AD and AS Case study questions

Q.1 Amidst indications of an economic slowdown in the beginning of year 2020 came the challenge of Corona pandemic in Feb-Mar 2020, forcing the Government to impose a strict lockdown leading to near cessation of major economic activities across all sectors. The Finance Minister on 13th, 14th, 15thMay‘20 announced an economic package of ₹20 Lakh Crore for revival of Indian economy. Government of India‘s ₹20 lakh crore ‗AatmaNirbhar Bharat‘ package which aimed at reviving the economy, includes major fiscal measures like free food for the poor, direct cash transfer, money for rural job guarantee scheme, MGNREGA and credit guarantees to MSMEs. RBI has also taken steps to slash lending rates and add more liquidity into the markets. a. Indicate the impact of economic package on AD: a) Fall in Aggregate Demand b) Rise in Aggregate Demand c) Rise in general Price level d) No change in Aggregate Demand Ans: Bm b. To induce liquidity RBI must have: a) Increased Cash Reserve Ratio b) Reduced Repo Rate c) Increased Reverse Repo Rate d) Kept Statutory liquidity Ratio constant Ans: b c. The likely impact of ―Deficit Demand‖ under income and employment theory, in an economy are: a) Decrease in income, output, employment and general price level b) Decrease in nominal income, but no change in real output c) Increase in income, output, employment and general price level d) No change in output/employment but increase in general price level Ans: A d. The nature of fiscal policy undertaken by the government is _____________ and Monetary Policy is _____________ in its nature . a) Expansionary, Expansionary b) Expansionary, Contractionary c) Contractionary, Expansionary d) Contractionary, Contractionary Ans: A e. Finance Minister Nirmala Sitaraman held her first FSDC ( Financial Stability And Development Council ) meet amid Covid-19 outbreak to review the economy. The Supreme Court has given interim directions to the state governments to help resolve their blame game on stranded migrant workers. The Economic Times; October 10th, 2020 Q.2 State and discuss any two fiscal measures that may be taken by the Government of India to correct the situation indicated in the above news report. Ans: The situation suggests that Aggregate Demand is less than Aggregate Supply. Following two fiscal measures may be taken to control it: (a) Decrease in Taxes - The government under its fiscal policy may decrease the rate of taxes (both direct and indirect taxes). This will ensure greater purchasing power in the hands of general public. This will help to increase aggregate demand and remove the deflationary gap.

(b) Increase in Government Expenditure - The government may also increase its expenditure. This may increase the purchasing power in the hands of the general public which in turn may increase the Aggregate Demand in the economy to bring it equal to the Aggregate Supply. CASE STUDY Q.3 Why Does Unemployment Rise During a Recession? During a recession a rash of business failures occurs. Why these business failures happen is explained by various economic theories as a result of negative economic shocks, real resource or credit crunches brought about by previously over-expansionary monetary policy, the collapse of debt-based asset price bubbles, or a negative shift in consumer or business mood. Regardless of the cause, as the recession spreads, more and more businesses curtail their activities or fail altogether and as a result lay-off their workers. During a recession many businesses lay-off employees at the same time, and available jobs are scarce. When businesses fail, under the normal operation of markets the assets of the business are sold off to other businesses and the former employees are rehired by other competing businesses. In a recession, because many businesses across many different industries and markets are failing all at once, the number of unemployed workers looking for new jobs goes up rapidly. The available supply of labor available for immediate hire goes up, but the demand to hire new workers by businesses goes down. In a perfect, frictionlessly functioning market, economists would expect such an increase in supply and decrease in demand to result in a lower price (in this case the average wage) but not necessarily a lower total number of jobs once the price adjusts. However, this does not necessarily happen during recessions. The unemployed workers face difficulty in finding new jobs, and the result is a surplus of labor of many kinds that can persist for many months. The amount of unemployment that can be attributed to the job losses and delay in unemployed workers finding new jobs due to the recession (above and beyond the normal unemployment associated with day-today labor market turnover) is known as cyclical unemployment. Based on the above paragraphs, answer the following: Q1. Under usual circumstances, what happens when a business fail? (1) Q2. Which of the following is not the reason for business failure (1) A. Economic shock B. Sudden fall in consumer demand C. Loans granted on low interest rates D. High default rate on credit facilities Q3. ''Low wages are a consequence of recession' .State whether the statement is true or false (1) Q4. What can the govt do to overcome recession? (1) Ans1. Other business take over or buy assets and create jobs for the ones who lost in business failure Ans2. C Ans3. True

Ans4. Provide cheap loans or increase govt expenditure or lower taxes Q.4 Aggregate demand for petroleum products, including auto and industiral fuels, rose for the first time in seven months, as India's economy limped out of a pandemic-induced consumption slowdown. Consumption of petroleum and related products rose 2.5% year-on-year to 17,777 thousand metric tonnes in October, according to data from the Petroleum Planning and Analysis Cell. That‘s the first increase since March. The combined consumption of petrol, diesel, liquefied petroleum gas, naphtha and pet coke, among others, was 84.1% of last year‘s level in April- October. That reflects the prolonged impact of one of the harshest lockdowns in the world to contain the pandemic. Questions: Q.1. What do you mean by Aggregate Demand? Q.2. Write Down the Components of Aggregate Demand. Q.3. What is the equation of Consumption? Q.4. _____________ is the slope of Consumption Function. (APC/ MPC) Answers: 1.Aggregate Demand refers to the sum total of expenditure on the domestically produced goods and services during the period of an accounting year. 2. AD = C + I + G + (X-M) 3. C= C + bY 4. MPC Q.5 Read the following news report and answer Questions on the basis of the same: Coronavirus impact: RBI to infuse liquidity via OMO. With the heightening of Covid-19 pandemic risks, certain financial market segments have been experiencing a tightening of financial conditions. After reviewing the current liquidity and financial conditions, the central bank has decided to conduct open market operations on March 20,2020 in the form of purchase of an aggregate amount of Rs.10,000crores of the Government securities through a multi-security auction. The Economic Times; March 18th, 2020 1. Sale of securities by RBI is likely to……….. (increase/decrease) the demand for goods and services in the economy. (choose the correct alternative) 2. Purchase of securities by RBI will lead to…...........… (choose the correct alternative)

a. fall in aggregate demand c. rise in aggregate demand b. no change in aggregate demand d. fall in general price level 3. The difference by which actual Aggregate Demand exceeds the Aggregate Demand, required to establish full employment equilibrium is known as……….………(inflationary gap/deflationary gap). (choose the correct alternative) 4.The impact of ―Deficient Demand‟ under Keynesian theory of income and employment, in an economy are: (choose the correct alternative) a. decrease in income, output, employment and general price level b. decrease in nominal income, but no change in real output c. increase in income, output, employment and general price level . d. no change in output,employment but increase in general price level. ANSWERS 1-DECREASE 2- RISE IN AGGREGATE DEMAND 3-INFLATIONARY GAP 4- a Q.6 RBI Monetary Policy 2020: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept its repo rate unchanged at 4 per cent while maintaining an ‘accommodative stance’ as long as necessary at least through the current financial year, RBI Governor Shaktikanta Das announced on Friday Answer the following Questions: 1. What are the components of Aggregate demand in a closed economy? 2. When does the situation of inflation occurs

a)AD=AS b)AD>AS c)AD<AS 3. What are the policies RBI take to correct the problem of inflation? 4. The picture depicts (Excess demand/ Deficient demand) as comparison with the Sep-Oct month 5. List out any two monetary tools to correct the situation of inflation. Answers: 1. AD=C+I+G 2. AD>AS 3. Monetary policies 4. Excess demand 5. Bank rate, Repo rate, CRR and SLR are raised during inflation(Any two) Q.7 Read the following news report and answer Questions on the basis of the same : State Bank of India‘s latest edition of Eco wrap has noted that many households may have marginal propensity to consume less because several types of spending are not easily available amid social distancing constraints. Analysing the trends in deposits since the lockdown was first imposed, on May 25, the bank noted that the data revealed that deposits (savings, current and term) increased significantly during Lockdown-1 as people were apprehensive in the beginning about spending, and turned frugal. During Lockdown-2, there was a 25% decline in bank deposits, but term deposit accrual was very healthy. Business Standard; June 2nd, 2020 1. is the ratio of change in consumption to change in income. (APC/MPC) (Choose the correct alternative) 2. According to given article, many households may have marginal propensity to consume because several types of spending are not easily available amid social distancing constraints. (Choose the correct alternative) (a) no change (b) more (c) less (d) None of these 3. There was a 25% n bank deposits, but term deposit accrual was very healthy during lockdown 2. (increase/decline) (Choose the correct alternative) 4. The sum of APC and MPC is .................. (Choose the correct alternative) (a) 1 (b) 0 (c) both (a) and (b) (d) None of these ANSWERS Q no 1 APC Q. No. 2 v Less Q. No. 3 Declin iQ. No. 4 (D) Q.8 The inflationary gap represents the point in the business cycle when the economy is expanding. Due to the higher number of funds available within the economy, consumers are more inclined to purchase goods and services. As demand for goods and services increases but production has not yet compensated for the shift, prices rise to restore market equilibrium. When the potential GDP is higher than the real GDP, the gap is instead referred to as a deflationary gap.

The other type of output gap is the recessionary gap, which describes an economy operating below its full-employment equilibrium. A government may choose to use fiscal policy to help reduce an inflationary gap, often through decreasing the number of funds circulating within the economy. This can be accomplished through reductions in government spending, tax increases, bond and securities issues, and transfer payment reductions. Central banks also have tools at their disposal to combat inflationary activity. Q1. ―RBI starts selling Government securities to the public.‖ Name the monetary 1 measure. Q2. To correct the inflationary gap, the central bank should _____ the cash reserve ratio. 1 Q3. The gap by which actual aggregate demand exceeds the aggregate demand required 1 to establish full employment equilibrium is known as _______. 1 Q4. State the impact of excess demand on production and employment. 1 Q5. A fiscal policy measure to combat deflationary gap is _______ a) Increase in tax rates b) Increase in government expenditure 1 c) Increase in price level d) Decrease in government expenditure Answers: 1. Open Market Operation (OMO) 2. Increase 3. Inflationary gap 4 Production and employment remain unchanged, as economy is already operating at the full employment level 5. b) Increase in government expenditure Q.9 Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to rise in prices in the long run. Attempt the following questions (2-5) on the basis of this paragraph. ‗Equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources‘. 1. What type of unemployment does it signify? Ans: Voluntary unemployment 2. Define full employment. Ans: Refers to a situation when all those who are able to work and are willing to work at the existing wage rate, are getting work.

