Namma Kalvi 12th Economics Chapter 1 To 3 Sura Guide em 214939

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Higher Secondary Second Year
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ECONOMICS
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Based on the New Syllabus and
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New Textbook for the year 2019-20
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Salient Features
 Exhaustive Additional MCQs, VSA, SA, LA questions with answers are given in each
chapter.
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 All the objective type (1 Mark) questions, are given with 4 options.
(i) Choosing the correct option
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(ii) Matching
(iii) True or False
(iv) Correctly Matched
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(v) Not Correctly Matched

(vi) Assertion & Reason
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(vii) Picking the Odd one Out

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1
Chapter
Introduction to
Macro Economics
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CHAPTER SNAPSHOT
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1.1 Introduction 1.8 Concepts of Macro Economics

1.2 Meaning of Macro Economics 1.8.1 Stock and flow variables
1.3 Importance of Macro Economics 1.9 Circular flow of Income
1.4 Scope of Macro Economics 1.9.1 Circular flow of income in a Two
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1.5 Limitations Sector Economy

1.6 Economy and its Types 1.9.2 Circular flow of Income in a Three
1.7 Economic Systems Sector Economy
1.7.1 Capitalistic Economy (Capitalism) 1.9.3 Circular flow of Income in a Four
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1.7.2 Socialistic Economy (Socialism) Sector Economy

1.7.3 Mixed Economy (Mixedism)
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[1]

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Scope of Macro
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Introduction
Economics Macro Economics Macro Economics
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Economic INTRODUCTION TO Limitations of

Systems Macro Economics
Sura’s - XII Std - Economics
MACRO ECONOMICS
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2
Capitalistic
Economy
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Concept of Macro
Economics Circular Flow of Income
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Socialistic
Economy
Circular Flow of Income in a
Stock and flow Two Sector Economy
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variables
Mixed
Economy Circular Flow of Income in a
Three sector Economy
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Circular Flow of Income in a
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Four sector Economy
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Chapter 1
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Introduction to Macro Economics Sura’s - XII Std - Economics
Important Terms
Macro Economics : Macro Economics deals with aggregates such as national, income, employment
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and output.
Business Cycle : All the economies face the problem of business fluctuations and business cycle.
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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.
Globalism : Globalisation that connects nations together through international trade and
aiming at global development.
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Capitalistic : Capitalist economy is where the role of the government is minimum and market
Economy / Market determines the economic activities.
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Economy / Free
Trade Economy
Socialistic Economy : Socialism refers to system of total planning, public ownership and state control
/ Command on economic activities.
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Economy / Socialism
Mixed Economy / : In a mixed economy system both private and public sectors co-exist and work
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Mixedism together towards economic development.

Economic Model : A model is a simplified representation of real situation.
Circular flow of : The circular flow of income is a model of an economy showing connections
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Income between different sectors of an economy.

Stock : A quantity of a commodity that is constant at a point of time.
Definitions
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Macro Economics : According to - Dorn Busch, Fischer and Startz “ Macro Economics is very much
about tying together facts and theories”.
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Economy : The term economy has been defined by A.J. Brown as, “A system by which
people earn their living”.
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J.R. Hicks : J.R. Hicks defined as, “An economy is a cooperation of producers and workers to
Definition of make goods and services that satisfy the wants of the consumers”.
Economy
Capitalistic : According to “Adam Smith” capitalistic economy is also termed as a free economy
Economy (Laissez Faire, in Latin) or market economy where the role of government is
minimum and market determines the economic activities.
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Sura’s - XII Std - Economics Chapter 1
Socialism : Any of various economic and political theories advocating collective or

governmental ownership and administration of the means of production and
distribution of goods.
Mixed Economy : An economic system combining private and state enterprise.
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Circular flow of : Circular flow of income is the flow of money made as payments in exchange for
income products and services between various sectors in the economy, balanced by the
flow of payments made in exchange for goods and services.
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Model Questions
Part - A 7. A steady increase in general price level is
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termed as _______.
Multiple Choice Questions 1 Mark (a) Wholesale price index
(b) Business Cycle
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1. The branches of the subject Economics is
(c) Inflation
(a) Wealth and welfare
(d) National Income [Ans. (c) Inflation]
(b) Production and consumption
(c) Demand and supply 8. Identify the necessity of Economic policies.
(a) to solve the basic problems
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(d) Micro and macro
[Ans. (d) micro and macro] (b) to overcome the obstacles
(c) to achieve growth
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2. Who coined the word ‘Macro’?

(d) all the above [Ans. (d) all the above]
(a) Adam Smith (b) J M Keynes
(c) Ragnar Frisch (d) Karl Marx 9. Indicate the fundamental economic activities
[Ans. (c) Ragnar Frisch] of an economy.
(a) Production and Distribution
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3. Who is regarded as Father of Modern Macro

(b) Production and Exchange
Economics?
(c) Production and Consumption
(a) Adam Smith (b) J M Keynes
(d) Production and Marketing
(c) Ragnar Frisch (d) Karl Marx
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[Ans. (c) Production and Consumption]

[Ans. (b) J M Keynes]
10. An economy consists of
4. Identify the other name for Macro Economics.
(a) Consumption sector
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(a) Price Theory (b) Income Theory

(b) Production sector
(c) Market Theory (d) Micro Theory
(c) Government sector
[Ans. (b) Income Theory]
(d) All the above
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5. Macro economics is a study of _______. [Ans. (d) All the above]

(a) individuals (b) firms
11. Identify the economic system where only
(c) a nation (d) aggregates
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private ownership of production exists.

[Ans. (d) aggregates]
(a) Capitalistic Economy
6. Indicate the contribution of _______ J M (b) Socialistic Economy
Keynes to economics. (c) Globalisic Economy
(a) Wealth of Nations (b) General Theory (d) Mixed Economy
(c) Capital (d) Public Finance [Ans. (a) Capitalistic Economy]
[Ans. (b) General Theory]
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12. Economic system representing equality in 20. The Circular Flow Model that represents an
distribution is _______. open Economy.
(a) Capitalism (b) Globalism (a) Two Sector Model
(c) Mixedism (d) Socialism (b) Three Sector Model
[Ans. (d) Socialism] (c) Four Sector Model
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(d) All the above
13. Who is referred as ‘Father of Capitalism’?
[Ans. (c) Four Sector Model]
(a) Adam Smith (b) Karl Marx
(c) Thackeray (d) J M Keynes Part - B
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[Ans. (a) Adam Smith]
Answer the following questions in
14. The country following Capitalism is _______. one or two sentences 2 Marks
(a) Russia (b) America
21. Define Macro Economics.
(c) India (d) China
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Ans. The word ‘Macro’ is derived from the Greek
[Ans. (b) America]
word ‘Makros’ meaning ‘large’ - Hence, Macro
15. Identify The Father of Socialism. Economics is the study of the economy as
(a) J M Keynes (b) Karl Marx a whole. In other words macro economics
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(c) Adam Smith (d) Samuelson deals with aggregates such as national income,
[Ans. (b) Karl Marx] employment and output. Macro Economics is
also known as “Income theory”.
16. An economic system where the economic
22. Define the term Inflation.
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activities of a nation are done both by the
private and public together is termed as Ans. Inflation refers to steady increase in general
_______. price level.
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(a) Capitalistic Economy 23. What is meant by an ‘Economy’?

(b) Socialistic Economy J.R. Hicks defined as, “An economy is a
(c) Globalisic Economy cooperation of producers and workers to make
(d) Mixed Economy [Ans. (d) Mixed goods and services that satisfy the wants of the
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Economy] consumer”.
17. Quantity of a commodity accumulated at a 24. Classify the economies based on status of
development.
point of time is termed as _______.
Ans. (i) Status of Development
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(a) production (b) stock

(c) variable (d) flow (ii) System of Activities
[Ans. (b) stock] (iii) Scale of Activities
(iv) Nature of Functioning
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18. Identify the flow variable.

(v) Nature of Operation
(a) money supply
(b) assests 25. What do you mean by Capitalism?
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(c) income Ans. Adam Smith is the Father of Capitalism. He

defined that “capitalistic economy is also
(d) foreign exchange reserves termed as a free economy (Laissez faire, in
[Ans. (c) income] Latin) or market economy where the role of the
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19. Identify the sectors of a Two Sector Model. government is minimum and market determines
(a) Households and Firms the economic activities.
(b) Private and Public 26. Define ‘Economic Model’.
(c) Internal and External Ans. A Model is a simplified representation of real
(d) Firms and Government situation. Economists use models to describe
[Ans. (a) Households and Firms] economic activities, their relationships and their
behaviour.
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27. ‘Circular Flow of Income’ - Define. 30. Outline the major merits of capitalism.
Ans. It shows flows of income, goods and services Ans. (i) Automatic Working :
and factors of production between economic Without any government intervention the
agents such as firms, house - holds government economy works automatically.
and nations.
(ii) Efficient use of Resources :
Part - C
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All resources are put into optimum use.
Answer the following questions in (iii) Incentives for Hard work :
one paragraph 3 Marks Hard work is encouraged and
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entrepreneurs get more profit for more
28. State the importance of Macro Economics. efficiency.
Ans. (i) There is a need to understand the (iv) Consumers sovereignty :
functions of an economy at the aggregate All production activities are aimed at
level to evolve suitable strategies and to satisfying the consumers,
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solve the basic problems prevailing in an (vi) Higher Rates of Capital Formation :
economy. Leads to higher rates of capital formation.
(ii) Understanding the future problems needs
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and challenges of an economy as a whole. 31. Indicate the demerits of socialism.
(iii) Macro economics provides ample Ans. (i) As decision are taken by government
opportunities to use scientific investigation agencies, approval of many officials and
to understand the reality. movement of files from one table to other
takes time and leads to red tapism.
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(iv) Macro economics helps to make
meaningful comparison and analysis of (ii) The major limitation of socialism is that
economic indicators. this system does not provide any incentive
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for efficiency.
(v) Macro economics helps for better
prediction about future. (iii) Consumers do not enjoy freedom of
choice over the consumption of goods
29. Describe the different types of economic and services.
systems.
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(iv) The state takes all major decisions.

Ans. There are three major types of economic systems.
They are, 32. Enumerate the features of mixed economy.
(i) Capitalistic Economy (Capitalism) : Ans. Features of Mixed Economy :
1. Ownership of Property and Means of
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Capitalistic economy is also known as and

Market economy / free trade economy. Production : The means of production
Where in capitalistic economy the role of and properties are owned by both private
the government is minimum. and public. Public and Private have the
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right to purchase, use or transfer their

(ii) Socialistic Economy (Socialism) :
resources.
Socialism refers to a system of total
2. Coexistence of Public and Private
planning, public and state control on
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Sectors : In mixed economies, both

economic activity.
private and public sectors coexist. Private
(iii) Mixed Economy (Mixedism) : industries undertake activities primarily
In a mixed economy system both private
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for profit. Public sector firms are owned by

and public sectors co-exist and work the government with a view to maximize
together towards economic development. social welfare.
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3. Economic Planning : The central 34. Briefly explain the two sector circular flow
planning authority prepares the economic model.
plans. National plans are drawn up by Ans. Circular flow of Income in a Two-Sector
the Government and both private and economy :
public sectors abide In general, all sectors There are only two sectors namely house hold
of the economy function according to
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sector and firm sector.
the objectives, priorities and targets laid
down in the plan.
4. Solution to Economic Problems : The
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basic problems of what to produce, how
Goods and services
to produce, for whom to produce and how
to distribute are solved through the price
mechanism as well as state intervention. Consumer expenditure
5. Freedom and Control : Though private
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has freedom to own resources, produce
goods and services and distribute the
same, the overall control on the economic
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activities rests with the government.
33. Distinguish between Capitalism and Households Firms
Globalism. Wages, rent, dividends
Ans.
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S.
Capitalism Globalism
No. Factors for production
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1. The system where An economic

the means of system where
production are the economic
privately owned activities of a
and market nation are inter (i) In a two-sector economy, production and
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determines connected and sales are equal and there will be a circular
the economic inter dependent on flow of income and goods.
activities. each other nation. (ii) Outer circle represents real flow (factors
2. The role of the Governments of and goods)
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government is various nations (iii) The inner circle represents the monetary
limited. plays a major role flow factor prices and commodity prices.
in policy making. (iv) Real flow indicates the factor services flow
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3. All economic All economic from house hold sector to the business
activities are activities are sector and goods and services flow from
regulated by price regulated by business sector to the household.
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mechanism. i.e. government (v) The basic identities of the two sector
demand and policies on
economy are as under Y = C + I
supply. imports and
exports. i.e. Import Where :
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policy and Export Y is Income, C is Consumption, I is

policy. Investment.
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Part - D 36. Illustrate the functioning of an economy

based on its activities.
Ans. (i) The functioning of an economy by its
one page 5 Marks activities is explained in the flow chart.
35. Discuss the scope of Macro Economics.
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Ans. The study of macro economics has wide scope Functioning of an Economy Based on
and it covers the major areas as follow. Activities
(i) Measurement of national income and Growth
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its composition by sectors are the basic
aspects of macro economic analysis.
(ii) The trends in National Income and
its composition provide a long term Production Activity Consumption Activity
understanding at the growth process of an
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economy.
Inflation : Exchange Activity
(i) Inflation refers to steady increase in
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general price level.
Supporting Economic and Non-
(ii) Estimating the general price level by Economic Activities of an Economy
constructing various price index numbers
such as Wholesale Price Index, Consumer
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Price Index, etc, are needed.
Business Cycle : External Activities (Activities of other Economies)
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(i) Almost all economies face the problem of

business fluctuations and business cycle.
(ii) The cyclical movements (boom, recession, (ii) In an economy the fundamental
depression and recovery) in the economy economic activities are production and
consumption.
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need to be carefully studied based on

aggregate economic variables. (iii) The ultimate aim of these activities is to
Poverty and Unemployment : The major achieve growth.
problems of most resource - rich nations are (iv) The exchange activity supports the
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poverty and unemployment. This is one of the production and consumption activities.
economic paradoxes. A clear understanding (v) The major economic activities include
about the magnitude of poverty and transportation banking advertising
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unemployment facilitates allocation of resources planning government policy and others

and initiating corrective measures. the major non-economic activities are
Economic Growth : The growth and environment, health regulations. etc.,
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development of an economy and the factors (vi) Other economies such as imports, exports,
determining them could be understood only International relations, emigration,
through macro analysis. immigration foreign investment, foreign
exchange earning etc. also influence the
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Economic Policies :
(i) Macro Economics is significant for entire functioning of the economy.
evolving. Suitable economic policies.
(ii) Economic policies are necessary to solve
the basic problems, to over come the
obstacles and to achieve growth.
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37. Compare the features of capitalism and socialism.
Ans.
S. No. Features Capitalism Socialism
1. Ownership of means of Private ownership Public ownership
production
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2. Economic motive Profit Social Welfare
3. Solution of central Free market system central planning system.
problems
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4. Government Role Internal Regulation only Complete Involvement
5. Income Distribution Unequal Equal
6. Nature of Enterprise Private Enterprise Government Enterprise
7. Economic Freedom Complete Freedom Lack of Freedom
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8. Major problem Inequality Inefficiency
38. Compare the features among Capitalism, Secularism and Mixedism.
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Ans.
S. No. Features Capitalism Socialism Mixedism
1. Ownership of means Private ownership Public ownership Private ownership
of production and Public ownership
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2. Economic motive Profit Social welfare Social welfare & profit
motive
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3. Solution of central Free market system Central planning Central planning

problems system. system and free
market system
4. Government Role Internal Regulation Complete Limited Role
only Involvement
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5. Income Distribution Unequal Equal Less unequal

6. Nature of Enterprise Private Enterprise Government Both private and state
Enterprise enterprises
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7. Economic Freedom Complete Freedom Lack of Freedom Limited freedom

8. Major problem Inequality Inefficiency Inequality and
Ineffiency
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Additional Questions and Answers

8. Combination of both capitalism and socialism
Part - A _______.
Multiple Choice Questions 1 Mark (a) Capitalist Economy
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(i) Choose the Correct Option. (b) Traditional Economy
(c) Mixed Economy
1. A steady fall in general price level is termed as
_______. (d) Socialist Economy
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(a) Deflation [Ans. (c) Mixed Economy]
(b) Inflation 9. Socialist Economy promote _______.
(c) Trade (a) Social welfare motive
(d) To achieve growth [Ans. (a) Deflation] (b) Collective welfare motive
s.
2. Micro means _______. (c) Profit motive
(a) Large (b) Big (d) Both ‘a’ and ‘b’ [Ans. (d) Both ‘a’ and ‘b’]
(c) Small (d) Both ‘a’ and ‘b’ 10. Market forces are _______.
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[Ans. (c) Small] (a) Supply and price
3. Macro means _______. (b) Demand and price
(a) Large (b) Aggregate (c) Prices of commodity
(d) Supply and demand
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(c) Economy as a whole (d) All the above
[Ans. (d) All the above] [Ans. (d) Supply and demand]
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4. Macro economics is also known as _______. 11. The right to property exists largely in _______.
(a) Price theory (a) Traditional society (b) Capitalism
(b) Income theory (c) Socialism (d) Mixed economy
(c) Business cycle [Ans. (b) Capitalism]
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(d) Poverty and unemployment 12. Absence of Price Mechanism is a characteristic

[Ans. (b) Income theory] feature of the _______.
(a) Socialist economy
5. Planned economy is also known as _______.
(b) Capitalist economy
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(a) Capitalist Economy

(c) Traditional economy
(b) Socialist Economy
(d) Mixed economy
(c) Mixed Economy
[Ans. (a) Socialist economy]
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(d) All the above[Ans. (b) Socialist Economy]

13. Non-interference of the state is a characteristic
6. Father of socialism _______. features of the _______.
(a) Adamsmith (b) J.M. Keynes (a) Socialist Economy
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(c) Karl Marx (d) J.R. Hicks (b) Capitalist Economy

[Ans. (c) Karl Marx] (c) Traditional Economy
(d) Command Economy
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7. Example for Mixed Economy _______.

