Explain the 'redistribution of income' objective of Government budget.  from Economics Class 12 CBSE Year 2011 Free Solved Previous Year Papers

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Economics

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CBSE Class 12

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CBSE Economics 2011 Exam Questions

Long Answer Type

31.

Explain the process of money creation by the commercial banks with the help of a numerical example. 


Process of Creation of Money:
The process of money creation by the commercial banks starts as soon as people deposit money in their respective bank accounts. After receiving the deposits, as per the central bank guidelines, the commercial banks maintain a portion of total deposits in form of cash reserves. The remaining portion left after maintaining cash reserves of the total deposits is then lend by the commercial bank to the general public in form of credit, loans and advances. Now assuming that all transactions in the economy are routed through the commercial banks, then the money borrowed by the borrowers again comes back to the banks in form of deposits. The commercial banks again keep a portion of the deposits as reserves and lend the rest. The deposit of money by the people in the banks and the subsequent lending of loans by the commercial banks is a never-ending process. It is due to this continuous process that the commercial banks are able to create credit money a multiple time of the initial deposits.
The process of creation of money is explained with the help of the following numerical example.

Rounds Deposits Received  Loans Extended Cash Reserves
Initial 10,000 8,000 2,000
Ist Round 8,000 6,400 1,600
IInd Round 6400 5,120 1,280
- - - -
nth Round - - -
Total 50,000 40,000 10,000

Suppose, initially the public deposited Rs 10,000 with the banks. Assuming the Legal Reserve Ratio to be 20%, the banks keep Rs 2,000 as minimum cash reserves and lend the balance amount of Rs 8,000 (Rs 10,000 – Rs 2,000) in form of loans and advances to the general public.
Now, if all the transactions taking place in the economy are routed only through banks then, the money borrowed by the borrowers is again routed back to the banks in form of deposits. Hence, in the second round there is an increment in the deposits with the banks by Rs 8,000 and the total deposits with the banks now rises to Rs 18,000 (that is, Rs 10,000 + Rs 8,000). Now, out of the new deposits of Rs 8,000, the banks will keep 20% as reserves (that is, Rs 1600) and lend the remaining amount (that is, Rs 6,400). Again, this money will come back to the bank and in the third round, the total deposits rises to Rs 24,400 (i.e. Rs 18,000 + Rs 6,400).
The same process continues and with each round the total deposits with the banks increases. However; in every subsequent round the cash reserves diminishes. The process comes to an end when the total cash reserves (aggregate of cash reserves from the subsequent rounds) become equal to the initial deposits of Rs 10,000 that were initially held by the banks. As per the above schedule, with the initial deposits of Rs 10,000, the commercial banks have created money of Rs 50,000.

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Short Answer Type

32.

Explain the role of the following in correcting 'deficient demand' in an economy: 
Bank rate


Bank Rate as an Instrument to Correct Deficit Demand:
Bank rate refers to the rate at which the central bank provides loans to the commercial banks. To curtail deficit demand, the central bank lowers the bank rate. This implies that cost of borrowing for the commercial banks from the central bank reduces. The commercial banks in turn reduce the lending rate (the rate at which they provide loans) for their customers. This reduction in the lending rate raises the borrowing capacity of the public, thereby, encourages the demand for loans and credit. Consequently, the level of Aggregate Demand in the economy increases and deficit demand is corrected.

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33.

Giving reasons classify the following into intermediate products and final products:
Chalks, dusters, etc. purchased by a school. 


Chalks, dusters, etc, are a final product as they are used for final consumption and does not undergo any further processing.

730 Views

34.

Explain the role of the following in correcting 'excess demand' in an economy: 
Bank rate


Bank Rate as an Instrument to Correct Excess Demand:
Bank rate is the rate at which the central bank provides loan to the commercial banks. To control excess demand, the central bank increases the bank rate. A rise in the bank rate increases the cost of borrowing for the commercial banks from the central bank. The commercial banks in turn raise the lending rate (the rate at which they provide loans) for their customers. This rise in the lending rate reduces the borrowing capacity of the public, thereby, discourages the demand for loans and credit. Consequently, the level of Aggregate Demand in the economy falls and excess demand is curtailed.

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35.

From the following data about a Government budget, find out (a) Revenue deficit, (b) Fiscal deficit and (c) Primary deficit:
                                                                                       (Rs. Arab)
(i) Capital receipts net of borrowings                                       95
(ii) Revenue expenditure                                                        100
(iii) Interest payments                                                            10
(iv) Revenue receipts                                                             80
(v) Capital expenditure                                                          110


(a) Computation of Revenue Deficit:
Revenue deficit= Revenue expenditure –Revenue receipts
Revenue expenditure = 100
Revenue receipts = 80
Revenue Deficit = 100-80 = Rs 20 arab

(b) Computation of Fiscal deficit:
Fiscal deficit = Revenue Expenditure + Capital Expenditure - Revenue Receipts - Capital Receipts net of Borrowings
= 100+110 – 80-95 = Rs 35 arabs

(c) Computation of Primary Deficit:
Primary deficit = Fiscal deficit - Interest payment
= 35- 10= Rs 25 arab.

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36.

Giving reasons classify the following into intermediate products and final products:
Furniture purchased by a school.


Furniture purchased by the school is a final product as it is used by the school for final consumption purposes and does not undergo any further processing.

449 Views

Long Answer Type

37.

Distinguish between collusive and non-collusive oligopoly. Explain how the oligopoly firms are interdependent in taking price and output decisions.


Oligopoly in a commodity market occurs when there are a small number of firms producing a homogenous commodity. There are two types of oligopoly, collusive and non-collusive.
In a collusive oligopoly, the firms may collude together and decide not to compete with each other and maximise total profits of the two firms together. In such a case the two firms would behave like a single monopoly firm that has two different factories producing the commodity. The firms cooperate with each other in deciding price and output.

In a Non-Collusive Oligopoly, firms compete with each other. Non-Collusive Oligopoly exists when the firms in an oligopoly do not collude and so have to be very aware of the reactions of other firms when making price decisions.

In an oligopoly, firms are interdependent because each firm takes into consideration the likely reactions of its rival firms when deciding its output and price policy. It makes a firm dependent on other firms. The firm may have to reconsider the change in the light of the likely reactions.

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Short Answer Type

38.

Explain the role of the following in correcting 'excess demand' in an economy: 
Open market operations


Open Market operations as an Instrument to Correct Excess Demand:
Open Market Operations refer to the buying and selling of securities either to the public or to the commercial banks in an open market. To curtail excess demand the central bank sells securities in the open market. By selling the securities in the open market, the central bank withdraws excess money from the economy. This results in a lower Aggregate Demand in the economy and excess demand is controlled.

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39.

Explain the role of the following in correcting 'deficient demand' in an economy: 
Open market operations.


Open Market Operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. To curtail deficit demand, the central bank purchases securities in the open market. With purchase of securities, the central bank pumps in additional money into the economy. With the additional money the level of Aggregate Demand in the economy increases. Thus, the deficit demand is corrected.

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40.

Explain the 'redistribution of income' objective of Government budget. 


Redistribution of income is one of the important objectives of government budget. The government through its budgetary policy attempts to promote fair and right distribution of income in an economy. This is done through taxation and expenditure policy. Through its taxation policy, government levies high rate of tax on rich people reducing their disposable income and lowers the rate on lower income group. Purchasing power extracted from the higher income groups in the form of taxes is then transferred to the poor sections of the society through the expenditure policy (subsidies, transfer payments, etc). Thus, with the help of taxation and expenditure policy in the budget, the government aims at redistribution of income such that a fair and just distribution of income is achieved in the society.

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