3. Name the principal components of aggregate demand in an open economy. Ans: Private consumption expenditure, Private Investment expenditure, Government expenditure ,Net exports 4. What is break even point? Ans: The point where total consumption is equal to the total income or the point where total saving is equal to zero. Q.10 India suffers first recession in decades India has plunged into recession for the first time in nearly a quarter of a century as the pandemic continues to weigh heavily on Asia's third biggest economy, which economists warn will struggle to recover from the slump. Official data published on Friday showed gross domestic product for the July-September quarter fell by 7.5% compared to the same period last year, when the economy was growing by more than 4%. That follows a record drop of nearly 24% in GDP in the April-June period, the first quarter of India's fiscal year. \"With a view to contain the spread of the Covid-19 pandemic, restrictions were imposed on the economic activities not deemed essential during the first quarter,\" the Indian Ministry of Statistics said in a statement on Friday. \"Though the restrictions have been gradually lifted, there has been an impact on the economic activities.\" While manufacturing returned to growth, the services sector suffered a second consecutive double- digit decline. Government consumption also fell sharply in part because of an \"inadequate fiscal response to the crisis,\" said senior India economist at Capital Economics, Shilan Shah. Source : CNN India, November 27 Answer the following questions 1. Refer to the given case, it would be appropriate fiscal policy for government to: a) decrease spending and increase taxes. b) increase spending and increase taxes. c) decrease spending and decrease taxes. d) increase spending and decrease taxes. Ans. d) increase spending and decrease taxes. 2. Deflationary gap is said to exist when: a) aggregate demand is more than the aggregate supply b) aggregate demand is less than the aggregate supply c) aggregate demand is more than the aggregate supply at full employment level. d) aggregatre demand is less than the aggregate supply at full employment level. Ans . c) aggregate demand is less than the aggregate supply at full employment level. 3. ―While manufacturing returned to growth, the services sector suffered a second consecutive double-digit decline. Government consumption also fell sharply in part because of an \"inadequate fiscal response to the crisis,\"

According to the given statement what will be the impact of increasing in manufacturing activities in the economy. (a) The C + I curve will increase dut to increase in consumption expenditure in the economy. (b) The C + I curve will increase due to increase in investment expenditure in the economy (c) The C + I curve will decrease due to decrease in consumption expenditure in the economy. (d) The C + I curve will decrease due decrease in investment expenditure in the economy. Ans (b) The C + I curve will increase due to increase in investment expenditure in the economy. 4. A decline in GDP suggests that in the economy: (a) Ex-poste aggregate demand is less than ex-poste aggregate supply (b) Ex-poste aggregate demand is more than ex-poste aggregate supply (c) Ex-ante aggregate demand is more than ex-ante aggregate supply (d) Ex-ante aggregate demand is less than ex-ante aggregate supply Ans (d) Ex-ante aggregate demand is less than the ex-ante aggregate supply. Q.11 AUG 25 , 2020 : ECONOMICS TIMES Government consumption will have to fuel demand till the economy comes out of the COVID-19 shock and regains pre-COVID-19 momentum, the Reserve Bank's annual report said on Tuesday. Private consumption, which has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities, will come in later as \"behavioural restraints may prevent the normalisation of demand for these activities\", RBI said in the annual report. Q1 The term demand referred above means : a Individual demand b Aggregate demand c Market demand d none of the above Ans : a Aggregate Demand Q2 What situation is faced by the economy due to this COVID situation? a Excess Demand b Deflationary gap c Deficient Demand d both b and c ANS : d both b and c Q3 Net Exports is a part of Aggregate demand for an economy. True / False Ans : True Q4 If this is situation is not addressed immediately then an economy will face : a Boom and rise in prices b Depression and fall in prices

c Recovery and fall in prices d recession and rise in prices Ans : b Depression and fall in prices Q.12 Read the following paragraph and answer Questions on the basis of the same: Keynes‘ multiplier is known as investment or income multiplier. The essence of multiplier is that total increase in income, output or employment is manifold the original increase in investment. For example, if investment equal to Rs. 100 crores is made, then the income will not rise by Rs. 100 crores only but a multiple of it. The total cost will amount to Rs. 100 crores. This will increase incomes of the people equal to Rs. 100 crores. But this is not all. The people who receive Rs. 100 crores will spend a good part of them on consumer goods. Suppose marginal propensity to consume of the people is 4/5 or 80%. Then out of Rs. 100 crores they will spend Rs. 80 crores on consumer goods, which would increase incomes of those people who supply consumer goods equal to Rs. 80 crores. But those who receive these Rs. 80 crores will also in turn spend these incomes, depending upon their marginal propensity to consume. If their marginal propensity to consume is also 4/5, then they will spend Rs. 64 crores on consumer goods. Thus, this will further increase incomes of some other people equal to Rs. 64 crores. It is thus clear that if the marginal propensity to consume is 4/5, the investment of Rs. 100 crores lead to the increase in the national income by Rs.500 crores. Therefore, multiplier here is equal to 5. Q1. MPC is _______ related to the value of multiplier. (directly/inversely) Q2. It helps in increasing the income in multiples, so it should be introduced at the time of ________ demand. (excess/deficit) Q3. What is the basic rule of investment multiplier? Q4. What will be the value of multiplier if MPC is 1? Ans1. Directly Ans2. Deficit Ans3. One person’s expenditure is another person’s income. Ans4. K=1/1-MPC MPC = 1 K= 1/1-1 K=1/0 = ∞ Q.13 \"An acceleration in food inflation and ongoing virus-related supply disruptions have kept headline CPI inflation higher than we had anticipated, but price pressures should ease soon,\" said Shilan Shah, senior India economist at Capital Economics. Above-average rainfall this year, a key determinant of yields in farming, is predicted to help reduce food-price pressures over the coming months. But inflation running above target is expected to keep the RBI on the sidelines for the for the rest of this year, despite expectations the Indian economy will mark its first full-year contraction since 1979 this year. The Indian government appointed three new external members to the Monetary Policy Committee on Monday after delaying the latest policy-setting meeting, which is scheduled to conclude later

on Friday. 1. Monetary Policy is the policy of ________to control money supply and credit creation in the economy. 2. -----------------(Excess Demand/ Deficient Demand) leads to inflation. 3. During Excess Demand, the government should increase expenditure on Public works. (True/ False) 4. Give 2 reasons for Deficient Demand. ANSWERS 1. Central Bank 2. Excess Demand 3. False 4. Decrease in propensity to consume, Increase in Taxes, Rise in Imports, Fall in Exports Q.14 Read the following extract and answer the questions based on it. The Government announced giving out cash vouchers to Central Government employees this year, in lieu of leave travel concession (LTC) fare which could be spent only on buying non-food GST- rated items. Finance minister said that the Government will also give Rs 10,000 special festival advance to all its employees as a one-time measure. THE HINDU 12 OCTOBER 2020 Q1. The objective behind this measure taken by the government in the present situation is to ------- ------------ Increase/ Decrease the demand in the economy. 1 Q2. Increase in Government spending will help to bridge ------------ Inflationary/Deflationary gap. 1 Q3. Correcting the situation of -----------------------------Deficient/Excess demand will help in ensuring full employment of the available resources. 1 Q4. Deficient demand leads to -------------------Full employment/ Unemployment and fall in output and income. Go through the Centre‘s proposal on expenditure given by Finance Minister Ms.NirmalaSitharaman and Answer the questions that follow: ₹25,000 crore has been allotted in addition to the earlier figure set aside for budgeted expenditure of ₹4,13,000crore. \"This will be specifically on roads, urban development, water supply, defence infrastructure, and domestically produced equipment for defence infrastructure,\". Q1 Above mentioned expenditure allotted by the govt. is ------------------- Revenue/ Capital expenditure. 1 Q2. Choose the correct statement: a) In depressed situations govt. reduces its expenditure to bring stability. b) Government increase its expenditure to control fluctuations in the economy. c) In depressed conditions govt. increase its expenditure to undertake important projects, thus influences allocation of resources and bring Q.15 Read the following case study and answer the following: The minimum value of multiplier is one when the value of MPC is zero. When MPC is zero implies that the economy decides to save the whole of its additional income and nothing is additional income is spent on consumption. So, there will be no further increase income. As a result, the total increase in income will be equal to the increase in investment.

Q-1 When MPC is Zero, what would be the value of Multiplier? Calculate Q-2 Define MPC. What its relationship with Multiplier? Q-3 Give basic assumption of multiplier . Q-4 When there is no additional income is spent on consumption , what does it mean? Ans 1 – When MPC =0 , K (Multiplier)=1 K= 1/1-MPC K= 1/1-0 k=1/1 k=1 Ans-2 MPC is Marginal Propensity to consume is the ratio of change in consumption to change in Income. MPC= delta C/delta Y MPC is directly related with Multiplier means if Income increases MPC will also increase and if MPC fall MPC will also fall. Ans-3 Assumption of Multiplier‖ One person‘s expenditure is another person‘s income. Ans-4 When there is no additional income is spent on consumption it means there is no increase in income. Q.16 Smart City Project: There was a time when India is used to known as the country of Nagas and beggars. But now the demography has changed and India is world‘s 6th largest economy. But some areas are still a cause of concern for the government. As per the census 2011 the Slum population in India is 17.36% as percentage of urban population. Now the government is trying to fetch out more and more peoples from the clutch of the poverty and slums. Hence the launch of the Smart City Project is a good step in this direction. The Smart Cities Mission (SCM) is a holistic city rejuvenation programme for 100 cities in India launched on June 25, 2015. The objective of the Smart Cities Mission is to promote cities that provide core infrastructure and give a decent quality of life to its citizens, a clean and sustainable environment and application of ‗Smart‘ Solutions. 1. Under Smart City Project, government of India is spending a lot of money on infrastructure development, what will be its impact on level of aggregate demand a) Aggregate demand will increase b) Aggregate demand will decrease c) No change in Aggregate demand d) None of the above Ans. Aggregate demand will increase 2. Under Smart City Project, government is trying to fetch out more and more peoples from the clutch of the poverty and slums, this step of government indicates that India is trying to minimize a) Frictional unemployment b) Seasonal unemployment c) Voluntary unemployment d) Involuntary unemployment e) Seasonal and Involuntary unemployment Ans. Seasonal and Involuntary unemployment 3. Due to Smart City Project government is resorting to Deficit Budget, which indicates a) Fiscal Policy b) Monetary Policy c) Combination of both d) None of the above Ans. Fiscal Policy

4. Smart City Project of government, which is focusing on infrastructure development and increasing purchasing power of people through investment multiplier effect, as a result it will lead to a) Inflation in economy b) Deflation in economy c) Increases level employment and reduces idle capacity of economy d) None of the above. Ans. Increases level employment and reduces idle capacity of economy Q.17 CASE STUDY BASED QUESTIONS Read the following case study paragraph carefully and answer the questions given below Consumption and savings are dependent on disposable income .As income rises consumption also rises but lesser than increase in income which is known as psychological law of consumption that is what termed as MPC. Government tries to use its expenditure and receipts to check inflationary and deflationary gap in the economy. The model of income and employment is based on the assumption that one man‘s expenditure is another man‘s income. Hence more is the propensity to consume more is the generation of income. However more savings cause withdrawal from circular flow of income. Government also spends money on investment which further enhances the aggregate demand of the economy and income too, At initial level, consumption exceeds income. But after a particular level of income reached where consumption = income consumption lagged behind income.Income is either consumed or saved. During inflation government follows Dear Money Policy and During deflation it follows Cheap Money Policy. 1. If Government increase its expenditure on development of infrastructure, aggregate demand---- ----------------------- (a) increases (b) decreases (c) remains constant (d) none of these ANSWER (a) increases 2. The value of MPC can‘t exceed ___________(zero/one) ANSWER ONE 3, What is Cheap Money Policy. Give example, ANSWER It means to make money cheaper for public to increase money supply like reduction in Repo Rate, CRR, SLR etc. provision of loan at lower rate of interest. 4. In Macro Economics when Y=C its called __________(equilibrium income/break even income) And at this point savings will be____________(constant/zero/one) ANSWER break even income and zero Q.18 In particular the RBI will conduct outright and special open market operations to keep liquidity conditions comfortable. The size of auction will be increase to Rs.20,000crore per auction. It will also, for the first time, conduct open market operations in state development loans. The RBI also announced an on-tap targeted long-term repo operations. Rs. 1 lakh crorein funds will be available under this facility for a period of three years. Liquidity availed under this facility should be deployed in corporate bonds, debentures and bank loans to specific sectors, Governor Das said. October 10, 2020, Bloombergquint. 1. The rate at which the central bank lends money to commercial banks to meet their long- term needs is called______________________. 2. Purchase of securities by central bank __________________ the reserves and raises the bank‘s ability to give credit. 3. Who is authorised to sell or purchase treasury bills and government securities?