(a) India (b) France [Ans. (b) Capitalist Economy]
(c) China (d) Both ‘a’ and ‘b’ 14. _______ sector sells the entire output to house
[Ans. (d) Both ‘a’ and ‘b’] holds.
(a) Firm (b) House hold
(c) Government (d) Foreign trade
[Ans. (a) Firm]
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15. In addition to household and firms, inclusion (ii) Match the following and choose the
of the government sector make this model a correct answer by using codes given
_______ model. below.
(a) Single sector model 1. (A) Father of Macro (i) J.M. Keynes
(b) Two sector model Economics
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(c) Three sector model (B) Father of Socialist (ii) Karl Marx
(d) Four sector model Economy
[Ans. (c) Three sector model] (C) Micro (iii) Small
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16. _______ is a combination of both capitalism (D) Macro (iv) Large
and socialism.
(a) Socialistic economy Codes :
(b) Capitalistic economy (a) A - (i), B - (ii), C - (iii), D - (iv)
(b) A - (ii), B - (i), C - (iii), D - (iv)
s.
(c) Traditional economy
(d) Mixed economy (c) A - (iv), B - (iii), C - (ii), D - (i)
[Ans. (d) Mixed economy] (d) A - (i), B - (iv), C - (ii), D - (iii)
Ans. (a) [A - (i), B - (i), C - (iii), D - (iv)]
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17. Identify the Father of Scientific Socialism.
(a) Adamsmith (b) J.M. Keynes 2. (A) The General (i) Income
(c) Karl Marx (d) Marshall Theory of Theory
[Ans. (c) Karl Marx] employment
interest and
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18. Identify the stock variable. money
(a) Wealth (b) Income (B) Macro (ii) Inflation
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(c) Foreign exchange (d) Money (C) Aggregate (iii) 1936

[Ans. (a) Wealth] Economics
19. Identify the economic system where only (D) Steady increase in (iv) Greek
public ownership of production exists. general price
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(a) Capitalistic economy Codes :

(b) Socialistic economy (a) A - (iv), B - (iii), C - (ii), D - (i)
(c) Globalistic economy (b) A - (ii), B - (i), C - (iv), D - (iii)
(d) Mixed economy
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(c) A - (iii), B - (iv), C - (i), D - (ii)

[Ans. (b) Socialistic economy] (d) A - (iv), B - (i), C - (ii), D - (iii)
20. Identify the economic system where all Ans. (c) [A - (iii), B - (iv), C - (i), D - (ii)]
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decision are under taken by the central

3. (A) Socialist (i) Free Trade
planning authority.
Economy Economy
(a) Socialist economy
(B) Traditional (ii) Command
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(b) Globalistic economy

Economy Economy
(c) Mixed economy
(d) Capitalistic economy (C) Mixed (iii) Subsistence
Economy Economy
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[Ans. (a) Socialist economy]

(D) Capitalistic (iv) Co-existence of
21. Capitalism leads to _______. Economy both public and
(a) Central planning (b) Class struggle private
(c) Welfare (d) All the above
[Ans. (b) Class struggle]
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Codes : Codes :
(a) A - (ii), B - (iii), C - (iv), D - (i) (a) A - (iii), B - (ii), C - (iv), D - (i)
(b) A - (iv), B - (iii), C - (ii), D - (i) (b) A - (iv), B - (i), C - (ii), D - (iii)
(c) A - (i), B - (iv), C - (iii), D - (ii) (c) A - (iv), B - (iii), C - (ii), D - (i)
(d) A - (ii), B - (iii), C - (i), D - (iv) (d) A - (ii), B - (iii), C - (iv), D - (i)
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Ans. (a) [A - (ii), B - (iii), C - (iv), D - (i)] Ans. (b) [A - (iv), B - (i), C - (ii), D - (iii)]
7. (A) Only Internal (i) Traditional
4. (A) Role of (i)
Mixed Regulation economy
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Government Economy (B) Complete (ii) Mixed
(B) Customs and (ii) Capitalistic involvement economy
Tradition Economy (C) Limited Role (iii) Capitalism
(C) Profit Motive (iii) Socialistic (D) Federal (iv) Socialistic
Economy
s.
Government Economy
(D) Co-existence of (iv) Traditional
public and private Economy Codes :
(a) A - (iii), B - (iv), C - (ii), D - (i)
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Codes :
(b) A - (i), B - (ii), C - (iv), D - (iii)
(a) A - (ii), B - (iii), C - (iv), D - (i)
(c) A - (iv), B - (iii), C - (ii), D - (i)
(b) A - (iii), B - (iv), C - (ii), D - (i)
(d) A - (i), B - (ii), C - (iii), D - (iv)
(c) A - (iii), B - (i), C - (iv), D - (ii)
Ans. (a) [A - (iii), B - (iv), C - (ii), D - (i)]
(d) A - (iv), B - (iii), C - (i), D - (ii)
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Ans. (b) [A - (iii), B - (iv), C - (ii), D - (i)] (iii) State whether the Statements are true or
false.
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5. (A) Market force (i) Socialism 1. (i) There is a competition in the socialistic
(B) Bureaucratic (ii) Inefficiency of economy.
expansion production (ii) Profit is the main motive of capitalistic
(C) Private property (iii) Supply, economy.
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demand and (a) Both (i) and (ii) are true

price (b) Both (i) and (ii) are false
(D) Red tapism and (iv) Laissez Faire (c) (i) is true but (ii) is false
corruption economy (d) (i) is false but (ii) is true
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Codes : [Ans. (d) (i) is false but (ii) is true]

(a) A - (iii), B - (i), C - (iv), D - (ii) 2. (i) In a socialistic economy complete
determined and controlled by a central
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(b) A - (iv), B - (iii), C - (ii), D - (i)

(c) A - (ii), B - (iv), C - (i), D - (iii) planning authority.
(d) A - (ii), B - (iii), C - (iv), D - (i) (ii) In a mixed economy both private and
public co-exist.
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Ans. (a) [A - (iii), B - (i), C - (iv), D - (ii)]

(a) Both (i) and (ii) are true
6. (A) Planned Economy (i) West (b) Both (i) and (ii) are false
Germany (c) (i) is true but (ii) is false
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(B) Capitalist (ii) Cuba (d) (i) is false but (ii) is true
Country [Ans. (d) (i) is false but (ii) is true]
(C) Socialist Country (iii) India
(D) Mixed Economy (iv) Socialistic
Economy
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3. (i) J.M. Keynes is the Father of modern Micro 3. (a) Micro - Large
Economics.
(b) Macro - Small
(ii) J.M. Keynes is the Father of Modern Macro
Economics. (c) Father - Adam Smith
(a) Both (i) and (ii) are true of macro
(b) Both (i) and (ii) are false economics
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(c) (i) is true but (ii) is false (d) Father of - Karl Marx
(d) (i) is false but (ii) is true Socialism
[Ans. (d) (i) is false but (ii) is true]
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[Ans. (d) Father of Socialism - Karl Marx]
4. (i) The word ‘Macro’ is derived from the
Greek word. (v) Which is the following is Not correctly
(ii) The word ‘Macro’ is derived from the latin matched.
word.
1.
s.
(a) Both (i) and (ii) are true (a) In equality leads to - Monopoly
(b) Both (i) and (ii) are false (b) Fair and Hire Policy - Capitalists
(c) (i) is true but (ii) is false (c) Equal opportunity to all - Mixed
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(d) (i) is false but (ii) is true (d) Maximum Social Benefit - Socialism
[Ans. (c) (i) is true but (ii) is false]
[Ans. (c) Equal opportunity to all - Mixed]
5. (i) The word Micro means small.
(ii) The word Macro means large. 2. (a) Mixed - Efficient utilization
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(a) Both (i) and (ii) are true Economy
(b) Both (i) and (ii) are false
(b) Socialism - Promotes Social
(c) (i) is true but (ii) is false
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Welfare
(d) (i) is false but (ii) is true
(c) Capitalistic - Profit Motive
[Ans. (a) Both (i) and (ii) are true]
Economy
(iv) Which is the following is correctly (d) Traditional - Modern Technology
matched.
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Economy
1. (a) Capitalism - Welfare motive
(b) Socialist - Profit motive [Ans. (d)
Traditional Economy - Modern
Technology]
(c) Traditional - Modern technology
.s
economy 3. (a) Two Branch of - Micro and

(d) Mixed - Social welfare and Economics Macro
economy profit motive Economics
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[Ans. (d) Mixed economy - Social welfare and (b) First Nobel Price - Ragnar Frisch
profit motive] in Economic
Science
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2. (a) Two sector - Firm and Industry

model (c) Father of Modern - Adam Smith
Macro Economics
(b) Three sector - Firms, Households
(d) Father of Macro - J.M. Keynes
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model and Industry

Economics
(c) Four sector - Firm, Households
model Government and [Ans. (c) Father of Modern Macro Economics
Foreign Trade - Adam Smith]
(d) India - Two sector model
[Ans. (c) Four sector model - Firm, Households
Government and Foreign Trade]
13
4. (a) General System - Socialistic (vi) Assertion and Reason.

of Economics Economy 1. Assertion (A) : The fundamental economic
(b) One of the - Central Planning activities are production and consumption.
scope of Macro Authority Reason (R) : The ultimate aim of these
Economics activities is to achieve growth.
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(c) Father of - Adam Smith (a) Both ‘A’ and ‘R’ are true and R is the correct
Capitalism explanation to A
(d) Capitalistic - Welfare Motive (b) Both ‘A’ and ‘R’ are true but R is not the
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Economy correct explanation to A
[Ans. (d) Capitalistic Economy - Welfare (c) A is true but R is false
Motive] (d) A is false but R is true
[Ans. (a) Both ‘A’ and ‘R’ are true and R is the
5.
s.
(a) Market Economy - Command correct explanation to A]
Economy
(b) Merits of - Reduction in 2. Assertion (A) : Profit is the driving force
Socialism inequalities behind capitalistic economy.
ok
(c) Karl Marx - Father of Reason (R) : Price Mechanism is the heart of
Scientific any capitalistic economy.
Socialism (a) Both ‘A’ and ‘R’ are true and R is the correct
(d) Mixed Economy - USA explanation to A
o
[Ans. (d) Mixed Economy - USA] (b) Both ‘A’ and ‘R’ are true but R is not the
correct explanation to A
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6. (c) A is true but R is false

(a) Circular flow - Two
models (d) A is false but R is true
(b) Four Sectors - House [Ans. (a) Both ‘A’ and ‘R’ are true and R is the
holds, firms, correct explanation to A]
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Government and
external sector 3. Assertion (A) : In a Socialistic economy all
(c) Socialism - Central planning resources are owned and operated by the
authority government.
.s
(d) Total Freedom - Capitalism Reason (R) : Public welfare is the main motive
[Ans. (a) Circular flow models - Two] behind socialistic economy.
(a) Both ‘A’ and ‘R’ are true and R is the correct
7.
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(a) Fundamental - Production and explanation to A

Economic Consumption (b) Both ‘A’ and ‘R’ are true but R is not the
Activity correct explanation to A
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(b) Economic - Three (c) A is true but R is false

Systems (d) A is false but R is true
(c) Mixedism - India [Ans. (a) Both ‘A’ and ‘R’ are true and R is the
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(d) Capitalistic - Co-existence correct explanation to A]

Economy of Public and
Private 4. Assertion (A) : In a mixed economic system
[Ans. (d) Capitalistic Economy - Co-existence both private and public co-exist.
of Public and Private] Reason (R) : Mixed economy tends to eliminate
the evils of both capitalism and socialism.
14

(a) Both ‘A’ and ‘R’ are true and R is the correct 4. Demerits of Socialism
explanation to A (a) Read Tapism and Bureaucracy
(b) Both ‘A’ and ‘R’ are true but R is not the (b) Reduction in inequalities
correct explanation to A (c) Absence of incentives
(c) A is true but R is false (d) Limited freedom of choice
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(d) A is false but R is true [Ans. (b) Reduction in inequalities]
correct explanation to A] Part - B
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5. Assertion (A) : The circular flow of income is Answer the following questions in
a model of an economy showing connections
between different sectors of an economy. one or two sentences 2 Marks
Reason (R) : The circular flow analysis is 1. Write down the three types of economic
s.
the basis of national accounts and Macro systems.
economics. Ans. (i) Capitalistic Economy (Capitalism)
(a) Both ‘A’ and ‘R’ are true and R is the correct (ii) Socialistic Economy (Socialism)
ok
explanation to A (iii) Mixed Economy (Mixedism)
(b) Both ‘A’ and ‘R’ are true but R is not the
correct explanation to A 2. What is Globalism?
(c) A is true but R is false Ans. Globalism : An economic system where
(d) A is false but R is true the economic activities of a nation are inter
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connected and inter dependent on each other
correct explanation to A] nation.
ab
3. What are the demerits of socialism?

(vii) Pick the Odd one Out. Ans. (i) Concentration of wealth and income
1. The subject matters covered Macro economics (ii) Wastage of Resources
are _______ (iii) Class struggle
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(a) Investment and Saving (iv) Business Cycle

(b) Inflation Business Cycle (v) Production of Non essential goods
(c) International Trade 4. What do you mean by Socialism?
(d) Individual Demand and Supply
.s
Ans. (i) Socialism refers to a system of total

[Ans. (d) Individual Demand and Supply] planning.
2. General Economics Systems : (ii) Public ownership and state control on
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(a) Indian economy economic activities.

(b) Capitalist economy 5. What is Mixed Economy?
(c) Socialist economy Ans. (i) In economic system both private and
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(d) Mixed economy public sectors co-exist.

[Ans. (a) Indian economy] (ii) It work together towards economic
development.
3. Features of Capitalistic Economy :
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6. What are the merits of Mixed Economy?

(a) Freedom of choice and enterprise
Ans. (i) Rapid Economic Growth
(b) Profit motive
(c) Collective welfare (ii) Balanced Economic Growth
(d) Price Mechanism (iii) Economic Equality
[Ans. (c) Collective welfare] (iv) Proper Utilization of Resources
(v) Special Advantages to the Society
15
7. Give examples for Mixed Economic countries. 13. Write the equation for Four-sector economy.
Ans. (i) India Ans. Y = C + I + G + (X – M)
(ii) England C - Consumption Expenditure (Households)
(iii) France and I - Investment Expenditure (Firms)
(iv) Brazil are the examples of mixed economy
G - Government Expenditure (Government)
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8. Give the countries which have communism.
(X–M) – Net Exports (External Sector)
Ans. (i) North Korea
(ii) China 14. What are the different models of circular flow
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(iii) Venezuela of income?
9. Write down the countries that have capitalistic Ans. There are three models of circular flow of
economy. income. They are,
Ans. (i) The USA (i) Two sector model
(ii) Three sector model
s.
(ii) West Germany
(iii) Australia and (iii) Four sector model
(iv) Japan 15. What are the movements of Business Cycle?
ok
10. Draw the diagram for Circular flow of income Ans. The movements of business cycles are,
in a Two-sector economy. (i) Boom
Ans. (ii) Recession
(iii) Depression and
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Goods and services (iv) Recovery
Consumer expenditure 16. What is Business Cycle?
ab
Ans. All economics face the problem of business

fluctuations.
17. What is Economic Policies?
Households Firms Ans. Economic policies are necessary to solve the
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Wages, rent, dividends

basic problems to overcome the obstracles and
to achieve growth.
Factors for production
18. What is Globalisation?
.s
Ans. Globalisation is nothing but connect the nations

together through international trade and aiming
11. Write any three merits of capitalism. at global development.
Ans. (i) Efficient use of Resources
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19. What is Price Mechanism?

