Oswaal NTA CUET (UG)| Question Bank Chapterwise & Topicwise Economics For 2024 Exam 9789359589428, 935958942X

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For 2024 Exam

Highly Recommended

CHAPTER-WISE

CHAPTER-WISE

QUESTION BANK

ECONOMICS

QUESTION BANK Includes SOLVED PAPERS (2022 - 2023)

ECONOMICS Section - II (Domain Specific Subject) Strictly as per the Latest Exam Pattern issued by NTA

The ONLY book you need to #AceCUET(UG)

SECTION - II

1

2

3

4

5

100% Updated

Previous Years’ Questions

Revision Notes

Concept Videos

800+ Questions

With 2023 CUET Exam Paper

(2022-2023) for Better Exam Insights

for Crisp Revision with Smart Mind Maps

for Complex Concepts Clarity

for Extensive Practice

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1st EDITION

I S BN

YEAR 2024 "9789359589428"

CUET (UG)

SYLLABUS COVERED

PUBLISHED BY OSWAAL BOOKS & LEARNING PVT. LTD.

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All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without written permission from the publishers. The author and publisher will gladly receive information enabling them to rectify any error or omission in subsequent editions.

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DI SCL A IMER

This book is published by Oswaal Books and Learning Pvt Ltd (“Publisher”) and is intended solely for educational use, to enable students to practice for examinations/tests and reference. The contents of this book primarily comprise a collection of questions that have been sourced from previous examination papers. Any practice questions and/or notes included by the Publisher are formulated by placing reliance on previous question papers and are in keeping with the format/pattern/ guidelines applicable to such papers. The Publisher expressly disclaims any liability for the use of, or references to, any terms or terminology in the book, which may not be considered appropriate or may be considered offensive, in light of societal changes. Further, the contents of this book, including references to any persons, corporations, brands, political parties, incidents, historical events and/or terminology within the book, if any, are not intended to be offensive, and/or to hurt, insult or defame any person (whether living or dead), entity, gender, caste, religion, race, etc. and any interpretation to this effect is unintended and purely incidental. While we try to keep our publications as updated and accurate as possible, human error may creep in. We expressly disclaim liability for errors and/or omissions in the content, if any, and further disclaim any liability for any loss or damages in connection with the use of the book and reference to its contents”.

Kindle Edition (2)

Preface Welcome to the ultimate resource for your Common University Entrance Test (CUET) preparation! The Common University Entrance Test (CUET) marks a significant shift in the admission process for UG programs in Central Universities across India. The introduction of CUET aims to create a level playing field for students nationwide, regardless of their geographical location, and revolutionize the way students connect with these prestigious institutions. CUET (UG), administered by the esteemed National Testing Agency (NTA), is a prestigious all-India test that serves as a single-window opportunity for admissions. The NTA consistently provides timely notifications regarding the exam schedule and any subsequent updates. The curriculum for CUET is based on the National Council of Educational Research and Training (NCERT) syllabus for class 12 only. CUET (UG) scores are mandatory required while admitting students to undergraduate courses in 44 central universities. A merit list will be prepared by participating Universities/organizations. Universities may conduct their individual counselling on the basis of the scorecard of CUET (UG) provided by NTA. Oswaal CUET (UG) Question Bank is your strategic companion designed to elevate your performance and simplify your CUET journey for success in this computer-based test.

Here’s how this book benefits you: • 100% Updated with 2023 CUET Exam Paper • Previous years Questions (2022-2023)for Better Exam insights • Revision Notes for Crisp Revision with Smart Mind Maps • Concept Videos for complex concepts clarity • 800+ questions for Extensive Practice Almost 1.92 million candidates registered for CUET (UG) in 2023. Candidates have been quite anxious about appearing for CUET (UG), however, with the right preparation strategy and resources, you can secure a good rank in CUET (UG). We believe that with dedication, hard work, and the right resources, you can conquer CUET and secure your place in the Central Universities of your choice. Good luck with your preparations, with this trusted companion on your journey to academic success! All the best! Team Oswaal Books

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Contents l Know your CUET(UG) Exam

6 - 6

l Latest CUET (UG) Syllabus

7 - 8

l Examination Paper CUET 2023



11 - 15

Chapter-1 – Introduction to Microeconomics

1-9

Chapter-2 – Consumer Behaviour and Demand

10 - 19

Chapter-3 – National Income and Related Aggregates

20 - 28

Chapter-4 – Determination of Income and Employment

29 - 37

Chapter-5 – Money and Banking

38 - 46

Chapter-6 – Government Budget and the Economy

47 - 55

Chapter-7 – Balance of Payments

56 - 64

Chapter-8 – Development Experience (1947- 90) and Economic Reforms Since 1991

65 - 74

Chapter-9 – Current Challenges Facing the Indian Economy

75 - 87

Chapter-10 – Development Experience of india

88 - 96 qqq

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2 Languages + 6 Domain Specific Subject + General Test

OR

3 Languages + 5 Domain Specific Subjects + General Test

Subject/Language Choice

Objective Type with MCQs

CBT

Mode of Test

Test Pattern

Know Your CUET (UG) Exam SECTIONS

SECTION I (A) 13 Languages

Tested through reading Comprehension (i) Factual (ii) Literary (iii) Narrative

SECTION III SECTION I (B)

SECTION II

20 Languages

Domain Specific Subjects ( 27 Subjects)

General Test (Compulsory)

INCLUDES : NCERT Model syllabus (only of 12th Standard) is available on all the Subjects

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• • • • • •

General Knowledge Current Affairs General Mental Ability Numerical Ability Quantitative Reasoning Logical & Analytical Reasoning

Latest CUET (UG) Syllabus SYLLABUS FOR LANGUAGES (IA AND IB) Note: There will be one Question Paper which will have 50 questions out of which 40 questions need to be attempted. Unit I: Introduction to Microeconomics • What is microeconomics? • Central problems

Unit II: Consumer Behaviour and Demand • Consumer’s Equilibrium: meaning and attainment of equilibrium through Utility Approach: One and two commodity cases. • Demand: market demand, determinants of demand, demand schedule, demand curve, movement along and shifts in the demand curve, price elasticity of demand, measurement of price elasticity of demand – percentage, total expenditure, and geometric methods

Introductory Macroeconomics Unit III: National Income and Related Aggregates — Basic Concepts and Measurement • Macroeconomics: meaning. • Circular flow of income, concepts of GDP, GNP, NDP, NNP (at market price and factor cost). • Measurement of National Income –Value Added method, Income method, and Expenditure method.

Unit IV: Determination of Income and Employment • • • • • • •

Aggregate demand, aggregate supply, and their components Propensity to consume and propensity to save (average and marginal) Meaning of involuntary unemployment and full employment Determination of income and employment: two-sector model Concept of investment multiplier and its working Problems of excess and deficient demand Measures to correct excess and deficient demand – availability of credit, change in government spending

Unit V: Money and Banking • Money: meaning, evolution, and functions • Central bank: meaning and functions • Commercial banks: meaning and functions

Unit VI: Government Budget and the Economy • Government budget – meaning and its components • Objectives of government budget • Classification of receipts – revenue and capital; classification of expenditure – revenue and capital, plan and non-plan, and developmental and non-developmental • Balanced budget, surplus budget, and deficit budget: meaning and implications • Revenue deficit, fiscal deficit, and primary deficit: meaning and implications; measures to contain different deficits.

Unit VII: Balance of Payments • Foreign exchange rate – meaning (fixed and flexible), merits and demerits; determination through demand and supply • Balance of payments accounts – meaning and components • A brief analysis of recent exchange rate issues (7)

Contd... INDIAN ECONOMIC DEVELOPMENT Unit VIII: Development Experience (1947-90) and Economic Reforms since 1991 A brief introduction of the state of the Indian economy on the eve of independence. Indian economic system and common goals of Five year Plans. Main features, problems and policies of agriculture (institutional aspects and new agricultural strategy), industry (IPR 1956; SSI – role & importance) and foreign trade.

Unit IX: Current challenges facing the Indian Economy Poverty – absolute and relative; Main programmes for poverty alleviation: A critical assessment; Human Capital Formation – How many people become resource; Role of human capital in economic development; Rural development: Key issues – credit and marketing – role of cooperatives; agricultural diversification; Employment: Growth and changes in work force participation rate in formal and informal sectors; problems and policies Infrastructure: Meaning and Types: Cases Studies: Health: Problems and Policies – A critical assessment; Sustainable Economic Development: Meaning, Effects of Economic Development on Resources and Environment, including global warming

Unit X: Development Experience of India • • • •

A comparison with neighbours India and Pakistan India and China Issues: economic growth, population, sectoral development and other Human Development Indicators

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0808

BARIPADA

UTTAR PRADESH DEHRADUN

( 10 )

CUET Question Paper - 2023 NATIONAL TESTING AGENCY Held on 29th May, 2023

Economics

Max. Marks : 200

Time allowed : 45 Minutes

General Instructions: (i) This paper consists of 50 MCQs, attempt any 40 out of 50 . (ii) Correct answer or the most appropriate answer: Five marks (+5) . (iii) Any incorrect option marked will be given minus one mark (– 1) . (iv) Unanswered/Marked for Review will be given no mark (0) . (v) If more than one option is found to be correct then Five marks (+5) will be awarded to only those who have marked any of the correct options . (vi) If all options are found to be correct then Five marks (+5) will be awarded to all those who have attempted the question . (vii) If none of the options is found correct or a Question is found to be wrong or a Question is dropped then all candidates who have appeared will be given five marks (+5). (viii) Calculator / any electronic gadgets are not permitted . 1. A country’s consumption function described as C = 500+0.7 Y the Autonomous consumption (1) 350 (2) 500 (3) 3500 (4) 350 2. Escheat is an example of: (1) Capital receipt (2) Revenue receipt (3) Capital expenditure (4) Revenue expenditure 3. Match List I with List II: List -I (A)

Reduction in (I) value of currency

List - II Disinvestment

(4) Trade Deficit 5. “Growth refers to increase in the country’s capacity of module the output of goods and services with in the country.” Choose the incorrect option from the following in relation to Growth: (1) Growth implies a large stock of production capital. (2) Growth implies a large stock of supporting services. (3) Growth implies an equal contribution to GDP by each sectors of the economy. (4) Growth implies an increase in efficiency of productive capital and services. 6. Match List I with List II: List -I

(B)

Dilution of (II) share in organisation

Inflation

(C)

Restriction on (III) trade by taxes

Devaluation

(D)

Rise in general (IV) price level

Tarrif Barriers

Choose the correct answer from the options given below: (1) (A)-(III), (B)-(I), (C)-(I), (D)-(IV) (2) (A)-(I), (B)-(II), (C)-(III), (D)-(IV) (3) (A)-(IV), (B)-(II), (C)-(III), (D)-(I) (4) (A)-(III), (B)-(I), (C)-(IV), (D)-(II) 4. When nation is a borrower from other countries means: (1) Trade surplus (2) Deficit in current Account (3) Surplus in current Account

List - II

(A)

NABARD

(I)

Women-oriented community bared poverty reduction program

(B)

Kudumbashree

(II)

Uses the mixed croplive stock farming system

(C)

Animal Husbandry

(III)

HYV seeds, chemical fertilizers

(D)

Organic farming

(IV)

Set up in 1982

Choose the correct answer from the options given below: (1) (A)-(IV), (B)-(III), (C)-(II), (D)-(I) (2) (A)-(IV), (B)-(I), (C)-(II), (D)-(III) (3) (A)-(IV), (B)-(II), (C)-(I), (D)-(III) (4) (A)-(III), (B)-(I), (C)-(II), (D)-(IV)

12

OSWAAL CUET (UG) Chapterwise Question Bank ECONOMICS

7. The benefit of organic farming is. (1) Limited shelf life (2) Labour intensive (3) Limited off - season crops (4) Marketing issues 8. Arrange the following events in proper sequence. A. Ultraviolet radiation causes skin cancer B. High levels of chlorine and bromine compounds in the stratosphere C. Fridge brought to the house D. Chlorofluore carbons used as cooling agent E. Depletion of ozone layer Choose the correct answer from the options given below: (1) B, C, D, E, A (2) C, D, E, B, A (3) C, D, B, E, A (4) E, D, C, B, A 9. Elasticity of Demand is given by the formula. Q P ∆Q P × × (1) (2) ∆Q ∆P Q ∆P ∆Q Q ∆P ∆Q × (4) × P P P Q 10. C=40+0.8Y and I = 10, then what will be the equilibrium level of income? (1) – 300 (2) – 250 (3) 300 (4) 250 11. Which of the following is not true about the benefits of education? (1) Increases skewed income distribution (2) Raises standard and quality of living (3) Increases participation rate (4) Develops mental abilities 12. Disadvantages of casualisation of workforce: A. No Paid leave B. No regular income C. No access to training D. Permission to take leave is not required E. Less working hours Choose the correct answer from the options given below: (1) A, C and E only (2) B. C and D only (3) A, B and C only (4) C, D and E only 13. Match List I with List II: (3)

List -I (A)

List - II

Product will not (I) pass through further transformation

Capital Good

(B)

A product used (II) as raw material or input for production

Final Good

(C)

The good which (III) enables for production on process

Consumer Good

Goods purchased by ultimate consumer

Intermediate Goods

(D)

(IV)

Choose the correct answer from the options given below: (1) (A)-(III), (B)-(I), (C)-(IV), (D)-(II) (2) (A)-(II), (B)-(IV), (C)-(I), (D)-(III) (3) (A)-(I), (B)-(III), (C)-(II), (D)-(IV) (4) (A)-(IV), (B)-(II), (C)-(III), (D)-(I) 14. In China a campaign intiated in 1958 aimed at industrialising country on a massive scale. People were encouraged to set up industries in their backyard. This campaign is called. (1) Great Show Forward (2) Great Dragon Forward (3) Great Run Forward (4) Great Leap Forward 15. Arrange the following in order of occurrence. A. Green Revolution B. Setting up of Planning Commission C. Resolution which formed on the basis of second Five Year Plan D. Exchange rate was made fully convertable for Current Acccounts E. Karve Committee Choose the correct answer from the options given below: (1) B, C, E, A, D (2) B, E, C, A, D (3) B, E, C, D, A (4) B, C, E, D, A 16. “Increase in price of good ‘x’ leads to increase in demand of good “Y”. How the goods are related to. (1) Complementary goods (2) Normal goods (3) Inferior goods (4) Substitute goods 17. Suppose an Individual buys 15 units of good when its price is ` 5 per unit. What will happen to his demand when price of the good increases to ` 7 per unit and elasticity of demand for the good is 0.5. (1) Increase his demand (2) No change in his demand (3) Reduce his demand (4) Shift to other Good 18. Match List I with List II: List -I

List - II

(A)

Regular salaried (I) employees

Common form of unemployment in rural India

(B)

Self employed

(II)

Assurance of minimum 100 days employment

(C)

MGNREGA

(III)

Who own and operate an enterprise to earn their livelihood

(D)

Disguised unemployment

(IV)

Permanent workers

Choose the correct answer from the options given below: (1) (A)-(IV), (B)-(II), (C)-(I), (D)-(III) (2) (A)-(II), (B)-(III), (C)-(I), (D)-(IV) (3) (A)-(IV), (B)-(III), (C)-(II), (D)-(I) (4) (A)-(I), (B)-(II), (C)-(IV), (D)-(III)

13

CUET (UG) Exam Paper 2023

19. If C= X+0.6Y & Investment is ` 1,500 Equilibrium level of income in economy would be 4050, find out the autonomous consumption. (1) – 120 (2) 100 (3) 120 (4) – 100 20. Match List I with List II: List -I

List - II

(A)

Growth in GDP (I) without generating employment

Formal sector

(B)

Process of moving (II) self employment and regular salaried to casual wage work

Jobless Growth

(C)

All establishments (III) which employ 10 hired workers or more

Casualization of work force

(D)

Increases in propor- (IV) tion of work force in informal sector

Informalisation of work force

Choose the correct answer from the options given below: (1) (A)-(II), (B)-(I), (C)-(IV), (D)-(III) (2) (A)-(II), (B)-(III), (C)-(I), (D)-(IV) (3) (A)-(III), (B)-(II), (C)-(I), (D)-(IV) (4) (A)-(II), (B)-(I), (C)-(III), (D)-(IV) 21. Arrange the following operations in a sequential manner in order to calculate NNPFC from GDPMP A. GDPMP - Net Indirect Taxes B. NDPFC + Net Factor Income From Abroad C. GDPFC - Depreciation Choose the correct answer from the options given below: (1) A, B and C only (2) B, C and A only (3) A, C and B only (4) C, A and B only 22. In case of an unexpected fall in turnover of a firm, who is producing a certain commodity, there will a situation of .......... . Choose the correct option. (1) Planned accumulation of inventories (2) Unplanned accumulation of inventories (3) Unplanned decumulation of inventories (4) Planned decumulation of inventories 23. In 1970, Pakistan introduced nationalisation of Capital Good industries, but later due to international pressure they shifted the policy to. (1) De marketisation (2) Denationalisation (3) Derecognition (4) Deforming 24. Which of the following are correct statements related to stock and flow? A. Flows are defined over on 1st January B. Flows are defined over a period of time C. Flows and stocks are defined as a mutual understanding D. Stocks are defined from January to December E. Stocks are defined at a particular point of time

Choose the correct answer from the options given below: (1) B and E only (2) A and D only (3) C and E only (4) A and B only 25. .......... measures are .............. measures intended to correct some of weaknesses that have developed in the Balance of payment. (1) Stabilisation, Short term (2) Structural Reform, Long term (3) Stabilisation, Long term (4) Structural Reform, Short term 26. Which one is not the objective of government budget? (1) Reallocation of resources (2) Economic stability (3) Increase in regional disparities (4) Economic growth 27. Which of the following statement is true about Autonomous transactions? (1) These items are done to correct the imbalance of BOP Account (2) These are also known as below the line item (3) These only occur in capital A/c of BOP (4) BOP is said to be in surplus if autonomous receipts are greater than autonomous payments 28. A farmer want to take credit to meet his expenditure in agriculture inputs. Which of the following is not an institution he may approach for the credit ? (1) Regional Rural Banks (RRBs) (2) National Bank for Agriculture and Rural Development (3) Commercial Banks (4) Land Development Banks 29. Identify the symbol that is used to denote autonomous consumption. (1) C (2) C (3) DC (4) MPC 30. How will the earthquake in Turkey affect the production possibility curve of their economy? (1) Production Possibility curve will shift rightward (2) Production Possibility curve will shift leftward (3) No change in Production Possibility curves (4) Production Possibility Curve can shift leftward and rightward both 31. In what ways labour laws enable the workers to protect their rights. A. Providing more holidays B. Protection of wages C. Providing unemployment allowances D. Redress of grievances (compensation for loss) E. Right to organise and form trade unions Choose the correct answer from the options given below: (1) A, C and D only (2) B, D and C only (3) A, B and C only (4) B, D and E only 32. Which of the following statements is true. If exchange rate changes from $1 = ` 72 to ` 81. A. Import will fall B. Import will rise C. Exports will rise D. National Income will rise E. National Income will fall

14 Choose the correct answer from the options given below: (1) B, C and D only (2) A, C and D only (3) B, C and E only (4) A, C and E only 33. The following is a part of Agriculture marketing system. A. Minimum Support Price B. Buffer Stock C. Micro Credit Programmes D. Public Distribution System Choose the correct answer from the options given below: (1) A and B only (2) A and D only (3) B, C and D only (4) A, B and D only 34. People demand foreign exchange because: (1) They want to send gifts abroad (2) The foreigners send gift in our country (3) They want to purchase imported goods from our market (4) The foreigners like to purchase goods from our market 35. The Process of moving from self -employment and regular salaried employment to casual wage work is known as: (1) Casualisation of work force (2) Regularisation of casual wage (3) Non Salaried Force (4) Self employment Force 36. The apex body that coordinates the activities of all institution involved in the rural financing system is: (1) National Bank for Allied Activities and Rural Development (2) National Bank for Agriculture and Road Development (3) Reserved Bank of India (4) National Bank for Agriculture and Rural Development 37. From the following data, Calculate Primary Deficit. ` (crore) Revenue expenditure 22,250 Capital expenditure 28,000 Revenue receipts 17,750 Capital receipts (net of borrowing) 20,000 Interest payment 5,000 Borrowings 12,500 (1) ` 7,500 (2) ` 12,500 (3) ` 5,000 (4) ` 17,750 38. Which of the following has highest FDI ? (1) India (2) China (3) Sri Lanka (4) Pakistan 39. Chronologically arrange the following events. A. Announcement of Demonetisation B. Circulation of Fake Currency C. Rs 500 and 1000 Notes lost legal tender D. Impact on Economic Activities E. New Rs 2000 Currency Note in the circulation Choose the correct answer from the options given below: (1) B, D, A, C, E (2) C, D, B, A, E (3) B, C, D, A, E (4) A, E, B, C, D

OSWAAL CUET (UG) Chapterwise Question Bank ECONOMICS

40. Choose the correct sequence from the following. A. British introduced railways in India B. Latest population census C. Population explosion according to 2nd stage of demographic transition theory D. Year of “Great Divide” E. First census conducted by British India Choose the correct answer from the options given below: (1) A, B, D, E, C (2) B, A, E, D, C (3) C, A, B, D, E (4) A, E, D, C, B 41. The Reserve Bank of India (RBI) recently imposed a monetary penalty on three banks —` 1.50 lakhs on Dr. Ambedkar Nagarik Sahakari Bank Maryadit, ` 25,000 on Nagarik Sahakari Bank Maryadit and ` 1 lakh on Ravi Commercial bank for violating the provisions of its regulations. The banking regulator has imposed a monetary penalty for contravention of non-compliance with the directions issued to Ravi commercial bank an exposure norms and statutory and other restrictions & KYC. Which function of central Bank is referred to in the above paragraph. (1) Financial Advisor (2) Supervisor to Banks (3) Banker’s Bank (4) Lender to last resort 42. The Reserve Bank of India (RBI) recently imposed a monetary penalty on three banks —` 1.50 lakhs on Dr. Ambedkar Nagarik Sahakari Bank Maryadit, ` 25,000 on Nagarik Sahakari Bank Maryadit and ` 1 lakh on Ravi Commercial bank for violating the provisions of its regulations. The banking regulator has imposed a monetary penalty for contravention of non-compliance with the directions issued to Ravi commercial bank an exposure norms and statutory and other restrictions & KYC. As a bankers’ bank, what is the role played by RBI? A. Custodian of cash reserves B. Maintain Foreign Exchange Reserves C. Currency [ssue D. Lender of last resort E. Clearing house Choose the correct answer from the options given below: (1) A, C, D and E only (2) B and C only (3) A only (4) A, D and E only 43. The Reserve Bank of India (RBI) recently imposed a monetary penalty on three banks —` 1.50 lakhs on Dr. Ambedkar Nagarik Sahakari Bank Maryadit, ` 25,000 on Nagarik Sahakari Bank Maryadit and ` 1 lakh on Ravi Commercial bank for violating the provisions of its regulations. The banking regulator has imposed a monetary penalty for contravention of non-compliance with the directions issued to Ravi commercial bank an exposure norms and statutory and other restrictions & KYC. How does RBI act as a supervisor to bank? (1) Banker to government (2) Agent to government (3) Financial advisor to government (4) Inspection & imposing penalty

15

CUET (UG) Exam Paper 2023

44. The Reserve Bank of India (RBI) recently imposed a monetary penalty on three banks —` 1.50 lakhs on Dr. Ambedkar Nagarik Sahakari Bank Maryadit, ` 25,000 on Nagarik Sahakari Bank Maryadit and ` 1 lakh on Ravi Commercial bank for violating the provisions of its regulations. The banking regulator has imposed a monetary penalty for contravention of non-compliance with the directions issued to Ravi commercial bank an exposure norms and statutory and other restrictions & KYC. If all the deposits, one day come to withdraw all the cash, what would be role played by RBI? (1) Maintaining Foreign Exchange Reserves (2) Lender of last resort (3) Maintaining cash reserves (4) Currency issue 45. The Reserve Bank of India (RBI) recently imposed a monetary penalty on three banks —` 1.50 lakhs on Dr. Ambedkar Nagarik Sahakari Bank Maryadit, ` 25,000 on Nagarik Sahakari Bank Maryadit and ` 1 lakh on Ravi Commercial bank for violating the provisions of its regulations. The banking regulator has imposed a monetary penalty for contravention of non-compliance with the directions issued to Ravi commercial bank an exposure norms and statutory and other restrictions & KYC. Which of the following is correct statement? (1) RBI act as banker to commercial banks & Central Bank (2) Central Bank creates credit in economy (3) All financial institutions are banking institutions (4) One rupee note and all coins are issued by the Ministry of Finance 46. Real GDP is calculated in a way such that goods and services are evaluated at some constant set of prices. Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. When value of final goods and services are Estimated at current price it is? (1) Real GDP (2) Nominal GDP (3) GDP at constant prices (4) Consumer Price Index

47. Real GDP is calculated in a way such that goods and services are evaluated at some constant set of prices. Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of Production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. Real GDP increases only when. (1) Prices increases (2) Prices decreases (3) Production increases (4) Production decreases 48. Real GDP is calculated in a way such that goods and services are evaluated at some constant set of prices. Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of Production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. Keeping output constant nominal GDP increases because. (1) Prices increase

(2) Prices decrease

(3) Output decrease (4) Prices increase and output increase 49. Real GDP is calculated in a way such that goods and services are evaluated at some constant set of prices. Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of Production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. Which GDP is the indicator of growth and development of a country? (1) Nominal GDP (2) National Income (3) Real GDP (4) Domestic Income 50. Real GDP is calculated in a way such that goods and services are evaluated at some constant set of prices. Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of Production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. If output in an economy is decreasing but GDP of country is increasing which GDP it is: (1) Real GDP (2) Domestic Income (3) GDP at Constant Price (4) Nominal GDP 

WRITING YOUR NOTES Just in case you have forgotten today, takedown your notes! But why is it so important? Tools for the hands are tools for the brain writes Hetty Roessingh. Handwritten notes are a powerful tool for encrypting embodied cognition and in turn supporting the brain’s capacity for recuperation of information. If that sounds so scientific then in simple words: Writing notes by hand help you in: 

Increasing your comprehension  Strengthening your memory  Igniting your creativity  Engaging your mind  Increasing your attention span Are these reasons enough to get you started?

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Study Time

CHAPTER

1

Max. Time: 1:25 Hours Max. Questions: 40

INTRODUCTION TO MICROECONOMICS  Central Problem of an Economy

 Revision Notes

 Economics is a social science that studies how individuals, businesses, governments, and societies allocate their resources to meet their needs and desires. It examines the production, distribution, and consumption of goods and services and the underlying principles that govern these processes. Economics can be broadly divided into two main branches: (1) Microeconomics:  Microeconomics focuses on the behavior of individual economic agents, such as consumers, Scan to know producers, and firms.  It examines how consumers make choices based on preferences and budget constraints, how firms determine prices and production levels, and how individual markets operate.

more about this topic

(2) Macroeconomics:  Macroeconomics takes a broader perspective and looks at the economy as a whole.

 Macroeconomists study factors that influence the overall performance of an economy and often examine the impact of government policies on economic outcomes.

(2) How to produce (Selection of technique of production) (3) For whom to produce (Distribution of goods or income) (1) What to Produce: The problem of ‘what to produce’ arises as the producers have limited resources. In an economy, because of scarcity of resources, producers are unable to produce everything in bulk but they will have to make a choice as to which one is important as a whole so that limited resources can be rationally managed. Problem of ‘what to produce’ involves two-fold decisions : kinds of goods to be produced and quantum of goods to be produced. (2) How to Produce:

Microeconomics

 Key concepts in microeconomics include supply and demand, market competition, consumer and producer surplus, and various market structures.

 It analyzes aggregate economic variables like gross domestic product (GDP), inflation, unemployment, interest rates, and overall economic growth.

(1) What to produce (Selection of goods)

Scan to know more about this topic

Central Problems

 Economics Problem is the problem of choice arising from use of limited means which have the alternative use for the satisfaction of various wants. Economics seeks to address the economic problem by studying how individuals, firms, and governments make choices, allocate resources, and manage trade-offs. Through the analysis of supply and demand, production, consumption, and distribution, economists aim to provide insights and strategies for addressing the fundamental economic problem and improving overall economic welfare. Economic systems and policies are designed to tackle these issues, and they vary from one country or society to another based on different economic theories and ideologies.

It is concerned with how to organise production. This problem is related to the choice of techniques of production. It arises due to the availability of various techniques for the production of a commodity such as Labour–Intensive Technique and Capital–Intensive Technique. (3) For Whom to Produce: The problem of ‘for whom to produce’ is the problem of distribution of produced goods and services. At the micro level, the decision relates to different sets of buyers in the economy. In an economy, producers would obviously be inclined to produce more for the rich buyers to maximise their profits but government also intervenes to regulate the use of resources so that enough production is done for the poorer sections of the society also.  Causes of economic problems are: (1) Unlimited Human Wants: People have unlimited desires and wants for goods and services. They continually seek to improve their standard of living, acquire more comfort, convenience, and well-being. This insatiable nature of human wants is a primary cause of economic problems, as it creates the demand for various goods and services. (2) Scarcity of Economic Resources: Economic resources, such as land, labor, capital, and entrepreneurship, are limited in quantity. There is only a finite amount of land, a finite number of workers, a finite supply of capital, and a finite number of individuals with entrepreneurial skills. Scarcity arises because these resources are not sufficient to fulfill all the wants and needs of society.

Production Possibility Frontier

Normative Economics

Positive Economics

to Micro n e tio

n co

The collection of all possible combinations of the goods and services that can be produced from a given amount of resources are called production possibility frontier.

health care’’ is an example of normative economics.

• ‘‘What ought to be’’phenomenon. • ‘‘Government should provide basic

economics focuses on ‘What is’ phenomenon. • ''Government provided health care increase public expenditures i s a n ex a m p l e o f p o s i t i v e economics.

• Positive

Microeconomics

Macroeconomics

benefit of production

•How everyone gets the

output to all

•How to distribute equal

•With the help of labour •With the help of machinery •Which technology to be adopted

•More food •Kind of goods to be produced •Quantity of goods to be produced •More luxury items •More agricultural products

First Level

Second Level

Trace the Mind Map Third Level

Value of the next best alterative foregone.

An enti re netwo rk o f producers, distributors and consumers of goods and services of goods and services in a local, regional or national community.

od uc e

Opportunity Cost

Economy

ce

Ho wt o Pro duce

u rod P o tt

Central Problems of an Economy

W ha 

In microeconomics, we study the behavior of individual economic agents in the market for different goods and services are determined throug h t h e i n t e r a c t i o n o f individuals in these markets.

In t r o d uc

m

Pr 

ho W For

to 

In macroeconomics, we try to get an understanding of the economy as a whole by focusing our attention on measures, such as, total output, employment etc.

2 Oswaal CUET (UG) Chapterwise Question Bank ECONOMICS

ics m o

3

INTRODUCTION TO MICROECONOMICS

(3) Alternative uses of Resources: Economic resources can be used in various ways to produce different goods and services. This creates the need for choices. When resources are allocated to produce one item, they are not available for producing other items. The concept of opportunity cost is related to this cause, as it refers to the value of the next best alternative that must be foregone when a resource is used for a particular purpose.  Production Possibility frontier or production possibility curve shows all possible combinations of two sets of goods that an economy can produce with available resources and given technology, assuming that all resources are fully and efficiently utilized. It serves as a visual representation of the trade-offs an economy faces when allocating resources between the production of different goods and helps illustrate the concept of scarcity and opportunity cost in economics. The PPF is a fundamental tool in economic analysis and provides insights into an economy’s production capabilities and potential for growth.  The production possibility curve will shift under two conditions: (1) Change in Resources: When there is a change in the quantity or quality of available resources, it can cause the PPC to shift. This change can be due to factors such as the discovery of new natural resources, changes in the labor force (e.g., population growth or changes in the skill level of the workforce), or changes in the availability of capital. 

An increase in available resources, for example, would shift the PPC outward, indicating that the economy can now produce more of both goods. Conversely, a decrease in resources may cause the PPC to shift inward, indicating a reduction in the economy’s production capacity. 

(2) Change in Technology of Production: Changes in technology can have a significant impact on an economy’s production capabilities. Technological advancements can make the production process more efficient, allowing for the production of more output with the same amount of resources or the production of the same output with fewer resources. 

An improvement in technology can shift the PPC outward, indicating that the economy can produce more of both goods, making it more productive. Conversely, a regression in technology or a failure to adopt new and more efficient production methods could shift the PPC inward. 

 Properties of PPC: 1. PPC slopes downwards: It slopes downwards from left to right because more than one goods can be produced only by taking resources away from the production of another goods. 2. PPC is concave shaped: PPC is concave to the origin because of increasing MRT, that is, more and more units of a commodity are sacrificed to gain one additional unit of another commodity.

 Attainable Point: Any point that lies either on the production possibility curve or to its left is said to be an attainable point.  Unattainable Point: The points that lies to the right of production possibility curve is said to be an unattainable point.  Efficient Point: An efficient point is one that lies on the PPC.  Inefficient Point: The Point that lies within the curve is said to be an inefficient point.  Shifts in PPC: The PPC can shift either towards right or left when there is change in resources or technology with respect to both the goods.  Types of economies: (1) Capitalist Economy: In a capitalist economy, the means of production (such as land, labor, and capital) are primarily owned and operated by private individuals and businesses. The government’s role is typically limited to regulating economic activity and enforcing property rights. 

Key characteristics include private ownership, marketdriven allocation of resources, competition among businesses, and a focus on profit maximization. 

Examples of countries with predominantly capitalist economies include the United States, the United Kingdom, and many other Western nations. 

(2) Socialist Economy: In a socialist economy, the means of production are often owned or controlled by the state or the community. The central goal is to reduce income inequality and ensure that resources are distributed more equitably. 

Key characteristics include state ownership or control of major industries, central planning, and the aim of meeting the collective needs of the population rather than maximizing profit. 

Examples of countries with socialist economies include Cuba and North Korea, although many countries incorporate elements of socialism within a mixed economy. 

(3) Mixed Economy: A mixed economy is a combination of both capitalist and socialist elements. In a mixed economy, there is a private sector with private ownership and market-driven activities, as well as a public sector with government involvement and regulation of certain industries and services. 

Many modern economies are mixed, where the government plays a role in areas like healthcare, education, infrastructure, and social welfare, while the private sector operates in competitive markets for goods and services. 

Examples of countries with mixed economies include Canada, Sweden, and many others. 

4 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS 1. How will the earthquake in Turkey affect the production possibility curve of their economy? [CUET 2023] (1) Production Possibility curve will shift rightward (2) Production Possibility curve will shift leftward (3) No change in Production Possibility curves (4) Production Possibility Curve can shift leftward and rightward both 2. Identify the normative statement. [CUET 2022] (1) Government has doubled the expenditure on education in this year’s budget. (2) Recently RBI has increased repo rate to regulate inflation in economy. (3) Rise in diesel prices causes rise in transportation cost. (4) Environmental regulation must be tough to protect the environment. 3. Which of the following is a positive economics statement?  [CUET 2023] (1) People should take COVID-19 vaccines (2) Every child should pursue one sport in school (3) The government provides subsidies. It increases their financial burden. (4) The government should provide basic healthcare to the public. 4. What is the other name of Microeconomics and Macroeconomics? (1) Price Theory, Income Theory (2) Price Theory, Employment Theory (3) Cost Theory, Income, and Employment Theory (4) Price Theory, Income, and Employment Theory 5. According to Samuelson, there are three fundamental and interdependent problems in an economic organization. What are they? (1) what, when and how (2) what, how and for whom (3) what, where and when (4) what, how and where 6. Economists like Adam Smith followed which school of economics? (1) Positive (2) Normative (3) Both (4) None of these 7.  Capital-intensive technique would be chosen in the economy in which (1) Labour surplus economy. (2) Rate of Interest is high. (3) Capital formation is taking place. (4) Capital is in surplus. 8. Which economists divided economics into two branches Microeconomics and Macroeconomics? (1) Marshall (2) Ricardo (3) Ragnar Frisch (4) None of these

9. Among the central problems of an economy, which one pertains to the allocation of National Income? (A) How to produce (B) What to produce (C) For whom to produce (1) A and B (2) B and C only (3) B only (4) C only 10.  The opportunity cost of watching a movie will be equal to: (1) the time lost while watching the show (2) the pleasure that could have been enjoyed watching TV instead (3) the pleasure enjoyed by watching the show (4) the amount paid to buy the tickets 11.  Which of the following statements is/are true? (A) Human wants are unlimited. (B) Resources are infinite. (C) Scarcity problem gives birth to choice (1) Only A (2) A and B only (3) A and C only (4) C only 12. Which of the following is a type of economic activity? (1) Consumption (2) Investment (3) Production (4) All of these 13. In which economy, decisions are taken on the basis of price mechanism? (1) Mixed (2) Capitalist (3) Socialist (4) Both (2) and (3) 14. Which of the following is a branch of microeconomics?  (1) Gross domestic product (2) Employment (3) Product price determination (4) None of these 15.  Which of the following is one of the major causes of economic problems? (1) One of the major causes of economic problems is unlimited human wants. (2) One of the major causes of economic problems is the alternative usage of resources. (3) One of the major causes of economic problems is the scarcity of economic resources. (4) All of the above 16. If a country’s PPC shifts outward and to the right, what does this indicate about its economic growth? (1) Economic growth is slowing down. (2) Economic growth is stagnant. (3) Economic growth is accelerating. (4) Economic growth is unpredictable. 17. Which of the following is a microeconomic issue? (A) National unemployment rate (B) Inflation in the country (C) Pricing strategy of a specific company (D) Government’s fiscal policy

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INTRODUCTION TO MICROECONOMICS

(1) A and B only

(2) B and C only

(3) C only

(2) D only

18. Match the following and choose the correct option. Column I A. Positive economics

Column II I. Deals with the problem of choosing the technique of production

B. Microeconomics II. Deals with the problem at the level of an economy as a whole C. Macroeconomics III. Deals with the problem at the level of an individual D. How to produce

IV. Deals with the things ‘as they are’

(1) A-IV, B-III. C-II, D-I

(2) A-III, B-II. C-I, D-IV

(3) A-I, B-III. C-II, D-IV

(4) A-IV, B-II. C-III, D-I

19.  In a market-oriented economy, which of the following best describes how goods and services are allocated? (1) By government authorities based on central planning (2) By consumer demand and the forces of supply and demand (3) By equal distribution among all citizens (4) By a lottery system among producers 20. What does a production possibilities curve (PPC) illustrate in microeconomics? (1) The allocation of resources in a specific firm. (2) The trade-offs between two goods an economy can produce efficiently. (3) The distribution of income within an economy. (4) The government’s fiscal policy choices.

