Economics 50 long questions solve by suman jyoti (dhaka university of engineering)

DEPERTMENT OF CIVIL ENGINERRING
DHAKA UNIVERSITY OF ENGINEERING AND
TECHNOLOGY, GAZIPUR
20th
Dec 2020
Tel: +88-02-49274003, Website: www.duet.ac.bd
CH 1103 -Economic Assignment – I/II
SUBMITTED BY:
Suman Jyoti
(Student ID.: 191125)
(info.official.sumn@gmail.com)
SUBMITTED TO:
Mamumar Rashid
(mamumarrashid@duet.ac.bd)
Department of Humanities

BACHELORS OF SCIENCE IN DEPARTMENT OF CIVIL ENGINEERING 2 | P a g e
Dhaka University of Engineering and Technology (DUET)
Name.: Suman Jyoti (info.official.sumn@gmail.com)
Student Id.: 191125 (191125@student.duet.ac.bd)
Assignment one questions:
CH – 1 THE INTRODUCTIONOF ECONOMICS
1. Define Economics. Why economics is important as a course for the civil
engineers?
2. Write five major concepts of Economics and explain it.
3. Contrast Microeconomics and Macroeconomics perspectives. Discuss about
what to produce, howto produce, when to produce, where to produce, and for
whom to produce?
4. Write down the similarities and differences between Micro-economics and
Macro-economics.
5. Justify the scope of Economics.
6. Write short notes of the Wants, Production, Investment, Equilibrium and
Price.
CH – 2 THE MARKET FORCES OF SUPPLY AND DEMAND
7. Discuss Demand and Supply in brief. Illustrate the relationship between
Demand and Supply graphically?
8. How does the law of supply and demand affect prices?
9. If both supply and demand increase at the same time, then what will happen?
10.When analyzing a market, how do economists dealwith the problem that many
factors that affect the market are changing at the same time?
11.What does a downward-sloping demand curve mean about how buyers in a
market will react to a higher price?
12.What is producer surplus? How is it illustrated on a demand and supply
diagram?
13.When the price is above the equilibrium, explain how market forces move the
market price to equilibrium. Do the same when the price is below the
equilibrium.
CH – 3 PRODUCTIONPOSSIBILITIES FRONTIERS (PPF)
14.Explain how to extend a production possibilities curve. Why is a production
possibilities frontier typically drawn as a curve, rather than a straight line?
15.What are the three assumptions underlying the production possibilities
frontier? What happens when an economy operates inside its production
possibilities frontier?

16.What is a production possibilities frontier? What moves an economy along its
production possibilities frontier? What factors shift the production
possibilities frontier? What key assumption must be changed for the
productionpossibilities frontier to shift? Explain why. Illustrate your answers
with graphs if applicable.
17.Explain why the production possibilities frontier curve is bowshaped?
18.What is opportunity cost?Compare short run and long run economic growth.
CH – 4 ELASTICITY AND ITS APPLICATION
19.Describe any three factors that affect Price Elasticity of Demand. How is a price
Elasticity of Demand of a good influenced by availability of its close substitute?
Explain by giving an example.
20.What is the effect or application of elasticity of demand in real life business?
21.Define the price and Income elasticity of demand. Why is this concept important in
economics?
22.Complete the following table by completing the slope of demand curve at is of a
given point. Next, derive the point elasticity of demand at each of the points, and
enter your result in the table. Finally, in the last column, identify if the demand curve
is elastic, unit elastic, or inelastic at each of the points.
Point Quantity Price ($) Slope Point Elasticity Type of elasticity
A 3 7
B 5 5
C 8 2
(Hint: Because the demand curve is downward sloping, club should be reported as a
negative number each row. Round the point elasticity value to nearest tenth. The price
elasticity of demand is absolute value of the percentage change in quantity divided by the
percentage change in price)
The point elasticity of demand is not equal to the slope of the demand curve. True
or False…?
23.What are the types of elasticity of Demand? Write concept of Elasticity of
Demand (Explain with diagram).
CH – 5 INTERDEPENDENCE AND GAINS FROM TRADE
24.What are the major sources of gains from trade? Explain how absolute
advantage and comparative advantage differ?
25.Absolute advantage vs. Comparative advantage. Is it possible for a country to
have both absolute advantage and comparative advantage in producing the
same good?

Assignment two questions:
CH – 6 THE COST PRODUCTION
1. Assume a computer firm’s marginal costs of production are constant at
$1,000 per computer. However, the fixed costs of production are equal to
$10,000.
a. Calculate the firm’s average variable cost and average total cost curves.
b. If the firm wanted to minimize the average total costof production, would
it choose to be very large or very small? Explain.
2. Why is the MC (marginal costs)curveU-Shaped?Showthe relationship with
graph of Average Variable Cost (AVC) and Average Total Cost (ATC) to
Marginal Cost (MC).
3. What is the relationship between marginal productand marginal costin short
run?
4. Suppose that a firm’s cost per unit of labor is $100 per day and its cost per
unit of capital is $400 per day.
a. Draw the iso-cost line for a total cost per day of $2,000. Label the axes.
b. If the firm is producing efficiently, what is the marginal rate of technical
substitution between labor and capital?
c. Demonstrate your answer to part (b) using iso-cost lines and isoquant
curves.
5. Explain graphically long run cost and short run cost and write their
differences. (analysis by showing curve).
6. Define average cost and marginal cost. Illustrate the relationship between
Marginal Cost (MC) and Average Total Cost (ATC).
CH – 7 THEORY OF CONSUMER CHOICE
7. What Does the Budget Line Tell Us? Show the graph of the effect of a price
change and income change on the budget line.
8. List the functions of Commercial Bank and explain each. Distinguish two
methods of credit control used by central Bank.
9. What is budget? List the types of Budget and explain it.
10.Why is Budgeting so important? What about budget forecasting and
planning?
11.What should central bank do? Write the functions of central bank?

CH – 8 FISCAL AND MONETARY POLICY
12.How does fiscal policy affect monetary policy? Demonstrate the role of Fiscal
policy in Economic Development.
13.Write down the main objectives of Fiscal Policy in developing country like
Bangladesh?
14.Which is more effective in comparison to Fiscal Policy and Monetary Policy?
15.What is Monetary Policy? Discuss Expansionary Monetary Policy and
contractionary Monetary Policy.
16.Write the tool of Fiscal Policy. Discuss Expansionary Fiscal Policy and
contractionary Fiscal Policy.
CH – NATIONAL INCOME CONCEPT AND MEASUREMENT
17.Explain the methods of computing National income with precautions. Which factor
can change the National Income?
18.Write the characteristics of capitalist Economics.
19. Calculate National Income and Net National Disposable Income from the following
table.
S.N Contents Amount in dollar($)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Net change in stock
Government final consumption expenditure
Net current transfer to abroad
Gross domestic fixed capital formation
Private final consumption expenditure
Net imports
Depreciation
Net factor income to abroad
Net indirect tax
Net capital transfer to abroad
$ 50
$ 100
$ 30
$ 200
$ 500
$ 40
$ 70
- $ 10
$ 120
$ 25
20.Why are exports included in the estimation of domestic product by the expenditure
method? Can gross domestic product be greater than gross national product?
Explain.
21.Mention the difficulties in the measurement of National Income? List the main
components of National Income.
22.Write short notes of the following.
a) Economic Profit vs. Accounting Profit
b) Personal Income vs. Disposable Personal Income
c) Gross National Product and Net National Product
d) Monetary Policy and Fiscal Policy
e) GDP and NDP
f) Theory of Consumer Choice
g) Variable Costs and Fixed Costs

1. Define Economics. Why economics is important as a course for the civil
engineers?
Economics is the branched of knowledge concerned with the production
consumption and transfer of wealth, it focuses on the behavior and
interactions of economic agents and how economic growth.
In another words, ‘Economics is a study of man’s actions in the ordinary
business of life’. The word ‘economics’come from two Greek words ‘eco’
meaning home and ‘nomos’ meaning accounts.
Economics is important as a course for the civil engineers because it
involves the systematic evaluation of the economic benefits of proposed
solutions to engineering problems.This subjecthelps one understand the
need for the knowledge of economicsforbeing an effective manager and
decisionmaker. Engineering economics involves estimating, formulating,
evaluating and the economics outcomes when alternates to accomplisha
defined purpose are available. It is subset of economics concerned with
the use and application of economics principles in the analysis of
engineering decisions. Engineers seek solution is normally considered
along with the technical aspects.
Economics is importance because ithelps people understand how variety
of factors work with and against each other to control how resources such
as laborand capital getused,and how inflation, supply, demand and other
factors determine how much you pay for goods and services.
Following points are the importance of economics for civil
engineers.
 How to distribute resources?
 How to achieve social efficiency?
 Understanding client behavior.
 How to fix site/project failure?
 Cost of decisions.
 Wealth Management.
 Give information to make informed choices.
Thus, Engineering economics is asubjectof vitalimportance to engineers.

