# Bihar Board 12th Economics Model Question Paper 3 in English Medium

Bihar Board 12th Economics Model Papers

## Bihar Board 12th Economics Model Question Paper 3 in English Medium

Time : 3 Hour 15 Min
Full Marks : 100

Instructions

1. Candidates are required to give their answers in their own words as far as practicable.
2. Figures in the right hand margin indicate full marks.
3. 15 minutes of extra time has been allotted for the candidate to read the questions carefully.
4. This question paper has two sections : Section-A and Section-B.
5. In Section-A, there are 50 objective type questions which are compulsory, each carrying 1 mark. Darken the circle with black/blue ball pen against the correct option on OMR Sheet provided to you Do. not use Whitener/Liquid/Blade/Nail on OMR Sheet, otherwise the result will be treated as invalid.
6. In Section-B, there are Non-objective type questions. There are 25 Short answer type questions, out of which any 15 questions are to be answered. Each question carries 2 marks. Apart froms this, there are 08 Long answer type questions, out-of which any 04 of them are to be answered. Each questions carries 5 marks.
7. Use of any electronic device is prohibited.

Objective Type Questions

Question No. -1 to 50 have four options provided, out of which only one is correct. You have to mark, your selected option, on the OMR-Sheet. Each questiion carries 1 (one) mark. [50 x 1 = 50]

Question 1.
Who was the father of Economics ?
(a) J. B. Say
(b) Mai thus
(c) Asam Smith
(d) Joan Robinson
(c) Asam Smith

Question 2.
How many types of elasticity of demand are these ?
(a) Three
(b) Five
(c) six
(d) seven
(b) Five

Question 3.
Which of following is a source of prodution ?
(a) Land
(b) Labour
(c) Capital
(d) All of these
(d) All of these

Question 4.
According to whom, Economics is a science of human welfare ?
(a) Marshall
(b) samuelson
(c) J. S’. Mill
(a) Marshall

Question 5.
Market price is found is ___________
(a) Long period market
(b) Short period market
(c) Very long period market
(d) None of these
(a) Long period market

Question 6.
For Giffin goods price elasticity of demand is ___________
(a) Negative
(b) Positive
(c) Zero
(d) None of these
(b) Positive

Question 7.
Long-run production funtion is related to ___________
(a) Law of demand
(b) Law of returns to scale
(c) Elasticity of demand
(d) Law of increasing returns
(a) Law of demand

Question 8.
If the price of goods rises by 60% but supply increases by only 5%, the supply of goods will be ___________
(a) Elastic
(b) Inelastic
(c) Highly elastic
(d) perfectly inelastic
(b) Inelastic

Question 9.
Which is the central problem of economy ?
(a) Distribution of resources
(b) effective utilisation of resources
(c) Economic development
(d) All of these
(a) Distribution of resources

Question 10.
In which economy decision is taken on the basis of price mechanism ?
(a) Socialist
(b) Capitalist
(c) Mixed
(d) All of these
(b) Capitalist

Question 11.
The cycle which increases first and after being constant starts to reduce is called?
(a) APP
(b) MPP
(c) TPP
(d) All of these
(b) MPP

Question 12.
The quantity of goods which seller is ready to sell in a market at fixed price and time is called ?
(a) Supply
(b) Demand
(c) Elasticity of supply
(d) Elasticity of demamd
(a) Supply

Question 13.
Central bank of India is ___________
(a) Reserve Bank
(b) State Bank
(c) Public Bank
(d) Shere market
(a) Reserve Bank

Question 14.
Which of the following is not a fixed cost ?
(b) Interest
(c) Cost of raw material
(d) Rent of the factory
(c) Cost of raw material

Question 15.
Which of the following is a component of budget receipts?
(a) Revenue Receipts
(b) Capital receipts
(c) Both a and b
(d) None of these
(c) Both a and b

Question 16.
Which one of the following services is included in secondary sector ?
(a) Insurance
(b) Banking
(d) Manufacturing
(d) Manufacturing

Question 17.
Demand curve generally slopes ___________
(a) Upward from left to right
(b) Downward from left to right
(c) Parallel to X-axis
(d) None of these
(b) Downward from left to right

Question 18.
On which factor does Keynesian theory of employment depend ?
(a) Effective demamd
(b) Supply
(c) Production
(d) None of these
(a) Effective demamd

Question 19.
Financial year in India is ___________
(a) April 1 to March 31
(b) January 1 to December 31
(c) October 1 to September 30
(d) None of these
(a) April 1 to March 31

Question 20.
Credit money is increased when CRR ___________
(a) Falls
(b) Rises
(c) Both a and b
(d) None of these
(a) Falls

Question 21.
Narsimham committee is related to ___________
(a) Tax reforms
(b) Banking reforms
(c) Agriculture
(d) Infrastucture reforms
(b) Banking reforms

