Short Answer TypeGiving reason, explain how the following should be treated in estimating national income:
Expenditure on fertilizers by a farmer.
Giving reason, explain how the following should be treated in estimating national income:
Purchase of tractor by a farmer
Explain the components of Legal reserve Ratio.
LRR (Legal Reserve Ratio) refers to that legal minimum fraction of deposits which the banks are mandate to keep as cash with themselves. The LRR is fixed by the Central Bank. It has two components:
1. Cash Reserve Ratio
2. Statutory Liquidity Ratio
Cash Reserve Ratio (CRR): It refers to the minimum amount of funds that a commercial bank has to maintain with the Reserve Bank of India, in the form of deposits. For example, suppose the total assets of a bank are worth Rs 200 crore and the minimum cash reserve ratio is 10%. Then the amount that the commercial bank has to maintain with RBI is Rs 20 crore. If this ratio rises to 20%, then the reserve with RBI increases to Rs 40 crore. Thus, less money will be left with the commercial bank for lending. This will eventually lead to considerable decrease in the money supply. On the contrary, a fall in CRR will lead to an increase in the money supply.
Statuary Liquidity Ratio (SLR): SLR is concerned with maintaining the minimum reserve of assets with RBI, whereas the cash reserve ratio is concerned with maintaining cash balance (reserve) with RBI. So, SLR is defined as the minimum percentage of assets to be maintained in the form of either fixed or liquid assets with RBI. The flow of credit is reduced by increasing this liquidity ratio and vice-versa. In the previous example, this can be understood as rise in SLR will restrict the banks to pump money in the economy, thereby contributing towards decrease in money supply. The reverse case happens if there is a fall in SLR, as it increases the money supply in the economy.
Long Answer Type| S.No. | Items | (Rs crores) |
| (i) | Factor income from abroad | 15 |
| (ii) | Private final consumption expenditure | 600 |
| (iii) | Consumption of fixed captial | 50 |
| (iv) | Government final consumption expenditure | 200 |
| (v) | Net current transfers to abroad | (-)5 |
| (vi) | Net domestic fixed capital formation | 110 |
| (vii) | Net factor income to abroad | 10 |
| (viii) | Net imports | (-)20 |
| (ix) | Net indirect tax | 70 |
| (x) | Change in stocks | (-)10 |
Explain the concept of ‘excess demand’ in macroeconomics. Also explain the role of ‘open market operation’ in correcting it.
Explain the concept of ‘deficient demand’ in macroeconomics. Also explain the role of Bank Rate in correcting it.
Explain the distinction between autonomous and accommodating transactions in balance of payments. Also explain the concept of balance of payments deficit in this context.
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