2. Write five major concepts of Economics.
The five major concepts of Economics are mentioned below:
a) Supply and demand:
Many of us have seen the infamous curves and talked about equilibrium
in our micro- and macroeconomic classes, but how many of us apply that
information to our daily lives? The basic theory behind supply and
demand states that there is a price point where consumers and producers
both match up; in essence, every good or service has a unique point at
which buyers and sellers agree to make an exchange.
Supply and demand can be affected by factors like speculation of future
developments, advances in technology and shortages and surpluses in
the domestic and international markets.
b) Scarcity:
This concept goes hand in hand with supply and demand. Scarcity is
defined as the basic economic problem that arises because people have
unlimited wants but resources are limited. he reasons that this is an
important concept to understand is because it helps us place a value on a
good or service. The scarcer a resource and the higher the demand for it,
the more expensive it is going to be.
When allocating your resources for any project, you must learn how to
prioritize your resources. The scarcest resource is your most valuable, so
plan accordingly.
c) Opportunity cost:
Before making any decision, be sure that what you are choosing to do is
more valuable to you than the things that you are missing out on. The trick
is being able to identify when you are giving up something, and remember:
inaction is also a cost. For example, every time that you skip class to sleep
in, your upfront, sunk costs are what you directly paid in tuition for that
class.
d) Time value of money:
The time value of money guides us to do several things. In addition to
encouraging us to invest our money to beat market interest rates, it also
tells us to factor in the concepts of inflation. The theory behind the time
value of money states that, in purely economic terms, a dollar today is
worth more than a dollar tomorrow.
e) Purchasing power:
We have to remember that wealth is relative to how much we can buy with
it. If prices continue to increase and all else stays the same, our purchasing
power decreases. The way to counter this is to make your money grow.
Invest in funds that take calculated risks and look for investment
arrangements that give you a higher return than the inflation rate.

3. Contrast Microeconomics and Macroeconomics perspectives. Discuss about
what to produce, howto produce, when to produce, where to produce, and for
whom to produce?
Economic theory can be applied at both the personal level as well as at a regional or
national level. However, the perspective is different according to your involvement.
From a Microeconomic Perspective:
• A choice is a tradeoff (opportunity cost)
• Choices are made at the margin (additional benefit from an additional cost instead
of total benefits from total cost)
• Exchange is voluntary (& markets are an efficient way of exchange)
• Markets can and do fail.
From a Macroeconomic Perspective:
• For the economy as a whole, Expenditure = Income = Value of Production
• Productivity improves standards of living
• Inflation occurs when the quantity of money increases faster than production
• Unemployment can result from market failure but some unemployment is
productive.
What to produce?
• Consumer demand
• Tastes and preferences change over time
• Resources available and potential
How to produce?
• Resource endowment and the need to meet the consumer’s budget.
• In reality, it restructures them and in many instances reinvents new ones.
When to produce?
• While each product has a season for production, strategic farmers focus
on season for demand.
• Changes in consumer demand.
Where to produce?
• Access to customers.
• Location of the consumers.
For whom to produce?
• Willingness (tastes & preferences) and ability to pay (income and prices).
• Forces of supply & consumer demand.

4. Write down the similarities and differences between Micro-economics and
Macro-economics.
Similarities between microeconomics and macroeconomics
1. Micro principles are used in macroeconomics. If you study the impact of
devaluation, you are likely to use same economic principles, such as the
elasticity of demand to changes in price.
2. Micro effects macroeconomics and vice versa. If we see a rise in oil prices,
this will have a significant impact on cost-push inflation. If technology
reduces costs, this enables faster economic growth.
3. Blurring of distinction. If house prices rise, this is a micro economic effect for
the housing market. But, the housing market is so influential that it could also
be considered a macro-economic variable, and will influence monetary
policy.
4. There have been efforts to use computer models of household behaviour to
predict the impact on the macro economy.
Differences between microeconomics and macroeconomics
S.N Micro-Economics S.N Macro Economics
1
It deals with an individual firm, an
individual household or an
individual consumer.
1
It deals with the economics issues
at the level of the economy as a
whole.
2 Analyses demand and supply of
labour.
2 Analyses total employment in the
economy.
3 Particularly focus on price
analysis.
3 Particularly focus on income
analysis.
4 Homogenous or similar products. 4 Heterogeneous or dissimilar
products.
5 Assumes partial equilibrium. 5 Assumes general equilibrium.
6
Laws related to marginal analysis
are included in its scope. 6
Problem related to whole economy
like employment, public finance,
national income etc. are included
in its scope.
7
Microeconomics provides the
information relating to the
individual prices, individual
consumption and production.
7
Macroeconomics provides the
information relating to National
income, total consumption, total
output and general price level.
8 Small segment of Economy. 8 Whole aggregate of Economy.
9 Tends to work from theory first
and only in brief.
9 Greater emphasis on empirical
data and trying to explain it.
10 For e.g. Individual Income. 10 For e.g. National Income.

BACHELORS OF SCIENCE IN DEPARTMENT OF CIVIL ENGINEERING 10 |
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5. Justify the scope of Economics for an engineering aspects.
Engineering Economics is a subject of vital importance to Engineers. This
subject helps one understand the need for the knowledge of Economics for
being an effective manager and decision maker. It offers wide opportunities in
developing countries like India. An engineering aspirant can perform the
following roles:
1. Demand analysis and forecasting
2. Production and cost analysis
3. Product policy, sales promotion, and marketing strategy
4. Profit management
5. Capital management
6. Pricing decisions, policies, and practices
Economics is a “a social science studying how people attempt to accommodate
scarcity to their wants and how these attempts interact through exchange”.
These four aspects of economics may now be discussed.
a) Science and Art: In economic 'Science' is an organized branch of
knowledge that analyses cause and effect relationship between
economics as agents. Further economic health in integrating various
science such as mathematics, statics etc.to identify the relationship
between price, demand, supply and other economic factor.
In Economics 'Art' is the discipline that express the way things are to
be done as so as to an achievement the desire end. Economics has
various branch like production, distribution, consumption and
economics that provide general rules and laws that are capable of
solving different problem of society.
b) Subject matter: Economics is the study of all phenomena relating to
wealth and value. It is one of the social science that deals with the
economics goods, the creation of wealth for the satisfaction of human
wants, the explanation of wealth, value, and price, the distribution of
income and the mechanism of exchange and market of an economy.
c) Positive or Normative: Another controversial aspect of Economics is
whether it should be neutral or fast value judgements. A positive
science is one that studies the relationship between two variables but
does not give any value judgement that is it is state "what is". It deals
with the fact about the entire economy. As a normative science,
economics passes value judgement that is "what ought to be". It is
concerned with economics goals and policies to attend these goals.

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d) Problem solving Nature: The classical economists believed that
economics could not solved practical problems, because there were
non-economic (social, political, ethical, religious and other) aspect of
people's lives.
6. Write short notes of the Wants, Production, Investment, Equilibrium and
Price.
Wants:
In Economics, a want is something that is desired. It is said that every person
has unlimited wants, but limited sources. (Economics is based on the
assumption that only limited resources are available to us). Thus, people cannot
have everything they want and must look for the most affordable alternatives.
Wants are often distinguished from needs.
Production:
Production is a process of combing various material inputs and immaterial
inputs in order to make something for consumption. It is the act of creating an
output, a good or service which has value and contributes to the utility of
individual.
Investment:
An investment is the purchase of goods that are not consumed today but are
used in the future to create wealth. In finance, an investment is a monetary
asset purchased with the idea that the asset will provide income in the further
or will later be sold at a higher price for a profit.
Equilibrium:
In economics, economic equilibrium is a situation in which economic forces
such as supply and demand are balanced and in the absence of external
influences the (equilibrium) values of economic variables will not change. It has
three properties:
 The variable of agent is consistent.
 No agent has an incentive to change its behavior.
 Equilibrium is the outcome of some dynamic process.
Price:
Price is the monetary value of good, service or resource established during a
transaction. Price can be set by a seller or producer when they possess
monopoly power and are said to be price makers, or set through the market
itself when firms are price takers.

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7. Discuss Demand and Supply in brief. Illustrate the relationship between Demand
and Supply graphically?
DEMAND refers to the quantity of certain goods and services desired by the
consumers in the market.
SUPPLY refers to the quantity of certain goods and services which are provided
to the market place by the desired suppliers of the market.
There is an inverse relationship between the supply and prices of goods and services
when demand is unchanged. If there is an increase in supply for goods and services
while demand remains the same, prices tend to fall to a lower equilibrium price and a
higher equilibrium quantity of goods and services. If there is a decrease in supply of
goods and services while demand remains the same, prices tend to rise to a higher
equilibrium price and a lower quantity of goods and services.
 For e.g. If the price of the bread increases from 20 Taka to 50 Taka, the demand
for the same will fall after an increase of ₹30 in its prices. As a result, people will
automatically avoid buying the same product. In accordance with this, Demand
curve is downward sloping from left to right. Graphically it can be represented as –
The left diagram depicts the prices on y-
axis and the quantity demand on x-axis.
It is clearly understood that, as the prices
of the goods increase, quantity
demanded by the consumer falls and
vice-versa.
 For eg. If the price of a pen increases from ₹60 to ₹100, the supply for the
same will also increase after an increase of ₹40 in its prices. As a result,
producer will feel motivated to produce more. In accordance with this, Supply
curve is upward sloping from left to right. Graphically it can be represented as
–
The above diagram depicts the prices
on y-axis and the quantity demand on
x-axis. It is clearly understood that, as
the prices of the goods increase,
quantity supplied by the producer also
increases and vice-versa.