Question 22.
Which type of currency is issued by central bank ?
(a) Currency notes
(b) Credit money
(c) Coin
(d) All the above
(a) Currency notes

Question 23.
In which year Reserve Bank of India was established ?
(a) 1947
(b)1935
(c)1937
(d)1945
(b)1935

Question 24.
The expenditiure which do not create assets for the government is called ___________
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Both a and b
(d) None of these
(a) Revenue Expenditure

Question 25.
For a change in which of the following there is no change in demamd ?
(a) Change in price
(b) Change in Income
(c) Change in Taste and Fashion
(d) none of these
(a) Change in price

Question 26.
With an increase income consumers decrease the consumption of which goods ?
(a) Inferior goods
(b) Normal goods
(c) Giffin goods
(d) Both A and B
(b) Normal goods

Question 27.
The ability of satisfying human want in goods is called its ___________
(a) Productivity
(b) Satisfaction
(c) Utility
(d) Profitability
(a) Productivity

Question 28.
Mention the name of the curve which shows economic problem ___________
(a) Production curve
(b) Demand curve
(c) Indifference curve
(d) production possibility curve
(d) production possibility curve

Question 29.
Consumer behaviour is studied in ___________
(a) Micro Economics
(b) Income Analysis
(c) Macro Economics
(d) None of the above
(a) Micro Economics

Question 30.
Which of the following is studied under Micro Economics ?
(a) Individual unit
(b) Economic Aggregate
(c) National Income
(d) None of the above
(a) Individual unit

Question 31.
Utility is related to ___________
(a) Usefulness
(b) Morality
(c) Satisfaction of human wants
(d) All of above
(d) All of above

Question 32.
For luxury good the demand is ___________
(a) Inelastic
(b) Elastic
(c) Highly elastic
(d) perfectly inelastic
(c) Highly elastic

Question 33.
In production function, production is a function of ___________
(a) Price
(b) Factors of production
(c) total expenditure
(d) None of these
(b) Factors of production

Question 34.
At which time all the factors of production may be changed ?
(a) Short run
(b) Long run
(c) Very long run
(d) All the three
(b) Long run

Question 35.
Banking Ombudsmen scheme was announced in the year ___________
(a) 1990
(b)1995
(c)1997
(d)2000
(b)1995

Question 36.
The alternative name of opportunity cost is ___________
(a) Economic cost
(b) Equilibrium price
(c) Marginal cost
(d) Average cost
(a) Economic cost

Question 37.
Central bank controls credit through ___________
la) Bank Rate
(b) Open market operations
(c) CRR
(d) All the above
(d) All the above

Question 38.
Who regulates money supply ?
(a) Government of India
(b) Reserve Bank of India
(c) Commercial Banks
(d) Planning commission
(b) Reserve Bank of India

Question 39.
For keynes, investment implies ___________
(a) Financial Investment
(b) Real Investment
(c) Both a and b
(d) None of the above
(c) Both a and b

Question 40.
What is the duration of a Budget ?
(a) Annual
(b) Two years
(c) Five years
(d) Ten years
(a) Annual

Question 41.
The factor(s) of the production is/are ___________
(a) Land
(b) Labour
(c) Capital
(d) All of these
(d) All of these

Question 42.
Who invented the economic science ?
(a) Kautilya
(b) Carlyle
(c) William Morris
(d) Charles Dickens
(a) Kautilya

Question 43.
Who said ” Economics is the science of scarcity” ?
(a) Robbins
(c) Marshall
(d) J.S. Mill

Question 44.
Who said “Economics is the science of material welfare” ?
(a) Robbins
(b) Marshall
(c) J.B.Say
(d) Senior
(c) J.B.Say

Question 45.
On which basic has structure of economic problem been installed ?
(a) Unlimited wants
(b) Limited resources
(c) Both (a) and (b)
(d) None of these
(c) Both (a) and (b)

Question 46.
ForGiffen goods price elasticity of demand is ___________
(a) Negative
(b) Positive
(c) Zero
(d) none of these
(b) Positive

Question 47.
The main reason of operating the Law of Diminishing Return is ___________
(a) Scarcity of factors
(b) Imperfect substitution between factors
(c) Both (a) and (b)
(d) none of these
(a) Scarcity of factors

Question 48.
When supply increases more with a result of small increase in price,the nature of supply will be ___________
(a) elastic
(b) inelastic
(c) perfectly elastic
(d) perfectly inelastic
(a) elastic

Question 49.
Which of the following is the formula for measuring the elasticity of demand ?
(a) Proportionate change in demand /Proportionate change in price
(b) Proportionate change in price/ Proportionate change in demand
(c) Change in demand/Change in price
(d) None of these
(a) Proportionate change in demand /Proportionate change in price

