MBA – 0903 – MANAGERIAL ECONOMICS
Two Mark questions with Answers
1.Explain the meaning of Production.
Production is an activity that transforms inputs into output. Production is
any activity that increases consumer usability of goods and services thus
production consists of producing , storing and distributing tangible of goods
For example : A sugar mill uses such inputs as labour, raw material like
sugarcane and capital invested in machinery, factory building to produce
2. Explain short run and long run production .
Short run production.
The short run is that period of time in which some of the firm’s inputs
are fixed – these fixed inputs act as a limiting factor on change in output. In
the short run at least one of the inputs remains constant , while the other
inputs are vary in nature. Simply, if the firm uses more then two inputs but
only two of them are variable and other is fixed is said to be short run
The long run term is that period of time in which there are no limiting
factors on output change. In long run all the variables are variable in nature
and there is no fixed input like short run . Simply, if the firm uses only two
inputs and both of them variable in nature is said to be long run.
3. Define Production function with its assumptions.
The production function is purely a technological relationship which
expresses the relation between output of a good produced and the
different combinations of inputs used in its production. It means the
maximum Amount of output that can be produced with the help of each
possible combination of inputs. The production function can be
mathematically written as
1. technology is invariant
2. Production function includes all the technically efficient methods of
4. Define law of variable propositions .
The law of variable propositions states that as more and more of one
factor input is employed , all other input quantities held constant , a point
will eventually be reached where additional quantities of the varying input
will yield diminishing marginal contributions to total product
This law is also called as law of diminishing marginal returns
5. Define Iso-quant with its types .
An Iso-quant is a curve representing the various combination of two
inputs that produce the same amount of output . An Iso-quant is defined
as curve which shows the different combinations of the two inputs
producing a given level of output.
1. Linear Iso-quant
2. Input- output Iso-quant
3. Kinked Iso-quant
4. Smooth convex Iso-quant
6. What is Economies of Scale?
Economies of scale simply denote that per unit cost of production will
goes down if the firm involves in mass production. The cost benefit
secured by the firm at the time of large scale production is simply called as
economies of scale . Simply , If a firm expands its size of production by
increasing all the factor . These economies of large scale production have
been classified into
• Internal Economies
• External Economies
7.Define cost and cost of production .
The term cost refers to “ the amount of expenditure , notional or
actual , attributable to a thing or a product . Cost is the main factor with
which the profit maximizing firms need to deal carefully.
Cost of production.
Business decisions are generally taken on the basis of money
values of the inputs and outputs. Inputs multiplied by their respective
prices and added together give the money value of the inputs, i.e., the cost
of production . The cost of production is an important factor in almost all
business analysis and decisions.
8. Explain Sunk cost .
Sunk costs are the cost that are not altered by a change in quantity
and cannot be re covered . Sunk costs are a part of outlay costs. However,
most business decisions require cost estimates that are essentially
incremental and not sunk in nature .
9. Define short run & Long run cost function
In short run one input has to be kept constant and there is no
other way for the manufacturer to change his plant size. He has to keep
the plant size as constant and he has to manufacture all the things by
using the existing plant
In the long – run , by definition , all factors are variable so that the
entrepreneur has the before him a number of alternative plant sizes and
levels of output which he can adopt
10.Why a long run average cost curve is likely to be L – shaped?
The basis of argument as to why long run average cost curve is likely
to be L shaped rather then U shaped . Production costs falls continuously
with increase in output, while managerial costs may rise at very large
scales of output. The fall in production costs more then offsets the increase
in the managerial costs, so that the long run average cost continuously
falls with increase in scale
11. Write short notes on Market Structure?
Market structure shows the relationship between various buyers
and sellers in the market. An analysis of the market structure leads to an
understanding of the nature of competition in the market and nature of
pricing in the market.
Characteristics of Market Structure
The degree of seller concentration
The degree of Buyer concentration
The degree of product differentiation
The entry condition to the market
12. What is Monopoly?
Monopoly market is the market where there is only one supplier in the
market. Hence it is known as ‘one firm industry’. The product of the firm
has no close substitute in the market. There are considerable barriers to
the entry of new firms to the market.