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RELATIONSHIP BETWEEN DEMAND AND SUPPLY-
The relationship between Demand and Supply can be categorized under three
heads-
 CASE 1: Excess of Supply or when Supply > Demand
This is a situation of disequilibrium
when the price of the goods and
services are set above the equilibrium
price which creates a hype in supply by
the producers but demand in
accordance is not that efficient.
 CASE 2: Excess of Demand or when Demand > Supply
This is also a situation of disequilibrium
where the prices of goods and services
are set below the equilibrium price
which creates a hype in demand by the
consumers but the supply in
accordance is not that efficient.
 CASE 3: State of Equilibrium
This is the state of equilibrium when
the demand for the goods and services
by the consumers is equal to the
supply of goods and services by the
producer. Here, the economy is at a
satisfied situation because the
producer supplies his goods being
produced at the same price at which
the consumer is demanding.

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8. How does the law of supply and demand affect prices?
The law of supply and demand is an economic theory that explains how supply and
demand are related to each other and how that relationship affects the price of goods
and services. It's a fundamental economic principle that when supply exceeds
demand for a good or service, prices fall. When demand exceeds supply, prices tend
to rise.
There is an inverse relationship between the supply and prices of goods and services
when demand is unchanged. If there is an increase in supply for goods and services
while demand remains the same, prices tend to fall to a lower equilibrium price and a
higher equilibrium quantity of goods and services. If there is a decrease in supply of
goods and services while demand remains the same, prices tend to rise to a higher
equilibrium price and a lower quantity of goods and services.
The same inverse relationship holds for the demand for goods and services. However,
when demand increases and supply remains the same, the higher demand leads to a
higher equilibrium price and vice versa.
Supply and demand rise and fall until an equilibrium price is reached. For example,
suppose a luxury car company sets the price of its new car model at $200,000. While
the initial demand may be high, due to the company hyping and creating buzz for the
car, most consumers are not willing to spend $200,000 for an auto. As a result, the
sales of the new model quickly fall, creating an oversupply and driving down demand
for the car. In response, the company reduces the price of the car to $150,000 to
balance the supply and the demand for the car to reach an equilibrium price ultimately.
9. If both supply and demand increase at the same time, then what will happen?
If supply were to increase without an increase in demand, price would go down and
quantity sold would increase. If there is an increase in demand and no increase in
supply, the price and quantity sold would both increase. As it were, quantity sold would
increase, but price would likely remain the same.
If demand rises without a change in supply, it causes an increase in quantity and an
increase in prices. If supply rises without a change in demand, it causes an increase
in quantity and a decrease in prices. Since increases in demand and supply
separately both cause quantities to rise, an increase in both at the same time will also
have to cause quantities to rise.
Things are not so simple when it comes to price. Increases in supply and demand pull
the price in different directions. If demand increases more than supply does, we get
an increase in price. If supply rises more than demand, we get a decrease in price. If
they rise the same amount, the price stays the same.
In general, then, we can say that when supply and demand rise simultaneously, we
get an increase in equilibrium quantity and an unknown change in price. Please follow
the link below for an interactive answer to this question.

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10.When analyzing a market, how do economists dealwith the problem that many
factors that affect the market are changing at the same time?
In order to study the change in the factors affecting the market easily,
economists prefer to consider one factor at a time and keep other factors
constant. This strategy is difficult to apply in real world, but this makes the
understanding of an economic model simpler.
Economists use the ceteris paribus assumption. Look at how each economic
event affects each market, one event at a time, holding all else constant. Then
combine the analyses to see the net effect.
For example: Demand for normal goods can increase because of the increase
in the income of a consumer or because of decrease in the prices of these
goods. In order to make their study simpler, economists will try to isolate both
the variables and consider only one factor at a time, keeping other factor
constant.
11.What does a downward-sloping demand curve mean about how buyers in a
market will react to a higher price?
It means that, all else equal, as the price rises, people will buy less of the
good. Equilibrium point on a demand and supply graph can be located where
demand curve and supply curve intersect each other. Both demand and supply
curve have price on x- axis and quantity demanded on y-axis. So both the
curves can be shown on the same graph as shown below:
As shown in the left side
diagram, both demand
curve and supply curve are
on the same graph.
Demand curve is downward
sloping, showing inverse
relationship between price
and quantity demanded
whereas supply curve is
upward sloping, showing
positive relationship
between price and quantity
supplied. The point E is the
point of equilibrium where
both demand and supply
are equal.

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12.What is producer surplus? How is it illustrated on a demand and supply
diagram?
Producer surplus is the difference between how much a person would be willing to
accept for given quantity of a good versus how much they can receive by selling
the good at the market price. The difference or surplus amount is the benefit
the producer receives for selling the good in the market.
In other words, Producer surplus is the difference between an amount that sellers
are paid for and the sellers actual cost. It is an area below price and above supply
curve, as shown in the below diagram:
As shown in the left side
diagram, on horizontal axis,
quantity has been taken and on
vertical axis, price has been
taken.
E is the point of equilibrium at
which demand curve and supply
curve intersect each other.
Producer surplus is a triangular
area J which is the area below
price and above supply curve
showing that equilibrium price is
more than the amount what
producers were willing to get for
their products.
13.When the price is above the equilibrium, explain how market forces move the
market price to equilibrium. Do the same when the price is below the
equilibrium.
If the price is above the equilibrium level, the quantity supplied will exceed
the quantity demanded, so there will be a surplus. A surplus means
businesses are producing more than they are selling. In order to get rid of
accumulating inventories, firms will cut the price (otherwise known as putting
the good "on sale.") As the price falls, people will buy more and sellers will
produce less. This will have continued until the quantity demanded and
quantity supplied are equal.
If the price is below the equilibrium level, the quantity demanded will exceed
the quantity supplied, so there will be a shortage. A shortage means people
want to buy more than firms are producing. That will cause the price to rise.
As the price rises, buyers will buy less and sellers will produce more. This
will continue until the quantity demanded and quantity supplied are equal.

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14.Explain how to extend a production possibilities curve. Why is a production
possibilities frontier typically drawn as a curve, rather than a straight line?
The representation of opportunity costs of alternatives available before the
economy, with the given endowment of resources can be shown through the
production possibility curve.
The production possibility curve is the locus of all the production possibilities
available with the economy which it is capable of producing with the given
amount of resources it has. The production possibility curve shows the efficient
level of production in the economy. The production possibility curve can be
extended or expanded by the following the ways:
1. Improvement in Technology: When there is technological development in
the country, the productivity of the factors increases. This leads to greater
production at all levels in the economy, thus leading to a rightward extension or
shift in the production possibility curve.
2. Technical Progress: When there is technical progress which leads to
increases the factor's efficiency to produce, then also the production possibility
curve will shift to the right.
3. Economic Growth: When the economy undergoes high economic growth,
the production capabilities in the economy increases and with the given amount
of resources the economy becomes capable of producing greater outputs,
leading to extension of the PPC curve.
Production possibilities frontier typically drawn as a curve, rather than straight
line because there a cost involved in making a choice i.e. when the quantity of
one good produced is higher and the quantity of the other is low and this is
known as opportunity cost.
Increasing opportunity cost is created when the production factors used within
the production process are homogenous or highly job specific. This means that
a combination of product factors used to produce a certain product cannot be
efficiently used to produce another product. Graphically follows:

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15.What are the assumptions underlying the production possibilities frontier?
What happens when an economy operates inside its production possibilities
frontiers?
Following are the assumptions of production possibility frontier.
 Resources and technology remain the same and they do not change.
 Resources can be used to produce one or two of both the goods.
 Resources are used in technically efficient way.
 Only two goods X (consumer goods) and Y (capital goods) are produced in
different proportions in the economy.
 The same resources can be used to produce either or both of the two goods
and can be shifted freely between them.
 The supplies of factors are fixed. But they can be re-allocated for the
production of the two goods within limits
 The production techniques are given and constant.
 The economy’s resources are fully employed and technically efficient.
 The time period is short.
Given these assumptions, we construct a hypothetical production
possibility schedule of such an economy in below Table.
Production Possibility Schedule:
Possibilities Quantity of X Quantity of Y
P 0 250
В 100 230
С 150 200
D 200 150
P1 250 0
In this schedule, P and P1 are such possibilities in which the economy can
produce either 250 units of Y or 250 units of X with given quantities of factors.
But the assumption is that the economy should produce both the goods.
There are many possibilities to produce the two goods. Such possibilities are В,
С and D. The production possibility schedule shows that when the economy
produces more units of X, it produces less units of Y successively. Units of good
X are measured horizontally and that of Y on the vertical axis. The concave
curve PP1 depicts the various possible combinations of the two goods, P, В, C,
D and P1. This is the production possibility curve which is also known as the
transformation curve or production possibility frontier. Each production
possibility curve is the locus of output combinations which can be obtained from
given quantities of factors or inputs.
When an economy operates inside its production possibilities frontier,
resources are left unemployed and it is producing less than efficient
combination of output.