Question 50.
To which factor are economic problems basically related ?
(a) Choice
(b) Consumer’s selection
(c) Firm selection
(d) None of these
(a) Choice

Non-Objective Type Questions

Question no. 1 to 25 are Short answer type questions. Answer any 15 out of them. Each question carries 2 marks. (15 x 3 = 30)

Question 1.
Explain any two factors that affect price elasticity of demand.
Factors affecting elasticity of demand are discussed below:

1. Substitutes : When substitute of any goods is available, then demand elasticity of such goods is highly elastic because when price of these goods increases, substitutes are used in place of it. In the same way, on decrease in price of these goods, use of substitutes decrease. Tea, coffee, gas, sugar etc. are examples of subsitutes.
2. Alternative uses : When goods could be used in only one way, its demand will be in elastic and when it would be used in many ways, its demand will be elastic, eg. coal has so many used-it can be used industries houses ralways etc. Demand of coal for railways in in elastic but for house purpose, its cheeper alternative goods like wood cooking gas etc. could be used in place of it.

Question 2.
What is mean by law of increasing returns ?
Law of increasing returns : Increasing returns to scale occurs when a given percentage increase in all factor inputs (in some constant ratio) causes proportionately greater increase in output. In this way, if factors of production are increased by 10%, then production increases more than 10%.

Percentage incress in all factors

Increasing returns to scale occur due to division of labour and Percentage increase in all factors (Factor ratio remains constant) specialisation. Division of labour and specialisation increases productivity of labour. Due to increasing in size of the scale more efficient and specialised machines are used which give increasing returns to scale.

Question 3.
Where is the equilibrium price determined ?
Commodity Price : Demand-Supply Equilibrium : Buyer wants to give the least price while the seller wants to take the maximum price of the commodity. Bargaining takes price between both the parties and at last, the price of the commodity is determined at the price where both demand for and supply of the commodity become equal. This price is called equilibrium price.

In following Fig. price determined of the commodity by demand and supply forces has been shown. Demand curve DD and supply curve is cuts each other at point E where price OP is determined. This price OP (or EQ) shows the equilibrium price.

Question 4.
What is the difference between Micro¬Economics and Macro-Economics ?
Micro Economics :

1. In Micro Economics economic problems at individual level are studied e.g., one consumer, one producer, one firm
2. Individual and individual behaviour is studied of Macro Economics.
3. Micro economic analysis assumes macro parameter as constant.

Macro Economics :

1. Macro Economics studies the economic units of the entire economy, e.g., national income, total consumption, general price level.
2. Society as a whole and its behavior is studied in Macro Economics.
3. Macro Economic analysis assumes parameters as constant.

Question 5.
State the qualities of good money.
Follwoing are the qualities of good money :

1. Utility : The metal with which coin is made, must bear the feature of utility. The metal must easily be accepted. Gold and silver are such metals which possess utility.
2. Port ability: The metal with which coin is made, can easily be transferred from one place to antother. Gold and silver coins bear this feature also.
3. Durable : Money is saved by people and hence coin should be made of such metal which is durable from saving purpose.
4. Divisibility : Money metal should be divisible without my loss in its value. Gold and silver are such metals having the feature of divisibility.
5. Homogeneity : All units of money should be homogeneous.
6. Economy : Minting cost of coin should be minimum and the depreciation in the coin should be least.
7. Stability of Value: Money metal should be stable in value i.e. price fluctuation in the metal of coin should be minimum.
8. Liquidity: Money metal should be liquid in nature, metal should easily be converted into coins and coins can again be converted into metal on easily
9. Cognisibility: Metal should easily be identified. Take coins on easily be traced out if metal of money is cognisible. Gold and silver are such metals having full cognisibility.

Question 6.
State the merits & demerites of Direct Taxes.
Merits of Direct Takes :

1. Direct takes ensure certainity. The government and the tax payer both know fairly definitely what amount are to be paid.
2. Direct taxes are elastic whenever the government needs more revenue it may raise the rate of direct taxes.
3. Direct taxes are progressive in nature. It increases with the increases in money income.
4. Direct Taxes are supposed to have on educative elfect. The tax payer is concious that provides funds to the

government and is interested in seeing that they are properly used.
Demerits of Direct Taxes :

1. Tax evasion is possible in case of direct taxes.
2. It has narrow base or limited area of functioning.
3. Directed taxes are numerious accounting and other formalities, have to be observed and partly, because large lump sum tax payment have to be made.

Question 7.
What is meant by Balance of Trade ?
Balance of Trade : It is defined as the difference between exports and imports of goods. It takes into account only those transactions arising out of exports and imports of goods (the visible items). It does not consider the exchange of services between the countries.
Symbolically, BOT = Vx – Vm where Vx = value of exports.
VOT = value of imports.

