Ans. 4 (c), 2013.<\/strong><\/a><\/p>\n(b)<\/strong> Commercial banks, firstly keep certain amount to RBI as a cash Reserve. Then the banks lend loans to their customers, invest in production houses as well as invest in Gilt edged markets i.e. Govt. Bonds, Debentures etc. to increase their profits.<\/p>\n(c)<\/strong> Money supply refers to the amount of money held by the public in an economy at any given time.
\nIncreased money supply results in increased purchasing power thereby increasing the aggregate demand, which in turn increases the prices of the goods and services.<\/p>\n(d)<\/strong> When the price of a commodity falls, the consumer can buy a larger amount of the commodity with his given money income. Or, he can buy the same amount of the commodity as before and at the same time he would be able to save some money. In other words, a fall in the price of the commodity results in an increase in real income i.e. purchasing power of the given money income increases.<\/p>\n(e)<\/strong> There is a contraction in demand.
\nIn case I, there is a fall in demand as same price.
\nIn case II, there is a same demand at fall in price.<\/p>\nSECTION-II \u00a0(60 Marks)<\/strong><\/span>
\n(Answer any four<\/strong> questions from this section)<\/em><\/p>\nQuestion 5:<\/strong>
\n(a)<\/strong> (i) Define price elasticity of demand. Give the percentage formula of price elasticity of demand.
\n(ii) As a result of 5% fall in the price of a good, its demand rises by 12%. Find the price elasticity of demand.
\n(iii) What type of good is this? Give reasons.
\n(iv) Give two examples of such a good. [7]<\/strong>
\n(b)<\/strong> Give reasons for the following:<\/p>\n\n- Product differentiation is practiced in monopolistic competition.<\/li>\n
- Creeping inflation is regarded essential for economic growth. [8]<\/strong><\/li>\n<\/ol>\n
Answer:<\/strong>
\n (a)<\/strong><\/p>\n(i)<\/strong> Price elasticity of demand may be defined as the degree of responsiveness of quantity demanded of a commodity in response to change in its price.
\n
\n(iii)<\/strong> Relative elastic Demand i.e. Normal good.
\nThis type of good is highly price elastic demand because a small change in price leads to high change in demand.
\n(iv)<\/strong> (a) Television as consumer durable.
\n(b) Milk as consumer non-durable.<\/p>\n(b)<\/strong><\/p>\n\n- Product differentiation is the key element in monopolistic competition. Under monopolistic competition firms produce differentiated products. The products produced by different firms are similar but not identical. They are substitutes for each other, but not perfect substitutes. These products are not homogeneous, but they are not altogether different as well. They are similar enough to be regarded as same commodity, but are sufficiently different so that consumers tend to regard them different from each other.<\/li>\n
- When the price level increases at a very slow rate, say at the rate of only 2% to 2.5% per annum, it is called creeping inflation. This type of inflation is not of much concern so it is not essential for economic growth.<\/li>\n<\/ol>\n
Question 6:<\/strong>
\n (a)<\/strong> Which of the following statements are correct and which are incorrect? Give reasons to support your answer.<\/p>\n\n- To control inflation, the central bank lowers the bank rate.<\/li>\n
- Uniform price is a key feature of a perfectly competitive market.\u00a0[7]<\/strong><\/li>\n<\/ol>\n
(b)<\/strong><\/p>\n\n- Define money.<\/li>\n
- What is legal tender money? **<\/li>\n
- Explain how money facilitates production and trade. ** [8]<\/strong><\/li>\n<\/ol>\n
Answer:<\/strong>
\n (a)<\/strong><\/p>\n\n- Bank rate is that discount rate at which the central bank of any country rediscounts the bills of exchange submitted by any commercial bank to take loans from the central bank. To check inflationary pressures, the RBI increases the bank rate. This discourages the investors to take loans from commercial banks, resulting in fall in investment in the economy, leading to a control on inflation. Similarly the RBI keeps the Bank rate at a low level to check the deflationary situation.<\/li>\n
- In perfectly competitive market, the price is determined by the industry i.e. by all the firms taken together, by the forces of market demand and supply. An individual firm takes the price as given and he has to take decision about the amount of output to be sold on that price. Thus the firm under perfect competition is assumed to be price taker rather than price maker.<\/li>\n<\/ol>\n
(b) 1.\u00a0<\/strong>In any country, the commodity which acts as a medium of exchange, the measure of value, the standard of deferred payments and as a store of value, is defined as money.<\/strong><\/p>\nQuestion 7:<\/strong>
\n (a)<\/strong> State one important function of capital.