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16.What is a production possibilities frontier? What moves an economy along its
production possibilities frontier? What factors shift the production
possibilities frontier? What key assumption must be changed for the
productionpossibilities frontier to shift? Explain why. Illustrate your answers
with graphs if applicable.
Production possibility frontier is composed of all the different combination of two goods
that particular country is able to manufacturer with its all resource employed fully and
making the best use of the available Technology.
The nation can be producing at any point of the PPF when the production is efficient.
Suppose, that it is producing at one extreme where all resources are concentrated at
one place. As we know down along the PPF, the nation draws resource from one
sector to other. In such a case, resources that are more is specific in production of one
good and are less productive in manufacturing of the other, experience increasing
opportunity cost. Hence, when economy moves along the PPF, opportunity cost of
the producing the other good increases. There is trade-off between the two goods. To
have more of one good, the nation has to produce less of the other.
Shift in PPFoccurs when there is a change in technology, or there is change in amount
of resources. These two factor are resource and Technology. If resources are
increased due to events such as immigration, or technology is updated, then there is
the rightward shift of PPF showing economic growth. If growth is not based and then
PPF will shift to the right from both ends. If, however, it is based in one of two
goods, then new PPF will have a higher value for one of the intercepts relative to the
other. Immigration and increase employment can be another factor beside technology
for economic growth. Similarly, if resource is reduced; for example, due to war on
natural calamity, PPF would shift inwards.
The assumption that are changed for shifting of PPF is fixed amount of resources
available and giving level of Technology. As long as they are unchanged, PPF cannot
shift.

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17.Explain why the production possibilities frontier curve is bow shaped?
The production possibility curve is concave to the origin because of the
diminishing marginal opportunity cost and the law of increasing opportunity cost,
which explains the idea that the more units of a product are produced, the less
capability the economy has of producing other products.
To increase the production of one commodity, one will have to forego the
production of other, with given technology and resources. Marginal opportunity
cost is the cost of additional unit foregone in order to increase the production of
the other commodity. This curve is also known as Transformation Curve.
18.What is opportunity cost?Compare short run and long run economic growth.
Opportunity cost, or alternative cost,
is the loss of potential gain from
other alternatives when one
particular alternative is chosen over
the others. It is the forgone benefit
that would have been derived by an
option not chosen. Considering the
value of opportunity costs can guide
individuals and organizations to
more profitable decision-making. In
simple terms, opportunity cost is the
loss of the benefit that could have
been enjoyed had a given choice not
been made.
Short term growth is, as the name suggests, growth in the output of a country
in terms of GDP over a given (short, usually a year) period of time. It is
measured by the annual percentage change in GDP.
Long term growth however is when the country's productive potential is
increased, the potential of the country's GDP is increased. Due to an expansion
in either the quality or quantity of factor inputs, the country is now able to
produce more.
Both these concepts can be shown simply on an aggregate supply/aggregate
demand curve. Short term growth would be shown by any movement along the
x-axis (real GDP), and Long term growth shown by a shift to the right of the
LRAS (long-run aggregate supply) curve.

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19.Describe any three factors that affect Price Elasticity of Demand and Supply.
How is a price Elasticity ofDemand of a good influenced byavailability ofits
close substitute? Explain by giving an example.
Following are the factors affecting price elasticity of Demand.
 The number of close substitutes: The closer substitutes there are in the market,
the more elastic is demand because consumers find it easy to switch. E.g. Air
travel and train travel are weak substitutes for inter-continental flights but closer
substitutes for journeys of around 200-400km e.g. between major cities in a large
country.
 The cost of switching between products: There may be costs involved in
switching. In this case, demand tends to be inelastic.
 The degree of necessity or weather the good is a luxury: Necessities tend to
have an inelastic demand whereas luxuries tend to have a more elastic demand.
 The proportion of a consumer’s income allocated to spending on the good.
Following are the factors affecting price elasticity of Demand.
 Time Period: On short period relatively less elastic.
On long period more elastic.
 Nature of Commodity: Perishable goods - relatively less elastic
Durable goods – elastic supply
 Technique of Production: Complex Technique – Inelastic
Simple Technique – Elastic
 Production Speed and Capacity.
 Stocks of finished produced and Components.
The larger the number of close substitutes of a good available in the market,
greater the elasticity for that good. Number of substitutes of a goods demand
for goods which have close substitutes (like example tea and coffee) is
relatively more elastic. Because, when price of such a good rise, the consumers
have the option of shifting to its substitute. If the price of tea rises, consumers
may curtail the consumption of tea and purchase coffee and versa. Goods
without close substitutes like cigarettes etc. are generally found to be less
elastic or inelastic in demand.
20.What is the effect or application of elasticity of demand in real life business?
Elasticity of demand is the degree of responsiveness of the quantity demanded
of a commodity to a change in its price.
The concept of elasticity is crucial in managerial decision making as it has a
direct bearing on profits. Raising the price of a product whose price elasticity of
demand is less elastic, i.e., consumers are less responsive or indifferent to price
changes, or products with less elastic substitutes, proves to be profitable for
businesses.

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Income elasticity:
Income elasticity is useful in demand forecasting when the rate of change in
income and income elasticities is given; the problem of over and under
production can be effectively managed.
Substitutes and Complements:
Cross elasticity of demand is also useful in making key pricing decisions. If
cross elasticity in response to price of substitutes is greater than one,
decreasing the price of the product would be beneficial (goods that are
substitutes like tea and coffee have a positive cross elasticity).
On the other hand, complements have a negative cross elasticity of demand.
So, if cross elasticity in response to price of complements is greater than one,
increasing the price of the product would be more beneficial.
Government policies:
 The government may impose taxes on products with less elasticity if it
wants to increase revenue from taxes.
 Trade policies relating to tariffs also depend on the elasticity of demand
for exports and imports.
 Correcting adverse Balance of Payments involves studying elasticity of
demand for exports and imports. Devaluating currency requires knowing
the elasticity of demand for a country's imports and exports.
21.Define the price and Income elasticity of demand. Why is this concept
important in economics?
Price elasticity is a term in economics used to measure the responsiveness of
demand with regards to changes or fluctuations in the priceof a particular product.
It is important because it helps in measuring the total revenue that can earned from
a market by planning and implementing the best possible combination of demand
and price.
Income elasticity is a term in economics used to measure the responsiveness of
demand with regards to changes or fluctuations in the income of the households
purchasing the particular product. It is important because it helps to gauge the best
pricing strategy for a product that generates the maximum revenue. With income
elasticity the product’s category is known whether it is a necessity or a luxury good.
Elasticity of demand have different concepts but the most important of them all in
making or taking business, organizational, governmental and international
decisions is the PriceElasticity of Demand (PED). Its importance can be seen from
the International trade view, Formulation of government policies, Factor pricing,
decisions of monopolist and Paradox of poverty amidst plenty.

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22.Complete the following table by completing the slope of demand curve at is
of a given point. Next, derive the point elasticity of demand at each of the
points, and enter your result in the table. Finally, in the last column, identify
if the demand curve is elastic, unit elastic, or inelastic at each of the points.
Point Quantity Price ($) Slope Point Elasticity Type of elasticity
A 3 7
B 5 5
C 8 2
(Hint: Because the demand curve is downward sloping,club should be reported as
a negative number each row. Round the point elasticity value to nearest tenth. The
price elasticity of demand is absolute value of the percentage change in quantity
divided by the percentage change in price)
The point elasticity of demand is not equal to the slope of the demand curve.
True or False…?
Graphically,
From the analysis of diagram, it is
clear that the equation of demand
curve is -
Q = 10 – P
Slope = first derivative of demand
curve equation = dQ/dP
dQ/dP = - 1
Point elasticity = (dQ/dP) * P/Q
Point
Quantity Price ($) Slope Elasticity Type of Elasticity
A 3 7 -1 - 2.33 Elastic demand
B 5 5 -1 - 1 Unit elastic
C 8 2 -1 - 0.25 Inelastic
b) True, evident from the above table.