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (1). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): PPC is concave to the origin.  Reason (R): More and more units of one commodity are sacrificed to gain an additional unit of another commodity. 2.  Assertion (A): Human wants differ in priorities.  Reason (R): For every individual, some wants are more important and urgent as compared to others. 3.  Assertion (A): Tools of microeconomics are demand and supply.  Reason (R): Microeconomics studies the behaviour of individual units of an economy. 4. Assertion (A): Madan bought 2 kg of mangoes as it was cheaper. This is an example of Normative Economics.

 Reason (R): Normative economics examines real economic events from moral and ethical angles and judges whether certain economic events are desirable or not. 5. Assertion (A): The determination of price in a Perfect competition market is a study of microeconomics.  Reason (R): Determination of a price only affects the individual market and not the economy as a whole. 6. Assertion (A): In the realm of positive economic analysis, we assess whether or not various mechanisms are considered favorable.  Reason (R): Positive economic analysis is grounded in the use of empirical data and objective observations to investigate economic systems, institutions, and behaviors. 7. Assertion (A): The issue of making choices arises due to the limited availability of resources.  Reason (R): Scarce resources within an economy have multiple potential uses, requiring every society to determine how to allocate these limited resources. 8. Assertion (A): Economic principles that apply to microeconomics may not necessarily hold true in macroeconomics.  Reason (R): Microeconomics and macroeconomics are two distinct branches of economics that are typically studied separately from each other. 9. Assertion (A): An increase in the price of gasoline led to a decrease in the demand for SUVs is a statement of positive economics.  Reason (R): Positive economics seeks to provide factual explanations of economic events without making value judgments. 10. Assertion (A): The central problem of economics is often described as the issue of scarcity.  Reason (R): Scarcity arises because human wants and needs are unlimited, while resources to fulfill them are limited.

[C] CASE BASED QUESTIONS I.  Read the following passage and answer the given questions: The economic problem is the problem of choice. The problem of choice has to be faced by every economy of the world, whether developed or developing. Human beings have unlimited wants. Economic problems are reflected in the form of Central or Basic Problems of an economy. Any economy— whether market, centrally planned, or mixed has to face these problems. In economic analysis, the concept of opportunity cost is widely used. Opportunity cost is defined as the cost of an alternative opportunity given up or surrendered. 1. The problem of choice is faced by: (1) (2) (3) (4) 2.

Centrally planned economy Socialist economy Mixed economy All of the above What do economic problems reflect in the context of an economy?

(1) The elimination of wants (2) Centralization of decision-making

6 Oswaal CUET (UG) Chapterwise Question Bank (3) Basic problems faced by every economy (4) The satisfaction of limited human wants 3. Which concept in economic analysis is defined as the cost of best next alternative given up or surrendered? (1) Scarcity

(2) Unlimited wants

(3) Opportunity cost

(4) Basic problems

4. A professor can do three jobs—teaching, tuition work, and writing books. He gets ₹2.5 lakhs from teaching, ₹1.5 lakhs from tuition work and ₹2 lakhs from the royalty of books. He is presently teaching. What is the opportunity cost of teaching? (1) Tuition work

(2) Teaching

(3) Switching profession

(4) Writing books

For Whom to Produce: This query explores the distribution of goods and services among various segments of society. Income distribution and consumer preferences play significant roles in ensuring that goods and services are allocated in a manner that aligns with societal needs and preferences. 6. What is the primary emphasis of microeconomics? (1) Analyzing the overall economic performance of a nation. (2) Studying individual economic units’ behavior within markets. (3) Evaluating government policies and regulations. (4) Assessing international trade dynamics. 7. Which of the following is NOT among the central problems addressed in microeconomics?

5. Which system of economy does India follow? (1) Mixed

(2) Centrally planned

(3) Market

(4) None of these

II.  Read the following passage and answer the given questions: In the field of economics, microeconomics is a foundational branch that scrutinizes the economic decisions made by individual economic entities within specific markets. These entities can be consumers, producers, households, or firms. Unlike macroeconomics, which takes a broader view of the entire economy, microeconomics zooms in on the intricacies of smaller economic units.

ECONOMICS

Microeconomics revolves around several central problems:

What to Produce: This core issue pertains to determining the mix of goods and services that should be produced within an economy. Decisions here are influenced by factors such as consumer demand, available resources, and technological capabilities. How to Produce: This question focuses on the most efficient means of resource utilization and the selection of production techniques. Firms and producers aim to minimize costs while maximizing output, often requiring choices related to technology, labour, and capital.

(1) What to Produce

(2) How to Produce

(3) When to Produce

(4) For Whom to Produce

8. The question “What to Produce” in microeconomics refers to: (1) Deciding the quantity of goods and services to produce. (2) Determining the production techniques and methods. (3) Selecting the mix of goods and services to produce. (4) Setting the price of goods and services. 9. What does the concept of “opportunity cost” mean in microeconomics? (1) The total cost of producing a goods or service. (2) The cost of missed opportunities when making choices. (3) The price of a goods or service in the market. (4) The fixed costs of production. 10. Which of the following is an example of a microeconomic decision made by a firm? (1) Deciding on the country’s monetary policy. (2) Setting the national unemployment rate. (3) Determining the price of its product. (4) Regulating international trade agreements.

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (2)

2. (4)

3. (3)

4. (4)

5. (2)

6. (1)

7. (4)

8. (3)

9. (4)

10. (2)

11. (3)

12. (4)

13. (2)

14. (3)

15. (4)

16. (3)

17. (3)

18. (1)

19. (2)

20. (2)

8. (3)

9. (1)

10. (1)

8. (3)

9. (2)

10. (3)

[B] ASSERTION & REASON 1. (1)

2. (1)

3. (1)

4. (4)

5. (1)

6. (4)

7. (1)

[C] CASE BASED QUESTIONS 1. (4)

2. (3)

3. (3)

4. (4)

5. (1)

6. (2)

7. (3)

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INTRODUCTION TO MICROECONOMICS

ANSWERS WITH EXPLANATION

Explanation: Adam Smith is known for his contributions to classical economics, which is a branch of positive economics. Positive economics focuses on the objective analysis and description of economic phenomena without making value judgments or normative recommendations. It seeks to understand and explain economic behavior as it is, based on empirical observations and data.

production, as there is an abundance of capital available for investment in machinery, technology, and automation. 8. Option (3) is correct. Explanation: Ragnar Frisch, a Norwegian economist, is credited with dividing economics into two branches: Microeconomics and Macroeconomics. He played a significant role in developing the concept of macroeconomics and is known for his pioneering work in econometrics, which is the application of statistical and mathematical methods to economic data. Frisch’s contributions were instrumental in shaping the modern field of economics and its division into microeconomics and macroeconomics. 9. Option (4) is correct. Explanation: The central problem of “For whom to produce” pertains to the allocation of National Income. It deals with the question of how the goods and services produced in an economy should be distributed among its citizens. This problem is focused on income distribution and determining who benefits from the National Income. 10. Option (2) is correct. Explanation: The opportunity cost of watching a movie refers to the value or benefit you forgo by choosing to watch the movie instead of engaging in the next best alternative activity. In this case, it’s the enjoyment or pleasure you could have experienced by watching TV instead of going to the movie. It represents the value of the foregone alternative, which is a fundamental concept in economics when making choices. 11. Option (3) is correct. Explanation: Human wants and desires for goods and services are virtually limitless. People continually seek to satisfy their wants, and new desires often arise as old ones are fulfilled. Scarcity, which arises from limited resources and unlimited wants, necessitates making choices among alternative uses of those resources. Choice is a fundamental response to the problem of scarcity. 12. Option (4) is correct. Explanation: Consumption represents the use of goods and services by individuals and households, Investment involves spending on capital goods to enhance future production, and Production is the creation of goods and services. All three are essential economic activities. 13. Option (2) is correct. Explanation: In a capitalist or market-oriented economy, the allocation of resources and the production of goods and services are primarily driven by market prices and the forces of supply and demand. The price mechanism plays a central role in decision-making. 14. Option (3) is correct. Explanation: Product price determination falls under the purview of microeconomics, which focuses on the behavior of individual consumers and firms, including how prices are determined in specific markets.

7. Option (4) is correct.

15. Option (4) is correct.

Explanation: In an economy where capital is in surplus, it’s more likely to choose capital-intensive techniques for

Explanation: Economic problems arise from the coexistence of unlimited human wants, the necessity to choose among

[A] MULTIPLE CHOICE QUESTIONS 1. Option (2) is correct. Explanation: The earthquake in Turkey is likely to lead to a leftward shift in the production possibility curve (PPC) of their economy. This means that in the aftermath of the earthquake, the economy’s ability to produce goods and services will be temporarily reduced due to the damage to infrastructure, businesses, and resources. This leftward shift represents a decrease in the economy’s production capacity in the short term as it copes with the immediate impact of the disaster. 2. Option (4) is correct. Explanation: Normative economics deals with prospective or theoretical situations. This division of economics has a more subjective approach. It focuses on the ideological, perspectivebased, opinion-oriented statements towards economic activities. The aim here is to summarise the desirability quotient among individuals and quote factors like ‘what can happen’ or ‘what ought to be’. Normative economics statements are subjective and rely heavily on values originating from an individual opinion. These statements are often very rigid and perceptive. Therefore, they are considered political or authoritarian. 3. Option (3) is correct. Explanation: Positive economics is the stream of economics that has an objective approach, and relied on facts. It concentrates on the description, quantification, and clarification of economic developments, prospects, and allied matters. This subdivision of economics relies on objective data analysis and relevant facts and figures. Therefore, it tries to establish a cause-and-effect relationship or behavioral relationship that can help determine as well as test the advancement of economic theories. 4. Option (4) is correct. Explanation: The main objective of microeconomics is to determine the price of a commodity or factors of production whereas, the main aim of macroeconomics is to determine the income and employment level of the economy. It studies the behaviour of aggregates of the economy as a whole. 5. Option (2) is correct. Explanation: According to Samuelson, an economic organization’s three fundamental and interconnected problems: what, how, and for whom, are grouped under allocation of resources. The term “allocation of resources” refers to how much of each resource is committed to a specific task. 6. Option (1) is correct.

8 Oswaal CUET (UG) Chapterwise Question Bank alternative uses of resources, and the fundamental scarcity of economic resources. These factors collectively contribute to economic challenges. 16. Option (3) is correct. Explanation: When a country’s PPC shifts outward and to the right, it suggests that the country is capable of producing more of both goods compared to a previous period. This indicates economic growth and an increase in the country’s overall production capacity. 17. Option (3) is correct. Explanation: Microeconomics deals with specific economic units and issues, including the pricing decisions made by individual firms. 18. Option (1) is correct. Explanation: Positive economics, represented by A, pertains to the objective analysis of economic phenomena as they exist in reality, without judgment or normative considerations. Microeconomics, denoted by B, focuses on individual economic agents and their decision-making processes, while macroeconomics, marked as C, examines the overall economy and its aggregates. Lastly, D, “How to produce,” relates to the allocation of resources and the selection of production techniques. 19. Option (2) is correct. Explanation: In a market-oriented economy, goods and services are typically allocated based on consumer demand and the interaction of supply and demand in the marketplace, rather than through central planning or other methods. 20. Option (2) is correct. Explanation: A PPC shows the various combinations of two goods an economy can produce efficiently, highlighting the trade-offs between them.

[B] ASSERTION & REASON 1. Option (1) is correct. Explanation: The concavity of the PPC is primarily due to the concept of increasing opportunity cost, where as an economy shifts resources from the production of one commodity to another, the trade-off becomes steeper, and more units of one commodity need to be sacrificed to gain an additional unit of the other commodity. 2. Option (1) is correct.  xplanation: Human wants differ in priorities and this E highlights that the differences in priorities arise because some wants are more important and require immediate attention compared to others. 3. Option (1) is correct  xplanation: Microeconomics indeed studies the behavior of E individual units, and demand and supply are two fundamental tools used in microeconomics to analyze how individuals and firms make decisions in markets. 4. Option (4) is correct. Explanation: A positive economic decision made by Madan based on price considerations. Normative economics, as described in Reason (R), deals with value judgments about what ought to be, whereas this scenario is more descriptive and

ECONOMICS

positive in nature. Positive economics is a branch of economics that focuses on objective analysis and the description of economic phenomena as they are, without making value judgments or prescribing how things should be. 5. Option (1) is correct.  xplanation: Microeconomics is a branch of economics that E focuses on the behavior and decisions of individual consumers, firms, and markets at a smaller scale. It examines how supply and demand, pricing, production, and consumption choices are made in specific industries and markets. 6. Option (4) is correct. Explanation: Positive economics primarily concerns itself with objective, value-free analysis based on empirical data and observations, aiming to describe and explain economic phenomena as they are, without making value judgments or assessing whether mechanisms are desirable. 7. Option (1) is correct.  xplanation: The challenge of decision-making becomes E increasingly pronounced when there is a shortage of resources compared to the wants and needs of individuals and society. This situation calls for decisions aimed at optimizing the allocation of resources and achieving the most efficient and effective utilization of the available resources to enhance overall well-being. 8. Option (3) is correct.  xplanation: While it is true that there are differences between E microeconomics and macroeconomics, the reason incorrectly states that they are typically studied in complete isolation from each other. In reality, there are connections and interactions between these two branches of economics, and they are often studied together to gain a comprehensive understanding of economic systems. 9. Option (1) is correct.  xplanation: The statement presented exemplifies positive E economics, as it describes an observed cause-and-effect relationship between an increase in gasoline prices and a decrease in SUV demand without introducing value judgments. Positive economics aims to provide objective, factual explanations of economic events based on empirical data and observations, which aligns with the nature of the statement. 10. Option (1) is correct.  xplanation: The central problem of economics is indeed often E described as the issue of scarcity. Scarcity is a fundamental challenge in economics because human wants and needs are unlimited, while the resources required to satisfy them, such as land, labor, capital, and entrepreneurship, are limited. This scarcity necessitates economic decision-making about what to produce, how to produce, and for whom to produce, making it a foundational concept in economics.

[C] CASE BASED QUESTIONS 1. Option (4) is correct.  xplanation: The problem of choice, driven by scarcity and E unlimited human wants, is a universal challenge faced by all types of economies, including centrally planned, socialist, and mixed economies. Regardless of the economic system in place, the need to allocate limited resources efficiently and

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INTRODUCTION TO MICROECONOMICS

make trade-offs is a fundamental aspect of economic decisionmaking. 2. Option (3) is correct.  xplanation: Economic problems are reflected in the form of E central or basic problems faced by every economy, whether market, centrally planned, or mixed, as stated in the passage. These problems are related to the allocation of limited resources to satisfy unlimited human wants. 3. Option (3) is correct.  xplanation: Opportunity cost is the cost of the best next E alternative opportunity given up or foregone. It is a fundamental concept in economics that represents the value of what is sacrificed when making a choice.

6.  Option (2) is correct.  xplanation: Microeconomics focuses on the actions and E decisions of individual economic entities (consumers, producers, firms) within specific markets. 7.  Option (3) is correct.  xplanation: The central problems in microeconomics concern E decisions related to what to produce, how to produce, and for whom to produce. The timing of production is not typically a central problem in microeconomics. 8. Option (3) is correct

4.  Option (4) is correct.

Explanation: “What to Produce” involves choosing the specific goods and services to produce, considering factors like consumer preferences and available resources.

 xplanation: The opportunity cost of teaching is the value E of the next best alternative foregone, which is the income he could have earned from the next best alternative, which, in this case, is writing books.

9. Option (2) is correct.  xplanation: Opportunity cost represents the value of the E next best alternative that is foregone when a decision is made, helping assess trade-offs in decision-making.

5. Option (1) is correct.

10. Option (3) is correct.

Explanation: In a mixed economy, elements of both market and planned economies coexist, with a significant role for both the private sector and the government in economic activities. India has a diverse economic landscape where private enterprises, as well as government interventions and regulations, play a crucial role in shaping the economy.

 xplanation: Microeconomic decisions made by a firm E include pricing its products, choosing production methods, and making resource allocation choices. Monetary policy, unemployment rates, and international trade agreements are typically macroeconomic issues.

Study Time

CHAPTER

2

Max. Time: 1:25 Hours Max. Questions: 40

CONSUMER BEHAVIOUR AND DEMAND (ii) Law of diminishing marginal utility remains valid.

 Revision notes  Consumer is an economic agent who consumes final goods and services to fulfill his basic needs. The consumer is in equilibrium when, given his income and market prices, he plans his expenditure on different goods and services, in such a manner that he maximises his total satisfaction.  Law of diminishing marginal utility states that as more and more units of a commodity are consumed, marginal utility derived from every additional unit must decline.  Law of Equi-Marginal Utility: The law of equi-marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each goods is equal.  Consumer Equilibrium in case of a Single Commodity: A consumer purchasing a single commodity will be at equilibrium when he is buying such a quantity of that commodity which gives him maximum satisfaction. Being a rational consumer, he will be at equilibrium when marginal utility is equal to the price paid for the commodity, i.e., MUx = MUm Px MUx - Marginal utility of commodity X

Px - Price of commodity X MUm - Marginal utility of Money  Consumer Equilibrium in case of Two Commodities: A consumer purchasing two commodities will be at equilibrium when he spends his limited income in such a way that the ratios of marginal utilities of two commodities Scan to know more about and their respective prices are equal and this topic MU falls as consumption increases, i.e.,

MUy - Marginal utility of commodity Y

(i) When MU is positive, TU will be increasing. (ii) When maximum.

MU

is

zero, TU

 Demand: The quantity of a commodity that a consumer is willing and able to buy at each possible price during a given period of time.

Py - Price of commodity Y

Relationship between TU and MU

Price per unit (in `)

Quantity Demanded (Units)

1

4

2

3

3

2

4

1

 Demand Curve: A demand curve is a graphical representation of the data in the demand schedule. It illustrates the inverse relationship between price and quantity demanded, with price on the vertical axis and quantity on the horizontal axis.

D

em

an

d

MUm - Marginal utility of Money  Conditions of Consumer’s Equilibrium using Marginal Utility Analysis: (i) Marginal utility of money remains constant.

Scan to know more about this topic

 Demand Schedule: A demand schedule is a table that shows the quantities of a goods or service consumers are willing to purchase at different prices. It helps illustrate the relationship between price and quantity demanded.

Consumer equilibrium

Px - Price of commodity X

is

(iii) When MU is negative, TU will be decreasing

Price

MUx MUy = = MUm Px Py MUx - Marginal utility of commodity X

 Relationship between Total Utility and Marginal Utility:

Quality

CONSUMER BEHAVIOUR AND DEMAND

11

12 Oswaal CUET (UG) Chapterwise Question Bank  Movements Along the Demand Curve: Movements along the demand curve occur when the price of a good changes. If the price rises, the quantity demanded typically decreases, and if the price falls, the quantity demanded generally increases. Y D

Price

P3 P1 P2

Contraction of Demand A3 Expansion of A1 Demand A2 D

O

Q3 Q1 Q2 Quality

X

      Shifts in the Demand Curve: Shifts in the demand curve happen due to changes in factors other than the price. For example, if consumer income increases, there is a shift to the right, indicating an increase in demand. If income decreases, there’s a shift to the left, indicating a decrease in demand.

ECONOMICS

 Complementary Goods: If the price of a complementary good (a product used in conjunction with another) rises, the demand for the original good may decrease because the combined cost of the two goods becomes more expensive. (c) Money Income of the Consumers: The income of consumers is a significant determinant of demand. When consumers have higher incomes, they can afford to buy more goods and services, leading to an increase in demand for various products. (d) Tastes and Preferences of Consumers: Consumer preferences and changing tastes can have a substantial impact on demand. If a product becomes more fashionable or desirable, demand may increase, even if the price remains constant. (e) Changes in Weather Conditions: Weather conditions can influence the demand for certain products. For example, hot weather may increase the demand for ice cream, while cold weather may boost the demand for winter clothing. (f) Changes in Population: An increase in the population can lead to an increase in the demand for goods and services. A larger population means more potential consumers. (g) Distribution of Income: How income is distributed within a society can affect demand. If income inequality increases, it may impact the demand for various products. (h) Changes in the Structure of Population: Demographic changes, such as the age distribution of the population, can influence the demand for specific products. For instance, an aging population may increase the demand for healthcare services. (i) Changes in the Quantity of Money: Changes in the money supply can influence overall demand in an economy through its effects on inflation and interest rates. (j) Distribution of National Wealth: The distribution of wealth within a country can impact the spending patterns and demand for luxury and high-end goods.

 Demand Function : It is the functional relationship between demand of a good and factors affecting it. It is expressed as : Dx = f (Px, Pr, Y, T, E ...........)

(k) Phases of Business Cycles: The stage of the business cycle (e.g., boom, recession) can affect consumer confidence and, in turn, the demand for various goods and services.

 Determinants of Demand:

(l) Change in Saving Habits: When people save more, they may spend less, leading to a decrease in demand for certain products.

(a) Price of Commodity: The price of the product itself is one of the most influential determinants of demand. In general, when the price of a good increases, the quantity demanded decreases, and when the price decreases, the quantity demanded increases, assuming all other factors remain constant. This is known as the law of demand. (b) Price of Related Commodities: The prices of related goods can affect the demand for a particular product. There are two types of related goods:  Substitute Goods: If the price of a substitute good (a product that can replace another) rises, the demand for the original good may increase because consumers are more inclined to purchase the cheaper alternative.

 Price Elasticity of Demand : Price Elasticity of Demand is defined as the measurement of percentage in quantity demanded in response to a given percentage change in own price of the commodity. Ed = Percentage Change in Quantity Demanded /Percentage Change in Price

Ed =

∆Q P × Q ∆P

 Degrees of Price Elasticity of Demand (a) Perfectly Elastic Demand (Ed = ∞): When percentage change in quantity demanded is infinite with a slight rise in the

13

CONSUMER BEHAVIOUR AND DEMAND

price, then demand for such a commodity is said to be perfectly elastic. In such a situation, demand curve is parallel to X axis.

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(b) Perfectly Inelastic Demand (Ed = 0) : When change in price produces no Elasticity of change in demand, then such a demand Demand is called perfectly inelastic demand. In this situation, demand curve is a straight line parallel to the Y axis. (c) Unitary Elastic Demand (Ed = 1): When percentage change in quantity demanded is equal to percentage change in price, then demand for such a commodity is said to be unitary elastic. Shape of demand curve is rectangular hyperbola and elasticity at every point on this curve is unity. (d) Highly Elastic Demand (Ed > 1): When percentage change in price of a commodity causes greater percentage change in quantity demanded then demand is said to be highly elastic. (e) Relativity Inelastic Demand (Ed < 1): When the demand is said to be inelastic, percentage change in price of a commodity causes relatively less percentage change in quantity demanded.

(b) Change in Income of Consumers: Changes in consumer income can affect the elasticity of demand. For normal goods, demand is positively related to income, while for inferior goods, demand may be inversely related. (c) Standard of Living of People: A higher standard of living can make the demand for certain goods more elastic, as consumers have more choices and are less price-sensitive. (d) Share in Total Expenditure: The proportion of income spent on a particular good can affect its elasticity. Goods that represent a significant portion of a consumer’s budget tend to have more elastic demand. (e) Class of Buyers: Different classes or income groups of buyers may have varying elasticities of demand for the same product due to differences in income and preferences. (iii) Social Factors: (a) Distribution of National Income: The distribution of income within a society can influence demand elasticity. Income inequality can lead to varying elasticities among different income groups. (b) Rationing System: In some cases, the presence of a rationing system, where consumers have limited access to a good, can impact demand elasticity.

 Factors determining the Elasticity of Demand:

(iv) Price Factors:

(i) Objective Factors:

(a) General Price Level: The overall price level in the economy can affect the elasticity of demand. In periods of high inflation, consumers may be more price-sensitive, leading to more elastic demand.

(a) Nature of Commodity: The elasticity of demand can vary based on whether a good is a necessity (inelastic) or a luxury (elastic). Necessities tend to have less elastic demand, while luxuries have more elastic demand. (b) Existence of Substitutes: The availability of close substitutes for a product can make its demand more elastic. If consumers can easily switch to a substitute when the price of a good rises, demand tends to be more elastic. (c) Alternative Uses of a Commodity: If a commodity has multiple uses, its demand may be more elastic because consumers have options for how to use it. (d) Postponement of Consumption: For goods that can be easily postponed, such as vacations or nonessential items, the demand is typically more elastic because consumers can delay their purchases in response to price changes. (e) Joint Demand: When two goods are demanded together, a change in the price of one can impact the demand for the other. The elasticity of joint demand depends on the relationship between the two goods. (ii) Subjective Factors: (a) Habits of Consumers: The habits and preferences of consumers can influence the elasticity of demand. If consumers are loyal to a particular brand or have strong preferences for a product, their demand may be less elastic.

(b) Effect of Time Element: Over time, consumer behavior can change. Short-run demand may be less elastic, while long-run demand can become more elastic as consumers adjust their behavior and choices.  Measurement of Elasticity of Demand (a) Total expenditure method : Under this method, impact (effect) of change in price on the expenditure of a goods is studied. When price of a goods changes, consumer’s total expenditure on it may increase, decrease, or remain constant. Thus, elasticity is measured by comparing the total expenditure made on the goods before and after the price change. (i) If total expenditure on a commodity remains unchanged before and after the price change, the elasticity is said to be unity ed = 1. (ii) If total expenditure increase with fall in price (and viceversa), elasticity of demand is said to be greater than unity ed > 1. (iii) If total expenditure decreases with fall in price (and vice-versa), elasticity of demand is said to be less than unity ed < 1. (b) Proportionate or Percentage Method or Percentage Change Method: The percentage method measures price

14 Oswaal CUET (UG) Chapterwise Question Bank elasticity of demand by dividing the percentage change in amount demanded by percentage change in price of commodity.

ECONOMICS

 If 1 < ed < ∞, the demand is elastic

 If ed = 0, the demand is perfectly inelastic

 If ed = 1, the demand has unitary elasticity

Methods of measuring price elasticity of demand 1. Percentage Method:  The percentage method is one of the most common ways to measure PED.



 The formula is: PED = (% Change in Quantity Demanded) / (% Change in Price).



 To use this method, you calculate the percentage change in quantity demanded and the percentage change in price when the price changes.



 If the result is greater than 1, it indicates elastic demand; if it’s less than 1, it’s inelastic; and if it’s equal to 1, it’s unitary elastic.



 If ed = ∞, the demand is perfectly elastic

2. Total Expenditure Method:  The total expenditure method focuses on the effect of a price change on total expenditure (the amount consumers spend on a goods).



 When demand is elastic, a price increase reduces total expenditure, and a price decrease increases it.



 When demand is inelastic, a price increase increases total expenditure, and a price decrease reduces it.



 When demand is unitary elastic, total expenditure remains constant as price changes.



 If 0 < ed < 1, the demand is inelastic

3. Geometric Method:  The Geometric method, suggested by Prof. Marshall, is employed to measure elasticity at specific points along the demand curve.  This method, also known as the Graphic Method, Point Method, or Arc Method, is used when there are infinitesimally small changes in price and demand.



 Elasticity of demand (Ed) can vary at different points along the same straight-line demand curve.



 To measure Ed at a particular point, you divide the lower portion of the curve from that point by the upper portion of the curve from the same point using the formula: Elasticity of Demand (Ed) = Lower segment of demand curve (LS) / Upper segment of demand curve (US).





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CONSUMER BEHAVIOUR AND DEMAND

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS

1. The elasticity of Demand is given by the formula:  [CUET 2023] Q P ∆Q P × (1) (2) × ∆Q ∆P Q ∆P ∆P ∆Q ∆Q Q × (4) × P Q P P 2. Suppose an Individual buys 15 units of good when its price is ₹ 5 per unit. What will happen to his demand when price of the good increases to ₹ 7 per unit and elasticity of demand for the goods is 0.5. [CUET 2022] (1) Increase his demand (2) No change in his demand (3) Reduce his demand (4) Shift to other Goods 3. If the price elasticity of demand for a goods is greater than 1, it is considered to be: [CUET 2022] (1) Inelastic (2) Elastic (3) Unitary elastic (4) Perfectly elastic 4. Choose correct statements about utility. [CUET 2022] (A) As consumption increases marginal utility increases. (B) As consumption increases marginal utility decreases. (C) Utility does not differ from person to person. (D) Total utility is the sum of marginal utilities. (1) A and B only (2) B and C only (3) C and A only (4) B and D only 5. If there is no change in demand of goods X with the change in price of goods X, then price elasticity of demand for goods X is: [CUET 2022] (1) Perfectly elastic (3) Perfectly inelastic (3) Unitary elastic (4) Greater than 6. When price of good falls from ₹ 15 per unit to ₹ 12 per unit, its demand rises by 25 per cent. Calculate price elasticity of demand. (1) 0.25 (2) 1.25 (3) 2 (4) 1 7.  When we add up utility derived from consumption of all the units of the commodities, we get: (1) Total utility (2) Initial utility (3) Marginal utility (4) None of these 8. Which of the following is the reason behind the downward slope of the demand option? (1) Purchasing power falls (2) Fall in the price of a commodity (3) New consumers creating demand (4) Demand less unit of commodity 9. Which of the following are the correct assumptions for the utility approach? (A) Prices of commodities are given and remain constant. (B) Consumer’s income is given. (3)

(C) Utility is not measurable in monetary terms (1) A and B only (2) B only (3) B and C only (4) C only 10.  We say that there is a decrease in demand when: (1) Fall in demand, with the same price. (2) Fall in demand, with a decrease in price. (3) Fall in demand, with an increase in price. (4) None of the above. 11.  There is a sudden change in climatic conditions resulting

in hot weather. Assuming no change in the price of the cold drinks, it will lead to: (1) upward movement along the same market demand curve. (2) downward movement along the same market demand curve. (3) rightward shift in the market demand curve. (4) leftward shift in the market demand curve. 12. In response to a health campaign promoting a tobacco-free lifestyle, the demand for cigarettes has decreased. Which of the following best describes the change in the demand curve for cigarettes? (1) The demand curve shifts to the left (decreases). (2) The demand curve shifts to the right (increases). (3) The demand curve remains unchanged. (4) The supply curve shifts. 13. Which of the following is NOT a determinant of demand for clothing? (1) Consumer preferences for clothing styles. (2) Consumer income. (3) The price of clothing materials. (4) The price of complementary goods like shoes. 14. Due to an increase in consumer income, the demand for luxury watches has increased. What is the likely effect on the demand curve for luxury watches? (1) The demand curve shifts to the left (decreases). (2) The demand curve shifts to the right (increases). (3) The demand curve remains unchanged. (4) The supply curve shifts. 15.  Due to changes in consumer preferences, the demand for electric cars has significantly increased. What can be said about the market demand curve for electric cars? (1) The demand curve shifts to the left (decreases). (2) The demand curve shifts to the right (increases). (3) The demand curve remains unchanged. (4) The supply curve shifts. 16. Consumer aims to maximize their utility. If the marginal utility of consuming an additional unit of goods X is 15 utils, and the price of X is ₹10, while the marginal utility of goods Y is 10 utils, and the price of Y is ₹5, what should the consumer do to reach equilibrium? (1) Consume more of X (2) Consume more of Y (3) Consume less of X (4) Consume less of Y 17. What happens to total expenditure when the price of a good decreases in an elastic demand scenario? (1) It decreases. (2) It remains unchanged. (3) It increases. (4) It depends on the income of consumers. 18. When there is a movement along the demand curve, what is the cause? (A) A change in consumer preferences (B) A change in the price of the goods (C) A change in consumer income (D) A change in the number of consumers

16 Oswaal CUET (UG) Chapterwise Question Bank (1) A and B only (2) A, C and D only (3) B only (4) C only 19.  A company reduces the price of its product by 20%, and as a result, the quantity demanded increases by 25%. What can be inferred about the price elasticity of demand for this product? (1) The product has perfectly elastic demand. (2) The product has inelastic demand. (3) The product has unitary elastic demand. (4) The product has elastic demand. 20. Identify the correctly matched pair of column A to that of Column B: Column A

Column B

(A) Marginal Utility

(I)

The power or capacity of a commodity to satisfy human wants.

(B)

(II)

The addition to total utility on consuming an additional unit of a commodity.

Cardinal measure of utility

(C) Total Utility

(III) It is the sum total of utility derived from the consumption of all units of a commodity.

(D) Utility

(IV)

It is that measurement of utility, which is measured in terms of units.

(1) A – (I), B – (II), C – (III), D – (IV) (2) A – (I), B – (III), C – (III), D – (II) (3) A – (II), B – (IV), C – (III), D – (I) (4) A – (III), B – (II), C – (I), D – (I)

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (1). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): The elastic demand curve for luxuries is flatter than normal.  Reason (R): The coefficient of elasticity ranges between 0 and 1. 2.  Assertion (A): The demand curve is downward sloping.  Reason (R): Income effect means with fall in the price of a goods, consumer’s real income or purchasing power rises and he demands more units of the goods. 3.  Assertion (A): A goods is considered to be normal when with increase in income of the consumer, its demand rises.  Reason (R): Normal goods have negative income effect. 4. Assertion (A): The demand for salt is inelastic.  Reason (R): Necessary goods have inelastic demand. 5. Assertion (A): When the price of Y increases the demand for X increases.  Reason (R): X and Y are substitute goods when they can be used in place of each other.

ECONOMICS

6. Assertion (A): Marginal utility can never be negative.  Reason (R): When MU becomes negative, TU falls with increase in consumption of a commodity. 7. Assertion (A): When consumer preferences change in favor of electric cars, the demand for electric cars will increase.  Reason (R): A change in consumer preferences is one of the determinants of demand. 8. Assertion (A): A fall in consumer income will lead to an increase in the demand for inferior goods.  Reason (R): Inferior goods are those for which demand increases as consumer income falls. 9. Assertion (A): When the price of smartphones decreases, the quantity demanded for smartphones cases also decreases.  Reason (R): Smartphones cases are complementary goods to smartphones. 10. Assertion (A): In consumer equilibrium, the marginal utility of the last unit consumed is zero.  Reason (R): At this point, the consumer experiences no satisfaction from consuming additional units of the goods.

[C] CASE BASED QUESTIONS I.  Read the following case and answer the given questions: In recent years, there has been a growing awareness of health concerns associated with fast food consumption. Various reports and studies have linked excessive fast-food consumption to health issues such as obesity, heart disease, and diabetes. As a result, many consumers are revaluating their dietary choices and considering healthier options. Amid these concerns, fast-food chains are adapting by introducing healthier menu items, such as salads, grilled options, and organic ingredients. They are also promoting their healthier offerings to attract more health-conscious consumers. However, these healthier options are often priced higher than traditional fast-food items. 1. What is the likely effect of the health concerns and the introduction of healthier menu items on the demand for traditional fast-food items? (1) Increase in demand (2) Decrease in demand (3) No change in demand (4) Increase in supply 2. What is the primary determinant of demand affected by the introduction of healthier menu items in this scenario? (1) Consumer income (2) Price of traditional fast-food items (3) Consumer preferences (4) Health concerns 3. How would you classify the price elasticity of demand for traditional fast-food items in this scenario? (1) Elastic (2) Inelastic (3) Unitary elastic (4) Perfectly elastic 4. If a fast-food chain decides to offer significant discounts on their healthier menu items, what is the likely effect on the demand for those healthier items? (1) Increase in demand (2) Decrease in demand (3) No change in demand (4) Increase in supply 5. How do consumer preferences and health concerns play a role in the price elasticity of demand for traditional fastfood items in this scenario?