In the monopoly market structure, market power and profitability for
the firm will be high. In practice, monopoly exists today only in certain
products like medicine and public utilities. In monopoly, there is no
difference between the firm and the industry. It is the only firm producing
13. What is Oligopoly?
Oligopoly is a term derived from the Greek words ‘oligos’ meaning a
few and ‘pollenin’ meaning to sell. Oligopoly refers to only few producers in
the market. If the producers are selling identical commodity, we will call it a
case of pure or perfect oligopoly. But if they are selling different
commodities, it will be a case of imperfect oligopoly. In oligopoly market
the sellers are few in number. Each seller knows his competitors
individually in each market. Any change in price and advertising policy of
an oligopolist will lead its competitors to change their products.
14. What is Monopolistic Competition?
The most important type of competition is the monopolistic
competition. In such competition, there are many buyers and sellers but
they are not producing identical commodities though all are producing the
In this market, the product of each company has a specific feature
to differentiate it with the product of other companies. Thus in Monopolistic
competition there is product differentiation and hence each company
charges different price. E.g. Soaps, tooth pastes, blades, radios etc..,
15. What is Perfect Competition?
Under perfect competition, there exists homogeneity of the
product, there are large number of dealers and buyers. Free entry or exit is
possible in this market. In perfect competition, there is only one price in the
market. This price cannot be altered by one individual seller because he is
selling a very small quantity of the total supply.
Price can be only affected when the supply is significantly changed.
This change can only be brought about by a change in the total supply of
the industry. Hence, in perfect competition, an individual seller or a firm
cannot affect the price.
16. Explain the main features of perfect competition.
The perfectly competitive market is characterized by
A very large number of relatively small buyers and sellers. A single
buyer’s or seller’s actions cannot therefore have any perceptible
influence on market price.
All sellers are selling homogenous products
The firms are free to enter or leave the industry. That is, in the long
run in efficient firms would have left the industry and new but
efficient firms would enter, so that ultimately the firms in the industry
have almost similar levels of efficiency.
The firms in the industry do not collude with each other that is
Each buyers and seller operates under conditions of uncertainity.
17. What is Pure Monopoly?
A pure monopoly exists if one and only one firm produces and sells
a particular commodity in the market. No other seller can enter the market,
else monopoly would cease to exist. Thus, in case of pure monopoly, the
single firm producing the product is itself both the firm and the industry.
There are no direct competitors or rivals.
18. Explain the main features of Pure Monopoly.
The main features of pure monopoly was
Only one firm sells the commodity having no rivals or direct
Monopolist is a price maker. He tries to take the best of whatever
demand and cost conditions exist without the fear of new firms
entering to compete away his profits.
Indirect rivalry or competition may exist in the form of
i. Existence of substitutes
ii. The monopolist’s product competing with all other goods
and services in the general struggle for the consumer’s
19. What is Monopoly Power?
In practice no monopolist will have absolute monopoly power. The
monopoly power or control enjoyed will be limited and partial. Even in state
monopolistic control, we cannot say that monopoly power is absolute. It will
be limited and the limitation may vary from producer to producer
depending upon the method by which they have to enjoy monopoly power.
Usually the producer will gets a monopoly control or power in the following
Power given by government
Bias of the consumer
20. What is Simple Monopoly and Discriminating Monopoly?
It is a situation where the single producer produces a
commodity having only a remote substitute. Here the product of the firm
may have some substitute. But in economic analysis, we take that the
monopoly firm produces a commodity having no close substitutes.
The Monopolists may charge different prices for different
consumers or markets. He has not only the power to fix the price of the
commodity but also charge different prices from different consumers.
The Monopolists will discriminating between the markets.
21. What are the main features of Monopolistic competition?
The main features of the Monopolistic Competition are
Existence of large number of firms
Freedom of entry and exit of firms
22. How the Price is determined under Monopolistic Competition
Price – output determination under monopolistic competition is
governed by the cost and revenue curves of the firm. The cost curves are
governed by laws of production. The revenue curves of the firm will not be
very elastic. It will not be very steep falling down curve as in monopoly.