4. Sale of securities in the open market adversely affects the bank‘s ability to create credit and decreases the level of _______________________ in the economy. Answers: 1. Bank rate. 2. Increases 3. RBI. 4. Aggregate demand Q19. The Reserve Bank of India is empowered to regulate the money supply in the economy through its Monetary Policy. It is the policy adopted by Central Bank of an economy in the direction of credit control or money supply. Monetary policy helps to control the situation of excess and efficient demand through its quantitative or qualitative instruments The quantitative instrument aim to influence the total volume of credit in circulation and include -Bank Rate, Repo Rate, Open market operations and Legal Reserve Requirements. The qualitative instruments aim to regulate the direction of credit and includes Margin Requirements ,Moral Suasion and Selective Credit Controls. Answer the following questions Q1 Name the monetary measure indicated in the following statement RBI start selling government securities to the public Q2 What is open market operation? Q 3 Repo rate is the rate at which A. Commercial bank sells government securities from the central bank B. Commercial bank can take long term loans from central bank C. Commercial bank can keep their deposits with Central bank D. Short term loans are given by commercial bank Q4 What measures have been taken by RBI to solve covid 19 situation with respect to bank rate? Ans 1 Open market operation Ans 2 Open market operation refer to sale and purchase of security in the open market by the central bank Ans 3 Commercial bank can take long term loans from central bank Ans 4 RBI has reduced bank rate to solve covid 19 situation as decrease in bank rate makes credit cheaper which induces people to borrow more funds which leads to increase in aggregate demand. Q.20 Read the following publication of RBI and answer the questions that follow: Available information suggests a gradual recovery is under way with the re-opening of the economy. While the rising number of COVID-19 infections continues to weigh on the near-term outlook, private consumption may recover faster than other components of aggregate demand with a boost from rural demand on the back of bright agricultural prospects. Private investment may, however, take longer to stabilize, hamstrung by low capacity utilisation, still subdued bank credit and the global recession. The prospects for the industrial sector hinge around the response to the government‘s initiatives, including Make in India. The game changer would be public capital spending, given its high multiplier effect. An early containment of the pandemic should also speed up the revival. The outlook for the services sector also improved with activity gaining some momentum in Q2. Q.1 How will reopening of economy help in recovery of the same?

Ans: Reopening of the economy will increase Aggregate Demand in the economy. Q.2 What are the other components of the demand referred to in above case study? Ans: Investment Expenditure, Government consumption expenditure and netexports. Q.3 Name any one tool in the hands of RBI that may enhance the credit creation process. Ans: Open market operations. Q..4 How will make in India encourage economy? Ans: Make in India will lead to increase in Investment in India thus increasing demand and employment in the country. CASE STUDY: Q.21 As aggregate demand increases, unemployment decreases as more workers are hired, real GDP output increases, and the price level increases; this situation describes a demand-pull inflation scenario ............... As more workers are hired, unemployment decreases. Moreover the price level increases, leading to increases in inflation. Q1. Excess demand leads to: a) Inflationary gap b) Rise in prices c) Rise in employment level d) both (a) and (b) Q2. Full Employment equilibrium refers to a situation of: a) AD = AS (full utilisation of resources) b) Zero unemployment c) both (a) and (b) d) none of these Q3. ........................ unemployment refers to a situation when people choose to remain unemployed. (Voluntary/ Involuntary) Q4. Define the concept of Aggregate Supply. Answers: 1. (d) 2. (a) 3. Voluntary 4. AS refers to flow of goods and services as planned by the producers during an accounting year.It is identical with the flow of income (Y) during an accounting year. Therefore AS = Y. Q.22 Read the following news report and answer Questions 7-10 on the basis of the same: ‗COVID-19 to have significant deflationary impact due to demand evaporation‘ Ruling out any impact of stimulus on the price situation, Chief Economic Advisor K.V. Subramanian on Thursday said the COVID-19 pandemic has severely dented the demand for non-

essential or discretionary goods, creating deflationary conditions. He also said that a good part of the ` 20 lakh crore stimulus package is designed in a manner that the fiscal deficit remains under control. ―COVID has a significant deflationary impact because demand especially for non- essential or discretionary goods and services will go down significantly. Therefore, it is unlikely that there would be too much inflationary impact through fiscal deficit or stimulus package,‖ Subramanian told in an interview. The proposed stimulus package will generate demand by infusing liquidity into the system and thus perk up the economy, the CEA said. The Economic Times; May 15th,2020 7. ________ (Excess/Deficiency) of demand creates deflationary gap in the economy. (Choose the correct alternative) 8. Demand for goods has gone significantly up during covid period. (Choose the correct alternative) (a) non-essential (b) essential (c) both (a) and (b) (d) None of these 9. The proposed stimulus package has tried to create more _______ (demand/supply) in the economy. (Choose the correct alternative) 10. Inflationary gap: (Choose the correct alternative) (a) raises the level of output. (b) does not change the level of output. (c) raises the general price level. (d) both b and c Answers : 7. Deficiency 8. (b) essential 9. Demand 10. (d) both b and c Q.23 Read the following case study paragraph carefully and answer the questions given below Consumption and savings are dependent on disposable income .As income rises consumption also rises but lesser than increase in income which is known as psychological law of consumption that is what termed as MPC. Government tries to use its expenditure and receipts to check inflationary and deflationary gap in the economy. The model of income and employment is based on the assumption that one man‘s expenditure is another man‘s income. Hence more is the propensity to consume more is the generation of income. However more savings cause withdrawal from circular flow of income. Government also spends money on investment which further enhances the aggregate demand of the economy and income too, At initial level, consumption exceeds income. But after a particular level of income reached where consumption = income consumption lagged behind income.Income is either consumed or saved. During inflation government follows Dear Money Policy and During deflation it follows Cheap Money Policy.

1. If Government increase its expenditure on development of infrastructure, aggregate demand---- ----------------------- (a) increases (b) decreases (c) remains constant (d) none of these ANSWER (a) increases 2. The value of MPC can‘t exceed ___________(zero/one) ANSWER ONE 3, What is Cheap Money Policy. Give example, ANSWER It means to make money cheaper for public to increase money supply like reduction in Repo Rate, CRR, SLR etc. provision of loan at lower rate of interest. 4. In Macro Economics when Y=C its called __________(equilibrium income/break even income) And at this point savings will be____________(constant/zero/one) ANSWER break even income and zero Q. 24: Read the following news report and answer questions on the basis of the same: Jobs are back, income is not: Workers take lower-paying jobs; still suffer salary cuts, November 24, 2020 More than half the households in India have suffered a fall in their incomes during the lockdown, compared to a year ago, and a very large proportion has seen no increase. The Indian economy is recovering, listed companies are making huge profits, the employment rate is rising; but, the common people are still struggling with stagnant household incomes. More than half the households in India have suffered a fall in incomes during the lockdown, compared to a year ago, and a very large proportion has seen no increase, according to the Centre for Monitoring Indian Economy (CMIE). Now, India is nearly eight months into the lockdown with several relaxations in the movement of goods and delivery of services, and many fast frequency indicators have reported a smart recovery, but the recovery in household incomes is very slow. Questions; 1. State the conditions under which full employment equilibrium exists. 2. _______ and _______are not the components of aggregate demand in two-sector economy. 3. Deficient Demand indicates _________equilibrium. 4. Minimum level of expenditure is dependent on the level of income in the economy. Giving reason, state true or false. Answers; 1. AD=AS, S=I 2. Net exports and Government Expenditure 3. Under employment 4. False. It is because of existence of autonomous consumption and investment. Q25: Case study In Keynesian analysis, aggregate supply refers to the ex-ante,ie. Planned aggregate output produced in the economy in a given year. In a two sector economy, in the absence of indirect tax and subsidy,the value of total final goods and services is distributed among the factors of production ( wages to labour, interest to capital and rent to land) whatever leftover is appropriated by the entrepreneur and is called profits. Thus, the sum total of aggregate factor payments in the economy ie. National income, is equal to the aggregate value of the output of final goods ie Aggregate Supply .

Q.1 In the two sector economy and without any 8ndirect tax and subsidy,aggregate supply and----- ---- are always equal. ( fill the blank) Q.2 Discuss the significance of 45°line in Keynesian economics. Q.3 Define Aggregate Supply. Q.4 The aggregate supply depicts the relationship between A. The unemployment rate and the total quantity of goods and services that firms supply. B. The cost of labour and the total quantity of goods and services that firms supply. C. The cost of inputs and total quantity of goods and services that firms supply. D. The level of prices and the total quantity of goods and services that firms supply. Answers: 1. National income 2. Corresponding to every point on the 45° line ,Aggregate Supply =National Income. 3. Aggregate Supply is the total amount of money value of goods and services (which is paid to the factors of production against their factor services) that all the producers are willing to supply in the economy. Q.26 Read the passage carefully and answer questions given below RBI Monetary Policy 2020: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept its repo rate unchanged at 4 per cent while maintaining an ‘accommodative stance’ as long as necessary at least through the current financial year, RBI Governor Shaktikanta Das announced on Friday. The RBI governor announced that the decision was taken unanimously and added that the reverse repo rate too was kept unchanged at 3.35 per cent. The RBI governor also said that the central bank is committed to preserve the interest of depositors in the financial system. He said that they have been able to contain human losses, ensure financial systems function normally and reached out to the most vulnerable. The near-time financial losses have been contained, Das said. A. Define reverse repo rate 1M B. How should rrr be changed to check inflation? 1M C. Repo rate is-----------------to correct the situation of deficient demand. 1M D. To correct the situation of deflationary gap, the central bank 1M 1. Increase margin 3. Decreases margin 2. Increase CRR 4. Both 2 and 3 ANSWERS: A. the rate at which central bank of a country borrows money from commercial bank . B. it should be increased so that commercial banks are induced to park more funds with RBI to generate interest income. less funds will be used as crr reserves for credit. C. decreased D. 3. Q.27 Read the following extract and answer the questions given below A business cycle contraction occurs when there is a general decline in economic activity. This happens due to a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large scale natural disaster (e.g. a pandemic).