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CONSUMER BEHAVIOUR AND DEMAND

(1) They make the demand elastic. (2) They make the demand inelastic. (3) They have no impact on elasticity. (4) They shift the demand curve. II. Read the following case and answer the given questions. In a rapidly evolving market, consumers find themselves navigating complex decisions to make the most of their limited income. This case delves into consumer choices, examining how they attain equilibrium through utility maximization. Amelia, a college student with a tight budget, is faced with two commodities, textbooks and entertainment. Textbooks are essential for her studies, but she also values relaxation and entertainment. She needs to allocate her limited income to achieve the highest level of satisfaction. 6. What is the primary objective of a rational consumer like Amelia in a two-commodity case? (1) To minimize expenses (2) To maximize their total utility (3) To consume only essential goods (4) To maximize the price of the commodities 7. What is the budget constraint for Amelia in this scenario? (1) Her preferences for textbooks and entertainment (2) Her savings and investments

(3) Her income and the prices of textbooks and entertainment (4) The number of hours she studies each day 8. If the price of textbooks increases while Amelia’s income remains the same, what is likely to happen to her equilibrium? (1) She will achieve a new equilibrium with lower total utility. (2) Her equilibrium will remain unchanged. (3) She will consume more textbooks and less entertainment. (4) She will spend her entire budget on textbooks. 9. In the utility approach, what does it mean for Amelia to attain equilibrium? (1) To maximize the price of commodities (2) To achieve her desired income level (3) To be content with her current consumption (4) To maximize her total utility within her budget constraint 10. Why is the analysis of consumer equilibrium through the utility approach important? (1) To calculate the Gross Domestic Product (GDP). (2) To understand how consumers make choices to maximize satisfaction. (3) To determine government tax policies. (4) To encourage consumers to save more money.

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (2)

2. (3)

3. (2)

4. (4)

5. (2)

6. (2)

7. (1)

8. (2)

9. (1)

10. (3)

11. (3)

12. (1)

13. (3)

14. (2)

15. (2)

16. (2)

17. (3)

18. (3)

19. (4)

20. (3)

8. (1)

9. (1)

10. (1)

8. (1)

9. (4)

10. (2)

[B] ASSERTION & REASON 1. (3)

2. (1)

3. (3)

4. (1)

5. (1)

6. (4)

7. (1)

[C] COMPETENCY BASED QUESTIONS 1. (2)

2. (3)

3. (2)

4. (1)

5. (2)

6. (2)

7. (3)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (2) is correct. Explanation: The price elasticity of demand (PED) formula calculates the responsiveness of quantity demanded to price changes. It is found by dividing the percentage change in quantity demanded by the percentage change in price, helping determine if demand is elastic (responsive to price changes), inelastic (unresponsive), or unitary elastic (proportional). 2. Option (3) is correct. Explanation: When the price elasticity of demand is greater than 1, demand is considered elastic, indicating that consumers are highly responsive to price changes. 3. Option (2) is correct. Explanation: When the price elasticity of demand is greater than 1, demand is considered elastic, indicating that consumers are highly responsive to price changes. 4. Option (4) is correct. Explanation: Total utility is the total psychological satisfaction a consumer obtains from consuming a given amount of a

particular goods. Alternatively, total utility is the sum of marginal utilities obtained from consumption of successive units of a commodity. Law of diminishing marginal utility states that marginal utility derived from the consumption of a commodity declines as more units of that commodity are consume. 5. Option (2) is correct. Explanation: The demand for a commodity is called perfectly inelastic when quantity demanded does not change at all in response to change in its prices. Graphically, the demand curve in parallel to y-axis. 6. Option (2) is correct. Explanation: Given, P = ₹15 P1 = ₹12 ∆P = P1 − P = ₹12 − ₹15 = (−) ₹3 ∆P ( − ) 3 × 100=20% × 100 = Percentage change in price = P 15 Percentage change in quantity demanded =25%

18 Oswaal CUET (UG) Chapterwise Question Bank Price elasticity of demand (Ed)=Percentage change in price/ Percentage change in quantity demanded 20% = 25% = 1.25 7. Option (1) is correct. Explanation: When we add up the utility derived from the consumption of all units of a commodity, we get the total utility. Total utility represents the overall satisfaction or benefit derived from consuming a certain quantity of a good or service. 8. Option (2) is correct. Explanation: When the price of a commodity decreases, consumers typically demand more of it, which results in a negative relationship between price and quantity demanded, leading to the downward slope of the demand curve. 9. Option (1) is correct. Explanation: The utility approach in economics assumes that prices of commodities are given and remain constant, meaning that prices don’t fluctuate during the analysis. It also assumes that the consumer’s income is given or fixed, serving as a budget constraint. 10. Option (3) is correct. Explanation: A decrease in demand occurs when consumers are willing to buy less of a product at the existing price, and this often happens when the price of the product increases. 11. Option (3) is correct. Explanation: Hot weather increases the overall demand for cold drinks. A rightward shift in the market demand curve reflects an increase in the quantity demanded at all price levels due to the change in weather conditions, without a change in the price of cold drinks. 12. Option (1) is correct. Explanation: A decrease in demand due to a health campaign will shift the demand curve to the left, indicating a decrease in quantity demanded. 13. Option (3) is correct. Explanation: The price of clothing materials is a determinant of supply, not demand. 14. Option (2) is correct. Explanation: An increase in consumer income typically leads to an increase in the demand for normal or luxury goods like luxury watches. When consumers have more disposable income, they are more likely to purchase luxury items. This increase in demand is reflected by a rightward shift of the demand curve. 15. Option (2) is correct. Explanation: When changes in consumer preferences result in a significant increase in the demand for a product, like electric cars, the market demand curve shifts to the right. This indicates that at each price level, consumers are now willing to buy a larger quantity of electric cars, reflecting the increased demand. 16. Option (2) is correct. Explanation: To reach equilibrium, the consumer should consume more of goods Y because the marginal utility per rupee spent on Y is higher. 17. Option (3) is correct. Explanation: In an elastic demand scenario, when the price decreases, total expenditure increases because the increase in

ECONOMICS

quantity demanded more than offsets the price decrease. 18. Option (3) is correct. Explanation: A movement along the demand curve occurs when the price of the good changes while other factors remain constant. 19. Option (4) is correct. Explanation: With a percentage increase in quantity demanded exceeding the percentage decrease in price, this indicates elastic demand. 20. Option (3) is correct. Explanation:  Utility: Utility is a measure of satisfaction or benefit from consuming goods and services.  Marginal Utility: Marginal utility is the additional satisfaction gained from consuming one more unit of a goods.  Total Utility: Total utility is the overall satisfaction from consuming a specific quantity of a goods.  Cardinal Measure of Utility: A cardinal measure assigns numerical values to utility for quantifying and comparing consumer preferences.

[B] ASSERTION & REASON 1. Option (3) is correct. Explanation: The elastic demand curve for luxuries is flatter than normal because the coefficient of elasticity is always greater than one. 2. Option (1) is correct. Explanation: Income effect means with fall in the price of a goods, consumer’s real income or purchasing power rises and he demands more units of the goods. This shows that when the price falls, demand increases and so the demand curve is downward sloping. 3. Option (3) is correct Explanation: A goods is considered normal when, with an increase in the consumer’s income, its demand rises. This is the defining characteristic of normal goods. Thus, Normal goods do not have a “negative” income effect. Instead, they have a positive income effect. 4. Option (1) is correct. Explanation: The demand for salt is inelastic. Inelastic demand means that the quantity demanded is relatively insensitive to changes in price, and this often applies to necessary goods because consumers continue to buy these goods regardless of price changes due to their essential nature. 5. Option (1) is correct. Explanation: When the price of via commodity increases leading to an increase in the demand for the X commodity, it means that the two commodities are competitive or substitute goods. When the price of one commodity rises and it becomes expensive for the consumer, He diverts his income towards other commodities and increases the demand for X commodity. Hence the price of one and the demand for another commodity in case of substitute goods are directly related and these goods can be used in place of each other. 6. Option (4) is correct. Explanation: Marginal utility can be negative after the point of satiety. When the consumer increases the consumption of the commodity beyond a particular limit, it provides disutility to the consumer which is indicated by negative marginal utility.

CONSUMER BEHAVIOUR AND DEMAND

 hen marginal utility is negative, total utility which is the sum W of all the marginal utilities starts falling with the increase in consumption. 7. Option (1) is correct. Explanation: When consumer preferences change favorably towards a product, it typically leads to an increase in demand for that product. 8. Option (1) is correct. Explanation: Inferior goods are those for which demand increases as consumer income falls. When consumer income decreases, they tend to buy more of these goods. 9. Option (1) is correct. Explanation: Demand for complementary goods is a concept in economics where the demand for one goods is closely related to the demand for another goods, and they are often consumed together. These goods are considered interdependent because an increase in the demand for one goods typically leads to an increase in the demand for the other. Conversely, a decrease in the demand for one goods results in a decrease in the demand for the complementary goods. 10. Option (1) is correct. Explanation: In consumer equilibrium, the consumer maximizes utility by equating the marginal utility of the last unit consumed to the price of the goods. When the marginal utility of the last unit consumed is zero, it indicates that the consumer is no longer gaining additional satisfaction from consuming more units of the goods.

[C] CASE BASED QUESTIONS 1. Option (2) is correct. Explanation: Health concerns and the availability of healthier options are likely to decrease the demand for traditional fastfood items. 2. Option (3) is correct. Explanation: The introduction of healthier menu items primarily affects consumer preferences, leading them to reconsider their choices.

19 3. Option (2) is correct. Explanation: Price elasticity of demand for traditional fastfood items is likely to be inelastic because consumers of these items may be less responsive to price changes, especially if they have strong preferences for fast food. 4.  Option (1) is correct. Explanation: Offering discounts on healthier menu items is likely to increase the demand for those items, especially among price-sensitive consumers. 5. Option (2) is correct. Explanation: Consumer preferences and health concerns tend to make the demand for traditional fast-food items inelastic, as consumers may be less responsive to price changes due to their preferences and health considerations. 6.  Option (2) is correct. Explanation: In a two-commodity case, a rational consumer aims to allocate their budget to maximize their total utility by choosing a combination of commodities that provides the highest satisfaction. 7. Option (3) is correct. Explanation: Amelia’s budget constraint is determined by her income and the prices of both textbooks and entertainment. 8. Option (1) is correct. Explanation: An increase in the price of textbooks, with income held constant, is likely to lead to a new equilibrium with lower total utility as Amelia adjusts her consumption. 9. Option (4) is correct. Explanation: In the utility approach, consumer equilibrium is reached when the consumer allocates their budget to maximize their total utility within their budget constraint. 10. Option (2) is correct. Explanation: The analysis of consumer equilibrium through the utility approach helps us understand how consumers make choices to maximize their satisfaction and allocate their budget efficiently to attain equilibrium.

Study Time

CHAPTER

3

 Revision notes

Max. Time: 1:25 Hours Max. Questions: 40

NATIONAL INCOME AND RELATED AGGREGATES

 Macroeconomics: Macroeconomics is a branch of economics that focuses on the study of Scan to know the overall behavior and performance more about of an entire economy. It examines the this topic key economic aggregates such as Gross Domestic Product (GDP), inflation, unemployment, government policies, and international trade to understand and Macroeconomics analyze the functioning of an economy on a broader scale.  Circular Flow of Income: The circular flow of income is a fundamental economic concept Scan to know more about that illustrates the continuous flow of this topic money and goods and services within an economy. It demonstrates how different economic agents, such as households, firms, the government, and the rest of the world, interact and exchange resources, Circular Flow of Income income, and production. The circular flow model simplifies the complex interactions in an economy and serves as a useful tool for understanding economic relationships. Key components of the circular flow of income:  Households: Households are the primary consumers in the economy. They provide factors of production, such as labor

and capital, to firms. In return, households receive income from firms in the form of wages, salaries, rent, and profits.  Firms: Firms are businesses that produce goods and services. They hire labor, purchase capital, and pay rent and interest to households. Firms receive revenue from the sale of their goods and services to households and other entities.  Product Market: The product market is where firms sell their goods and services to households. Households buy products and services from firms, paying for them using the income they’ve earned. This creates a flow of money from households to firms.  Factor Market: The factor market is where households provide factors of production (labor, capital) to firms in exchange for income. Firms pay wages and rent to households in this market.  Government: The government collects taxes from both households and firms. It also provides goods and services (e.g., education, healthcare, defense) and transfers (e.g., Social Security, unemployment benefits) to households. In doing so, the government participates in both the product and factor markets.  Rest of the World: The rest of the world represents international trade. It includes exports (goods and services sold to other countries) and imports (goods and services purchased from other countries). This international trade has financial transactions involving the inflow and outflow of funds.

NATIONAL INCOME AND RELATED AGGREGATES

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22 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

 Gross Domestic Product (GDP):

 Net National Product (NNP):

 GDP is the total monetary value of all final goods and services produced within a country’s borders during a specific period, usually a year.

 NNP is similar to NDP but considers the net value added by a nation’s residents, including income earned abroad and subtracting depreciation.

 At market prices, GDP includes the actual prices that consumers pay for goods and services. It reflects both the production value and taxes on products.

 At market prices, NNP accounts for the depreciation of capital assets and includes taxes on products. It reflects the net income earned by residents, including income from abroad.

 At factor costs, GDP considers only the production value and excludes taxes on products. It represents the income earned by factors of production (wages, rent, interest, profits) before taxes and subsidies. GDPMP = C + I + G + X-M

 At factor costs, NNP considers the depreciation of capital assets and excludes taxes on products. It represents the net income earned by residents, including income from abroad, before taxes and subsidies. NNPMP = GNPMP– Depreciation

Where,

NNPFC = GNPMP – Net Indirect Taxes – Depreciation

C: Consumption Expenditure I: Investment Expenditure

 Methods of measuring National Income:

G: Government Expenditure

1. Value Added Method:

X: Exports

 The Value-added Method calculates a nation’s National Income by considering the difference between the value of a firm’s output and the value of the intermediate goods and services used in the production process.

M: Imports GDPFC = GDPMP – NIT Where,

 This method breaks down the economy into sectors like agriculture, industry, and services.

NIT: Net indirect taxes  Gross National Product (GNP):  GNP measures the total monetary value of all final goods and services produced by a country’s residents (both domestically and abroad) during a specific period.  At market prices, GNP includes the actual prices that consumers pay for goods and services produced by residents, whether within the country or abroad. It reflects the production value and taxes on products.  At factor costs, GNP accounts for the production value and excludes taxes on products. It represents the income earned by factors of production before taxes and subsidies, whether within the country or abroad. GNPMP = GDPMP + Net factor income from abroad GNPFC = GDPMP – Net indirect taxes  Net Domestic Product (NDP):  NDP is derived from GDP by subtracting depreciation (wear and tear) on the country’s capital assets, such as machinery and infrastructure.  At market prices, NDP considers the depreciation of capital assets and includes taxes on products. It reflects the net production value after the depreciation.

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Aggregates of NI and their Estimation

 At factor costs, NDP accounts for the depreciation of capital assets and excludes taxes on products. It represents the net income earned by factors of production after depreciation. NDPMP = GDPMP – Depreciation NDPFC = GDPFC – Depreciation

 For each sector, it calculates the value added by subtracting the value of inputs (intermediate consumption) from the value of the final output. This approach avoids double counting, ensuring that only the additional value created at each stage is included. 2. Income Method:  It focuses on determining the total income earned by various economic agents, including individuals, businesses, and the government, during a specific period.  This method considers different income sources such as wages, rent, interest, profits, and taxes.

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Measurement of National Income

 Analyzing income distribution, provides insights into the economic activity within a country and how income is shared among the different factors of production. 3. Expenditure Method:  The Expenditure Method estimates a nation’s National Income by analyzing the total expenditures made by different economic agents within the country over a specific time frame, typically a year.  It includes consumer spending, business investments, government expenditures, and net exports (exports minus imports).  This method is based on the principle that total expenditures in an economy equal the total income generated.  To avoid double counting, it excludes the intermediate goods and includes the taxes on products and subsidies.

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NATIONAL INCOME AND RELATED AGGREGATES

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS



1. Arrange the following operations sequentially in order to calculate NNPFC from GDPMP [CUET 2023] (A) GDPMP - Net Indirect Taxes

(1) B, D, A, C (2) D, B, C, A (3) C, B, D, A (4) C, A, B, D 7.  Identify which of the following is a flow variable:  [CUET 2022] (A) Inventory (B) Wealth (C) Income (D) Change in inventories (1) A and C only (3) B and D only (3) C and D only (4) A and B only 8. Unforeseen obsolescence of fixed capital assets during production is: [CUET 2022] (1) Consumption of fixed capital (2) Capital loss (3) Income loss (4) None of these

(B) NDPFC + Net Factor Income from Abroad (C) GDPFC - Depreciation

Choose the correct answer from the options given below:

(1) A, B, and C only

(2) B, C and A only

(3) A, C, and B only

(4) C, A and B only

2. Which of the following are correct statements related to stock and flow? [CUET 2023] (A) Flows are defined on 1st January (B) Flows are defined over some time

Choose the correct answer from the options given below:

(C) Identify and classify the income-generating units

9. From the options given below identify the intermediate good/goods. [CUET 2022] (A) Printer purchased by a dealer for supplying in the school. (B) Car purchased by a cab driver. (C) Fruits and vegetables purchased by a shopkeeper. (D) Smart boards purchased by the University for teaching. Choose the correct answer from the options given below: (1) A and C only (2) B and D only (3) B and C only (4) D only 10.  Calculate GDPMP. [CUET 2022] (A) Private final consumption expenditure = ₹ 200 cr (B) Indirect Tax = ₹ 50 cr (C) Government final consumption expenditure = ₹ 100 cr (D) Net Exports = ₹ 50 cr (E) Gross Domestic Capital formation = ₹ 50 cr (F) Depreciation = ₹ 20 cr (1) 370 (2) 400 (3) 320 (4) 270 11.  Which of the following is not a ‘factor payment’? (1) Free uniform to defense personnel (2) Salaries to the Members of Parliament (3) Rent paid to the owner of a building (4) Scholarship given to the students 12. If in an economy the value of Net Factor Income from Abroad is ₹200 crores and the value of Factor Income to Abroad is ₹40 crores. Identify the value of Factor Income from Abroad: (1) ₹200 crores (2) ₹160 crores (3) ₹240 crores (4) ₹180 crores 13. Which of the following is a flow variable in the Circular Flow of Income? (1) National Debt (2) Consumption (3) Capital Goods (4) Savings 14. Which of the following is not included in the expenditure method of calculating national income? (1) Net exports

(D) Calculating domestic factor income

(2) Private Final Consumption Expenditure

(C) Flows and stocks are defined as mutual understanding (D) Stocks are defined from January to December (E) Stocks are defined at a particular point of time

Choose the correct answer from the options given below:

(1) B and E only

(2) A and D only

(3) C and E only

(4) A and B only

3. Identify the correct sequence for computing the National Income: [CUET 2022] (A) Add NFIA to calculate NNPFC (B) Add sales and change in stock to get the value of output (VO) (C) Value of intermediate consumption to be deducted from the value of output to calculate GVA at MP. (D) Deduct the value of depreciation and Net Indirect Taxes to get NVAFC. Choose the correct answer from the options given below: (1) C, D, A, B (2) B, C, D, A (3) D, C, B, A (4) C, B, A, D 4. A person whose stay in a country is at least for one year and whose economic interest lies in that country is called a: [CUET 2022] (1) Non-resident

(2) Normal-resident

(3) Normal citizen

(4) Domestic citizen

5. Sales for a firm are calculated as:

[CUET 2022]

(1) Value of output + Intermediate consumption (2) Value of output – Intermediate consumption (3) Value of output + Change in stock (4) Closing stock + Value of output 6. Arrange the following steps in the calculation of National Income, by Income Method in the correct sequence:  [CUET 2022] (A) Add net factor income from abroad to arrive at National Income (B) Estimate the factor income paid by each sector

24 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

(3) Government Final Consumption Expenditure

[B] ASSERTION & REASON

(4) Expenditure on second-hand goods

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

15.  Which of the following statements is incorrect? (1) Gross Domestic Product (GDP) at Market Price = GDP at Factor Cost + Net Indirect Taxes (2) Net National Product (NNP) at Market Price = NNP at Factor Cost. (3) Gross National Product (GNP) at Market Price = GDP at Market Price + Net Factor Income from Abroad (4) Net National Product (NNP) at Factor cost= National Income 16. Read the figure carefully and choose the correct alternative given below:

(1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): The flour purchased by a baker is considered as an intermediate good.  Reason (R): The flour is used for the production of bread, cakes and biscuits to be sold to the consumer. 2.  Assertion (A): Refrigerator used at home is considered as Capital Good.  Reason (R): Refrigerator is a one-time purchase for the household and will not be purchased for a very long time.

(1) NDP at FC

(2) NDP at MP

(3) NNP at FC

(4) NNP at MP

17. Suppose the GDP at market price of a country in a particular year was ₹1,100 crores. Net factor income from abroad was ₹100 crores. The value of (Indirect taxes and subsidies) was ₹150 crores and the national income was ₹850 crores. Calculate the aggregate value of depreciation. (1) ₹ 200 crores

(2) ₹ 150 crores

(3) ₹ 1,000 crores

(4) ₹ 950 crores

18. From the following information, compute GNPMP. GDPFC = ₹3,000; Net factor income to abroad = ₹200;

Indirect Taxes = ₹420, Subsidies = ₹200.

(1) ₹ 3,380

(2) ₹ 2,980

(3) ₹ 3,020

(4) ₹ 2,620

19.  Match the following and choose the correct option. List -I (A) The product will not pass through further transformation (B)

List -II (I)

A product used as raw material (II) or input for production

Capital Good Final Good

(C) The good that enables for production of the process

(III) Consumer Good

(D) Goods purchased by the ultimate consumer

(IV)

Intermediate Goods

(1) (A)-(III), (B)-(I), (C)-(IV), (D)-(II) (2) (A)-(II), (B)-(IV), (C)-(I), (D)-(III) (3) (A)-(I), (B)-(III), (C)-(II), (D)-(IV) (4) (A)-(IV), (B)-(II), (C)-(III), (D)-(I) 20. The sum of factor payments is equal to __________.  (1) Gross Domestic Income (2) National Income (3) Per Capital Real Income (4) Per Capital National Income

3.  Assertion (A): Services of housewives are not included in national income.  Reason (R): Love and affection for family members cannot be measured in terms of money. 4. Assertion (A): The value of intermediate goods should not be included.  Reason (R): This will cause the problem of double counting as the value of intermediate goods is already included in the value of the final good. 5. Assertion (A): Income from illegal activities like smuggling, theft, gambling, etc., should not be included.  Reason (R): Including illegal activities will cause the problem of double counting. 6. Assertion (A): Brokerage on the sale/purchase of shares and bonds is to be included.  Reason (R): Brokerage is a payment for productive service rendered. 7. Assertion (A): Leisure is not included in GNP.  Reason (R): It does not involve rendering of any factor service. 8. Assertion (A): Profits of chemical industries increased by 150%; fishermen’s income was reduced by 70% due to untreated chemical pollutants in water bodies. This is a negative externality.  Reason (R): The profits of chemical industries is causing pollution which is harming the water and in turn leading the fishermen to catch less fish as the biodiversity of the water body is disturbed. 9. Assertion (A): GDP does not exhibit the structure of the product.  Reason (R): If the increase in GDP is mainly due to increased production of war equipment and ammunitions, then such an increase cannot improve welfare in economy.

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NATIONAL INCOME AND RELATED AGGREGATES

10. Assertion (A): With every increase in the level of GDP, social welfare definitely increases in the economy.  Reason (R): GDP is not a true indicator of the welfare of the economy.

[C] CASE BASED QUESTIONS I.  Read the following text and answer the given questions Real GDP is calculated in a way such that goods and services are evaluated at some constant set of prices. Since these prices remain fixed, if the Real GDP changes, we can be sure that it is the volume of production that is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices. [CUET 2023] 1. When value of final goods and services are estimated at current price, it is? (1) Real GDP (2) Nominal GDP (3) GDP at constant prices (4) Consumer Price Index 2. Real GDP increases only when: (1) Prices increases (2) Prices decreases (3) Production increases (4) Production decreases 3. Keeping output constant nominal GDP increases because: (1) Prices increase

deducting the value of intermediate goods used by the refinery from the value of its output. The value added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their well-being will fall. Pollution may also kill fish or other organisms of the river on which fish survive. [CUET 2023] 6. Which of the following is correct? (1) If the GDP of the country is rising, the welfare will always rise. (2) Externalities refer to the benefits a firm or an individual cause to another for which they are not paid. (3) Non-monetary exchanges can’t he excluded in the estimation of GDP. (4) Adding the value of final goods once leads to the problem of double-counting

Choose the correct answer from the options given below:

(1) A and C only

(2) C and D only

(3) B and C only

(4) A and B only

7. Value added by the oil refinery will be equal to: (1) Value of output – Intermediate cost

(2) Prices decrease

(2) Value of output + Intermediate cost

(3) Output decreases (4) Prices increase and output increases

(3) Crude oil only

4. Which GDP is the indicator of growth and development of a country?

(4) Amount of oil it refines and crude oil 8. Oil refinery polluting nearby area is an example of:

(1) Nominal GDP

(2) National Income

(1) Non-monetary exchanges (2) Positive externalities

(3) Real GDP

(4) Domestic Income

(3) Negative externalities

(4) GDP externalities

5. If output in an economy is decreasing but GDP of the country is increasing which GDP it is:

9. In the above case study, GDP is ............... actual welfare.

(1) Real GDP

(2) Domestic Income

(1) underestimated

(2) overestimated

(3) GDP at Constant Price

(4) Nominal GDP

(3) accurately estimating

(4) equal to

II. Read the following text and answer the given questions: There is an oil refinery which refines crude petroleum and sells it in the market. The output of the refinery is the amount of oil it refines. We can estimate the value added of the refinery by

10. A rise in GDP will ....................... (1) reduce welfare (2) always increase welfare (3) may or may not increase welfare (4) not affect welfare

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (3)

2. (1)

3. (2)

4. (2)

5. (3)

6. (3)

7. (3)

8. (2)

9. (1)

10. (2)

11. (4)

12. (3)

13. (2)

14. (4)

15. (2)

16. (1)

17. (1)

18. (2)

19. (2)

20. (2)

8. (1)

9. (1)

10. (4)

8. (3)

9. (2)

10. (3)

[B] ASSERTION & REASON 1. (1)

2. (4)

3. (1)

4. (1)

5. (3)

6. (1)

7. (1)

[C] CASE BASED QUESTIONS 1. (2)

2. (3)

3. (1)

4. (3)

5. (4)

6. (3)

7. (1)

26 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (3) is correct. Explanation: When we want to find out the Net National Product at Factor Cost (NNPFC) from the Gross Domestic Product at Market Price (GDPMP), we follow these steps: First, we subtract Net Indirect Taxes from GDPMP. These are taxes that were added to the prices of goods and services, so we have to remove them to see the real value of what we produce. Next, we subtract Depreciation, which is like the wear and tear on the machines and buildings used to make things. We want to see how much is left after considering this wear and tear. Lastly, we add Net Factor Income from Abroad. This accounts for the income earned by our country’s residents from other countries, and it helps to complete the picture. By following these steps in order, we can calculate NNPFC, which tells us how much our country produced, accounting for taxes, wear and tear, and international earnings. 2. Option (1) is correct. Explanation: Flows, such as income over a year, occur over a period, while stocks, like bank account balances, are values at a specific point of time. 3. Option (2) is correct. Explanation: The net value added of each producing unit of the economy is estimated from their gross value of output which is calculated by multiplying the total volume of goods produced with their prices. After deducting the sum of the value of intermediate goods (IG), depreciation, and net indirect taxes (NIT) from the value of output we get the net value added at FC of the producing units. Net National Product at factor cost is obtained by adding the net factor income from ROW to net domestic product at factor cost. 4. Option (2) is correct. Explanation: A normal resident is a person who ordinarily resides in a country and whose center of economic interest also lies in that particular country. Normal residents include both nationals (such as Indians living in India) and foreigners (non-nationals living in India). For example, Nepalese living in India for more than one year and performing economic activities of production, consumption, and investment in India, will be treated as normal residents of India. 5. Option (3) is correct. Explanation: The value of output can be expressed as the sum of sales and change in stock because output is either sold or accumulated as an unsold stock. 6. Option (3) is correct. Explanation: The income method is used for measuring the national income at the distribution level. According to this method, national income is estimated by adding incomes earned by all the factors of production for their factor services during a year. To calculate the National Income by the Income method, we have to add different factor income from the economy. The addition of all these factor incomes gives us the calculation by the National Income, i.e. Net Domestic Product at FC (NDPFC).

7. Option (3) is correct. Explanation: A flow variable is a quantified variable that is measured over a specified period. It is time-bound and expressed as per unit of time. National income, investment in the economy and aggregate supply- all are flow variables since they relate to a period. 8. Option (2) is correct. Explanation: Capital loss is non-recurring. Unforeseen obsolescence of fixed capital assets during production is a capital loss that may happen due to the natural calamities, war, unexpected decreases in demand, etc. 9. Option (1) is correct. Explanation: Intermediate goods are those goods that are meant either for reprocessing or for resale. Goods used in the production process during an accounting year are known as intermediate goods. These are non-durable goods and services used by the producers such as raw materials, oil, electricity, coal, fuel, etc., and services of hired engineers and technicians, etc. Goods which are purchased for resale are also treated as intermediate goods. For example, Rice, wheat, sugar, etc. purchased by a retailer/wholesaler. 10. Option (2) is correct. Explanation: Private final consumption expenditure + Government final consumption expenditure + Net exports + Gross domestic capital formation = ₹ 200 + ₹ 100 + ₹ 50 + ₹ 50 = ₹ 400 crores 11. Option (4) is correct. Explanation: Factor payments are those in which productive services are rendered & being paid in return while transfer payments are those transactions that are conducted without any expectation in return for money. 12. Option (3) is correct. Explanation: Net Factor Income from Abroad= Factor Income from Abroad - Factor Income to Abroad ₹200 = Factor Income from Abroad - ₹40 Factor Income from Abroad = ₹200 + ₹40 = ₹240 crores 13. Option (2) is correct. Explanation: Consumption is a flow variable because it represents the continuous spending by households on goods and services over time. In contrast, National Debt, Capital Goods, and Savings are stock variables, representing the values at a specific points or periods. 14. Option (4) is correct. Explanation: Expenditure on second-hand goods is not typically included in the expenditure method of calculating national income. The expenditure method focuses on the total spending on newly produced goods and services within an economy during a specific period. Purchases of second-hand goods do not represent the production of new goods and are therefore, not a part of the calculation of national income using this method. 15. Option (2) is correct. Explanation: In the National Income accounting framework, NNP at Market Price is adjusted by adding Net Indirect Taxes

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NATIONAL INCOME AND RELATED AGGREGATES

to arrive at NNP at Factor Cost. This adjustment is made because Net Indirect Taxes represent taxes on production and goods that are included in Market Price but need to be deducted to calculate the actual income received by factors of production (i.e., NNP at Factor Cost). 16. Option (1) is correct. Explanation: NDP at FC refers to the net money value of all the final goods and services produced during a year within the domestic territory of a country. 17. Option (1) is correct. Explanation: GDPMP = NNPFC + Depreciation − NFIA + NIT 1,100 = 850 + Depreciation − 100 + 150 Depreciation = ₹ 200 crores 18. Option (2) is correct. Explanation: GNP (at MP) = 2,980 Calculation: Formula: GNP(at MP)= GDP(at FC) – Net factor income to abroad + Indirect Tax - Subsidies = 3,000 – 200 + 420 – 200 = ₹ 2,980 19. Option (2) is correct. Explanation: Capital goods play a pivotal role in the production process as they enable and facilitate the creation of goods and services. Consumer goods are those that are purchased by the end consumers for their personal use. Final goods are products that are ready for the consumption that don’t undergo from the further transformation. Intermediate goods are materials or inputs used in production and need for further processing to become final goods. This distinction helps categorize goods based on their role in the production and consumption process. 20. Option (2) is correct. Explanation: The factor payments indicate the value added to the factor/inputs of production, as these are the payments made to factor of production. Thus, the sum of all the factor payments also constitutes National Income.

[B] ASSERTION & REASON 1. Option (1) is correct. Explanation: Goods used in the production of final goods are known as intermediated goods. 2. Option (4) is correct. Explanation: Capital goods includes those fixed or tangible assets that are purchased by the producers or the businesses to produce goods and services. 3. Option (1) is correct Explanation: The services of housewives are non-market services. They are not included in the national income as it is difficult to calculate their monetary valuation. 4. Option (1) is correct. Explanation: Including the value of intermediate goods would lead to a double counting, as the value of these goods is already accounted for in the value of the final goods and services produced. To avoid overestimating the GDP, intermediate goods are excluded from the calculation. 5. Option (3) is correct. Explanation: Illegal activities like smuggling, theft, gambling, etc., are not considered as legal economic activities.

6. Option (1) is correct. Explanation: Brokerage fees on the sale/purchase of shares and bonds are included in Gross National Product (GNP) because they represent the payments for productive services rendered in facilitating financial transactions, adding to the overall economic activity. 7. Option (1) is correct. Explanation: Leisure is not included in Gross National Product (GNP) because it represents non-market activities and does not involve the production or exchange of goods and services in the formal economy. 8. Option (1) is correct. Explanation: Profits of chemical industries are causing pollution because it is causing water bodies to get polluted and hence is an example of a negative externality. 9. Option (1) is correct. Explanation: GDP is considered to be measure of the welfare of the economy but it does not measure the structure of the product because GDP may rise due to production of ammunitions but it does not measure welfare. 10. Option (4) is correct. Explanation: GDP is a flawed measure of human welfare, e.g., if the increase in the level of GDP is associated with a higher level of income inequality, social welfare may not increase.

[C] CASE BASED QUESTIONS 1. Option (2) is correct Explanation: When the value of final goods and services is estimated at current market prices, it is referred to as Nominal GDP. Nominal GDP does not account for changes in prices over time, so it reflects the current market value of the goods and services produced. 2. Option (3) is correct Explanation: Real GDP is a measure of the total value of goods and services produced in an economy adjusted for inflation or changes in the price level. When the quantity or production of goods and services in an economy increases, it results in increase in real GDP, indicating the economic growth. 3. Option (1) is correct. Explanation: Nominal GDP increases when the value of goods and services produced in an economy increases at the current market prices. This can happen when the prices of goods and services increase, even if the quantity of output remains constant. In other words, when prices rise, the nominal GDP goes up, even if there’s no increase in the actual production or output. 4.  Option (3) is correct. Explanation: Real GDP (Gross Domestic Product adjusted for inflation) is considered a better indicator of the growth and development of a country because it accounts for changes in the quantity of goods and services produced while removing the effects of inflation. 5. Option (4) is correct. Explanation: When the output in an economy is decreasing but the GDP of the country is increasing, it typically indicates that the increase in GDP is driven by rising prices (inflation) rather than an actual increase in the quantity of goods and services produced. Nominal GDP is GDP measured at the current market prices, so it includes the effect of price changes.

28 Oswaal CUET (UG) Chapterwise Question Bank 6.  Option (3) is correct. Explanation: Many goods and services contributing to economic welfare are not included in GDP or Non-Monetary exchanges. There are many goods and services which are left out of the estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc. These are left on account of the non-availability of data and problems in valuation. 7.  Option (1) is correct. Explanation: By value-added method, the total value of all the final goods and services produced in an economy during a given time period are estimated to obtain the value of domestic income. The formula by the product method of measuring national income is: Value Added or Value Addition = Value of Output – Intermediate Consumption. 8. Option (3) is correct Explanation: A negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are commonly cited examples of negative externalities.

ECONOMICS

9. Option (2) is correct. Explanation: Though externalities are not taken into account in GDP, they affect welfare. Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare. GDP does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare in this case, welfare is much less than indicated by GDP. 10. Option (3) is correct. Explanation: A rise in GDP may or may not increase welfare. While GDP measures the overall economic output of a country, it doesn’t account for how the wealth is distributed or whether it leads to improvements in the well-being of all citizens. Factors like income inequality, environmental impact, and the distribution of resources can affect whether an increase in GDP translates to an increase in the overall welfare of the population. Therefore, the relationship between GDP and welfare is complex and context-dependent.

Study Time

CHAPTER

4

Max. Time: 1:25 Hours Max. Questions: 40

DETERMINATION OF INCOME AND EMPLOYMENT

 Revision notes  Aggregate Demand (AD): AD represents the total spending in an economy at different price levels. It is calculated as: AD = C + I + G + (X − M)

where, C = Consumption Y = Income f = Functional relationship  Equation of Consumption Function

Where: C  (Consumer Expenditure): This represents the spending by households on consumption goods and Scan to know more about services. It includes purchases of items this topic like food, clothing, electronics, and services like healthcare and education. I (Investment): This component includes spending by businesses on capital Components of Aggregate goods like machinery, equipment, and Demand infrastructure. Investment represents the expenditure aimed at increasing or maintaining the productive capacity of the economy. G   (Government Expenditure): G represents government spending on public goods and services, such as defense, education, healthcare, and infrastructure. It encompasses all government purchases that contribute to the economy’s total demand. X (Exports): This component refers to the value of goods and services produced within the country and sold to foreign consumers or firms. Exports contribute positively to the country’s total spending. M (Imports): Imports represent the value of goods and services purchased from foreign countries. They are a negative component in the equation because they involve spending on products produced outside the domestic economy.  Aggregate Supply (AS): AS represents the total production capacity of an economy. Aggregate Supply is the money value of all final goods and services available for purchase by an economy during a given period. AS is nothing but the national income. AS = C + S

C = C + MPC * Y or C + b(y) C = Consumption C =   Autonomous consumption (minimum consumption , even when income is zero)

level

of

MPC(b) = Marginal Propensity to consume  Propensity to consume: It is a schedule that shows consumption expenditure at different levels of income in an economy. It encompasses two key components: (i) Average Propensity to Consume (APC): APC denotes the relationship between total consumption (c) and total income (Y) at a specific income level within the economy. = APC

Consumption(C ) C = Income (Y ) Y

(ii) Marginal Propensity to Consume (MPC): The marginal propensity to consume (MPC) is the change in consumption due to a change in income. It can be expressed as: MPC = ΔC / ΔY  Saving function refers to the functional relationship between saving and national income. S = f (y) Equation of Saving function S = - C +MPS.(Y) where, S = Saving Y = National Income f = Functional relationship

Aggregate supply represents the national income of the country.