The average revenue of the firm under monopolistic competition will be a
slopping down curve, the slope neither too steep nor flat. It will not be flat
or parallel straight line because the firm may not very elastic demand for its
23. Explain the defects or wastes of Monopolistic Competition.
The Main defects of Monopolistic or imperfect competition are
referred to as wastes of competition. They are
Failure to specialize
51. Define Oligopoly.
Oligopoly is a term derived from the Greek words ‘oligos’
meaning a few and ‘pollenin’ meaning to sell. It is also referred as
“competition among the few”
Prof. Stigler defines oligopoly as that “situation in which a firm bases
its market policy in part on the expected behavior of a few close rivals”.
According to Prof.Leftwhich “An oligopolistic industry is one in which the
number of sellers is small enough for the activities of a single seller to
affect the other firms and for the activities of other firms and for the
activities of other firms to affect him”.
24. Explain the types of Oligopoly.
The following are the main types of oligopoly
Pure or Perfect Oligopoly
Open and Closed Oligopoly
Collusive and Competitive Oligopoly
Partial and Full Oligopoly
Syndicated and Organized Oligopoly
25. Explain the characteristics of Oligopoly.
The following are the main features of Oligopolistic Market,
Importance of Selling costs
Indeterminate demand curve
Element of Monopoly
26. How the Pricing is done under Oligopoly?
Price Rigidity under oligopoly is explained with the help of Kinked
Demand Curve used by Prof.Paul M.Sweezy. The kinked demand model
represents a condition in which the firm has no incentive either to increase
the price or to decrease the price but keep the price rigid at a particular
level. The firm believes that the rival firms will not follow suit if it raises the
price. But if cut downs the price the rival firms will follow suit. Acting on this
belief the firm maintains the present price.
27. What is Bilateral Monopoly?
A Bilateral Monopoly is a situation in which monopolist faces a
monopsonist i.e.., a single seller faces a single buyer in the market. The
commodity is a distinct product which has no close substitute. If a tea
estate owner could supply the raw material to a tea manufacturer in the
area, it is a situation of Bilateral Monopoly. The buyer has no competitor to
buy raw tea and the seller has no competitive producers.
28. What is Normal and Super-Normal profit?
Normal Profits are like wages to labour, which accrue to the
entrepreneur, in the long run, for his work as an organizer and manager of
the enterprise. Normal Profit is the profit which will not attract the new firms
to get into an industry. At the same time it will not compel the existing firms
to go out of the industry.
Super Normal Profit:-
Super Normal Profits are the excess profits earned by the
entrepreneur over and above what is earned by marginal entrepreneurs.
Hence it does not enter into cost of production
29. What is Duopoly?
DUO means two and duopoly refers to a market situation in which
there are only two sellers. Each seller tries to guess the rival’s motives and
actions. The two firms may either resort to competition or collusion.
Under Duopoly, there is no product differentiation and goods are
identical. The consumers are indifferent between the two producers and
the same price must be charged by both in the long run, otherwise a seller
charging a higher price may not be able to sell more. They must fix the
price as it they were a single monopolist. Only by this method they can
maximize their profits.
30. Explain the assumptions of Duopoly.
The following are the main assumptions of duopoly
There are two independent sellers, each producing and selling the
The cost of production of two sellers is identical
Each seller is rational in the sense that it aims at maximizing the
The number of buyers are large
Each firm has a complete knowledge about the demand conditions
The duopolies accept the price at which he can sell his total output.
31. Explain the types of Monopoly.
There are various kinds of Monopoly which are as follows
32. Explain the causes of Monopoly.
The following are the main causes of monopoly,
Strategic Raw materials
Patent’s over Inventions
Cost of establishing an efficient plant in relation to the market
Control of secret process
Restricted Market for a Product
Deliberate policy to exclude competitors
Transport cost, Reputation
33. Explain the concept of National Income.
The concept of national income occupies an important place in
economic theory. National income is the flow of goods and services which
became available to a nation during a year. To be more precise, national
income is the aggregate money value of all goods and services produced
in a country during one year, account being taken of the deductions made
due to wear and tear, and depreciation of plants and machineries used in
the production of goods and services. It is distributed among the factors of
production in the form of rent, interest, wages and profits. The larger the
national income, other things remaining the same, the larger will be the
share of the each factor.