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23.What are the types of elasticity of Demand? Write concept of Elasticity of Demand
(Explain with diagram).
Following are the types of elasticity of Demand.
1. Price elasticity: Price elasticity of demand is the level of responsiveness of
quantity of goods/services demanded by the consumer when there is a change in the
price. The price elasticity of demand has two major parts which are the price elastic
which tells how price sensitive the product is and it’s also greater than one, second is
price inelastic when the price is insensitive and is below one.
2. Income elasticity: Income elasticity of demand refers to the sensitiveness of
quantity demanded in the change in incomes. This show the change in the quantity of
goods demanded as the income of a consumer increases, the consumer starts looking
into luxury goods and there will be a decrease in inferior goods.
3. Cross elasticity of demand: The amount requested of a specific goods shifts as
indicated by the cost of different merchandise. An ascent in cost of a goods, for
example, chicken would expand the amount requested of a substitute of meat; Then
again an ascent in cost of a good, e.g. Nokia would prompt a fall in amount requested
of a supplement of Samsung.
The equation for figuring the cross elasticity of demand for good is X ,
𝐸 ×=
%∆𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝐷𝑒𝑚𝑎𝑛𝑑𝑜𝑓𝐺𝑜𝑜𝑑𝑋
%∆𝑖𝑛𝑃𝑟𝑖𝑐𝑒𝑜𝑓𝐴𝑛𝑜𝑡ℎ𝑒𝑟𝐺𝑜𝑜𝑑𝑋
=
∆𝑄 ×
𝑄 ×
. 100
∆𝑃𝛾
𝑃𝛾
. 100
⟹
∆𝑄𝑥
𝑄𝑥
×
𝑃𝛾
∆𝑃𝛾
Two products, which are substitutes, will have a positive cross.
Two products, which are supplements, will have a negative cross elasticity
GRAPHICAL EXPLANATION.
Price elasticity of demand is negative, since the change in quantity demanded is in
opposite direction to the change in price. When price falls, quantity demanded rises
and vice versa. But for the sake of convenience in understanding the magnitude of
response of quantity demanded to the change in price we ignore the negative sign and
take into account only the numerical value of the elasticity.

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This will be clear from Figures 14 and 15 which represent two demand curves. For a
given fall in price, from OP to OF’, increase in quantity demanded is much greater in
Figure 14 than in Figure 15. Therefore, demand curve in figure 14 as more elastic than
the demand curve in figure 15 for a given fall in price. Demand for the goods
represented in Figure 14 is generally said to be elastic and the demand for the goods
in figure 15 to be inelastic.
We might clarify later pick point those elements which are in charge of the distinctions
in elasticity of demand of different products. However, the main reason for this is the
likelihood of substitution. The more we could find a substitution for some of the
products or goods in the market, the higher the price elasticity for that goods.
24.What are the major sources of gains from trade? Explain how absolute
advantage and comparative advantage differ?
The major sources of gain form trade are specialization, division of labor, expanded
size of the market, low per-unit cost, and mass production made possible by
the trade and innovation and discovery of new production techniques and products.
Absolute advantage is when one party can produce more goods. Or when one
party can produce same units of good using less amount of resources. A party
may have absolute advantage in both the goods.
While comparative advantage is when one party can produce goods with lower
opportunity cost. Unlike, absolute advantage, one party cannot have
comparative advantage in both goods.
25.Absolute advantage vs. Comparative advantage. Is it possible for a country to
have both absolute advantage and comparative advantage in producing the
same good?
Absolute advantage and comparative advantage are two very important terms
used in economics. Both terms usually come in use when talking about
International Trade. Both these are simple terms to define the capacity of a
business or a country as a whole to produce or manufacture a good absolutely
on their own or chose to allocate resources to the activity that is of maximum
benefit to the economy. Though people often use both the terms to convey the
same meaning, they are very different from each other. Thus, to understand the
real meaning and use of both these terms, we need to know the differences
between Absolute Advantage vs. Comparative Advantage.
MEANING OF ABSOLUTE & COMPARATIVE ADVANTAGE
Absolute advantage is a scenario where a business or a country is wholly
sufficient to continuously produce a higher quality product at better rates
compared to others. A country might have an absolute advantage in producing
some goods due to its natural resources, climate conditions and so on.

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Yes, one party may have both absolute as well as comparative advantage in
same good.
ASSIGNMENT – 2
1. Assume a computer firm’s marginal costs of production are constant at
$1,000 per computer. However, the fixed costs of production are equal to
$10,000.
a. Calculate the firm’s average variable cost and average total cost curves.
The variable cost of producing an additional unit, marginal cost, is constant at
$1,000, so VC = $1000Q, and AVC = VC/Q = $1,000Q/Q = $1,000. Average
fixed cost is $10,000/Q.
Average total cost is the sum of average variable cost and average fixed cost:
ATC = $1000 + $10, 000/Q
b. If the firm wanted to minimize the average total cost of production, would it
choose to be very large or very small? Explain.
The firm should choose a very large output because average total cost
decreases with increase in Q. As Q becomes infinitely large, ATC will equal
$1,000.

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2. Why is the MC (marginal costs)curveU-Shaped?Showthe relationship with
graph of Average Variable Cost (AVC) and Average Total Cost (ATC) to
Marginal Cost (MC).
The Marginal Cost curve is U shaped
because initially when a firm
increases its output, total costs, as
well as variable costs, start to
increase at a diminishing rate. At this
stage, due to economics of scale and
the Law of Diminishing Returns,
Marginal Cost falls till it becomes
minimum. Then as output rises, the
marginal cost increases.
The relation of average variable cost (AVC) and average total cost (ATC)
to marginal cost (MC), it seems necessary that the various types of costs and
their relationship should be shown in the form of a table. This is illustrated in the
table below:
Units
of
Output
(Q)
Total Fixed
Cost (TFC)
TFC = AFC*Q
Total Variable
Cost (TVC)
TVC = AVC * Q
Average Total
Cost (ATC)
ATC=AFC+AVC
Average
Fixed Cost
(AFC)
TFC / Q
Average
Variable Cost
(AVC)
TVC / Q
Marginal
Cost (MC)
Down TVC-
Up TVC
($) ($) ($) ($) ($) ($)
1 30 15 45 30 15 15
2 30 16.9 23.4 15 8.4 1.9
3 30 18.4 16.1 10 6.1 1.5
4 30 19.4 12.3 7.5 4.8 1
5 30 20 10 6 4.0 0.6
6 30 22 8.7 5 3.7 2
7 30 25 7.8 4.3 3.6 3
8 30 30 7.5 3.7 3.7 5
9 30 36 7.3 3.3 4 6
10 30 43 7.3 3 4.3 7
11 30 60 8.2 2.7 5.5 17
12 30 90 10 2.5 7.5 30
13 30 125 11.9 2.3 9.6 35
14 30 165 13.9 2.1 11.8 40
15 30 210 16 2 14.8 45
16 30 270 18.7 1.9 16.7 60
In above table, the relation of average total cost to marginal cost. As
production increases, the average total cost and the marginal cost both
begin to decrease.

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The average total cost goes on decreasing up to the 9th unit and then after 10,
it begins to rise. The marginal cost goes on falling up to 5th unit and then it
begins to increase. So long as the average total cost does not rise, the marginal
cost remains below it. When average total cost begins to increase, toe marginal
cost rises more than the average total cost.
Summing Up:
 When average cost is falling, the marginal cost is always lower than the
average cost.
 When average cost is rising, marginal cost lies above AC and rises faster
than AC.
 The marginal cost curve must cut the average cost curve at the minimum
point of AC.
The relation of average variable cost and marginal cost is also very clear from
the diagram given below. The AVC goes on falling up to the 7th unit, and then
it steadily moves upwards. On the other hand, the marginal cost falls up to the
5th unit and then rises more rapidly than average variable cost. It can be
represented as:
In the diagram AFC, AVC, ATC and MC curves are shown. Here, units of
production are measured along OX and cost along OY. ATC and AVC both fall
in the beginning, reach a minimum point and then begin to rise. So is the case
with the marginal cost curve. It first falls and then after rising, sharply crosses
through the lowest point of average variable cost and average total cost and
rises.

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3. What is the relationship between marginal productand marginal costin short
run?
The marginal product shows the change in the total product when an additional
unit of the variable factor is used. Marginal cost shows the change in the
total cost when an additional unit of output is produced.
Short run is a time period in which one factor of production remains constant.
Marginal product is the last product and marginal cost (MC)is the cost of
producing last product.
MC= Change in total cost / Change in total products.
As shown in the diagram below, Average variable cost (AVC)curve Marginal
cost curve are mirror images of Average product and marginal product curves.
This happens due to law of diminishing returns. Till the output level when
average product is above marginal product, marginal product is increasing.
Because at low output marginal product of labour increases and cost decreases
as increase in output is more than increase in cost. At higher output cost
increase is more than product output due to space and productivity constraints.
In short MC and MP are mirror images of each other
There is an inverse relationship between marginal cost and marginal Product.
Let me show within following diagram.
Marginal Cost and Marginal Product

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4. Suppose that a firm’s cost per unit of labor is $100 per day and its cost per
unit of capital is $400 per day.
a. Draw the iso-cost line for a total cost per day of $2,000. Label the axes.
b. If the firm is producing efficiently, what is the marginal rate of technical
substitution between labor and capital?
c. Demonstrate your answer to part (b) using iso-cost lines and isoquant
curves.
A curve showing the combinations of factor inputs that have constant
market cost. If firms are acting as price-takers in factor markets, the iso-cost
curve is a straight line, whose slope represents the relative prices of different
factors' services. Iso-cost line refers to the locus of all input combinations which
incurs the same cost for producing a given level of output.
a) Firm’s cost per unit of labor is $100 per day, and its cost per unit of capital is
$400. Then, the iso-cost line for a total cost of $2,000 is shown in the below
figure.
From Figure-1, it is suggested that only 5 units of capital can be used in
production process, if there is no labor unit. Similarly, only 20 units of labor can
be used in the production process, if there is no capital used in production.

