land, labour, capital and organisation.
It spends its entire income on the purchase
of goods and services produced by the
business sector. The household sector
receives income from firm sector by
providing the factors of production owned
by it.
(ii) Firms: The firm sector generates its
revenue by selling goods and services to
the household sector. It hires the factors
of production, i.e., land, labour, capital
and organisation, owned by the household
sector. The firm sector sells the entire
output to households.
Goods and services
Consumer expenditure
Households Firms
Wages, rent, dividends
Factors for production
™™ In a two-sector economy, production
and sales are equal and there will be
a circular flow of income and goods.
™™ The outer circle represents real flow
(factors and goods) and the inner circle
represents the monetary flow (factor
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prices and commodity prices).
™™ Real flow indicates the actor services
flow from household sector to the
business sector, and goods and
services flow from business sector to
the household.
 The basic identities of the two-sector
economy are as under:
Y=C+I
Where Y is Income; is Consumption ; I is
investment
PART - D
Answer the following questions in one
page
35. Discuss the scope of Macro Economics.
The study of macro economics has wide
scope and it covers the major areas as follows
i. National Income: Measurement of
national income and its composition
by sectors are the basic aspects of
macroeconomic analysis. The trends in
National Income and its composition
provide a long term understanding of
the growth process of an economy.
ii. Inflation: Inflation refers to steady
increase in general price level.
Estimating the general price level
by constructing various price index
numbers such as Wholesale Price Index,
Consumer Price Index, etc, are needed.
iii. Business Cycle: Almost all economies
face the problem of business
fluctuations and business cycle. The
cyclical movements (boom, recession,
depression and recovery) in the
economy need to be carefully studied
based on aggregate economic variables.
iv. Poverty and Unemployment: The major
problems of most resource - rich nations
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are poverty and unemployment. This is Capitalism

one of the economic paradoxes. A clear Adam Smith is the ‘Father of Capitalism’.
understanding about the magnitude of Capitalistic economy is also termed as a free
poverty and unemployment facilitates economy (Laissez faire, in Latin) or market
allocation of resources and initiating economy where the role of the government is
corrective measures. minimum and market determines the economic
v. Economic Growth: The growth and activities.
development of an economy and Socialism
the factors determining them could Socialism is defined as a way of
be understood only through macro organizing a society in which major industries
analysis. are owned and controlled by the government, A
vi. Economic Policies: Macro Economics Socialistic economy is also known as ‘Planned
is significant for evolving suitable Economy’ or ‘Command Economy’.
economic policies. Economic policies Mixedism
are necessary to solve the basic In a mixed economy system both
problems, to overcome the obstacles private and public sectors co-exist and work
and to achieve growth. together towards economic development. It is a
combination of both capitalism and socialism.
36. Illustrate the functioning of an economy
 Functioning of an economy based on its
based on its activities.
activities are mentioned as below,
Introduction S.
Features Capitalism Socialism Mixedism
No
Economic System refers to the manner
Private
in which individuals and institutions are Ownership
Private Public Ownership
1. of Means of
connected together to carry out economic Production
Ownership Ownership and Public
activities in a particular area. Ownership
Social
It is the methodology of doing economic Economic Social Welfare
2. Profit
activities to meet the needs of the society. Motive Welfare and Profit
Motive
Types of Economic Systems Central
Solution Free Central Planning
There are three major types of economic 3. of Central Market Planning System and
systems. They are: Problems System System Free Market
System
1. Capitalistic Economy (Capitalism),
Internal
Government Complete Limited
2. Socialistic Economy (Socialism)and 4. Regulation
Role Involvement Role
only
3. Mixed Economy (Mixedism) Income Less
5. Unequal Equal
Distribution unequal
Economic Systems Both
Nature of Private Government Private
6.
Enterprise Enterprise Enterprise and State
Capitalist Economy Enterprises
Economic Complete Lack of Limited
7.
Socialist Economy Freedom Freedom Freedom Freedom
Inequality
Major
8. Inequality Inefficiency and
Mixed Economy Problem
Ineffiency