(ii) Automatic working
Ans. (i) Price Mechanism is the heart of any
(iii) Higher Rates of capital formation
capitalistic economy.
(iv) Development of new technology
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(ii) All the economic activities are regulated

12. Who is the controll authority of socialistic through price mechanism.
economy?
Ans. (i) Central planning authority is the 20. Write a note on Central Planning?
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controlling authority in a socialistic Ans. (i) Planning is an integral part of a socialist

economy. economy.
(ii) All the decisions are under taken by the (ii) In socialist economy all decisions are
central planning authority. undertaken by the Central Planning
(iii) It means all factors of production are Authority.
nationalized and managed by public
authority.
16

Part - C (ii) Competitive Attitude : It is expected that
both government and private should work
with a complementary spirit towards the
one paragraph 3 Marks welfare of the society, but in reality they
are competitive in their activities.
1. Outline major demerits of capitalism.
(iii) Inefficiency : Most of the public sector
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Ans. (i) Concentration of wealth and income
enterprises remain inefficient due to
(ii) Wastage of Resources
lethargic bureaucracy, red tapism and lack
(iii) Class struggle of motivation.
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(iv) Business cycle (iv) Fear of Nationalization : In a mixed
(v) Production of non essential goods. economy, the fear of nationalization
2. Write any two demerits of capitalism. discourages the private entrepreneurs in
Ans. (i) Class Struggle : their business operations and innovative
initiatives.
s.
Capitalism leads to class struggle as it divides
the society into capitalists and workers. (v) Widening Inequality : Ownership of
(ii) Business Cycle : resources, laws of inheritance and profit
motive of people widens the gap between
ok
Free Market System leads to frequent violent
rich and poor.
economic fluctuations and crisis.
6. What are the limitation of Macro Economics.
3. Draw the circular flow of income in a three
sector economy. Ans. Macro economics suffers from certain limitation.
They are
o
Ans.
(i) There is a danger of excessive
Trade Sector of the
Imports Rest of the Export

Economy
World
generalisation of the economy as a whole.
ab
Purchases of goods and Service (ii) It assumes homogeneity among the

individual units.
Income Made up of Households
₹ Taxes Demand (iii) There is a fallacy of composition. What is

Government Firms
Govt
Purchases
Households Government Firms

good of an individual need not be good
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Social Taxes
for nation and viceversa and, what is good
Transfers
Incomes ₹
for a country is not good for another
country and at another time.
7. Explain any three features of Capitalistic
.s
4. Explain any two merits of socialism.

Economy.
Ans. (i) Reduction in inequalities :
Ans. (i) Private Ownership of Property and Law
No one is allowed to own and use private of Inheritance :
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property to exploit others.

The basic feature of capitalism is that
(ii) Absence of class conflicts : all resources namely, land, capital,
As inequalities are minimum, there is no conflict machines, mines etc. are owned by private
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between rich and poor class. Society functions individuals. The owner has the right to
in a harmonious manner. own, keep, sell or use these resources
according to his will. The property can be
5. What are the demerits of mixed economy? transferred to heirs after death.
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Ans. (i) Lack of Coordination : The greatest (ii) Freedom of Choice and Enterprise :
drawback of mixedism is lack of Each individual is free to carry out any
coordination between public sector and occupation or trade at any place and
private sector. As both work with divergent produce any commodity. Similarly,
motives, it creates many coordination consumers are free to buy any commodity
related problems. as per their choice.
17
(iii) Free Competition : Inefficiency :

There is free competition in both product Most of the public sector enterprises remain
and factor market. The government or inefficient due to lethargic bureaucracy, red
any authority cannot prevent firms from tapism and lack of motivation.
buying or selling in the market. There is Fear of Nationalization :
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competition between buyers and sellers. In mixed economy, the fear of nationalization
8. Bring out the functions of an economy with discourages the private enrepreneurs in their
business operations.
the help of flow chart.
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Ans. Functioning of an Economy based on Activities Part - D
Growth Answer the following questions in
one page 5 Marks
1. Explain the four sector circular flow model.
s.
Production Consumption
Activity Activity Ans. (1) Circular flow of income in a four sector
economy.
(2) In a four sector economy. in addition
ok
to household, firms and government, a
Exchange Activity fourth sector namely, external sector is
included.
(3) In real life, only four-sector economy is
o
exists.
Supporting Economic and (4) This model is composed of four sectors
namely.
ab
Non-Economic Activities of our

Economy (i) Households
(ii) Firms
(iii) Government
(iv) External
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External Activities (Activities of other (5) The external sector comprises exports and
Economies imports.
(6) It is illustrated in the flow chart.
9. Describe the three models of circular flow of
.s
income.
Trade Sector of the
Imports Rest of the Export

Ans. Two Sector Model :
Economy
World
It is for a simple economy with households and
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firms Purchases of goods and Service
Three Sector Model :

Income Made up of Households
It is for a mixed and closed economy with

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₹ Taxes Demand
Government Firms
Govt
Purchases
households, firms and government.
Households Government Firms
Four Sector Model :
Social Taxes
It is for an open economy with households,
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Transfers
Incomes ₹
firms, government and rest of the world.

10. Indicate the demerits of Mixed Economy.
Ans. Lack of Co-ordination : (7) In four sector economy, expenditure for
The greatest drawback of Mixedism is lack of the entire economy include domestic
co-ordination between public sector and private expenditure.
sector. (C + I + G) and net exports (X–M)
18

(8) Therefore four sector model expressed as 2. Wastage of Resources : Large amount
Y = C + I + G + (X–M) of resources are wasted on competitive
advertising and duplication of products.
2. Explain the merits of socialism. 3. Class Struggle : Capitalism leads to class
Ans. Merits of Socialism : struggle as it divides the society into
capitalists and workers.
m
1. Reduction in Inequalities :
No one is allowed to own and use private 4. Business Cycle : Free market system leads
property to exploit others. to frequent violent economic fluctuations
2. Rational Allocation of Resources : and crises.
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The central planning authority allocates 5. Production of non essential goods : Even
the resources in a planned manner. the harmful goods are produced if there is
Wastages are minimised and investments possibility to make profit.
are made in a pre planned manner. 4. Explain the merits of Mixed Economy.
s.
3. Absence of Class Conflicts : Ans. (a) Rapid Economic Growth :
As inequalities are minimum, there (i) It promotes rapid economic growth.
is no conflict between rich and poor (ii) Thus both public requirements and
ok
class. Society functions in a harmonious private needs are taken care of.
manner.
(b) Balanced Economic Growth :
4. End of Trade Cycles :
(i) Mixedism promotes balanced
Planning authority takes control over growth of the economy.
production and distribution of goods and
o
(ii) It promotes balanced growth
services. Therefore, economic fluctuations
between agriculture and industry.
can be avoided.
ab
(c) Proper utilization of Resources :

5. Promotes Social Welfare :
(i) The government can ensure proper
Absence of exploitation, reduction in
utilization of resources.
economic inequalities, avoidance of
trade cycles and increase in productive (ii) The government controls must of
the important activities directly.
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efficiency help to promote social welfare.

(d) Economic Equality :
3. Explain the Demerits of capitalism.
(i) The government uses progressive
Ans. Demerits of Capitalism rates of taxation.
1. Concentration of Wealth and Income :
.s
(ii) Income tax to bring about economic

Capitalism causes concentration of wealth equality.
and income in a few hands and thereby
increases inequalities of income.
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
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19
2
Chapter
National Income
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s.
CHAPTER SNAPSHOT
2.1 Introduction
o
2.2 Meaning of National Income
ok 2.5.3 The Expenditure Method (outlay
method)
2.3 Definitions 2.6 Importance of National Income Analysis
ab
2.4 Basic Concepts of National Income 2.7 Difficulties in Measuring National Income
2.4.1 Gross Domestic Product (GDP) 2.7.1 Transfer payments
2.4.2 Gross National Product (GNP) 2.7.2 Difficulties in assessing depreciation
2.4.3 Net National Product (NNP) allowance
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2.4.4 NNP at Factor Cost 2.7.3 Unpaid services

2.4.5 Personal Income 2.7.4 Income from illegal activities
2.4.6 Disposable Income 2.7.5 Production for self - consumption
2.4.7 Per capita Income and changing price
.s
2.4.8 Real Income 2.7.6 Capital Gains

2.5 Methods of Measuring National Income 2.7.7 Statistical problems
2.5.1 Product Method 2.8 National Income and Social Accounting
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2.5.2 Income Method (Factor Earning

Method)
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[20]

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w Concept Map
NNP of Net National
Factor Cost Product (NNP)
National Income
w Meaning of
Per Capital Personal National Income
Income Income
Basic Concepts of
orders@surabooks.com
.s
National Income
Definitions
Disposable Gross National
Income Product (GNP)

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Real Gross Domestic Introduction
Income Products (GDP)
21
NATIONAL INCOME
ab
National Income and
Methods of Measuring Social Accounting
National Income
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Statistical Problems Summary
Importance of
National Income
Product Analysis
Method Production for Self
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Consumption and Income from
Changing Price Illegal Activities
Difficulties in
Income Method Measuring
Factor Earning Method National Income Difficulties in
s.
Transfer
Assessing Payments
Depreciation
The Expenditure
PH: 9600175757 / 8124201000 / 8124301000

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Method
Capital Gains Unpaid Services
Sura’s - XII Std - Economics
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Important Terms
GNP : Total money value of final goods and services produced in a country during a
particular year (one year) including depreciation and net exports.
m
NNP : Total money value of final goods and services produced in a country during a
particular year excluding depreciation including net exports.
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NNP at factor cost : The total of income payment made to factors of production.
Personal Income : Total income received by the individuals of a country before payment of direct
taxes.
Disposable Income : It is the sum of the consumption and saving of individuals after the payment
s.
of income tax.
Per capital Income : Annual average income of a person.
ok
Social Accounts : The accounts of national income considering the social cost generated by
economic activities.
Unpaid Services : Rendering useful services like preparation of meals, washing, learning bringing
up children, services to their friends and relatives without payment.
o
Capital Sector : It includes saving and investment activities.
Transfer Payments : Government makes payments in the form of pensions unemployment
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allowance, subsidies, etc.

Real Income : Nominal income is national income expressed in term of a general price level
of a particular year in the other words, real income.
Outlay Method : The total expenditure incurred by the society in a particular year is called total
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expenditure of a society.
Factor Cost : There are number of inputs that are included into a production process when
producing goods and services. These inputs are commonly known as factor of
.s
production.
Market Price (MP) : The market price is the price that consumer will pay for the product when they
purchase from the seller.
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Capital Gains : Capital gains are the difference between a higher selling price and a lower
purchase price.
“Social accounting is the process of measuring and reporting to stakeholders
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Social Accounting :
the social and environmental effects of an organisation’s actions”.
Definitions
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National Income by : Alfred Marshal defined National Income as “The labour and capital of country
Alfred Marshall acting on its natural resources produce annually a certain net aggregate of
commodities, material and immaterial including services of all kinds. This is
the true net annual income or revenue of the country or national dividend”.
22
National Income Sura’s - XII Std - Economics
National Income by : According to Samuelson “The concept of national Income is an indispensable

Samuelson preparation for tackling the great issues of unemployment, inflation and
growth”.
GDP Deflator : The GDP deflator, also known as the implicit price deflator, measures the
impact of inflation on the gross domestic product during a specified period,
m
usually a year.
Per Capita Income : The average income of a person of a country in a particular year is called Per
Capita Income. Per capita Income is obtained by dividing nation income by
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population.
National Income by : “The net output of the commodities and services flowing during the year from
Simon Kuznets the country’s productive system into the hands of the ultimate consumers or
into net addition to the country’s stock of capital goods”.
s.
- Simon Kuznets.
Formulae
1. Gross Domestic product (GDP)
o
GDP by expenditure method at market prices
= C + I + G + (X –M)
ok8. Percapita Income
Percapita Income =
National income
Population
ab
2. Net Domestic Product (NDP) 9. Real Income

Net Domestic Product = GDP – Depreciation
National Income at constant price
3. GNP at market prices = GDP at market P1
prices + Net factor income from abroad. = National income at current price ÷
ur
P0
4. NNP = GNP – Depreciation allowance. 10. GDP deflator
5. NNP at factor cost = NNP at market prices – National GDP
GDP deflator = × 100
.s
Indirect taxes + subsidies. Real GDP
6. Personal Income = National income – (Social 11. Method of measuring National Income
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security contribution and Output = Income = Expenditure.

undistributed corporate
profits) + Transfer 12. Income method
payment. Y = W + r + i + π F(R – P)
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7. Disposable Income = Personal income – 13. The expenditure method

Direct tax. GNP = C + I + G + (X – M)
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As the entire disposable income is not spent

on consumption,
Disposal income = consumption + saving.
23
Model Questions
8. National income is a measure of the _______
Part - A performance of an economy.
Multiple Choice Questions 1 Mark (a) Industrial (b) Agricultural
m
(c) Economic (d) Consumption
1. Net National product at factor cost is also [Ans. (c) Economic]
known as
9. Per capita income is obtained by dividing the
co
(a) National Income National income by _______.
(b) Domestic Income (a) Production
(c) Per capita Income (b) Population of a country
(d) Salary. (c) Expenditure
[Ans. (a) National Income]
s.
(d) GNP [Ans. (b) Population of a country]
2. Primary sector is _______. 10. GNP = _______ + Net factor income from
(a) Industry (b) Trade abroad.
ok
(c) Agriculture (d) Construction. (a) NNP (b) NDP
[Ans. (c) Agriculture] (c) GDP (d) Personal income
[Ans. (c) GDP]
3. National income is measured by using
_______methods. 11. NNP stands for _______.
o
(a) Two (b) Three (a) Net National Product
(c) Five (d) Four (b) National Net product
ab
[Ans. (b) Three] (c) National Net Provident

(d) Net National Provident
4. Income method is measured by summing up
of all forms of _______. [Ans. (a) Net National Product]
(a) Revenue (b) Taxes 12. _______ is deducted from gross value to get
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(c) expenditure (d) Income the net value.

[Ans. (d) Income] (a) Income
5. Which is the largest figure? (b) Depreciation
(a) Disposable income (c) Expenditure
.s
(b) Personal Income (d) Value of final goods

(c) NNP [Ans. (b) Depreciation]
(d) GNP [Ans. (d) GNP] 13. The financial year in India is _______.
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6. Expenditure method is used to estimate (a) April 1 to March 31

national income in _______. (b) March 1 to April 30
(a) Construction sector (c) March 1 to March 16
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(b) Agricultural Sector (d) January 1 to December 31

(c) Service sector [Ans. (a) April 1 to March 31]
(d) Banking sector
14. When net factor income from abroad is
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[Ans. (a) Construction sector]

deducted from NNP, the net value is _______.
7. Tertiary sector is also called as _______ sector (a) Gross National Product
(a) Service (b) Income
(b) Disposable Income
(c) Industrial (d) Production
(c) Net Domestic Product
[Ans. (a) Service]
(d) Personal Income
[Ans. (c) Net Domestic Product]
24

15. The value of NNP at production point is called 22. Write the formula for calculating GNP.
_______. Ans. GNP at market prices = GDP at market prices +
(a) NNP at factor cost Net factor income from Abroad.
(b) NNP at market cost GNP = C + I + G + ((X–M) + (R – P))
(c) GNP at factor cost
C - Consumption Expenditure
(d) Per capita income
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I - Investment Expenditure
[Ans. (a) NNP at factor cost]
G - Government Expenditure
16. The average income of the country is _______.
(a) Personal Income X–M - Difference between value exports and
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(b) Per capita income imports of goods.
(c) Inflation Rate R–P - Net factor income from abroad
(d) Disposal Income 23. What is the difference between NNP and NDP?
[Ans. (b) Per capita income] Ans. Net Domestic Produce (NDP) is the value of
s.
17. The value of national income adjusted for net output of the economy during the year.
inflation is called _______.
(a) Inflation Rate Net Domestic product = GDP – Depreciation
(b) Disposal Income Net National Product (NNP) refers to the value
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(c) GNP of the net output of the economy during the year.
(d) Real national income NNP = GNP – depreciation allowance
[Ans. (d) Real national income]
18. Which is a flow concept ? 24. Trace the relationship between GNP and NNP.
o
(a) Number of shirts (b) Total wealth Ans. Gross National Product (GNP) is the total
(c) Monthly income (d) Money supply measure of the flow of final goods and services at
ab
[Ans. (c) Monthly income] market value resulting from current production
19. PQLI is the indicator of _______. in a country during a year, including net income
(a) Economic growth from abroad.
(b) Economic welfare Net National Product (NNP) refers to the value
(c) Economic progress of the net output of the economy during the year.
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(d) Economic development NNP is obtained by deducting the value of

[Ans. (b) Economic welfare] depreciation.
20. The largest proportion of national income NNP = GNP – depreciation allowance
.s
comes from _______. 25. What do you mean by the term ‘Personal
(a) Private sector Income’?
(b) Local sector Ans. (i) Personal income is the total income
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(c) Public sector received by the individuals of a country

(d) None of the above[Ans. (a) Private sector] from all sources before payment of direct
taxes in a year.
Part - B
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(ii) Personal income is never equal to the

Answer the following questions in national income, because the former
one or two sentences 2 Marks includes the transfer payments whereas
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they are not included in national income.