In such cases the economy witnesses a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Governments usually respond to these fluctuations by adopting expansionary macroeconomic policies, such as increasing money supply or increasing government spending and decreasing taxation. Source: Wikipedia If there is a difference between aggregate demand and aggregate supply at full employment level, it is a situation of a. Excess demand b. Deficient demand c. Both a and b d. Such a situation is not possible 1. Fill in the blank One fiscal measure for correcting deficient demand is ______________________ (increasing govt spending /increasing taxes/ increasing money supply) 2. Raising margin requirement will be helpful in controlling a situation of deficient demand a.True b. False 3. Which of the following measures would the RBI adopt to reduce deflationary gap? a. Reduce bank rate b. Raise CRR c. Raise SLR d. Sell govt securities Q.28 Case Based Question Article from Indian Express dated 5th December 2020

The Six member Monetary policy committee of the reserve bank of India, headed by the governor, Shaktikanta Das on Friday decided to maintain status quo on policy rate and sticky rate of inflation. At this point ,the repo rate or the rate at which RBI lends to banks, stands unchanged at 4 percent. Qns1. Monetary Policy is the policy of ……………………to control money supply and credit creation. Ans. Central Bank Que 2. A low rate of inflation is considered necessary for economic growth.Why? A. It acts as an incentive to boost supply in the economy. B. It indicates that the currency I in continuous demand by the public. C. It affects only the rich and not the poor. D. It does not affect the purchasing power of wages. Ans. A Que3 What is core inflation? Ans. It represents price rise in all goods and services but does not include articles from food and energy sector. Que 4. Which among the following defines Repo rate? A. The rate at which bank place their surplus funds with the RBI. B. The rate at which banks can borrow against their excess SLR securities to meet additional liquidity C. The rate at which the reserve bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase. D. The rate at which banks borrow funds from the Reserve bank against eligible collaterals. Ans. D Q.29 Read the following hypothetical case study carefully and answer the question number 1-4 on the base on the same:- 1. Aggregate demand curve is the sum total of consumption expenditure, investment expenditure, government expenditure and the net export and indicates the planned for ex_ante demand. So all the consumption investment and saving function influence aggregate demand.In the IS-LM model the demand curve is derived from the investment saving curve and is influenced by the investment multiplier. The slope of the curve depend on the value of the multiplier as well .. 1.Aggregate demand curve indicates________ demand in the economy. (i)Ex-ante (ii)Initial (iii)Ex-post (iv)Final 2. Ex-post investment refers to_______ in the economy during the period of one year. (i).Actual. (ii)Planned (iii)Desired. (iv)All of the above 3. The value of multiplier is_______________ (I)1/MPC. (ii)1/MPS

(iii)1/1-MPS (iv)1/MPS-MPC 4. The value of multiplier will be ________if entire additional income is convert into additional consumption (I)Infinity (ii)Zero (iii)One (iv)double the consumption ANSWERS:--- 1.Ex-ante 2.Actual 3.1/MPS 4.Zero Q.30 Read the following news report and answer questions on the basis of the same: Jobs are back, income is not: Workers take lower-paying jobs; still suffer salary cuts, November 24, 2020 More than half the households in India have suffered a fall in their incomes during the lockdown, compared to a year ago, and a very large proportion has seen no increase. The Indian economy is recovering, listed companies are making huge profits, the employment rate is rising; but, the common people are still struggling with stagnant household incomes. More than half the households in India have suffered a fall in incomes during the lockdown, compared to a year ago, and a very large proportion has seen no increase, according to the Centre for Monitoring Indian Economy (CMIE). Now, India is nearly eight months into the lockdown with several relaxations in the movement of goods and delivery of services, and many fast frequency indicators have reported a smart recovery, but the recovery in household incomes is very slow. Questions; 1. State the conditions under which full employment equilibrium exists. 2. _______ and _______are not the components of aggregate demand in two-sector economy. 3. Deficient Demand indicates _________equilibrium. 4. Minimum level of expenditure is dependent on the level of income in the economy. Giving reason, state true or false. Answers; 1. AD=AS, S=I 2. Net exports and Government Expenditure 3. Under employment 4. False. It is because of existence of autonomous consumption and investment. Q.31 Read the following extract and answer the questions based on it. Monetary and fiscal instruments are the key to combat the problems of excess and deficient demand. Fiscal instruments relate to revenue and expenditure policy of the government. Monetary instruments relate to the regulation of money supply in the economy. To combat excess demand,

the government needs to curb its expenditures and raise its revenue. On the monetary front, it needs to pursue a Dear Money Policy, making availability of credit tougher than before and shrinking the credit creation capacity of the commercial banks. To combat deficient demand, on the other hand, expenditure needs to be stimulated while revenue needs to be curbed. On the monetary front, Cheap Money Policy needs to be pursued, facilitating easy availability of credit and enhancing credit creation capacity of the commercial banks. Answer the following question- 1. Explain dear monetary policy. 2. How do government use expenditure policy to solve the situation of excess demand? 3. Differentiate between monetary and fiscal policy. 4. COVID 19 has left the economy with -------------(excess demand/deficient demand) ANSWERS 1. It is policy for making availability of credit tougher than before and shrinking the credit creation capacity of the commercial banks 2. Government reduce its expenditure to curb excess demand. 3. Fiscal instruments relate to revenue and expenditure policy of the government. Monetary instruments relate to the regulation of money supply in the economy. 4. Deficient Demand Q.32 Read the passage carefully and answer questions given below RBI Monetary Policy 2020: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept its repo rate unchanged at 4 per cent while maintaining an ‘accommodative stance’ as long as necessary at least through the current financial year, RBI Governor Shaktikanta Das announced on Friday. The RBI governor announced that the decision was taken unanimously and added that the reverse repo rate too was kept unchanged at 3.35 per cent. The RBI governor also said that the central bank is committed to preserve the interest of depositors in the financial system. He said that they have been able to contain human losses, ensure financial systems function normally and reached out to the most vulnerable. The near-time financial losses have been contained, Das said. 1. Define reverse repo rate 1M 2. How should rrr be changed to check inflation? 1M 3. Repo rate is-----------------to correct the situation of deficient demand. 1M 4. To correct the situation of deflationary gap, the central bank 1M a. Increase margin b. Decreases margin c. Increase CRR d. Both 2 and 3 ANSWERS: A. the rate at which central bank of a country borrows money from commercial bank . B. it should be increased so that commercial banks are induced to park more funds with RBI to generate interest income. less funds will be used as crr reserves for credit. C. decreased D. 3. Q.33 Read the following news report and answer questions----

Painting of a gloomy picture of the economy, the Reserve Bank of India on Friday said the impact of covid -19 is more severe than anticipated and the GDP growth during 2020-21 is likely to remain in the negative territory The outlook of inflation also remains highly uncertain . RBI governor Shaktikanta Das said while announcing a 40-basis point cut in the repo rate as part of the monetary measures to deal with the current crisis. Even if the economic activities are restored in a phased manner, the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual in activity only in the second half of 2020-21----he added (may 22,2020---the Economics times) Answer the following questions: 1. A monetary policy measure to combat deflationary gap is ----- a. Increase in tax rates b. Increase in government expenditure c. Increase in price level d. Decrease in interest rate Ans : 2. The effects of deficient demand in an economy are : a. Increase in output, income , employment and price level. b. Decrease in output, income , employment and price level c. Increase in output, income and employment but no change in price level d. Decrease in output, income and employment but no change in price level Ans b Q.34 Consumption expenditure refers to that portion of income which is spent on the purchase of goods and services at the given level of income. Consumption function refers to functional relationship between consumption and national income. It represents the willingness of households to purchase goods and services at a given level of income during a given time period. It also shows the consumption level at different levels of income in an economy. It is a psychological concept as it is influenced by subjective factors like consumer‘s preferences , habits etc. Q1- What is the slope of consumption curve? A1- Consumption curve has a positive slope. Q2- What does slope of consumption curve indicate? A2- It indicates that as income increases, consumption also rises. Q3- Consumption curve starts from point of origin (true/false) A3- False. It starts from Y axis which implies that there is autonomous consumption even when the national income is zero. Q4- What is break even point? A4- At break even point consumption becomes equal to income and saving is 0. ---------------------------------------------------------------------------------------------------------------- Q.35 Read the following extract and answer questions 9-12 on the basis of the same: Amidst indications of an economic slowdown in the beginning of year 2020 came the challenge of Corona pandemic in Feb-Mar 2020, forcing the Government to impose a strict lockdown leading to near cessation of major economic activities across all sectors. The Finance Minister on 13th, 14th, 15thMay‘20 announced an economic package of ₹20 Lakh Crore for revival of Indian economy. Government of India‘s ₹20 lakh crore ‗AatmaNirbhar Bharat‘ package which aimed at reviving the economy, includes major fiscal measures like free food for the poor, direct cash transfer,

money for rural job guarantee scheme, MGNREGA and credit guarantees to MSMEs. RBI has also taken steps to slash lending rates and add more liquidity into the markets. Q9. Indicate the impact of economic package on AD: a) Fall in Aggregate Demand b) Rise in Aggregate Demand c) Rise in general Price level d) No change in Aggregate Demand Q10. To induce liquidity RBI must have: a) Increased Cash Reserve Ratio b) Reduced Repo Rate c) Increased Reverse Repo Rate d) Kept Statutory liquidity Ratio constant Q11. The likely impact of ―Deficit Demand‖ under income and employment theory, in an economy are: a) Decrease in income, output, employment and general price level b) Decrease in nominal income, but no change in real output c) Increase in income, output, employment and general price level d) No change in output/employment but increase in general price level Q12. The nature of fiscal policy undertaken by the government is _____________ and Monetary Policy is _____________ in its nature. a) Expansionary, Expansionary b) Expansionary, Contractionary c) Contractionary, Expansionary d) Contractionary, Contractionary Q.36 CASE STUDY BASED QUESTION India holds a lot of potential that needs to be unleashed, said LaxmanNarasimhan, chief executive officer, Reckitt Benckiser, adding that he was ―deeply optimistic‖ about the market. (Mint,10.12.2020) On the basis of this statement we can say that a change in investment spending will affect output and income. It is logical that an increase in fixed business investment will increase the level of output and income through increase in productive capacity. The investment multiplier mechanism ensures that an initial increase in investment increases the final output or income of the economy by an amplified amount, which is a multiple of the initial increase in investment. Investment multiplier is the ratio of change in income or output due to a given change in initial investment. QUESTIONS: 1. What is the formula to calculate multiplier? Answer: K= ∆Y/∆I 2. An increase of Rs. 250 crore in investment in an economy results in income increasing by three more than the increase in investment. Calculate the value of multiplier. Answer: 1000/250=4 3. What is the significance of the statement given by LaxmanNarasimhan ? Answer: He is talking about economic growth which is shattered due to this Pandemic and role of investment multiplier to boost the economy.

Q.37 Read, the following hypothetical Case Study, carefully and answer the below question on the basis of the same. Aggregate supply and demand are represented separately by their own curves. Aggregate supply is a response to increasing prices that drive firms to utilize more inputs to produce more output. The incentive is that if the price of inputs remains the same but if the price of output increases, the firm will generate larger profits and margins by producing and selling more. The aggregate supply curve is represented by a curve that slopes upward, which indicates that as the price per unit goes up, a firm will supply more. The supply curve eventually becomes vertical, indicating that at a certain price point a firm cannot produce anymore, as they are limited by certain inputs, e.g. number of employees and number of factories. Q.1.______________ (Aggregate Demand/ Aggregate Supply) is the total quantity of output firms will produce and sell—in other words, the real GDP. Q.2. ____________(Aggregate Demand/ Aggregate Supply) is the amount of total spending on domestic goods and services in an economy. Q.3.The Supply curve shows the positive relationship between price level and real GDP in the short run. State True or False. Q.4.What is the formula of Components of Aggregate Demand? Ans: 1. Aggregate Supply 2. Aggregate Demand 3. True 4. AD= C+I+G+(X-M) Q.38 Read, the following hypothetical Case Study, carefully and answer the below question on the basis of the same. The theory of multiplier occupies an important place in the modern theory of income and employment. The concept of multiplier was first of all developed by F.A. Kahn in the early 1930s. But Keynes later further refined it. F.A. Kahn developed the concept of multiplier with reference to the increase in employment, direct as well as indirect, as a result of initial increase in investment and employment. Keynes, however, propounded the concept of multiplier with reference to the increase in total income, direct as well as indirect, as a result of original increase in investment and income. Therefore, whereas Kahn‘s multiplier is known as ‘em­ployment multiplier‘, Keynes‘s multiplier is known as investment or income multiplier. The essence of multiplier is that total increase in income, output or employment is manifold the original increase in investment. For example, if investment equal to Rs. 100 crores is made, then the income will not rise by Rs. 100 crores only but a multiple of it. If as a result of the investment of Rs. 100 crores, the national income increases by Rs. 300 crores, multiplier is equal to 3. If as a result of investment of Rs. 100 crores, total national income increases by Rs. 400 crores, multiplier is 4. Q.1. The multiplier is the ratio of increment in ______ (Income/Investment) to the increment in _________(Income/Investment). Q.2. Give the formula of Investment Multiplier.