Saving function (Propensity to Save) is of two types.

AS = Y (National Income)  Consumption function shows functional relationship between consumption and Income.

(i) Average Propensity to Save (APS): Average Propensity to Save (APS) represents the proportion of total income saved, calculated as:

C = f(Y)

APS = S / Y

30 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

31

DETERMINATION OF INCOME AND EMPLOYMENT

(ii) Marginal propensity to Save (MPS): Marginal Propensity to Save (MPS) indicates the change in savings resulting from a change in income, calculated as: MPS = ΔS / ΔY  Determining Equilibrium Income: The equilibrium level of income is found when Aggregate Demand (AD) equals Aggregate Supply (AS) or when Savings (S) equals Investment (I), signifying a balance between the economy’s production and demand for goods and services. This equilibrium does not always guarantee full employment. It can occur at levels below full employment.

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Determination of Income and Employment

Aggegate Demand (AD)

Equilibrium (AD = AS) AD (or C + 1) Equilibrium level of income X

Income/Output/ Employment

Aggregate Demand (AD)

(ii) S-I Approach

Supply/Investment

O

Equilibrium (AD = AS) E

• Change in Public Borrowing: Adjusting government borrowing from the central bank affects the money supply and, subsequently, demand. Reducing public borrowing helps control inflation by limiting the money supply. • Deficit Financing (Printing New Notes): While used cautiously, printing new currency (deficit financing) can be employed to boost demand during a recession or deficient demand situation by increasing the money supply. (2) Monetary Measures or Monetary Policy: (i) Quantitative Measures:

S S

E O

Excess and Deficient Demand

• Change in Tax: Adjusting taxes can influence overall demand. Cutting taxes increases disposable income, encouraging consumer spending, and business investments. Raising taxes can reduce spending to control excess demand.

AD (or C + 1)

Y

Equilibrium (S = I)

 Methods to control excess demand or deficient demand:

Y (or AS)

45° Y

(ii) Deficient Demand: Occurs when AD < AS, leading to unemployment.

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• Change in Public Expenditure: Altering government spending can impact aggregate demand. Increasing public expenditure can stimulate demand, while reducing it can cool down an overheated economy.

Y

45°

(i) Excess Demand: Occurs when AD > AS, leading to inflation.

(1) Fiscal Measures or Fiscal Policy:

(i) AD-AS Approach

E

 Problems of Excess and Deficient Demand

I X

Income/Output/Employment Y'

 Full Employment: Full employment denotes a condition in which all individuals who are capable and willing to work at the current wage rate have opportunities for employment. Voluntary Unemployment: Voluntary unemployment occurs when a person is capable of working but is unwilling to do so at the prevailing wage rate.  Involuntary Unemployment: Involuntary unemployment arises when a worker is both capable and willing to work at the prevailing wage rate but is unable to find employment.  Underemployment: Underemployment characterises a situation in the economy where AS equals AD or S equals I, but the workforce is not fully utilised at existing wage rates. It indicates a condition where not all available labor resources are effectively employed.

• Bank Rate: Raising the central bank’s lending rate (bank rate) can increase interest rates and reduce borrowing, effectively controlling excessive demand. • Cash Reserve Ratio: Increasing the reserve requirement for banks reduces their lending capacity, which can be used to manage demand. • Statutory Liquidity Ratio: Raising the proportion of assets that banks must hold in the form of government securities can limit lending. • Open Market Operation: Central banks can use open market operations to buy or sell government securities, affecting the money supply and interest rates. (ii) Qualitative/Selective Measures: • Marginal Requirement: Establishing minimum down payments for consumer loans can influence borrowing behavior. • Credit Rationing: Imposing limits on the amount of credit that banks can extend controls borrowing and spending. • Direct Action: Intervention in the credit market or industry-specific regulations can be used to manage overall demand. • Moral Suasion: Central banks may use persuasion to encourage specific lending practices.

32 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

OBJECTIVE TYPE QUESTIONS 1. A country’s consumption function is described as C = 500 + 0.7Y, the autonomous consumption will be: [CUET 2023] (1) 350 (2) 500 (3) 3,500 (4) 350 2. C = 40 + 0.8Y and I = 10, then what will be the equilibrium level of income? [CUET 2023] (1) 300 (2) – 250 (3) 300 (4) 250 3. If C= x+0.6Y and Investment is ₹1,500. Equilibrium level of income in economy would be 4050, then find out the autonomous consumption. [CUET 2023] (1) – 120 (2) 100 (3) 120 (4) – 100 4.  In case of an unexpected fall in turnover of a firm, that is producing a certain commodity, there will be a situation of .......... [CUET 2023] (1) Planned accumulation of inventories (2) Unplanned accumulation of inventories (3) Unplanned decumulation of inventories (4) Planned decumulation of inventories 5. Identify the symbol that is used to denote autonomous consumption. [CUET 2023] (1) C̅ (2) C (3) DC (4) MPC 6.  Excess demand is a situation in which, [CUET 2022] (1) AD > AS at full employment level (2) AD < AS at full employment level (3) AD > AS at under-employment level (4) AD < AS at underemployment level 7.  A ............. function describes the functional relationship between consumption and income. [CUET 2022] (1) Income (2) Production (3) Consumption (4) Cost 8. Identify the correct sequence relating to equilibrium in an economy: [CUET 2022] (A) Inventories in hand with the producers start falling. (B) This process continued till aggregate demand becomes equal to aggregate supply. (C) When planned demand exceeds planned output. (D) Producers will plan to raise production and employment. (E) It means buyers are planning to buy more goods and services than producers are planning to produce. Choose the correct answer from the options given below: (1) A, B, C, D, E (2) E, D, C, B, A (3) C, E, A, D, B (4) C, B, A, E, D 9. Match the List I with List II List I

List II

A. Marginal propensity to consume

I.

C Y

B.

Marginal propensity to save

II.

∆C ∆Y

C.

Average propensity to save

III.

S Y

∆S ∆Y Choose the correct answer from the options given below: (1) A-I, B-11, C-III, D-IV (2) A-IV, B-III, C-II,D-I (3) A-III, B-II, C-IV, D-I (4) A-II, B-IV C-III,D-I D. Average propensity to consume

IV.

10.  If the consumption function is C = 300 + 0.6Y, then the savings function will be [CUET 2022] (1) (1) S = 300 – 0.6Y (2) S = (–) 300 + 0.6Y (3) S = (–) 300 + 0.4Y (4) S = 300 – 0.4Y 11.  If the marginal propensity to save (MPS) is 0.5 and the initial change in investment is Rs. 250 crore, then the final change in income is: [CUET 2022] (1) ₹125 crore (2) ₹1,250 crore (3) ₹600 crore (4) ₹500 crore 12. Which situation of the economy is reflected here? Y

Aggregate Demand (AD)

[A] MULTIPLE CHOICE QUESTIONS

S R M 45°

O

(1) (2) (3) (4)

AD (or C + 1)

K

X N Y T Income/Outout/Employment

Underemployment equilibrium Over Employment Voluntary unemployment Full employment equilibrium

13. If the marginal propensity to consume (MPC) is 0.8, what is the marginal propensity to save (MPS)? (1) 0.8 (2) 0.2 (3) 1.0 (4) 0.5 14. If aggregate demand is greater than aggregate supply, what kind of problem does the economy face? (1) Excess demand

(2) Deficient demand

(3) Cyclical unemployment

(4) Stagflation

15.  Which of the following statements is incorrect concerning underemployment equilibrium? (1) Aggregate supply is equal to aggregate demand. (2) Resources are fully utilised in an efficient manner. (3) Resources are not fully utilised in an efficient manner. (4) There is an existence of excessive production capacity in the economy. 16. The aggregate demand function depicts a connection between the level of output, employment, and the aggregate demand price that is best described as: (1) Positive

(2) negative

(3) Constant

(4) Non-linear

17. In a two-sector economy, which of the following is not a part of aggregate demand? (1) Consumption (2) Government spending (3) Net exports (4) Both (2) and (3) 18. If the value of Average Propensity to Consume (APC) is 0.6 and National Income is ₹3,600 crores, the value of savings will be __________. (1) ₹6,000 crores (3) ₹5,000 crores

(2) ₹2,400 crores (4) ₹1,600 crores

33

DETERMINATION OF INCOME AND EMPLOYMENT

19.  If the marginal propensity to consume is greater than marginal propensity to save, the value of the multiplier will be: (1) greater than 2 (2) less than 2 (3) equal to 2 (4) equal to 5 20. If MPS = 0.20, Autonomous Consumption = ₹100 crores and Investment = ₹200 crores, then Equilibrium Income will be: (1) ₹1,500 crore (2) ₹1,000 crore (3) ₹3,000 crore (4) ₹1,450 crore

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): Full employment means zero unemployment.  Reason (R): Even in the situation of full employment, natural rate of unemployment always exists in the economy. 2.  Assertion (A): Excess demand raises the market value of output.  Reason (R): Higher demand than supply leads to a decrease in the general price level. 3.  Assertion (A): The economy fails to create enough jobs under involuntary unemployment.  Reason (R): Planned output is lower than the full employment level of output. 4. Assertion (A): The Government increases taxes in order to correct the problem of Excess Demand.  Reason (R): When taxes are increased it reduces the purchasing power of the public, thus reducing the Aggregate Demand. 5. Assertion (A): Saving curve makes a negative intercept on the vertical axis at zero level of income.  Reason (R): Saving function refers to the functional relationship between saving and income. 6. Assertion (A): There is an inverse relationship between the value of marginal propensity to save and investment multiplier.  Reason (R): Saving is a leakage in the circular flow of income. Greater the saving, greater the leakage and lower the value of investment multiplier. 7. Assertion (A): The maximum value of investment multiplier is equal to infinity.  Reason (R): The maximum value of investment multiplier is ∞, when MPC is 1, i.e., whole additional income is converted into additional consumption. 8. Assertion (A): The value of APC can be greater than one.  Reason (R): Total consumption can be greater than the total income.

9. Assertion (A): Saving and investment are always equal.  Reason (R): Planned S and Planned I are equal only at equilibrium level. 10. Assertion (A): The minimum value of investment multiplier is equal to one.  Reason (R): The minimum value of investment multiplier is 1, when MPC is 0 and MPC can never be negative.

[C] CASE BASED QUESTIONS I.  Read the following news report and answer the questions that follow on the basis of the same: New Delhi: The Indian economy will suffer its deepest contraction on record this fiscal year and recent government stimulus does not go far enough to significantly boost activity depressed by the corona virus pandemic, according to economists polled by Reuters. With over 7.6 million corona virus infections, India is the second worst hit country in the world after the United States and the spread shows no signs of abating. While the government has removed most restrictions imposed on businesses to slow the spread of the virus, the Reserve Bank of India issued gloomy economic forecasts earlier this month but kept interest rates unchanged citing rising inflation. – “Indian economy set for a near double-digit contraction this fiscal” – The Economic Times – October 22nd, 2020 1. According to the economists polled by Reuters, what is the expected outcome for the Indian economy in the current fiscal year? (1) A significant boost in economic activity. (2) The economy will be largely unaffected by the pandemic. (3) The deepest contraction on record. (4) A substantial decrease in inflation. 2. Why has the government given a stimulus package? (1) To increase the Aggregate Demand. (2) To increase the Aggregate Supply. (3) To increase the GDP of the economy. (4) To gain votes in the election. 3. What has the government done to slow down the spread of corona virus? (1) Increased the government spending. (2) Increased the taxes. (3) Imposed the restriction on businesses. (4) Done nothing at all. 4. What is the main reason for the central bank to not increase the interest rates? (1) Curbing Inflation (2) Curbing Deflation (3) Controlling the Economy (4) Relying more on Fiscal Policy 5. What is the situation faced by the economy in the current Covid-19 situation? (1) Excess Demand

(2) Deficient Demand

(3) Aggregate Demand

(4) Aggregate Supply

34 Oswaal CUET (UG) Chapterwise Question Bank II.  Read the following news report and answer the questions that follow on the basis of the same: The Reserve Bank of India (RBI) cut Repo Rate to 4.4%, the lowest in atleast 15 years. Also, it reduced the Cash Reserve Ratio (CRR) maintained by the banks for the first time in over seven years. CRR for all banks was cut by 100 basic points to release ` 1.37 lakh crores across the banking system. RBI governor Dr. Shaktikanta Das predicted a big global recession and said India will not be immune. It all depends how India responds to the situation. Aggregate demand may weaken and ease core inflation. – The Economic Times; March 27th, 2020 6. Cut in Repo rate by RBI is likely to ____________ the demand for goods and services in the economy. (1) Increase (2) Decrease (3) Either (1) or (2) (4) Neither (1) nor (2) 7. Decrease in Cash Reserve Ratio will lead to __________. (1) fall in Aggregate Demand. (2) rise in Aggregate Demand. (3) no change in Aggregate Demand. (4) fall in general price level. 8. The difference by which actual Aggregate Demand exceeds the Aggregate Demand, required to establish full employment equilibrium is known as ______________.

ECONOMICS

(1) Inflationary gap (2) Deflationary gap (3) Either (1) or (2) (4) Neither (1) nor (2) 9. The impact of ‘Excess Demand’ under Keynesian theory of income and employment, in an economy are: (1) decrease in income, output, employment and general price level. (2) decrease in nominal income, but no change in real output. (3) increase in income, output, employment and general price level. (4) no change in output/employment but increase in general price level. 10. According to the RBI governor, what potential economic challenges did he anticipate for India, and what was his perspective on how India might respond to these challenges? (1) He anticipated a surplus in government revenue and expected a rise in inflation. (2) He expected a significant decrease in global recession but believed India would remain immune. (3) He predicted a potential global recession and suggested that India’s response would be crucial. (4) He foresaw a substantial increase in international trade and a boost in India’s economic growth.

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (2)

2. (4)

3. (3)

4. (2)

5. (1)

6. (1)

7. (3)

8. (3)

9. (4)

10. (3)

11. (4)

12. (4)

13. (2)

14. (1)

15. (2)

16. (1)

17. (4)

18. (2)

19. (1)

20. (1)

8. (1)

9. (4)

10. (1)

8. (1)

9. (4)

10. (3)

[B] ASSERTION & REASON 1. (4)

2. (3)

3. (1)

4. (1)

5. (2)

6. (1)

7. (1)

[C] CASE BASED QUESTIONS 1. (3)

2. (1)

3. (3)

4. (1)

5. (2)

6. (1)

7. (2)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (2) is correct. Explanation: C = c + bY Where, C = Consumption c = Autonomous consumption bY = Induced Consumption The autonomous consumption in a consumption function represents the level of consumption that occurs when income (Y) is zero. In the given consumption function, C = 500 + 0.7Y, the autonomous consumption is the constant term, which is 500. 2. Option (4) is correct. Explanation: Y=C+I Y = 40 + 0.8Y + 10

Y = 50 + 0.8Y 0.2Y = 50 Y = 50/0.2 = 250 3. Option (3) is correct. Explanation: Y = C + I 4050 = C + 1,500 C = 2,550 It is given that C = x + 0.6Y C = x + 0.6 x 4,050 2550 = x + 2430 X = ₹120 4. Option (2) is correct. Explanation: When there is an unexpected fall in the turnover of a firm (i.e., the rate at which the firm sells its products), the production of the commodity remains the same as before the

35

DETERMINATION OF INCOME AND EMPLOYMENT

fall in demand. However, due to the reduced demand, the firm is unable to sell its products at the anticipated rate. In such a situation, the firm will face a buildup of unsold products or inventory that it had produced but cannot sell immediately. This accumulation of unsold inventories is unplanned because it was not intended or foreseen by the firm. 5. Option (1) is correct. Explanation: Autonomous consumption is denoted by the symbol ‘c’ or sometimes represented as “ C̅ “. It represents the level of consumption that exists even when income is zero or when there is no disposable income available. Autonomous consumption is independent of income and represents the minimum level of consumption that individuals or households undertake regardless of their income level. 6. Option (1) is correct. Explanation: Excess demand occurs when the total demand for goods and services in an economy (aggregate demand) surpasses the total supply (aggregate supply). This situation can lead to rising prices (inflation) and potentially economic growth, but if persistent, it may cause economic instability due to sustained inflation. 7. Option (3) is correct. Explanation: The consumption function shows the relationship between consumption and the various levels of income. As the income rises, consumption also rises. There is a direct relationship between consumption and income. 8. Option (3) is correct. Explanation: (C) “When planned demand exceeds planned output” - This signifies that there is an initial imbalance between planned demand and planned output in the economy. (E) “It means buyers are planning to buy more goods and services than producers are planning to produce” - This reflects the situation where consumers want more than producers are initially willing to supply. (A) “Inventories in hand with the producers start falling” - As consumers demand more than initially planned, producers begin to draw down their inventories. (D) “Producers will plan to raise production and employment” - In response to falling inventories and increased demand, producers decide to increase production and employment. (B) “This process continued till aggregate demand becomes equal to aggregate supply” - The adjustment process continues until aggregate demand equals aggregate supply, achieving equilibrium. 9. Option (4) is correct. Explanation: Average Propensity to Consume measures the proportion of income spent on consumption. APC =

Total Consumption Total Disposable Income

Marginal Propensity to Save (MPS) measures the increase in savings from a given increase in household income. MPS =

Changes in Savings Changein Disposable Income

The Marginal Propensity to Consume (MPC) measures the increase in household consumption from an increase in household income.

MPC =

Changes inConsumption Changein Disposable Income

Average Propensity to Save (APS) measures the total proportion of income that is saved. APS =

Total savings Total Income

10. Option (3) is correct. Explanation: C = c + bY Savings (S) = Income (Y) – Consumption S=Y–C S = Y – 300 – 0.6Y S = – 300 + Y (1– 0.6) Saving function: (–)300 + 0.4Y 11. Option (4) is correct. Explanation: 1 MPS 1 ∆Y= ` 250 × 0.5 = `500crores ∆Y =∆I ×

12. Option (4) is correct. Explanation: Full employment refers to a situation in which all those people, who are willing and able to work at the existing wage rate, get work without any undue difficulty. 13. Option (2) is correct. Explanation: The sum of the MPC and MPS is always equal to 1. Therefore, if MPC is 0.8, MPS is 0.2. 14. Option (1) is correct. Explanation: When aggregate demand exceeds aggregate supply, the economy faces a problem of “Excess demand.” This situation can lead to inflationary pressures as demand outstrips the available supply of goods and services, potentially causing rising prices. 15. Option (2) is correct. Explanation: Underemployment equilibrium refers to a situation where resources are not fully utilized, leading to unemployment or underemployment. In this scenario, there is a gap between aggregate demand and aggregate supply, resulting in less than full utilization of resources. 16. Option (1) is correct. Explanation: A positive relationship means that as the level of output and employment increases, so does the aggregate demand price. In other words, when more goods and services are produced and more people are employed, there is typically an increase in overall demand for those goods and services. This relationship is fundamental in macroeconomics, where economic growth and higher employment tend to lead to higher demand for goods and services. 17. Option (4) is correct. Explanation: In a two-sector economy, aggregate demand (AD) comprises the total demand for goods and services generated by two sectors: households (consumption) and

36 Oswaal CUET (UG) Chapterwise Question Bank businesses (investment). Government expenditure and net exports are not included in a two-sector economy since it does not account for government activity or international trade. 18. Option (2) is correct. Explanation:

APC = C/Y



0.6 = C/3,600



C = ₹6,000



S =Y–C

= ₹6,000 - ₹3,600 = ₹2,400 crore 19. Option (1) is correct. Explanation: A higher MPC indeed signifies that a larger proportion of additional income is spent, resulting in a larger multiplier. This, in turn, demonstrates how a small initial change in investment or government spending can have a magnified impact on aggregate demand and national income. 20. Option (1) is correct. Explanation: If MPS = 0.20 , then MPC = 1- MPS = 1- 0.20 = 0.80 So, Consumption function is C = 100+ 0.80 Y where Y is the income in the economy. At the equilibrium level of income, AS = AD Y=C+I ⇒ Y = 100 + 0.80 Y + 200 ⇒ Y − 0.80 Y = 100 + 200 ⇒ 0.20 Y = 300 ⇒ Y = 300/ 0.20 = ₹ 1,500 crores

[B] ASSERTION & REASON 1. Option (4) is correct. Explanation: Full employment does not mean zero unemployment because even then some structural and frictional unemployment do exist. 2. Option (3) is correct. Explanation: When demand is greater than supply, then it leads to rise in general price level. 3. Option (1) is correct Explanation: In a full employment scenario, all available labor resources are being effectively utilized, and there is no involuntary unemployment. However, when planned output is below this full employment level, there is insufficient demand for labor, resulting in a shortage of jobs and involuntary unemployment. 4. Option (1) is correct. Explanation: During inflation, the government should raise rates of all taxes, especially on rich people because taxation withdraws purchasing power from the taxpayers and to that extent reduces effective demand. 5. Option (2) is correct. Explanation: Saving is measured on Y–axis and income on X– axis, S-line represent saving function, indicating the behavior of S with respect to Y. The functional relationship between S and Y is called saving function.

ECONOMICS

6. Option (1) is correct. Explanation: Higher the MPS, lower the multiplier and lower the MPS, higher the multiplier, as K = 1/MPS 7. Option (1) is correct. Explanation: K=

1 1 − MPC

=

1 1−1

=

1 = ∞ 0

8. Option (1) is correct. Explanation: The value of Average Propensity to Consume can be greater than one, as due to the existence of autonomous consumption, the total consumption can be greater than the total income in the economy. 9. Option (4) is correct. Explanation: Saving (S) and Investment (I) can be realised (ex-post) and planned (ex-ante). Planned S and Planned I are equal only at equilibrium level. Realised S and Realised I are always equal. 10. Option (1) is correct. Explanation: 1 K= 1 − MPC =

1 = 1 1− 0

[C] CASE BASED QUESTIONS 1. Option (3) is correct Explanation: According to the passage, economists polled by Reuters expect the Indian economy to suffer its deepest contraction on record in the current fiscal year due to the impact of the corona-virus pandemic. This contraction implies a significant decline in economic activity. 2. Option (1) is correct Explanation: Due to Covid, income level decreased, resulting decreased Aggregate Demand. 3. Option (3) is correct. Explanation: To slow down the spread of the corona-virus, the government imposed restrictions on businesses. These restrictions included lockdowns, social distancing measures, and other regulations to limit economic and social activities to prevent the spread of the virus. 4.  Option (1) is correct. Explanation: The central bank did not increase interest rates primarily to curb inflation. Despite the economic challenges posed by the pandemic, the central bank was concerned about rising inflation, and therefore, it decided to keep interest rates unchanged. Increasing interest rates would have been a tool to control inflation but could have further hampered economic recovery. 5. Option (2) is correct. Explanation: When aggregate demand is less than Aggregate Supply at full employment level, there is deficient demand in the economy.

DETERMINATION OF INCOME AND EMPLOYMENT

6.  Option (1) is correct. Explanation: To correct the situation of deficient demand RBI will reduce repo rate. Banks in turn will reduce lending rate of interest, so there will be more demand for loans. This will increase money supply and correct the situation of deficient demand. 7. Option (2) is correct. Explanation: To correct the situation of deficient demand RBI will reduce cash reserve ratio. Banks inturn will have more money to lend. This will increase money supply and correct the situation of deficient demand. 8. Option (1) is correct Explanation: An inflationary gap occurs when actual aggregate demand exceeds the level needed for full employment equilibrium, leading to upward pressure on prices and inflation.

37 It’s a situation where demand is excessive, contributing to inflationary pressures. 9. Option (4) is correct. Explanation: Excess demand leads to rise in prices in the economy and hence it does not lead to change in output or employment in the economy. 10. Option (3) is correct. Explanation: Dr. Shaktikanta Das, foresaw a potential global recession. This means that he expected economic challenges not only for India but on a global scale. His perspective was that India’s response to this potential recession would be vital. In other words, he believed that India needed to take specific measures and actions to navigate and mitigate the impact of the global economic challenges.

Study Time

CHAPTER

5

Max. Time: 1:25 Hours Max. Questions: 40

MONEY AND BANKING

 Revision notes  Money: Money is anything which is generally used as a medium of exchange, measure of value, Scan to know store of value and means of standard more about deferred of payment. this topic  Evolution of money: Money has evolved from barter systems to various forms, including commodity money (e.g., gold), fiat money (government-issued Introduction to Money currency), and digital currencies (e.g., crypto currencies like Bitcoin). Animal Money: In the earliest stage, people used animals such as cows and sheep as a medium of exchange. These animals had intrinsic value and were traded in exchange for goods and services. Commodity Money: As society progressed, commodities like rice, wheat, and cotton were used as a medium of exchange. These items held value and were widely accepted for trade. Metallic Money: The use of metals like gold, silver, and brass as money marked another stage of evolution. These metals were durable, divisible, and widely accepted for trade. Paper Money: The introduction of currency notes and coins became a more convenient form of money. These paper and metal representations of value were easier to carry and use for trade. Credit/Bank/Near Money: The development of financial institutions led to the use of cheques, drafts, bills of exchange, and bonds as a form of money. These instruments represented promises of payment and were used in financial transactions. Plastic Money: In the modern era, the use of credit and debit cards, often made of plastic, has become a common form of money. These cards enable electronic transactions and are widely used for purchases and payments.  Barter Exchange System: It implies the direct exchange of goods for goods without the use of money.

3. Impossibility of Subdivision of Goods: Some goods can’t be easily divided, which poses challenges when trading. For example, it’s not practical to split a cow for exchange. 4. Lack of Information: Participants may not have complete information about the availability of goods and the preferences of potential trading partners, making transactions less efficient. 5. Production of Large and Costly Goods Not Feasible: Some goods, like large machinery or costly equipment, may be challenging to produce or trade under a barter system due to the logistical and economic constraints.  Functions of Money: (1) Primary Functions: Medium of Exchange: Money serves as a widely accepted medium for facilitating the exchange of goods and services, making transactions more efficient.



Scan to know more about this topic

Functions of Common Measure of Value: Money Money provides a standard unit of value, enabling individuals to compare the worth of various goods and services.



(2) Secondary Functions:  Standard of Deferred Payment: Money allows for agreements to make future payments, creating a standard for contractual obligations.

 Store of Value: Money can be saved or stored for future use, preserving value over time.

 Transfer of Value: Money enables the transfer of value across time and space, making it possible to trade with individuals or entities not physically present.

(3) Contingent Functions:  Basis of Credit: Money forms the foundation for credit systems, where individuals or organizations can borrow and lend money.

 Liquidity: Money is highly liquid, easily convertible into goods and services, providing financial flexibility.

The five main difficulties found in barter system are as follows:



1. Double Coincidence of Wants: Barter requires both parties to have goods that the other desires, leading to the challenge of finding matches where both parties’ needs align.



2. Lack of a Standard Unit of Account: In a barter system, there’s no common unit of value or measure, making it difficult to compare the relative worth of different goods.



 Basis of Price Mechanism: Money facilitates the determination of prices in a market economy, allowing for efficient allocation of resources.  Maximum Profit to Producers: Money serves as a motivator for producers, who aim to maximize their profits by selling goods and services for currency.

• • • • • • • •

Credit Control Tools Bank Rate Cash Reserve Ratio Statutory Liquidity Ratio Repo Rate Reverse Repo Rate Open Market Operations Margin requirement

Credit Control Tools

Evolution of Money

Functions of Money

and Bank y e ing on M

Central Bank

Money creation by Commercial Banking System

Credit creation by Commercial banks =1/Reserve Ratio× Initial deposits

 Custodian of Foreign Exchange

 Control of Credit

 Government's Banker



First Level

Second Level

Trace the Mind Map

Plastic Money

Credit Money

Paper Money

Metallic Money

Third Level

Commodity Money

 Medium of exchange  Value of measurement/unit of account  Acts as a store of value  Standard of deferred payments



 Banker's Bank



 Issues currency on behalf of the Indian government

MONEY AND BANKING

39

40 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

 Maximum Satisfaction to Consumers: Consumers use money to obtain goods and services, seeking to maximize their satisfaction and utility.

 Custodian of Foreign Exchange:

 Basis of Distribution of Income: Money is essential in income distribution, as wages, salaries, and other income are typically received in the form of money.

 It oversees all foreign currency receipts and payments and

 Money Supply:

 Controller of Credit:





It refers to the total stock of money held by public at a particular point of time in an economy. It is a stock concept because it is measured at a particular point of time. MEASURES OF MONEY SUPPLY.  1= Currency and coins with public + Demand deposits with M commercial banks + Other deposits with RBI M2 = M1 + Savings deposit with Post office saving bank M3 = M1 + Net time deposits with banks. M4 = M3 + Total deposits with post office saving bank  Central Banks: A central bank is a financial institution that serves as the country’s main regulatory Scan to know authority for its monetary and financial more about this topic system. Central banks play a pivotal role in managing a nation’s money supply, controlling inflation, ensuring the stability of the financial system, and often acting as Central Bank the government’s bank.

 The

central bank manages a country’s foreign exchange reserves.

conducts foreign exchange operations to stabilise exchange rates. As a credit controller, the central bank influences the money supply and liquidity in the economy. 

It can raise interest rates to reduce money supply and control inflation, or lower rates to stimulate economic growth. 

 Commercial Banks: Commercial banks play a crucial role in the financial system by accepting Scan to know deposits from individuals and businesses more about this topic and by also providing loans and various financial services to promote economic growth and profitability. 

Primary Functions



1. Advancing Loans



2. Discounting Bills of Exchange

Commercial Banks

 Secondary Functions: Agency Function: 1. Transfer of Funds

 Functions:

2. Collection of Funds

 Bank of Issue:

3. Purchase and Sale of Shares and Securities

The central bank, such as the Reserve Bank of India (RBI), has the exclusive authority to issue currency in a country.

4. Collection of Dividends and Interest

RBI maintains reserves, including gold and foreign securities, to back the currency it issues, ensuring the stability and credibility of the monetary system.

6. Acting as Executors and Trustees





 Banker to the Government: The central bank serves as the government’s banker, facilitating various financial transactions on behalf of the government. 

It manages government securities, conducts debt management, and advises the government on financial matters. 

 Banker’s Bank and Supervisory Role:  The

central bank acts as the “banker’s bank” by holding a portion of commercial banks’ cash reserves.  Commercial banks are required to deposit a certain percentage of their deposits as a Cash Reserve Ratio (CRR) with the central bank.  The central bank supervises, regulates, and controls commercial banks to maintain the stability and integrity of the financial system.  Lender of Last Resort: In times of financial crisis or liquidity shortages, the central bank serves as the lender of last resort to commercial banks. 

It provides short-term credit to banks against approved securities, helping them maintain solvency and stability. 

5. Payment of Bills and Insurance Premiums 7. Acting as Correspondents and Providing Letters of Credit General Utility Function: 1. Purchase and Sale of Foreign Exchange 2. Issuance of Travelers’ Checks 3. Safe Custody of Valuables 4. Underwriting of Securities  Credit creation/ Money Multiplier: The capacity of commercial banks to create credit depends on two factors: - Primary deposits and LRR. The deposits of households and firms held by a bank are called Primary deposits. LRR- Legal Reserve Ratio, it is the fraction of deposits of commercial banks which is legally compulsory for the commercial bank to keep in the form of cash (CRR) and liquid assets (SLR) as reserves.  Money multiplier= 1/Legal reserve ratio.  Process of Credit Creation: - Let us assume primary deposit is equal to 1000. Banks know from their experience that all depositors do not demand all the money at the same time, only some portion of it may be demanded at any time. Suppose bank decides to keep 10% as cash reserves of their deposits.

41

MONEY AND BANKING

Then remaining can be given as loan. So, now bank can give remaining 900 as a loan to the public. Bank never offers loan in cash, rather banks open the account of the borrower and this loan money is deposited in their account. The amount which is given as loan is known as secondary deposit. Further again bank will keep 10% of 900 with them and excess can be given as loan and this process will go on. Total credit creation= Primary deposit × 1/LRR. Deposits Creation By Commercial Banks Deposits (₹)

Loans (₹)

Cash Reserves (LRR=0.1) (₹)

Initial

1000

900

100

Round I

900

810

90

Round II

810

729

81

____

___

___

____

____

___

___

____

____

___

___

____

Total

10,000

9,000

1,000

The total money creation is thus, Money creation = Initial deposit ×  Monetary policy instruments

1 = 10,000 LRR

Bank Rate: - It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. Cash Reserve Ratio: - It refers to the minimum percentage of bank’s total deposit that a commercial bank has to keep with RBI in the form of cash. Statutory Liquidity Ratio: - It refers to the percentage of bank’s total deposits that a commercial bank has to keep with itself in the form of liquid assets Open Market Operation: - Open Market Operation refers to sale and purchase of the government securities by RBI in the open market on behalf of the government. Repurchasing Option Rate: - The interest rate at which RBI lends money to commercial banks for short run is called Repo rate.

It can also be explained with the help of the following formula:

Reverse Repurchasing Option Rate: - It is the rate at which commercial banks can deposit their excess funds with RBI or central bank.

1 1 = = 10 LRR 0.1

Margin Requirement: - It refers to the difference between the value of asset which is mortgage and amount of loan.

Money Multiplier =

OBJECTIVE TYPE QUESTIONS [CUET 2022]

(3) C  urrency held by the public and demand deposits with commercial banks. (4) Currency held in the government account. 4.  Value of money multiplier ……………… with an increase in Cash Reserve Ratio. (1) increases (2) decreases (3) remains unchanged (4) none of these

[A] MULTIPLE CHOICE QUESTIONS 1.  Match the List I with List II List -I

List -II

(A) CRR

(I)

Buying and selling of government securities by RBI from/to the public and commercial banks

(B) SLR

(II)

Percentage of deposits which a bank must keep as a reserve with RBI

(C) Repo rate

(III)

Rate at which RBI lends money to commercial banks to meet their short-term needs

(D) Open (IV) market operations

Percentage of deposits which a bank must keep as reserves in liquid form with itself

(1) A-I, B-II, C-III, D-IV (2) A-II, B-IV, C-I, D-III (3) A-II, B-IV, C-III, D-I (4) A-IV, B-II, C-III, D-I 2.  Which of the following components is not included in M1 measure of money supply? [CUET 2022] (1) Currency and coins held by public (2) Demand deposits of public (3) Inter bank deposits of commercial banks (4) Other deposits of banks 3.  Supply of money refers to ___________. (1) Currency held by the public (2) Currency held by Reserve Bank of India (RBI).

5.  If the total deposits created by commercial banks are ₹ 10,000 and the LRR is 20%, what will be the initial deposit? (1) ₹ 4,000 (2) ₹ 3,000 (3) ₹ 2,000 (4) ₹ 5,000 6.  “The Federal Reserve Raises Interest Rates to Combat Inflation.” What is the primary function of central banks like the Federal Reserve when they raise interest rates? (1) To stimulate economic growth (2) To combat inflation (3) To encourage borrowing (4) To decrease the money supply 7. What is depicted in the image?

42 Oswaal CUET (UG) Chapterwise Question Bank (1) Monetary system (3) Gold Exchange system

(2) Barter system (4) None of these

8. “Commercial Banks Cut Interest Rates on Home Loans.” How do commercial banks affect the economy when they cut interest rates on home loans? (1) Encourage saving (2) Discourage borrowing (3) Stimulate housing market activity (4) Increase inflation 9. Which form of money is depicted in the image?

