Solved question paper for EBE May-2019 (BBA 2nd)

Question paper 1

1. SECTION-A

   1. Discuss the scope of macro economics.
    

   Answer:

   The scope and subject matter of microeconomics can be described as follows

   1. Microeconomics is concerned with the behavior of the economics as a whole. It is the study of aggregate and average of the entire economy.

   2. The subject matter of microeconomics is income and employee infection money supply price level, investment and economic growth and development. The purpose of microeconomics is to present a logical Framework for the analysis of these phenomena.

   3. Having understood these phenomena the aim is how to ensure the maximum level of income and employment in the country.

   4. Since the subject matter of microeconomics resolves around determination of the level of a income and Employment therefore it is also known as theory of income and Employment.

2. 2. Discuss briefly the income method of measuring national income.

   Answer:

   There are three method to measure national income:-

   1. Product method:- Under this method we add the value of output product or service rendered by the different sectors of the economic during the year in order to calculate income.

   2. Income method:- Under this method we add all the income from employment and ownership of asset before taxation received from all the production activities in an economy. Thus it is also factor income method.

   3. Expenditure method:- This method measure the total domestic expanditure of the economy. It consists of two element viz consumption expenditure and investment expenditure.

3. 3. Explain the concept of full employment.

   Answer:

   Full employment is an economic situation in which all available level resources are being used in the most efficient way possible. Full employment embodies is the highest amount of skilled And unskilled Labor that can be employed with in an economy at any given time.

   The full employment is an ideal:- Probably unachievable situation in which anyone who is willing and able to work can find a job and unemployment is zero. It is a theoretical goal for economic policy makers to aim for the rather than an actually observed the state to the economy. In practical terms economist can define various level of full employment that are associated with low but non zero rate of unemployment.

4. 4. Describe the difference and relation between APC and MPC.

   Answer:

   APC referred to average propensity to consume which defines the amount of consumption in every one rupee of income for all level of income which can be more than income for example before the breakeven point APC >1.

   MCP I.e. Marginal propensity to consume referred to the ratio between the percentage change in consumption for every one rupee of change in the income. It cannot be more than one as it is percentage change in consumption when there is a some change in the level of income which cannot be more than the change in income.

6. 5. Describe the types of Inflation.

   Answer:

   There are different types of inflation:-

   1. Creeping inflation:- This is also known as mild inflection or moderate inflation. This type of inflation occurs when the price level persistently Rises over a period of time at a mild rate. When the rate of inflation is less than 10% and usually or it is a single digit to be a moderate inflation.

   2. Galloping inflation:- It mild inflation is not checked and if it is uncontrollable it may consume the practice of galloping inflation. inflation in double or triple digit range of 20,100 or 200 percent real is called galloping inflation. Many Latin America countries such as Argentina, Brazil have inflation rate of 50 to 100 % per year in the 1970s and 1980s.

7. 6. Give the qualities of good monetary system.

   Answer:

   The qualities of good mandatory system are:-

   1. General acceptability:- An important quality of money is an acceptance to all without any hesitation first off since the law declared money as the tender it has an enhanced quality of journal acceptability.

   2. Portability:- Apart from its acceptance e good money also require profitability full stop if people can carry over transfer money from one place to another then it is good money.

   3. Durability:- Acceptance and portability aside the material used to make money must least for a long time without losing its value. For example Ice and fruit are not good money since they lose their value quickly without the passage of time.

8. SECTION-B

   7. Define national income. Explain the different methods of measuring national income.

   Answer:

   National income is an uncertain term which is used to interchangeable output and national expenditure full stop on this basis national income has been defined in a number of ways full stop in common national income means the total value of goods and services produced annually in a country.

   Different methods to measure national income are

   1. Product method:- In this method national income is measured as flow of goods and service. We calculate money value of all final goods and service produce in a economy during a year for stop final good which are directly consumed and not used in father production process for stop goods which are further used in a production process are called intermediate goods. in the value of final good value of intermediate goods is already included therefore we do not count value of intermediate goods in national income otherwise there will be double counting of value goods.

   To avoid the problem of double counting we can use a value addition method in which not the whole value of a commodity but a value addition for example value of final good value of intermediate goods at each stage of production is calculated at these are summed up to arrive at GDP.

   The money value is calculated at market price so sum total is the GDP at market prices. GDP at market price can convert into by method discussing earlier.

   2. Income method:- Under this method national income is measured as follow of factor income. There are generally four factor of production labor capital land and entrepreneurship full stop labor get usage and salaries capital get interest land get rent and entrepreneurship get profit as their remuneration.