34. What is meant by Aggregate Demand?
Aggregate Demand is the total expenditure which at given fixed
prices all households and business firms want to make on goods and
services in a period at various levels of national income. Thus by
aggregate demand means how much expenditure the households and the
entrepreneurs are undertaking on consumption and investment. Therefore
Aggregate Demand = Consumption demand + Investment
AD = C + I
Aggregate Demand consists of two components 1. There is
consumption demand 2. There is demand for capital goods which is called
as Investment Demand.
35. What is Aggregate Supply?
The aggregate supply means the total money value of goods and
services produced in an economy in a year. There are two important
constituents of aggregate supply. They are
The supply or output of final consumer goods and services in a year
The output of capital goods which are also called investment goods
or producer goods because they help in producing further goods.
The aggregate supply of goods of an economy depends upon the stock
of capital, The amount of labour used and the state of technology.
36. Explain the major factors which determine the National Income.
There are number of influences which determine the size of the
national income in a country. The following are the main influences of
Quantity and Quality of factors of production – The quantity and
quality of land, the climate, the rainfall, etc.., determine the quantity
and quality of agricultural production and hence the size of national
The state of Technical Know how – A country with poor technical
knowledge cannot have a large sized national income, because it
will not be in a position to make the best possible use of its
Political Stability – Political Stability is the main factor which
determines the national income. The economic development of
several countries, particularly the South American republics, has
been hindered in the past by political instability.
37. Explain the difficulties or hindrances faced by the under
developed countries in calculating the National Income.
The calculation of the National Income of a country is a task full of
difficulties and complexities. The main difficulties in calculating the National
The available statistics in these countries are not only inadequate
but also unreliable.
The existence of a large non-monetized sector in underdeveloped
countries also makes the computation of national income difficult.
The majority of the small producers in the under developed countries
are illiterate and ignorant and they are not in a position to keep any
account of their productive activities.
There is little of occupational specialization on the part of the people
in underdeveloped countries.
38. What is Disposable Income?
The part of personal income which is left behind after payment of
personal direct taxes is called as Disposable Personal Income. In fact it is
the disposable income which is spent by the individual or the household on
Disposable Personal Income = Personal Income – Personal Direct
Sometimes the individuals will allot some of his income for savings.
At that time,
DPI = Consumption + Saving
39. What do you mean by Multiplier Model?
The name Multiplier comes from the finding that each dollar
change in exogenous expenditures (such as investment) leads to more
than a dollar change (or a multiplied change) in GDP. The Multiplier Model
explains how shocks to investment, foreign trade, and government tax and
spending policies can affect output and employment in an economy.
The key assumption underlying in these model are the wages and
prices are fixed and that there are unemployed resources. In addition, we
are suppressing the role of monetary policy and assuming that there are
no financial market reactions to changes in the economy.
40. What is Gross National Product and Gross Domestic Product?
Gross National Product
The GNP is defined as the value of all final goods and services
produced during a specific period, usually one year, plus incomes earned
abroad by the nationals minus incomes earned locally by the foreigners.
The GNP so defined is identical to the concept of gross national income.
Gross Domestic Product
The GDP is defined as the market value of all final goods and
services produced in the domestic country during a period of one year,
plus income earned locally by the foreigners minus income earned abroad
by the nationals
41. What do you mean by Static Multiplier?
The Static multiplier is essentially a theoretical concept. It is
based on the assumption that ∆I results instantly in ∆y. There is no time
lag between ∆I and ∆y. It implies that when ∆I takes place, the equilibrium
of national income shifts instantly from one point to another, at a higher
level of income.
42. Explain the limitations of Multiplier.
The following are the main limitations of Multiplier
The Multiplier formula, i.e., m- 1/(1-mpc) imples that the higher
the mpc the higher the multiplier. The actual Multiplier does not
depend upon on the mpc alone. It depends on number of other
The working of Multiplier assumes that those who earn income as
a result of certain autonomous investment, would continue to
spend a certain percentage of their newly earned income on
consumption. This assumption may not be hold in reality.
The working Multiplier is based on the assumption that the goods
and services are available in adequate supply. Thus this is not
suitable for the scarce supply.
43. What is Business Cycle?
The fluctuations in economic activity have been occurring
periodically and regularly and these fluctuations are popularly called as
Business Cycle. This is also called as Trade Cycle. As per J.M.Keynes,
“A Trade cycle is composed of periods of good trade characterized by
rising prices and low unemployment percentages with periods of bad trade
characterized by falling prices and high employment percentages. The
duration of Business Cycle has not been of the same length; it has varied
from a minimum of two years to a maximum of ten to twelve years.