21. Define National Income.
Ans. “The labour and capital of a country acting on 26. Define GDP deflator.
its natural resources produce annually a certain Ans. GDP deflator is an index of price changes of
net aggregate of commodities, material and goods and services included in GDP.
immaterial including services of all kinds. This
is the true net annual income or revenue of the GDP deflator = Nominal GDP × 100
country or national dividend”. Real GDP
25
27. Why is self consumption difficult in measuring national income?

Ans. Self consumption is difficult in measuring national income because it is not clear that the produce which
is not sold in the market can be included in the national income or not.
Part - C
Answer the following questions in one paragraph
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3 Marks
28. Write a short note on per capita income.
Ans. (i) The average income of a person of a country in a particular year is called per capita income.
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(ii) Per capita income is obtained by diving national income by population.
Per capita income = National income

Population
s.
29. Differentiate between personal and disposable income.
Ans.
S. No. Personal Income Disposable Income
1. Personal income is the total income Disposable Income is also known as Disposable
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received by the individuals of a country personal income. It is the individuals income after the
from all sources before payment of payment of income tax.
direct taxes in a year.
2. Personal income is never equal to the This is the amount available for households for
national income, because the former consumptions.
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includes the transfer payments whereas
they are not included in national
ab
income.
3. Personal Income = National income Disposable Income = Personal Income – Direct tax.
– social security contribution and As the entire disposable income is not spent of
undistributed corporate profits) consumption.
+ Transfer payments. Disposable income = Consumption + Saving
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30. Explain briefly NNP at factor cost. GNP = C + I + G + (X – M)

Ans. (i) NNP refers to the market value of output.
C = Private consumption
.s
(ii) NNP at factor cost is the total of income expenditure.

payment made to factors of production.
I = Private investment expenditure.
(iii) The money value of NNP at market price,
G = Government expenditure.
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we deduct the amount of indirect taxes

and add subsidies to arrive at the net X – M = Net exports.
national income at factor cost. 32. What is the solution to the problem of double
counting in the estimation of national income?
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NNP at factor cost = NNP at Market prices –

Indirect taxes + subsidies. Ans. (i) Double counting is to be avoided under
value added method.
31. Give short note on Expenditure method.
(ii) Any commodity which is either raw
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Ans. (i) The total expenditure incurred by the material or intermediate good for the final
society in the particular year is added production should not be included.
together.
(iii) For example, value of cotton enters value
(ii) To calculate the expenditure of the
of yarn as cost, and value of yarn in
society, it includes personal consumption
expenditure, net domestic investment, cloth and that of cloth in garments. At
government expenditure on consumption every stage value added only should be
as well as capital goods and net exports. calculated.
26

33. Write briefly about national income and (vi) To build economic models both in short
welfare. and long-run.
Ans. (i) National income is considered as an (vii) To make international comparison,
indicator of the economic well-being of a inter regional comparison and
country. inter-temporal comparison for the growth
(ii) The economic progress of country is of the economy.
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measured in terms of their GDP per capita (viii) To know a country’s per capita income
and their annual growth rate. which reflects the economic welfare of the
(iii) A country with a higher per capita income country.
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is supposed to enjoy greater economic (ix) To know the distribution of income for
welfare with a higher standard of living. the various factors of productions.
34. List out the uses of national income. To arrive at many macro economic
variables namely, Tax - GDP ratio, Current
Ans. Uses of National Income :
Account Deficit - GDP ratio, Fiscal Deficit
s.
(i) The National Income of a country GDP ratio, Debt - GDP ratio etc.
describes the economic performance or
production performance of a country. 36. Discuss the various methods of estimating the
national income of a country.
ok
(ii) Economists, planners, Government,
business man and international agencies Ans. There are three methods of measuring national
(IMF, World Bank etc.) use national Income. They are,
income data and analysis them for various (i) Production (or) Value added method.
purposes. (ii) Income method (or) Factor earning
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(iii) National income data help in measuring method.
changes in the standard of living over time (iii) Expenditure method.
and also enable us to compare standard of
ab
(i) Production Method :

living of different countries.
(1) Product method measures the
(iv) Level of development of a country is output of the country.
also measured by using national income
(2) It is also called inventory method.
figures.
(3) In this method, the gross value
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Part - D of output from different sectors

like agriculture, industry and
commerce etc. is obtained for the
one page 5 Marks entire economy during a year.
.s
35. Explain the importance of national income. (4) The value obtained is actually the
GNP at market prices.
Ans. Importance of National Income :
(5) Care must be taken to avoid double
(i) The national income is considered as
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counting.
accounts of the economy, which are
known as social accounts. (6) The value of the final product is
derived by summation of all the
(ii) To know the relative importance of the
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values added in the productive

various sector of the economy and the
process.
contribution towards national income.
(7) To avoid double counting, either
(iii) To formulate the national policies such as
the value of the final output should
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monetary policy, fiscal policy and other

be taken into the estimate of GNP.
policies.
(8) Double counting is to be avoided
(iv) The proper measures can be adopted to
under value added method.
bring the economy to the right path.
(9) Any commodity which is either raw
(v) To formulate planning and evaluate
material or intermediate good for
plan progress. It is essential that the data
the final production should not be
pertaining to a country’s gross income.
included.
27
(ii) Income Method : (Factor Earning (i) Transfer payments

Method) (ii) Difficulties in assessing depreciation
(1) This method approaches national allowance
income from the distribution side. (iii) Unpaid services
(2) In this method national income (iv) Income from illegal activities
m
is calculated by adding up all the (v) Production for self-consumption and
incomes generated in the cource of changing price
producing national product.
(vi) Capital gain
(3) Factor incomes are grouped under
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(vii) Statistical problems
labour income, capital income and
mixed income. (i) Transfer payments :
(4) National Income is calculated as Government makes payments in the form
domestic facors income plus net of pensions, unemployment allowance,
subsidies etc. These are government
s.
factor incomes from abroad.
expenditure not included in the national
Y = w + r + i + π + (R–P) income.
w - wages, r-rent, i-interest, (ii) Difficulties in assessing depreciation
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π - profit, R - exports and allowance :
P - imports. (1) The deduction of depreciation
(iii) The Expenditure Method : (Outlay allowances, accidental damages,
method) repair and replacement charges
o
(1) Under this method, the total from the national income.
expenditure incurred by the (2) It requires high degree of judgement
society in a particular year is added to assess the depreciation allowance
ab
together. and other charges.

(2) To calculate the expenditure of (iii) Unpaid services :
a society it includes personal (1) A housewife renders a number of
consumption expenditure, net useful services like preparation of
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domestic investment, government meals, serving, tailoring, cleaning,

expenditure on consumption as well washing etc., She is not paid for
as capital goods and net exports. them and her service are not directly
GNP = C + I + G + (X–M) included in national income.
.s
C - Private consumption (2) Such services performed by paid

expenditure servants are included in the national
income.
I - Private Investment Expenditure
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(3) Housewife’s services (domestic

G - Government Expenditure
work) cannot be measured in
X–M - Net Exports monetary terms.
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37. What are the difficulties involved in the (iv) Income from illegal activities :
measurement of national income? (1) Income earned through illegal
Ans. Difficulties in measuring National Income : activities like gambling, smuggling,
w
In India, a special conceptual problem is posed illicit extraction of liquor etc., is not
by the existence of a large, unorganised and included in national income.
non-monetised subsistence sector where the (2) Such incomes have value and satisfy
barter system still prevails for transacting goods the wants of the people, so it is
and services. considered as productive income.
28

(v) Production for self-consumption and (4) Most of the statistical staff are
charging price : untrained and inefficient.
(1) Farmers keep a large portion of (5) National income estimates in
food and other goods produced on our country are not accurate and
the farm for self consumption. adequate.
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(2) The produce which is not sold in the (6) National income is over estimated
market can be included in national or under estimated by atleast 10%.
income or not.
38. Discuss the importance of social accounting
(vi) Capital gains :
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in economic analysis.
(1) The gain is the difference between Ans. (i) National Income is also being measured
a higher selling price and the lower by the social accounting method.
purchasing price.
(ii) Under this method, the transaction among
(2) Capital gains are excluded from the various sectors such as firms, households,
s.
national income. government etc., are recorded and their
(vii) Statistical problems : inter relationship traced.
The following are some of the statistical (1) The social accounting framework
ok
problems. is useful for economists as well as
(1) In animal husbandry, there are no policy makers.
authentic production data available. (2) It represents the major economic
(2) Different languages, customs etc., flows and statistical relationship
also create problems in computing
o
among various sectors of the
estimates. economic system.
(3) People in India are indifferent to the (3) It becomes possible to forecast the
ab
official inquiries. trends of economy more accurately.

3. Formula for calculating NNP at factor cost.
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Part - A
Nominal GDP
(a) × 100
Multiple Choice Questions 1 Mark Real GDP
(i) Choose the Correct Option. (b) NNP at Market Prices – Indirect taxes +
.s
Subsidies.
1. GNP stands for (c) GNP – Depreciation allowance
(a) Net National Product (d) Output = Income = Expenditure
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(b) Gross Net Product [Ans. (b)

NNP at Market Prices – Indirect
(c) Gross Net Provident taxes + Subsidies.]
(d) Gross National Product
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4. Value of output =
[Ans. (d) Gross National Product]
(a) Sales + Change in stock
2. GDP stands for (b) Sales – Change in stock
(a) Gross Domestic Product
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(c) Sales ÷ Change in stock

(b) Gross Direct Product (d) Sales × Change in stock
(c) Gross Domestic Provident [Ans. (a) Sales + Change in stock]
(d) Gross Derived Product
[Ans. (a) Gross Domestic Product]
29
5. Percapita Income = 12. GNP is the total measure of the flow of _______
(a) National Income – Population and services.
(b) National Income + Population (a) Semi goods
(c) National Income ÷ Population (b) Semi finished good
(d) National Income × Population (c) Final goods
m
[Ans. (c) National Income ÷ Population] (d) None of these [Ans. (c) Final goods]
6. A country which has no economic relations 13. GNP includes _______ types of final goods
with other countries in termed as and services.
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(a) Open economy (a) Two (b) Four
(b) Closed economy (c) Five (d) Three
(c) Planned economy [Ans. (c) Five]
(d) Command economy 14. Goods and services produced in a year to
s.
[Ans. (b) Closed economy] satisfy immediate wants is known as _______.
7. National Income provides a comprehensive (a) Production (b) Consumption
measure of _______ activities of a nation. (c) Distribution (d) Exchange
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(a) Economic activity [Ans. (b) Consumption]
(b) Production activity 15. Inventories of finished and unfinished goods
(c) Consumption activity are called _______.
(d) Industrial activity (a) Net Investment (b) Investment
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[Ans. (a) Economic activity] (c) Gross Investment (d) Both ‘a’ and ‘b’
8. Nobel laureate Smimon Kuznets introduced [Ans. (c) Gross Investment]
ab
the first concept of _______. 16. The difference between value of exports and
(a) Percapita Income (b) National Income imports of goods and services is known as
(c) Domestic Income (d) Personal Income _______.
[Ans. (b) National Income] (a) X–M (b) G+I
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9. GDP calculate at market price is known as (c) X × M (d) All the above
_______. [Ans. (a) X–M]
(a) GDP at factor price 17. GNP at Market prices = GDP at Market
(b) NDP at factor price
.s
Price + _______.
(c) GNP at factor price (a) Net Market Income
(d) GDP at Market price (b) Net Factor Income from abroad
[Ans. (d) GDP at Market price]
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(c) Both ‘a’ and ‘b’

10. GDP by expenditure at _______ price. (d) Personal Income
(a) Factor price (b) Market price [Ans. (b) Net Factor Income from abroad]
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(c) Real price (d) All the above 18. NNP = _______ – Depreciation.
[Ans. (b) Market price] (a) GNP (b) GDP
11. Net Domestic = GDP – _______. (c) NDP (d) All of these
w
(a) NNP (b) NDP [Ans. (a) GNP]

(c) GNP (d) Depreciation 19. NNP at factor cost = NNP at Market Price –
[Ans. (d) Depreciation] _______ + Subsidies.
(a) Direct taxes (b) Canons of taxes
(c) Indirect taxes (d) None of these
[Ans. (c) Indirect taxes]
30

20. _______ income is never equal to the national 28. Great care is required to calculate _______.
income. (a) Capital Gains
(a) Disposal Income (b) Percapita Income (b) Social Accounting
(c) Personal Income (d) GDP Deflater (c) Double Counting
[Ans. (c) Personal Income] (d) Statistical Problems
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21. _______ Income is the buying power of [Ans. (c) Double Counting]
nominal income. 29. _______ Framework is useful for economists
(a) Gross Income (b) Real Income as well as policy makers.
co
(c) Percapita Income (d) National Income (a) Social Accounting
[Ans. (b) Real Income] (b) Statistics
22. National Income expressed in terms of money (c) Capital Gains
at _______ prices. (d) None of these[Ans. (a) Social Accounting]
s.
(a) Constant Price (b) Market Price 30. Under social accounting method the economy
(c) Current Price (d) All the above is divided into _______ sectors.
[Ans. (c) Current Price] (a) four (b) two
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23. Output = Income = _______. (c) several (d) three
(a) Price (b) Expenditure [Ans. (c) several]
(c) Income (d) None of these 31. _______ provides the social goods like public
[Ans. (b) Expenditure] health and education etc.
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(a) Private (b) Government
24. Output = _______ = Expenditure.
(c) Unorganised sector (d) None of these
(a) Output (b) Expenditure
ab
[Ans. (b) Government]

(c) Price (d) Income
[Ans. (d) Income] 32. The growth of an economy is indicated by an
________.
25. _______ reflects the economic welfare of the
(a) Increase in general prices
country.
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(b) Increase in national income

(a) Personal Income (b) Percapita Income
(c) Increase in savings
(c) Disposal Income (d) All of these
(d) Increase in investment
[Ans. (b) Percapita Income]
(Ans : (b) Increase in national income)
.s
26. Income earned through illegal activities are

_______. 33. The per capita income of an economy can be
(a) gambling and smuggling calculated by ________.
w
(a) Dividing GDP by population

(b) illicit extraction of liquor
(b) Dividing GNP by population
(c) gambling
(c) Multiplying GNP by population
(d) All of these
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(d) Dividing GNP by number of people

[Ans. (d) All of these]
employed
27. _______ are excluded from national income. (Ans : (b) Dividing GNP by population)
w
(a) Capital Gains

34. The total money value of final goods and
(b) Social Accounting
services produced in the country excluding
(c) Statistical Problems depreciation is called ________.
(d) None of these [Ans. (a) Capital Gains] (a) NDP (b) GDP
(c) NNP (d) GNP
(Ans : (a) NDP)
31
35. The difference between NNP and NDP is 42. The income method of calculating national
________. income includes the income of the
(a) Depreciation ____________.
(b) Current transfers from rest of the world (a) farmers only
(c) Indirect tax (b) businessmen only
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(d) Net factor income from abroad (c) service sector only
(Ans : (d) Net factor income from abroad) (d) factors of production
(Ans : (d) factors of production)
36. National income as commonly understood by
co
every one refers to ________. 43. _________ employ factors of production to
(a) GNP (b) NNP produce the goods and services.
(c) GDP (d) NDP (a) Consumer (b) Business sectors
(Ans : (b) NNP) (c) House holds (d) Farmers
s.
37. National income per person is used as an (Ans : (b) Business sectors)
indicator of _______.
(a) standard of living of people 44. ________ is not the correct indicator for the
living standards of the people.
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(b) poverty of the people
(c) the richness of people (a) Per capita income
(d) growth of industrialisation (b) National income
(Ans : (a) Standard of living of people) (c) Both
(d) None of the above
o
38. National income was called ‘national dividend’ (Ans : (c) Both)
by _______.
(a) Irving Fisher (b) Alfred Marshall 45. According to the year 2001, Indian per capita
ab
(c) Samuelson (d) J.M. Keynes income is _______dollar.