(1) Coins (2) Paper currency (3) Plastic currency (4) All of these 10. M4 = _________+ Total deposits with the Post Office Saving Organization (excluding National Saving Certificate). (1) M1 (2) M2 (3) M3 (4) None of these 11. Identify the correctly matched pair of items in Column A to those in Column B:

ECONOMICS

16. If the total deposits created by commercial banks is ₹ 10,000 crores and legal reserve requirements is 10%, the amount of initial deposits will be _________. (1) ₹ 1,000 crores (2) ₹ 2,000 crores (3) ₹ 5,000 crores (4) ₹ 9,000 crores 17. A bank ‘run’ occurs when a large number of customers of a bank withdraw their deposits simultaneously. This can cause a bank to become insolvent if they cannot pay back all the depositors. Which of the following facts about a bank make a bank run impossible? (1)  Banks hold only about 15 per cent of their deposits as cash. The rest of the deposits are given out as loans. (2) Banks have to pay a specific amount to the person in whose name a cheque has been issued. (3) Banks charge a higher interest rate on loans than what they offer on deposits. (4)  Banks pay an amount to account holders as interest on deposits. 18. There are two statements given below, about the effect of a rise in the general price level of an economy. P: It will lead to a rise in the value of money. Q: It will lead to a rise in the demand for money. Which of these is/are true? (1) Only P (2) Only Q (3) Both P and Q (4) Neither P nor Q 19. Given CRR = 4% and SLR = 16%, the value of the money multiplier is: (1) 5 (2) 25 (3) 8.33 (4) 6.25

(1)

Money Multiplier

(a)

Discount rate

(2)

Commercial Bank

(b)

1/1-LRR

20. Identify the institution that accepts deposits, makes loans, and makes investments with the intent of profiting. (1) Central Bank (2) Commercial Bank (3) Neither 1 nor 2 (4) Both 1 and 2

(3)

Central Bank

(c)

Credit Control

[B] ASSERTION & REASON

(4)

Bank rate

(d)

Supply of Money

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): BANK OF BARODA is a commercial bank.  Reason (R): It accepts deposits and grants loan from general public. 2.  Assertion (A): RBI is known as issuing authority.   Reason (R): It has the monopoly power of issuing currency. 3.  Assertion (A): Demand Deposits are considered a convenient mode of payment for the execution of even high-value transactions.  Reason (R): Demand Deposits are non-withdraw able and cannot be withdrawn against the issue of cheques and other similar instruments of payment. 4. Assertion (A): Banks use the depositors’ money to lend to their customers, which is termed as loans.

Column A

Column B

(1) 1 – (b, ), 2 – (d), 3 – (c), 4 – (a) (2) 1 – (a), 2 – (d), 3 – (c), 4 – (b) (3) 1 – (b, ), 2 – (d), 3 – (a), 4 – (c) (4) 1 – (b, ), 2 – (c), 3 – (d), 4 – (a) 12. Cut in Repo rate by RBI is likely to ____________ the demand for goods and services in the economy. (1) Increase (2) Decrease (3) Either (1) or (2) (4) Neither (1) nor (2) 13. Bank money is that money which is: (1) Printed by RBI (2) Printed by the government (3) Generated in the form credit creation (4) None of these 14. If reserve ratio is 10% and primary deposit is ₹1,250crores, the total deposit created by commercial banks will be : (1) ₹13,500 crores (2) ₹10,500 crores (3) ₹12,500 crores (4) ₹11,500 crores 15. If an economy is to control recession like most of the EuroZone nations, which of the following can be appropriate? (1) Reserve Bank of India (2) Reducing CRR (3) Both (1) and (2) (4) None of (1) and (2)

MONEY AND BANKING

 Reason (R): Borrowers from various sectors like industry, agriculture, education, and construction avail loans to conduct their economic activities. 5. Assertion (A): Repo Rate is increased to control the money supply.  Reason (R): “Rationing of credit” involves specifying the amount and purpose for which credit is to be given. 6. Assertion (A): The money supply roughly includes both cash and deposits that can be used almost as easily as cash.  Reason (R): Supply of money includes that stock of money which is held by people, other than the suppliers of money. 7. Assertion (A): The credit creation by commercial banks depends on credit multiplier.  Reason (R): Credit creation is inversely to LRR. 8. Assertion (A): Demand Deposits are not a part of money supply.  Reason (R): The amount available in the demand deposit can be used for purchasing goods and services. 9. Assertion (A): Commercial banks do not directly contribute to the increase in the money supply through note issuance.  Reason (R): Commercial banks have note-issuing authority. 10. Assertion (A): Barter system is also known as C- C economy.  Reason (R): Because the goods were exchanged for money.

[C] CASE BASED QUESTIONS I Read the following text and answer the given questions The Reserve Bank of India (RBI) recently imposed a monetary penalty on three banks —₹ 1.50 lakhs on Dr. Ambedkar Nagarik Sahakari Bank Maryadit, ₹ 25,000 on Nagarik Sahakari Bank Maryadit and ₹ 1 lakh on Ravi Commercial bank for violating the provisions of its regulations. The banking regulator has imposed a monetary penalty for contravention of non-compliance with the directions issued to Ravi commercial bank an exposure norms and statutory and other restrictions & KYC. 1.  Which function of central Bank is referred to in the above paragraph. (1) Financial Advisor (2) Supervisor to Banks (3) Banker’s Bank (4) Lender to last resort 2. As a bankers’ bank, what is the role played by RBI? (A) Custodian of cash reserves (B) Maintain Foreign Exchange Reserves (C) Currency Issue (D) Lender of last resort (E) Clearing house Choose the correct answer from the options given below: (1) A, C, D and E only (2) B and C only (3) A only (4) A, D and E only 3. How does RBI act as a supervisor to bank? (1) Banker to government (2) Agent to government (3) Financial advisor to government (4) Inspection & imposing penalty

43 4. If all the deposits, one day come to withdraw all the cash, what would be role played by RBI? (1) Maintaining Foreign Exchange Reserves (2) Lender of last resort (3) Maintaining cash reserves (4) Currency issue 5. Which of the following is a correct statement? (1)  RBI act as banker to commercial banks & Central Bank (2) Central Bank creates credit in economy (3) All financial institutions are banking institutions (4) One rupee note and all coins are issued by the Ministry of Finance II.  Read the following passage and answer the given questions: Money is a fundamental concept in economics, serving as a medium of exchange, a unit of account, and a store of value. It has evolved over the centuries, adapting to the changing needs of societies. In its early forms, money took the shape of commodities such as gold and silver, which had intrinsic value. However, modern economies rely on fiat money, which is currency issued by governments and lacks intrinsic value but is widely accepted as a means of payment. The evolution of money is closely tied to its functions. Firstly, it acts as a medium of exchange, allowing people to trade goods and services without the need for barter. Money also serves as a unit of account, providing a common measure for prices and values. Additionally, it functions as a store of value, enabling individuals to save wealth and use it at a later time. In today’s digital age, money has further evolved with the emergence of crypto currencies like Bitcoin, which operate on blockchain technology and offer decentralized, digital alternatives to traditional fiat currencies. While these crypto currencies are not issued or regulated by central authorities, they are gaining acceptance as a form of money in various sec 6. What are the three primary functions of money mentioned in the passage? (1) Medium of exchange, unit of value, and store of wealth (2)  Medium of exchange, unit of account, and store of value (3) Medium of trade, unit of wealth, and store of assets (4) Medium of exchange, unit of price, and store of goods 7. What is the distinguishing feature of fiat money in modern economies? (1) It has intrinsic value. (2) It is issued by governments. (3) It is made of precious metals. (4) It is not widely accepted. 8. What role does money play in eliminating the need for barter? (1) Store of value (2) Medium of exchange (3) Unit of account (4) Intrinsic value 9. In the passage, what is mentioned as a modern example of money that operates on blockchain technology? (1) Gold coins (2) Silver bars (3) Banknotes (4) Crypto currencies like Bitcoin

44 Oswaal CUET (UG) Chapterwise Question Bank 10. What is the main takeaway from the passage? (1) Money has intrinsic value. (2) Money’s functions have remained unchanged over time.

ECONOMICS

(3) Money has evolved from commodities to fiat currencies and crypto currencies. (4) Money is primarily a store of value.

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (3)

2. (3)

3. (3)

4. (2)

5. (3)

6. (2)

7. (2)

8. (3)

9. (3)

10. (3)

11. (1)

12. (1)

13. (3)

14. (3)

15. (2)

16. (1)

17. (1)

18. (2)

19. (1)

20. (2)

8. (4)

9. (3)

10. (3)

8. (2)

9. (4)

10. (3)

[B] ASSERTION & REASON 1. (1)

2. (1)

3. (3)

4. (1)

5. (2)

6. (1)

7. (1)

[C] CASE BASED QUESTIONS 1. (2)

2. (4)

3. (4)

4. (2)

5. (4)

6. (2)

7. (2)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (3) is correct. Explanation: Repo rate is the rate at which commercial bank borrow money from the central bank for short period by selling their financial securities to the central bank. Open market operations refer to the policy of sale and purchase of government securities in the open market by the central bank. Cash Reserve Ratio refers to the minimum percentage of a bank’s total deposits, which it is required to keep with the central bank. Commercial banks have to keep with the central bank a certain percentage of their deposits in the form of cash reserves as a matter of law. Statutory Liquidity Ratio refers to minimum percentage of net total demand and time liabilities; which commercial banks are required to maintain with themselves. 2. Option (3) is correct. Explanation: M1 = Currency (notes and coins) with the public + Demand deposits + other deposits held with the Reserve Bank of India. 3. Option (3) is correct. Explanation: Money supply refers to the total stock of money of all types (currency as well as demand deposits) held by the people of a country at a given point of time. 4. Option (2) is correct. Explanation: When the Cash Reserve Ratio (CRR) increases, it means that banks are required to hold a larger portion of their deposits as reserves, leaving them with less money to lend out. This decrease in the amount of money available for lending reduces the money multiplier, leading to a decrease in the value of the money multiplier. 5. Option (3) is correct. Explanation: Total Credit Created = 1/(Legal Reserve Ratio) × Initial Deposit 10,000 = 1/(0.20) x Initial Deposits Initial Deposits = 10,000 x 0.20 = ₹ 2000

6. Option (2) is correct. Explanation: Central banks raise interest rates to combat inflation by reducing consumer spending and borrowing, which can help cool down an overheated economy. 7. Option (2) is correct. Explanation: Bartering is the exchange of goods and services between two or more parties without the use of money. It is the oldest form of commerce. Individuals and companies barter goods and services between each other based on equivalent estimates of prices and goods. 8. Option (3) is correct. Explanation: When commercial banks lower interest rates on home loans, it often stimulates the housing market as more people are inclined to buy homes due to lower borrowing costs. 9. Option (3) is correct. Explanation: Plastic money is your debit or credit card, although it can also refer to the wire transfers of funds from one bank to another. 10. Option (3) is correct. Explanation: M4 is the widest measure of money supply that the RBI uses. It includes all the aspects of M3 and also includes the savings of the post office banks of the country. It is the least liquid measure among all of them. 11. Option (1) is correct. Explanation: 1. Money Multiplier is associated with the formula (1 - LRR), where LRR represents the Legal Reserve Ratio, and it reflects how much money supply can expand based on reserves held by banks. 2. Commercial Bank relates to the concept of credit control and its role in influencing the supply of money in the economy. 3. Central Bank is linked to the discount rate, which is a tool used by the central bank to control the money supply and credit within the financial system. 4. Bank rate pertains to the rate set by the central bank, which has an impact on the interest rates in the economy, affecting the flow of money and credit.

45

MONEY AND BANKING

12. Option (1) is correct. Explanation: Cut in Repo rate by RBI is likely to Increase the demand for goods and services in the economy. 13. Option (3) is correct. Explanation: The Reserve Bank of India (RBI) prints the currency notes in India. Although the RBI has the power to print currency, the government still has the final say in what denominations are to be circulated. 14. Option (3) is correct. Explanation: Total Deposit Creation = 1/LRR × Intial Deposits 100 /10 × 1,250 = ₹ 12,500 15. Option (2) is correct. Explanation: In order to control recession, the Central Bank has to increase the money supply. Therefore, the correct answer is to reduce the CRR. 16. Option (1) is correct. Explanation: Total Deposit Creation = 1/LRR × Intial Deposits 10,000 = 100 /10 × Intial Deposits Intial Deposits = ₹ 1,000 17. Option (1) is correct. Explanation: Banks are required by the RBI to keep a certain cash deposit with them and the rest is given out as loan. This helps the bank run to not occur so often and the bank always have money to repay its depositors. 18. Option (2) is correct. Explanation: When there is a general price rise in the economy, it will lead to a fall in the value of money and thus, the demand for money will rise as more money will be needed to purchase the same amount of the commodity. 19. Option (1) is correct. Explanation: Money Multiplier corresponds to 1/LRR. LRR is equivalent to SLR plus CRR. Hence Money Multiplier denotes 1/20%. 20. Option (2) is correct. Explanation: Commercial banks accept all types of deposits, advance loans, and invest deposit money in various investment schemes in order to earn profit.

[B] ASSERTION & REASON 1. Option (1) is correct. Explanation: Commercial Banks accept deposits and grant loans to the public. BANK OF BARODA is a commercial bank that deals with the general public. 2. Option (1) is correct. Explanation: The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently, it is in denominations of ₹ 2, 5, 10, 20, 50, 100, 500, and 1,000. 3. Option (3) is correct Explanation: A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time, without advance notice. 4. Option (1) is correct. Explanation: Banks utilize depositors’ money to extend loans to borrowers, and this is an essential function of the banking

system. When individuals or businesses deposit their money in banks, they essentially entrust the bank to keep their funds safe, and, in return, they receive interest on their deposits. Banks, in turn, use a portion of these deposited funds to offer loans to individuals and entities from various sectors, including industry, agriculture, education, and construction, to support their economic activities. These loans often come with interest rates, generating income for the bank. Banks carefully manage the process of lending, assessing the creditworthiness of borrowers and, in many cases, securing collateral to minimize risks. This interplay between depositors, banks, and borrowers is a crucial mechanism in the financial system, facilitating economic growth and development. 5. Option (2) is correct. Explanation: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation. If Central bank increases its bank rate/repo rate, it leads to an increase in interest rate which discourages borrowers for taking a loan. It reduces credit creation power of the commercial bank. Bank rate is increased to control the inflation. 6. Option (1) is correct. Explanation: The money supply is the total amount of money— cash, coins, and balances in bank accounts—in circulation. The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term period. 7. Option (1) is correct. Explanation: Credit creation by commercial banks is indeed dependent on the credit multiplier, which quantifies the expansion of the money supply based on the initial deposit made in the banking system. Furthermore, the Reason (R) correctly states that credit creation is inversely related to the Legal Reserve Ratio (LRR). As the LRR decreases, banks are required to hold fewer reserves, which enables them to lend out more of their deposits, thus increasing the credit multiplier and overall credit creation. 8. Option (4) is correct. Explanation: Demand deposits are usually considered as a part of the narrowly defined money supply, as they can be used, via checks and drafts, as a means of payment for goods and services and to settle debts. The money supply of a country is usually defined to consist of currency plus demand deposits. 9. Option (3) is correct. Explanation: Commercial banks don’t contribute to quantum of money supply in the economy as they do not have noteissuing authority. 10. Option (3) is correct. Explanation: The barter system is also known as a C-C economy as in a barter system, goods are directly exchanged for other goods, and no money is involved (C-C).

[C] CASE BASED QUESTIONS 1. Option (2) is correct. Explanation: The function of the central bank referred to in the paragraph is “Supervisor to Banks.” The Reserve Bank of India (RBI) is penalizing the banks for violating its regulations and non-compliance with its directions, which is a regulatory and supervisory role.

46 Oswaal CUET (UG) Chapterwise Question Bank 2. Option (4) is correct. Explanation: As a bankers’ bank, the role played by RBI includes:  A: Custodian of cash reserves - RBI holds a portion of commercial banks’ cash reserves.  D: Lender of last resort - RBI provides short-term credit to banks in times of financial crisis.  E: Clearing house - RBI facilitates the clearing and settlement of interbank transactions. 3. Option (4) is correct. Explanation: RBI acts as a supervisor to banks by:  Inspecting banks’ operations and compliance with regulations.  Imposing penalties for violations and non-compliance. 4.  Option (2) is correct. Explanation: RBI would provide cash to commercial banks to meet the withdrawal demands of depositors during a crisis. 5. Option (4) is correct. Explanation: Unlike higher denomination currency notes,

ECONOMICS

which are issued by the RBI, one-rupee notes and coins are issued by the Ministry of Finance in India. 6.  Option (2) is correct. Explanation: The passage states that money serves as a medium of exchange, unit of account, and store of value. 7.  Option (2) is correct. Explanation: The passage mentions that fiat money is currency issued by governments. 8. Option (2) is correct Explanation: Money acts as a medium of exchange, allowing people to trade without barter. 9. Option (4) is correct. Explanation: The passage discusses crypto currencies like Bitcoin as modern examples of money. 10. Option (3) is correct. Explanation: The passage discusses the evolution of money from commodities to fiat money and crypto currencies, highlighting its adaptability over time.

Study Time

CHAPTER

6

Max. Time: 1:25 Hours Max. Questions: 40

GOVERNMENT BUDGET AND THE ECONOMY (ii) Capital Expenditure:

 Revision notes  Government Budget: A government budget is a financial plan that outlines the expected government revenue and expenditure for a specific period (usually a fiscal year). It serves as a tool for managing a country’s finance and achieving economic and social objectives.  Components of Government Budget:

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Components of Government Budget

1. Revenue Budget: The Revenue Budget consists of two main components: Revenue Receipts and Revenue Expenditure. (i) Revenue Receipts: Tax Revenue: These are revenues that are generated through taxation, such as income tax, corporation tax, and other taxes imposed on individuals and businesses. Non-Tax Revenue: This includes income from sources other than taxation, like fines, penalties, special assessments, and escheat (reversion of unclaimed property to the state). (ii) Revenue Expenditure: This category encompasses the government spending that neither creates any assets nor reduces the government liabilities. It mainly includes day-to-day operational expenses, such as salaries, subsidies, interest payments, and maintenance costs. 2. Capital Budget:

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Receipts and Expenditures

The Capital Budget comprises Capital Receipts and Capital Expenditures. (i) Capital Receipts: Capital Receipts are funds acquired by the government that either create any liabilities (e.g., repayment of loans) or reduce the assets (e.g., disinvestment of state-owned assets). These receipts are typically non-repetitive and non-routine in nature. Examples of capital receipts include loans taken by the government, disinvestment proceeds from selling the public assets, and grants or aids for capital projects.

Capital Expenditure involves the government spending that results in the creation of physical or financial assets or the reduction of the government liabilities. These expenses are related to long-term investments and development projects. Capital expenditure can include the acquisition of assets like land, machinery, and equipment, as well as loans and advances provided to the state governments for various development purposes.  Objectives of Government Budget: Reallocation of Resources: The government budget aims to effectively distribute financial resources to crucial sectors such as education, healthcare, and infrastructure. By reallocating resources, it ensures that funds are utilized efficiently for the betterment of society and national development.

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Government Budget & the Economy

Redistribution of Activities: This objective seeks to reduce regional disparities by directing investments into underdeveloped areas and industries. It promotes a balanced economic landscape by encouraging economic activities in regions or sectors that may have been historically disadvantaged or overlooked, fostering inclusivity. Stabilizing Economic Activities: The government budget serves as a tool for maintaining economic stability. It allows for adjustments in public expenditure and taxation to counteract inflation during economic booms and stimulate economic activity during downturns, contributing to a more predictable and secure economic environment. Management of Public Enterprises: The budget includes provisions for the efficient operation and financing of stateowned enterprises. This ensures these entities operate effectively, align with public interests, and contribute to the overall welfare of the country, enhancing the quality and accessibility of public services. Economic Growth: The government budget is designed to foster economic growth by allocating funds to critical sectors like infrastructure, technology, and education. These investments enhance productivity, leading to an increase in the overall national output and an improvement in the living standards of the population.

48 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

49

GOVERNMENT BUDGET AND THE ECONOMY

Generation of Employment: In pursuit of this goal, the government budget focuses on job creation. By investing in labor-intensive projects and implementing policies that stimulate economic activity, it seeks to provide opportunities for employment and reduce unemployment rates, ultimately enhancing workforce participation and economic wellbeing.  Plan Expenditure: This classification pertains to expenditures that are a part of a planned development projects. It aims to promote economic growth and development.

certain activities or investments and is willing to incur temporary debt or utilize reserves to cover the shortfall.  Measures of Government Deficit: 1. Revenue Deficit: Definition: A revenue deficit arises when the government’s expenses in revenue expenditure exceed its revenue receipts.



Revenue Deficit = Revenue Expenditure - Revenue Receipts

 Types of Budgets

 Significance: It indicates that, the government relies on savings from other sectors to fund part of its consumption expenditure. Consequently, the government turns to borrowing to meet its daily expenses, as well as funding capital investments like infrastructure. This increased borrowing results in substantial debt and interest payment obligations, leading to reduced spending. As a substantial portion of revenue expenditure constitutes committed expenditure (such as salaries of government employees), it becomes challenging to reduce it, affecting productive capital and welfare expenditure and ultimately resulting in lower economic growth and adverse consequences for the public.

1. Surplus Budget:

2. Fiscal Deficit:

 Non-Plan Expenditure: Non-plan expenditure covers the routine operational expenses that are not directly linked to planned development projects.  Developmental Expenditure: This category includes the government spending that contributes to economic growth, infrastructure development, and the welfare of citizens.  Non-Developmental Expenditure: Non-developmental expenditure includes expenses related to administrative and maintenance activities, which do not directly contribute to a economic development.

A surplus budget is one in which the projected or actual revenues exceed the projected or actual expenses for a specific period, typically a fiscal year.



 Definition: The fiscal deficit represents the difference between the government’s total expenditure and total receipts (excluding borrowing).





It results in a surplus, which is the amount by which income or revenues exceed the total costs or expenditures.

Fiscal Deficit = Total Expenditure - (Revenue Receipts + Non-debt creating capital receipts)



Surplus budgets are often used when an organization or government aims to accumulate funds for future investments, pay off debt, or build financial reserves for unforeseen circumstances. 

2. Balanced Budget: A balanced budget occurs when the projected or actual revenues match the projected or actual expenses for a given period. 

In a balanced budget, there is neither a surplus nor a deficit, and the organization or government’s income covers its expenditures. 

Balanced budgets are often considered a sign of financial responsibility, as they indicate that an entity is living within its means and not accumulating debt. 

3. Deficit Budget: A deficit budget is one in which the projected or actual expenses exceed the projected or actual revenues for a specific period. 

 This budget results in a deficit, which is

the amount by which costs or expenditures exceed income or revenues. 

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Budget Deficit and its Measures

Deficit budgets may be used when an entity needs to finance

 Significance: The fiscal deficit is a critical indicator for evaluating the financial health of the public sector and overall economic stability. It reveals the extent of borrowing required to cover the deficit. When a significant portion of the fiscal deficit is attributed to the revenue deficit, it implies borrowing for consumption rather than investment, potentially impacting an economic stability.

3. Primary Deficit:  Definition: Measuring the primary deficit draws an attention to current fiscal imbalances. It represents the amount of borrowing necessary due to current expenditures exceeding revenues, excluding interest payments.

Gross Primary Deficit = Gross Fiscal Deficit - Net Interest Liabilities  Significance: The primary deficit aids in estimating borrowing requirements resulting from current expenditures exceeding revenue. It excludes interest payments on existing debt. The total borrowing needs of the government also encompass an amount related to an interest payments on old accumulated debt. Net interest liabilities denote the difference between the government interest payments and interest received on domestic lending.

50 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS 1. (1) (3) 2.

Escheat is an example of: [CUET 2023] Capital receipt (2) Revenue receipt Capital expenditure (4) Revenue expenditure Which one is not the objective of the government budget?  [CUET 2023] (1) Reallocation of resources (2) Economic stability (3) Increase in regional disparities (4) Economic growth 3.  From the following data, calculate the Primary Deficit.  [CUET 2023] ₹ (crore) Revenue expenditure 22,250 Capital expenditure 28,000 Revenue receipts 17,750 Capital receipts (net of borrowing) 20,000 Interest payment 5,000 Borrowings 12,500 (1) ₹7,500 (2) ₹12,500 (3) ₹5,000 (4) ₹17,750 4.  Match the following and choose the correct answer: Column I

Column II

A. Direct Tax

I. Sale of shares of public sector undertaking

B. Non-tax

II. Corporate tax

C. Indirect tax

III. Custom duties

D. Capital Receipts

IV. Cash grants-in-aid from the foreign countries  [CUET 2022] (1) A-II, B-IV, C-III, D-I (2) A-IV, B-II, C-III, D-I (3) A-II, B-III, C-IV, D-I (4) A-I, B-IV, C-III, D-II 5.  In a government budget, the revenue deficit is ₹70 crores. If the revenue receipts are ₹140 crores and capital expenditure is ₹240 crores, then how much is the revenue expenditure? (1) ₹210 (2) ₹100 (3) ₹30 (4) ₹170 6.  The interest requirement as per the government budget during a year is ₹2,80,000 crores. If the total borrowing requirements of the government are estimated at ₹5,40,000 crores, then how much is the primary deficit? (1) ₹8,20,000 crores (2) ₹2,60,000 crores (3) ₹2,00,000 crores (4) ₹5,40,000 crores 7.  In a government budget, the primary deficit is ₹24,000 crores and interest payment is ₹14,000 crores. How much is the fiscal deficit? (1) ₹10,000 crores (2) ₹40,000 crores (3) ₹24,000 crores (4) ₹38,000 crores 8. Among the following options, which one of these is a revenue receipt? (1) Loan recovery (2) External grants (3) Disinvestment (4) Borrowings 9. Construction of railway lines is a type of ______________ expenditure.  (1) Capital (2) Revenue (3) Primary (4) All of these

10.  Which one of the following is a combination of direct taxes? (1) Excise duty and Wealth tax (2) Service tax and Income tax (3) Excise duty and Service tax (4) Wealth tax and Income tax 11. Fiscal Deficit equals: (1) Interest payments (2) Borrowings (3) Interest payments less borrowing (4) Borrowings less interest payments 12. Which of the following is a direct tax? (1) Corporation tax (2) Entertainment tax (3) Excise duty (4) Service tax 13. Which one of the following is not a capital expenditure? (1) Loans advanced by the World Bank (2) Construction of school buildings (3) Repayment of loans (4) Purchase of Metro Coaches from Japan 14.  The Government of India has decided to vaccinate the adult population of India (with Covaxin/ Covishield), without any charge. This would be categorised as ___________. (1) revenue nature income (2) capital nature expenditure (3) revenue nature expenditure (4) capital nature income 15. In 2021, the government said that despite the current resource crunch, it has decided to hike its capital expenditure by 34.5%. Which of the following could be a reason for this hike? (1) increasing salaries of the government employees (2) repayment of mounting interests on international loans (3) paying pending pensions to the government employees (4) rapid employment generation through infrastructural projects 16. Which of the following statements is true? (1) Government Borrowings from the World Bank is a Revenue Receipt. (2) A higher fiscal deficit is the result of a higher revenue deficit. (3) The loans taken by the government represent a situation of fiscal deficit. (4) The excess of capital receipts over the revenue receipts is called Revenue deficit. 17. Match the following and choose the correct answer: Column I

Column II

A. Balanced Budget I. Estimated government expenditure > Estimated government receipts B. Surplus Budget

II. Budget expenditure = Budget receipts

C. Capital Budget

III. Estimated government receipts > Estimated government expenditure

D. Deficit Budget

IV. Capital Receipts + Capital Expenditures

51

GOVERNMENT BUDGET AND THE ECONOMY

(1) A-III, B-IV, C-II, D-I (2) A-II, B-III, C-IV, D-I (3) A-II, B-IV, C-III, D-I (4) A-III, B-IV, C-I, D-II 18.  Which of the following is TRUE about revenue receipts?  (1) non-recurring in nature (2) may create corresponding liability (3) do not lead to an increase in liability (4) include loans taken by the government 19.



Which of the following would be the best fit for the above image of deficit budget? (1) Loan (2) Consumption (3) Tax (4) Saving 20. Receipts from Post Office deposits and Kisan Vikas Patras is treated as (1) Capital receipt (2) Revenue receipt (3) Both (1) and (2) (4) None of these

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): The revenue budget impacts the assetliability status of the government.  Reason (R): High capital receipts are often related to the compulsion of borrowing. 2.  Assertion (A): Pension is a revenue expenditure.  Reason (R): Pension does not lead to any type of asset formation. 3.  Assertion (A): A surplus budget means the government is spending more than its revenue.  Reason (R): A surplus budget is typically a sign of financial stability and responsible fiscal management. 4. Assertion (A): The primary deficit is the fiscal deficit minus interest payments.  Reason (R): The primary deficit indicates how much the government is borrowing to fund its non-interest expenses.

5. Assertion (A): A balanced budget implies that a government has no fiscal deficits.  Reason (R): Balanced budgets are a common goal for most of the governments. 6. Assertion (A): Budget shows the monetary policy of the government.  Reason (R): The government budget serves as a blueprint for how the government intends to manage its finances, allocate resources, and achieve various economic and social goals during the budget period. 7. Assertion (A): Revenue deficit is a part of fiscal deficit.  Reason (R): Fiscal Deficit = Revenue Deficit – Capital Expenditure + Non-Debt Creating Capital Receipts 8. Assertion (A): The government budget is the statement showing actual receipts and expenditures of the government during a financial year.  Reason (R): The government budget is presented by the Finance Minister of India. 9. Assertion (A): Expenditure on Ujjwala Yojana launched by the government is an example of revenue expenditure.  Reason (R): It is the expenditure that neither created assets nor reduced liabilities of the government. 10. Assertion (A): Taxation is an effective tool to reduce the inequalities of income.  Reason (R): By imposing higher tax rates on the wealthy and providing targeted social programs funded by these taxes, governments can channel resources to those with lower incomes, addressing social and economic inequalities.

[C] CASE BASED QUESTIONS I.  Read the following information and answer the given questions: S.No

Content

₹ (in crores)

1.

Revenue Expenditure

100

2.

Capital Receipts

40

3.

Net Borrowings

38

4.

Net Interest Payments

27

5.

Tax Revenue

50

6.

Non-tax Revenue

15

1. What is the revenue deficit? (1) ₹ 50 cr. (2) ₹ 45 cr. (3) ₹ 35 cr.

(4) ₹ 30 cr.

2. Which of the following shows fiscal deficit? (1) ₹38 cr. (2) ₹45 cr. (3) ₹40 cr. (4) ₹50 cr. 3. What will be the primary deficit? (1) ₹17 cr. (2) ₹23 cr. (3) ₹11 cr.

(4) ₹20 cr.

4. Which of the following is a non-tax revenue for the government? (1) Return on assets

(2) Excise duties

(3) Service tax

(4) Customs

5. Which of the following is true for tax revenue? (1) Tax revenue primarily serves as a source of income for the government. (2) Tax revenue is solely used for reducing government deficits.

52 Oswaal CUET (UG) Chapterwise Question Bank (3) Tax revenue has no impact on the government expenditures. (4) Tax revenue is unrelated to an economic growth. II.  Read the following passage and answer the given questions: MUMBAI: Investors were relieved as Finance Minister Nirmala Sitharaman avoided an increase in the long-term capital gains tax on equity investments and securities transaction tax in the Union Budget for 2021-22 announced today. Heading into the Budget, most investors were concerned that the government may look at increasing the long-term capital gains tax or the securities transaction tax in order to boost its revenues, especially as the stock market has witnessed a breakneck rally since the beginning of April. In her Budget speech in July 2019, the Finance Minister reintroduced the long-term capital gains tax after 15 years. Currently, individuals who make capital gains of more than lakh on their equity investment after a holding period of more than one year have to pay a tax of 10 per cent on the capital gains. However, the capital gains tax for individuals in the highest bracket of earnings comes to around 15 % inclusive of a cess. Money managers had said that, the government needed to bring out an equity-friendly budget, implying no changes in taxation related to the stock market, in order to ensure that its plans went smoothly in the next fiscal year. 6. What did investors expect the government might do in the Union Budget for 2021-22, which was a cause for concern?

ECONOMICS

(1) Increase the income tax rate. (2) Decrease the securities transaction tax. (3) Increase the long-term capital gains tax. (4) Introduce new tax exemptions. 7. What category of tax does the Capital Gains Tax fall under in the passage? (1) A type of tax collected by the government. (2) An additional fee imposed by the government. (3) A tax applied to reduce income disparities. (4) A government salary. 8. What is the primary reason for the government’s potential consideration of tax increases, as mentioned in the passage? (1) To extract revenue from the public. (2) To utilise the revenue for personal use. (3) To promote income equality. (4) To augment government officials’ income. 9. Why did the government refrain from discussing the capital gains tax, according to the passage? (1) To stabilise the nation’s economy. (2) To support economic growth. (3) To recover losses caused by the pandemic. (4) All of the above. 10.  The capital gains tax for individuals in the highest earnings bracket is approximately _____________. (1) 10%

(2) 15%

(3) 20%

(4) None of these

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (2)

2. (3)

3. (1)

4. (1)

5. (1)

6. (2)

7. (4)

8. (2)

9. (1)

10. (4)

11. (2)

12. (1)

13. (1)

14. (3)

15. (4)

16. (3)

17. (2)

18. (3)

19. (3)

20. (1)

8. (4)

9. (1)

10. (1)

8. (3)

9. (4)

10. (2)

[B] ASSERTION & REASON 1. (4)

2. (1)

3. (4)

4. (1)

5. (2)

6. (4)

7. (3)

[C] CASE BASED QUESTIONS 1. (3)

2. (1)

3. (3)

4. (1)

5. (1)

6. (3)

7. (1)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (2) is correct. Explanation: Revenue receipts are those inflows of funds of the government that do not create any liability or reduce government assets. Escheat typically involves unclaimed assets reverting to the government, and the funds acquired through escheat are considered as revenue receipts because they do not create any debt or reduce the government assets. 2. Option (3) is correct. Explanation: Government budgets are primarily aimed at achieving economic stability, promoting economic growth, and ensuring the efficient allocation of resources. The objective

is to reduce regional disparities and promote equitable development rather than increasing disparities. Therefore, increasing regional disparities goes against the core objectives of a government budget. 3. Option (1) is correct. Explanation: Primary Deficit = Fiscal deficit - Interest payments Fiscal deficit = Total expenditure – Total receipts excluding borrowings = (22,000 +28,000) – (17,750 +20,000) Capital receipts are already excluding the borrowings. Fiscal deficit = ₹12,500

GOVERNMENT BUDGET AND THE ECONOMY

Primary Deficit = 12,500 – 5,000 = ₹7,500 4. Option (1) is correct. Explanation: Direct Tax: Taxes directly imposed on individuals and businesses based on their income, profits, or assets. Non-tax Revenue: Income generated by the government from sources other than taxation, including investments, profits, and foreign grants. Indirect Tax: Taxes collected through intermediaries on the production or consumption of goods and services, such as value-added tax (VAT) or excise duties. Capital Receipts: Funds acquired by the government through activities that either create liabilities or reduce assets, like the sale of government assets or borrowing for long-term projects. 5. Option (1) is correct. Explanation: Revenue deficit = Revenue expenditure – Revenue receipt ₹70 crores = Revenue expenditure – ₹140 crores Revenue Expenditure = ₹70 crores + ₹140 crores = ₹210 crores 6. Option (2) is correct. Explanation: Total borrowing requirements of the government are estimated at ₹2,70,000 crores. It means, Fiscal deficit = ₹5,40,000 Primary deficit = Fiscal deficit – Interest payment Primary deficit = ₹5,40,000 crores – ₹2,80,000 crores = ₹2,60,000 crores 7. Option (4) is correct. Explanation: Primary deficit = Fiscal deficit – Interest payment ₹24,000 crores = Fiscal deficit – ₹14,000 crores Fiscal deficit = ₹24,000 crores + ₹14,000 crores = ₹38,000 crores 8. Option (2) is correct. Explanation: Revenue receipts are typically funds received by the government that do not create any additional liability or obligation. External grants, often provided by other countries or international organisations, are considered as revenue receipts because they do not need to be repaid and represent an inflow of funds that can be used for government expenses. 9. Option (1) is correct. Explanation: Construction of railway lines is a long-term investment that contributes to the creation of assets and infrastructure, and it is categorised as capital expenditure. Capital expenditures are typically used for the acquisition, construction, or improvement of long-term assets that provide ongoing benefits over an extended period. In the case of railway lines, this infrastructure investment falls under the capital expenditure. 10. Option (4) is correct. Explanation: Both of these taxes are classified as direct taxes because they are imposed directly on individuals and entities. Wealth tax is levied on an individual’s or entity’s accumulated wealth, while income tax is imposed on their earnings. This combination consists of taxes that directly affect an individual’s financial assets and income.

53 11. Option (2) is correct. Explanation: When a government runs a fiscal deficit, it typically finances that shortfall by borrowing money. Therefore, the total borrowing requirements of the government in a given financial year are often equal to the fiscal deficit for that year. 12. Option (1) is correct. Explanation: Direct taxes are the taxes that are imposed on individuals or entities directly by the government, and the liability for paying the tax cannot be transferred to someone else. In the case of corporation tax, it is imposed on the income of corporations or companies. 13. Option (1) is correct. Explanation: A loan advanced by the World Bank is a capital receipt as it raises liability. 14. Option (3) is correct. Explanation: It is the expenditure by the government that is related to the current financial year. These expenses neither cause an increase in the government assets nor cause any reduction in the government liability. In this case, as the vaccine is being given without any charge and it will not create any asset or reduce any liability, it will be categorised as revenue expenditure. 15. Option (4) is correct. Explanation: Increasing salaries of the government employees, repayment of mounting interests on international loans and paying pending pensions to the government employees are all revenue expenditures as they do not reduce any liability or create any assets. In the case of rapid employment generation through infrastructural projects, it leads to the generation of assets in the form of infrastructure, so it is a capital expenditure that the government’s capital expenditure hiked by 34.5%. 16. Option (3) is correct. Explanation: Fiscal deficit is defined as the amount of borrowing the government has to resort to meet its expenses. 17. Option (2) is correct. Explanation: A. Balanced Budget: Budget expenditure is equal to budget receipts, means the government’s income matches its spending. B. Surplus Budget: Estimated government receipts exceed estimated government expenditure, resulting in a surplus. C. Capital Budget: It involves capital receipts and capital expenditures, focusing on long-term investments and assets. D. Deficit Budget: Estimated government expenditure exceeds estimated government receipts, leading to a deficit and the need for additional financing. 18. Option (3) is correct. Explanation: Revenue receipts are recurring in nature and do not create any liability or lead to an increase or decrease in any asset. The loans taken by the government are capital receipts. 19. Option (3) is correct. Explanation: A budget deficit occurs when the government’s expenditures exceed its revenues, resulting in a shortfall of funds. Several factors can contribute to a budget deficit, including increased government spending, decreased tax revenue due to factors like lower tax rates or economic downturns, and other financial pressures.