Q.3. Calculate multiplier if MPS is 0.40 Q.4. In an economy, income generated is four times the increase in investment expenditure. Calculate the value of MPC. Ans: 1. Income, Investment 2. K = ∆Y/∆I 3. K= 2.5 4. MPC= 0.75. Q.39 Consumption refers to the amount of income which is spent on purchase of goods and services at the given level of income. On the other hand consumption function refers to the schedule showing consumption expenditure at various level of income. Consumption function is based on Keynes famous Psychological law of consumption. This law states that there is minimum consumption ,known as autonomous consumption even at zero level of national income because survival needs consumption, As the income increases consumption also increases. Income rises at a greater proportion as compared to increase in consumption 1 Consumption curve has a..............positive/ negative slope. (choose the correct alternative) 2 The psychological law of consumption implies that there is a tendency on the part of the people to spend on consumption .........than their full increment of income. (choose the correct alternative) A Full B less C more D same 3 Autonomous consumption cannot be 0.state true or false. Give reason 4 The point where consumption becomes equal to income and savings is zero is known as ...... Answers 1 positive 2 Less 3 True ,because survival needs consumption 4 Break even point Q.40 Read the following news report and answer questions---- Painting of a gloomy picture of the economy, the Reserve Bank of India on Friday said the impact of covid -19 is more severe than anticipated and the GDP growth during 2020-21 is likely to remain in the negative territory The outlook of inflation also remains highly uncertain . RBI governor Shaktikanta Das said while announcing a 40-basis point cut in the repo rate as part of the monetary measures to deal with the current crisis. Even if the economic activities are restored in a phased manner, the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual in activity only in the second half of 2020-21----he added (may 22,2020---the Economics times) Answer the following questions: 1. A monetary policy measure to combat deflationary gap is ----- 2. Increase in tax rates 3.Increase in government expenditure

4. Increase in price level 5. Decrease in interest rate Ans : The effects of deficient demand in an economy are : 1. Increase in output, income , employment and price level. 2. Decrease in output, income , employment and price level 3. Increase in output, income and employment but no change in price level 4. Decrease in output, income and employment but no change in price level Ans b Q.41 Case Study The concept of marginal propensity to consume helps in calculating the multiplier which has a great importance in Macro Economic theories. Investment multiplier estimates that if government increases investment by a certain fraction that total national income would increase manifold as compared to the level of investment, the multiplier is calculated as K = 1/ 1 – MPC, where K stands for multiplier and MPC is marginal propensity to consume. When same investment in same project is undertaken, it leads to the increase in income of those employed in the project, but the process of income generation does not stop here. The increase in income are further spent on consumption and this leads to further increase in income of some other person by the equivalent amount and this chain of income and consumption continues and ultimate increase in income and Employment is multiple of the original increment in investment. Que. 1 We can determine consumption spending for any income level if we know: (a) level of autonomous consumption (b) MPC (c) Both (a) and (b) (d) None of the above Answer : (c) Both (a) and (b) Que. 2 The Marginal Propensity to Save MPS : (a) plus the MPC = National Income (b) minus national income = consumption (c) plus intended investment = 1 (d) plus the MPC = 1 Answer: (d) plus the MPC = 1 Que. 3 Propensity to consume will increase when (a) income increases (b) due to an increase in the credit availability (c) social security measure improvement (d) all of the above Answer: (d) all of the above Que.4 The maximum value of investment multiplier can be _______ when the MPC is assumed to _______. (a) Infinity, zero (b) Infinity, one (c) One, Infinity (d) none of these Answer: (b) Infinity, one

Q.42 Read the following news report and answer the following questions. The reserve bank of India cut repo rate 4.4 percent. The lowest in the recent 15 years , so also it reduce CRR for all banks cut by the 100 wages point to release 7 lack crore across the overall banking system. RBI governor Dr.shaktikant Das adopted a big global recession and said India will not to be immune .it all depends how India respond to the situation and it will aggregate demand will weaken and ease core inflation. Source: Economic Survey 2012-13, p. 100-101. Some sample questions for discussion based on the given case 1. Cut in repo rate by RBI is likely to increase / decrease the demand of goods and services in the economy. And. Increase 2. Decrease in CRR will lead to – a. Fall in aggregate demand b. Rise in aggregate demand c. No change in aggregate demand d. Fall in general price level 3. The difference by which actual aggregate demand exceeds the aggregate demand requires to stabilize full employment equilibrium is known as inflationary / deflationary gap. ` Ans. Inflationary GAP 4. The impact of the excess demand according to Keynesian theory of income and employment in an economy- a. Decrease in income , employment and general price level b. Decrease in nominal income but no change in real output c. Increase in income , employment and general price level d. No change in income, employment but increase in general price level Q.43 In the Keynesian theory, employment depends upon effective demand. Effective demand results in output. Output creates income. Income provides employment. Since Keynes assumes all these four quantities, viz., effective demand (ED), output (Q), income (Y) and employment (N) equal to each other, he regards employment as a function of income. Effective demand is determined by two factors, the aggregate supply function and the aggregate demand function. The aggregate supply function depends on physical or technical conditions of production which do not change in the short-run. Since Keynes assumes the aggregate supply function to be stable, he concentrates his entire attention upon the aggregate demand function to fight depression and unemployment. Thus employment depends on aggregate demand which in turn is determined by consumption demand and investment demand. According to Keynes, employment can be increased by increasing consumption and/or investment. Consumption depends on income C(Y) and when income rises, consumption also rises but not as much as income. In other words, as income rises, saving rises. Consumption can be

increased by raising the propensity to consume in order to increase income and employment. But the propensity to consume depends upon the psychology of the people, their tastes, habits, wants and the social structure which determine the distribution of income. All these elements remain constant during the short-run. Therefore, the propensity to consume is stable. Employment thus depends on investment and it varies in the same direction as the volume of investment. Investment, in turn, depends on the rate of interest and the marginal efficiency of capital (MEC). Investment can be increased by a fall in the rate of interest and/or a rise in the MEC. The MEC depends on the supply price of capital assets and their prospective yield. Answer the following questions 1. Define the following terms (a) Aggregate demand (b) Aggregate Supply (c) Consumption function. 2. What do you mean by the Effective demand? State two factors affecting Effective demand 3. Which measure does Keynes suggest for fighting against the depression? 4. What is MEC? How does it affect the level of investment? Answers 1. (a) Aggregate demand refers to sum total of demand for all goods and services in an economy during the period an accounting year (b) Aggregate supply is the money value of the total output produced in an economy in an accounting year (c) The functional relationship between income and consumption is called as consumption function 2. Effective demand is that level of aggregate demand where it is equal to aggregate supply. It is affected by Aggregate demand and aggregate supply. 3. Keynes advocates for Aggregate demand to fight against the depression. 4. Marginal Efficiency of Capital means expected rate of return from capital or amount of investment. High MEC motivates firms to invest more. Assertion(A) . Equilibrium GDP is read only in a situation of full employment. Reason(R) . A situation when AS=AD along with fuller utilisation of resources in the economy is called full employment equilibrium Assertion(A) is false but Reason(R)is true. Assertion (A). The sum of APC and APS is equal to 1 Reason (B). The income can either be consumed or saved, so APC+APS=1 Both Assertion(A) and Reason(R )are true and Reason(R)is the correct explanation of the assertion.

(Assertion) Marginal propensity to consume will be equal to unity when income is equal to consumption. (Reason) Saving is zero at the break-even level of equilibrium output. Both A and R are true and R is the correct explanation of A. Assertion: The value of APC can be equal to one. Reason: Value of APC falls with successive increase in the level of income. Ans : Both assertion and reason are true and reason is not the correct explanation of assertion. Assertion – bank rate is the rate of interest at which central bank lends to the commercial banks for long term. Reason – During deflation central bank has to lower its bank rate. Both Assertion and Reason are True and Reason is not the correct explanation of assertion Assertion (A) An increase in demand before the full employment level of income does not increase output and employment Reason (R) Resources are lying idle in the economy. An increase in demand before the full employment level of income tends to increase output and employment Both Assertion (A) and Reason (R) are true and Reason (R) is the true correct explanation of Assertion (A) Assertion (A) Excess demand does not affect the level of output. Reason (R) Excess demand is a post full employment situation. Both Assertion (A) and Reason (R) are true and Reason (R) is the true correct explanation of Assertion (A) Assertion(A): Y= C+I (where Y= National Income, C= consumption, I= Investment) Reason (R) : C and I are important determinants of national income. Both A and R are true and R is the correct explanation of A. Assertion: Consumption curve always starts from a positive incept on Y-axis. Reason: Autonomous consumption refers to minimum level of consumption, which is needed for survival, i.e. consumption at zero level of national income. Ans: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

CASE STUDY It is the matter of fact when income increases, consumption also increases. For example, in an economy, income increases from ₹ 5000 to ₹ 10,000. As a result of it, consumption in the economy also increases from ₹ 3,000 to ₹ 6000 cr. In the same economy, autonomous consumption is given as ₹ 50. At the same time, some business firms are planning to infuse ₹ 1,000 crores as new investment to boost their productive capacity which will also increases employment and hence bring prosperity in the economy. Answer the following question on the basis of information given above: Q: 1 Define Consumption function. Also derive equation of consumption function from the information given above. Q:2 Define Induced Consumption. Q:3 Define investment multiplier. Find the value of investment multiplier with reference to above information. Q:4. Find the value of additional income resulted from new investment of 1,000 Ans. 1 Consumption function refers to functional relationship between consumption and national income, i.e. C = f (Y) equation of consumption function -- C = C + bY C = 50 + .6Y Ans. 2 Induced consumption is the portion of consumption that changes with change in income. With increase in income, consumption increases and with fall in income consumption falls. So there is a positive relationship between income and induce consumption. Ans.3 Investment multiplier is the ratio between Change in income and change in consumption. The value of investment multiplier is 2.5. Ans.4 2500 Read the following news report and answer Questions 7--10 on the basis of the same: The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Of course, even if income is zero, some consumption still takes place. Since this level of consumption is independent of income, it is called autonomous consumption. We can describe this function as: C = + cY (4.1) The above equation is called the consumption function. Here C is the consumption expenditure by households. This consists of two components autonomous consumption and induced consumption (cY). Autonomous consumption is denoted by and shows the consumption which is independent of income. If consumption takes place even when income is zero, it is because of autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income. When income rises by Rs. 1. Induced consumption rises by MPC i.e. c or the marginal propensity to consume. Source: NCERT Book. 7. Consumption Function is the relationship between consumption and ______________ (Income/saving). 8. Consumption at Zero level of income is called as ___________________ (autonomous consumption/ induced consumption).

9. Which consumption is dependent on income __________________ (autonomous consumption/ induced consumption)? 10. When MPS = 0.25, MPC is: a) 0.80 b) 4 c) 0.75 d) None of the above. 11.Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: (1 mark) Assertion (A):Inflationary gap may be defined as an excess of aggregate demand over aggregate supply at the full employment level Reason (R): The inflationary gap results in the rise in general price level which is called inflation. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A) c. Assertion (A) is true but Reason (R) is false. d. Assertion (A) is false but Reason (R) is true Answers 7. Income 8. Autonomous consumption 9. Induced consumption 10. c) 0.75 11. b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A) Read the following statements- Assertion (A) and Reason (R). Choose one of the correct alternatives given below: Assertion (A): If investment falls, multiplier process does not work. Reason (R): Multiplier is the reciprocal of marginal propensity to save. Alternatives: (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) (b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A) (c) Assertion (A) is true but Reason (R) is false (d) Assertion (A) is false but Reason (R) is true Answer (d) CASE STUDY A strong revival of consumption demand is important for the Indian economy as it has ripple effect on other sectors. Consumption is often viewed as the driving force of India‘s growth story. The central bank said demand in the economy will take quite some time to mend and regaining pre-COVID levels will have to be fuelled by government consumption. In its report, RBI also said that \"deep-seats and wide-ranging\" reforms are needed to regain losses and return to the path of sustainable economic growth.

