SUPPLEMENTARY MATERIAL ECONOMICS

QNO1.Write short note on various sectors as used to

explain circular flow of income?

1.Household sector: Households are owners of the factors

of production and are essentially the consumers.
2.Production sector: This sector is engaged in production
activity or value adding activity.
3.Government sector: It acts both as welfare agency as
well as a consumer of goods produced in production
sector.
4.The rest of the world sector or external sector: This
sector is engaged in export and import of goods and flow
of capital between the domestic economy and other
countries of the world.
Qno2.What is meant by economic agents?
Ans:Economic agents are individuals or institutions who
take economic decisions in the economy. These include
consumers, producers and the govt.
Qno3.what is micro-macro paradox.?
Ans :what is true at micro level may not be true at macro
level. For example if an individual saves more, he adds to
his future prosperity. but if all the people save in an
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economy demand for goods may decline. this will be

detrimental to the health of an economy.
Qno4:Explain is saving a virtue or a voice?
Or what is meant by paradox of thrift?
Ans:For an individual saving is virtue because it will earn
for him interest. For the economy as a whole saving may
prove to be a vice. When every body save more,
expenditure tends to decline. It causes decline in aggregate
demand.
Qno5.Distinguish between open economy and closed
economy.?
Ans :Closed economy is that economy which does not have
trade relations with other countries. This economy neither
deals in exports nor imports. It is also known as isolation
economy. Open economy is that economy which have trade
relations with other countries.
Qno6.Define intermediate consumption?
Ans :Expenditure on intermediate goods by the producers
during an accounting year is called intermediate
consumption.
Qno7.What is current replacement cost?
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Ans :It refers to the estimated value of depreciation for all

the producing units in the economy during the period of
an accounting year.
Qno8.Explain the significance or importance of study of
circular flow of income?
Or Discuss importance of national income studies?
Ans :Following points highlights the importance of national
income studies:
1.indicator of economic structure: National income
estimates are an important index of the economic
structure of the economy. they tell us how incomes are
earned and spent.
2.Knowledge of interdependence: circular flow models helps
us to understand interdependence between different
sectors of an economy.
3.identification of injections and leakages: it helps in
identifying leakages and injections in an economy.
4.estimation of national income: It helps us in measuring
national income. example national is sum total of factor
incomes(rent+profit+Wages+Interest) .
5.helpfull in economic planning: national income estimates
are also important tool for economic planning. framing an
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economic plan requires a prior knowledge of the trends in

national income.
Qno9. Explain three phases of circular flow of income?
Ans: 1phase of production. It refers to the production of
goods and services by the producer sector. Production
goods and services is termed as production phase.
2.phase of distribution. it refers to flow of income to(in
terms of rent, wages, interest and profit)from the producing
sector to the house hold sector.
3.Phase of expenditure: this phase refers to expenditure on
the purchase of goods and services by the household
sector .

Production

DISTRIBUTION EXPENDITURE
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QNO9Define operating surplus?

Ans :The Operating surplus includes the income from
property and entrepreneurship. It includes rent, interest and
profit.
Qno10 Define natural rate of unemployment?
Ans:it is that rate of unemployment which exist at full
employment level of an economy.
Qno11.Define business cycle?
Ans :the ups and downs of business activity or fluctuations
in business activity is called business cycle or trade cycle.
Qno13.Distingusih between induced and autonomous
investment?
Ans:Induced investment is that investment which depends
on the level of incomes. As income increase investment
increase and vice versa. While as autonomous investment is
independent of the level of income.
Qno13.Discuss need or importance or significance of public
expenditure?
Ans :in modern economic activities public expenditure has
to play an important role. It helps to accelerate economic
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growth and ensure economic stability. Public expenditure

can promote economic development as follows:
1.it helps in promoting rapid economic development by
building socio-economic overheads e.g roads, railways etc.
2.it helps in the promotion of balanced regional growth by
investing on those areas where private sector is not
willing to investment
3.public expenditure helps in increasing social welfare .
4.it helps in equitable distribution of income.
5.public expenditure promotes employment and maintains
price stability
6.it helps in the development of agriculture and industrial
sector.

QNO14.Define foreign exchange market? Explain its

functions?
Ans :the foreign exchange market is the market where
foreign currencies are sold and purchased.
FUNCTIONS
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1.Transfer function: the most fundamental function of a

foreign exchange market is to effect transfer of funds from
one country to another.
2.credit function: financing of trade across different
countries , it is called the credit function.
3.Hedging function:It implies protection against the risk
related to variations in foreign exchange rate. Covering of
foreign exchange risk is known as hedging.
QNO15. Who supplies money in India or who are money
issuing authority in India?
Ans :in India the sources of supply of money in India are
govt. central bank and commercial banks. Finance minister
issues one rupee note and all the coins. Money is mainly
supplied by the RBI.RBI issues currency on the basis of
minimum reserve system
Qno15.Distinguish between money and high powered
money?
Ans .money consists of currency and demand deposits
while high powered money consist of currency and cash
reserves with the bank.
Qno16.write some definitions of money?
Ans:Following are some definitions of money:
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1.according to Walker, ‘Money is what money does ‘

2.according to Seligman,’ money is anything that possesses
general acceptability”
3.according to D.H.Robertson”anything which is widely
accepted in payment for goods or in discharge of other
kinds of business obligations is called money”
4.According to crowther ,”anything that is generally
acceptable as a means of exchange and at the same time
acts as a measure and store of value”.
Qno16.Distinguish between primary and secondary
deposits?
Ans :primary deposits are cash deposits with the
commercial banks by the people. These are reflected as a
part of demand deposits of the bank.
While as secondary deposits arise due to the loans by
provided by the banks. They are also called as derivative
deposits.
Qno17.Define credit multiplier?
Ans :credit multiplier measures the amount of money that
the banks are able to create in the form of deposits with
every bank. It is equal to ratio between demand deposits
and cash reserves.
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Credit multiplier= 1/CRR (CRR= cash reserve ratio)

QNO18 Define overdraft?
Ans :clients who have current account with the bank are
granted the facility of withdrawing more money than
actually lying in their accounts. it is called overdraft. this
facility is available to for short term to reliable persons.
QNO19.Distinguish between central bank and commercial
bank.?
Ans:following points highlights the difference between the
two:
1.central bank is an apex bank. On the other hand central
commercial bank works under the control of central bank.
2.commercial bank focus on profit maximization. central
bank focus on social welfare.
3.central bank controls credit while as commercial bank
contributes to credit.
4.commercial bank accepts deposits from the general bank
and advances loans to people. Central does not do that.
5.the central bank issues currency while as commercial
bank has no such authority.
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6.central bank is custodian of foreign exchange. a

commercial bank is not.
Qno20.Discuss the role of commercial banks in economic
development of a country?
Ans :the role of commercial banks in economic
development of a country is briefly discussed as under:
1.capital formation: banks play an important role in capital
formation, which is essential for economic development of
a country. They mobilize the small savings of the people
scattered over a wide area through their network of
branches all over the country and make it available for
productive purpose.
2.Development of rural sector: commercial banks help to
develop rural sector. They give liberal loans at concessional
rate of interest to farmers for the purchase of agricultural
inputs.
3.employment opportunities. these banks absorbs lot of jobs
to people. Not only this they play an important role in
setting up private enterprise for self employment and
business purposes.
4.economic stability: by increasing or decreasing money
supply as required they contribute to economic stability.
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QNO21define inflation?
Ans ;the continuous and general rise in prices which
decrease the purchasing power of money is called inflation