54 Oswaal CUET (UG) Chapterwise Question Bank 20. Option (1) is correct. Explanation: Receipts from Post Office deposits and Kisan Vikas Patras are typically treated as Capital receipts. These represent funds that the government has borrowed or received as an investment and do not contribute to its regular revenue.

[B] ASSERTION & REASON

1. Option (4) is correct. Explanation: The capital budget of a government plays a pivotal role in determining its asset-liability status. Capital receipts, which encompass the borrowings and the sale of assets, have a direct impact on the government’s liabilities, while capital expenditures, primarily investments in long-term assets and infrastructure, contribute to the government’s assets. 2. Option (1) is correct. Explanation: Pension is indeed a revenue expenditure because it involves regular payments made by the government to retired employees or the beneficiaries. These payments are a part of the government’s routine operational expenses, which are classified as revenue expenditures. 3. Option (4) is correct Explanation: A surplus budget implies that the government’s revenue exceeds its spending, indicating responsible financial management. 4. Option (1) is correct. Explanation: The primary deficit is indeed calculated as fiscal deficit minus interest payments, and it represents how much the government is borrowing for non-interest expenses. 5. Option (2) is correct. Explanation: A balanced budget means that a government’s revenue equals its expenditure, resulting in no fiscal deficits. It is indeed a common objective for many governments. 6. Option (4) is correct. Explanation: Government budgets, both revenue and expenditure components, are the key instruments for implementing a country’s fiscal policy. Fiscal policy involves the use of government revenue and spending to influence the overall economic conditions and achieve specific economic goals. A government budget outlines how the government intends to manage its finances, allocate resources, and implement fiscal policies, which can include measures to stimulate economic growth, control inflation, reduce unemployment, and address various economic and social challenges. 7. Option (3) is correct. Explanation: Fiscal Deficit = Revenue Deficit + Capital Expenditure – Non-Debt creating Capital Receipts 8. Option (4) is correct. Explanation: A government budget is a financial plan that outlines the estimated revenue and expenditures of a government over a specific period, typically a fiscal year. The budget is a necessary step in the fiscal planning process, allowing governments to allocate resources and set financial priorities in advance of the fiscal year while considering economic conditions and policy goals. 9. Option (1) is correct. Explanation: Expenditure on government programs like Ujjwala Yojana is categorised as revenue expenditure because

ECONOMICS

it involves recurring payments or subsidies to beneficiaries and does not result in the creation of lasting assets. This aligns with the definition of revenue expenditures, which encompass regular operational expenses and welfare programs and do not lead to either the formation of assets or the reduction of government liabilities. 10. Option (1) is correct. Explanation: Taxation can indeed be an effective tool for reducing income inequalities by implementing the progressive tax systems that impose higher rates on higher incomes. These additional tax revenues can be used to fund targeted social programs, providing essential resources to individuals with lower incomes and addressing social and economic disparities. Overall, this approach contributes to a more equitable distribution of resources and opportunities in society.

[C] CASE BASED QUESTIONS 1. Option (3) is correct Explanation: Revenue Deficit = Revenue Expenditure – Revenue Receipts = 100 – (50 + 15) = 100 – 65 = ₹ 35 Cr. 2. Option (1) is correct Explanation: Borrowing itself is the fiscal deficit. So, Net Borrowing of ₹ 38 crore is the amount of fiscal deficit. 3. Option (3) is correct. Explanation: Primary Deficit = Fiscal Deficit – Net Interest Payment = 38 – 27 = ₹11 crore 4.  Option (1) is correct. Explanation: Return on assets is earned not by taxing people but by investments done 5. Option (1) is correct. Explanation: Tax revenue primarily serves as a source of income for the government. It plays a crucial role in funding government expenditures, which include public services, infrastructure development, social programs, and other activities that contribute to the overall well-being and economic growth of a society. II.  Read the following passage and answer the given questions: 6.  Option (3) is correct. Explanation: Investors were apprehensive about the government’s intentions in the Union Budget for 2021-22, specifically fearing an increase in the long-term capital gains tax. This concern stemmed from the anticipation that the government might consider raising taxes on capital gains from investments, which could impact their returns. Such tax changes can significantly affect an investment strategies and decisions, making it a noteworthy point of concern among the investors. 7. Option (1) is correct. Explanation: The Capital Gains Tax falls under the category of a direct tax collected by the government. It is a tax applied to the gains individuals make from equity investments and serves as a source of the government revenue. 8. Option (3) is correct Explanation: The primary reason for the government’s potential consideration of tax increases, as suggested in the

GOVERNMENT BUDGET AND THE ECONOMY

passage, is to promote income equality. Higher taxes on longterm capital gains can be a means to redistribute wealth and foster income equality within the country. 9. Option (4) is correct. Explanation: The government’s decision not to discuss the capital gains tax may be influenced by the multiple factors, including the need to stabilise the nation’s economy, promote economic growth, and address losses that may have occurred

55 due to various factors, such as the impact of the pandemic. 10. Option (2) is correct. Explanation: The capital gains tax rate for individuals in the highest earnings bracket, as mentioned in the passage, is approximately 15%, inclusive of a cess. This indicates that individuals with the highest incomes pay this percentage as tax on their capital gains from equity investments.

Study Time

CHAPTER

7

Max. Time: 1:25 Hours Max. Questions: 40

BALANCE OF PAYMENTS

 Revision notes

 Merits of Fixed Exchange Rate:

 Balance of Payments (BOP): The Balance of Payments is a comprehensive record that systematically Scan to know documents all economic transactions more about between a country’s normal residents this topic and the rest of the world throughout an accounting year. The BOP is divided into two primary accounts:



1. Current Account: This account records the transcations releted to the export and import of goods and services and unilateral transfers.



2. Capital Account: The Capital Account records transactions involving the sale and purchase of foreign assets and liabilities between a country’s normal residents and the rest of the world within an accounting year.

     Lack



Potential undervaluation or overvaluation of currency

 Trade Balance: The trade balance refers to the net difference between imports and exports of visible items (goods) between a country’s normal residents and the rest of the world.



Incompatibility with free market principle.

BOP

 Autonomous Items: Autonomous items pertain to transactions driven by the motive of profit maximisation rather than the objective of maintaining balance in the BOP. They are the first items recorded before calculating a deficit or surplus in the BOP.  Accommodating Items: Accommodating items are transactions that aim to restore the BOP and are often referred to as ‘Below the Line’ items.  Deficit in BOP Account: A deficit in the BOP occurs when the total inflow of foreign exchange from autonomous transactions is less than the total outflow for such transactions.  Foreign Exchange Rate: The foreign exchange rate denotes the rate at which one unit of a country’s currency can be exchanged for a specific number of units of another country’s currency. In essence, it represents the price of one currency in terms of another.

Scan to know more about this topic

Foreign Exchange Rate and BOP

 Exchange Rate Systems: 1. Fixed Exchange Rate: In this system, the exchange rate is officially set or determined by the government or the country’s monetary authority.

Stability in exchange rates

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     Facilitation

of capital movement and international trade Reduced scope for speculation



     Pressure

on the government to control inflation

Types of Exchange Rates

Attraction of foreign capital

 Demerits of Fixed Exchange Rate: Need to hold foreign exchange reserves



of automatic adjustment in the Balance of

Payments

2. Flexible Exchange Rate: In this system, the exchange rate is determined by the market forces of demand and supply for reccuse tarnsction .  Merits of Flexible Exchange Rate: 

No need to maintain foreign exchange reserves



Automatic adjustment in the Balance of Payments



Enhanced resource allocation efficiency



Removal of barriers in the transfer of capital and trade



Elimination of currency undervaluation or overvaluation

issues Encouragement of venture capital through foreign exchange 

 Demerits of Flexible Exchange Rate: 

Exchange rate fluctuations



Encouragement of speculation



Potential deterrence to international trade and investment



Market instability.

 Determination of Equilibrium Foreign Exchange Rate: The equilibrium foreign exchange rate is the rate at which the demand for and supply of foreign exchange are equal. Under a free market scenario, it is determined by market forces, with an inverse relationship between demand for foreign exchange

E

Foreign Exchange Rates

d

Fix e

First Level

Second Level

Trace the Mind Map

Third Level

Managed floating is a mixture of a flexible exchange rate system and a fixed rate system. Under this system, Central Banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate.

It is a type of exchange rate which is determined by the market that can rapidly change due to supply and demand and are neither pegged or controlled by Central Bank.

It is the type of exchange rate where a currency's value is determined by the government against the value of another single currency or to a basket of other currencies or to another measure of value such as gold.



Rs/$ The Exchange Rate e*

D

ate



D

S

D

n a la

ce of Paym

Amount of foreign exchange $

S

ation min e te r

eR

B

ng ha c x



en t

Foreign Exchange Rate Issues

Balance of Payments Account

Current account generally includes visible goods, invisible goods and unilateral transfers.

Total Imports>Total Exports

Total Exports>Total Imports

• Exchange rate Volatibity • Currency Depreciation • Trade Conflicts • Monetary Policy Divergence • Global Economic Uncertainity • Digital Currencies

It includes those entries which cause a change in the assets or liabilities of the residents of a country or its government.

Deficit

lus Surp

The balances of payments account records the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically one year.

BALANCE OF PAYMENTS

57

s

58 Oswaal CUET (UG) Chapterwise Question Bank

Rate of foreign exchange (Price of Dollar in terms of Rupees)

and exchange rate, and a direct relationship between supply and exchange rate.

D R1

Excess Supply

S

E

R R2

 Trade Imbalances: Exchange rate movements can influence a nation’s trade balance. A weaker currency can improve a country’s exports but may also increase the cost of imported goods. Trade imbalances can impact a nation’s economic stability.

Inflation and Interest Rates: Exchange rate changes can affect a country’s inflation rate. A weaker currency may lead to imported inflation, prompting central banks to adjust interest rates to maintain price stability.

S

Excess Demand

D

Q2 Q Q1 D Demand and Supply for foreign exhchange (in Dollars)

 Currency Depreciation and Appreciation: Currency depreciation signifies a decrease in the value of a domestic currency concerning foreign currency due to changes in demand and supply in a flexible exchange rate system. Currency appreciation, conversely, denotes an increase in the value of a domestic currency in terms of foreign currency due to shifts in demand and supply.  Managed Floating System: In this system, the central bank allows market forces to determine the exchange rate but intervenes as needed to influence the rate. When the rate is too high, the central bank sells foreign exchange from its reserves to lower it, and when the rate is too low, it purchases foreign exchange to raise it.  A brief analysis of recent exchange rate issues: Volatility in Exchange Rates: Recent years have witnessed heightened exchange rate volatility driven by various factors, including geopolitical tensions, economic uncertainties, and the impact of the COVID-19 pandemic. These fluctuations have had significant implications for international trade and financial markets. 

 Currency Depreciation and Appreciation: Some countries have experienced currency depreciation, making their exports more competitive in global markets, while others have seen currency appreciation, which can affect their trade

balances. Central banks often intervene to manage these fluctuations.

Y

 Devaluation and Revaluation: Devaluation refers to the official reduction of a country’s domestic currency’s external value concerning all other foreign currencies. Revaluation, on the other hand, involves an official increase in the external value of a country’s domestic currency.



ECONOMICS



 Impact on Investment: Foreign exchange rates influence investment decisions, as investors consider the potential returns and risks of investing in a particular currency or country. Exchange rate movements can impact capital flows and foreign direct investment.

Foreign Exchange Reserves: Central banks often maintain foreign exchange reserves to stabilize their currencies in response to exchange rate issues. These reserves can also serve as a cushion against external financial shocks.



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Supply and Demand in Foreign Exchange Market

Cryptocurrencies: The rise of cryptocurrencies, like Bitcoin, has introduced a new dimension to exchange rate issues. Their volatility and the potential for them to influence traditional currency markets have garnered attention.



 International Cooperation: Many countries engage in international cooperation through mechanisms like the G7 and G20 to address exchange rate challenges, promote currency stability, and ensure global economic growth.

 Policy Responses: Governments and central banks employ various policies, such as currency interventions, interest rate adjustments, and capital controls, to manage exchange rate issues and promote economic stability.

 Global Economic Impact: Exchange rate issues have broader economic implications, affecting economic growth, employment, inflation, and financial market stability. A well-managed exchange rate regime is vital for a country’s economic health.

59

BALANCE OF PAYMENTS

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS

1. When a nation is a borrower from other countries means:  [CUET 2023] (1) Trade surplus (2) Deficit in Current Account (3) Surplus in Current Account (4) Trade Deficit 2. ................ measures are ................. measures intended to correct some of weaknesses that have developed in the Balance of payment. [CUET 2023] (1) Stabilisation, Short term (2) Structural Reform, Long term (3) Stabilisation, Long term (4) Structural Reform, Short term 3.  Which of the following statements is true about Autonomous transactions? [CUET 2023] (1) These items are done to correct the imbalance of BOP Account. (2) These are also known as below-the-line item. (3) These only occur in the Capital a/c of BOP. (4) BOP is said to be in surplus if autonomous receipts are greater than autonomous payments. 4. Which of the following statements is true, if the exchange rate changes from $1 = ₹ 72 to ₹ 81? [CUET 2022] (A) Import will fall (C) Import will rise (C) Exports will rise (D) National Income will rise (E) National Income will fall Choose the correct answer from the options given below: (1) B, C and D only (2) A, C and D only (3) B, C and E only (4) A, C and E only 5.  People demand foreign exchange because: [CUET 2023] (1) They want to send gifts abroad (2) The foreigners send gifts to our country (3) They want to purchase imported goods from our market (4) The foreigners like to purchase goods from our market 6.  Match the following and choose the correct option:  [CUET 2023] Column I

Column II

A. Investments made abroad

I. Credit side of the current account of BOP

B. Remittances to a relative staying abroad

II. Debit side of the current account of BOP

C. Borrowing from IMF

III. Debit side the capital account of BOP

D. Export of cotton IV. Credit side of the capital clothes account of BOP (1) A-III, B-II, C-IV, D-I (2) A-I, B-II, C-III, D-IV (3) A-IV, B-III, C-II, D-I (4) A-II, B-III, C-I, D-IV 7.  Country X has more inflation than country Y. Which of the following is most likely to happen in such a case? (1) A surplus trade balance in country Y (2) A deficit trade balance for country X (3) A rise in exports from country X to country Y (4) A rise in imports from country Y to country X

8. “The Reserve Bank of India is said to have intervened lately to arrest the rupee’s slide by selling Dollars on a large scale.” (Source: The Economic Times, March 03, 2021) Which of the following statements regarding the above news is false? (1) The transaction above will be termed as an accommodating transaction. (2) The foreign exchange rate for one rupee must be rising before intervention. (3) The value of the rupee against one dollar must be rising before the intervention. (4) The transaction will be categorized as a below-the-line item in the balance of payments. 9. Which of the following statements is not true? (1) Borrowings from the Asian Development Bank by the government is an accommodating transaction. (2) Loan given to Sri Lanka by the government is an accommodating transaction. (3) Buying machinery from Japan is an accommodating transaction. (4) Borrowing from the public is an accommodating transaction. 10.  A company located in India receives a loan from a company located abroad. How is this transaction recorded in India’s Balance of Payments Account? (1) Credit side of current account (2) Debit side of current account (3) Credit side of capital account (4) Debit side of capital account 11. Identify which of the following statements is true? (1) The flexible exchange rate system gives the government more flexibility to maintain large stocks of foreign exchange reserves. (2) In the managed floating exchange rate system, the government intervenes to buy and sell foreign currencies. (3) In the managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations. (4) In the fixed exchange rate system, market forces fix the exchange rate. 12. Look at the following data of a given country. S.No.

Items

Value (in Million US Dollars)

1

Exports (of goods)

150

2

Imports (of goods)

200

3 (1) (2) (3)

Net Invisibles 20 Which of the following is in correct? Balance of trade is unfavourable for the country. Balance of payment cannot be determined by the data. There is a Current Account Deficit of 30 million US Dollars. (4) There is a Capital Account Surplus of 50 million US Dollars. 13. Two friends Mira and Sindhu were discussing the exchange rate systems. ‘Under this system, the exchange rates are determined by the market forces of demand and supply. However, deliberate efforts are made by the competent authority to keep the exchange rates within a specific range.’

60 Oswaal CUET (UG) Chapterwise Question Bank

The above-mentioned statement was given by Sindhu. Identify the type of exchange rate system was she talking about. (1) Fixed Exchange Rate (2) Floating Exchange Rate (3) Managed Floating Exchange Rate (4) Managed Fixed Exchange Rate 14.  Suppose that the Balance of Trade (BOT) of a nation exhibits a surplus of ₹20,000 crores. The import of merchandise of the nation is half of the exports of merchandise to the rest of the world. The value of exports would be ₹ ______ crores. (1) 30,000 (2) 40,000 (3) 24,000 (4) 35,000 15. Under the Balance of Payments structure of a nation, the two main categories of accounts for the classification of the transactions are ________ and ________. (i) Current Account (ii) Unilateral transfer Account (iii) Capital Account (iv) Loan Account Identify the correct alternatives from the following: Alternatives: (1) i and ii (2) i and iii (3) iii and iv (4) iv and i 16. Identify which of the following is not an example of ‘invisible item’ under Current Account of the Balance of Payments transactions. (1) Air and sea transport (2) Postal and courier services (3) Education-related travel (4) Merchandise-linked transactions 17. Find the balance on the balance of payments account. Is the overall balance of payments balanced? Items (₹ in lakhs) (i) Capital account balance (−)400 (ii) Value of imports 150 (iii) Value of exports 450 (iv) Unilateral transfers 100 (v) Balance of visible trade 200 (1) ₹ 800 Lakhs (2) ₹ 1,000 Lakhs (3) ₹ 200 Lakhs (4) None of these 18.  As per the given image, BOP is in______________.

EXPORT IMPORTS

ECONOMICS

(1) Surplus (2) Deficit (3) Balance (4) None of these 19. Find the current account balance from the following: Items (₹ in crores) (i) Capital account balance 80 (ii) Export of services 20 (iii) Balance of visible trade 50 (iv) Transfers from one country to another country 5 (1) ₹ 50 crores (2) ₹ 75 crores (3) ₹ 25 crores (4) ₹ 145 crores 20. Which one of the following items is not included in the current account of India’s Balance of Payments? (1) Short-term commercial borrowings (2) Non-monetary gold movements (3) Investment income (4) Transfer payments

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): Managed floating exchange rate system is also known as ‘hybrid system’.  Reason (R): Managed floating exchange rate system is a combination of a flexible and fixed exchange rate system. 2.  Assertion (A): In order to restore the value of depreciating domestic currency, Central Bank sells the US dollars in the international money market.  Reason (R): By selling US dollars, supply of dollars will increase which will reduce the price of dollar. 3.  Assertion (A): The Ukraine Russia war has caused the depreciation of rupee.  Reason (R): India has a high dependence on oil imports and the prices of oil has increased. 4. Assertion (A): Due to COVID–19, the currency of the tourism-based countries like Sri Lanka has depreciated.  Reason (R): Sri Lanka is not getting enough foreign exchange which it earned in tourism. 5. Assertion (A): Acquisition of a domestic (Indian) company by a foreign (Australian) company will be recorded on the credit side of Balance of Payment Account.  Reason (R): It leads to the outflow of foreign exchange from the domestic economy. 6. Assertion (A): Trade of invisible items between two nations is a part of capital account of Balance of Payment  Reason (R): Transactions that affect the asset-liability status of a country in relation to the rest of the world are known as Capital Account transactions.

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BALANCE OF PAYMENTS

7. Assertion (A): If the receipts and payments on the current account are equal to each other, it depicts a situation of Current Account Surplus.  Reason (R): A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries. 8. Assertion (A): Balance of payment is same as Balance of Trade.  Reason (R): Balance of Trade shows all the imports and exports of goods. 9. Assertion (A): Capital account transactions do not give rise to future claims.  Reason (R): Capital account transactions reveal borrowings from rest of the world. 10. Assertion (A): When balance of trade is in deficit, the balance of payment is not in deficit.  Reason (R): Balance of trade is only a part of BOP accounts.

[C] CASE BASED QUESTIONS

I.  Read the following passage and answer the given questions: NEW DELHI: India’s balance of payments this year is going to be “very very strong” on the back of significant improvement in exports and a fall in imports, Commerce and Industry; Minister Piyush Goyal said on Monday. He said that “good” green shoots are visible in the economy and exports have shown a “good” turnaround. “We are in July at about 91 per cent export level of July 2019 figures. Imports are still at about 70-71 per cent level of July 2019. So, broadly our balance of payments this year is going to be very very strong, which is why we feel confident that Indian industry will see opportunities for themselves, will see opportunities of growth,” he said at a FICCI webinar. India’s exports fell for the fourth straight month in June as shipments of key segments like petroleum and textiles declined but the country’s trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59 per cent. The country posted a trade surplus of USD 0.79 billion in June. 1. What is the reason behind India’s strong balance of payments this year, as mentioned by Commerce and Industry Minister Piyush Goyal? (1) A significant increase in imports. (2) A decline in exports. (3) A fall in imports and improvement in exports. (4) A significant increase in both imports and exports. 2. What percentage of export levels in July 2019 did India achieve in July of the current year? (1) 70-71% (2) 91% (3) 79% (4) 18 years 3. In June, India posted a trade surplus of how much USD? (1) $0.79 billion (2) $4.59 billion (3) $18 billion (4) $91 million 4. What has been the trend in India’s exports for the past four months prior to June? (1) Steady increase. (2) Decline in exports. (3) No change. (4) Increase in petroleum exports.

5. What was notable about India’s trade balance for the first time in 18 years in June? (1) India achieved its highest trade surplus in history. (2) India had the largest trade deficit in 18 years. (3) India’s trade balance turned surplus. (4) India’s trade balance remained neutral. II. Read the news report given below and answer the questions that follow on the basis of the same: A lower trade deficit along with strong FDI and portfolio flows in F/Y 19 January-March quarter may help the external sector balance sheet and prop up both current account as well as the overall balance of payments numbers. This could reflect in a lower current account deficit in the balance of payments for the quarter ended March. Trade balance, an important component of the current account, is estimated at a deficit of $35.6 billion for Q4 compared to $40.6 billion in the same period a year ago, thanks to lower crude prices and slowdown in gold and other imports. Other factors influencing the current account are software services income and remittances by overseas Indians. Market estimates for F/Y 19 March quarter current account deficit is at $8.1 billion versus $13.2 billion for March’18 quarter. In the Capital Account, thanks to some bidding for defaulting companies by Arcelor Mittal which are expected to have bought in some funds, FDI inflows in March is projected to be almost double the amount in the previous comparable period of March’18. Also, external commercial borrowing flows in the latest quarter are almost double the amount of previous comparable quarter ending March’18. In addition, Forex resources raised through the swap agreements with the commercial banks are expected to add another $5 billion through the foreign investment route. The overall balance of payments surplus is estimated higher at $17 billion for the latest March quarter compared to $13 billion surplus in the March’18 quarter. 6. Which of the following is not the benefit of a lower trade deficit? (1) Help the external sector balance sheet. (2) Prop-up the Current Account. (3) Increase the Balance of Payment numbers. (4) Increase the Capital Account deficit. 7. What is the expected change in the trade balance for Q4, according to the passage? (1) An increase in the trade deficit. (2) A decline in the trade deficit. (3) Trade balance is projected to be in surplus. (4) Trade balance is expected to remain unchanged. 8. FDI inflows in March is a type of _____________. (1) Accommodating transaction (2) Accumulating transaction (3) Autonomous transaction (4) None of the above 9. What is expected to be the Capital Account’s condition in the latest quarter, according to the passage? (1) It is expected to have a significant deficit. (2) FDI inflows are projected to decrease. (3) Capital Account is likely to show a surplus due to increased FDI inflows and external borrowings. (4) No specific information is provided about the Capital Account.

62 Oswaal CUET (UG) Chapterwise Question Bank 10.  What is the estimated overall balance of payments surplus for the latest March quarter, as per the passage? (1) $8 billion surplus.

(3) $17 billion surplus.

ECONOMICS

(4) $5 billion surplus.

(2) $13 billion surplus.

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (2)

2. (1)

3. (4)

4. (2)

5. (1)

6. (1)

7. (4)

8. (3)

9. (3)

10. (3)

11. (3)

12. (4)

13. (3)

14. (2)

15. (2)

16. (4)

17. (4)

18. (2)

19. (2)

20. (1)

8. (4)

9. (4)

10. (1)

8. (3)

9. (3)

10. (3)

[B] ASSERTION & REASON 1. (1)

2. (1)

3. (1)

4. (1)

5. (3)

6. (4)

7. (4)

[C] CASE BASED QUESTIONS 1. (3)

2. (2)

3. (1)

4. (2)

5. (3)

6. (4)

7. (2)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (2) is correct. Explanation: When a nation is a borrower from other countries, it typically indicates a deficit in the Current Account. This means that the country is importing more goods and services than it is exporting, leading to a shortfall in its balance of payments. 2. Option (1) is correct. Explanation: Stabilisation measures are short-term measures intended to correct some of the weaknesses that have developed in the Balance of Payments. These measures are designed to address immediate imbalances in the economy, such as a trade deficit, by implementing short-term policies to stabilise the situation. Structural reform measures, on the other hand, are long-term measures aimed at addressing more fundamental and structural issues in the economy. 3. Option (4) is correct. Explanation: Autonomous items are undertaken for economic motives. These items may lead to a surplus or deficit in BOP. These are not undertaken or influenced by the status of the BOP account. These are known as above-the-line items. When autonomous receipts are greater than autonomous payments it leads to a surplus in BOP. On the other hand, in case autonomous payments are greater than autonomous payment, it leads to a deficit. 4. Option (2) is correct. Explanation: A depreciation of the domestic currency means that it takes more of the domestic currency to buy one unit of foreign currency. This, in turn, makes the country’s exports cheaper for foreign buyers and its imports more expensive for domestic consumers. As a result, exports are expected to increase, and imports are likely to decrease. When a country’s currency depreciates, making its exports more competitive and increasing export volumes, it can lead to higher economic activity and an increase in the national income. So, when the exchange rate changes from $1 = ₹72 to $1 = ₹81, national income is likely to increase. 5. Option (1) is correct. Explanation: Foreign exchange is often required for making unilateral transfers, such as sending gifts to other countries.

When individuals or entities in one country want to send money or valuable items to recipients in another country, they typically need to convert their domestic currency into the foreign currency of the recipient. 6. Option (1) is correct. Explanation: 1. Investments made abroad are typically recorded on the debit side of the capital account in the Balance of Payments (BOP) since they represent capital outflows from the country. 2. Remittances to a relative staying abroad are typically recorded on the debit side of the current account in the Balance of Payments (BOP) since they represent an outflow of funds, reflecting payments made to individuals abroad. 3. Borrowing from the International Monetary Fund (IMF) is recorded on the credit side of the capital account in the Balance of Payments (BOP) as it represents a financial inflow into the country. 4. Export of cotton clothes is recorded on the credit side of the current account in the Balance of Payments (BOP) as it represents earnings from the export of goods, which contribute positively to the country’s balance of payments. 7. Option (4) is correct. Explanation: When there is more inflation in country X as compared to Country Y, the goods in the Country X will be more expensive as compared to the goods in Country Y, making the goods in Country Y more attractive for the citizens of Country X, increasing the imports of Country X for the goods from country Y. 8. Option (3) is correct. Explanation: Central bank interventions often occur when the value of the domestic currency is depreciating, not necessarily when it’s rising. Interventions are used to stabilise or influence the exchange rate, which may involve selling or buying foreign currency to counteract depreciation or excessive appreciation of the domestic currency. 9. Option (3) is correct. Explanation: Buying machinery from Japan is an autonomous transaction. Autonomous transactions refer to those Balance of Payment (BOP) transactions that are undertaken for profit.

63

BALANCE OF PAYMENTS

10. Option (3) is correct. Explanation: The capital account includes transactions related to the acquisition or disposal of non-financial assets, such as loans and investments, between residents and non-residents. In this case, the loan received from a foreign company represents an inflow of capital, which is recorded as a credit on the capital account. 11. Option (3) is correct. Explanation: The managed floating exchange rate system is the amalgamation of the flexible exchange rate system and the fixed exchange rate system. Under this system, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements. 12. Option (4) is correct. Explanation: The exports of goods are less than the imports by 50 million US dollars, meaning that there is a capital account deficit. 13. Option (3) is correct. Explanation: The type of exchange rate that Sindhu is talking about is ‘Managed floating exchange rate’. In this type of exchange rate, with the help of market forces of demand and supply, exchange rate is determined and competent authority, i.e., country’s central bank intervenes so as to maintain the exchange rate within a specific range. Central bank also keeps reserves of foreign exchange within the targeted value. Managed floating exchange rate is also called as ‘Dirty floating’. 14. Option (2) is correct. Explanation: Balance of Trade (BOT) = Exports – Imports ₹20,000 = Exports(X) – Imports (M) ₹20,000 = Exports(X) – ₹20,000 =

Exports ( X )

2 2 Exports ( X − Exports ( X ) 2

= ₹ 40,000 crores

15. Option (2) is correct. Explanation: The balance of payment of a country comprises two accounts: (1) Current account, and (2) Capital account. The current account records transactions related to the export and import of goods and services, unilateral transfers received and paid to and from the rest of the world, and capital account records transactions related to borrowings and loans given, investment made to and from the rest of the world, and change in foreign exchange reserves. 16. Option (4) is correct. Explanation: Merchandise transactions are part of the visible items category, as they involve the physical exchange of goods between countries and are recorded on the current account as part of the trade balance. 17. Option (4) is correct. Explanation: Balance in the Balance of Payments Account = Value of exports - Value of imports + Unilateral transfers + Capital account balance

= ₹ 450 lakhs – ₹ 150 lakhs + ₹ 100 lakhs + (-) ₹ 400 lakhs =0 18. Option (2) is correct. Explanation: A balance of payments deficit means a country imports more products, services, and capital than it exports. 19. Option (2) is correct. Explanation: Current Account Balance = Balance of visible trade + Export of services + Transfers from one country to another country = ₹ 50 crores + ₹ 20 crores + ₹ 5 crores = ₹ 75 crores 20. Option (1) is correct. Explanation: Short-term commercial borrowings fall under the capital and financial accounts of the balance of payments because they represent financial transactions and do not directly relate to trade, income, or transfers.

[B] ASSERTION & REASON 1. Option (1) is correct. Explanation: Managed floating system is a combination of fixed and flexible exchange rate system. It is known as hybrid system as it is a mixture of both fixed and flexible exchange rate systems. 2. Option (1) is correct. Explanation: Selling domestic currency in the international money market, which reduces its supply, can help restore the value of a depreciating domestic currency relative to another currency, such as the US dollar, by making it more expensive to purchase the domestic currency, thereby affecting the exchange rate. 3. Option (1) is correct Explanation: India being dependent on oil imports and the prices of oil rising due to the war has lead to the increase in the demand of US dollars leading to a decrease in the value of Rupee in the international market. 4. Option (1) is correct. Explanation: As the countries were locked down and due to travel restrictions, countries like Sri Lanka who are dependent on tourism to earn foreign currency and maintain the steady supply of it couldn’t do so, forcing the supply of foreign currency fall short of the demand leading to the appreciation of the foreign currency. 5. Option (3) is correct. Explanation: When domestic company, for example, any Indian company is acquired by foreign company (i.e. Australian company), then it will lead to inflow of foreign exchange in the domestic economy. 6. Option (4) is correct. Explanation: Trade of invisible items between two nations is a part of ‘current account’ of balance of payment. Hence, the assertion is false. The reason statement is true as the transactions affecting asset-liability status of a country with the rest of the world are known as capital account transactions. 7. Option (4) is correct. Explanation: The assertion is false. Since current account surplus can be defined as receipts on the current account greater than payments on the current account. The reason is true, as surplus current account implies nation provides loans

64 Oswaal CUET (UG) Chapterwise Question Bank to other countries while a deficit current account implies that the nation borrows from other countries. 8. Option (4) is correct.  xplanation: The Balance of Trade specifically focuses on E the trade of goods (exports and imports), whereas the BOP is a broader accounting system that includes not only the trade of goods but also trade in services, investment income, and transfer payments. The BOP is a comprehensive record of a country’s economic transactions with the rest of the world, encompassing all international economic activities. 9. Option (4) is correct.  xplanation: Capital account transactions can also involve E investments, such as foreign direct investment, which may lead to future claims or returns on those investments. 10. Option (1) is correct.  xplanation: Balance of trade, being just one component E of the BOP, does not provide the full picture of a country’s overall economic transactions with the rest of the world. A trade deficit may be offset by surplus in other components of the BOP, such as the balance of services (exports of services exceeding imports), investment income (income earned on foreign investments), or transfer payments (e.g., foreign aid).

[C] CASE BASED QUESTIONS 1. Option (3) is correct. Explanation: The strong balance of payments is attributed to a fall in imports and a significant improvement in exports. 2. Option (2) is correct. Explanation: India achieved about 91% of the export level in July 2019. 3. Option (1) is correct.

ECONOMICS

 xplanation: In June, India posted a trade surplus of USD 0.79 E billion. 4.  Option (2) is correct. Explanation: The provided information states that India’s exports fell for the fourth straight month in June.

5. Option (3) is correct. Explanation: India’s trade balance turned surplus for the first time in 18 years in June as imports dropped significantly. 6.  Option (4) is correct. Explanation: The benefit of a lower trade deficit is not the increase in Capital Account deficit whereas all other options show it. 7.  Option (2) is correct. Explanation: The passage mentions that the trade balance is estimated at a deficit of $35.6 billion for Q4 compared to $40.6 billion in the same period a year ago. 8. Option (3) is correct Explanation: Foreign direct investments are autonomous transactions of long-term capital movements, motivated by economic interests, with the profit at the first place. 9. Option (3) is correct. Explanation: The passage mentions that FDI inflows are expected to be almost double the amount of the previous comparable period, and external commercial borrowing flows have increased. 10. Option (3) is correct. Explanation: The passage states that the overall balance of payments surplus is estimated to be higher at $17 billion for the latest March quarter.

Study Time

CHAPTER

8

 Revision notes

Max. Time: 1:25 Hours Max. Questions: 40

DEVELOPMENT EXPERIENCE (194790) AND ECONOMIC REFORMS SINCE 1991

 Indian Economy Before British Rule:  Self-sufficient economy is known for handicraft industries.  Exporter of handicraft items.  British transformed India into a source of raw materials and a consumer of British industrial products.  Indian Economy During British Rule:  Became a net exporter of raw materials and a net importer of finished goods.  85% of the population lived in the rural areas, dependent on agriculture.  Agricultural stagnation due to British land settlement systems.  The decline in indigenous handicrafts resulted in mass unemployment.  Limited industrial growth with the establishment of cotton and jute textile mills and Tata Iron and Steel in the early 20th century.  Impact on Trade:  India was shifted from exporting handicrafts to being a net exporter of raw materials.  Imported finished consumer goods from Britain.  The economic structure was significantly altered to favory the British interests.  Primarily Agrarian Economy:  Approximately 85% of the population was based in rural areas.  Livelihoods were predominantly dependent on an agriculture. Scan to know  Agricultural Stagnation: more about  Agricultural productivity was low this topic during the British rule.  Land settlement systems like zamindari negatively affected Indian farmers. Agriculture  The decline in the indigenous handicraft industry led to increased pressure on agriculture.  Demographic Transition in 1921:  India was in the first stage of the demographic transition.  High birth and death rates.  Low literacy levels, inadequate public health facilities, high mortality rates, and low life expectancy.  Occupational Structure:  Around 70-75% of the workforce is engaged in agriculture.  Only 10% are employed in manufacturing.  15-20% involved in the service sector.