\"An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre – COVID -19 momentum,‖ the central bank said. Private consumption has lost its discretionary elements across the board, it said, adding that transport services, hospitality, recreation, and cultural activities were particularly affected in the economy, where consumption accounts for some 60 per cent of the GDP. Read more at: https://economictimes.indiatimes.com/markets/stocks/news/economic-contraction-likely-to- continue-in-q2- rbi/articleshow/77749186.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign =cppst Q1. AD function is indicated by: 1) The line of C+I 2) The line of Y 3) The line of C+S 4) None of these Ans.The line of C+I Q2. Who‘s MPC is higher? (Rich/Poor) Ans. Poor Q3. The Equilibrium level of GDP is determined when: 1) Y= Autonomous C + MPC(Y) – 1 2) Y= Autonomous C - MPC(Y) – 1 3) Y= Autonomous C + MPC(Y) + 1 4) Y= Autonomous C - MPC(Y) + 1 Ans. Y= Autonomous C + MPC(Y) + 1 CASE STUDY When an economy undergoes a deflationary shock, the implications can be both positive and negative for consumers and businesses. There is a big difference between the term‘s disinflation and deflation. Which we will first go over before getting into the causes and effects of deflationary shocks and how these shocks can affect the economy, consumers and businesses. Disinflation usually occurs during a period of recession and manifests itself by slowing down the rate at which prices increase; this occurs as a result of a decrease in consumer sales. If the inflation rate drops to a lower level than before, technically that difference is deflation. Deflation, on the other hand can be thought as the opposite of inflation or as negative inflation and it occurs when the supply of goods or services rises than the supply of money. 1. ___________ (Central Bank / Commercial Bank) helps to correct the situation of deflationary shock in a country through its credit control policy. 2. Which of the following statements stand true during deflationary gap? a. Actual output falls short of potential output. b. Potential output falls short of actual output. c. Actual demand is less than expected demand. d. Expected demand is less than actual demand. 3. Which of the following steps should be taken by the Central Bank to boost demand in the economy during deflationary gap?

a. Decrease tax rate b. Deficit financing c. Decrease legal reserve requirements d. Increase foreign exchange reserves 4. What will be the impact on money supply during deflationary gap? a. Increase b. Decrease c. Remain constant d. Cant be predicated Answers: 1. Central Bank 2. c. Actual demand is less than expected demand. 3. c. Decrease legal reserve requirements 4. b. Decrease ASSERTION-REASON BASED QUESTIONS Assertion: In an economy, if consumption expenditure is high, investment multiplier will be high. Reason: The velocity by which money change hands, determines the growth of an economy. Alternatives: a. Both Assertion and Reason are true and Reason is the correct explanation of assertion. b. Both Assertion and Reason are true and Reason is not the correct explanation of assertion. c. Assertion is true but reason is false. d. Assertion is false but reason is true. Answer: d. Assertion is false but reason is true. I Assertion; According to Keynesian theory of employment an economy can be at equilibrium only at full employment equilibrium. Reasoning: An economy can be in equilibrium both at full employment and at under full employment . a) Assertion is correct b)Only reasoning is right. C) both A&R are right . d) both are wrong. Answer-Option b CASE STUDY:‖ An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe and it will take quite some time to mend and regain the pre Covid 19 momentum. Urban consumption demand has suffered a major blow viz., Consumer durables, hospitality, recreation and cultural activities etc. The consumer confidence fell to an all time low reporting pessimism relating to general economic situation, employment, inflation and income. --- -The Economic Times, August 25, 2020 1What are the main components of aggregate demand? 2What are the primary reasons cited for decline of aggregate demand? 3The implications of fall in AD can be severe for the economy—clarify. 4.Explain the relation between fall in AD and the economy at large. Answers:. 1AD= C+I 2Consumer confidence was low due to unemployment, inflation and income. 3.Fall in AD will affect future investment ,employment, savings and ultimately GDP . 4.AD is very essential for circular flow of income in the economy. Unless consumers show an inclination to consume, economic activities cannot increase. Then AS cannot also increase as business men will have no incentive to produce.

Read the following news report and answer Questions 7-10 on the basis of the same: COVID-19 to have significant deflationary impact due to demand evaporation’ Ruling out any impact of stimulus on the price situation, Chief Economic Advisor K.V. Subramanian on Thursday said the COVID-19 pandemic has severely dented the demand for non- essential or discretionary goods, creating deflationary conditions. He also said that a good part of the 20 lakh crore stimulus package is designed in a manner that the fiscal deficit remains under control. ―COVID has a significant deflationary impact because demand especially for non-essential or discretionary goods and services will go down significantly. Therefore, it is unlikely that there would be too much inflationary impact through fiscal deficit or stimulus package,‖ Subramanian told in an interview. The proposed stimulus package will generate demand by infusing liquidity into the system and thus perk up the economy, the CEA said. The Economic Times: May 15th, 2020 Q7. Deficiency of demand creates_______ (deflationary gap/inflationary gap) in the economy. (Choose the correct alternative) Ans: Deflationary gap Q8. Inflationary gap: (Choose the correct alternative) a) raises the level of output. b) does not change the level of output c) raises the general price level. d) both (b) and (c) Ans: d) both b and c Q9. ___________ gap is measured as the difference between ‗planned AD which is beyond full employment level‘ and ‗AD that corresponds to full employment‘. (Inflationary/Deflationary) Ans: Inflatioanry gap Q10. In a given situation when AD<AS in an economy then_______. (a) General price level in the economy will increase (b) Inventory stock will decrease beyond desired level (c) Situation of excess supply arises (d) Producers will decrease planned output Ans: d) Producers will decrease planned output Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: Assertion(A): APS can be negative at low level of income when consumption expenditure is greater than income. Reason(R): APS can never be greater than 1 as savings can never be more than national income. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A) c. Assertion (A) is true but Reason (R) is false. d. Assertion (A) is false but Reason (R) is true. Ans: a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

An assessment of aggregate demand during the year so far suggests that the shock to consumption is severe, and it will take quite some time to mend and regain the pre-COVID-19 momentum. The Reserve Bank's survey for the month of July indicates that consumer confidence fell to an all- time low, with a majority of respondents reporting pessimism relating to the general economic situation, employment, inflation and income. Urban consumption demand has suffered a bigger blow - passenger vehicle sales and supply of consumer durables in Q1 of 2020-21 have dropped to a fifth and one- third, respectively, of their level a year ago; air passenger traffic has ground to a halt. Rural demand, by contrast, has fared better, it added. The second straight quarter of contraction pushed India into a technical recession for the first time. The Reserve Bank of India has projected the Indian economy to contract 9.5% in the current fiscal while the International Monetary Fund (IMF) and World Bank estimates contraction at 10.3% and 9.6%, respectively. Q1. Deficient Demand indicates- b) deflationary gap a)Underemployment equilibrium d) both a and b c) full employment equilibrium ANSWER d) both a and b Q2 Effect of deficient demand in an economy are a) increase in output, income,employment and price level. b) decrease in output, income, employment and price level. c) increase in output, income and Employment but no change in the price level. d) decrease in output ,income and Employment but no change in the price level. ANSWER b) decrease in output, income, employment and price level. Q 3 In the economy consumption level has fallen and now suppose people are spending only 20% of the additional income on consumption .Assuming that investment increases by 100 cr.,total increase in income will be ___________. Answer 125 cr. Q3. To overcome the situation of deficient demand central bank should- (a) Increase CRR (b) Increase Bank rate (c) purchase of government securities in the open market (d) sale of Government Security in the open market. ANSWER ( C) purchase of government securities in the open market Q5 which of the following doesn't come under quantitative method of monetary policy? (a) bank rate (b) CRR

(c) SLR (d) margin requirement ANSWER(d) Margin requirement Q5 In situation of deficient demand, taxes must be__________( increased/ decreased) ANSWER Decreased. ASSERTION REASONING ASSERTION(A): bY shows dependence of consumption on income. Reason(R) : Induced consumption is directly determined by level of income. Alternatives 1.Both Assertion (A)and Reason (R )are true and Reason(R) is the correct explanation of assertion(A). 2. Both Assertion (A)and Reason ( R) are true but reason ( R )is not the correct explanation of Assertion (A). 3. Assertion (A) is true but reason( R )is false. 4.Assertion (A) is false but reason ( R) is true. ANSWER 1.Both Assertion (A)and Reason (R )are true and Reason(R) is the correct explanation of assertion(A). Case based questions Read the following case study paragraph carefully and answer the questions on the basis of the same. In the simple Keynesian model of income determination, we assume that there is no government activity in the economy. If we remove this assumption to see how the equilibrium level of income can be determined in the presence of economic activity of the government, it can be seen that, the government collects money from the economy and spends money into the economy. Government expenditures and receipts have an important effect on the economy. Government budget has two sidesi.e, the expenditure side and the receipt side. Money inflows in the receipt side of the budget are of three types, ie taxation, public borrowing and sales of goods and services: money outflow in the expenditure side of the budget are also of three types i.e. purchase of goods and services, transfer payment and repayment of debts. Taxation is a compulsory contribution made by the people to the government against which no direct payments are made by the government. A taxpayer becomes poorer by the amount of taxes. Hence, the income available in the hands of the people is reduced by the amount of taxes paid. Public borrowing is made through the sale of new Government Bonds, which people voluntarily purchase. Neither their income nor their wealth is deduced thereby. They simply alter the form and composition of wealth in the private sector. An increase in the net indebtedness of the government to the central bank takes place through the creation of new money by the central bank. 1. If government increase its expenditure on infrastructural development project, how will this impact the aggregate demand? (a) Increase (b) Decrease (c) Remains constant (d) Increase in a three-sector closed economy Ans a

Assertion (A) - Higher income groups has lower propensity to consume, as compared with lower income group. Reason (R) - Consumption expenditure can never be zero even when a person doesn't have any income. Alternatives 1. (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion ( 2. (b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assert 3. (c) Assertion (A) is true, but Reason (R) is false 4. (d) Assertion (A) is false, but Reason (R) is true Ans b The Covid-19 crisis and lockdowns imposed to curb the spread of the virus, presented a unique challenge for economies, including India. It was a simultaneous demand and supply shock. Restrictions on movement impacted the supply, while a fall in jobs, income and regular business activities impacted demand. Economists have been divided on whether the Covid crisis will prove to be inflationary or deflationary. Early indications ⁠— from inflation expectation surveys and now inflation data ⁠— suggest a mix of forces leading to higher inflation headline. Economists, however, still believe that a collapse in demand will eventually lead to deflationary pressures overwhelming any supply-driven inflation. ―As the forward and backward linkages of economic activity are gradually repaired, the supply shock will likely fade while the demand shock will remain, pushing core inflation lower,‖ Ruling out any impact of stimulus on the price situation, Chief Economic Advisor K V Subramanian on Thursday said the COVID-19 pandemic has severely dented the demand for non- essential or discretionary goods, creating deflationary conditions. He also said that a good part of the Rs 20 lakh crore stimulus package is designed in a manner that the fiscal deficit remains under control. \"COVID has a significant deflationary impact because demand especially for non- essential or discretionary goods and services will go down significantly. Therefore, it is unlikely that there would be too much inflationary impact through fiscal deficit or stimulus package,\" Subramanian told in an interview. The proposed stimulus package will generate demand by infusing liquidity into the system and thus perk up the economy. Last week, the government raised its market borrowing programme by a whopping 54 per cent of the Budget estimate to Rs 12 lakh crore for the current fiscal to fund a comprehensive stimulus package of Rs 20 lakh crore to fight the COVID-19 crisis. According to some estimates, Rs 4.2 lakh crore additional borrowing by the government will push the fiscal deficit to 5.8 per cent of the GDP in FY21 as against the budget target of 3.5 per cent. 1. Increase in liquidity is an essential step by the government during- a) Inflation b) Deflation c) Both d) None Ans. B 2. Due to COVID 19, which type of good is having more elastic demand? a) Essential Items b) Non-essential Goods c) Both d) None Ans. B 3. What are the sources by which government borrows-