Question 8.
What are the different types of economic system ?
Economic system is a structure of such institutions with which all economic activities are operated in the society. Every economy is based on an economic system which can be divided into three categories :

1. Capitalist Economy or market Economy
2. Socialist Economy or planned Economy
3. Mixed Economy.

Question 9.
What is Indifference Curve ?
Indifference curve explains the consumer’s behaviour related with the combination of two goods and this consumer’s behaviour is explained with the help of “Indifference schedule or Indifference set.” various combinations of two goods giving equal satisfactions to the consumer become the component of ‘Indifference schedule’. When indifference schedule is represented on a graph paper, we get indifference curve.

In the words of watson “An indifference schedule is the list of combination of two commodities, the list being so arranged that a consumer is indifferent to the combinations preferring more of any other”.

Question 10.
What is elasticity of demand ?
Elasticity of Demand : Elasticity means tendency of increasing or decreasing elasticity depends on two factors-‘Nature of Goods’ and the ‘pressure on it’, when goods undergoes greater changes in response to less pressure, it is said to be ligaly elastic and when it produces less change in response to high pressure, it is said to be less elastic.

According to Marshall. “The Elasticity of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, or diminishes much or little for a given rise in price.”

Elasticity of Demand (ed) = $$\frac { Proportionate changes in quality demanded }{ Proportionate Change in price }$$

Question 11.
What do you mean by Giffen goods ?
Giffin Goods : Giffin goods are those inferrior goods whose income effect is negative and price effect is positive. Law of demand is not applicable in case of Giffin Goods.

Question 12.
Explain the static and dynamic functions of money.
Static Functions: Static functions are those which help the operation of the economy but those do not create movement in the economy. In this respect, the functions of money like medium of exchange, measure of value, store of value and measure of deferred payment are the static functions of money because these functions do not create any movement in economy.

Dynamic functions: The dynamic functions are those by which money acheively influences the economic system through its impact on price level interest rates, value of production distribution of wealth and income.

Question 13.
How is central bank different from commercial bank ?
Distinction between central bank and commercial bank.
Central Bank :

1. It is an apex bank in the country which controls all other banks.
2. Its main objective is to operate banking system in national interest. It does not work with profit earning profit.
3. Leaving USA where 12 central Banks are working every country has only one central Bank.
4. It is subordinate to the government.
5. Apart from a few specific situation, it has no direct dealing with public.

Commercial Bank :

1. It is a part of banking and works under the control of central Bank.
2. Its main objective is to earn maximum profit with banking operations.
3. A country has a number of commercial banks.
4. These banks are basically banks of share holders. It may or may not be state owned.
5. It directly deals with general public.

Question 14.
What do you mean by Returns to Scale ?
Returns to scale refers to long run production function when none of the factors of production remains fixed. All factors of production become variable and they can be changed also. Scale production can be changed in the long run. Internal and external economies are obtained in production due to technical improvement, division of labour, specialisation etc. These economics are not permanent and they get converted to diseconomies in the continuous process of production.

In the initial stage of production, these internal and external economics give ‘Increasing Returns to scale’ but when they get converted to diseconomies at later stage of production law of diminishaing returns comes into existence. According to watson Returns to scale refers to the behaviour of total output as all inputs are varied in the same proportion and is a long run concept”.

Question 15.
What is the shape of demand curve of a firm in perfect competition ?

When a demand schedule is graphically represented, we get a demand curve. It shows the inverse relationship between price and quantity demanded. Due to this inverse relationship, demand curve slopes downward from left to right. It shows that higher the price, lower will be the quantity demanded and vice versa.

Question 16.
What is the difference between trade balance and balance of payments ?
Difference between Balance of trade and Balance of payments.

1. Balance of trade refers to the difference between exports and imports of goods by a country in a year.
2. It is a narrow concept as it is a component of balance of payments.
3. It is only a partial record. Hence, it is not a true indicator of economic relations with other countries.
4. It may be favorably or unfavorable.

Balance of payments :

1. Balance of payments is a statement of all economic transactions between die residents of a country and rest of the world during a year
2. It is a wider concept
3. It is a complete record of economic transactions with the rest of the world. Hence, it provides a true picture of the economy of a country with the rest of the world.
4. From accounting viewpoint; it is always balanced.

Question 17.
What is equilibrium price ?
Equilibrium price is the price at which demand and supply of a commodity are equal. It determined by the interaction of the forces of demand and supply.

Question 18.
What is the difference between substitute goods and complementary goods ?

1. Substitute goods : Substitute goods means is that goods which is used for each other for very one object, e.g. Tea-coffee.
2. Complementary goods : Complementary goods means that goods which used together to fullfil a particular object, e.g. scooter petrol.