44. What do you mean by Economic Growth?
Economic Growth means sustained increase in per capita national
output or net national product over a long period of time. It implies that the
rate of increase in total output must be greater than the rate of population
growth. That is Economic growth is defined as increase in an economy’s
real national income or gross national product over a period of time. Simply
we can say that economic growth means the annual increase in percapita
income of a country. Economic Growth describes the growth of output per
head of population.
45. Explain the concept of Economic Development.
Economic development is the development of economic wealth of
countries or regions for the well-being of their inhabitants. From a policy
perspective, economic development can be defined as efforts that seek to
improve the economic well-being and quality of life for a community by
creating or retaining jobs and supporting or growing incomes and the tax
base. The term "economic development" is often used in a regional sense
as well (e.g., a mayor might say that "we need to promote the economic
development of our city"). In this sense, economic development focuses on
the recruitment of business operations to a region, assisting in the
expansion or retention of business operations within a region or assisting
in the start-up of new businesses within a region. (See section 'regional
46. Explain the three major areas where we can encompass the
The Economic development can be encompassed in the
Policies that governments undertake to meet broad economic
objectives such as price stability, high employment, and sustainable
growth. Such efforts include monetary and fiscal policies, regulation
of financial institutions, trade, and tax policies.
Policies and programs to provide infrastructure and services such as
highways, parks, affordable housing, crime prevention, and K-12
Policies and programs explicitly directed at job creation and
retention through specific efforts in business finance, marketing,
neighborhood development, small business development, business
retention and expansion, technology transfer, and real estate
development. This third category is a primary focus of economic
47. Explain the three major areas where we can encompass the
policies of economic development
The policies of an economic development can be framed in the
Governments undertaking to meet broad economic objectives such
as price stability, high employment, and sustainable growth. Such
efforts include monetary and fiscal policies, regulation of financial
institutions, trade, and tax policies.
Programs that provide infrastructure and services such as highways,
parks, affordable housing, crime prevention, and K-12 education.
Job creation and retention through specific efforts in business
finance, marketing, neighborhood development, small business
development, business retention and expansion, technology
transfer, and real estate development. This third category is a
primary focus of economic development professionals.
48. What is Balance of Payments?
The Balance of Payments is a systematic record of economic
transactions of the residents of a country with the rest of the world during a
given period of time. The record is so prepared as to provide meaning and
measure to the various components of a country’s external economic
transactions. Thus, the aim is to present an account of all the receipts and
payments on account of goods exported, services rendered and capital
transferred by residents of the country. The main purpose of keeping these
records is to know the economic position of the country and help the
government in reaching decisions on monetary and fiscal policies
49. What is Inflation?
By inflation generally means a general rise in prices. Inflation is measured
as the growth of the money supply in an economy, without a commensurate
increase in the supply of goods and services. This results in a rise in the general
price level, as measured against a standard level of purchasing power. There are
a variety of measures of inflation in use, related to different price indices,
because different prices affect different people. Two widely known indices for
which inflation rates are commonly reported are the Consumer Price Index
(CPI), which measures nominal consumer prices, and the GDP deflator, which
measures the nominal prices of the goods and services produced by a given
country or region.
50. How we can measure the Inflation?
The following way clearly explains the way which is used
for measuring the inflation
Consumer price indices (CPIs) - Which measures the price of a
selection of goods purchased by a "typical consumer."
Cost-of-living indices (COLI) - which often adjust fixed incomes
and contractual incomes based on measures of goods and services
Producer price indices (PPIs) - which measure the price received
by a producer.
Wholesale price indices, which measure the change in price of a
selection of goods at wholesale, prior to retail mark ups and sales
taxes. These are very similar to the Producer Price Indices.
Commodity price indices - which measure the change in price of a
selection of commodities
GDP Deflator - Measures price increases in all assets rather than
some particular subset. The term "deflator" in this case means the
percentage to reduce current prices to get the equivalent price in a
previous period. The US Commerce Department publishes a deflator
series for the U.S. economy.