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 XII - Economics Surya

37. Compare the features of capitalism and Income Less

5. Unequal Equal
socialism. Distribution unequal
Both
S.
Features Capitalism Socialism Nature of Private Government Private
No 6.
Ownership Enterprise Enterprise Enterprise and State
Private Public Enterprises
1. of Means of
Ownership Ownership Economic Complete Lack of Limited
Production 7.
Freedom Freedom Freedom Freedom
Social Inequality
2. Economic Motive Profit Major
Welfare 8. Inequality Inefficiency and
Central Problem
Ineffiency
Solution of Free Market
3. Planning
Central Problems System
System Additional One Marks (Chapter 1)
Internal Complete
4. Government Role 1. The subject Economics is classified into
Regulation only Involvement
Income
two branches, namely,
5. Unequal Equal a. Micro Economics and Minor Economics
Distribution
Nature of Government
b. Micro Economics and Macro Economics.
6. Private Enterprise c. Positive and Normative economics
Enterprise Enterprise
d. Deductive and inductive economics
Economic Complete Lack of
7.
Freedom Freedom Freedom 2. Who was the Norwegian economist and
8. Major Problem Inequality Inefficiency co-recipient of the first Nobel Prize?
a. JM Keynes b. JR Hicks
38. Compare the feature among Capitalism, c. Ragnar Frisch d. Adam Smith
Socialism and Mixedism. 3. Macroeconomics in its modern form, began
S. with John Maynard Keynes and his book
Features Capitalism Socialism Mixedism “The General Theory of Employment,
No
Private Interest and Money” published in …..?
Ownership
Private Public Ownership a. 1936 b. 1963 c. 1935 d. 1937
1. of Means of
Ownership Ownership and Public 4. Identify which is not a subject matters
Production
Ownership
covered in Macro Economics
Social
a. employment
Economic Social Welfare
2. Profit b. national income
Motive Welfare and Profit
c. inflation,
Motive
Central d. Profit maximization
Planning 5. Inflation refers to steady ……………….. in
Solution Free Central
System general price level.
3. of Central Market Planning
and Free a. decrease b. increase
Problems System System
Market c. constant d. flat
System 6. The growth and development of an economy
Internal
Government Complete Limited and the factors determining them could be
4. Regulation
Role Involvement Role understood only through………...
only

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a. macro analysis b. micro analysis 13. Identify which is not a part of classification
c. positive analysis d.rational analysis of economy based on System of Activities.
7. Who defined the following statement for a. Capitalistic Economies
b. Institutional Economies
an economy? “A system by which people
c. Socialistic Economies
earn their living.” d. Mixed Economies
a. J. R. Hicks b. A. J. Brown
c. J. S. Mill d. J.M. Keynes 14. Identify which is not a part of classification
of economy based on Level of National
8. Who defined the following statement for
Income
an economy? “An economy is a cooperation
a. Foreign Income Economies
of producers and workers to make goods
b. Low Income Economies
and services that satisfy the wants of the
c. Middle Income Economies
consumers.” d. High Income Economies.
a. A. J. Brown b. J. R. Hicks
c. J. S. Mill d. J.M. Keynes 15. What is the term coined by Manfred D
Steger (2002) to denote the new market
9. What supports the production and
ideology of globalisation that connects
consumption activities?
nations together through international
a. production activity
b. consumption activity trade and aiming at global development?
c. distribution activity a. Extended Capitalism
d. ‘exchange activity’ b. Confined Capitalism
c.Favourable Capitalism
10. Identify which of the following is not an d. None of above
external activity?
a. import and export 15. Identify which is not an example of
b. international relations capitalistic economy.
c. emigration and immigration a. The USA economy
d. central bank policy b. Germany economy
11. How the economy is divided based c. Indian economy
Nature of Functioning? d. Australia economy
a. Static and Dynamic Economies 16. What is considered as the heart of any
b. Developed and underdeveloped capitalistic economy?
economies a. Sales mechanism
c. Capitalist and Socialist economics b. Price mechanism
d. None of above c. Demand mechanism
12. Identify which is not a part of d. Exchange mechanism
classification of economy based on
17. Which of the following system leads
Status of Development.
to leads to frequent violent economic
a. Mixed Economy
fluctuations and crises?
b. Developed and underdeveloped
economies a. Free market system
c. Undeveloped economies b. Restricted market system
d. Developing economies c. Black market system
d. New market system