Question 19.
By which percentage method elasticity of demand is measured ?
Percentage method :

Question 20.
Expain the concept of Average Revenue.
Average revenue is found by deviding the total revenue by total number of production
AR = $$\frac { TR }{ Q }$$ , Where AR = Average Revenue
TR = Total Revenue, Q = Quantity

Question 21.
What are the causes of change in supply ?
The law of supply states the there is direct relation between price and supply of a commodity other things remaining the same. The assumptin other things remaining the same means that factors other price of the goods, determining supply remains unchanged.
Causes of changes in supply :

1. Extention of supply
2. Contraction supply.

Question 22.
Explain different types of market.
There are mainly three types of market :

1. Perfect competition : Perfect competition refers to a market situation in which there are large number of buyers and sellers. The seller sell homogenous product at single uniform price through out the market.
2. Monopoly: Monopoly refers to a market situation in which there are no close substitute of the commodity sold by the monopolist.
3. Monopolistic competition : Monopolistic competition refers to a market situation in which there are large number of buyers and sellers. The sellers sells closely related but not identical.

Question 23.
Why is short run average cost curve U- shaped ?
The total revenue curve of a price taking firm is an upward-slopping straight line because it changed at a constant rate. The total revenue curve of a price-taking firm passes through the origin (point U) because the total revenue of the firm becomes zero at zero output.

Question 24.
Explain firm’s equilibrium in Non-perfect competition.
A consumer is said to be in equalibrium when he is spending his given income on various goods in such a way that maximases his satisfaction.

Question 25.
Explain the causes of downward sloping in demand curve.
Negative slope of demand curve is due to following reasons :-

1. Law of diminishing marginal utility Law of demand is based on law diminishing marginal utility. According to it marginal utility of a goods diminishes as an individual consumes-more units of a goods.
2. Increase in purchasing power or Income Effect When price of a goods power of consumer increases due to which he can maintain his previous level of consumption with less expenditure. In this way, at lower prices, more goods could be purchase. On the contrary, when price of a goods increase real income of consumer decreases due to which his consumption decreases.
3. Substitution effect Substitution effect is due to inverse relation between price and demand of a goods. Whenever there is a change in the relative prices of goods a rational consumer will be induced to substitute the relatively dearer commodity by buying the cheaper one.
4. Change in consumer number Change in price also effects the number of consumers. When price decrease, number of consumers increases as cheaper goods can be purchased by many consumers, i.e. even those consumers start purchasing goods which were not using it earlier due to high price.

Question no. 26 to 33 are Long answer type questions. Answer any 4 of them. Each question carries 5 marks. (4×5 = 20)

Question 26.
What do you mean by credit control ? Explain the methods of credit control by Central Bank.
The most important function of the central bank is to control the credit activities of the commercial banks. Credit control refers to the increase or decrease in the value of credit money in accordance with the monetary requirement of the country. More expansion of credit money than necessary leads to the situation of inflation, greater contraction of credit money, on the other hand, might create a situation of deflation. Central bank seeks to contain credit money within reasonable limits. With Central bank keeping credit under proper control, stability in general price level and increase in output and employment can be achieved in the country.

Methods of credit control-In modern times central bank uses two types of controls to regulate the credit created by commercially banks. The following are the method of credit control by a central bank.

A. Quantitative methods-The object of the quantitative controls is to regulate the amount of bank advance. It include the following methods-

I. Bank rate-The bank rate is the rate at which the central bank discounts the first class securities of its member bank. Thus the bank rate is also called discount rate. As the central bank is only the leader of the last resort, the bank rate is normally higher than the rate of interest. The rate of interest means the rate which the commercially banks pay to the depositions a grant their deposits.

The bank rate has close relation with the market rate of interest. The central bank increases the bank rate to increase the supply of money. If there is need for contraction in money supply the bank rate is reduced. Thus the central bank control the quantum of total money supply in the country by making change in the bank rate.

This method of credit control will, however, succeed only if the other rates in the money market follow bank rate.

II. Open market operation-The cnetral bank of the country controls the supply of money through open market operations. According to De-Kock. “In the wider sense, open market operation may be held to cover the purchase or sale by the central bank in the market of any kind of paper in which it deals – whether government securities or other securities. But in the narrow sense, open market operation has come to be applied only to the purchase or sale of government securities both long term & short term.” ‘

In this operation the central bank makes sale and purchase of securities with the commercial banks of the country. If supply of money is needed to be increased the central bank starts purchasing securities from bank and if supply is needed to be reduced it starts selling securities to the banks.

III. Change in reserve ratio-It is one of the methods of credit control by the central bank. The commercial banks deposit certain percentage of their fixed deposit with the central bank & on that basis they create credit in the economy. When theh central bank desires to restrict credit, it may raise the reserve ratio and if it wants to expand the credit, the reserve ratio will be the low.
But this method of credit control has some limitations-

1. The bank may have very large excess of reserves with them
2. A large inflow of gold in payment against export may increase the banks lending power
3. The government policy of keeping interest rate low may discourage the increase in reserve ratio.

