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
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.
Excess demand refers to the situation when aggregate demand (AD) is more than the aggregate supply (AS) corresponding to full employment level of output in the economy. It is the excess of anticipated expenditure over the value of full employment output.
Due to the excess of aggregate demand, there exists a difference (or gap) between the actual level of aggregate demand and full employment level of demand. This difference is termed as inflationary gap. This gap measures the amount of surplus in the level of aggregate demand. Graphically, it is represented by the vertical distance between the actual level of aggregate demand (ADE) and the full employment level of output (ADF). In the figure, EY denotes the aggregate demand at the full employment level of output and FY denotes the actual aggregate demand. The vertical distance between these two represents inflationary gap.
Following are the reasons for Excess Demand:
1. Rise in the Propensity to consume: Excess demand may arise because of increase in consumption expenditure due to rise in the propensity to consume or fall in propensity to save.
2. Reduction in taxes: It may also occur due to increase in disposable income and consumption demand because of decrease in taxes.
3. Increase in Government Expenditure: Rise in government demand for goods and services due to increase in public expenditure will also result in excess demand.
4. Increase in Investment. Excess demand can also arise when there is increase in investment due to decrease in rate of interest or increase in expected returns.
5. Fall in Imports: Decrease in imports due to higher international prices in comparison to domestic prices may also lead to excess demand.
6. Rise in Exports: Excess demand may also arise when demand for exports increases due to comparatively lower prices of domestic goods or due to decrease in the exchange rate for domestic currency.
Role of Open Market Operation in curbing the Excess Demand:
In order to curb the problem of excess demand, the government can opt for open market operations (OMO). Open market operations refer to sale and purchase of securities in the open market by the central bank. It directly influences the level of money supply in the economy. During excess demand, central bank offers securities for sale. Sale of securities reduces the reserves of commercial banks. It adversely affects the bank’s ability to create credit and decreases the level of aggregate demand in the economy.
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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