a) RBI b) Public c) ROW d) All Ans. D 4. Why finance minister has proposed Financial packages? Ans. To increase the money supply in economy. ASSERTION (A) Equilibrium below full employment level led to decrease in output level. REASON (R) Output level is decreased due to overutilisation of resources. Assertion (A) is correct but Reason (R) is false. Aggregate demand represents the total demand for goods and services at any given price level in a given period. Aggregate demand over the long-term equals gross domestic product (GDP) because the two metrics are calculated in the same way. In the long-run, increases in aggregate demand cause the price of a good or service to increase. When the demand increases the aggregate demand curve shifts to the right.The aggregate supply determines the extent to which the aggregate demand increases the output and prices of a good or service. Q.1 How can you relate Aggregate demand and Expenditure method ? Ans : Formula for AD = C +I + G + X-M Expenditure method : consumption expenditure + Investment expenditure + government expenditure + net exports From the formula they are related to each other. Q.2 how can you control increase in AD ? Ans. With the help of bank rate, CRR , SLR or open market operations. Q.3 what is the impact on employment and resources due to excess demand? Ans. As it is over full employment equilibrium, the resources are already fully utilized and their in no unemployment only change is in price. Q.4 What degree of angle is formed when AS is plotted on graph ? Ans. 45* AR question : Assertion : In case of excess demand, RBI increases the bank rate which reduces the money supply Reason : Apart from Bank rate CRR and SLR is also increased A) Assertion is correct and Reason is supporting assertion B) Assertion is correct but reason is not supporting assertion C) Assertion and reason both are incorrect D) None of the above

Ans. A ) Indian Households May Have Marginal Propensity To Consume Less State Bank of India's latest edition of Ecowrap has noted that many households may have marginal propensity to consume less because several types of spending are not easily available amid social distancing constraints. Analysing the trends in deposits since the lockdown was first imposed, on May 25, the bank noted that the data revealed that deposits (savings, current and term) increased significantly during Lockdown 1 as people were apprehensive in the beginning about spending, and turned frugal. During Lockdown 2, there was a 25% decline in bank deposits, but term deposit accrual was very healthy. Powered by Capital Market - Live News MPC explains what proportion of change in income is spent on __________ Consumption. ―Indian Households May Have Marginal Propensity To Consume Less’. Analyze the statement. Fall in MPC implies fall in income of the country as the value of multiplier depends upon MPC. The bank noted that the data revealed that deposits (savings, current and term) increased significantly during Lockdown 1 as people were apprehensive in the beginning about spending, and turned frugal. People turning frugal is good for the economy. Defend/refute the statement. The given statement is refuted. Being frugal is good for households but not for economy as it will lead to fall in consumption and income of the country One person expenditure is another person‘s___________ Income. A/R QUESTIONS Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: Assertion (A): Decrease in propensity to consume lead to deficient demand during pandemic. Reason (R): It will lead to less production, involuntary unemployment & fall in general price level in the economy. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)

b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A) c. Assertion (A) is true but Reason (R) is false. d. Assertion (A) is false but Reason (R) is true. a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) Read the following statements- Assertion (A) and Reason (R). Choose one of the correct alternatives given below: Assertion (A):- Average propensity to consume can never be zero. Reason (R) :- Consumption can never be zero i.e. even at zero level of national income, there is autonomous consumption. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A) c. Assertion (A) is true but Reason (R) is false. d. Assertion (A) is false but Reason (R) is true. Ans: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) Read the following hypothetical case study carefully and answer the following questions on the base of the same: Open Market Operations (OMOs) in State Development Loans (SDLs) In order to impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. This would improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities. This measure should ease concerns about illiquidity and absorptive capacity for the total government borrowing in the current year. Governor‘s Statement- 9 October 2020 (a) What do you mean by Open Market Operations? (1) Ans. Open Market Operations refers to sale and purchase of government securities in the open market by the central bank. (b) In order to impart liquidity as one of the member of Monetary Policy committee you would suggest the government to _______ the government securities through OMO. (1) Ans. buy (c) As per the above move of the RBI in Governor‘s statement this will solve the problem of ___________. Ans. Deficient Demand (1) (d) State any one fiscal measure to control the above discussed problem. (1) Ans. Increase in Government Expenditure or Decrease in Taxes

If we want to predict what the equilibrium value of the final goods, output or GDP will be, it is important to know what quantities of the final goods people plant to demand and supply. We must, therefore, learn about the determinants of the ex-ante values for consumption, investment or aggregate output of the economy. When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consist of ex-ante consumption, ex-ante investment, government spending etc. we also assume that the aggregate supply is fixed at this price level. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. An increase in investment causes aggregate output of final goods to increase by larger amount. Q1. What is the planned value of investment variable known as? Q2. __________ process leads to change in aggregate output due to change in investment. Q3. Aggregate output can be defined as aggregate ________ of final goods and services in the economy. Q4. Investment that is income inelastic is called as ________ investment and investment that is income elastic is called as _________ investment. Answers: 1. Ex-ante investment 2. Investment multiplier 3. Supply 4. Autonomous, induced Assertion and Reason based: Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: Assertion (A): the deflationary gap is called deflationary because it sets in motion forces that cause deflation i.e. a fall in general price level. Reason (R): in order to remedy the problem of deficient demand, the aggregate output has to be increased by an amount equal to the deflationary gap. Alternatives: (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) (b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (c) Assertion (A) is true but Reason (R) is false. (d) Assertion (A) is false but Reason (R) is true. ANSWER: (c) Assertion (A) is true but Reason (R) is false. 1. Readthefollowingstatements- Assertion(A)andReason(R).Chooseoneofthecorrectalternativesgiven below: Assertion(A):Effective Demand is that aggregate demand price which becomes effective, because it is equal to aggregate supply price Reason (R): Effective Demand represents a position of ‗short-run‘ equilibrium.

Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion(A). b. BothAssertion(A)andReason(R)aretrueandReason(R)isnotthecorrectexplanationofAsse rtion(A) c. Assertion (A) is true but Reason (R) isfalse. d. Assertion (A) is false but Reason (R) istrue. Ans: BothAssertion(A)andReason(R)aretrueandReason(R)isnotthecorrectexplanationofAssertion(A ) 2. Readthefollowingstatements- Assertion(A)andReason(R).Chooseoneofthecorrectalternativesgiven below: Assertion(A):Aggregate Supply is nothing but the national income Reason (R): Money value of final goods and services is equal to net value added. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion(A). b. BothAssertion(A)andReason(R)aretrueandReason(R)isnotthecorrectexplanationofAsse rtion(A) c. Assertion (A) is true but Reason (R) isfalse. d. Assertion (A) is false but Reason (R) istrue. Ans: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion(A). Case Studies 1. Read, the following hypothetical Case Study, carefully and answer the below question on the basis of the same. John Maynard Keynes offered new thinking on income and employment theory with the publication of General Theory of Employment, Interest and Money (1936). Building on his theory, Keynesians have stressed the relationship between income, output, and expenditure. Since transactions are two-sided—in that one person‘s income is another person‘s expenditure—the relationship could be expressed in the form of a simple equation: Y = O = D, where Y is the national income (i.e., purchasing power), O is the value of the national output, and D is national expenditure. What this equation means is that effective demand is equal to income as well as to output. Since consumers can either spend or save their income, Y = C + S, where C is consumption and S is savings.

Similarly, on the output side, production is either sold to final customers or invested in inventory or new capital equipment, (such as production plants or machinery). So O = C + I, where C represents sales to final customers and I investment. Thus, C + S = C + I and, therefore, S = I. However, while savings and investment may thus be equated from an accounting standpoint, in fact, actual planned savings and planned investment may differ in real life. Keynesians say that economic instability stems from this discrepancy between savings and investment. Source: https://www.britannica.com/ 1. The theory of income and employment was propounded by ______________ (J M Keynes) 2. Income (Y) is always equal to ____________. (C + S). 3. What is effective Demand? Effective Demand is that aggregate demand which becomes effective, because it is equal to aggregate supply. 4. Defined planned savings. The savings which are planned (intended) to be made by all the households in the economy during a period is called planned (or ex-ante) savings The Indian household's typical marginal propensity to consume is estimated to be about 0.7. Consumption is a fundamental aspect of economic activity and also an important component of national income. Consumption function also plays an important role in determining income and employment in the economy. Employment in the economy is based on effective demand. The country's savings have increased significantly since the economic recovery. This can be considered as a positive aspect of economic development. The value of the multiplier has dropped significantly since the economic reforms. The main reason behind this is the decline in marginal consumption. From the above it can be said that in order to increase employment in the country, it is very necessary for the government to increase autonomous investment. In addition, the government must make the necessary efforts to attract the savings of the economy to investment. Read the above information carefully. And answer the following questions: 1. Explain diagrammatically how consumption function is affected by fall in MPC. 2. Calculate Investment multiplier for the Indian economy, assuming MPC fall by 0.2 from a typical Indian household during COVID‘19. 3. With a numerical example show how increase in autonomous investment will increase employment? 4. Give two measures to overcome the effects on the economy from COVID Pandemic which can be taken by RBI. Ans: 1.

2. Investment Multiplier will be K = 1/1-MPC = 1/1-0.5 = 2 3. Hint: Working of Investment Multiplier 4. Hint: Monetary policy Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: Assertion (A): Autonomous consumption refers to the investment expenditure which is independent of income. Reason (R): We need to maintain a minimum amount of saving for survival. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A). c. Assertion (A) is true but Reason (R) is false. d. Assertion (A) is false but Reason (R) is true. Answer- c. Assertion (A) is true but Reason (R) is false. Case Study on Aggregate demand Chapter Aggregate demand for petroleum products, including auto and industiral fuels, rose for the first time in seven months, as India's economy limped out of a pandemic-induced consumption slowdown. Consumption of petroleum and related products rose 2.5% year-on-year to 17,777 thousand metric tonnes in October, according to data from the Petroleum Planning and Analysis Cell. Answer the following questions - (4) Q1. Aggregate demand would shift right if either a) Price level decreased, or government expenditure increased b) Price level decreases, or government instituted a tax credit c) Government expenditure or the money supply increased Ans c) Government expenditure or the money supply increased Q2.If countries that imported from the US went into a recession , US went into a recession, U.S. net exports would a) rise , making aggregate demand shift right b) rise, making aggregate demand shift left c) fall , making aggregate demand shift right d) fall , making aggregate demand shift left Ans d) fall, making aggregate demand shift left Q3. An increase in which of the following shifts aggregate demand to the right ? a) Consumption b) Investment c) Government expenditure d) All of the above are correct Ans d) All of the above are correct