IV. Liquidity ratio-The banks are required to maintain certain resources in a liquid form under the provision of the Act. This is known as statutory liquidity ratio. The charge in this ratio will cause a change in the money supply.

B. Qualitative methods-Under this system following method of credit control is adopted-

V. Credit rationing-Under this method the central bank makes rationing of credit by distribution in different sectors, of the economy according to the requirements. This method of controlling credit can be justified only as a measure to meet exceptional emergencies. Central bank makes credit rationing by three following methods-

1. By abolition of rediscounting facilities
2. By restriction of limit of re-discounting
3. By fixing the quota of the loan provided by the bank to different industries.

VI. Moral persuasion-Under this method the central bank may request and persuade member banks not to use their loans for speculation or non-essential activities. This become obligatory to the banks to follow the directions of the central bank. This method of credit control may succeed on the fulfilment of the following condition.

1. The central bank should have full control on commercial banks & money markets.
2. The money market of the country should be developed & organised.
3. There should be good relation between the Central Bank & other bank.

VII. Publicity-The credit creation is based on the state of mind of the people. Sometimes the Central Bank makes publicity and educates the people to control credit expansion. For this purpose central bank issues weekly statistics, periodical review of the money market condition, etc.

VIII. Selective credit control-Sometimes some selective measures such as differential discount rates, regulation of consumers credit, fixing of margin are adopted for the purpose of credit control.

IX. Direct action-The central bank is so powerful that it may take direct action against the commercial banks for their activities which lead to credit expansion for example-Central Bank refuses to rediscount for banks whose credit policy is not in accordance with the wishes of the central bank of whose borrowings from the central bank are excess in relation to their capital & reserve. The commercial banks by the central bank. In this regard various legislative measures are taken to regulate the credit.

From the above methods of credit control, it is clear that every method has its own importance. But in modern economy the importance of quantitative methods is increasing constantly.

Question 27.
What do you mean by Exchange Rare ? Explain the main factors which determine exchange rate.
Foreign exchange rate : Meaning-Foreign exchange rate refers to the rate at which one unit of currency of a country can be exchanged for the number of units of currency of another country. In other words, it is the price paid in domestic currency in order to get one unit of foreign currency. In other words, exchange rate expresses the ratio of exchange between the currencies of two countries. Hence, exchange rate is the price of a currency expressed in terms of another currency.
Important definitions:

1. According to Sayers, “The price of currencies in terms of each other are called foreign exchange rate.”
2. According to Crowther, “The rate of exchange measures number of units of one currency which is exchanged in the foreign market for one unit or another.”

Causes of changes in exchange rates-The market or the current rate of exchange is subject to fluctuations due to changes in demand and supply of foreign exchange in the foreign exchange market. Some of the important factors which cause fluctuations in the rate of exchange are given as following-

1. Change in trade-The demand and supply of foreign exchange is influenced by changes in exports and imports. If exports exceed imports, demand for domestic currency increases so that rate of exchange moves in its favour. But, if imports exceed exports, the demand for foreign exchange increases and the rate of exchange will move against the country.
2. Capital movements-Short-term or long-term capital movements also influence the exchange rate. For example, if there is a capital flow from USA for investment in India, the demand for Indian currency will increase in the foreign exchange market. As a result, the rate of exchange of India rupee in terms of US dollar will rise.
3. Sale and purchase of securities-The stock exchange transactions, i.e., the sale and purchase of foreign securities, debentures, shares, etc., influence the demand for foreign exchange, and thereby, the exchange rate.
4. Bank rate-The bank rate also influences the exchange rate. If bank rate is raised, more funds will flow into the country from abroad to earn high interest rate. As a result supply of foreign currency increases and the rate of exchange moves against the foreign exchange. Converse will be the case if the bank rate falls.
5. Speculative activities-Speculation in the foreign exchange market also influences the exchange rate. If the speculators expect a fall in the value of foreign currency, they will sell that currency. As a result, rate of exchange will move against foreign currency and in favour of home currency.
6. Political conditions-If there is political stability, strong and efficient administration foreign investment increases in the country. The demand for domestic currency will increase and the exchange rate will move in favour of the country.

Question 28.
Distinguish between Market Economy and Planned Economy.
Following are the differences between market economy and planned economy.
Market Economy:

1. Goods and services go where they are most in demand and force market responds quickly to peoples wants and wide variety of goods services
2. No need for and overriding authority to determine allocation of goods and services,
3. Producers
and Consumers are free to make large profit greater efficiency innovation
4. Producers and consumers are free to make changes to sait their aims,
5. It is not competent to providing certain services
6. It creates inequility of incomes.