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18. ……………… used in economic analysis 24. What shows flows of income, goods
are classified as stock and flow. and services and factors of production
a. Models b. Variables between economic agents such as firms,
c. Charts d. Equations households, government and nations.
a. Circular Flow
19. How many models of circular flow of
economy are there? b. Regular Flow
a. One b. Three c. Five d. Two c. Income Flow
d. Expenditure Flow
20. From the households sectors receives the
income? 25. Assertion (A):  The term coined by
Manfred D Steger (2002) to denote the
a. households sector
new market ideology of globalization.
b. government expenditure
Reason (R):  The ideology connects nations
c. external sector together through international trade and
d. firm sector aiming at global development.
21. The firm sector generates its ……………… Codes:
by selling goods and services to the a. Both (A) and (R) are true and (R) is the
household sector. correct explanation of (A).
a. revenue b. sales b. Both (A) and (R) are true, but (R) is not
c. expenditure d. cost the correct explanation of (A).
22. Pick basic composition of two sector of c. (A) is true, but (R) is false.
model of economy. d. (A) is false, but (R) is true.
a. Y = C + I + G + (X – M) 26. Assertion (A):  Each individual and
b. Y = C + I + G organization produce only those goods
c. Y = C + S which ensure high profit.
d. Y = C + I Reason (R): Profit is the driving force behind
all economic activities in a capitalistic economy.
22. Pick basic composition of three sector of
model of economy. Codes:
a. Y = C + I + G + (X – M) a. Both (A) and (R) are true and (R) is the
b. Y = C + I + G correct explanation of (A).
c. Y = C + S b. Both (A) and (R) are true, but (R) is not
the correct explanation of (A).
d. Y = C + I
c. (A) is true, but (R) is false.
23. Pick basic composition of three sector of
d. (A) is false, but (R) is true.
model of economy.
27. The government has a limited role in a
a. Y = C + I + G + (X – M)
capitalistic economy.
b. Y = C + I + G
The government provides basic services
c. Y = C + S
such as, defense, public health, education, etc.
d. Y = C + I
Codes:
a. Both (A) and (R) are true and (R) is the

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Purchases of goods and services

correct explanation of (A). b. Solution to Economic Problems
b. Both (A) and (R) are true, but (R) is not c. Equality of Income
the correct explanation of (A). d. Freedom ?and Control
Govt
Purchases Demand

c. (A) is true, but (R) is false. 31. Find the odd one out.
d. (A) is false, but (R) is true. Households Government Firms
a. C + I b. C + I + G + (X – M)
28. Planning is an integral part of a Capitalist c. C + I + G d. (X – M)
economy. Incomes Social Taxes
32. Find the missing flow from households to
Transfers

In socialist system, all decisions are government in the diagram.

undertaken by the central planning authority. Wages, dividends, interest, profits and rent

Codes:
a. Revenue b. Fees
a. Both (A) and (R) are true and (R) is the
c. Taxes d. None of the above
correct explanation of (A).
b. Both (A) and (R) are true, but (R) is not 33. Given the chart, find the missing system
the correct explanation of (A). of economy.
c. (A) is true, but (R) is false. a. Pure Mixed
d. (A) is false, but (R) is true. b. Capitalist Learning
29. Match the items in the List – I with items c. Mixed Learning
in List – II. Select the correct answer
from the code given below : d. Marxist

List – I List – II 34. Given the chart, find the missing activity
I. Ownership of Means 1. Free market of an economy.
of Production System
2. Private Growth
II. Economic Motives
Ownership
3. Internal
III. Solution of Central
Regulation Production Activity Consumption Activity
Problems
Only
IV. Government Role 4. Profit
?