(Ans : (b) Alfred Marshall) (a) 520 (b) 460 (c) 240 (d) 900
(Ans : (b) 460)
39. _______ is a measure of the total value of the
goods and services produced in an economy 46. In _______ method, the measures of GDP are
ur
for a year. calculated for adding total value of output

(a) GNP produced by all activities during a year.
(b) GDP (a) Expenditure (b) Income
.s
(c) National income (c) Product (d) All the above

(d) Per capita income (Ans : (c) Product)
(Ans : (c) National income)
47. In ___________ method, the measures of GDP
w
40. GDP = _______. are calculated by adding all the expenditures

(a) GNP + Depreciation made in the economy.
(b) GNP – Net income earned from abroad (a) Income (b) Expenditure
w
(c) GNP – Depreciation (c) Product (d) All the above

(d) NNP – Depreciation (Ans : (b) Expenditure)
(Ans : (b)
GNP – Net income earned from
abroad) 48. GDP indicates productive capacity for an
w
_______.
41. _______is the total value of output produced (a) economy (b) employment
and income received in a year by domestic
(c) income (d) population
residence of a country.
(Ans : (a) economy)
(a) GDP (b) NNP
(c) NDP (d) GNP
(Ans : (d) GNP)
32

49. Transfer earnings is referred to ________. 56. Disposable income = _______.
(a) Pension payments to retired persons Nominal GDP
(b) Income paid as rent to landlord (a) GDP deflater = × 100
Real GDP
(c) An interest payments to a capitalist
(d) Medical payments made to an employee of (b) GNP - Depreciation allowance
a company (c) GDP - Depreciation
m
(Ans : (a) Pension payments to retired persons) (d) Gross National Product
50. The value of net national product will be more [Ans. (d) Gross National Product]
than the value of net domestic product, if
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________. (ii)
Match the following and choose the
(a) imports exceed exports correct answer by using codes given
(b) exports exceed imports below.
(c) exports equal imports 1. (A) GDP by (i) Personal income –
s.
(d) none of the above expenditure Direct tax
(Ans : (b) exports exceed imports) method at
market prices
51. Parallel economy refers to ________.
ok
(a) agricultural economy (B) Net domestic (ii) GNP – Depreciation
product allowance
(b) industries
(c) banking activities (C) NNP (iii) C + I + G + (X – M)
(d) black money in circulation (D) Disposable (iv) GDP –Depreciation
(Ans : (d) black money in circulation) income
o
52. _______ is measured by using three method. Codes :
(a) A - (i), B - (ii), C - (iv), D - (iii)
ab
(a) National Income

(b) Domestic Income (b) A - (iii), B - (iv), C - (ii), D - (i)
(c) Per capita Income (c) A - (iv), B - (iii), C - (ii), D - (i)
(d) Personal Income (d) A - (ii), B - (iii), C - (iv), D - (i)
[Ans. (a) National Income] [Ans. (b) A - (iii), B - (iv), C - (ii), D - (i)]
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53. Secondary sector is _______ 2. (A) GDP (i)

(a) Industry (b) Trade National Income
deflator
(c) Agriculture (d) Manufacture Population
.s
[Ans. (a) Industry] (B) Per capita (ii) Double counting

54. Tertiary sector is _______ income
(a) Industry (C) National (iii) Nominal GDP
w
(b) Banking income at × 100

Real GDP
(c) Agriculture constant
(d) Import and Export [Ans. (b) Banking] aprice
w
(D) Product (iv) National Income at

55. GDP = _______ method current price ÷ P1/P0
(a) GDP at Market Price + Net factor income
from abroad Codes :
w
Nominal GDP (a) A - (iv), B - (iii), C - (ii), D - (i)

(b) GDP = × 100
Real GDP (b) A - (ii), B - (iv), C - (i), D - (iii)
(c) A - (iii), B - (ii), C - (iv), D - (i)
(c) GDP = GNP + Net factor income from
abroad (d) A - (iii), B - (i), C - (iv), D - (ii)
(d) All the above [Ans. (d) A - (iii), B - (i), C - (iv), D - (ii)]
[Ans. (c) GDP = GNP + Net factor income
from abroad]
33
3. (A) Product method (i) Closing stock 6. (A) The financial year (i) Industrial
-Opening stock in India
(B) Income method (ii) Outlay method (B) Teritary Sector (ii) April 1 to
(C) Expenditure (iii) Factor earning March 31
method method (C) NNP (iii) Service
m
(D) Change in stock (iv) Inventory (D) Secondary Sector (iv) Net National
method Product
Codes : Codes :
co
(a) A - (ii), B - (i), C - (iv), D - (iii) (a) A - (iv), B - (iii), C - (ii), D - (i)
(b) A - (iii), B - (iv), C - (ii), D - (i) (b) A - (ii), B - (iii), C - (iv), D - (i)
(c) A - (iv), B - (iii), C - (ii), D - (i) (c) A - (iv), B - (i), C - (iii), D - (ii)
(d) A - (i), B - (ii), C - (iii), D - (iv) (d) A - (iii), B - (ii), C - (iv), D - (i)
s.
[Ans. (c) A - (iv), B - (iii), C - (ii), D - (i)] [Ans. (b) A - (ii), B - (iii), C - (iv), D - (i)]
4. (A) Primary sector (i) Industry 7. (A) GNP (i) Agriculture
ok
sector
(B) PQLI (ii) Income Method
(B) Secondary sector (ii) GNP
(C) Primary (iii) Economic Welfare
(C) Tertiary sector (iii) Agriculture Sector
(D) Largest figure (iv) Service sector (D) Distribution (iv) Gross National
o
Codes : side Product
(a) A - (iv), B - (iii), C - (ii), D - (i) Codes :
ab
(b) A - (iii), B - (i), C - (iv), D - (ii) (a) A - (ii), B - (iii), C - (iv), D - (i)
(c) A - (ii), B - (i), C - (iv), D - (iii) (b) A - (ii), B - (i), C - (iv), D - (iii)
(d) A - (iii), B - (iv), C - (i), D - (ii) (c) A - (iv), B - (iii), C - (i), D - (ii)
[Ans. (b) A - (iii), B - (i), C - (iv), D - (ii)] (d) A - (iii), B - (ii), C - (iv), D - (i)
ur
5. (A) GNP (i) 3 Types [Ans. (c) A - (iv), B - (iii), C - (i), D - (ii)]
(B) Methods of (ii) 5 Types (iii) State whether the Statements are true or
Measuring false.
National Income 1. (i) Production generates income.
.s
(C) Basic concepts (iii) Transfer (ii) Income generates expenditure.

payments (a) Both (i) and (ii) are true
(D) Difficulties (iv) GND, GDP, (b) Both (i) and (ii) are false
w
in calculating NNP & NDP (c) (i) is true but (ii) is false
national income
w
Codes : [Ans. (a) Both (i) and (ii) are true]

(a) A - (iv), B - (iii), C - (ii), D - (i) 2. (i) National wealth is both man - made and
(b) A - (iii), B - (iv), C - (i), D - (ii) nature’s gift.
w
(c) A - (ii), B - (i), C - (iv), D - (iii) (ii) In a four sector economy, flow of
(d) A - (iii), B - (ii), C - (iv), D - (i) income takes place between firms of and
[Ans. (b) A - (iii), B - (iv), C - (i), D - (ii)] households.
34

(a) Both (i) and (ii) are true 7. (i) In the calculation of national income
(b) Both (i) and (ii) are false output and value methods are the same
(c) (i) is true but (ii) is false (ii) National income is calculated according to
output, income and expenditure methods
(d) (i) is false but (ii) is true are different.
[Ans. (c) (i) is true but (ii) is false] (a) Both (i) and (ii) are true
m
3. (i) Disposable income is the sum of the (b) Both (i) and (ii) are false
consumption and savings of an individuals (c) (i) is true but (ii) is false
after the payment of income tax. (d) (i) is false but (ii) is true
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(ii) Per capita income is nothing but an annual [Ans. (c) (i) is true but (ii) is false]
average income of a person. (iv)
Which is the following is correctly
(a) Both (i) and (ii) are true matched.
1. (a) Methods of - Three Methods
s.
(c) (i) is true but (ii) is false measuring
(d) (i) is false but (ii) is true national income
[Ans. (a) Both (i) and (ii) are true] (b) Expenditure - Output Method
ok
Method
4. (i) The concept of national income was first
introduced by Simon Kuznets. (c) Income Method - Value Method
(ii) National income means the total value of (d) Product Method - Factor Earning
all final goods and services produced. Method
o
(a) Both (i) and (ii) are true [Ans. (a)
Methods of measuring national
(b) Both (i) and (ii) are false income - Three Methods]
ab
(c) (i) is true but (ii) is false 2. (a) Inputs = Factors of production
(b) MP = FC – Indirect Taxes +
[Ans. (a) Both (i) and (ii) are true] Subsidies
5. Methods of measuring National Income (c) FC = MP – Direct Taxes +
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(i) Product Method Subsidies

(ii) Revenue Method (d) GNP = C – I – G – (X–M)
(a) Both (i) and (ii) are true [Ans. (a) Inputs = Factors of production]
.s
(b) Both (i) and (ii) are false (v) Which is the following is Not correctly
(c) (i) is true but (ii) is false matched.
(d) (i) is false but (ii) is true 1. (a) Net = GNP – Depreciation
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[Ans. (c) (i) is true but (ii) is false] Domestic

Product
6. Difficulties in measuring National Income.
(b) Gross = C + I + G + (X – M)
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(i) Production for self-consumption and

Domestic
changing price.
Product
(ii) Statistical Problem
(c) Percapital = GDP
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(a) Both (i) and (ii) are true Income

(b) Both (i) and (ii) are false Total Population
(c) (i) is true but (ii) is false (d) GDP = GDP
(d) (i) is false but (ii) is true deflator
Real GDP
GDP
[Ans. (d) GDP deflator = ]
Real GDP
35
2. (a) Disposal = Consumption – Saving (a) Both A and R are true and R is the Correct
Income explanation of A
(b) Output = Income = Expenditure (b) Both A and R are true but R is not the correct
explanation of A
(c) NNP = GNP – Depreciation
allowance (c) A is the true but R is false
m
(d) NNP at = NNP at marked price (d) A is false but R is true
factor cost –Indirect taxes + [Ans. (a) Both A and R are true and R is the
Subsidies. Correct explanation of A]
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[Ans. (a) Disposal Income = Consumption (vii) Pick the Odd one Out.
– Saving]
(vi) Assertion and Reason. 1. Concepts of National Income
(a) Gross National Product
1. Assertion (A) : The expenditure method is
s.
(b) Gross Domestic Product
also called as outlay method. (c) Net National Product
Reason (R) : The total expenditure (d) Output = Income = Expenditure
ok
incurred by the society in a particular year is [Ans. (d) Output = Income = Expenditure]
added together.
2. Methods of measuring National Income
(a) Both A and R are true and R is the Correct
(a) Product Method
explanation of A
(b) Consumption Method
(b) Both A and R are true but R is not the correct
o
(c) Income Method
explanation of A
(d) Expenditure Method
(c) A is the true but R is false
ab
[Ans. (b) Consumption Method]

(d) A is false but R is true
[Ans. (a) Both A and R are true and R is the 3. Per Capita Income
Correct explanation of A] (a) The total income of a country
(b) The average income of a person
2. Assertion (A) : Income method approaches
ur
(c) National Income / Population

national income from the distribution side.
(d) GDP / Population
Reason (R) : National income is calculated [Ans. (a) The total income of a country]
by adding all the expenditure generated in the
.s
4. Labour Income
economy.
(a) Wages (b) Divident
(c) Salaries (d) Fringe benefits
explanation of A
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[Ans. (b) Divident]

explanation of A 5. Capital Income
(c) A is the true but R is false (a) Interest (b) Profit
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(d) A is false but R is true (c) Fringe benefit (d) Divident

[Ans. (c) A is the true but R is false] [Ans. (c) Fringe benefit]
Part - B
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3. Assertion (A) : Product method measures the

output of an economy. Answer the following questions in
Reason (R) : The value of the final product one or two sentences 2 Marks
is derived by the summation of all the values 1. Write the formula for calculating NDP.
added in the productive process.
Ans. Net Domestic Product = GDP – Depreciation.
36

2. Write the formula for calculating per capita 10. How the economy is divided based on Social
income. Accounting?
National Income
Ans. Per capita income = Ans. (i) Firms
Population
(ii) House holds
3. What are the methods of measuring National (iii) Government
m
Income? (iv) Rest of the world
Ans. (i) Production or Value added method. (v) Capital Sector
(ii) Income method or Factor Earning
method. 11. What are the basic concepts for measuring
co
national income?
(iii) Expenditure Method or outlay method.
Ans. (i) Gross National Product (GNP)
4. What do you mean by Real Income? (ii) Gross Domestic Product (GDP)
Ans. (i) Nominal income is expressed in terms of (iii) Net National Product (NNP)
a general price level of a particular year.
s.
(iv) Net Domestic Product (NDP)
In other words, real income is the buying
power of nominal income. 12. What is National Income?
(ii) The real income is derived as follows. Ans. National Income is a measure of the total value
ok
National Income National Income at of the goods and services (Output) produced by
= an economy over a period of time (normally a
at constant price current price ÷ P1/P0
year).
5. What do you mean by National Income?
13. What is Gross National Product?
o
Ans. National Income means the total money value
Ans. (i) Gross National Product (GNP) is the
of all final goods and services produced in a
country during a particular period of time. total value of output (goods and services)
ab
produced and income received in a year

6. What is GDP? Write the formula. by domestic residents of a country.
Ans. GDP is the total market value of final goods and (ii) It includes profits earned from capital
services produced within the country during a invested from abroad.
year.
ur
14. What is Gross Domestic Product?

GDP by expenditure methods at market Ans. (i) Gross Domestic Product (GDP) is the
prices = C + I + G + (X – M) total value of output (goods and services)
produced by the factors of production
.s
7. Write the formula for Personal Income.

located within the country’s boundary in
Ans. Personal Income = National Income – (Social
a year.
Security contribution and undistributed (ii) The factors of production may be owned
w
corporate profit) + Transfer Payments. by anyone-citizens or foreigners.

8. What do you mean by Disposable Income? GDP = GNP – Net income earned from abroad
Ans. Disposable Income is an individuals income after 15. What is Net Domestic Product?
w
the payment of income tax. This is the amount Ans. Net Domestic Product (NDP) is also arrived
available for households for consumption. from GDP by making adjustment with regard to
9. Write a short note on Capital Gains. depreciation
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Ans. Capital gains arise when a capital asset such as GDP – Depreciation = NDP
a house, other property, stocks or shares, etc. is 16. What is the real national income?
sold at higher price than was paid for it at the Ans. As the national income at ‘constant price’
time of purchase. Capital gains are excluded is computed based on the real worth of the
from national income. purchasing power of income it is called as ‘real
national income’
37
17. What is Simple circular flow? 3. What is Depreciation?

Ans. Simple circular flow model is explained Ans. (i) The Depreciation cost (or) capital
without the other components of national consumption refers to all those
income namely savings or investment(I), public expenditure undertaken by the producers
expenditure by government(G) and expenditure to replace the worn out parts of the capital
on net exports(X-M).
m
goods like Machinery, tools, equipments
18. What is Current prices? and buildings used up in the production
Ans. (i) ‘Current Prices’ is the ongoing market of goods and services.
co
prices to compute the value of output. (ii) These expenditure should be excluded
(ii) The Current Price may always be higher from the Gross output.
than real value.
4. What is Per capita income?
Part - C Ans. (i) Per Capita income (or) output per person
s.
is an indicator to show the living standards
Answer the following questions in of people in a country.
one paragraph 3 Marks (ii) If real PCI increases.
ok
(iii) It is considered to be an improvement in
1. What are the difficulties in measuring the overall living standard of people.
National Income?
(iv) PCI is arrived at by dividing the GDP by
Ans. (i) Transfer payments
the size of population.
(ii) Difficulties in assessing depreciation
o
allowance. (v) It is also arrived by making some
adjustment with GDP
(iii) Unpaid Services
ab
(iv) Income from illegal activities.

(vi) GDP
(v) Production for self consumption and PCI =
changing price. Total number of people
(vi) Capital Gains in a country
ur
(vii) Statistical problems or
2. Write down the some of the statistical National Income

PCI =
problems? Total Population
.s
Ans. (i) Accurate and reliable data are not adequate

as farm output in the subsistence sector is 5. What is Output method? What is its major
not completely informed. challenge?
(ii) In animal husbandry there are no
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Ans. (i) In the output or product method, the

authentic production data available. measures of GDP are calculated by adding
(iii) Different languages, customs, etc., also the total value of the output (of goods and
create problems in computing estimates.
w
services) produced by all activities during

(iv) People in India are indifferent to the any time period, such as a year.
official inquiries. They are in most cases (ii) The major challenge of this method is the
non-cooperative also.
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problem of double counting.