 Impact on Infrastructure: The introduction of railways was a notable Scan to know more about development, along with the construction this topic of some ports and roads. These developments were often geared towards serving British interests, such as facilitating the export of goods. The primary motive behind these infra- Indian Economy on the Eve of structure projects was not the direct proIndependence motion of the Indian economy. The transition from a barter system of exchange to a monetary system facilitated division of labor and large-scale production, contributing to economic changes.  Planning Commission (1950):  Established with the Prime Minister as the chairperson.  Spearheaded economic planning and development initiatives. Scan to know more about  Goals of Five-Year Plans this topic Growth: Economic growth is the fundamental objective of any economic plan. It revolves around increasing the Gross Domestic Product (GDP) of a nation, representing a larger economy. This growth reFive Years Plan sults from expanded production capacity in various sectors – agriculture, industry, and services. Historically, countries often prioritize specific sectors based on their development needs. In India, agriculture was initially the primary focus, followed by industrial and service sector growth, as reflected in different Five-Year Plans. Modernisation: Modernisation is about embracing technology, innovation, and advancements to enhance economic and societal progress. It involves the integration of new techniques, tools, and practices to increase productivity. For example, the adoption of modern agricultural methods has significantly increased output, while the IT boom in India is a testament to the benefits of modernisation. Beyond the economy, modernisation also signifies societal advancement, moving toward a more equitable and contemporary society. Self-Reliance: Self-reliance is essential for emerging economies like India to reduce over-dependence on imports. It emphasizes the need to produce domestically what a nation is capable of producing. This approach helps protect national sovereignty and ensures a level of economic independence. While India focused on self-reliance for many years, it eventually opened up its economy to global markets in 1991, after establishing a robust domestic base. Equity: Equity goes beyond economic goals and focuses on societal development. It ensures that the benefits of economic growth are accessible to all members of society. This includes meeting basic needs like food, housing, and clothing, as well as reducing wealth inequality and addressing social disparities. It aims to create a fair and inclusive society where every citizen

66 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

DEVELOPMENT EXPERIENCE (1947-90) AND ECONOMIC REFORMS SINCE 1991

has the opportunity to improve their quality of life and participate in the benefits of economic progress.  Agriculture Reforms  Land reforms to transfer land ownership from zamindars to tillers of the soil  Green Revolution to the boost agricultural productivity  Industrial Sector  The Industrial Policy Resolution of 1956 categorised industries  Import substitution strategy initially employed  Protectionism through tariffs and quotas led to inefficiencies  Introduction to Economic Reforms: Economic reforms, often referred to as structural adjustments, encompass a comprehensive and multi-dimensional set of policies aimed at achieving the rapid economic growth, improved production efficiency, and creating a competitive business environment. India embraced Economic Reforms in 1991.  Factors driving Economic Reforms: Scan to know more about 1. Decline in Foreign Exchange Rethis topic serves: The growth of imports outpaced exports, leading to a decrease in foreign exchange reserves. 2. Adverse Balance of Payments: India faced a balance of payments crisis due to Economic unfavourable trade balances. Reforms since 1991 3. Mounting Fiscal Deficit: Government expenditure outpaced revenue, resulting in a growing fiscal deficit. 4. Inflationary Pressure: Rising prices negatively impacted investment. 5. Public Sector Failures: Public enterprises yielded low returns on high investments. 6. Impact of Gulf Crisis: The Gulf crisis escalated the crude oil prices, adversely affecting the balance of payments. 7. High Deficit Financing: The government resorted to high deficit financing. 8. Collapse of the Soviet Bloc: The disintegration of the Soviet bloc disrupted economic and geopolitical equations.  New Economic Policy: The New Economic Policy, initiated in 1991, aimed to enhance the productivity, profitability, and global competitiveness of the Indian economy.  Measures of the New Economic Policy: 1. Stabilisation Measures: Short-term measures focused on controlling inflation, managing the balance of payments, and stabilising foreign exchange reserves. 2. Structural Adjustments: Long-term policies aimed at improving the economics efficiency and increasing the international competitiveness by eliminating a rigidity in various economic sectors.  Liberalisation: Liberalisation entails the removal of unnecessary controls and restrictions, such as permits, licenses, protective duties, and quotas. It allows the private sector companies to operate with fewer constraints.  Objectives of Liberalisation: 1. Reducing the Country’s Debt Burden 2. Expanding the Market Size 3. Promoting Competition Among Domestic Industries 4. Encouraging Import and Export of Goods and Services  Economic Reforms Under Liberalisation: 1. Industrial Sector Reforms  Abolition of Industrial Licensing

67

Reduction of Public Sector Presence Easing Imports of Capital Goods 2. Financial Sector Reforms  Lowering Various Ratios (SLR, CRR)  Transition of RBI from Regulator to Facilitator  Deregulation of Interest Rates 3. Fiscal/Tax Reforms 4. Foreign Exchange Reforms  Rupee Devaluation 5. Trade and Investment Reforms  Privatisation: Privatisation involves engaging the private sector in the ownership or operation of state-owned enterprises.  Privatisation Policies: 1. Reducing the Public Sector’s Footprint 2. Transferring Management of Public Enterprises from Government Control 3. Selling Shares of Public Enterprises  Objectives of Privatisation: 1. Mobilising Funds Through Disinvestment 2. Enhancing Government’s Financial Position 3. Introducing Healthy Competition in the Economy 4. Facilitating Foreign Direct Investment  Globalisation: Globalisation is a process associated with increased openness, growing economic interdependence, and deeper integration into the world economy.  Policies Promoting Globalisation: 1. Raising the Equity Limit for Foreign Investment 2. Partial Convertibility 3. Long-term Trade Policy 4. Tariff Reduction  An Assessment of LPG Policies: 1. Positive Impacts  Increased Foreign Investment  Higher Foreign Exchange Reserves  Inflation Control  Growing National Income  Expanded Exports  Consumer Empowerment 2. Negative Consequences  Neglect of Agriculture  Jobless Growth  Widening Income Disparities  Adverse Effects of Disinvestment  Proliferation of Consumerism  Cultural Erosion  Encouragement of Economic Colonialism  World Trade Organisation (WTO): The WTO, established in 1995, succeeded the General Agreement on Trade and Tariffs (GATT) in place since 1946. Its primary objective is to facilitate smooth, free, fair, and predictable trade, achieved through administering trade agreements, acting as a forum for trade negotiations, dispute resolution, monitoring national trade policies, and providing technical assistance and training, especially to developing countries. Monitoring and Revising Domestic Trade Policies: The WTO monitors and evaluates the trade policies of member countries, providing a platform for reviewing and improving them.







68 Oswaal CUET (UG) Chapterwise Question Bank Supporting Members in Developing Trade Policies: It assists member nations in formulating effective trade policies through technical assistance and training programs. Administration of World Trade Agreements: The WTO administers and enforces international trade agreements to ensure adherence and compliance. Forum for Trade Negotiations: The WTO serves as a forum for negotiations on trade-related matters, enabling member countries to engage in discussions and reach agreements.

ECONOMICS

Settlement and Management of Trade Disputes: It provides a structured mechanism for resolving trade disputes among member countries, fostering trade stability. Technical Assistance for Developing Nations: The WTO offers technical assistance and training programs to developing countries to enhance their capacity for participating in global trade. Cooperation with Other International Organizations: The WTO collaborates with various international organizations to promote global economic cooperation and trade regulation.

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS

1. “Growth refers to an increase in the country’s capacity to module the output of goods and services within the country.” Choose the incorrect option from the following in relation to Growth: [CUET 2023] (1) Growth implies a large stock of production capital. (2) Growth implies a large stock of supporting services. (3) Growth implies an equal contribution to GDP by each sector of the economy. (4) Growth implies an increase in the efficiency of productive capital and services. 2. Arrange the following in order of occurrence.[CUET 2023] (A) Green Revolution (B) Setting up of Planning Commission (C) Resolution formed on the basis of the second Five Year Plan (D) Exchange rate was made fully convertible for Current Accounts (E) Karve Committee Choose the correct answer from the options given below: (1) B, C, E, A, D (2) B, E, C, A, D (3) B, E, C, D, A (4) B, C, E, D, A 3.  Choose the correct sequence from the following.  [CUET 2023] (A) British introduced railways in India (B) Latest population census (C) Population explosion according to the 2nd stage of demographic transition theory (D) Year of “Great Divide” (E) First census conducted by British India Choose the correct answer from the options given below: (1) A, B, D, E, C (2) B, A, E, D, C (3) C, A, B, D, E (4) A, E, D, C, B 4. Chronologically arrange the following events.[CUET 2023] (A) Announcement of Demonetisation (B) Circulation of Fake Currency (C) Rs 500 and 1000 Notes lost the legal tender (D) Impact on Economic Activities (E) New Rs 2000 Currency Note in circulation Choose the correct answer from the options given below: (1) B, D, A, C, E (2) C, D, B, A, E (3) B, C, D, A, E (4) A, E, B, C, D 5. The main aim of economic policies pursued by the colonial government in India was: [CUET 2022] (1) Development of the Indian economy (2) Protection and promotion of the economic interests of their home country

(3) To transform India into an exporter of finished goods (4) To promote Indian handicrafts. 6. Which of the following is not a goal of the Five-Year Plans? [CUET 2022] (1) Self-reliance (2) Land ceiling (3) Equity (4) Modernisation 7.  In 1991, India approached the ............... and ............... and received $7 billion as a loan to manage the economic crises. [CUET 2022] (1) World Bank, World Trade Organisation (2) International Monetary Fund, OPEC (3) World Bank, International Monetary Fund (4) World Trade Organisation, International Monetary Fund 8. Arrange the following in Chronological order:  [CUET 2022] (A) Foundation of World Trade Organisation (WTO) (B) Establishment of General Agreement on Trade and Tariff (GATT) (C) India’s New Economic Policy (NEP) (D) Introduction of Goods and Service Tax (GST) (1) D, B, A, C (2) A, C, B, D (3) B, C, A, D (4) C, B, D, A 9. All the public sector establishments and those private sector establishments which employ 10 hired workers or more are called ................ [CUET 2022] (A) Informal sector establishments (B) Formal sector establishments (C) Public sector establishments (D) Private sector establishments 10.  Which crop was benefited most by the green revolution?  (1) Wheat (2) Tea (3) Cotton (4) Oil seeds 11.  ________________ was the Indian Finance Minister in 1991, acknowledged for his capabilities to steer away the economic crisis looming large on the erstwhile Indian Economy. (1) Dr. Subramanian Swamy (2) Dr. Manmohan Singh (3) Pranab Mukherjee (4) Dr. Urjit Patel 12. India entered the ______________ stage of Demographic Transition after the year 1921. (1) fourth (2) second (3) third (4) first 13. Prior to India’s independence, the stagnation in the agricultural sector was mainly caused by _________. (1) investment in technology (2) investment in agriculture facilities

69

DEVELOPMENT EXPERIENCE (1947-90) AND ECONOMIC REFORMS SINCE 1991

(3) advanced infrastructural facilities (4) land settlement system 14. Which of the following falls under the role of the World Trade Organisation? (1) Setting the limit for domestic and foreign investments in a country. (2) Mandating the level of tax levied on foreign firms in developing countries. (3) Aiding the development of poor countries by providing infrastructural investment. (4) Providing a platform for member countries to decide future tariff-related strategies. 15. The problem of Small-Scale Industries is are:(1) Shortage of raw material (2) Inadequate use of capacity (3) Shortage of capital and credit (4) All of the above 16. Arrange the following events in the correct chronological order: (Choose the correct arrangements) (i) The year of Great Divide (ii) Establishment of Tata Iron and Steel Company (TISCO) (iii) Introduction of Railways in India by the British (iv) Opening of Suez Canal Alternatives: (1) iv, ii, i, iii (2) i, iv, iii, ii (3) ii, iii, iv, i (4) iii, iv, ii, i 17. There are two statements given below, about the changes in India’s structural composition in the period 1950-1990. P: At the beginning of this period, the share of agriculture in the GDP was the highest. Q: An Increase in agricultural productivity during this period led to a further increase in the share of agriculture in the GDP by the end of this period. Which of these statements is/are true? (1) Only P (2) Only Q (3) Both P and Q (4) Neither P nor Q 18. In the Swadeshi Movement against the British, started in which 1905, Indians started ditching British goods for Indian products. Which of the following would have been the likely impact of the movement? (i) Rise in import of raw materials (ii) Fall in imports from Britain (iii) Rise in production of goods in India (iv) Rise in export tariffs (1) only i and iii (2) only i and iv (3) only ii and iii (4) only iii and iv 19.  Which of the following statements correctly represents actions taken by the government towards liberalisation?

P: Levying high tariffs to discourage import and promote the consumption of domestic goods and services.

Q: Devaluation of the rupees to encourage inflow of foreign exchange. R: Allowing for private banks to make decisions independent of the RBI restrictions.



S: Fixing prices of certain industrial goods in order to support increased consumption of these goods to boost the manufacturing industry. (1) P and Q only (2) P and R only (3) Q and R only (4) Q and S only 20. Match the following and choose the correct answer: Column I

Column II

A. NABARD

I. 1937

B. RBI

II. 1952

C. National Development Council

III. 1964

D. IDBI

IV. 1982

(1) A-IV, B-I, C-II, D-III (2) A-I, B-IV, C-II, D-III (3) A-IV, B-II, C-III, D-I (4) A-IV, B-I, C-III, D-II 21. Analyse the below image and identify the element of the LPG policy of 1991.

(1) Liberalisation (2) Privatisation (3) Globalisation (4) All of these 22. Analyse the below image and identify the concept stated below.

(1) Outsourcing (2) Liberalisation (3) Globalisation (4) Privatisation 23. Which of the following is not true regarding the importance of agriculture in the Indian Economy? (1) Main source of structural unemployment (2) Contribution in National Income (3) Base of industrialization (4) Base of economic development 24. C. Rajagopalachari, a founder of the Swatantra Party, coined the term ‘permit-license raj’ to encapsulate the party’s frustrations with Nehru’s policies, writing in his magazine Swarajya: “I want the corruptions of the Permit/Licence Raj to go... I want real, equal opportunities for all and no private monopolies created by the Permit/ Licence Raj.”

70 Oswaal CUET (UG) Chapterwise Question Bank

How were these private monopolies indulging in the corruption that C. Rajagopalachari talks about? (1) They led to lobbying and personal benefits for big industrial houses. (2) They continued to function even when running into losses. (3) They exploited the people by grossly increasing prices. (4) They could not compete with international products. 25. Which of the following statements about the land ceiling policy is true? (1) It led to equity in the agricultural sector. (2) Many landlords were able to escape the legislation. (3) The implementation of the legislation was challenged by small tenants. (4) It was successful in Kerala and West Bengal because it met no resistance.

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): During the British rule, India saw a huge drain of wealth.  Reason (R): India generated a large export surplus during the period. 2.  Assertion (A): The goal of equitable distribution of land was fully served by the abolition of intermediaries, in the post-independence India.  Reason (R): Big landlords challenged the land ceiling legislation, delaying the implementation and subsequently escaping from the legislation. 3.  Assertion (A): The establishment of the Suez Canal intensified Britain’s control over India’s foreign trade.  Reason (R): The Europeans no longer had to travel around Africa to reach India. 4. Assertion (A): The 12th Five Year Plan tried to raise India’s Gross Enrollment Ratio in higher education to 25.2% by 2017–18 and to 30% by 2020–21.  Reason (R): The quality of the population ultimately decides the growth rate of the country. 5. Assertion (A): India became an exporter of primary products and an importer of finished consumer and capital goods produced in Britain.  Reason (R): Restrictive policies of commodity production, trade and tariff pursued by the colonial government adversely affected the structure, composition and volume of India’s foreign trade. 6. Assertion (A): India’s Green Revolution is an example of how the productivity of scarce land resources can be increased with improved production technology.  Reason (R): Because of the Green Revolution, farmers produced far larger quantities of food grains than was possible earlier, on the same piece of land.

ECONOMICS

7. Assertion (A): The major policy initiatives i.e, land reforms and green revolution helped India to become selfsufficient in food grains production.  Reason (R): The proportion of people depending on agriculture did not decline as expected. 8. Assertion (A): According to the Government of India, the disinvestment of Public Sector Enterprises has brought accountability and professionalism to them.  Reason (R): The Government of India used disinvestment mainly to improve financial discipline and facilitate modernisation. 9. Assertion (A): Every year government fixes a target for the disinvestment of Public Sector Enterprises (PSEs).  Reason (R): Disinvestment is an excellent tool for discarding the loss incurring Public Sector Enterprises (PSEs). 10. Assertion (A): Import substitution leads to unfavourable foreign trade.  Reason (R): Import substitution leads the goods to be produced in the country itself.

[C] CASE BASED QUESTIONS I.  Read the following news report and answer the questions that follow on the basis of the same: On the eve of India’s independence in 1947, the Indian economy was mired in underdevelopment, with a significant reliance on agriculture. Colonial rule had left the country economically disadvantaged, marked by widespread of poverty, limited industrialisation, and economic policies that favoured British interests. The Indian economic system at the time was primarily agrarian, with the majority of the population engaged in farming. However, the post-independence period marked a shift in economic priorities. India’s Five-Year Plans are aimed to achieve economic self-sufficiency, alleviate poverty, and promote industrialisation. These plans sought to transform the economy into a modern, diverse, and self-reliant system. In agriculture, the government introduced institutional aspects to support the farmers, including land reforms and agricultural credit facilities. The Green Revolution was a major turning point, focusing on improving an agricultural productivity through the use of high-yielding crop varieties, modern techniques, and increased use of fertilizers and irrigation. In the industrial sector, the Industrial Policy Resolution (IPR) of 1956 played a significant role. It aimed to strike a balance between the public and private sectors, with the public sector leading in strategic industries. The policy provided a framework for the development of industry in the country. Small Scale Industries (SSI) were recognised for their crucial role in employment generation and rural development. In terms of foreign trade, India followed a policy of import substitution and export promotion. Import substitution is aimed at reducing dependence on foreign goods by encouraging domestic production. The devaluation of the rupee in 1966 also aimed to boost exports. 1. What was the primary economic activity in India on the eve of independence? (1) Heavy industrialisation (2) Services sector (3) Agriculture (4)Foreign trade

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DEVELOPMENT EXPERIENCE (1947-90) AND ECONOMIC REFORMS SINCE 1991

2. What were the common goals of India’s Five-Year Plans following independence? (1) Promoting globalisation and urbanisation (2) Achieving economic self-sufficiency, poverty alleviation, and industrialisation (3) Expanding the advancements

defense

sector

and

technological

(4) Fostering stock market growth and privatisation 3. What significant development strategy is mentioned in the passage for improving agricultural productivity? (1) Land reforms

doing business, and technological upgradation, to take on the formidable challenge of creating millions of jobs, ensuring equitable distribution of national income, and achieving large-scale import substitution. The World Bank has recently approved a loan worth $750 million to address the immediate liquidity and credit needs of India’s MSME sector which has been severely impacted by the Covid-19 crisis. This will give a push to the Atmanirbhar Bharat vision of the government. 6. What is one of the significant transformations mentioned for the MSME sector in 2020? (1) Increased dependence on foreign imports. (2) Launch of a digital marketplace like Amazon.

(2) Export promotion

(3) Decreased contribution to the GDP.

(3) Import substitution

(4) A shift towards luxury products.

(4) Industrial Policy Resolution 4. What was the role of Small-Scale Industries (SSI) in India’s economy according to the passage? (1) They were emphasised for strategic industries. (2) They played a minor role in rural development. (3) They were recognised for their crucial role in employment generation and rural development. (4) They led in import substitution policies. 5. What was the focus of India’s foreign trade policy, as stated in the passage? (1) Import substitution to reduce dependence on foreign goods. (2) Promoting heavy industrialisation through exports. (3) Encouraging a trade surplus at all costs. (4) Implementing a policy of complete trade liberalisation. II. Read the passage and answer the given questions: The MSME sector is poised for a mega transformation in 2020, with the launch of an Alibaba-like e-marketplace, trendy yet affordable khadi products to appeal to the masses, and digital data-based credit ratings to help entrepreneurs avail loans. However, the MSME sector is often considered the bulwark of the economy as it contributes around 29% to the GDP and 48% to the Indian exports. There is an urgent need for major reforms and policy interventions towards ensuring the timely availability of low-cost credit, improving ease of

7. What is the contribution of the MSME sector to India’s GDP, as highlighted in the passage? (1) Around 10%

(2) Approximately 48%

(3) Over 50%

(4) Exactly 29%

8. What urgent reforms and policy interventions are needed for the MSME sector, according to the passage? (1) Expanding imports (2) Focusing on luxury products (3) Timely availability of low-cost credit, improving ease of doing business, and technological upgradation (4) Reduced technological advancements 9. What is the purpose of the $750 million loan recently approved by the World Bank, as per the passage? (1) To encourage imports (2) To promote luxury goods (3) To address the liquidity and credit needs of India’s MSME sector impacted by Covid-19 (4) To support large-scale export 10. Identify which of the following is not an advantage of the MSME sector. (1) It is suited for the utilisation of local resources. (2) It is helpful in the creation of employment opportunities. (3) It requires more capital than labour. (4) It ensures equitable distribution of income in the country.

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (3)

2. (2)

3. (4)

4. (1)

5. (2)

6. (2)

7. (3)

8. (3)

9. (2)

10. (1)

11. (2)

12. (2)

13. (4)

14. (4)

15. (4)

16. (4)

17. (1)

18. (3)

19. (3)

20. (1)

21. (3)

22. (1)

23. (1)

24. (1)

25. (2)

8. (1)

9. (2)

10. (4)

8. (3)

9. (3)

10. (3)

[B] ASSERTION & REASON 1. (2)

2. (4)

3. (1)

4. (1)

5. (1)

6. (1)

7. (2)

[C] CASE BASED QUESTIONS 1. (3)

2. (2)

3. (1)

4. (3)

5. (1)

6. (2)

7. (4)

72 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (3) is correct. Explanation: In reality, growth does not necessarily imply an equal contribution to GDP by each sector of the economy. Economic growth can be characterised by shifts in the contributions of different sectors, with some sectors growing faster or slower than others. Different sectors can play varying roles in driving an overall economic growth. 2. Option (2) is correct. Explanation: B. Setting up of Planning Commission: 1950 E. Karve Committee: 1951 C. Resolution formed on the basis of the second Five-Year Plan: 1956 to 1961. A. Green Revolution: 1960s and 1970s. D. Exchange rate was made fully convertible for Current Accounts: During is the mid-1990s (operationalised on August 19, 1994) 3. Option (4) is correct. Explanation: The correct sequence of the events is as follows: A. British introduced railways in India: The British introduced railways in India during the colonial period to improve transportation and facilitate the movement of goods and people. E. First census conducted by British India: The first population census in British India was conducted in 1871. D. Year of “Great Divide”: The “Great Divide” refers to the year 1921 when India’s population growth rate started to accelerate, marking the transition to a phase of rapid population growth. C. Population explosion according to the 2nd stage of demographic transition theory: The 2nd stage of demographic transition theory is characterised by high birth rates and declining death rates, leading to rapid population growth known as a population explosion. This phase corresponds to the period when India’s population growth rate started to increase significantly after 1921. B. Latest population census: The latest population census is the most recent census conducted to gather comprehensive demographic data of the population. As of the knowledge cutoff in September 2021, the latest population census for India was conducted in 2011. 4. Option (1) is correct. Explanation: The chronological order of the events is as follows: B. Circulation of Fake Currency: This refers to the problem of counterfeit currency circulating in the economy before the demonetisation move. D. Impact on Economic Activities: This event follows the circulation of fake currency and refers to the effects of demonetisation on various economic activities in the country. A. Announcement of Demonetisation: The government’s announcement of demonetisation, which took place on November 8, 2016. C. Rs 500 and 1000 Notes lost the legal tender: Following the announcement, ₹500 and ₹1,000 currency notes lost their status as a legal tender, means they were no longer accepted as valid means of payment. E. New ₹2000 Currency Note in circulation: After the demonetisation move, the government introduced the new ₹2,000 currency notes as part of the currency overhaul. 5. Option (2) is correct. Explanation: The economic policies pursued by the colonial government in India were concerned more with the protection and promotion of the economic interests of their home country

than with the development of the Indian economy. Such policies brought about a fundamental change in the structure of the Indian economy — transforming the country into a supplier of raw materials and a consumer of finished industrial products from Britain. 6. Option (2) is correct. Explanation: A plan should have some clearly specified goals. The goals of the five year plans were: growth, modernisation, self-reliance, economic development and equity. The plans were developed by the Planning Commission. 7. Option (3) is correct. Explanation: India approached the International Bank for Reconstruction and Development (IBRD), popularly known as the World Bank and the International Monetary Fund (IMF), and received $7 billion as a loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reducing the role of the government in many areas and removing trade restrictions between India and other countries. 8. Option (3) is correct. Explanation: The General Agreement on Tariffs and Trade (GATT) was signed by 23 countries in October 1947, after World War II, and became law on Jan. 1, 1948. The New Economic Policy (NEP) of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao. The World Trade Organization (WTO), created in 1995, as an international institution that oversees the rules for global trade among nations. On July 1st 2017, the Goods and Services Tax was implemented in India. 9. Option (2) is correct. Explanation: All the public sector establishments and those private sector establishments which employ 10 hired workers or more are called formal sector establishments and those who work in such establishments are formal sector workers. Those who are working in the formal sector enjoy social security benefits. They earn more than those in the informal sector. 10. Option (1) is correct. Explanation: Post-Green Revolution, the production of wheat and rice doubled due to initiatives of the government. 11. Option (2) is correct. Explanation: Dr. Manmohan Singh was the finance minister in 1991 who later became the prime minister of India under whose supervision economic reforms were introduced in 1991. 12. Option (2) is correct. Explanation: The first stage of demographic transition was experienced in India, during the period of 1891-1921. India entered the second stage of Demographic Transition after the year 1921. In this stage, birth rates remain high while death rates decline, leading to rapid population growth. 13. Option (4) is correct. Explanation: Before India’s independence, the agricultural sector stagnated due to mainly land settlement system. Various land revenue systems such as the Zamindari system, the Ryotwari system and the Mahalwari system exploited cultivators, or farmers very badly which led as to a decline in the agriculture sector.

DEVELOPMENT EXPERIENCE (1947-90) AND ECONOMIC REFORMS SINCE 1991

14. Option (4) is correct. Explanation: The World Trade Organisation is an intergovernmental organisation that helps in facilitating trade and regulating it. Since 1995, it has been providing the platform for the member nations to decide tariff structure and strategies. 15. Option (4) is correct. Explanation: The problem of small scale industries is a shortage of raw material, capacity is not completely utilised and lack of credit needs and lack of capital etc. 16. Option (4) is correct. Explanation: The year of the Great Divide: 1921 Establishment of Tata Iron and Steel Company (TISCO): 1907 Introduction of Railways in India by the British: 1853 Opening of Suez Canal: 1869 17. Option (1) is correct. Explanation: Statement Q is not true as the share of GDP of the agricultural sector remained stagnant even though agricultural productivity increased during this period. 18. Option (3) is correct. Explanation: The Swadeshi Movement started in 1905 and influenced the Indians to actually boycott British goods. This would have likely increased domestic production and decreased the demand for British goods, thus leading to a fall in imports. 19. Option (3) is correct. Explanation: The devaluation of the rupee to encourage the inflow of foreign exchange is a measure that can be seen as a step toward liberalisation, as it promotes exports and foreign exchange earnings. Allowing private banks to make decisions independent of RBI restrictions is indeed a liberalisation measure, as it promotes autonomy in the banking sector. 20. Option (1) is correct. Explanation: A. NABARD (National Bank for Agriculture and Rural Development) was established in 1982 to promote rural and agricultural development. B. RBI (Reserve Bank of India) was founded in 1937 as India’s central banking institution. C. The National Development Council was formed in 1952 to facilitate and guide India’s development policies. D. IDBI (Industrial Development Bank of India) was established in 1964 to support industrial growth and development in the country. 21. Option (3) is correct. Explanation: Globalisation means integrating the economy of the country with the world economy. 22. Option (1) is correct. Explanation: In outsourcing, a company recruits regular service from outside sources, often from other nations, that was earlier implemented internally or from within the nation (like computer service, legal advice, and security, each presented by individual departments of the corporation, and advertisement). 23. Option (1) is correct. Explanation: Agriculture sector is considered to be base for the industrial sector and for economic development. Also, it contributes to National income. 24. Option (1) is correct.

73

Explanation: According to the Industrial Policy Resolution, 1956, Permit License Raj was the policy used in which regulations were required to set up industries by the private sector. 25. Option (2) is correct. Explanation: Many landlords were able to escape the legislation as they transferred some landholdings in the name of their relatives or friends.

[B] ASSERTION & REASON 1. Option (2) is correct. Explanation: The drain of wealth means that British economic policies in India were driven primarily by grabbing huge profits from Indian trade. Foreign trade in India has produced a large export balance. This export balance did not result in the importation of gold or silver to India. There was a drain of India’s wealth into Britain. 2. Option (4) is correct. Explanation: The goal of equitable distribution of land was served due to various reasons such as the abolition of intermediaries, land ceiling and other factors. However big landlords who were not in favour of land ceiling led to delays in the implementation and hence did not favour the legislation. Hence, the reason is true. 3. Option (1) is correct Explanation: After the completion of the Suez Canal in 1869, it was easy for the Europeans to no longer travel all the way around Africa to reach India but could get direct access to the Red Sea from the Mediterranean Sea through the Suez Canal, making the trade easier and the route shorter. Thus, the British could now intensely control India’s Foreign Trade. 4. Option (1) is correct. Explanation: The 12th Five Year Plan tried to raise India’s Gross Enrollment Ratio in higher education in order to make the population more educated and skilled for finding the job that suits them the most. This will increase an employment in the economy and thus will lead to an increase in the growth rate of the country. 5. Option (1) is correct. Explanation: Britain’s main interest was to exploit the Indian market and to function for the main interest of their interests. 6. Option (1) is correct. Explanation: The green revolution benefited small farmers by increasing their production and productivity. 7. Option (2) is correct. Explanation: In this case, insecticides and pesticides were used which resulted in greater production of wheat and rice. 8. Option (1) is correct. Explanation: Disinvestment has led to a fall in the assets of public sector enterprises and hence it led to a rise in improved conditions of those enterprises. 9. Option (2) is correct. Explanation: It was considered that private funds and management skills could be used effectively to improve the performance of PSUs. 10. Option (4) is correct. Explanation: Import substitution implies that goods should be produced in the country rather than importing from the rest of

74 Oswaal CUET (UG) Chapterwise Question Bank the world and import substitution leads to make the balance of payment account favourable and hence foreign trade becomes favourable.

[C] CASE BASED QUESTIONS 1. Option (3) is correct  xplanation: India’s economy was predominantly agrarian at E that time, with the majority of the population engaged in farming. 2. Option (2) is correct  xplanation: The common goals of India’s Five-Year Plans, E are aimed at achieving economic self-sufficiency by reducing dependence on foreign goods, alleviating poverty through improved living standards and increased opportunities, and promoting industrialisation to create jobs and foster economic growth. These goals were crucial in shaping India’s postindependence economic policies and development strategies. 3. Option (1) is correct.  xplanation: Land reforms aimed to address issues related to E land ownership, land distribution, and access to agricultural land to enhance agricultural productivity and reduce inequality in land ownership. 4.  Option (3) is correct.  xplanation: These industries, often characterised by their E smaller scale of operations, were important in providing jobs and economic opportunities in rural areas. This recognition underlines their vital role in fostering economic growth, particularly in rural and less industrialised regions of the country. 5. Option (1) is correct. Explanation: India’s foreign trade policy focused on “import substitution to reduce dependence on foreign goods.” This approach aimed to decrease reliance on imports by encouraging domestic production of goods that were otherwise being imported. The policy aimed to boost self-sufficiency and reduce the trade deficit by fostering the growth of domestic industries and reducing the need for foreign goods. This strategy was a key element of India’s post-independence economic policies and development plans.

ECONOMICS

6.  Option (2) is correct. Explanation: The MSME sector is poised for a significant transformation in 2020, and one of the key transformations is the launch of a digital marketplace similar to Amazon. This indicates a shift towards e-commerce and digital platforms, which can provide MSMEs with broader market reach and opportunities for growth. This transformation is a noteworthy development in the MSME sector in 2020. 7.  Option (4) is correct. Explanation: The MSME (Micro, Small, and Medium Enterprises) sector contributes exactly 29% to India’s GDP. This statistic underlines the significant role played by the MSME sector in the Indian economy. It is important to note this specific percentage as it represents the sector’s economic contribution. 8. Option (3) is correct Explanation: The passage underscores the need for urgent reforms and policy interventions in the MSME sector. These include ensuring timely access to affordable credit, simplifying business processes to improve the ease of doing business, and promoting technological upgradation. These measures are seen as essential to address the challenges faced by the sector, foster growth, and support its vital role in job creation and equitable income distribution. 9. Option (3) is correct. Explanation: The World Bank has recently approved a loan worth $750 million with the specific purpose of addressing the immediate liquidity and credit needs of India’s MSME sector. This loan is intended to provide financial support to the MSME sector, which has been severely impacted by the Covid-19 crisis. It’s aimed at helping the sector overcome the challenges brought about by the pandemic and ensuring its continued functioning and growth. 10. Option (3) is correct. Explanation: MSMEs don’t require heavy capital investment as they produce simple products by using simple technologies mainly labour-intensive production techniques.

Study Time

CHAPTER

9

 Revision notes

Max. Time: 1:25 Hours Max. Questions: 40

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

 Poverty: Poverty is the inability to meet Scan to know more about basic life requirements like food, clothing, this topic housing, education, and healthcare.  Types of Poverty  Relative Poverty: Poverty relative to the living standards of others in differPoverty ent regions or countries.  Absolute Poverty: Total number of people living below the poverty line.  Measuring Absolute Poverty 1. Minimum Calories Consumption Criteria: People not getting 2400 calories per person per day in rural areas and 2100 calories in urban areas are considered below the poverty line. 2. Minimum Consumption Expenditure Criteria: In 2011-12, the poverty line is a monthly per capita consumption expenditure of ₹ 972 in rural areas and ₹ 1,407 in urban areas, or ₹ 32 in rural areas and ₹ 47 in urban areas on a per capita daily basis.  Poverty Line: The minimum average monthly expenditure required by people to meet their basic needs. According to the Tendulkar committee, it’s estimated at ₹ 816 in rural areas and ₹ 1,000 in urban areas. Those earning less are considered below the poverty line.  Poverty in India: Approximately 22% of the population in India lives below the poverty line.  Estimation of Poverty Line:  Calories-based estimation: In 1999-2000, monthly per capita expenditure criteria replaced calorie-based estimation. As per the Tendulkar committee, it’s ₹ 816 per person in rural areas and ₹ 1,000 in urban areas.  Government Approaches to Combat Poverty: 1. Enhancing Economic Growth 2. Specific Programs for Poverty Alleviation 3. Fulfilling Minimum Needs of the Poor  Causes of Poverty: Rapid Population Growth: A rapidly growing population can strain resources and lead to poverty, as resources are spread thin. Low National Product: A low national income or GDP can result in insufficient resources to support the population adequately. Price Inflation: Inflation can erode the purchasing power of the poor, making it difficult to afford basic necessities. Unemployment: Lack of employment opportunities can lead

to income insecurity and poverty for many individuals and families. Slow Economic Growth: A stagnant economy can hinder the creation of new jobs and income-generating opportunities. Lack of Capital: Limited access to financial resources and capital can restrict economic activities and job creation. Rural Indebtedness: High levels of debt, particularly in rural areas, can lead to poverty as borrowers struggle to repay loans. Exploitation Under British Rule: Historical factors, such as colonial exploitation, can have long-lasting economic impacts. Low Education Levels: Limited access to education can restrict people from securing well-paying jobs and improving their economic prospects. Inflationary Pressures: High and volatile inflation can erode the real value of earnings and savings. High Rural-Urban Migration: Migration from rural to urban areas can strain urban resources and lead to poverty for those unable to secure stable employment.  Government Measures to Alleviate Poverty: 1. Food for Work Program. 2. Swarnjayanti Gram Swarozgar Yojana. 3. Pradhan Mantri Gramodaya Yojana. 4. Sampoorna Grameen Rozgar Yojana. 5. Swarn Jayanti Shahri Rozgar Yojana. 6. Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). 7. Jawahar Gram Samridhi Yojana. Scan to know more about  Human Capital Formation this topic  Human Capital: Human capital is the knowledge, skills, and abilities of individuals, contributing to their productivity and a nation’s economic Human Capital growth. Formation  Physical Capital: Physical capital consists of tangible assets like machinery and infrastructure used in the production of goods and services, driving economic development.  Sources of Human Capital Formation  Expenditure on education.  Expenditure on health.  On-the-job training.  Study programs for adults.  Migration and expenditure on information.  Human Resource Development: Development of the workforce of an organisation, business sector, or economy.