Planned Economy :

1. There is more equal distribution of wealth and income
2. Production is for need rather than profit
3. Long term plans can be made taking into account a range of further needs such as population changes and the environment
4. Government is the employer of most workers and tells then how to do their jobs
5. Planners of ten get things wrong shortages of surpluses of some goods
6. People are poorly motivated.

Question 29.
What do you mean by Price Elasticity of Demand ? How is it measured ?
Price elasticity of demand may be defined as the percentage change in the quantity demanded of a commodity divided by the percentage change in price of that commodity. According to Marshall. “The elasticity of demand in a market is great or small accerding as the amount demanded increase much or little for a given full in price, or diminishes much or little for a given rise in price.”

However, we can say that price elasticity of demand (PEO or Ed) is a measure used in economics to show the responsiveness, or elasticily, of the quantity demanded of a goods or service to a change in its price. More precisely it gives the percentage change in quantity demanded in response to a one percent change in price

It can be measured as follow :

1. Percentage or Propotionate Method : According to method, for calculating the elasticity of demand, proportionate change in demand is divided by proportionate or percentage hange in price.
Ed : (-) Proportionate change in Demand / Proportionate change in price.
2. Point Method : This method is also called ‘Geomatric method’, to calculate elasilicity of demand at any point on the Demand curve, tangent to that potet is drawn, on the basis of geomatric method.
Ed : (=) Lower Segment / upper segment
3. Total Expenditure Method : In this method, amount of changes and direction of changes in total expenditure are determined as a result of change in price of commodity.
Total expenditure : commodity price x commodity Demand.

Question 30.
Define supply. Mention the causes which determine the supply of a commodity.
Meaning of supply : Supply of goods refers to those quantities which a seller is ready to sell at various prices at a certain point of time. Like demand, supply is also related with a certain time and price.

Definitions :

1. According to Thomas, “The supply of goods is the quantity offered for sale in a given market
at a given time at various prices”
2. According to Mayers, “We may define supply as a schedule of the amount of goods that would be offered for sale at all possible prices at any one instant of time, or during any one period of time (e.g., a day, a week and so on) in which conditions of supply remain the same.”

Following are the causes of supply of commodity :

1. Price of the commodity : There is a direct relationship between price of a commodity and its quantity supplied.
2. Price of Related Goods : The supply of a commodity is also indirectly affected by the price of related goods.
3. Prices of production factors : supply of a commodity is also affected by the price of factors used in the production of the commodity. It the factors price decreases, cost of production also declines, accordingly supply increases.
4. Technological level: Technological level and its change also affects supply of the commodity. Improvement in the techniques of production reduces cost of production.
5. Number of Firms : Market supply of a commodity also depends upon number of firms in the market increase in the number of frims results in the increase in the market supply.
6. Goal of the firm : If the goal of the firm is to maximise profits, more quantity of the commodity will be offered at higher price.
7. Expected Future price: Expected price change in the future also affects the supply. If the producer expects price of the commodity to rise in the near future, current supply of the commodity should reduce. On the other hand, the price is expected to fall in future, current supply increase.
8. Government policy : “Taxation and subsidy” policy of the government also affects market supply of the commodity. Increase in taxation tends to reduce the supply, while subsidies tends to reduce the producer to provide greater supply of the commodity.

Question 31.
How is National Income estimated by Value Added Method ?
Measurement of national income by value added method. (1) value Added Method or Product Method
First Step : Identification and Classification of Productive Enterprise : At the very first step, we are to identify and classify various productive enterprises of an economy. Broadly speaking, we can classify the economy into the following three sectors :

1. Primary Sector
2. Secondary Sector
3. Tertiary Sector.
1. Primary Sector : It is that sector which produces goods by exploiting natural resources like land, water,
forests, mines, etc. It includes all agricultural and allied activities, such as fishing, forestry, mining and quarrying.
2. Secondary Sector : This sector is also known
as manufacturing sector. It transforms one type of commodity into another, using men, machines and materials. For example, manufacturing of cloth from cotton or sugar from sugarcane. ‘
3. Tertiary Sector : This sector is also known as service sector which provides useful services to primary and secondary sectors. It consists of banking, insurance, transport, communication, trade and commerce etc.
Second Step: Calculation of Net Value of Output: To estimate the net value added in each identified enterprise in first step the following estimates are calculated :

• Value of Output
• Value of Intermediate Consumption
• Consumption of Fixed Capital, i.e., Depreciation.

Value of output is worked out by multiplying the amount of goods and services by each enterprise with their market prices. Value of intermediate consumption calculated by using the prices paid by the enterprises. Consumption of fixed capital is also estimated as per rule and regulations.
To arrive at the net value added by the enterprise, we have to deduct the following items from the value of output:

• Value of Intermediate Consumption
• Consumption of Fixed Capital
• Net Indirect Taxes.