(v) Most of the statistical staff are untrained
and inefficient. 6. What are the National Income identities?
(vi) Therefore, national income estimates Ans. The followings are some of the National Income
in our country are not very accurate or Identitities:
adequate. NNP = GNP – Depreciation
NNI = NNP – Indirect taxes
38

PI = NNI – Retained earnings, corporate Items not to be included :
taxes and interest on public debt (1) Transfer payments are not to be included
PDI = PI – Personal taxes in estimation of national income.
Where, (2) The receipts from the sale of second hand
GNP = Gross National Product goods should not be treated as part of
m
NNP = Net National Product national income.
NNI = Net National Income Items to be included :
PI = Personal Income (1) Imputed value of rent for self occupied
co
PDI = Personal Disposable Income house or offices is to be included.
(2) Imputed value of services provided by
Part - D owners of production unit (family labour)
is to be included.
s.
one page 5 Marks 2. Discuss the methods of measuring the
National Income by Product Method.
1. Discuss the method measuring the National Ans. Product Method :
ok
Income by Income Method. (i) Product method measures the output
Ans. (i) Income method approaches National of the country. It is also called inventory
Income from the distribution side. method.
(ii) National income is calculated by adding (ii) It is obtained for the entire economy
o
up all the incomes generated in the course during a year.
of producing national product. (iii) The value obtained is actually the GNP at
ab
(iii) Factor incomes are grouped under market prices.

labour income, capital income and mixed (iv) Care must be taken to avoid double
income. counting.
(iv) national income is calculated as domestic (v) The value of the final product is derived
ur
factor income plus net factor incomes by the summation of all the values added
from abroad. In short, in the productive process.
Y = w + r + i + π + (R–P) (vi) To avoid double counting either the value
of the final output should be taken in to
.s
w = wages
r = rent the estimate of GNP.
i = interest (vii) In India the gross value of the farm output
is obtained as follows.
w
π = profits
(1) The output of each crop is measured
R = Exports
by multiplying the area shown by
P = Imports
w
the average yield per hectare.

(v) This method is adopted for estimating the (2) The total output of each commodity
contributions of the remaining sector, viz. is valued at market prices.
(vi) Data on income from abroad (the rest
w
(3) The net value of the agriculture

of) the world sector or foreign sector are output is measured by making
obtained from the account of the balance deductions for the cost of seed,
of payment of the country. manures and fertilisers etc.,
39
(4) Net value of the output in these (ii) Higher GDP with greater environmental
sectors is derived by making hazards such as air, water and soil
deductions for cost of materials pollution will be little economic welfare.
used in the process of production (iii) The production of war goods will show
and depreciation allowances etc.,
the increase in national output but not
from gross value of output.
m
welfare.
(5) For example, value of cotton enters
value of yarn as cost and value of (iv) An increase in per capita income may
yarn in cloth and that of cloth in be due to employment of women and
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garments at every stage value added children or forcing workers to work
only should be calculated. for long hours. But it will not promote
economic welfare.
3. Discuss the limitations of National Income as
an index of economic welfare. (v) Therefore the physical quality of life index
(PQLI) is considered a better indicator of
s.
Ans. (i) The economic welfare depends upon
the composition of a goods and services economic welfare.
provided.
o 
ok
ab
ur
.s
w
w
w
40
3
Chapter
Theories of
Employment and Income
m
co
s.
CHAPTER SNAPSHOT
o ok
3.1 Introduction
ab
3.6 Effective Demand

3.2 Meaning of full Employment 3.6.1 Aggregate Demand Function
3.3 Unemployment and its types 3.6.2 Aggregate Supply Function
3.4 Classical Theory of Employment 3.6.3 Equilibrium between ADF and ASF
ur
3.4.1 Say’s Law of Market 3.7 Comparison of Classicism and Keynesianism

3.5 Keynes’ Theory of Employment and Income
.s
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w
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[41]

Concept Map
m
Introduction
co
Meaning of full Unemployment
s.
employment and its types
Keynes theory of
Employemnt and
Income
o ok Comparison of
classicism and
Keynesianism
ab
Classical Theory
Effective Demand Employment and
ur
Income
Aggregate Say’s Law of

.s
Demand Function Market

w
Aggregate Supply
Function
w
Equilibrium
between ADF &
ASF
w
THEORIES OF EMPLOYMENT
AND INCOME
42
Theories of Employment and Income Sura’s - XII Std - Economics
Important Terms
Full employment : Full employment means persons who are willing to work and able to work
m
must have employment or a job.
Seasonal : Unemployment that occurs during certain seasons is called seasonal
unemployment unemployment.
co
Frictional : Frictional unemployment arises due to imbalance between supply of labour
unemployment and demand for labour.
Technical : Modern technology being capital intensive requires less labourers and
unemployment contributes to technological unemployment.
s.
Structural : Structural unemployment is due to drastic change in the structure of the
unemployment society. For eg. rise in demand for mobile phones has adversely affected the
demand for cameras, tape recorders etc.
ok
Disguised : Disguised unemployment occurs when more people are doing work than what
unemployment? is actually required.
Effective Demand : Effective demand denotes money actually spent by the people on products of
industry.
o
Aggregate Demand : The aggregate demand is the amount of money which entrepreneurs expect
Function (ADF) to get by selling the output produced by the number of labourers employed.
ab
Aggregate Supply : Aggregate supply function is an increasing function of the level of employment.
Function
Frictional : Frictional unemployment arises due to imbalance between supply of labour
ur
unemployment and demand for labour.

Disguised : Disguised unemployment occurs when more people are doing work than what
unemployment is actually required.
.s
Unemployment : When there are people, who are willing to work and able to work but cannot
find suitable jobs.
Under employment : Resources are not fully utilized.
w
Effective demand : The amount of money which entrepreneurs expect to get by the output product.
Aggregate demand : The amount that households, firms, the governments and the foreign
w
purchasers would like to spend on domestic output.

Aggregate Supply : The value of total output of goods and services produced in an economy in a
year.
w
Marginal propensity : The additional consumption due to an additional unit of income.

to consume.
Marginal Efficiency : The expected rate of return over costs of a new capital goods.
of Capital
Money supply : The total stock of money circulating in an economy.
43
Definitions
Keynes theory of : “Effective demand signifies the money spent on consumption of goods and
m
employment services and on investment. The total expenditure is equal to the national
income which is equivalent to the national output.
co
Full employment : Full employment refers to a situation in which every able bodied person who
is willing to work at the prevailing wage rate is employed.
Definition of : According to Wonnacott. P and Wannacott. R “Unemployed people supper the
Unemployment demoralization, frustration and loss of self respect that come from enforced
s.
idleness”.
Definition of full : Lerner defines full employment as “That the level of employment at which any
employment by further increase in spending would result in an inflationary spiral of wages
ok
Lerner and prices”.
Classical theory of : Classical theory explains that “A person receives his income from production
employment which is spent on the purchase of goods and services produced by others for
an economy as a whole, therefore total production equals total income”.
o
Theory of : According to Keynes, the factors of production such as capital goods, supply
Employment and of labour, technology and efficiency of labour remain unchanged while
ab
Income determining the level of employment.

Effective Demand by : According to Keynes “Effective demand signifies the money spent on
Keynes consumption of goods and services and on investment. The total expenditure
is equal to the national income, which is equivalent to the national output”.
ur
Formulae
.s
w
S.
TO CALCULATE FORMULA
NO.
1. Effective Demand ED = Y = C + I = Output = Employment
w
2. Aggregate Demand AD = C + I + G + (X–M)

3. Aggregate Supply Aggregate Supply = C + S + T + RF = Aggregate income generated in the
w
economy
44
Model Questions
Part - A 7. The core of the classical theory of employment
is _______.
Multiple Choice Questions 1 Mark (a) Law of Diminishing Return
m
(b) Law of Demand
1. Every able bodied person who is willing to
(c) Law of Markets
work at the prevailing wage rate is employed
called as _______. (d) Law of Consumption
co
(a) Full employment [Ans. (c) Law of Markets]
(b) Under employment 8. Keynes attributes unemployment to _______.
(c) Unemployment (a) A lack of effective supply
(d) Employment opportunity (b) A lock of effective demand
s.
[Ans. (a) Full employment] (c) A lack of both
2. Structural unemployment is a feature in a (d) None of the above
_______. [Ans. (b) A lock of effective demand]
ok
(a) Static society (b) Socialist society 9. _______ Flexibility brings equality between
(c) Dynamic society (d) Mixed economy saving and investment.
[Ans. (c) Dynamic society] (a) Demand (b) Supply
3. In disguised unemployment, the marginal (c) Capital (d) Interest
o
productivity of labour is _______. [Ans. (d) Interest]
(a) Zero (b) One 10. _______ theory is a turning point in the
ab
(c) Two (d) Positive development of modern economic theory.

[Ans. (a) Zero] (a) Keynes’ (b) Say’s
(c) Classical (d) Employment
4. The main concention of the Classical Economic
Theory is _______. [Ans. (a) Keynes’]
ur
(a) Under employment 11. The basic concept used in Keynes Theory of
(b) Economy is always in the state of equilibrium Employment and Income is _______.
(c) Demand creates its supply (a) Aggregate demand
(d) Imperfect competition (b) Aggregate supply
.s
[Ans. (b) Economy is always in the state of (c) Effective demand

equilibrium] (d) Marginal Propensity Consume
5. J.B. Say is a _______. [Ans. (c) Effective demand]
w
(a) Neo Classical Economist 12. The component of aggregate demand is

(b) Classical Economist _______.
(c) Modern Economist (a) Personal demand
w
(d) New Economist (b) Government expenditure

[Ans. (b) Classical Economist] (c) Only export
(d) Only import
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6. According to Keynes, which type of

unemployment prevails in capitalist economy? [Ans. (b) Government expenditure]
(a) Full employment 13. Aggregate supply is equal to _______.
(b) Voluntary unemployment (a) C + I + G
(c) Involuntary unemployment (b) C + S + G + (x-m)
(d) Under employment (c) C + S + T + (x-m)
[Ans. (d) Under employment] (d) C + S + T + Rf [Ans. (d) C + S + T + Rf]
45

14. Keynes theory pursues to replace laissez faire Part - B
by _______.
(a) No government intervention Answer the following questions in
(b) Maximum intervention one or two sentences 2 Marks
(c) State intervention in certain situation
21. Define full employment.
(d) Private sector intervention
m
Ans. Full employment means that persons who are
[Ans. (c) State intervention in certain
situation] willing to work and able to work must have
employment or a job.
15. In Keynes theory of employment and income,
co
_______ is the basic cause of economic 22. What is the main feature of rural
depression. unemployment?
(a) Less production Ans. The major feature of rural unemployment is
(b) More demand the existence of unemployment in the form
(c) Inelastic supply of disguised unemployment and seasonal
s.
(d) Less aggregate demand in relation to unemployment.
productive capacity.
23. Give short note on frictional unemployment.
[Ans. (d) Less aggregate demand in relation to
ok
productive capacity.] Ans. (i) Frictional unemployment arises due to
imbalance between supply of labour and
16. Classical theory advocates _______. demand for labour.
(a) Balanced budget (ii) The persons who lose jobs and in search
(b) Unbalanced budget of jobs are also included under frictional
o
(c) Surplus budget unemployment.
(d) Deficit budget [Ans. (a) Balanced budget]
24. Give reasons for labour retrenchment at
ab
17. Keynes theory emphasized on _______ present situation.

equilibrium.
Ans. (i) Employers must classify what the reason
(a) Very short run (b) Short run
is for the possible retrenchment during
(c) Very long run (d) Long run the consultation process.
[Ans. (b) Short run]
ur
(ii) Israelstam explains that employers have

18. According to classical theory, rate of interest is to consult with labour unions as the
a reward for _______. representatives of employers in cases
(a) Investment (b) Demand where there is unionisation.
.s
(c) Capital (d) Saving

25. List out the assumptions of Say’s law.
[Ans. (d) Saving]
Ans. (i) No single buyer or seller of commodity or
19. In Keynes theory , the demand for and supply an input can effect price.
w
of money are determined by _______.

(ii) There will be a perfect competition in
(a) Rate of interest
labour and product market.
(b) Effective demand
(iii) Money acts only as a medium of exchange.
w
(c) Aggregate demand

(d) Aggregate supply (iv) Long-run analysis.
[Ans. (a) Rate of interest] 26. What is effective demand?
w
20. Say’s law stressed the operation of _______ in Ans. (i) Effective demand denotes money actually
the economy. spend by the people on products of
(a) Induced price mechanism Industry.
(b) Automatic price mechanism (ii) The money which entrepreneurs receive
(c) Induced demand is paid in the form of rent, wages, interest
(d) Induced investment and profit.
[Ans. (b) Automatic price mechanism]
46

27. What are the components of aggregate supply? (ii) According to Pigou, under free
Ans. The components of aggregate supply are competition the tendency of the economic
(i) Aggregate (desired) consumption system is automatically provide full
expenditure (C). employment in the labour market.
(ii) Aggregate (desired) savings (S). (iii) Unemployment results from rigidy in the
wage structure and state interference in
m
(iii) Net tax payments (T).
the market economy.
(iv) Personal desired transfer payments to the
(iv) According to Prof. Pigou if all government
foreigners (RF).
interferences are removed and forces of
co
Part - C competition are allowed to work freely,
Answer the following questions in the market induced changes of wage rates
will lead to full employment.
one paragraph 3 Marks
(v) Prof. Pigou illustrated the following
28. Explain the following in short
s.
equation.
(i) Seasonal unemployment
N = q. Y/W
(ii) Frictional unemployment
N = No. of workers, Q = Fraction
ok
(iii) Educated unemployment
Ans. (i) Seasonal unemployment :
of income earned as wages and
salaries.
(1) This type of unemployment occurs
during certain seasons of the year. Y = Full employment level of national
income.
(2) In agriculture and agro based
o
industries like sugar production W = Wage rate
activities are carried out only in (vi) If Y is given, N can be increased only by
ab
some seasons. reduction in W.

(ii) Frictional unemployment (Temporary (vii) This can be explained with following
unemployment) : figure.
(1) Frictional unemployment arises Reduced wage rate increases employment
due to imbalance between supply of y
ur
labour and demand for labour. d

(2) The persons who lose jobs and in W/P1 S (A)
search of jobs are also included W/P E
Real Wage
.s
under frictional unemployment

(iii) Educated unemployment : P
(1) Sometimes educated people are
w
under employment or unemployed

when qualification does not match
the job. 0 W/O NF N
(2) Faulty education system, Lack
w
of Employable skills, mass

student turnout etc., jobs are (B)
highly responsible for educated W/P1
w
unemployment in India.
W/P
29. According to classical theory of employment,
MPL
how wage reduction solve the problem of
unemployment diagramatically explain.
N
Ans. (i) During the days of the great depression 0
Employment
Prof. A.C. Pigou supplied the most logical
part of unemployment.
47
(viii) S - is the supply curve of labour. 30. Write short note on the implications of Say’s
(ix) D - is the demand curve of labour. law.
(x) The intersection of two curves shows full Ans. (i) There is no possibility for over production
employment at E. or unemployment.
(xi) If the wage is reduced to the level of W/P (ii) If there exist unutilized resources in the
m
then unemployment disappears and attain economy it is profitable to employ them
full employment. upto the point of full employment.
(xii) This is shown in panel (B). (iii) As automatic price mechanism operates
in the economy, there is no need for
co
(xiii) MP1 is the Marginal product of labour
curve which slopes downward as more government intervention.
labour is employed. (iv) Interest flexibility brings about equality
(xiv) The full employment level is reached between saving and investment.
when the wage rate falls from W/P1 to (v) Money performs only the medium of
s.
W/P level. exchange function in the economy, as
(xv) There is a cut in the money wage, the people will not hold idle money.
real wage is also reduced to the same
ok
extent which reduces unemployment and
ultimately brings full employment.
31. Explain Keynes’ theory in the form of flow chart.
Ans.
o
Effective Demand = Output = Income = Employment
ab
Aggregate Supply Aggregate Demand

Function Function
ur
Consumption Investment
Function Function
.s
Size of Income Propensity to Marginal Rate of Interest

consumer (MPC) Efficiency of
w
Capital (MEC)
w
Supply price of Prospective yield

Capital from Capital
w
Liquidity preference Supply of Money

of the public in the Economy
Transaction Precautionary Speculative

Motive Motive Motive
48

32. What do you mean by aggregate demand? y
Mention its components. Z1
Ans. (i) In the Keynesian model, output is
determined mainly by aggregate demand.
Expected Proceeds
(ii) The aggregate demand is the amount of
m
money which entrepreneurs expect to
get by selling the output produced by the z
number of labourers employed.
(iii) Aggregate demand has the following four
co
components.
(1) Consumption Demand
(2) Investment Demand
0 Nf x
(3) Government Expenditure and Employment
s.
(4) Net Export (export - import) Diagram Explanation :
AD = C + I + G + (X–M) (i) Z curve is linear where money wages
remains fixed; Z curve is non-linear since
ok
y wage rate increases with employment.
AD (ii) When full employment level of NF is
Aggregate Demand
reached it is impossible to increase output

by employing more men.
o
(iii) The slope of the aggregate supply curve
depends on the relation between the
employment and productivity.
ab
(iv) Thus aggregate supply is an important

factor in determining the level of
x economic activity.
0 Employment 34. Write any five differences between Classism
ur
and Keynesianism.
33. Explain about aggregate supply with the help
Ans.
of diagram.
Ans. (i) Aggregate supply function is an increasing S.
Keynesianism Classicism
.s
function of the level of employment. No.