Capital goods price Index- The growth in money supply has
remained fairly constant through since the 1970's however
consumption goods price inflation has been reduced because most
of the inflation has happened in the capital goods prices.
Regional Inflation - The Bureau of Labor Statistics breaks down
CPI-U calculations down to different regions of the US.
Historical Inflation - It is used to adjust for the differences in real
standard of living for the presence of technology. This is equivalent
to not adjusting the composition of baskets
51. Explain the types of Inflation.
There are three major types of inflation, as part of what Robert J.
Gordon calls the "triangle model":
• Demand-pull inflation - Inflation caused by increases in aggregate
demand due to increased private and government spending, etc.
• Cost-push inflation - Presently termed "supply shock inflation,"
caused by drops in aggregate supply due to increased prices of
inputs, for example. Take for instance a sudden decrease in the
supply of oil, which would increase oil prices. Producers for whom oil
is a part of their costs could then pass this on to consumers in the
form of increased prices.
• Built-in inflation- Induced by adaptive expectations, often linked to
the "price/wage spiral" because it involves workers trying to keep
their wages up (gross wages have to increase above the CPI rate to
net to CPI after-tax) with prices and then employers passing higher
costs on to consumers as higher prices as part of a "vicious circle."
Built-in inflation reflects events in the past, and so might be seen as
52. Explain the major problems of Inflation.
If inflation is high in an economy there are three main problems
it can cause:
People on a fixed income (e.g. pensioners, students) will be worse
off in real terms due to higher prices and equal income as before;
this will lead to a reduction in the purchasing power of their income.
This has a great effect on the GDP of a country
Rising inflation can encourage trade unions to demand higher
wages, as wages have to be adjusted to keep up with inflation. In
the case of collective bargaining the wages will be set as a factor of
price expectations (Pe). Pe will be higher when inflation has an
upward trend. This can cause a wage spiral. Also if strikes occur in
an important industry which has a comparative advantage the nation
may see a decrease in productivity and suffer.
If inflation is relatively higher in one country, and that country
maintains fixed exchange rates with other countries, then the
country's exports will become more expensive for other countries to
purchase, creating a deficit on its current account.
53. What do you mean by Inflation Accounting?
Inflation accounting is a financial reporting process that
considers the effects of inflation on financial statements. Accounting
assumes a stable monetary unit. Financial statements that are not
adjusted for changes in the purchasing power of the currency become
economically irrelevant. In certain countries experiencing high inflation
or hyperinflation, laws or accounting standards require corporate
financial statements to be adjusted for changes in purchasing power
using a price index
54. How to control Inflation?
There are a number of methods that have been suggested to stop
inflation, although a 0% inflation rate has never been achieved over any
sustained period of time in the past
High interest rates and slow growth of the money supply are the
traditional ways through which central banks fight or prevent
inflation, though they have different approaches
Keynesians emphasize reducing demand in general, often through
fiscal policy, using increased taxation or reduced government
spending to reduce demand as well as by using monetary policy is a
way to control Inflation
Supply-side economists advocate fighting inflation by fixing the
exchange rate between the currency and some reference currency
such as gold. This would be a return to the gold standard. All of
these policies are achieved in practice through a process of open
Another method attempted in the past has been wage and price
controls ("incomes policies"). Wage and price controls have been
successful in wartime environments in combination with rationing.
Temporary controls may complement a recession as a way to fight
inflation: the controls make the recession more efficient as a way to
fight inflation (reducing the need to increase unemployment), while
the recession prevents the kinds of distortions that controls cause
when demand is high
55. What is Deflation?
Deflation is a decrease in the general price level over a period
of time. Deflation is the opposite of inflation. For economists especially, the
term has been and is sometimes used to refer to a decrease in the size of
the money supply (as a proximate cause of the decrease in the general
price level). During deflation the demand for liquidity goes up, in
preference to goods or interest. During deflation the purchasing power of
money increases. Deflation is generally regarded as a negative in modern
currency environments, because a deflationary spiral may cause large falls
in GDP and purchasing power, and may take a very long time to correct
.Deflation is considered a problem in a modern economy because of the
potential of a deflationary spiral and its association with the Great
Depression, although not all episodes of deflation correspond to periods of
poor economic growth historically.