   Besides there are self employed person who employ their own labor as capital such as a doctor advocates CS etc. Their income is called mixed income full stop the sum total of all this factor income is called NDP at factor cost.

   3. Expenditure method:- In this method national income is measured as a flow of expanded. GDP is sum total of private consumption expenditure. Government consumption expenditure gross capital formation. (Government and private) ad net Exports (export-import).

9. 8. Discuss the classical theory of employment. Give its assumptions and criticism.

   Answer:

   The classical economist believed that there was always full employment in the economy in case of unemployment a journal cut in many ways would take the economic to the full employment level. This argument is based on the assumption that there is a direct and proportional relation between money wages and real wages.

   It’s assumption:-

   The classical theory of output and Employment is based on following assumptions:-

   1. There is existence of a full employment without a inflection.

   2. There is a laissez-fairs capitalist economy without government interferences.

   3. It is closely economy without foreign trade.

   4. There is perfect consumption in labor and product market.

   5. Labor is homogeneous.

   6. Total output of the economy is divided between consumption and investment expenditure.

   7. The quantity of money is given and money is only the medium of exchange.

   8. Wages and prices are perfectly flexible.

   9. There is perfect information on the part of all market participants.

   10. Money wedges are really wedges are directly related a proportional.

   11. It assume long run.

   Keynes's criticism of classical theory:-

   Keynes's vehemently criticized the classical theory of employment for its unrealistic injunction in his journal theory.

   1. Unemployment equilibrium:- Keynes rejected the fundamental of classical injunction of full employment equilibrium in the economy. He considered it as an realistic. He regarded full employment as a special situation in a capitalist ignore me is one of the under employment.

   This is because the capitalist society does not function according to sleeves law and supply Ave exceeds its demand. Does the existence of involuntary employment in capitalist economics prove that under employment equilibrium is a normal situation and full employment equilibrium is abnormal and accidental.

   2. Refutation of day's law:- Keynes refused say's law of market that supply always created it own demand. He maintained the all income earned by the factor honours would not be spent in buying product which they helped to produce.

   A part of the earned income is saved and investment are are direct functions. So when all earned income is not men consumption good and up position of it is saved their result in a definition of aggregate demand.

   3. Self adjustment not possible:- Keynes did not agree with the the Classic view that laisses faire policy e was essential for an automatic and self adjusting process of full employment equilibrium. He pointed out that the capitalist system was not automatic and self adjusting because of the non aggregation structure of its Society First of a there are two principal classes the rich and the poor.

   The rich process much quality but they do not spent their whole of it on consumption. The poor lack money to preserve consumption goods. Thus there is general defensive of aggregate demand in relation to aggregate supply which lens to overproduction and unemployment in the economy. This in the fact leads to the Great Depression.

11. 9. Critically examine the Keynesian model of income and employment.

    Answer:

    In Keynesian Theory employment depends upon effective demand. Effective demand results in output. Effective demand is determined by two factors the aggregate supply function and the aggregate demand function.

    Keynes's concept:-

    1. The level of employment is a directly related to the level of production or output.

    2. In a market economy planned spending on business output will determine the level of production. Business adjusts their level of production to accommodate demand for their products. Put simply supply adjust to demand concert this statement with say law which said supply creates its own demand.

    3. Since employment depend on production and production response to spending the level of employment in a market economy depend on the level of planned spending in economy.

    In fact Keynes turned other order around from the classical model in the classical model the labour market determined the level of output and therefore the position of a vertical aggregate supply curve.

    In the Keynesian model since there are unemployed resources they create supply caves will be horizontal not a vertical. Aggregate demands determine the level of output and the level of output determine the level of employment. Aggregate create demand which only determine the price level in the classical model now has the steering roll determining the level of real output.

    According to Keynes while consumption has an introduce for endogenous component investment is an autonomous or exogenous component of aggregate a Dzire expanded. These two function are known as the building block of the theory of income determination.

    The modern theory of income determination was presented in 1936 by JM ki NIS the great English economist. He stressed the influence of total demand in explaining the SH behavior.

    Fundamental assumption:-

    1. The potential output of an economy is nothing other than it full employment output this is the maximum output economy is capable for producing by utilizing all its existing resources of land labor power capital and Organization.

    2. Business frames will produce as much output is it necessary to satisfy the existing level of demand at certain prices. Output expression will continues until full employment is reached stop the implication it is clear as long as there is surplus capacity there is no need for prices to Rise so as to to simulate production if we make these two injunction we observe that the economy or national income depends on aggregate demand.

12. 10. Explain the psychological law of consumption. What are its implications ?