(ii) Aggregate supply refers to the value of total 1. Saving is a vice Saving is a social
output of goods and services produced in virtue
w
an economy in a year. 2. Short-run Long-run

The components of aggregate supply are : equilibrium equilibrium
(i) Aggregate desired consumption 3. Macro approach to Micro foundation to
w
expenditure (C) national problems Macro problems

(ii) Aggregate (desired) private savings (S) 4. Capitalism Capitalism is well
(iii) Net tax payments (T) has inherent and good
w
(iv) Personal (desired) transfer payments to contradictions

the foreigners (Rf) 5. Rate of interest is a Rate of interest is a
Aggregate Supply = C + S + T + RF = Aggregate flow stock
income generated in the economy
49
Part - D (2) Labour saving devices are

responsible for technological
Answer the following questions in unemployment.
one page 5 Marks (vi) Structural Unemployment :
35. Describe the types of unemployment. (1) Structural unemployment is due to
drastic change in the structure of
m
Ans. Types of Unemployment are,
the society.
(i) Cyclical Unemployment
(2) For example rise in demand for
(ii) Sesonal Unemployment
mobile phone has adversely affected
co
(iii) Frictional Unemployment the demand for cameras, tape
(iv) Educated Unemployment recorders etc.
(v) Technical Unemployment (vii) Disguised unemployment :
(vi) Structural Unemployment Disguised unemployment occurs when more
(vii) Disguised Unemployment people are working than what is actually
s.
(i) Cyclical Unemployment : required.
(1) This unemployment exists during 36. Critically explain Say’s law of market.
the downturn phase of Trade cycle
ok
Ans. According to Say, “When goods are produced
in the economy.
by firms in the economy, they pay reward to
(2) It is caused by deficiency of effective the factors of production. The households after
demand. receiving rewards of the factors of production
(ii) Seasonal Unemployment : spend the amount on the purchase of goods
o
(1) This type of unemployment occurs and services produced by them. Therefore,
during certain seasons of the year. each product produced in the economy creates
ab
(2) In agriculture and agro based demand equal to its value in the market.
industries like sugar, production Criticisms of say’s law :
activities are carried out only in
The following are the criticisms against say’s law.
some seasons.
(i) According to Keynes, supply does not
(iii) Frictional Unemployment :
create its demand. It is not applicable
ur
(1) Frictional unemployment arises where demand does not increase as much
due to imbalance between supply of as production increases.
labour and demand for labour.
(ii) Automatic adjustment process will not
(2) The persons who lose jobs and in
.s
remove unemployment.
search of jobs are also included
under frictional unemployment. (iii) Money is not neutral. Individuals hold
money for unforeseen contingencies
(iv) Educated Unemployment :
while businessmen keep cash reserve for
w
(1) Sometimes educated people are

future activities.
under employed or unemployed
when qualification does not match (iv) Say’s law is based on the proposition that
supply creates its own demand and there
w
the job.
is no over production.
(2) Faulty education system, Lack of
employable skills, mass student (v) Keynes regards full employment as
turnout etc., are highly responsible a special case because there is under
w
for educated unemployment in employment in capitalist economies.

India. (vi) The need for state intervention arises in
(v) Technical Unemployment : the case of general over production and
(1) Modern technology being capital mass unemployment.
intensive requires less labourers
and contributes to technological
unemployment.
50

37. Narrate the equilibrium between ADF and There are two approaches to determination of
ASF with diagram. the equilibrium level of income in Keynesian
Ans. (i) Under the Keynes theory of employment, theory these are :
a simple two sector economy consisting 1. Aggregate demand - Aggregate supply
of the households sector and the business approach
sector is taken to understand the
m
2. Saving - Investment approach
equilibrium between ADF and ASF. Diagram explanation :
(ii) All the decisions concerning consumption (i) In the figure, the aggregate demand and
expenditure are taken by the individual aggregate supply reach equilibrium at
co
households, while the business firms take point - E.
decisions concerning investment.
(ii) The employment level is N0 at that point.
(iii) It is also assumed that consumption
(iii) At ON1 employment, the aggregate supply
function is linear and planned investment
is N1 R1
s.
is autonomous.
(iv) They are able to produce M1 N1
y AS (v) The expected level of profit is M1 R1
E AD (vi) To attain this level of profit, entrepreneurs
ok
will employ more labourers.
(vii) The tendency to employ more labour will
Proceed and Cast
M1 stop once they reach point E.

(viii) At all levels of employment beyond ON0,
o
the aggregate demand curve is below the
aggregate supply curve indicating loss to
R1 the producers.
ab
(ix) Thus the concept of effective demand

becomes significant in explaining the
0 N1 N0 Nf x under employment equilibrium.
Employment
ur
38. Explain the differences between Classical theory and Keynes theory.
Ans.
S. No. Keynesianism Classicism
.s
1. Short-run equilibrium Long-run equilibrium

2. Saving is a vice Saving is a social virtue
w
3. The function of money is a medium of The function of money is to act as a medium of

exchange on the one side and a store of exchange.
value on the other side.
w
4. Macro approach to national problems Micro foundation to Macro problems

5. State intervention is advocated Champions of Laissez fair policy.
6. Applicable to all situations. Full Applicable only to the full employment situation.
w
employment and less than full

employment.
7. Capitalism has inherent contradictions Capitalism is well and good
8. Budgeting should be adjusted to the Balanced budget.
requirements of economy.
51
9. The equality between saving and The equality between saving and investment is
investment is advanced through achieved through changes of rate of interest.
changes in income.
10. Rate of interest is determined by the Rate of interest is determined by saving and
demand for and supply of money. investment.
m
11. Rate of interest is a flow Rate of interest is a stock.
12. Demand creates its own supply. Supply creates its own demand.
13. Rate of interest is a reward for parting Rate of interest is a reward for savings.
co
with liquidity.
s.
Part - A 5. Rate of interest is a stock
(a) Socialism (b) Keynesianism
Multiple Choice Questions 1 Mark (c) Classicism (d) All the above
ok
(i) Choose the Correct Option. [Ans. (c) Classicism]
1. Every able bodied person who is willing to 6. ‘Demand creates its own supply’ - who said
work at the prevailing wage rate but not this.
employed is called _______ (a) Socialism (b) Keynesianism
o
(a) Full employment (c) Classicism (d) Both ‘b’ and ‘c’
(b) Under employment [Ans. (b) Keynesianism]
ab
(c) Unemployment 7. ‘Rate of interest is a reward for parting with

(d) Employment opportunity liquidity’ - Its belongs to which theory.
[Ans. (c) Unemployment] (a) Keynesianism (b) Socialism
(c) Both ‘a’ and ‘b’ (d) Classicism
2. Interest flexibility brings equality between
[Ans. (a) Keynesianism]
ur
_______.
(a) Income and consumption 8. Every economy in the world aims at attaining
(b) Saving and investment the level of _______.
(c) Demand and supply (a) Full employment
.s
(d) Labour and capital (b) Unemployment

[Ans. (b) Saving and investment] (c) Seasonal unemployment
(d) Educated unemployment
w
3. ‘Full employment as the absence of involuntary

unemployment’ was said by _______. [Ans. (a) Full employment]
(a) J.B. Say (b) Ricardo 9. A person receives his income from _______.
(c) J.M. Keynes (d) Adamsmith
w
(a) production
[Ans. (c) J.M. Keynes] (b) purchase
4. Full employment as “that level of employment (c) sales
w
at which any further increase in spending (d) None of the above

would resort in an inflationary spiral of wages [Ans. (a) production]
and prices” who quote this above concept. 10. Total production equals to _______.
(a) J.M. Keynes (b) Lerner (a) total income (b) gross income
(c) J.B. Say (d) All the above (c) net income (d) total sales
[Ans. (b) Lerner] [Ans. (a) total income]
52

11. Keynes theory of employment and income is 20. Supply creates its own _______.
the principle of _______. (a) demand (b) production
(a) long run (b) short run (c) money (d) sales
(c) capital (d) production [Ans. (a) demand]
[Ans. (b) short run]
21. _______ price is the total amount of money.
m
12. Keynes theory of employment and income is
(a) Aggregate supply
the principle of _______.
(a) Reflective demand (b) Aggregate demand
(b) Market demand (c) Aggregate income
co
(c) Effective demand (d) Aggregate price
(d) Individual demand [Ans. (a) Aggregate supply]
[Ans. (c) Effective demand] 22. The entrepreneur would be encouraged to
13. _______ was one of the most influential employ _______.
s.
economists of the 20th Century. (a) more labour (b) more income
(a) J.B. Say (c) more product (d) more capital
(b) Marshall [Ans. (a) more labour]
ok
(c) John Maynard Keynes
23. _______ has inherent contradictions.
(d) Adamsmith
[Ans. (c) John Maynard Keynes] (a) Socialism (b) Traditional
(c) Capitalism (d) Economy
14. Effective demand equals to _______. [Ans. (c) Capitalism]
o
(a) National income (b) Gross income
(c) Total income (d) Net income 24. Based on Keynesianism _______ is vice.
ab
[Ans. (a) National income] (a) Saving (b) Production

(c) Consumption (d) None of these
15. _______ is only a medium of exchange.
[Ans. (a) Saving]
(a) Money (b) Goods
(c) Labour (d) Service 25. _______ returns takes place as more workers
ur
[Ans. (a) Money] are employed.

16. _______ is homogeneous (a) Law of diminishing marginal
(a) Goods (b) Product (b) Law of equi demand
(c) Labour (d) Money (c) Law of demand
.s
[Ans. (c) Labour] (d) None of the above

[Ans. (a) Law of diminishing marginal]
17. Wages and prices are _______.
26. _______ are classical economist.
(a) flexible (b) related
w
(a) Adamsmith
(c) homogeneous (d) none of the above
(b) J.B. Say
[Ans. (a) flexible]
(c) J.M. Keynes and Marshall
w
18. Capital stock and technological knowledge (d) Both ‘a’ and ‘b’
are given in the _______. [Ans. (d) Both ‘a’ and ‘b’]
(a) medium run (b) long run
(c) short run (d) none of the above 27. _______ attributes unemployment to a lack of
w
effective demand.
[Ans. (c) short run]
(a) J.M. Keynes (b) J.B. Say
19. Say’s law of market is the core of the _______ (c) Wonnacott (d) Marshall
theory of employment. [Ans. (a) J.M. Keynes]
(a) classical (b) economical
(c) environmental (d) proportional
[Ans. (a) classical]
53
28. J.B. Say is a_______ economist. (ii)

Match the following and choose the
(a) French (b) British correct answer by using codes given
(c) Dutch (d) Indian below.
[Ans. (a) French] 1. (A) Full (i) Types of
29. J.M. Keynes is one of the gretest and most employment Unemployment
m
influential economist in _______ century.
(B) Supply creates (ii) Lerner
(a) 17th (b) 18th (c) 19th (d) 20th its own
[Ans. (d) 20th] demand
co
30. Keynesian theory is based on _______ (C) An enquiry (iii) J.B. Say
equilibrium. into the nature
(a) Very short - run equilibrium and causes
of wealth of
(b) Short run - equilibrium
nation
s.
(c) Long run - equilibrium
(D) Educated (iv) Adam smith
(d) Very long run - equilibrium
Unemployment
[Ans. (b) Short run - equilibrium]
Codes :
ok
31. Classicism theory is based on _______ (a) A - (ii), B - (iii), C - (iv), D - (i)
equilibrium.
(b) A - (iv), B - (iii), C - (ii), D - (i)
(a) Very short run (b) Short run
(c) A - (ii), B - (i), C - (iv), D - (iii)
(c) Long run (d) very long run
(d) A - (iii), B - (i), C - (iv), D - (ii)
o
[Ans. (c) Long run]
[Ans. (a) A - (ii), B - (iii), C - (iv), D - (i)]
32. _______ refers to persuasion.
2.
ab
(a) Growth rate (b) Minimization (A) Cyclical (i) Occur drastic
Unemployment change in the
(c) Optimization (d) Moral Suasion
structure of
[Ans. (d) Moral Suasion] the society.
33. _______ started functioning from 1st July (B) Seasonal (ii) Occur
ur
1963. Unemployment qualification

(a) ARDC (b) IMF (c) RBI (d) SBI does not
[Ans. (a) ARDC] match the job.
34. _______ was set up in July 1982. (C) Educated (iii) Caused by
.s
(a) ARDC (b) NABARD Unemployment deficiency

of effective
(c) ICICI (d) Indian Bank
demand
[Ans. (b) NABARD]
w
(D) Structural (iv) During

35. J.M. Keynes was born in _______. Unemployment certain
(a) 1885 (b) 1884 seasons of the
w
(c) 1883 (d) 1882 year.

[Ans. (c) 1883] Codes :
36. Keynes book, “The General Theory of (a) A - (iii), B - (iv), C - (ii), D - (i)
w
Employment, interest and Money” published (b) A - (i), B - (ii), C - (iii), D - (iv)
in _______. (c) A - (ii), B - (iii), C - (iv), D - (i)
(a) 1932 (b) 1930 (d) A - (iv), B - (iii), C - (ii), D - (i)
(c) 1933 (d) 1936
[Ans. (a) A - (iii), B - (iv), C - (ii), D - (i)]
[Ans. (d) 1936]
54

3. (A) AD (i) Aggregate Supply Codes :
Function (a) A - (iii), B - (i), C - (iv), D - (ii)
(B) Aggregate (ii) C + I + G + (X–M) (b) A - (ii), B - (iii), C - (iv), D - (i)
Supply (c) A - (iv), B - (iii), C - (ii), D - (i)
(C) ED (iii) C + S + T + RF = (d) A - (iii), B - (i), C - (ii), D - (iv)
m
Aggregate income [Ans. (a) A - (iii), B - (i), C - (iv), D - (ii)]
generated in the
economy (iii) State whether the Statements are true or
false.
co
(D) ASF (iv) Y = C + I = Output
= Employment 1. (i) Say’s law of market was the basis for
assuming the situation of full employment.
Codes :
(ii) There will be imperfect competition in the
(a) A - (iii), B - (iv), C - (ii), D - (i) labour and product market.
s.
(b) A - (i), B - (ii), C - (iii), D - (iv) (a) Both (i) and (ii) are true
(c) A - (iv), B - (iii), C - (ii), D - (i) (b) Both (i) and (ii) are false
(d) A - (ii), B - (iii), C - (iv), D - (i) (c) (i) is true but (ii) is false
ok
[Ans. (c) A - (iv), B - (iii), C - (ii), D - (i)] (d) (i) is false but (ii) is true
[Ans. (c) (i) is true but (ii) is false]
4. (A) Keynes’ book (i) ADF
(B) Rate of interest (ii) ‘The general 2. (i) There are two approaches to
theory of determination of equilibrium.
o
employment (ii) (a) Demand and Supply approach
interest and (b) Saving and Investment approach
ab
money’ (a) Both (i) and (ii) are true

(C) Aggregate (iii) Cambridge (b) Both (i) and (ii) are false
demand (c) (i) is true but (ii) is false
function (d) (i) is false but (ii) is true
(D) John Maynard (iv) Reward for [Ans. (a) Both (i) and (ii) are true]
ur

Keynes parting with
liquidity. 3. (i) The aggregate demand and aggregate
supply reach equilibrium at point E.
Codes : (ii) “Supply creates its own demand”.
.s
(a) A - (i), B - (ii), C - (iii), D - (iv) (a) Both (i) and (ii) are true
(b) A - (ii), B - (iv), C - (i), D - (iii) (b) Both (i) and (ii) are false
(c) A - (iii), B - (iv), C - (ii), D - (i) (c) (i) is true but (ii) is false
w
(d) A - (iv), B - (iii), C - (ii), D - (i) (d) (i) is false but (ii) is true
[Ans. (b) A - (ii), B - (iv), C - (i), D - (iii)] [Ans. (a) Both (i) and (ii) are true]
4. (i) According to Say, “when goods are
w
5. (A) Liquidity (i) ASF produced by firms in the economy, they

preference pay reward to the factors of the production.
(B) Aggregate (ii) Day today (ii) There was no single theory which could be
w
supply function expenditure labeled as Classical theory of employment.