In short, Value Added = Value of Output – Intermediate Consumption – Net Indirect Taxes. By adding the net value added by all the producing enterprises in an industrial sector, we obtain net value added to that industrial sector. The sum total of net values added by all the industrial sectors in the domestic territory of the country, gives us the Net Domestic Product at Factor Cost.

Thrid Step : Calculation of Net Factor Income from Abroad : The third and final step in the estimation of national income is to estimate the net factor income earned from abroad and add it to the net domestic product at factor cost. This gives us the national income.
In shot, NNPFC = NDPFC + NFIA

Question 32.
Define central bank and explain its functions.
Meaning of Central Bank : Central Bank of a country is the apex monetary institution which works as a pivot for the entire banking system in the economy. Central Bank as an apex monetary institution not only plays the leadership role in banking system but also puts a control on commercial banks. Central Bank frames and executes the monetary policy and is responsible for maintaining stability and economic growth in the economy.

Definitions: According to Samuelson, “Central Bank has one function. It operates to control economy, supply of money and credit.”

According to De Kock, “A Central Bank is a bank which constitutes the apex of the monetary and banking structure of its country.” According to R.P. Kent, “Central Bank is an institution, charged with the responsible of imaging the expansion and contraction of volume of money in the interest of general public welfare.”

In modern times, a proper definition of Central Bank can be given as follows :
“Central Bank is an apex institution in a country’s monetary and banking system which develops, regulates and controls the currency and credit in the country with the objective of economic development and economic stability.”
Functions of Central Bank :

(a) Monopoly in Note Issue: In modern times, central bank alone has the exclusive right to issue notes in every country of the world. The notes issued by the central bank are unlimited legal tender throughout the country.
According to De Kock, “Almost everywhere the privilege of note issue is associated with the origin and development of central banking.”

Central Bank of the country enjoys monopoly right of note issue which has following merits :

1. It imparts uniformity in monetary system
2. Control on paper currency becomes simple
3. Central bank can change money supply, i.e, maintain the flexibility in system
4. It raises public confidence in the monetary system in the economy
5. Central bank can easily control the credit creation in the economy
6. It becomes successful in maintaining internal or external price stability.

(b) Banker, Agent and Financial Advisor to the Government: Like general public government also needs various services and the central bank performs the same functions as banker to the government as a commercial bank provides to its customers. As a ‘Banker, Agent and Financial Advisor’ to the government central bank performs the following functions :
(1) As a Banker to the Government: As a banker to the government, central bank performs following functions :

• Accounts : It maintains accounts of government transactions and submits the details to the government from time to time.
• Payments : It makes payments of all government expenses from government account.
• Debt and Loans : It arranges loans from national international level and deposit them in government account.
• Payments of Debt and Interest: It arranges and makes payments of interest and the amount of matured debts on behalf of the government.
• Loan to Government: It provides short-term loans to the government whenever it is required.

(2) As an Agent to the Government: It acts as an agent to the government. All dealings of economic transactions are performed by government on behalf of the central bank. Besides, central bank represents the government in various international institutions and conferences.

(3) As a Financial Advisor to the Government: Central bank advises to the government on various economic policies like deficit financing, devaluation, trade policy, foreign exchange, etc.

(c) Bank of Banks : It performs the functions of a banks to all other banks in the country. Central bank has almost the same relation with all. others banks as a commercial bank has with its customers. Central bank keep part of the cash balance of all commercial banks as deposit with a view to meeting liabilities of these banks in times of crises.

(d) Lender of the Last Resort: As banker to the banks the central bank acts as the lender of the last resort.
In other words, in case the commercial banks fail to meet their financial requirements from other sources, they can, as a last resort, approach to the central bank for loans and advances. The central bank assists such banks through discounting of approved securities and bills of exchange.

(e) Custodian of Foreign Exchange Reserves : Central bank also acts as custodian of foreign exchange reserve It is helpful in eliminating difficulties of balance of payments and in maintaining stable exchange rate. For minimising fluctations in foreign exchange rate, central bank buys or sells foreign exchange in the market.

(f) Function of Clearing House : Central bank also performs the function of a clearing house. By cleaming house function of central bank we mean settling the claims of various banks against each other with least use of cash.

(g) Credit Control: The most important function of the central bank is to control the credit activities of the commercial banks. Credit control refers to the increase or decrease in the volume of credit money in accordance with the monetary requirement of the country. More expansion of credit money-than necessary leads to the situation of inflation.

(h) Development Related Functions : For promoting economic development central bank performs following functions :

1. It extends organised banking system and established new financial institutions
2. It ensures sufficient money supply for development activities
3. Adopts cheap money policy for inducing investment.

(I) Other Functions :

1. collection of statistics
2. Relations with International Financial Institution
3. Survey of Banks
4. Arranging seminars.

Question 33.
What is law of diminishing marginal utility ? Explain its importance and limitations.