    Answer:

    Psychological law of consumption according to which as income increases consumption increases but not by as much as the increase in income will stop in other words marginal propensity to consume is less than one.

    The Keynesian concept of consumption function teams from the fundamental psychological law of consumption which state that there is a common tendency for people to spend more on consumption when income increases but not to the some extent as the rise in income because a part of the income is also saved. The community As a rule consumes as well as says a larger amount with a rise in income.

    Thus Keynes’s psychological law of consumption is based on the following proportions

    1. When the total income of a community increases the consumption expanded of the community will also increased but less proportionally.

    2. If followers from this is that and increases in income is always intu spending and saving.

    3. An increase in income will through lead to an increase in both consumption and saving this means that with an increasing income in the community we cannot normally expect our answer in total savings. A rising income will often to be a company's by increases Savings and a falling income by distress saving. The rate of increases and decreasing in savings will be greater in the interact stage of increases or decreases of income then in the largest trade for shop

    Implications of the psychological law of consumption:-

    1. Highlighting the critical importance of investment in an economy:- A virtual point in law is the tendency of people not to spend on consumption the full amount of an increases in their income. There is does a gap between aggregate consumption.

    Assuming the consumption function to be stable during a short running period the gap will wider with an increase in income.

    2. Reflecting say law:- It reflects say's law of market by indicating the demand defensive and possibility of over production.

    3. Explanation to the business cycle:- an explanation of the turning point of Business Cycle is also provided by the law of. The upper turning point from the Boom is caused by a collapse of the marginal fashion Si off capital occurring in the factor that consumption expenditure does not keep with increases in income during the prosperity phase.

    Similarly the law explains the revival of the marginal effective capital and the turning point of recovery from the depression on the basis of the factor that when income is reduce consumption exploitative does not decrease in the same proportion.

13. SECTION-C

    11. What do you understand by investment function ? Explain the factors which influence the level of investment in an economy.

    Answer:

    Factors like price wages and interest change the effective profit influences induced investment. Similarly demand also influences it. When income increases consumption demand also increases and to meet this investment increases in the ultimate analysis introduce investment is function of income.

    The classical economist opened that saving as well as investment both are a function of rate of interest. Savings is a directly function of rate of interest while investment is an introductory adjustment in the rate of interest being about in money market.

    Rate of interest is opportunity cost and investment. If investment or invest fund are borrowed one then it is cost and even if the expanded invests his own fund it is implicate cost for stop so whether to undertake an investment or not an investor compare rate of interest with return on investment.

    • If marginal efficiency of capital is lesser than rate of interest is advisable buy to undertake investment.

    • If marginal efficiency of capital is greater than rate of interest is advisable not to undertake investment.

    • If marginal efficiency of capital is equal to rate of interest consider other factor like a risk involved future expectations etc.

    Main factor influencing investments are:-

    1. Interest rate:- Investment is a financed either out of current savings or by boring. There for investment is strongly influenced by interest rate a full stop high interest rate make it more expensive to borrow. High interest rate also give a better rate of return form keeping money in the bank with higher interest rates for stock investment has a higher opportunity cost because of loss out the interest payment.

    2. Economic growth:- Frame investment to meet the father demand if demand is following them frame will cut off on investment for stop if economics prospect improve than frame will increase investment as they expect for the demand to write. There is strong empirical evidence that investment is cyclical. In a investment Falls and recover with economic growth.

    3. Confidence:- Investment is risky than saving frame will only invest if they are confident about future cost demand and economic prospects.

    4. Inflation:- In the long-term inflation rate can you have a influence on investment for stop higher and variable inflation trend to create more uncertainty and Confused with uncertainty over the future cost of investment if inflation is height and frame will be a certain at the final cost of investment they may also fear hi information could lead to economic uncertainty and future Downturn.

14. 12. What do you mean by monetary policy? How are the instruments of monetary policy used to meet the objective of price stability ?

    Answer:

    Monetary policy is the macroeconomic policy let down by the central bank. It involves management of money supply and internal rate and is the demand side economic policy used by the government of a country to achieve microeconomics objectives like in collection consumption growth and liquidity.

    The RBI implements the monetary policy through open market operations bank rate policy reserve system credit control policy moral and through many other instruments. Using any of these instruments will lead to change in the interest rate for the money supply in the economy. Monetary policy can be expansionary and contractionary in a nature. Increasing money supply and reducing interest rate indicate an expansionary policy. The rivers of this are a contractionary monetary policy.

    For instance liquidity is important for an economy to to Fir per growth. To maintain liquidity the RBI is a dependent on the monetary policy by purchasing bonds through open market operations the RBI introduced money in the system and reduce the interest rate.