Codes:
I II III IV
Supporting Economic and Non-
a 3 2 1 4 Economic Activities of an Economy
b 2 4 1 3
c 2 3 4 1
d 3 4 1 2 External Activities (Activities of other Economies)
30. Identify which of following is not a feature
of mixed economy? a. Foreign Activity
a. Coexistence of Public and Private Sectors

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b. Excess Activity MACROEONOMIC THEORY

c. Exchange Activity
d. Government Activity
35. Find the incorrect match. Capitalist Economy
The Theory
a. Capitalistic Economy Capitalism of Economic
Theory of Growth
b. Command Economy Socialism Consumption Theory of
function Investment
c. Socialistic Economy Globalism
Theory of
d. Mixed Economy Mixedism
Fluctuations (or
Business Cycles)
36. Which of the following is not a macro-
Theory of General
economic goal? Price level and
A. Full Employment Inflation
Open economy
B. Price Stability Macroeconomics
C. Economic Security Balance of Payments
and Foreigh
D. All of the above are macro economic Exchange
goals
3. Mention of some of stages of business
Additional Two Marks(Chapter 1) cycle

1. Why Keynes is considered as the father Prosperity

Business condition

of modern macro economics?

 Macroeconomics in its modern form, Recession
began with John Maynard Keynes Recovery
and his book “The General Theory Depression
of Employment, Interest and Money”
published in 1936.
O Time
 Keynes offered an explanation for i. Boom
fallout from the Great Depression, when
ii. Recession
goods remained unsold and workers
unemployed. iii. Depression
iv. Recovery
 Hence, Keynes is regarded as the ‘Father
of Modern Macro Economics’. 4. Mention any two limitations of macro
economics.
2. What are the subject matters of macro- Macro economics suffers from certain
economic theory? limitations. They are:

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1. There is a danger of excessive generalisation
of the economy as a whole.
2. It assumes homogeneity among the
individual units.
3. There is a fallacy of composition. What is
good of an individual need not be good
for nation and viceversa. And, what is
good for a country is not good for another
country and at another time.
4. Many non - economic factors determine
economic activities; but they do not find
place in the usual macroeconomic books.
5. Mention the classification of based on
Level of National Income.
i. Low Income
ii. Middle Income
iii. High Income Economies
6. What are the major types of economics
systems.
There are three major types of economic
systems.
1. Capitalistic Economy (Capitalism),
2. Socialistic Economy (Socialism)and
3. Mixed Economy (Mixedism)
7. Define Globalism
 The term coined by Manfred D Steger
(2002) to denote the new market
ideology of globalisation that connects
nations together through international
trade and aiming at global development.
 This ideology is also termed as
‘Extended Capitalism’ or Globalism.
8. How is socialism defined?
 Socialism is defined as a way of
organizing a society in which major
industries are owned and controlled by
the government.
13
 A Socialistic economy is also known
as ‘Planned Economy’ or ‘Command
Economy’.
9. What is mixed economy?
 In a mixed economy system both
private and public sectors co-exist
and work together towards economic
development.
 1It is a combination of both capitalism
and socialism.
Purchases of goods and services
10. What are flow variables?
 Flow variables are measured over a
periodTaxes
of time. Govt
Demand
Purchases
 National Income, imports, exports,
consumption,
Households production, investment
Government Firms
etc are examples of flow variables.
Incomes Social Taxes
11. Draw theTransfers
circular flow of a three sector
economy.
Wages, dividends, interest, profits and rent
12. Write a short note on household sector of
circular flow of national income.
 The household sector is the sole buyer
of goods and services, and the sole
supplier of factors of production, i.e.,
land, labour, capital and organisation.
 It spends its entire income on the
purchase of goods and services
produced by the business sector.
13. Write a short note on firm sector of
circular flow of national income.
 The firm sector generates its revenue
by selling goods and services to the
household sector.
 It hires the factors of production, i.e.,
land, labour, capital and organisation,
owned by the household sector.
 The firm sector sells the entire output
Chapter 1 : Chapter Wise Abstract
 XII - Economics Surya

to households. (b) The demand for coffee

14. What are the compositions of a four sector (c) Unemployment
model of economy?
(d) The price of a government bond relative
i. Households to the price of IBM stock
ii. Firms (e) Unemployment among economics
iii. Government professors
iv. External Sector (f) The business cycle
15. What is business cycle? (g) Consumption spending by the household
The  Business Cycle, also called sector
as  Economic Cycle  refers to the periodic (h) Rent controls in New York
booms and slumps in the economic
activities reflected by the fluctuations (i) Inflation
in the aggregate economic magnitudes, (j) The money supply
including employment, investment, total
production, wages, bank credits, etc. Macro Economic topics are as follow,