56. Explain the causes of Deflation.
From a monetary perspective deflation is caused by a reduction in
the velocity of money and/or the amount of money supply per
Capitalism (when sufficient competition exists) is also an engine of
deflation: as capital stocks improve, and there are more competitors,
the supply of goods goes up, which means prices must fall until they
balance demand. Capitalism also drives efficiency and innovation
which has a downward pull on prices.
In modern credit-based economies, a deflationary spiral may be
caused by initiating higher interest rates (i.e., to 'control' inflation),
thereby possibly popping an asset bubble or the collapse of a
command economy which has been run at a higher level of
production than it could actually support.
In a credit-based economy, a fall in money supply leads to markedly
less lending, with a further sharp fall in money supply (since debt is
money), and a consequent sharp fall-off in demand for goods.
Demand falls, and with the falling of demand, there is a fall in prices
as a supply glut develops.
In unstable currency economies, barter and other alternate currency
arrangements are common, and therefore when the 'official' money
becomes scarce, commerce can still continue (e.g., most recently in
Russia and Argentina). Since in such economies the central
government is often unable, even if it were willing, to adequately
control the internal economy, there is no pressing need for
individuals to acquire official currency except to pay for imported
57. Explain the effects of Deflation.
In more recent economic thinking, deflation is related to risk, where
the risk adjusted return of assets drops to negative
In an open economy it creates a carry trade and devalues the
currency producing higher prices for imports without necessarily
stimulating exports to a like degree.
Deflation is related to a sustained reduction in the velocity of money
or number of transactions.
Deflation discourages investment and spending, because there is no
reason to risk on future profits when the expectation of profits may
be negative and the expectation of future prices is lower,
The available amount of hard currency per person falls, in effect
making money scarcer; and consequently, the purchasing power of
each unit of currency increases.
Since deflationary periods favor those who hold currency over those
who do not, they are often matched with periods of rising populist
Deflation raises real wages which are both difficult and costly for
management to lower. This frequently leads to layoffs and makes
employers reluctant to hire new workers, increasing unemployment.
58. What do you mean by Balance of Trade?
Balance of Trade refers to the difference in value of imports
and exports of commodities only, i.e., visible items only. During the given
period of time, the exports and imports may be exactly equal, in which
case, the balance of payments of trade is said to be balanced. If the value
of its imports exceeds the value of its exports, the country is said to have a
deficit or an adverse balance of trade. Balance of Trade in other words, will
not balance. During any period a country may experience a favorable or
adverse balance of trade
59. Explain the causes of Inflation.
The following are the main causes of Inflation,
Increase in Money supply
Increase in Disposable Income
Increase in public expenditure
Increase in consumer expenditure
Cheap Monetary policy
Expansion of the private sector
Repayment of Public Debt
Increase in Exports
60. What are the measures that are adopted for controlling Inflation?
The following are the methods adopted for controlling the
• Credit control
• Demonetization of currency
• Issue of new currency
• Reduction in unnecessary expenditure
• Increase in savings
• Increase in taxes
• Surplus Budgets
• Public Debt
• To increase production, Rationing
• Rational Wage policy, Price control,
61. What do you mean by Economic Indicators?
An economic indicator (or business indicator) is a statistic
about the economy. Economic indicators allow analysis of economic
performance and predictions of future performance. Economic indicators
include various indices, earnings reports, and economic summaries, such
as unemployment, housing starts, Consumer Price Index (a measure for
inflation), industrial production, bankruptcies, Gross Domestic Product,
retail sales, stock market prices, and money supply changes. Economic
indicators are primarily studied in a branch of macroeconomics called
"business cycles". The term economic indicator is also described as
62. Explain the types of Economic Indicator.
The economic Indicators are divided into three types. They are
1. Coincident indicators – These indicators which occur at the same time
as the economic activity.
• Personal income less transfer payments and overall change in GDP
2. Leading indicators – These economic indicators which tend to change
before the general economic activity, and so may sometimes be used as a
• Stock prices
• Average work hours in manufacturing sector
• Housing Markets
• Interest rates
3. Lagging indicators – These indicator trail behind the general economic
• Unemployment rate
• Percentage change in CPI
• GDP (sometimes)
• The time difference between the indicator and the economic activity is
called lead time or lag time.
