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.
Explain the concept of ‘deficient demand’ in macroeconomics. Also explain the role of Bank Rate in correcting it.
Deficient demand refers to the situation when aggregate demand (AD) is less than the aggregate supply (AS) corresponding to full employment level of output in the economy.
The situation of deficient demand arises when planned aggregate expenditure falls short of aggregate supply at the full employment level. It gives rise to deflationary gap. Deflationary gap is the gap by which actual aggregate demand falls short of aggregate demand required to establish full employment equilibrium.
Reasons for deficient demand:
1. Decrease in Propensity to consume: A decrease in consumption expenditure, due to fall in the propensity to consume, leads to deficient demand in the economy.
2. Increase in taxes: AD may also fall due to imposition of higher taxes. It leads to decrease in disposable income and, as a result, the economy suffers from deficient demand.
3. Decrease in Government Expenditure: When government reduces its demand for goods and services due to fall in public expenditure, it leads to deficient demand.
4. Fall in Investment expenditure: Increase in the rate of interest or fall in the expected returns lead to decrease in the investment expenditure. It reduces the AD and gives rise to deficient demand.
5. Rise in Imports: When international prices are comparatively less than the domestic prices, then it may lead to a rise in imports, implying a cut in the aggregate demand.
6. Fall in Exports: Exports may fall due to comparatively higher prices of domestic goods or due to increase in the exchange rate for domestic currency. This will lead to deficient demand.
Role of Bank Rate in Correcting Deficit Demand:
The term ‘Bank Rate’ refers to the rate at which central bank lends money to commercial banks as the lender of last resort. During deficient demand, the central bank reduces the bank rate in order to expand credit. It leads to fall in the market rate of interest which induces people to borrow more funds. It ultimately leads to increase in the aggregate demand.
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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