16. Expand the given equation :Y = C + I + G (c) Unemployment

+ (X-M). (f) The business cycle
Y = National Income (g) Consumption spending by the
C = Consumption Expenditure household sector
I = Investment Expenditure (i) Inflation
G = Government Expenditure (j) The money supply
(X – M) = Net Exports 20. Mention the any three Socialist Learning
17. What is the main point that we are economies
supposed to glean from the circular flow North Korea China Venezuela
diagram?
21. Mention the any three Capitalist Learning
 We are supposed to recognize that one
economies
person’s expenditure is someone else’s
income.  France  Sweden
18. Which are the four components of the  United States  Japan
macroeconomy?
Macroeconomics focuses on four 22. Draw the chart depicting various systems
groups: households and firms (the private of economy
sector), the government (the public sector), Pure Planned Pure Free Market
Economy Economy
and the rest of the world (the external sector).
Economic Systems
19. Identify the following topics which are Mixed Economies Pure
predominantly macroeconomic. Communism Socialist
Learning
Capitalist
Learning
Competition

(a) Provision by firms of medical benefits

Example
North China France United States
for employees Countries:
Korea Venezuela Sweden Japan

14 Chapter 1 : Chapter Wise Abstract

 XII - Economics Surya

Three Marks Additional Question underdeveloped, undeveloped and

developing economies.
1. What are limitations from which Macro
economics suffer? 2. System of Activities: Capitalistic,
Socialistic and Mixed Economies.
Macro economics suffers from certain
limitations. They are: 3. Scale of Activities: Small and Large
1.
There is a danger of excessive Economies.
generalisation of the economy as a whole.
4. Nature of Functioning: Static and
2. It assumes homogeneity among the Dynamic Economies.
individual units.
5. Nature of Operation: Closed and Open
3. There is a fallacy of composition. What is
Economies.
good of an individual need not be good
for nation and viceversa. And, what is 6. Nature of Advancement: Traditional
good for a country is not good for another and Modern Economies.
country and at another time.
4. Many non - economic factors determine 7. Level of National Income: Low Income,
economic activities; but they do not find Middle Income and High Income
place in the usual macroeconomic books. Economies.

2. Draw the flow chart of Functioning of an 4. Explain are the Demerits of Capitalism
Economy Based on Activities
1. Concentration of Wealth and Income:
Capitalism causes concentration of
Growth
wealth and income in a few hands and
thereby increases inequalities of income.
Production Activity Consumption Activity
2. Wastage of Resources: Large amount
of resources are wasted on competitive
advertising and duplication of products.
Exchange Activity

3. Class Struggle: Capitalism leads to class

struggle as it divides the society into
Supporting Economic and Non-
Economic Activities of an Economy capitalists and workers.

4. Business Cycle: Free market system

leads to frequent violent economic
External Activities (Activities of other Economies)
fluctuations and crises.

5. Production of non essential goods:

3. Write the basis how Economies can be Even the harmful goods are produced if
classified into different types. there is possibility to make profit.
1. Status of Development: Developed,

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 XII - Economics Surya

5. What are the Merits of Socialism? Additional Questions Five Marks

1. Reduction in Inequalities: No one is
allowed to own and use private property
to exploit others.
2. Rational Allocation of Resources: The
central planning authority allocates the
resources in a planned manner. Wastages
are minimised and investments are
made in a pre planned manner.
3. Absence of Class Conflicts: As
inequalities are minimum, there is no
conflict between rich and poor class.
Society functions in a harmonious
manner.
4.
End of Trade Cycles: Planning
authority takes control over production
and distribution of goods and services.
Therefore, economic fluctuations can be
avoided.
1. Explain the three sector model of
economy with chart.
 In addition to household and firms,
inclusion of the government sector
makes this model a three-sector model.
 The government levies taxes on
households and firms,purchases goods
and services from firms, and receive
factors of production from household
sector.
 On the other hand, the government also
makes social transfers such as pension,
relief, subsidies to the households.
 Similarly, Government pays the firms
for the purchases of goods and services.
 The Flow Chart illustrates three- sector
economy model.
Purchases of goods and services