    Prices stability:-

    Prices stability Is an economy means that the general price level in an economy does not change much over time. In other work price in neither go up or down there is no significant degree or inflection or deflection. The tormented Re policy refers to the decision that a government am 1 concerning interest rate and the supply of money in an economy. Monetary policy can be used to try to keep price stable. In the United State the the federal reserve which serves as the United States Central Bank assets that mandatory policy.

    Open market operations and price:-

    The Federal reserve can attempt to control inflation or deflation by engaging in open market operations of full stop in open market operations in the Federal Reserve buy or sell government securities on the open market to change the rate of growth in the country's money supply. At change in the country's money supply affect the general price level in an economy as we will soon see.

    The Federal Reserve can also try to stop disgracing price by using of open market transaction for stop instead of selling government securities it will buy them bag trading money supply and tend to reduce interest rate and lands compete for browsers. Demand will increase because of the increases availability of money which will introduce selling to increase product and increase their prize to gain more profit from the demand. Eventually the demand of money will equal to supply of it and general price level will stabilize the.

16. 13. Define inflation. What are the causes of inflation ? Suggest measures to correct it.

    Answer:

    Demand pull inflation cost push inflation supply side in selection open inflection repressed inflection hyperinflation are different type of inflection. Increases in public spending holding tax reduction price rise in international market address and causes of inflection. These factors led to rising prices. Also increasing demand causes higher price which leads to inflation.

    Causes of inflection are:-

    1. Primary causes:- In an economy when the demand for an economy exceed its supply then the excess demand purchase the price up on the other hand when the factor prices increase the cost of production rise to. This led to an increase in the price level as well.

    2. Increases in public spending:- In any modern economy government spending is an important element of the total spending. It is also an important determination of aggregate demand.

    3. Population growth:- As the population growth in increases the total demand in the market for the excess demand creates inflaction.

    4. Hoarding:- Hoarders are people or entries which stockpile comedies and do not release them to market. Therefore there is an artificially create demand SS in the economy. This also lends to inflection.

    5. Genius shortage:- It is possible that at a certain time the factor of production are shortage of supply. This effective production full stop there for supply is less than the demand leading to an increase in prices and inflation.

    6. Exports:- In an economy the total production must fulfill the domestic as well as a foreign demand. If it fails to meet their demand and export create inflection in the domestic economy.

    Measure to control or correct infection:-

    1. Monetary policy:- Higher interest rate reduced demand in the economy leading to lower economic growth and lower inflection.

    2. Control of money:- Monetarist argue through is a close link between the money supply and inflection there for controlling money supply can control inflection.

    3. Supply side policies:- Policies to increase the competitiveness and efficiency of the economy putting down word pressure on long term cost.

    4. Fiscal policy:- A higher rate of income tax could reduce spending demand inflationary pressure.

    5. Wages control:- Trying to control wages could in theory help to reduce inflammation ariy pressure. However apart from the 1970 has between rarely used

17. 14. Explain and illustrate the concept of multiplier. How its value is related with marginal propensity to consume ?

    Answer:

    In Economics a multiplier broader referred to an economic factor that when increase or change cause increases or changed in many other related economic variables. in term of gross domestic product the multiplier effect causes gain in total output to be greater than the change in a spending that cause it.

    The term multiplier is usually used in reference to the relationship between Government spending and total national income. Multiplies are also used in explaining fractional reserve banking known as the deposit multiplier.

    1. The investment multiplier:- An IM similarly referred to the concept that any increases in public or private investment has a more than proportional positive impact on aggregate income and the journal economy the multiple attempts to to an additional effect of a policy beyond those immediately measurable.

    The larger and investments multiplier the more efficient it is an creating and disturbing well throughout an economy.

    2. The equality multipliers:- the equality multipliers is are commonly used a financial ratio calculated by dividing a company's total asset value by total net equity. It is a measurable of financial leverage. Companies finance their operation with equity or debit so a higher equity multiplier indicate that a larger position of asset financing is attributed to debate. The quality multipliers are does a variation of the debit ratio in which the definition of debit financing include all liabilities.

    Multiplier is the ratio between increasing in income and increase in investment. It explains how many time is income increased by increasing the investment. Multiply change in income change in investment.

    There exist a direct relationship between MPC and the value of multiplier. Higher the MP simo will be the value of multiplier and voice one person expander tutor is another person's income. So increase in consumption result in to increase in income people spend a part of this increase income or consumption which depend on the value of MPC.

    K=1 /(1-MPC)

    Therefore, if K=4

    NPC=3/4 0.75