63. How Correlation is used in economic indicators
An indicator can also move in the same or opposite direction of the
general economic activity. Pro-cyclical indicators move in the same
direction as the general economic activity. Counter-cyclical indicators
move in the inverse direction of the general economic activity.
Unemployment is an example of a counter-cyclical indicator. Statistically,
correlation can be used to determine whether an indicator is pro- or
64. Explain the stages of economic growth.
The stages of Economic growth are as follows
Pre-Take Off stage
Take- Off Stage
Stage of Self Sustaining Growth
Stage of High Mass Consumption
65. Explain the list of Indicators.
• Gross Domestic Product (GDP) (nominal and real) (for the entire
nation or per individual)
• Index of Leading Indicators
• Gross national happiness (GNH), a new concept relating happiness
with economic growth
• Labor Force: Employment, Unemployment rate, Average Weekly
• Public Expenditure, Revenues, Budget Surplus and Deficit, National
• Personal Income, Expenditure, Savings
• International: Balance of Payments (Current Account & Balance of
• Productivity Survey
• Manufacturing output, Capacity Utilization, Inventories
• Money Supply, Interest Rates, Yield on various financial Instruments
and Yield Curves.
• Stock Market Indices
• Inflation, CPI, Producer Price Index
• New Home Sales
• Retail Sales, Auto Sales
66.Define resale price maintenance and its types
The manufacturer of such products fix and stipulate the price of the
products at which the product is to be resold by the individual retailer. This
is done to maintain a uniform selling price of the branded products at all
the outlets of their sale .
1.Collectivre resale price maintenance
2.Individual resale price maintenance
67.Define Discretionary fiscal policy and non discretionary fiscal
Discretionary fiscal policy : Deliberate change in the government
expenditure and taxes to influence the level of national out put and prices .
Fiscal policy generally aims at managing aggregate demand for goods and
Non Discretionary Fiscal policy : Non – discretionary fiscal policy of
automatic stabilizers is a build- in tax or expenditure mechanism that
automatically increase aggregate demand when recession occurs and
reduces aggregate demand when there is inflation in the economy with out
any special deliberate actions on the part of the Government
68.List out the tools of monetary policy .
1.Open market operation
2.Changing the bank rate
3.Changing the cash reserve ratio and
4.Undetaking selective credit controls
69.Objectives of monetary policy>
1. To ensure economic stability at full employment or potential level of
2.To achieve price stability by controlling inflation and deflation
3.To promote and encourage economic growth in the economy
70. What is liquidity trap ?
A liquidity trap occurs when under conditions of depression of economy
finds itself in a situation where people hold all the increments in the stock
of money and money demand curve takes a horizontal shape .
ESSAY TYPE QUESTIONS
1.Explain in detail about cost function
2.Discuss about Economies of scale
3.Explain various cost concepts
4. How the price has been determined under oligopoly and Duopoly
5. How the price has been determined under perfect Competition?
6. How the price has been determined under Monopoly Competition?
7. How the price has been determined under Monopolistic Competition?
8. Explain the types of oligopoly.
9. Explain oligopoly with kinked demand curve
10. What is Non Price Competition? Discuss detail.
11. What did you understand from Market Structure?
12..Explain the methods available for calculating the National Income.
13.What is National Income? Explain the concept of National Income.
14.Explain the National Income determination under Three Sector
15..How the National Income has to be determined under Four Sector
16.What is Inflation? Explain the causes for Inflation.
17.Explain the methods available for calculating the Inflation rate.
18.What is Deflation? Explain the causes for Deflation.
19.What is Business Cycle? Explain the Phases of Business Cycle. Also
discuss the features of Trade Cycle.
20..Write about the Theories of Business Cycle.
21.Explain the determinants and stages of Economic growth.
22.Explain the role of Inflation in an economy.
23.Explain the effects of inflation.
24.Explain the government policies and regulations with regard to
economic growth and development.
25.Explain the role fiscal policy in overcoming recession and achieving
economic stability at full employment level
26.Distinguish between Discretionary fiscal policy and non discretionary
27.Briefly explain the instruments of monetary policy .
28.Explain the mechanism through which tight monetary policy works to
29.Explain crowding out and effectiveness of fiscal policy
30.Monetary policy for its success depends on fiscal policy – Explain and
critically examine this statement