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