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b) Efficient level of output can be produced at the tangency point between the
iso-cost line and the isoquant, where the slope of iso-cost line is equal to the
slope of isoquant. When firm’s total cost per day is $2,000, then the slope of iso-
cost line that is marginal rate of technical substitution (MRTS) can be calculated
as follows:
MRTSLK = -
𝑀𝑃𝑘
𝑀𝑃𝐿
or
𝛥𝐾
𝛥𝐿
…… (1)
Substitute the respective values in Equation (1) to obtain the marginal rate of
technical substitution.
MRTSLK = -
1
4
Thus, the value of MRT is -
1
4
c) Graphical representation: Efficient level of output Efficient level of output
with total cost of $2,000 is shown in the below figure.
Figure-2: Efficient level of output.

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5. Explain graphically long run cost and short run cost and write their
differences. (analysis by showing curve).
Long Run Costs
Long run costs are accumulated when firms change production levels over time in
response to expected economic profits or losses. In the long run there are no fixed
factors of production. The land, labour, capital goods, and entrepreneurship all vary to
reach the long run cost of producing a good or service. The long run is a planning and
implementation stage for producers. They analyse the current and projected state of
the market in order to make production decisions. Efficient long run costs are
sustained when the combination of outputs that a firm produces results in the desired
quantity of the goods at the lowest possible cost. Examples of long run decisions that
impact a firm’s costs include changing the quantity of production, decreasing or
expanding a company, and entering or leaving a market.
Short Run Costs
Short run costs are accumulated in real time throughout the production process. Fixed
costs have no impact of short run costs, only variable costs and revenues affect the
short run production. Variable costs change with the output. Examples of variable
costs include employee wages and costs of raw materials. The short run costs
increase or decrease based on variable cost as well as the rate of production. If a firm
manages its short run costs well over time, it will be more likely to succeed in reaching
the desired long run costs and goals.
Differences
The main difference between long run and short run costs is that there are no fixed
factors in the long run; there are both fixed and variable factors in the short run. In the
long run the general price level, contractual wages, and expectations adjust fully to the
state of the economy. In the short run these variables do not always adjust due to the
condensed time period. In order to be successful a firm must set realistic long run cost
expectations. How the short run costs are handled determines whether the firm will
meet its future production and financial goals?
Cost curve: This graph shows the relationship between long run and short run costs.

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6. Define average cost and marginal cost. Illustrate the relationship between
Marginal Cost (MC) and Average Total Cost (ATC).
Marginal Cost
In economics, marginal cost is the change in the total cost when the quantity produced
changes by one unit. It is the cost of producing one more unit of a good. Marginal cost
includes all of the costs that vary with the level of production. For example, if a
company needs to build a new factory in order to produce more goods, the cost of
building the factory is a marginal cost. The amount of marginal cost varies according
to the volume of the good being produced.
Average Cost
The average cost is the total cost divided by the number of goods produced. It is also
equal to the sum of average variable costs and average fixed costs. Average cost can
be influenced by the time period for production. Average costs are the driving factor of
supply and demand within a market. Economists analyse both short run and long run
average cost. Short run average costs vary in relation to the quantity of goods being
produced. Long run average cost includes the variation of quantities used for all inputs
necessary for production.
Relationship Between Average and Marginal Cost
Average cost and marginal cost impact one another as production fluctuate:
Cost curve: This graph is a cost curve that shows the average total cost, marginal cost, and marginal
revenue. The curves show how each cost changes with an increase in product price and quantity produced.
 When the average cost declines, the marginal cost is less than the average cost.
 When the average cost increases, the marginal cost is greater than the average cost.
 When the average cost stays the same (is at a minimum or maximum), the marginal
cost equals the average cost.

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7. What Does the Budget Line Tell Us? Show the graph of the effect of a price
change and income change on the budget line.
The ‘opportunity cost’ of consuming an additional unit of good 1 in terms of lost
consumption of good 2. In this example, what is the opportunity cost of a BMW?
A: Two houses. – Why? The answer is determined by the shape of the budget
line. The slope of the budget line is equal to the price of good 1 in terms of
good 2. This slope tells us how much good 1 we must give up to get an
additional unit of good 2.

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8. List the functions of Commercial Bank and explain each. Distinguish two
methods of credit control used by central Bank.
A commercial bank is a kind of financial institution which carries all the operations
related to deposit and withdrawal of money for the general public, providing loans for
investment, etc. These banks are profit-making institutions and do business only to
make a profit. Following are the function of commercial bank.
(a) Primary functions –
 Acceptance of deposits – The bank takes deposits in the form of saving, current
and fixed deposits. The surplus balances collected from the firm and individuals
are lent to the temporary required of commercial transactions.
 Provides Loan and Advances – Another critical function of this bank is to offer
loans and advances to the entrepreneurs and businesspeople and collect
interest. For every bank, it is the primary source of making profits. In this process,
a bank retains a small number of deposits as a reserve and offers (lends) the
remaining amount to the borrowers in demand loans, overdraft, cash credit and
short-run loans, etc.
 Credit Cash- When a customer is provided with credit or loan, they are not
provided with liquid cash. First, a bank account is opened for the customer and
then the money is transferred to the account. This process allows a bank to create
money.
 Clearing of cheques- It is the process of moving a cheque from the bank in
which it was deposited to the bank on which it was drawn, and the movement of
the money in the opposite direction. This process is called clearing cycle and
normally results in credit to the account at the bank of deposit, and an equivalent
debit to the account at the bank on which it was drawn.
 Remittance of Funds-
(b) Secondary functions –
 Discounting bills of exchange – It is a written agreement acknowledging the
amount of money to be paid against the goods purchased at a given point of
time in the future. The amount can also be cleared before the quoted time
through a discounting method of a commercial bank.
 Overdraft Facility – It is an advance given to a customer by keeping the
current account to overdraw up to the given limit.
 Purchasing and Selling of the Securities – The bank offers you with the
facility of selling and buying the securities.
 Locker Facilities – Bank provides lockers facility to the customers to keep their
valuable belonging or documents safely. Banks charge a minimum of an annual
fee for this service.
 Paying and Gather the Credit – It uses different instruments like a promissory
note, cheques and bill of exchange.

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Using the following two method of credit control used by the Central Bank acts as a
controller of money supply and credit.
 Margin requirement: It is a qualitative method of credit control. A margin refers
to the difference between market value of the security offered for loan and the
amount loan offered by the commercial banks. During inflation, supply of credit
is reduced by raising the requirement of margin. During deflation supply of credit
is increased by lowering the requirement of ‘margin’. This measure is often used
to discourage the flow of credit into speculative business activities.
 Open market operations: Under open market operations, RBI purchases or
sells government securities to commercial banks and general public for the
purpose of increasing or decreasing the stock of money in an economy. The
purchase or sale of securities controls the money in the hands of public as they
deposit or withdraw the money from commercial banks. Thus, money creation
by commercial banks get affected.
By selling the securities, the Central Bank withdraws cash balances from the economy
and by buying the securities, the Central Bank adds to the balance in the economy, in
this way, it works as a method of credit control. Based on economic conditions, the
Central Bank conduct buying and selling of securities in the open market.
9. What is budget? List the types of government Budget and explain it.
A budget is an estimation of revenue and expenses over a specified future
period of time and is usually compiled and re-evaluated on a periodic
basis. Budgets can be made for a person, a group of people, a business, a
government, or just about anything else that makes and spends money.
A budget is a financial plan for a defined period, often one year.
It is the sum of money allocated for a particular purpose and the summary of
intended expenditures along with proposals for how to meet them. It may
include a budget surplus, providing money for use at a future time, or a deficit
in which expenses exceed income.
A government budget is an annual financial statement which outlines the
estimated government expenditure and expected government receipts or
revenues for the forthcoming fiscal year. Depending on the feasibility of these
estimates, budgets are of three types -- balanced budget, surplus budget and
deficit budget. Mentioned below are brief explanations of these three types of
budgets:
BALANCED BUDGET
A government budget is said to be a balanced budget if the estimated
government expenditure is equal to expected government receipts in a
particular financial year. Advocated by many classical economists, this type of
budget is based on the principle of “living within means.” They believed the
government’s expenditure should not exceed their revenue.
Though an ideal approach to achieve a balanced economy and maintain fiscal
discipline, a balanced budget.