\nDifferentiate between:<\/p>\n\n- Capital and wealth. **<\/li>\n
- Capital and income. **<\/li>\n
- Capital and land. [7]<\/strong><\/li>\n<\/ol>\n
(b)<\/strong> In less developed countries, the state has an active role to play in establishing social justice. Explain four methods adopted by the Government to fulfil this objective. [8]
\n<\/strong>Answer:<\/strong>
\n (a) It expands employment:<\/strong> Since capital expands production, it also expands employment. Thus, if we are to reduce the volume of unemployment in the country, we must pay attention to capital formation in a country.
\nDifferentiate between:
\n<\/p>\n(b)<\/strong><\/p>\n\n- Various poverty alleviation programmes to generate income and income earning assets for the rural and Urban poor people.<\/li>\n
- Redistribution of agricultural lands among the landless farmers through the implementation of Land Ceiling Acts.<\/li>\n
- Redistribution of Income, by charging high Income tax on rich people and spending on poor people by providing facilities like schools, hospitals and employment.<\/li>\n
- By providing law and order in the country so as to develop confidence in the minds of domestic and foreign Investors for the purpose of providing development of the economy.<\/li>\n<\/ol>\n
Question 8:<\/strong>
\n(a)<\/strong> What is meant by economic depression? **
\nFor each of the following measures, state whether they are taken during inflation or depression. Give reasons for your answer.<\/p>\n\n- Direct taxes are reduced and public expenditure is increased.<\/li>\n
- Government securities are sold by the central’ bank in the open market operations.<\/li>\n
- Credit rationing. [7]<\/strong><\/li>\n<\/ol>\n
(b)<\/strong> Monopolistic competition is a perfect blending of monopoly and perfect competition. Explain. [8]<\/strong><\/p>\nAnswer:<\/strong>
\n (b)<\/strong> Monopolistic competition is a market situation where there is a large number of buyers and sellers selling closely related goods but surely not homogeneous. For example, take the case of tooth-paste, most commonly used commodity. There are many tooth pastes in the market, such as Colgate, Cibaca, Close-up, Pepsodent, etc. These are all closely related goods but there may be difference in quality, colour, size, taste etc. which separate them from one another. Each producer has a monopoly control over his own product but competition exists between them. Thus, we find a combination of monopoly and competitive elements. Similarly, we can take another example of toilet soap. There is a large number of firms producing different brands or varieties of soap, e.g. Hamam, Pears, Lifebuoy, Lux, Nirma etc. Each firm enjoys monopoly over its brand. For instance, Hindustan Lever Ltd. has monopoly over the trademark Lux. But there is a competition among these firms producing soap. Similarly, markets of so many products like tea, shoes, shampoo, watches, clothes, fans, bulbs, T.V. sets, pens, sewing machines, washing machines, etc. are example of monopolistic competition.<\/p>\nIn real life, neither perfect competition nor monopoly are seen. Almost, every market seems to have the features of both perfect competition and monopoly, Economists call such a market as monopolistic competition or imperfect competition. The concept of monopolistic competition was developed by an American economist Prof. Chamberlin while Mrs. Joan Robinson gave the concept of imperfect competition. According to Leftwitch, \u201cMonopolistic competition is a market situation in which there are many sellers of a particular product, but the product of each seller is in some way differentiated in the minds of consumers from the product of every other seller.\u201d
\nThus, monopolistic competition is the blending of two extreme markets viz. perfect competition and monopoly.<\/p>\n
Question 9:<\/strong>
\n (a)<\/strong> Read the extract given below and answer the questions that follow:
\nBusiness Telegraph, 23rd July 2008.
