Assuming that increase in investment is Rs. 1000 crore and marginal propensity to consume is 0.9, explain the working of multiplier.
Value of MPC = 0.9
Initial increase in investment = Rs 1000 crore
So, every increase of Re 1 in the income, 0.9 part of the increased income will be consumed
Consumption= Rs 0.90
Saving= Rs 0.10
It is given that initial increase in investment of RS1000 will lead to change in the income by RS1000 in the first round. As MPC is 0.9 so people will consume 0.9 of the increased income i.e 900 thereby saving RS 100. In the next round due to increase in the consumption expenditure by RS 900 there will be an increase in income by RS 900. Then people will again spend the increased income i.e RS 810 and save the rest part of the income RS 90. similarly, this process will continue and the income will go on increasing as a result of the increase in consumption. The total change in the income is RS 10,000 and the change in the investment will be RS 1,000.
Distinguish between final goods and intermediate goods. Give an example of each.
|basis of difference||final goods||intermediate goods|
|usage||finals goods are those goods which are used by the consumers for final use.||intermediate goods are those goods which are not ready for final consumption and are used as raw materials for further production.|
these goods are not meant for sale.
|these goods are resold for further production.|
|example||sugar, salt purchased by consumer for final consumption.||cotton purchased by a textile producer for making cloth from it.|
Explain ‘non-monetary exchanges’ as a limitation of using gross domestic product as an index of welfare of a country.
How will you treat the following while estimating domestic product of a country ? Give reasons for your answer :
(a) Profits earned by branches of country’s bank in other countries
(b) Gifts given by an employer to his employees on independence day
(c) Purchase of goods by foreign tourists
The major limitation of GDP as an index of welfare of country is that GNP does not take into account those transactions that are not expressed in monetary terms.Non-monetary exchanges are not considered for the estimation of domestic income. These transactions such as domestic services rendered by house wife, kitchen gardening and a parent teaching her child. It is difficult to ascertain their market value and not rendered for the purpose of earning income. Though these services are rendered for development of a child and welfare of the family, it is not included in the gross national product. Thus, 'non-monetary exchanges' as a limitation of using gross domestic product as an index of welfare of a country.
i. Profits earned by branches of country's bank in other countries are not included in the estimation of national income because the branches of country's bank in other countries are outside the domestic territory.
ii. Gifts given by an employer to his employees on Independence Day are included in the domestic income because the gifts given by the employer are compensation in kind.
iii. Purchase of goods by foreign tourists is included in the estimation of domestic income because they are exports and part of domestic income.
Explain the store of value function of money.
State the meaning and components of money supply.
People keep their wealth in the form of money because money is the most liquid form of wealth. Savings in the form of money is maintained for purchasing commodities in the future. In this case, the values of commodities are being stored. Hence, money acts as a store of value. Wealth is stored in terms of goods as there was no money in existence. . For example, wheat and rice do not possess durability i.e. their quality deteriorates with passage of time. Storage of good requires time and efforts. Hence, it is not practically possible to store people’s purchasing power.
justification for store value of money:
i)money is the most and widely accepted as a common medium of exchange
ii)there is no loss in the value of money over time
iii)money can be stored conveneintly and does not involve any cost
iv) money abolished barter system and all the problems related to it.
Money supply means the total stock of money in circulation, in form of coins and currency notes, among the people at a particular point of time in an economy.
There are various types of money supply and these are labeled as M0, M1, M2 and M3, according to the type and size of the account in which the instrument is kept.
M1 = Currency with the public + demand deposits with the commercial banks + deposits kept by commercial banks with the Reserve Bank.
or M1 = C + DD + OD
Demand deposits are not for any specific period of time. They can be withdrawn as and when required. Demand deposits are chequeable deposits.
2. M2 = M1 + Savings deposits with Post office Savings banks.
Saving deposit includes the features of both demand and term deposits.
3. M3 = M2 + Term deposits in Commercial banks. Term deposits are always for a specific period of time. They cannot withdraw
money as when required. They are not chequeable deposits as we cannot sign a cheque against these deposits.
4. M4 = M3 + Savings with the Post office other than in the form of National Saving Certificate.
Explain how government budget can be used to influence distribution of income ?