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SURPLUS BUDGET
A government budget is said to be a surplus budget if the expected government
revenues exceed the estimated government expenditure in a particular financial
year. This means that the government’s earnings from taxes levied are greater
than the amount the government spends on public welfare. A surplus budget
denotes the financial affluence of a country. Such a budget can be implemented
at times of inflation to reduce aggregate demand.
DEFICIT BUDGET
A government budget is said to be a deficit budget if the estimated government
expenditure exceeds the expected government revenue in a particular financial
year. This type of budget is best suited for developing economies, such as India.
Especially helpful at times of recession, a deficit budget helps generate
additional demand and boost the rate of economic growth. Here, the
government incurs the excessive expenditure to improve the employment rate.
This results in an increase in demand for goods and services which helps in
reviving the economy. The government covers this amount through public
borrowings (by issuing government bonds) or by withdrawing from its
accumulated reserve surplus.
10.Why is Budgeting so important? What about budget forecasting and
planning?
Budgeting is the process of creating a plan to spend your money. This
spending plan is called a budget. Creating this spending plan allows you to
determine in advance whether you will have enough money to do the things
you need to do or would like to do.
Budgeting is simply balancing your expenses with your income. If they don't balance and you spend
more than you make, you will have a problem. Many people don't realize that they spend more
than they earn and slowly sink deeper into debt every year.
If you don't have enough money to do everything you would like to do, then you
can use this planning process to prioritize your spending and focus your money
on the things that are most important to you.

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Since budgeting allows you to create a spending plan for your money, it ensures
that you will always have enough money for the things you need and the things
that are important to you. Following a budget or spending plan will also keep
you out of debt or help you work your way out of debt if you are currently in debt.
Once you create your first budget, begin to use it and get a good feel for how it
can keep your finances on track, you may want to map out your spending plan
or budget for 6 months to a year down the road. By doing this you can easily
forecast which months your finances may be tight and which ones you'll have
extra money. You can then look for ways to even out the highs and lows in your
finances so that things can be more manageable and pleasant.
Extending your budget out into the future also allows you to forecast how much
money you will be able to save for important things like your vacation, a new
vehicle, your first home or home renovations, an emergency savings account or
your retirement. Using a realistic budget to forecast your spending for the year
can really help you with your long term financial planning. You can then make
realistic assumptions about your annual income and expense and plan for long
term financial goals like starting your own business, buying an investment
or recreation property or retiring.
11.What should central bank do? Write the functions of central bank?
A Bank is like a pool into which the flow of savings, the idle surplus money of
households and from which loans are given on interest to individuals and others who
need them for investment or productive uses.
A Central Bank is the bank in any country to which has been entrusted the duty of
regulating the volume of currency and credit in that country.
Central banks carry out a nation's monetary policy and control its money supply,
often mandated with maintaining low inflation and steady GDP growth. On a macro
basis, central banks influence interest rates and participate in open market
operations to control the cost of borrowing and lending throughout an economy.
The main functions of a central bank are common all over the world. But the scope
and content of policy objectives may vary from country to country and from period to
period depending on the economic situations of the respective country. Generally, all
the central banks aim at achieving economic stability along with a high growth rate
and favorable external payment position through proper monetary management.
The common functions of central banks are:
1. Regulator of currency
The issue of paper money is the most important function of a central bank. The central
bank is the authority to issue currency for circulation, which is a legal tender money.
The issue department of the central bank has the responsibility to issue notes and
coins to the commercial banks. The central bank regulates the credit and currency
according to the economic situation of the country

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2. Banker, Agent and Adviser to the Government
The central bank of the country acts as the banker, fiscal agent and advisor to the
government. As a banker, it keeps the deposits of the central and state governments
and makes payments on behalf of governments. It buys and sells foreign currencies
on behalf of the government. It keeps the stock of gold of the country. As a fiscal agent,
the bank makes short-term loans to the government for a period not exceeding 90
days.
3. Custodian and Management of Foreign Exchange reserves
The central bank keeps and manages the foreign exchange reserves of the country.
It fixes the exchange rate of the domestic currency in terms of foreign currencies. If
there are any fluctuations in the foreign exchange rates, it may have to buy and sell
foreign currencies in order to minimize the instability of exchange rates.
4. Lender of the last resort
By giving accommodation in the form of re-discounts and collateral advances to
commercial banks, bill brokers and their financial institutions, the central bank acts as
the lender of the last resort. The central bank lends to such institutions in order to help
them when they are faced with difficult situations so as to save the financial structure
of country from collapse.
5. Clearing House Function
The central bank acts as a 'clearing house' for other banks and mutual obligations are
settled through the clearing system. Since it holds cash reserves of commercial banks,
it is easier for the central bank to act as a 'clearing house'.
6. Custodian of cash Reserves of commercial banks
Commercial banks are required to keep a certain percentage of cash reserves with
the central bank. On the basis of these reserves, the central bank transfers funds from
one bank to another to facilitate the clearing of cheque.
7. Controller of credit
The most important function of the central bank is to control the credit creation power
of commercial banks in order to control inflationary and deflationary pressures within
the economy. Controlling credit in the economy is amongst the most important
functions of the central bank. The basic and important needs of credit control in the
economy are:
 To encourage the overall growth of the "priority sector" i.e. those sectors of the
economy which is recognized by the government as "prioritized" depending upon
their economic condition or government interest. These sectors broadly total to
around 15 in number.
 To keep a check over the channelization of credit so that credit is not delivered
for undesirable purposes.
 To achieve the objective of controlling inflation as well as deflation.
 To boost the economy by facilitating the flow of adequate volume of bank credit
to different sectors.
 To develop the economy.

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12.How does fiscalpolicy affect monetary policy? Demonstrate the role ofFiscal
policy in Economic Development.
Fiscal policy affects aggregate demand through changes in government
spending and taxation. Those factors influence employment and household
income, which then impact consumer spending and investment. Monetary
policy impacts the money supply in an economy, which influences interest
rates and the inflation rate. Monetary policy impacts the money supply in an
economy, which influences interest rates and the inflation rate. It also impacts
business expansion, net exports, employment, the cost of debt, and the relative
cost of consumption versus saving all of which directly or indirectly impact
aggregate demand.
Fiscal policy plays very significant role for promoting economic development
and stability of under developed countries. It is demonstrating by the following
points.
 To mobilize the resources:
The foremost aim of fiscal policy in underdeveloped countries is to mobilize
resources in the private and public sectors. Generally, the national income
and per capita income is very low due to low rate of savings. Therefore,
the governments of such countries through forced savings pushes the rate
of investment and capital formation which in turn accelerates the rate of
economic development.
 To accelerate the rate of the growth:
Fiscal policy helps to accelerate the rate of economic growth by raising
the rate of investment in public as well as private sectors. Therefore,
various tools of fiscal policy as taxation, public borrowing, deficit financing
and surpluses of public enterprises should be used in a combined
manner so that they may not adversely affect the consumption,
production and distribution of wealth.
 Capital Formation:
Fiscal policy plays crucial role in underdeveloped countries by making
investment in strategic industries and services of public utility on one side
and induces investment in private sector by giving assistance to new
industries and introduces modern techniques of production.
 To Encourage Socially Optimal Investment:
In underdeveloped countries, fiscal policy encourages the investment into
those productive channels which are considered socially and economically
desirable. This means optimal investment which promotes economic
development and avoids wasteful and unproductive investment.
 To provide more employment opportunities:
Since in less developed countries, population grows at a very fast rate, the
aim of fiscal policy in such countries is to make high doses of expenditures

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which are helpful to raise employment opportunities. Generally, under
developed economies suffer from unemployment.
 Promotion of economic stability:
Still another role played by the fiscal policy in developing countries is of
maintaining reasonable internal and external economic stability. Generally,
a developing country is prone to the efforts of international cyclical
fluctuations.
 National income and proper distribution:
The existence of extreme inequalities in income and wealth create social
cleavages, lead to economic and political instability and the biggest
hindrance in the way of economic development of an economy.
 Reallocates Resources:
Allocation of resources are not proper in the underdeveloped countries.
Much of the resources in private sector are directed to the production of
those goods which meet the need of richer sections of society and yield
higher profit.
The various tools of fiscal policy such as budget, taxation, public expenditure,
public works and public debt can go a long way for maintaining full employment
without inflationary and deflationary forces in underdeveloped economies.
13.Write down the main objectives of Fiscal Policy in developing country like
Bangladesh?
1. Development by effective Mobilization of Resources
The principal objective of fiscal policy is to ensure rapid economic growth and
development. This objective of economic growth and development can be
achieved by Mobilization of Financial Resources. The governments of
Bangladesh used fiscal policy to mobilize resources. The financial resources
can be mobilized by:
 Taxation: Through effective fiscal policies, the government aims to
mobilize resources by way of direct taxes as well as indirect taxes because
most important source of resource mobilization in Bangladesh is taxation.
 Public Savings: The resources can be mobilized through public savings
by reducing government expenditure and increasing surpluses of public
sector enterprises.
 Private Savings: Through effective fiscal measures such as tax benefits,
the government can raise resources from private sector and households.
Resources can be mobilized through government borrowings by ways of
treasury bills, issue of government bonds, etc., loans from domestic and
foreign parties and by deficit financing.