\nInflation is already at a 13 year high of 11.91%. Any further hike in fuel prices could trigger more price pressures and cause widespread discontent. The Government raised the price of petrol by Rs. 5 per litre, diesel by Rs. 3 per litre and domestic LPG cylinder by Rs. 50.<\/p>\n\n- How does a rise in fuel price create inflation in a country?<\/li>\n
- What is cost push inflation?<\/li>\n
- Explain the effect of inflation on the following:\n
\n- Fixed income group in the economy.<\/li>\n
- Distribution of income.<\/li>\n
- Capital formation.<\/li>\n
- Producers. [10]<\/strong><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n
(b)<\/strong> What is meant by privatization of public sector units?
\nExplain four benefits of privatization. [5]<\/strong><\/p>\nAnswer:<\/strong>
\n (a)<\/strong><\/p>\n\n- Fuel is a commodity used in the production of any commodity directly or indirectly. Fuel can be used directly as raw material and indirectly for transporting goods. Therefore rise in fuel price means, increase in cost of production of all the commodities and hence it creates inflation.<\/li>\n
- The price level rises because of increasing cost of production. Rise in prices of factors of production like wage cost, rent etc. are the cost push factors.<\/li>\n
- Effect of inflation:\n
\n- Fixed income group in the economy:<\/strong> Real income means purchasing power of the money income. Fixed income group includes pensioners, Government servants etc. who get a fixed money income. This class is worst affected by inflation because the purchasing power of their fixed income goes on decreasing with rising prices.<\/li>\n
- Distribution of income:<\/strong> The profit incomes of the businessmen entrepreneurs increase during inflation, while the real income of the common salaried people declines. Thus, the pattern of income distribution in the economy or society becomes unequal.<\/li>\n
- Capital Formation:<\/strong> A majority of the governments of under developed countries have to take to deficit financing so as to make up for the growing expenditure on economic development. As a result, there is a lot of increase in prices.<\/li>\n
- Producers:<\/strong> This class gains by inflation because: (1) They produce more to meet rising demand (2) They stock large quantity of raw material bought at pre-inflation prices (3) Wages increases less than the prices. (4) Those entrepreneurs and traders who repay the loans borrowed earlier stand to gain.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n
(b)<\/strong> Privatization means the transfer of managerial control of any public sector units to any private enterprises or to any private corporate body.
\nBenefits of Privatization:<\/strong><\/p>\n\n- Creation of Competitive Environment:<\/strong> It is argued that if the ownership of public sector enterprises is transferred to private sector, then the monopoly of public sector enterprises will come to an end. But in fact, it will create a competitive environment which is must for industrial development of a country.<\/li>\n
- Clarity of objectives:<\/strong> In several PSUs, there is no clarity in corporate objectives. There exists a high degree of confusion among the managers of PSUs regarding the profit objectives as well as social responsibility. Many PSUs failed on both fronts. Thus, after privatization profit becomes the foremost social responsibility of PSUs.<\/li>\n
- Reduction of Budgetary Deficits:<\/strong> There would be no question of budgetary deficit, if the PSUs yield a 10% return on investment. But in reality it is not so. The budgetary deficit have risen sharply from year to year. For instance, the budgetary deficit which was Rs. 1417 crores in 1983-84, has increased to Rs. 1,51,000 crores in 2005-06. Therefore, the Government can control its staggering budgetary deficit by using the sale proceeds on the shares in PSUs.<\/li>\n
- Reduction in Public Debt:<\/strong> Prof. Hoouer has rightly observed, \u201cBlessed are the young for they shall inherit the national debt.\u201d A very common dictum is, \u201cBe not be made a beggar by banqueting upon borrowing.\u201d The public debt has increased in astronomical proportions. \u201cIn 1950-61 public debt was of Rs. 290 crores which in 2004-05 increased to Rs. 19,86,167 crores. This rapid increase in public debt is an alarming problem and if such a increase in public debt is not drastically reduced, India will have to face economic retardation.<\/li>\n<\/ol>\n
Question 10:<\/strong>
\n (a)<\/strong><\/p>\n\n- Explain three important functions of a Commercial Bank.<\/li>\n
- What is meant by Cash Reserve Ratio? [7]<\/strong><\/li>\n<\/ol>\n
(b)<\/strong><\/p>\n\n- Explain four factors on which efficiency of labour depends.<\/li>\n
- Give two causes of inefficiency ofIndian labour. [8]<\/strong><\/li>\n<\/ol>\n
Answer:<\/strong>
\n (a)<\/strong><\/p>\n\n