5. Promotes Social Welfare: Absence of

exploitation, reduction in economic Taxes
Govt
Demand
Purchases
inequalities, avoidance of trade cycles
and increase in productive efficiency
Households Government Firms
help to promote social welfare.
6. Draw the flow chart of four sector model. Income Social Taxes
Transfers
The External Rest
Imports Exports
Trade of the
Sector of the World Wages, dividends, interest, profits and rent
Economy

Purchases of goods and services Under three sector model, national income
(Y) is obtained by adding Consumption
The Domestic
Ciruclar Flow Taxes Govt Demand expenditure (C), Investment expenditure (I)
of Income Purchases
and Government expenditure (G).
Made up of Households Government Firms

Households
Therefore:
Income Social Taxes
Government
Transfers
Firms Y=C+I+G
Wages, dividends, interest, profits and rent
2. Explain the four sector model of economy
with chart.

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 XII - Economics Surya

 In a four-sector economy, in addition individuals. The owner has the right to own,
households, firms and government, a keep, sell or use these resources according to
fourth sector namely, external sector is his will. The property can be transferred to
included. heirs after death.

 In the real life, only four-sector economy 2. Freedom of Choice and Enterprise: Each
exists. This model is composed of four individual is free to carry out any occupation or
sectors namely, trade at any place and produce any commodity.
Similarly, consumers are free to buy any
i. Households commodity as per their choice.
3. Profit Motive: Profit is the driving force
ii. Firms
behind all economic activities in a capitalistic
iii. Government economy. Each individual and organization
produce only those goods which ensure high
iv. External Sector profit. Advance technology, division of labour,
and specialisation are followed. The golden rule
The external sector comprises exports and
for a producer under capitalism is ‘to maximize
imports. It is illustrated in the Flow Chart.
profit.’
The External
Imports Rest Exports
4. Free Competition: There is free competition
Trade of the
Sector of the World in both product and factor market. The
Economy
government or any authority cannot prevent
Purchases of goods and services firms from buying or selling in the market.
There is competition between buyers and
The Domestic
Ciruclar Flow Taxes
Govt
Purchases Demand sellers.
of Income
Made up of Households Government Firms 5. Price Mechanism: Price mechanism is
the heart of any capitalistic economy. All
Households
Government Income Social
Transfers
Taxes
economic activities are regulated through price
Firms
mechanism i.e, market forces of demand and
Wages, dividends, interest, profits and rent
supply.
In four-sector economy, expenditure 6. Role of Government: As the price mechanism
for the entire economy include domestic regulates economic activity, the government
expenditure (C+I+G) and net exports (X-M). has a limited role in a capitalistic economy.
Therefore, The government provides basic services such
as, defense, public health, education, etc.
Y = C + I + G + (X-M).
7. Inequalities of Income: A capitalist society
3. Discuss the features of Capitalist economy. is divided into two classes – ‘haves’ that is
1. Private Ownership of Property and Law those who own property and ‘have-nots’ who
of Inheritance: The basic feature of capitalism do not own property and work for their living.
is that all resources namely, land, capital, The outcome of this situation is that the rich
machines, mines etc. are owned by private become richer and poor become poorer. Here,

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economic inequality goes on increasing.

4. Explain the concepts of macro economics.

The important concepts used in macro
economics are presented below:
 Stock and Flow Variables :Variables
used in economic analysis are classified
as stock and flow. Both stock and flow
variables may increase or decrease with
time.
 Stock :refers to a quantity of a
commodity measured at a point of time.
In macro economics, money supply,
unemployment level, foreign exchange
reserves, capital etc are examples of
stock variables.
 Flow variables :are measured over
a period of time. National Income,
imports, exports, consumption,
production, investment etc are examples
of flow variables.
 Economic Models :A model is a
simplified representation of real
situation. Economists use models to
describe economic activities, their
relationships and their behaviour. A
model is an explanation of how the
economy, or part of the economy, works.
Most economic models are built with
mathematics, graphs and equations,
and attempt to explain relationships
between economic variables. The
commonly used economic models are
the supply-demand models and circular
flow models and Smith models.

18 Chapter 1 : Chapter Wise Abstract