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2. Efficient allocation of Financial Resources
The governments have tried to make efficient allocation of financial resources.
These resources are allocated for Development Activities which includes
expenditure on railways, infrastructure, etc. While Non-Development Activities
includes expenditure on defense, interest payments, subsidies, etc.
3. Reduction in inequalities of Income and Wealth
Fiscal policy aims at achieving equity or social justice by reducing income
inequalities among different sections of the society. The direct taxes such as
income tax are charged more on the rich people as compared to lower income
groups.
4. Price Stability and Control of Inflation
One of the main objectives of fiscal policy is to control inflation and stabilize
price. Therefore, the government always aims to control the inflation by
reducing fiscal deficits, introducing tax savings schemes, Productive use of
financial resources, etc.
5. Employment Generation
The government is making every possible effort to increase employment in the
country through effective fiscal measure. Investment in infrastructure has
resulted in direct and indirect employment. Lower taxes and duties on small-
scale industrial (SSI) units encourage more investment and consequently
generates more employment. Various rural employment program has been
undertaken by the Government to solve problems in rural areas.
6. Balanced Regional Development
Another main objective of the fiscal policy is to bring about a balanced regional
development. There are various incentives from the government for setting up
projects in backward areas such as Cash subsidy, Concession in taxes and
duties in the form of tax holidays, Finance at concessional interest rates, etc.
7. Capital Formation
The objective of fiscal policy is also to increase the rate of capital formation so
as to accelerate the rate of economic growth. An underdeveloped country is
trapped in vicious (danger) circle of poverty mainly on account of capital
deficiency. In order to increase the rate of capital formation, the fiscal policy
must be efficiently designed to encourage savings and discourage and reduce
spending.
8. Increasing National Income
The fiscal policy aims to increase the national income of a country. This is
because fiscal policy facilitates the capital formation. This results in economic
growth, which in turn increases the GDP, per capita income and national income
of the country.

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9. Development of Infrastructure
Government has placed emphasis on the infrastructure development for the
purpose of achieving economic growth. The fiscal policy measure such as
taxation generates revenue to the government. A part of the government's
revenue is invested in the infrastructure development. Due to this, all sectors of
the economy get a boost.
10. Foreign Exchange Earnings
Fiscal policy attempts to encourage more exports by way of Fiscal Measures
like, exemption of income tax on export earnings, exemption of sales tax etc.
Foreign exchange provides fiscal benefits to import substitute industries. The
foreign exchange earned by way of exports and saved by way of import
substitutes helps to solve balance of payments problem.
14. Which is more effective in comparison to Fiscal Policy and Monetary
Policy?
In terms of improving the real economy, expansionary fiscal policy is more
effective. In terms of the financial economy, expansionary monetary policy is
the better choice. Both types work through different channels and impact
individu0. also and corporations in different ways.
Fiscal policy affects consumers positively for the most part, as it leads to
increased employment and income. Essentially, it is targeting aggregate
demand. Companies also benefit as they see increased revenues.
However, if the economy is near full capacity, expansionary fiscal policy risks
sparking inflation. This inflation eats away at the margins of certain
corporations in competitive industries that may not be able to easily pass on
costs to customers; it also eats away at the funds of people on a fixed income.
Monetary policy has less impact on the real economy. Case in point: The Great
Depression, during which the Federal Reserve was particularly aggressive on
a historical scale. Its actions prevented deflation and economic collapse but
did not generate significant economic growth to reverse the lost output and
jobs.
Expansionary monetary policies can have limited effects on growth by
increasing asset prices and lowering the costs of borrowing, making
companies more profitable. As with fiscal policy, extended periods of low
borrowing costs can create asset bubbles that are only apparent in hindsight.
Another crucial difference between the two is that fiscal policy can be targeted,
while monetary policy is more of a blunt tool in terms of expanding and
contracting the money supply to influence inflation and growth.

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15.What is Monetary Policy? Discuss Expansionary Monetary Policy vs.
contractionary Monetary Policy.
Monetary policy is an economic policy that manages the size and growth rate
of the money supply in an economy. It is a powerful tool to regulate
macroeconomic variables such as inflation and unemployment.
These policies are implemented through different tools, including the
adjustment of the interest rates, purchase or sale of government securities, and
changing the amount of cash circulating in the economy. The central bank or a
similar regulatory organization is responsible for formulating these policies.
Expansionary vs. Contractionary Monetary Policy
Depending on its objectives, monetary policies can be expansionary or
contractionary.
Expansionary Monetary Policy
This is a monetary policy that aims to increase the money supply in the economy
by decreasing interest rates, purchasing government securities by central
banks, and lowering the reserve requirements for banks. An expansionary
policy lowers unemployment and stimulates business activities and consumer
spending. The overall goal of the expansionary monetary policy is to fuel
economic growth. However, it can also possibly lead to higher inflation.
Contractionary Monetary Policy
The goal of a contractionary monetary policy is to decrease the money supply
in the economy. It can be achieved by raising interest rates, selling government
bonds, and increasing the reserve requirements for banks. The contractionary
policy is utilized when the government wants to control inflation levels.
16.Write the tool of Fiscal Policy. Discuss Expansionary Fiscal Policy and
contractionary Fiscal Policy.
The first tool is taxation. That includes income, capital gains from investments,
property, and sales. Taxes provide the income that funds the government. The
downside of taxes is that whatever or whoever is taxed has less income to
spend on themselves.
The second tool is government spending. That includes subsidies, transfer
payments including welfare programs, public works projects, and government
salaries. Whoever receives the funds has more money to spend. That increases
demand and economic growth.
Expansionary fiscal policy and Contractionary fiscal policy

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The first and most widely-used is expansionary. It stimulates economic growth.
The government either spends more, cuts taxes or does both if it can. The idea
is to put more money into consumers' hands, so they spend more. That jump
starts demand, which keeps businesses running and adds jobs. Politicians
debate about which works better. Advocates of supply-side economics prefer
tax cuts. They say it frees up businesses to hire more workers to pursue
business ventures.
Advocates of demand-side economics say additional spending is more effective
than tax cuts. Examples include public works projects, unemployment benefits,
and food stamps. The money goes into the pockets of consumers, who go right
out and buy the things businesses produce.
The second type, contractionary fiscal policy, is rarely used. That's because its
goal is to slow economic growth. Why would you ever want to do that? One
reason only, and that's to stamp out inflation. That's because the long-term
impact of inflation can damage the standard of living as much as a recession.
The tools of contractionary fiscal policy are used in reverse. Taxes are
increased, and spending is cut. Thus, it's hardly ever used. Fortunately, the
contractionary monetary policy is effective in preventing inflation.
17. Explain the methods of computing National income with precautions.
Which factor can change the National Income?
There are 3 methods of computing National Income. They are;
 Product Method:
It is also known as inventory or Product method. In this method, the economy is
classified into convenient sectors like Agricultural, Industrial, Direct services and
foreign transaction sector where international payments are considered.
-According to this method, Value of output is estimated.
-Value of intermediate goods (input) is deducted from the value of output to obtain
Gross Value Added.
Mathematically,
1. Gross Value Added = Value of Output – Value of intermediate goods
2. Net Value Added = Gross Value Added – Depreciation
 Income Method
The net income received by all citizens of a country in a particular year, i.e. total
of net rents, net wages, net interest and net profits. It is the income earned by the
factors of production of a country.
Under this method, national income is measured as a flow of factor incomes.
There are generally four factors of production labor, capital, land and
entrepreneurship. Labor gets wages and salaries, capital gets interest, land gets
rent and entrepreneurship gets profit as their remuneration.
Mathematically,

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GNP = wages and salaries + rent +interest + Dividends + undistributed corporate
profits + mixed incomes + direct taxes + indirect taxes + depreciation + net
income from abroad.
 Expenditure Method
In this method, national income is measured as a flow of expenditure. GDP is
sum-total of private consumption expenditure. Government consumption
expenditure, gross capital formation (Government and private) and net exports
(Export-Import).
Precautions that must be followed to calculate the National Income through product
method:
 Avoid double counting.
 Production for self-consumption should be included.
 Sale of second hand goods is not to be included.
 Production from illegal activities is not to be included.
 Value of services rendered by family members is not to be included.
 Include the value of final product only.
 Sale of second hand goods is not included as these are already accounted for
during the year they were produced.
Precautions that must be followed to calculate the National Income through income
method:
 Transfer payments are not included in estimating national income.
 Imputed rent of self-occupied houses are to be included in calculating national
income.
 Illegal money through smuggling etc. are not included as they cannot be easily
estimated.
 Windfall gains are not included in this method.
 Indirect taxes are not included while estimating national income at factor cost.
There are also some difficulties in the estimation of national income under this method.
Precautions that must be followed to calculate the National Income through
expenditure method:
 Expenditure on only final goods and services should be included in the national
income estimation while intermediate consumption expenditure should not be
included.
 Similarly, expenditure onthe purchase of second hand goods should not be included
inthe national incomeestimationofthe current accounting year. This is becausethey
have already been included in the national income of the accounting year in which
they were originally purchased.
 Imputed value of the goods and services produced for self-consumption are
included.

Economics 50 long questions solve by suman jyoti (dhaka university of engineering)

Economics 50 long questions solve by suman jyoti (dhaka university of engineering)

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