Q4.If the dollar appreciates because of speculation or government policy, the U.S. net exports a) increase and aggregate demand shifts right b) increase and aggregate demand shifts left c)Decrease and aggregate demand shifts right d) Decrease and aggregate demand shifts left Ans d) Decrease and aggregate demand shifts left Assertion( A): Equilibrium beyond full employment is a better situation than equilibrium at full employment Reason( R): Output is greater even beyond full employment equilibrium Choose the correct alternative from the following. (a) Both A and R are true and R is the correct explanation of A. (b) Both A and R are true but R is not the correct explanation of A (c)A is true but R is false (d) A is false but R is true. (e) If both A and R are false Ans C) Read the following news report and answer questions 7-10 on the basis of the same: RBI governor Dr.Shaktikanta Das on Friday announced a series of steps to boost liquidity in a stimulus worth 3.2% of GDP to counter the economic impact of the coronavirus outbreak. RBI reduces the repo rate by 75 basis points to 4.4% and Reverse repo rate by 90 basis points to 4%. Cash Reserve Ratio (CRR) of all banks have been reduced by 100 basis points to 3 per cent of net demand and time liabilities with effect from the fortnight beginning March 28 for a period of 1 year. Reverse repo rate cut more so that banks are incentivized to lend, RBI governor said. RBI will also inject liquidity worth 74 lakh crores into the system. He also predicted a big global recession and said India will not be immune. Aggregate demand may weaken and ease core inflation. 1. Decrease in Cash Reserve Ratio by Reserve Bank of India will lead to a____________ (rise/fall) in aggregate demand. (Choose the correct alternative) 2. In a situation of inflationary gap at full employment level there is: (Choose the correct alternative) (a) Aggregate demand > Aggregate supply (b) Aggregate demand < Aggregate supply (c) Aggregate demand = Aggregate supply (d) None of these

3. Cut in Repo Rate by Reserve Bank of India is likely to____________ (increase/ decrease) the demand for goods and services in the economy. (Choose the correct alternative) 4. When at full employment level of income, aggregate demand is lesser than aggregate supply, it is termed as__________. (Choose the correct alternative) (a) Inflationary gap (b) Deflationary gap (c) Excess demand (d) None of these A1. Rise A2. (a) Aggregate demand > Aggregate supply A3. Increase A4. (b) Deflationary gap Question 5. Readthefollowingstatements- Assertion(A)andReason(R).Chooseoneofthecorrectalternativesgiven below: Assertion(A): Neither Inflation or Nor Deflation is desirable for economy. Reason (R): In short Run economy never operates at full employment. Alternatives: (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion(A). (b) BothAssertion(A)andReason(R)aretrueandReason(R)isnotthecorrectexplanationofAsserti on (A). (c) Assertion (A) is true but Reason (R) isfalse. (d) Assertion (A) is false but Reason (R) istrue. Ans5. (b) BothAssertion(A)andReason(R)aretrueandReason(R)isnotthecorrectexplanationofAssertion (A). Assertion (A):The value of APC can be greater than one. Reason (R):When total consumption is equal to total income. A. Both A and R are true and R is the correct explanation of A. B. Both A and R are not true and R is not correct explanation of A. C. A is true but R is false. D. A is false but R is true. Q2: Case study In Keynesian analysis, aggregate supply refers to the ex-ante,ie. Planned aggregate output produced in the economy in a given year. In a two sector economy, in the absence of indirect tax and subsidy,the value of total final goods and services is distributed among the factors of production ( wages to labour, interest to capital and rent to land) whatever leftover is appropriated by the entrepreneur and is called profits. Thus, the sum total of aggregate factor payments in the economy ie. National income, is equal to the aggregate value of the output of final goods ie Aggregate Supply . Q.1 In the two sector economy and without any 8ndirect tax and subsidy,aggregate supply and----- ---- are always equal. ( fill the blank) Q.2 Discuss the significance of 45°line in Keynesian economics. Q.3 Define Aggregate Supply. Q.4 The aggregate supply depicts the relationship between A. The unemployment rate and the total quantity of goods and services that firms supply. B. The cost of labour and the total quantity of goods and services that firms supply. C. The cost of inputs and total quantity of goods and services that firms supply.

D. The level of prices and the total quantity of goods and services that firms supply. Answers: 1. National income 2. Corresponding to every point on the 45° line ,Aggregate Supply =National Income. 3. Aggregate Supply is the total amount of money value of goods and services (which is paid to the factors of production against their factor services) that all the producers are willing to supply in the economy. Income Determination Case study and A/R Questions By Akshit Khanna Read the following extract and answer the questions based on it. The Government announced giving out cash vouchers to Central Government employees this year, in lieu of leave travel concession (LTC) fare which could be spent only on buying non-food GST- rated items. Finance minister said that the Government will also give Rs 10,000 special festival advance to all its employees as a one-time measure. THE HINDU 12 OCTOBER 2020 Q1. The objective behind this measure taken by the government in the present situation is to ------- ------------ Increase/ Decrease the demand in the economy. 1 Q2. Increase in Government spending will help to bridge ------------ Inflationary/Deflationary gap. 1 Q3. Correcting the situation of -----------------------------Deficient/Excess demand will help in ensuring full employment of the available resources. 1 Q4. Deficient demand leads to -------------------Full employment/ Unemployment and fall in output and income. 1 2. Go through the Centre‘s proposal on expenditure given by Finance Minister Ms.NirmalaSitharaman and Answer the questions that follow: ₹25,000 crore has been allotted in addition to the earlier figure set aside for budgeted expenditure of ₹4,13,000crore. \"This will be specifically on roads, urban development, water supply, defence infrastructure, and domestically produced equipment for defence infrastructure,\". Q1 Above mentioned expenditure allotted by the govt. is ------------------- Revenue/ Capital expenditure. 1 Q2. Choose the correct statement: a) In depressed situations govt. reduces its expenditure to bring stability. b) Government increase its expenditure to control fluctuations in the economy. c) In depressed conditions govt. increase its expenditure to undertake important projects, thus influences allocation of resources and bring Q1. Read the given content and answer the following questions:- India's retail inflation expected to stay above 7 % in November, economists say India's retail inflation probably fell in November from October but remained above the Reserve Bank of India's target, amid high food and petrol prices , a Reuters poll of economists showed. Retail inflation has stayed above the central bank's comfort zone of 2% to 6% for seven consecutive months, a streak not seen since August 2014. The Dec. 4-9 poll of 48 economists forecast a drop in inflation in November to 7.10 % from 7.61% in October, which was the highest since May 2014. If realised, November‘s rate would be above 7.0 % for the third consecutive month. \"Inflation for November is likely to be lower than October as there was some moderation in prices of vegetables

in particular as well as pulses:' said MadanSabnavis, chief economist at CARE Ratings \"On the upside, petrol prices had increased which ,worked in the other direction.\" At its Dec. 2-4 meeting, the RBI kept its key repo rate at 4.0% and the Monetary Policy Committee retained its accommodative stance while ensuring ample liquidity, playing a delicate balancing act of curbing high inflation and bolstering a nascent economic recovery . The Central bank also said inflation would remain elevated . \"There is still a lot of liquidity sloshing around in the system, which in combination with normalizing economic activity might produce a dangerous inflationary cocktail:' said Hugo Erken , head of international economics at Rabobank. The Indian economy will suffer its worst contraction on record this fiscal year, and recent government stimulus does not go far enough to significantly boost activity depressed by the coronavirus pandemic, according to economists polled by Reuters. Asia's third-largest economy contracted 7.5% in the quartet ending in September after declining 23.9% in the April-June quarter. The poll predicted industrial output rose 1.1% in October from a year earlier on strong manufacturing production ahead of the festive season. In September, industrial production was in positive territory for the first time since February 2020. Infrastructure output, which accounts for about 40% of total industrial production, contracted 2.5% in October. Q1. Which of the following measures should not be taken by the government in order to control inflation:- A. Increase in repo rate B. Increase in production C. Increase in imports D. Increase in government spending Answer: D. Increase in government spending Q2. Changing repo rate to correct inflation or deflation is a ________instrument. ( fiscal , monetary) Answer : Monetary Q3. What is meant by the term liquidity here?give Answer: Money supply Q2. Assertion (A): The value of both MPS and APS can be one. Reason (R): The sum of APS and MPS is equal to one. a) Both (A) and (R) are true and (R)is the correct explanation of (A) b) Both (A) and (R) are true and (R) is not the correct explanation of (A) c) Both (A) and (R) are false d) (A) is wrong (R) is true Answer: d) (A) is wrong (R) is true CASE STUDY BASED QUESTION Read the following news report and answer Questions on the basis of the same: The government is deliberating on making a special identity card for transgender community members that will help in linking them with various social welfare schemes, a member of the recently-constituted National Council for Transgender Persons said. The Centre had in August constituted the National Council for Transgender Persons (NCTP) to formulate policies, programmes, draft legislation and projects regarding members of the community for achieving equality and full participation by them. The first meeting of the NCTP was held through video conference on Thursday. It was chaired by Social Justice Minister Thaawar Chand Gehlot.

The Economic Times. Oct 18, 2020 1. Bank money is that money which is: (a) Printed by RBI (b) Printed by Government (c) Generated in the form of credit creation (d) None Answer-(c) 2. Excess of Government expenditure on the social security schemes may lead To ___________ (inflation/deflation) in the economy. (Choose the correct one) Answer-inflation 3. The best measure to make the deficiency demand balanced is: (Choose the correct option) (a) To increase the deficit budget (b) To raise the rate of interest (c) To make available more credit (d) To increase exports Answer-(c) 4. Full employment is the situation in which all desirable people get work at: (Choose the correct option) (a) market wage rate (b) constant wage rate (c) less than market wage rate (d) more than market wage rate Answer-(a) Assertion: To increase excess demand Central Bank starts purchasing securities from the open market. Reason: To maintain aggregate demand, RBI use only qualitative methods. (Choose the correct option) (a) Both assertion and reason are correct and reason is the correct explanation of assertion. (b) Both assertion and reason are correct and reason is not the correct explanation of assertion (c) Assertion is correct but reason is wrong. (d) Reason is correct but assertion is wrong. Answer- (c) Q1-Read the followingstatements-Assertion(A)andReason (R). Choose oneofthe correctalternatives given below: Assertion (A):The value of MPC lies between 0 and 1 Reason(R): ThereisalwayschangeinconsumptionwithrespecttochangeinIncome. Alternatives: (a) BothAssertion(A)andReason(R)aretrueandReason(R)is thecorrect explanationofAssertion(A). (b) BothAssertion(A)andReason(R)aretrueandReason(R)isnotthecorrectexplanation ofAssertion (A)

(c) Assertion(A)is truebut Reason(R)isfalse. (d) Assertion(A)is falsebut Reason(R)istrue. Ans-b Case study Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Equilibrium is attained at the point of equality of Y and AD by itself does not signify the full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factor of production . This situation is called the situation of deficient demand . It leads to decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to rise in prices in the long run. Q1. Which situation is not able to employ all factors of production? Ans. Deficient demand Q2. What leads to inflation? Ans. Excess demand Q3. When equilibrium is set to happen? Ans. Equilibrium happens when the level of income in the economy will not change even when there is unemployment in the economy. Q4. What do you mean by full employment level of income? It is that level of income where all the factors of production are fully employed. 21. Read the following statements - Assertion (A) and Reason (R). Choose one of 1 the correct alternatives given below: Assertion (A): The maximum value which MPC can take is 1. Reason (R):Consumer may choose not to change consumption even when income has changed. Alternatives: a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A). c. Assertion (A) is true but Reason (R) is false. d. Assertion (A) is false but Reason (R) is true. Ans. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A). Refer the following passage and answer questions on the basis of the same: You would recall that in microeconomic theory when we analyse the equilibrium of demand and supply in a single market, the demand and supply curves simultaneously determine the equilibrium price and the equilibrium quantity. In macroeconomic theory we proceed in two steps: at the first stage, we work out a macroeconomic equilibrium taking the price level as fixed. At the second stage, we allow the price level to vary and again, analyse macroeconomic equilibrium. What is the justification for taking the price level as fixed? Two reasons can be put