The government's budget and budgetary policy can influence distribution of income in the following ways:
i. The government uses the taxation and expenditure policy, through the taxation policy the government imposes the higher taxes on higher income group and through expenditure policy it transfers purchasing power in the hands of the poor section of societies in terms of subsidies etc.
ii. The government regularises the activities of the private sector to provide social benefit to the poor.
iii. A tax is a legally compulsory payment imposed by the government on households and producers. The government imposes taxes on socially unsafe goods such as alcohol and tobacco. Thereby resources will be shifted to the production of socially essential goods.
iv. The government also provides subsidies for necessary goods such as wheat, rice and sugar. Thereby the resources are shifted from the
production of goods for the rich to the production of goods for the poor.
Explain ‘banker to the government’ function of the central bank.
Explain the role of reverse repo rate in controlling money supply.
Central Bank acts as Banker to the government in the following ways:
(i)The central bank is also a banker, agent and financial advisor to the government.
(ii)As a banker, it manages government accounts across the country. It buys and sells securities on behalf of the government as an agent of the government.
(iii)It helps the government in framing policies to regulate the money market by acting as an advisor to the government.
(iv) it also grants short term loans and credit to government.
Reverse repo rate is the rate at which the RBI or the central bank borrows from the other commercial banks. It plays an effective role in controlling the money supply. For example, an increase in the average repo rate implies that the banks will get higher rate of interest from the RBI on their lendings. As a result the banks will lend more to the RBI and less to the public. Thus, resulting in a decrease in the money supply. Similarly, in the case the RBI decreases the reverse repo rate the banks will get a lower rate of interest on their borrowings. as result they can lend more to the public which will in turn increase the money supply.
Why does the demand for foreign currency fall and supply rises when its price rises ? Explain.
The demand for foreign currency fall and supply rises when its price rises because domestic goods become cheaper. It induces the foreign currency to increase their imports from the domestic country. When the price of the foreign currency increases, this implies that the domestic currency has increased in terms of the foreign currency.in other words, it means that the domestic currency has depreciated.
For example, if price of 1US dollar rises from Rs 53 to Rs 59, it implies that exports to US will increase as Indian goods will become relatively cheaper. It will raise the supply of US dollars.
Explain the basis of classifying taxes into direct and indirect tax. Give examples
Direct tax refers to those taxes which are directly imposed individuals and companies and are paid directly by them to the government. For example, income tax- the tax burden cannot be shifted to any other person, wealth tax, corporate tax etc.
Indirect tax refers to those taxes which are imposed on an individual but are paid by another person either partly or wholly. Hence, the impact and incidence of taxes are on different persons. Examples of indirect taxes are custom duties, excise dutiesetc. Indirect taxes are those taxes in which the tax burden can be shifted to another person. For example, the sales tax where the tax burden is shifted by the seller of the commodity to the buyer. Example: Direct tax- income tax and indirect tax- sales tax
Calculate (a) net domestic product at factor cost and (b) gross national disposable income :
|s. no.||in RS|
|1||Private final consumption expenditure||8000|
|2||Government final consumption expenditure||1000|
|5||Consumption of fixed capital||60|
|6||Gross domestic fixed capital formation||500|
|7||change in stock||100|
|8||Factor income to abroad||40|
|9||Factor income from abroad||90|
|12||Net current transfers to abroad||(-)30|
i. NDPFC = Private final consumption expenditure + Government final consumption
expenditure + Gross domestic fixed capital formation + Change in stock + Exports -
Imports - Consumption of fixed capital – Net indirect taxes
= 8,000 + 1,000 + 500 + 100 + 70 - 120 - 60 - (700 - 50)
= Rs 8,840 crores
ii. Gross National Disposable Income = NDPFC + Net indirect taxes - Net current transfers
to abroad + Factor income from abroad - Factor income to abroad
= 8,840 + (700 - 50) - (-30) + 90 - 40
= Rs 9,579 crores
An economy is in equilibrium. From the following data about an economy calculate autonomous consumption.
(i) Income = 5000
(ii) Marginal propensity to save = 0.2
(iii) Investment expenditure = 800
Income (Y) = 5000
Marginal propensity to save (s) = 0.2
Therefore, marginal propensity to consume = 1 -0.2 =0.8
As we know that
C =Y -1
C = 5000 – 800 = 4200
C= C' - cY
4200 = C' + 0.8(5,000)
C' = 200
Thus, autonomous consumption is 200.