(C) MEC (iii) Keynes (a) Both (i) and (ii) are true
(D) Transaction (iv) Rate of interest (b) (i) is true but (ii) is false
motive (c) Both (i) and (ii) are false
[Ans. (b) (i) is true but (ii) is false]
55
5. (i) Generally, full employment refers to the 10. (i) The major feature of rural unemployment
labour force of a country. is the existence of unemployment.
(ii) Wages and prices of goods were flexible. (ii) Full employment means that persons who
(a) (i) is true but (ii) is false are willing to work and able to work must
(b) Both (i) and (ii) are false have employment or a job.
m
(c) (i) is false but (ii) is true (a) Both (i) and (ii) are true
(d) Both (i) and (ii) are true (b) (i) is false but (ii) is true
[Ans. (d) Both (i) and (ii) are true] (c) (i) is true but (ii) is false
co
(d) Both (i) and (ii) are false
6. (i) Each product produced in the economy
creates demand.
11. (i) Effective demand determines the level of
(ii) Marginal productivity of labour is zero or
employment in the economy.
less or negative.
(ii) The rate of interest and marginal efficiency
s.
(a) Both (i) and (ii) are false
of capital determine the investment level.
(b) (i) is true but (ii) is false
(a) Both (i) and (ii) are true
(c) Both (i) and (ii) are true
ok
(c) (i) is true but (ii) is false
[Ans. (c) Both (i) and (ii) are true]
7. (i) The aggregate effective demand would [Ans. (a) Both (i) and (ii) are true]
increase the level of employment. 12. (i) As automatic price mechanism operates in
o
(ii) The decline in total effective demand the economy.
would lead to unemployment. (ii) Money is neutral.
ab
(a) Both (i) and (ii) are false (a) Both (i) and (ii) are true
(b) (i) is true but (ii) is false (b) Both (i) and (ii) are false
(c) Both (i) and (ii) are true (c) (i) is true but (ii) is false
(d) (i) is false but (ii) is true (d) (i) is false but (ii) is true
ur
[Ans. (c) Both (i) and (ii) are true] [Ans. (c) (i) is true but (ii) is false]
8. (i) The term ‘price’ refers to the amount of 13. (i) According to Keynes, supply does not
money received from the sale of output. create its demand.
(ii) Money acts only as a medium of exchange.
.s
(ii) The aggregate supply refers to the required

amount of labourers and materials. (a) Both (i) and (ii) are true
(a) Both (i) and (ii) are false (b) Both (i) and (ii) are false
w
(b) Both (i) and (ii) are true (c) (i) is true but (ii) is false
(c) (i) is true but (ii) is false (d) (i) is false but (ii) is true
(d) (i) is false but (ii) is true [Ans. (a) Both (i) and (ii) are true]
w
[Ans. (b) Both (i) and (ii) are true] 14. (i) Income is the principle of effective
9. (i) The aggregate supply curve can be demand.
expected to slope upwards. (ii) Effective demand is not equals to national
w
(ii) Rate of interest is determined by saving income.

and investment. (a) Both (i) and (ii) are true
(a) Both (i) and (ii) are true (b) Both (i) and (ii) are false
(b) Both (i) and (ii) are false (c) (i) is true but (ii) is false
(c) (i) is true but (ii) is false (d) (i) is false but (ii) is true
(d) (i) is false but (ii) is true [Ans. (c) (i) is true but (ii) is false]
56

(iv)
Which is the following is correctly 6. (a) Disguised - A kind of
matched. unemployment employment
1. (a) Keynes - Theory of (b) ASF - Aggregate Demand
employment and Function
Income (c) Classicism - State intervention
m
(b) Employment - Cyclical (d) Type of - Seasonal
(c) Development - India unemployment unemployment
Country [Ans. (d) Type of unemployment - Seasonal
co
(d) Unemployment - Not able to work unemployment]
[Ans. (a) Keynes’ - Theory of employment and (v) Which is the following is Not correctly
Income] matched.
2. (a) Cyclical - Widespread
s.
unemployment unemployment 1. (a) Self interest - Economic
(b) Say’s law - Unemployment decisions
(c) Keynes theory - Law of market (b) John Maynard - Influential
ok
Keynes economists
(d) ADF - Aggregate Supply
Function (c) Effective - Equal national
demand income
[Ans. (a) Cyclical unemployment - Widespread
unemployment] (d) Equilibrium - Unemployment
point
o
3. (a) ED = Y = - C + I = Output =
Employment [Ans. (d) Equilibrium point - Unemployment]
ab
(b) Equilibrium - Labour

2. (a) Classicism - Balanced budget
(c) Micro approach - National problem
(b) Keynesianism - Short-run
(d) Keynesianism - Balanced budget
equilibrium
[Ans. (a)
ED = Y = C + I = Output =
(c) Rate of interest - Stock
ur
Employment]
(d) Full - Unemployment
4. (a) Capitalist - Free market economy employment
economy
[Ans. (d) Full employment - Unemployment]
.s
(b) Equilibrium - Need full employment

level
3. (a) Disguised - Unemployment
(c) Effective - Aggregate demand
(b) Frictional - Full employment
demand
w
(c) Seasonal - Unemployment

(d) J.S. Mill - Enquiry into the
nature and causes of (d) Structural - Unemployment
wealth of nation.
w
[Ans. (b) Frictional - Full employment]

[Ans. (a)
Capitalist economy - Free market
economy] 4. (a) Full employment - Labour force
w
5. (a) Supply creates - Demand (b) Developing - Structural

(b) Classical theory - Unemployment countries unemployment
(c) Qualification - Frictional (c) Classical theory - Single theory
(d) Technical - Lack of necessary (d) Aggregate supply - Inelastic
unemployment skills curve
[Ans. (c) Classical theory - Single theory]
[Ans. (a) Supply creates - Demand]
57
5. (a) Consumption - Co-extensive 2. Keynesianism :

(b) Annual - Annual demand (a) State investment is advocated
produce (b) Short run equilibrium
(c) Saving - Investment (c) Saving is a vice
(d) Labour - Medium of (d) Balanced budget
m
exchange [Ans. (d) Balanced budget]
[Ans. (d) Labour - Medium of exchange] 3. Classicism :

(a) Capitalism is well and good.
co
(vi) Assertion, Reason. (b) Macro approach to national problems.
1. Assertion (A) : Disguised unemployment (c) Champions of Laissez - faire policy.
occurs when more people are working than (d) Long run equilibrium
what is actually required. [Ans. (b)
Macro approach to national
s.
Reason (R) : In Disguised unemployment problems.]
Marginal Productivity of labour is zero or less
or negative. Part - B
Answer
ok
(a) Both A and R are true and R is the Correct the following questions in
explanation of A one or two sentences 2 Marks
1. Give short note on Cyclical unemployment?
explanation of A
Ans. Cyclical Unemployment :
o
(c) A is the true but R is false
(i) This unemployment exists during the
(d) A is false but R is true downturn phase of trade cycle in the
ab
[Ans. (a) B oth A and R are true and R is the economy.

Correct explanation of A]
(ii) In a business cycle during the period
2. Assertion (A) : “The General Theory of of recession and depression, income
employment, interest and money” published and output fall leading to widespread
in 1936. unemployment.
ur
Reason (R) : A highly significant work that 2. What are the four components of aggregate
marked a turning point in the development of demand?
modern economic theory.
Ans. (i) Consumption Demand
.s

(ii) Investment Demand
explanation of A
(iii) Government Expenditure
(iv) Net Export (Export - Import)
w
explanation of A
(c) A is the true but R is false 3. Write the formula for aggregate supply?
(d) A is false but R is true Ans. Aggregate supply = C + S + T + RF = Aggregate
w
income generated in the economy.

[Ans. (b) B oth A and R are true but R is not
the correct explanation of A] 4. Write any two types of unemployment?
(iv) Pick the Odd one Out. Ans. (i) Seasonal unemployment
w
(ii) Frictional unemployment

1. “Supply creates its own demand”. - who
5. What is Say’s law of market?
enunciated this proposition.
Ans. J.B. Say enunciated the proposition that “Supply
(a) J.S. Mill (b) J.M. Keynes
creates its own demand”. Hence there cannot
(c) David Ricardo (d) J.B. Say
be general over production or the problem of
[Ans. (d) J.B. Say] unemployment in the economy.
58

6. Write a short note about Keynes theory? 2. Write a short note on effective demand?
Ans. Keynes theory of employment was based on Ans. (i) Effective demand denotes money actually
the view of the short run. According to him, spent by the people on products of
the factors of production such as capital goods, industry.
supply of labour, technology and efficiency of (ii) The money which entrepreneurs receive
labour remain unchanged while determining
m
is paid in the form of rent, wages, interest
the level of employment. and profit.
7. What is unemployment? (iii) Therefore effective demand equals
national income.
co
Ans. Unemployment is problem faced when there are
people, who are willing to work and able to work (iv) An increase in the aggregate effective
but can’t find suitable job. demand would increase the level of
employment. A decline in total effective
8. What are the assumptions of Say’s Law of
demand would lead to unemployment.
Market?
s.
Therefore,
Ans. (i) Ceteris paribus (constant extraneous
(v) Thus the total employment of a country
variables).
can be determined with the help of total
(ii) Existence of Normal Conditions.
ok
demand of a country.
(iii) Existence of a Laissez-faire Capitalist
Economy. 3. Give the factors on which the aggregate
demand depends.
9. What are the two factors depend on MEC? Ans. The aggregate demand is the amount of money
Ans. MEC depends on two factors namely which entrepreneurs expect to get by selling the
o
(i) Prospective yield of capital asset output produced by the number of labourers
(ii) Supply price of capital employed. Therefore, it is the expected income
ab
or revenue from the sale of output at different

10. What are the three motives of liquidity levels of employment.
preference? Aggregate demand has the following four
Ans. Liquidity preference is based on three motives. components :
They are,
ur
(i) Consumption demand

(i) Transaction motive (ii) Investment demand
(ii) Precautionary motive (iii) Government expenditure and
(iii) Speculative motive (iv) Net Export (export – import)
.s
Part - C 4. Write the criticism of Say’s Law.

Answer the following questions in Ans. The following are the criticisms against Say’s
3 Marks law :
w
one paragraph
1. Explain the classical theory about (i) According to Keynes, supply does not
unemployment? create its demand. It is not applicable
where demand does not increase as much
w
Ans. (i) The classical theory of employment is

composed of different views of classical as production increases.
economists on the issue of income and (ii) Automatic adjustment process will not
employment in the economy. remove unemployment. Unemployment
w
(ii) Classical economists assumed that the can be removed by increase in the rate of
economy operates as the live of full investment.
employment without inflation in the long (iii) Money is not neutral. Individuals hold
period. money for unforeseen contingencies
(iii) They also assumed that wages and prices while businessmen keep cash reserve for
of goods were flexible and the competitive future activities.
market existed in the economy.
59
5. What are the components of aggregate supply? (x) Unutilized resources used until reaches
Ans. The components of aggregate supply are, full employment.
(i) Aggregate (desired) consumption (xi) No Government intervention automatic
expenditure (C). Price adjustment mechanism operated.
(ii) Aggregate (desired) private savings (S). 2. Draw the diagram ADF.
m
(iii) Net tax payments (T) (Total tax payment
to be received by the government Ans. y
minus transfer payments, subsidy and
AD
interest payments to be incurred by the
Aggregate Demand
co
government) and
(iv) Personal (desired) transfer payments
to the foreigners (Rf)(eg. Donations to
international relief efforts)
s.
Part - D
Answer the following questions in x
ok
0 Employment
one page 5 Marks
1. List out all assumption of say’s law of market? 3. Draw the diagram for Aggregate supply curve
Ans. Assumption of the Say’s law of market : diagram.
o
(i) No single buyer (or) seller of commodity Ans. y
or an input can affect price. Z1
ab
(ii) Full employment.

Expected Proceeds
(iii) People are motivated by self interest

and self-interest determines economic
decisions. z
ur
(iv) The laissez fair policy is essential for an

automatic and self adjusting process of
full employment.
(v) There will be a perfect competition.
.s
(vi) There is wage - price flexibility.

(vii) Money acts only as a medium of exchange. 0 Nf x
Employment
w
(viii) Long run analysis.

(ix) There is no possibility for over production
or unemployment.
w
w
60

4. Compare Keynesianism to Classicism.
Ans. Comparison of Classicism and Keynesianism
S. No. Keynesianism Classicism
1. Short-run equilibrium Long-run equilibrium
2. Saving is a vice Saving is a social virtue.
m
3. The function of money is a medium of The function of money is to act as a medium of
exchange on the one side and a store exchange
of value on the other side.
co
4. Macro approach to national problems Micro foundation to macro problems
5. State intervention is advocated. Champions of Laissez-fair policy
6. Applicable to all situations – full Applicable only to the full employment situation.
employment and less than full
s.
employment.
7. Capitalism has inherent contradictions Capitalism is well and good.
8. Budgeting should be adjusted to the Balanced budget
ok
requirements of economy.
9. The equality between saving and The equality between saving and investment is
investment is advanced through achieved through changes of rate of interest.
changes in income.
o
10. Rate of interest is determined by the Rate of interest is determined by saving and
demand for and supply of money. investment.
ab
11. Rate of interest is a flow. Rate of interest is a stock.

12. Demand creates its own supply. Supply creates its own demand.
13. Rate of interest is a reward for parting Rate of interest is a reward for saving.
with liquidity.
ur

.s
w
w
w
61

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This is only for Sample

Higher Secondary Second Year

(v) Not Correctly Matched

(vii) Picking the Odd one Out

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1.1 Introduction 1.8 Concepts of Macro Economics

1.5 Limitations Sector Economy

1.7.2 Socialistic Economy (Socialism) Sector Economy

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Economic INTRODUCTION TO Limitations of

Circular Flow of Income in a

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Introduction to Macro Economics Sura’s - XII Std - Economics

Mixedism together towards economic development.

Income between different sectors of an economy.

Sura’s - XII Std - Economics Chapter 1

Socialism : Any of various economic and political theories advocating collective or

2. Who coined the word ‘Macro’?

3. Who is regarded as Father of Modern Macro

 [Ans. (c) Production and Consumption]

(a) Price Theory (b) Income Theory

5. Macro economics is a study of _______.  [Ans. (d) All the above]

private ownership of production exists.

Introduction to Macro Economics Sura’s - XII Std - Economics

(a) Capitalistic Economy 23. What is meant by an ‘Economy’?

(a) production (b) stock

18. Identify the flow variable.

(c) income Ans. Adam Smith is the Father of Capitalism. He

Sura’s - XII Std - Economics Chapter 1

(iv) The state takes all major decisions.

Capitalistic economy is also known as and

right to purchase, use or transfer their

Sectors : In mixed economies, both

for profit. Public sector firms are owned by

Introduction to Macro Economics Sura’s - XII Std - Economics

1. The system where An economic

policy and Export Y is Income, C is Consumption, I is

Sura’s - XII Std - Economics Chapter 1

Part - D 36. Illustrate the functioning of an economy

understanding at the growth process of an

(i) Inflation refers to steady increase in

(i) Almost all economies face the problem of

need to be carefully studied based on

unemployment facilitates allocation of resources planning government policy and others

Introduction to Macro Economics Sura’s - XII Std - Economics

38. Compare the features among Capitalism, Secularism and Mixedism.

3. Solution of central Free market system Central planning Central planning

5. Income Distribution Unequal Equal Less unequal

7. Economic Freedom Complete Freedom Lack of Freedom Limited freedom

Sura’s - XII Std - Economics Chapter 1

Additional Questions and Answers

(d) Poverty and unemployment 12. Absence of Price Mechanism is a characteristic

(a) Capitalist Economy

(d) All the above[Ans. (b) Socialist Economy]

(c) Karl Marx (d) J.R. Hicks (b) Capitalist Economy

7. Example for Mixed Economy _______.

Introduction to Macro Economics Sura’s - XII Std - Economics

(c) Foreign exchange (d) Money (C) Aggregate (iii) 1936

(a) Capitalistic economy Codes :

(c) A - (iii), B - (iv), C - (i), D - (ii)

decision are under taken by the central

(b) Globalistic economy

 [Ans. (a) Socialist economy]

[Ans. (c) Production and Consumption]

5. Macro economics is a study of _______. [Ans. (d) All the above]

(d) All the above[Ans. (b) Socialist Economy]

[Ans. (a) Socialist economy]

Codes : [Ans. (d) (i) is false but (ii) is true]

Ans. (a) [A - (iii), B - (i), C - (iv), D - (ii)]

2.5.2 Income Method (Factor Earning

7. Disposable Income = Personal income – 13. The expenditure method

[Ans. (b) Three] (c) National Net Provident

[Ans. (a) Construction sector]