76 Oswaal CUET (UG) Chapterwise Question Bank

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77

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

 Role of Human Capital Formation in Economic Growth Raises Production: Human capital, which includes skills, knowledge, and education, contributes to increased productivity and efficiency in various sectors, ultimately boosting overall production. Improves the Emotional and Physical Environment of Growth: A well-educated and skilled workforce can create a conducive environment for economic growth, fostering innovation, creativity, and adaptability. Enhances the Quality of Life: Human capital development improves the standard of living by enabling individuals to access better job opportunities, higher wages, and improved living conditions. Increases Life Expectancy: Better health and healthcare knowledge acquired through human capital formation lead to increased life expectancy, contributing to a healthier and more productive workforce. Develops Innovative Skills: Human capital development nurtures innovative thinking and problem-solving skills, which drive technological advancement and economic growth. Promotes Social Justice and Equality: Access to education and skill development can reduce disparities in income and opportunities, promoting social justice and equality, and fostering economic inclusivity.  Problems Facing Human Capital Formation Rising Population: Rapid population growth can strain educational and healthcare resources, making it challenging to provide quality education and healthcare to all. High Regional and Gender Inequality: Unequal access to education and job opportunities based on region and gender can hinder human capital development, leading to disparities. Brain Drain: The emigration of highly skilled individuals to other countries can result in a loss of human capital and expertise, impacting a nation’s development. Insufficient Manpower Planning: Inadequate planning for workforce development and skill training can result in a mismatch between the skills available and the skills needed in the job market. Lack of On-the-Job Training in Agriculture: Inadequate training and technological advancements in the agricultural sector can limit productivity and impede human capital development in rural areas. High Poverty Levels: Poverty can limit access to education and healthcare, hindering human capital formation, as individuals may not have the means to invest in their own development. Low Academic Standards: A lack of rigorous educational standards can result in a lower quality of education and less effective human capital formation.  Education Process of teaching, training, and learning, especially in schools and colleges, to enhance knowledge and skills. 

 Importance and Objectives of Education 

Produces responsible citizens.



Utilises the country’s resources effectively.



Advances in science and technology.



Expands individuals’ mental horizons.

Elevates cultural standards. Develops human personality.  Problems in Education Development in India  High illiteracy rates.  Inadequate vocational education.  Gender bias.  Low rural access to education.  Insufficient government spending on education. (III) Infrastructure Scan to know  Infrastructure encompasses essential more about services and facilities required for various this topic sectors of an economy, playing a vital role in boosting a country’s economic growth.  

 It contributes to economic development by enhancing productivity, improving the Infrastructure quality of life, and providing essential services for industrial, agricultural, trade, and domestic needs.  Types of Infrastructure 1. Economic Infrastructure



Transport





Power





Communication





Irrigation and watershed management





Science and Technology





Financial Institutions

2. Social Infrastructure



Education





Civic Amenities





Health





Law and Order





Housing

 Importance of Infrastructure 

Enhances productivity



Generates employment



Attracts foreign investments



Improves workforce capabilities



Facilitates outsourcing



Drives economic development



Expands market size



Establishes production linkages

 State of Health Infrastructure Significant expansion in health services since independence, but inadequate for the growing population. 

Disparities in access to public health services between rural and urban areas and rich and poor. 

Challenges in women’s health, including female foeticide and mortality. 

Collaboration with regulated private sector health services, NGOs, and community involvement is crucial for improved healthcare. 

Exploration of the Indian system of medicine (AYUSH) is essential. 

Primary Health Centers (PHCs) have been established at the village level, but further improvements are needed. 

78 Oswaal CUET (UG) Chapterwise Question Bank (IV) Rural Development  Rural Development: Rural developScan to know ment aims to uplift areas lagging behind in more about this topic the overall village economy through various initiatives.  Objectives of Rural Development 1. Enhancing agricultural productivity Rural 2. Creating alternative rural livelihoods Development 3. Promoting education and healthcare in rural regions  Key Issues in Rural Development (i) Establishing a robust rural credit system (ii) Implementing marketing mechanisms for fair agricultural prices (iii) Promoting crop diversification to reduce production risks and encourage commercial farming (iv) Expanding non-farm activities for sustainable rural livelihoods (v) Encouraging organic farming for environmental sustainability (vi) Implementing honest land reforms (vii) Developing human resources, including public health and sanitation (viii) Promoting literacy, education, and skill development (ix) Enhancing rural infrastructure like electricity, irrigation, and transportation  Rural Credit: Rural credit supports farmers with various needs like purchasing tools, seeds, and fertilizers due to the high gestation period between sowing and harvesting.  Sources of Rural Credit in India 1. Non-institutional sources include moneylenders, traders, landlords, friends, and relatives. 2. Institutional sources comprise: (i) Co-operative Credit Societies (ii) Commercial Banks (iii) Regional Rural Banks (iv) NABARD (National Bank for Agriculture and Rural Development) (v) Self Help Groups (SHGs)  Agricultural Marketing Agricultural marketing encompasses activities from gathering produce post-harvest to selling the produce to consumers. It covers processing, grading, packaging, storing, and transporting agricultural products.  Defects of Agricultural Marketing (i) Inadequate warehousing (ii) Excessive middlemen (iii) Malpractice in unregulated markets (iv) Insufficient finance (v) Limited transport and communication means  Government Measures to Improve Marketing (i) Regulating markets (ii) Co-operative agricultural marketing societies

ECONOMICS

(iii) Providing warehousing facilities (iv) Subsidised transport (v) Disseminating marketing information (vi) Buffer stocks and Minimum Support Prices (MSP) (vii) Public Distribution System (PDS) (viii) Alternative marketing channels (ix) Enhancing physical infrastructure  Diversification in Agriculture Activities  Diversification in agriculture involves crop diversification, which lowers risks, promotes commercial farming, and mitigates market risk. It also includes diversification into non-farming employment like animal husbandry, fisheries, horticulture, cottage industries, and IT.  Organic Farming  Organic farming sustains ecological balance by using organic manure, bio-fertilizers, and organic pesticides, contributing to sustainable agricultural development.  Work plays a crucial role in individual lives and society. A worker is someone who engaged in productive activities to earn a living.  Economic activities include consumption, production, and distribution. Production involves activities to create goods and services for income generation. (V) Education  The labour force comprises all working individuals and those who are able and willing to work at current wage rates.  Workforce refers to the actively employed individuals at a specific time, typically within the age group of 15-60 years.  Labour supply is the amount of labour workers are willing to provide at a specific wage rate.  The Workforce Participation Rate is the ratio of the workforce to the total population.  Types of Workers (1) Self-Employed: Individuals who own and operate their enterprises for livelihood. (2) Hired Workers: - Casual Workers: Not hired on a regular basis and lack social security benefits. - Regular Salaried Workers: Receive wages regularly from an employer.  Employment in India  A significant portion of the population is engaged in various economic activities.  Rural men make up the majority of the workforce.  The majority of workers in India are self-employed. Casual wage labourers and regular salaried employees together account for less than half of India’s workforce.  Around three-fifths of India’s workforce relies on agriculture and allied activities for their livelihood.  Jobless Growth: Occurs when GDP grows faster than employment opportunities, leading to unemployment.  Casualisation and Informalisation of Employment: Refers to the rising proportion of casual and informal workers in the workforce.  Unemployment: The situation where willing individuals cannot find work at the prevailing wage rate.

79

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

 Types of Unemployment 1. Rural Unemployment:  Seasonal Unemployment: Occurs during specific seasons.  Disguised Unemployment: People working in jobs that are not required. 2. Other Types of Unemployment:  Open: A person is not employed.  Frictional: Temporary unemployment while transitioning between jobs.  Structural: Mismatch of skills and job requirements.  Cyclical: Linked to business cycles. 3. Urban Unemployment:  Industrial Unemployment: In industrial sectors.  Educated Unemployment: Skilled individuals without jobs.  Technological Unemployment: Due to technological advancements.  Causes of Unemployment 1. Economic Slowdown 2. Population Growth 3. Underdeveloped Agriculture 4. Defective Education System 5. Slow Industrial Growth 6. Decline in Small-Scale Industries 7. Faulty Planning 8. Inadequate Employment Planning 9. Low Capital Formation 10. Excessive Use of Foreign Technology 11. Lack of Financial Resources 12. Increase in Labour Force  Remedial Measures for Unemployment 1. Accelerating GDP Growth 2. Population Control 3. Development of Small-Scale Enterprises 4. Infrastructure Development 5. Special Employment Programs 6. Rapid Industrialisation  Special Programs for Poverty and Unemployment  Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA): Provides guaranteed employment for those below the poverty line in rural areas.  Special Programs: Swarnjyanti Sahari Rozgar Yojna, Swarnjyanti Gram Swarozgaar Yojna, Pradhan Mantri Gramodaya Rozgar Yojna. (VI) Sustainable Development  Environment: It means, at a particular place, surrounding or conditions in which our organism lives and operates.  Physical Environment: This is also known as a nonbiological environment. It includes land, water, climate, mountains minerals and all other sources which nature provides to us as a free gift.

 Biological Environment: It is also called a living environment. It includes humans, animals, birds, plants and all micro organisms.  Functions and Roles of the Environment: 1. Resource Supply 2. Life Sustenance 3. Waste Assimilation 4. Quality of Life Enhancement  Causes of Environmental Degradation: 1. Population Growth 2. Poverty 3. Agricultural Development 4. Industrialisation 5. Transport Development 6. Urbanisation 7. Foreign Indebtedness 8. Market Failure  Effects of Economic Development on Environment or Resources: (i)

Global warming

(ii) Depletion of the Ozone layer (iii) Environmental crisis (iv) Rise in the opportunity cost of negative environmental impacts (v) Supply-Demand reversal of environmental resources (vi) Air Pollution (vii) Water Pollution (viii) Solid and hazardous waste (ix) Deforestation (x) Land degradation  Sustainable Development: Development that means the needs of the present generation without compromising the ability of future generation to meet their own needs is called sustainable development.

Scan to know more about this topic

Sustainable Development

 Objective of Sustainable Development: (i)

To increase economic growth

(ii) To meet basic needs (iii) To improve quality of life (iv) To maximise the net benefits of future generations.  Strategies to achieve Sustainable Development: (i)

Use of Non-conventional sources of energy

(ii) LPG and Gobar gas in rural areas (iii) CNG in urban areas (iv) Wind power, Solar power through photovoltaic cells (v) Mini hydel plants (vi) Bio-composting (vii) Bio-pest control

80 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS

1. Match the following and choose the correct answer:  [CUET 2023] Column I

Column II

A. NABARD

I. Women-oriented community bared poverty reduction program

B. KUDUMBASHREE

II. Uses the mixed croplivestock farming system

C. Animal Husbandry

III. HYV seed, chemical fertilizers

D. Organic Farming

IV. Set up in 1982

(1) A-IV, B-III, C-II, D-I (2) A-IV, B-I, C-II, D-III (3) A-IV, B-II, C-I, D-III (4) A-III, B-I, C-II, D-IV 2. Arrange the following events in proper sequence.  [CUET 2023] (A) Ultraviolet radiation causes skin cancer (B) High levels of chlorine and bromine compounds in the stratosphere (C) Fridge brought to the house (D) Chlorofluore carbons used as a cooling agent (E) Depletion of the ozone layer Choose the correct answer from the options given below: (1) B, C, D, E, A (2) C, D, E, B, A (3) C, D, B, E, A (4) E, D, C, B, A 3.  Which of the following is not true about the benefits of education? [CUET 2023] (1) Increases skewed income distribution (2) Raises standard and quality of living (3) Increases participation rate (4) Develops mental abilities 4. Disadvantages of casualisation of the workforce:  [CUET 2023] (A) No paid leave (B) No regular income (C) No access to training (D) Permission to take leave is not required (E) Less working hours Choose the correct answer from the options given below: (1) A, C and E only (2) B. C and D only (3) A, B and C only (4) C, D and E only 5. Match the following and choose the correct option:  [CUET 2023] Column I

Column II

A. Regular I. Common form of Salaried Employees unemployment in rural India B. Self-employed

II. Assurance of minimum 100 days of employment

C. MGNREGA

III. Who owns and operates an enterprise to earn their livelihood

D. Disguised IV. Permanent workers employment (1) A-IV, B-II, C-I, D-III (2) A-II, B-III, C-I, D-IV (3) A-IV, B-III, C-II, D-I (4) A-I, B-II, C-IV, D-III

6. Match the following and choose the correct option:  [CUET 2022] Column I

Column II

A. Growth in GDP without generating employment

I. Formal sector

B. Process of moving selfemployment and regular salaried to casual wage work

II. Jobless growth

C. All establishments which III. Casualisation employ 10 hired workers or more of workforce D. Increase in proportion of workforce in the informal sector

IV. Informalisation of workforce

(1) A-II, B-I, C-IV, D-III (2) A-II, B-III, C-I, D-IV (3) A-III, B-II, C-I, D-IV (4) A-II, B-I, C-III, D-IV 7. A farmer wants to take credit to meet his expenditure on agricultural inputs. Which of the following is not an institution he may approach for the credit? [CUET 2023] (1) Regional Rural Banks (RRBs) (2) National Bank for Agriculture and Rural Development (3) Commercial Banks (4) Land Development Banks 8. The following is a part of the Agriculture marketing system. [CUET 2022] (1) Minimum Support Price (2) Buffer Stock (3) Micro Credit Programmes (4) Public Distribution System Choose the correct answer from the options given below: (1) A and B only (2) A and D only (3) B, C and D only (4) A, B and D only 9. The apex body that coordinates the activities of all institutions involved in the rural financing system is:  [CUET 2023] (1) National Bank for Allied Activities and Rural Development (2) National Bank for Agriculture and Road Development (3) Reserved Bank of India (4) National Bank for Agriculture and Rural Development 10.  Which of the following is not a feature of an unorganized sector? [CUET 2023] (1) No job security (2) Social security schemes (3) Irregular payment (4) No fixed working hours 11. Identify the incorrect statement relating to the need for government intervention in the education and health sector. [CUET 2022] (1) Expenditure in education and health has a long-term impact and cannot be easily reversed. (2) Individual consumers of education and health care services do not have complete information about the quality of service and cost. (3) Large section of India’s population lives below its poverty line. (4) Basic education and health care are not considered as a right of the citizens.

81

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

12. The process which involves assembling storage processing, transporting, packaging, grading and distributing of different agriculture products across the country is known as ............... . [CUET 2022] (1) TANWA (2) Agriculture Marketing (3) Diversification (4) Cooperative Marketing 13. Distribution of employment by gender. Female Workers Male Workers Casual Casual 29% 56% Self 51% Self Employment Employment 20% Regular



Regular

Observe the pie chart and identify the major source of livelihood for both men and women. [CUET 2022]

(1) Casual wage labourers (2) Hired workers (3) Self-employed (4) Regular salaried employees 14. AYUSH stands for: (1) Aloe vera, Yoga, Unity, Siddha, Naturopathy and Homeopathy

19.  Ms. Ramanpreet has started a new business venture, she intends to spend a huge amount towards the ‘on-the-job training’ of her workers before putting them to work. It exhibits the right step in the direction of Human Capital Formation. Spot which of the following does not directly contribute to the process of human capital formation by Ms Ramanpreet:  (1) adds skills and expertise (2) improves efficiency (3) ensures gender equity (4) increases output productivity 20.  India faces ‘educated unemployment’. Even though the number of educated individuals ready for jobs has increased, they are unemployed. Which of the following is MOST LIKELY the reason for this? (1) The supply of labour is much higher than demand. (2) Investments in health have not taken place proportionally. (3) Although more students are enrolled in schools, there is a high dropout rate. (4) Reverse migration has not been accompanied by alternative employment opportunities.

(2) Ayurveda, Yin Yan, Unani, Spirituality and Homeopathy

21. Which of the following could aid in human capital formation?

(3) Ayurveda, Yoga, Unani, Siddha, Naturopathy and Homeopathy

(1) Expanding the labour market by increasing the supply of jobs

(4) Aloe vera, Yin Yan, Unani, Siddha and Homeopathy

(2) Creating larger industries with more complex equipment (3) Creating open markets with increased stability

15. An indicator used by experts to gauge the number of people dying prematurely due to a particular disease as well as the number of years spent by them in a state of disability owing to the disease is called ............... . [CUET 2022] (1) Grief of burden of disease (2) Goal burden of disease (3) Global burden of disease (4) Great burden of disease 16. Infrastructure contributes to the economic development of a country by: [CUET 2022] (1) Increasing the productivity of factors of production and improving the quality of life of its people (2) By improving quality of life and increasing transportation facilities (3) Increasing housing facilities (4) Increasing banking facilities and educational opportunities 17. The ability of the environment to absorb degradation is called: [CUET 2022] (1) Carrying capacity (2) Global warming (3) Ozone depletion (4) Absorptive capacity 18. Identify the incorrect statement from the following. (1) Diversification in the agriculture sector provides sustainable livelihood options to the rural population. (2) Diversification includes a change in cropping pattern, the shift of workforce from agriculture to other allied activities and non-agriculture sector. (3) The objective of investment in new agricultural avenues (non-farm activities) increases financial risks for the rural population. (4) Diversification reduces the proportion of the unemployed population in rural areas to considerable limits.

(4) Promoting gender equality in the family 22. Unemployment which is caused by the introduction of new machinery, improvement of production techniques, labour saving devices, etc., is called: (1) frictional unemployment (2) casual unemployment (3) structural unemployment (4) technological unemployment 23. Who amongst the following, has received the greatest investment in human capital formation? (1) a nurse in a clinic who is frequently absent because of his ill health (2) a 12-year-old who helps her mother with construction work (3) a 10th-pass girl who works as a store manager in a mall (4) a computer science graduate who works at a call centre 24. Which of the following is the CORRECT difference between physical and human capital? (1) Physical capital can be sold but human capital cannot be sold. (2) Physical capital cannot be separated from its owner while human capital can. (3) Physical capital provides both private and social benefits while human capital provides only social benefits. (4) The depreciation of physical capital can be corrected with more investment while human capital will continue to deplete.

82 Oswaal CUET (UG) Chapterwise Question Bank

(1) A-I, B-III, C-II, D-IV (2) A-I, B-IV, C-III, D-II (3) A-I, B-II, C-III, D-IV (4) A-II, B-III, C-I, D-IV 26. Prime Minister’s Rozgar Yojana was started in: (1) 1990 (2) 1991 (3) 1992 (4) 1993 27. Which two states of India continue to be the poorest states? (1) Orissa, Bihar (2) Uttar Pradesh, Jharkhand (3) Madhya Pradesh, Maharashtra (4) None of the above 28. ________ is a vital component of a well-functioning and equitable society, contributing to the overall development and welfare of its citizens. (1) Social Infrastructure (2) Common Infrastructure (3) Economic Infrastructure (4) None of these 29. Economic infrastructure supports the economy_____. (1) Indirectly (2) Directly (3) Doesn’t affect (3) None of these 30. Which of the following is/ are examples of Economic Infrastructure? (A) Transport (B) Education (C) Health (D) Communication (1) A only (2) A and B only (3) A and C only (4) A and D only

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): Since the default rates of farm loans have become chronically high due to multiple reasons, the rural banks are facing a lot of cash crunch.  Reason (R): Due to lack of proper storage facilities a lot of farm produce is wasted. 2.  Assertion (A): In developing countries, the growth of human capital has been faster than the growth is rather nebulous.  Reason (R): Empirical evidence to prove that an increase in human capital causes economic growth is rather nebulous.

[C] CASE BASED QUESTIONS I.  Read the following image and answer the following questions: Population Below Poverty Line in Some Large States, 1973-2012 (%) 70 50

55 49

40

17

0



57

46 36

34

20

63 55

53

48

30 10

66

62

62

60

32

33

29

21 15

9

20 11

1973-74 2011-12

West Bengal

IV. 1991

Uttar Pradesh

D. Beginning of Swarna Jayanti Shahari Rozgar Yojana (SJSRY)

Tamil Nadu

III. 1997

Odisha

C. Beginning of the National Rural Employment Guarantee Scheme

Rajasthan

II. 2001

Maharashtra

B. Beginning of Sampoorna Grameen Rozgar Yojana

Karnataka

I. 2005

Madhya Pradesh

A. Beginning of Swarna Jayanti Gram Swarojgar Yojna (SJGSY)

Gujarat

Column II

Bihar

Column I

3.  Assertion (A): Human capital formation is the process of adding to the stock of human capital over time.  Reason (R): Human capital formation leads to a higher employment rate. 4. Assertion (A): Most members of the Scheduled Castes and the Scheduled Tribes are not able to participate in the emerging employment opportunities in different sectors.  Reason (R): Casual labourers are among the most vulnerable in society as they have no job security. 5. Assertion (A): Human Capital can be developed without investing in the health sector.  Reason (R): Education helps in skill development and the generation of more employment opportunities. 6. Assertion (A): Human Capital Formation gives birth to innovation, invention and technological improvements.  Reason (R): Human capital formation is to be done through conscious policy formulations. 7. Assertion (A): Farmers need credit because most farmers in India are small and marginal landholders who practice subsistence farming.  Reason (R): The gestation period between sowing and harvesting is quite high. So, farmers have to borrow to fulfill their various needs during this period. 8. Assertion (A): Less women are found in regular salaried employment.  Reason (R): Women workers accord the highest priority to self-employment because of the mobility of the female labour work force both in urban as well as in rural areas. 9. Assertion (A): Power is an example of social infrastructure.  Reason (R): Social infrastructure comprises the foundational services, facilities, and systems that support the well-being, development, and quality of life of a society’s citizens. 10. Assertion (A): Although there has been a steady decline in poverty over the last two decades, the total number of poor people has remained constant.  Reason (R): There has been a considerable growth in population.

Andhra Pradesh

25. Match the following and choose the correct option:

ECONOMICS

[CUET 2022]

1. Which state had the lowest population of poor in 20112012?

83

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

(1) Madhya Pradesh (3) Odisha

(2) Andhra Pradesh (4) Bihar

2. Which state had the highest population of poor in 197374? (1) Odisha (2) Tamil Nadu (3) Andhra Pradesh (4) Rajasthan 3. Which state had the highest population of poor in 201112? (1) Odisha (2) Bihar (3) Maharashtra (4) Madhya Pradesh 4. Which two states had the same proportion of people below the poverty line in 1973-74? (1) Odisha and West Bengal (2) Gujarat and Andhra Pradesh (3) Bihar and Madhya Pradesh (4) Gujarat and West Bengal 5. ............... state reduced poverty level much better than other states. (1) Tamil Nadu

(2) Odisha

(3) Bihar (4) Madhya Pradesh II.  Read the article given below and answer any four questions that follows: Access to adequate and timely credit at affordable rates is critical for the rural poor to alleviate high cost debt and invest in livelihood opportunities. Despite the Government of India’s best efforts, financial inclusion of the rural poor has been beset with multiple challenges. Lack of adequate banking infrastructure and human resources in rural areas, unplanned expansion leading to unviable bank branches and low levels of financial literacy amongst the rural populace have been some of the key challenges. The most vulnerable communities, who often had no formal credit history or ability to provide collateral, have often been the worst affected.The inability to access loans from banks meant that the poorest had to resort to moneylenders for loans at unreasonably high rates of interest that invariably led them into a toxic debt trap. In this context, the SHG-Bank Linkage Programme, formalised by the National Bank for Agriculture and Rural Development (NABARD) in 1995, synthesizes ‘formal financial systems’ (in terms of a formal institution providing credit) with the ‘informal sector’ (comprising of rural poor with no formal credit history), has emerged as a preferred vehicle for providing financial services to the hitherto unbanked poor. Community-Based Repayment Mechanisms (CBRMs)

have been institutionalised at branches involved in financing SHGs to monitor and ensure timely repayment of loans by SHGs. The number of SHGs with outstanding bank loans stands at nearly 5 million today, implying that the program has brought formal banking services to over 50 million women. Source (edited): Kumar, Shantanu; Pinto, Alreena Renita; Arora, Amit; Roy, Sourav. 2020. SHG-Bank Linkage : A Success Story. South Asia Agriculture and Rural Growth Discussion Note Series; No. 3. World Bank, Washington, DC. https://openknowledge. worldbank.org/handle/10986/34725 6. Why is it important to ensure access to cheap formal sector credit to the rural poor? (1) to create a culture of savings and investment (2) to increase the earnings of the regional rural banks (3) to protect them from predatory lending and debt traps (4) to promote collectivization and organisation among them 7. Which of the following is a crucial area of improvement for rural banking? (1) risk protection for small businesses (2) profitability of non-farm activities (3) a culture of deposit mobilisation (4) sustainable development 8. This programme would be successful if it could support a large number of people. What would the number of beneficiaries depend on? (1) community support among them (2) their level of average income (3) their level of financial literacy (4) a culture of saving money 9. What could be the main reason for the institutionalisation of Community-Based Repayment Mechanisms (CBRMs)? (1) Rural people should play an active role in the bank’s dayto-day functions. (2) If the repayment rate is low, banks would be reluctant to sanction fresh loans. (3) High number of default loans is a burden on the government budget. (4) Rural people deliberately refuse to pay back loans to banks. 10. Which of the following is likely to be the MAIN objective of this programme? (1) providing livelihood to women (2) financial literacy for rural people (3) building community-bank partnerships (4) enabling credit access for the rural poor

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (2)

2. (3)

3. (1)

4. (3)

5. (3)

6. (2)

7. (2)

8. (4)

9. (4)

10. (2)

11. (4)

12. (2)

13. (3)

14. (3)

15. (3)

16. (1)

17. (4)

18. (3)

19. (3)

20. (1)

21. (4)

22. (4)

23. (4)

24. (1)

25. (3)

26. (4)

27. (1)

28. (1)

29. (2)

30. (4)

8. (1)

9. (4)

10. (1)

[B] ASSERTION & REASON 1. (2)

2. (2)

3. (2)

4. (2)

5. (1)

6. (1)

7. (2)

84 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

[C] CASE BASED QUESTIONS 1. (2)

2. (1)

3. (4)

4. (3)

5. (1)

6. (3)

7. (3)

8. (2)

9. (2)

10. (4)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (2) is correct. Explanation: A. NABARD (National Bank for Agriculture and Rural Development) was established on July 12, 1982. It is a financial institution in India that primarily focuses on agricultural and rural development. B. Kudumbashree is a poverty eradication and women empowerment program implemented in the state of Kerala, India. It aims to improve the quality of life of women by organising them into community-based groups and providing support for income-generating activities. C. Animal husbandry refers to the branch of agriculture that focuses on the breeding, care, and management of animals, primarily livestock, for various purposes, such as milk, meat, wool, and other products, as well as labour and companionship. D. Organic farming is an agricultural practice that avoids synthetic chemicals and emphasises natural methods to cultivate crops and raise livestock. 2. Option (3) is correct. Explanation: C. Fridge brought to the house - This event represents the introduction of household refrigeration systems. D. Chlorofluorocarbons used as a cooling agent Chlorofluorocarbons (CFCs) were commonly used as a cooling agents in refrigeration systems. B. High levels of chlorine and bromine compounds in the stratosphere - When CFCs are released into the atmosphere, they eventually reach the stratosphere, where they break down, releasing chlorine and bromine compounds. E. Depletion of the ozone layer - The release of chlorine and bromine compounds in the stratosphere leads to the depletion of the ozone layer, allowing harmful ultraviolet (UV) radiation to reach the Earth’s surface. A. Ultraviolet radiation causes skin cancer - Depletion of the ozone layer results in increased exposure to harmful ultraviolet radiation, which is a known cause of skin cancer. 3. Option (1) is correct. Explanation: Education is generally associated with reducing income inequality and improving economic opportunities, as it equips individuals with the skills and knowledge necessary to access better job opportunities and higher income levels. Education can play a role in promoting a more equitable distribution of wealth and opportunities within a society. 4. Option (3) is correct. Explanation: “No paid leave” means that casual workers may not receive paid time off for vacations or sick days. “No regular income” indicates that their earnings can be inconsistent or irregular. “No access to training” implies that they may miss out on opportunities for skill development and career advancement typically offered to regular employees, making them more vulnerable in the job market. 5. Option (3) is correct. Explanation: A. Regular Salaried Employees: Permanent workers with stable job positions.

B. Self-employed: Individuals who own and operate their own businesses or enterprises to support themselves. C. MGNREGA: Government program assuring a minimum of 100 days of employment in rural areas. D. Disguised employment: A prevalent form of underemployment and unemployment in rural India, characterised by more labourers engaged in a task than required for efficiency. 6. Option (2) is correct. Explanation: A. Growth in GDP without generating employment (II. Jobless growth) - Economic growth that doesn’t lead to job creation. B. Process of moving self-employment and regular salaried to casual wage work (III. Casualisation of the workforce) - The shift from self-employment or regular employment to more casual or temporary work arrangements. C. All establishments which employ 10 hired workers or more (I. Formal sector) - The formal sector includes businesses with 10 or more hired workers, typically regulated and structured. D. Increase in the proportion of the workforce in the informal sector (IV. Informalisation of the workforce) - The growth of employment in less regulated and often unorganized sectors of the economy. 7. Option (2) is correct. Explanation: NABARD primarily functions as a development and refinance agency that supports and coordinates the activities of other financial institutions involved in rural and agricultural finance. Farmers usually access credit through the RRBs, Land Development Banks, etc. rather than directly from NABARD. 8. Option (4) is correct. Explanation: The Minimum Support Price is a guaranteed price set by the government to support farmers for their produce, Buffer Stock involves maintaining a reserve of essential commodities to manage price fluctuations and food security, and the Public Distribution System ensures fair distribution of these commodities to consumers. These elements collectively contribute to the stability of agricultural markets and secure the availability of food to the population. 9. Option (4) is correct. Explanation: The apex body that coordinates the activities of all institutions involved in the rural financing system in India is the National Bank for Agriculture and Rural Development (NABARD). NABARD plays a crucial role in promoting agricultural and rural development by providing financial and developmental support to various institutions and initiatives in the rural sector. 10. Option (2) is correct. Explanation: Social security schemes are typically associated with the organised sector, where employees have access to benefits like provident funds, health insurance, and other forms of social security. The unorganised sector often lacks such formal social security provisions. 11. Option (4) is correct. Explanation: Human welfare should be increased through investments in education and health even if such investments

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

do not result in higher labour productivity. Therefore, basic education and basic health are important in themselves, irrespective of their contribution to labour productivity. In such a view, every individual has a right to get basic education and basic health care, that is, every individual has a right to be literate and lead a healthy life. 12. Option (2) is correct. Explanation: The mechanism through which the goods reach different places depends on the market channels. Agricultural marketing is a process that involves the assembling, storage, processing, transportation, packaging, grading and distribution of different agricultural commodities across the country. Agricultural marketing has come a long way with the intervention of the government in various forms. 13. Option (3) is correct. Explanation: As can be seen in the two pie charts, about 51 per cent of male and 56 per cent of female workforce in India belongs to self-employed which is more than the casual workers and Regular salaried employees combined together. 14. Option (3) is correct. Explanation: AYUSH stands for Ayurveda, Yoga, Unani, Siddha, Naturopathy, and Homeopathy. These are various traditional systems of medicine and healthcare practices recognised in India. 15. Option (3) is correct. Explanation: Global burden of disease (GBD) is an indicator used by experts to gauge the number of people dying prematurely due to a particular disease, as well as, the number of years spent by them in a state of ‘disability’ owing to the disease. A 2017 study shows nearly two-thirds of GBD, now known as the Total Burden of Disease was caused by noncommunicable diseases associated with the heart, respiratory system – lungs, kidney, obesity and lifestyle. 16. Option (1) is correct. Explanation: Infrastructure is a vital catalyst for a country’s economic development, as it increases the productivity of factors of production, including labour and capital, and simultaneously enhances the quality of life for its citizens. Well-developed infrastructure, comprising transportation, energy, communication, and social services, enables businesses to operate efficiently, thus promoting economic growth, and it also directly benefits the general population by providing improved living standards and access to essential services. 17. Option (4) is correct. Explanation: The ability of the environment to absorb degradation is referred to as “Absorptive capacity.” This term represents the environment’s capacity to endure or mitigate the negative impacts of various human activities and forms of pollution. 18. Option (3) is correct. Explanation: Diversification in agriculture is necessary for the economic development of a country. Diversification is of two types: Diversification of crop production and diversification of productive activities. It provides extra employment opportunities to rural people, helps them earn higher income and thus overcoming poverty. Investment in new agricultural opportunities does not increase financial risks for the rural

85 population. 19. Option (3) is correct. Explanation: By providing on-the job training to the workers, it leads to addition to an human capital by adding in their skills and expertise. Also, improving their efficiency and increasing the productivity of output by them. But it does not directly lead to gender equity. 20. Option (1) is correct. Explanation: India being a developing country, does it not have as many job opportunities as the number of educated individuals in the market. This creates a shortage of demand for employees with regard to the supply of labour or workforce in the country. 21. Option (4) is correct. Explanation: Human Capital can be aided by promoting gender equality as almost 50% of the workforce is actually women. Empowering women will make the human capital stronger and more efficient. 22. Option (4) is correct. Explanation: When new machinery or production techniques are introduced, they often lead to increased efficiency and productivity but can reduce the demand for labuor in certain industries or job roles. As a result, workers who were previously employed in these roles may find themselves unemployed or need to acquire new skills to remain relevant in the evolving job market. This type of unemployment highlights the impact of technology on the labour force and the need for workers to adapt to changing job requirements. 23. Option (4) is correct. Explanation: A nurse who is frequently ill is not the greatest investment in human capital as she is not being productive and is a burden to the development. It also shows that better health facilities need to be built. A 12 – year old is not considered as a part of the workforce. A 10th pass girl is not educated enough. Thus, only a computer science graduate working in a call centre is the greatest investment. 24. Option (1) is correct. Explanation: The key difference between physical and human capital is that physical capital, such as machinery or infrastructure, can be sold or transferred between owners, whereas human capital, which refers to an individual’s knowledge, skills, and abilities, cannot be sold or transferred in the same way. 25. Option (3) is correct. Explanation: A. Swarna Jayanti Gram Swarojgar Yojna (SJGSY) (2005) This program aimed to promote self-employment opportunities in rural areas by providing financial assistance and training to individuals or self-help groups for income-generating activities. B. Sampoorna Grameen Rozgar Yojana (2001) - This scheme focused on providing wage employment opportunities to rural labourers through infrastructure development projects in villages. C. National Rural Employment Guarantee Scheme (1997) This initiative aimed to provide rural employment opportunities and ensure livelihood security for households in rural areas by guaranteeing 100 days of wage employment per year.

86 Oswaal CUET (UG) Chapterwise Question Bank D. Swarna Jayanti Shahari Rozgar Yojana (SJSRY) (1991) - This program aimed to provide gainful employment to the urban unemployed and underemployed poor by promoting selfemployment ventures and skill development in urban areas. 26. Option (4) is correct. Explanation: The Prime Minister’s Rozgar Yojana was started in 1993. This program aimed to provide employment opportunities to the unemployed and underemployed population in India, especially in rural and urban areas. 27. Option (1) is correct. Explanation: Orissa (now known as Odisha) and Bihar were among the poorest states in India in terms of economic development. These states faced significant challenges in terms of poverty, infrastructure development, education, and access to basic amenities. 28. Option (1) is correct. Explanation: Social infrastructure is a crucial element in a thriving and equitable society. It encompasses services such as education, healthcare, and housing that directly impact citizens’ well-being, foster inclusivity, and support human capital development. By ensuring equal access to these vital services, social infrastructure plays a fundamental role in enhancing the quality of life, reducing disparities, and strengthening social cohesion within a community or nation. 29. Option (2) is correct. Explanation: Economic Infrastructure supports the economy directly. It includes essential components such as transportation, energy, communication, and utilities, which play a fundamental and direct role in facilitating economic activities, trade, and overall economic growth. 30. Option (4) is correct. Explanation: Transport and Communication are vital for facilitating economic activities, trade, and overall economic development. Education and health are typically considered social infrastructure, as they primarily contribute to the wellbeing and quality of life of a society’s citizens.

[B] ASSERTION & REASON 1. Option (2) is correct. Explanation: Both Rural banks are facing a lot of cash crunch due to default rates of farm loans having increased by a large amount. Also, farm produce gets wasted due to a lack of proper storage facilities. 2. Option (2) is correct. Explanation: Empirical evidence to prove that an increase in human capital causes economic growth is rather nebulous because of measurement problems. This is because education measured in terms of years of schooling, teacher-pupil ratio etc., does not reflect the quality of education, health services measured in monetary terms, life expectancy and mortality rate do not measure the health status of the people in an economy. Using the indicators mentioned above an analysis of improvement in health, education and growth in per capita income In both developed and developing countries shows that there is convergence in the measures of human capital but no convergence of per capita real income. 3. Option (2) is correct Explanation: Human capital formation leads to a higher employment rate. With an increase in employment,

ECONOMICS

productivity rises. Also, increase in employment opportunities also increases the level of income and this helps in reducing inequalities of wealth. Human Capital Formation is the process of acquiring and increasing the number of people who have the skills, education, and experience which are critical for the economic and political development of a country. In other words, human capital formation is the process of adding to the stock of human capital over time. 4. Option (2) is correct. Explanation: Most members of the Scheduled Castes and the Scheduled Tribes are not able to participate in the emerging employment opportunities in different sectors of the urban and rural economy as they do not have the necessary knowledge and skills to do so. Casual labourers are among the most vulnerable in society as they have no job security, no assets, limited skills, sparse opportunities and no surplus to sustain them. 5. Option (1) is correct. Explanation: Health and Education are the components of Human Capital. Thus, the development of Human Capital is not complete if there is no investment in the health sector. Education expenditure is an important source of human capital formation as it is the most effective way of enhancing and enlarging a productive workforce in the country. Health is another important source of human capital formation. A sick labourer without access to medical facilities is compelled to abstain from work and there is a loss of productivity. 6. Option (1) is correct. Explanation: Human Capital Formation not only increases the productivity of available human resources but also stimulates innovation and creates the ability to adopt new technologies. Investment in education creates the ability to adopt newer technologies, and facilitates invention and innovation since the educated workforce generally adapts to modern technologies and innovation. 7. Option (2) is correct. Explanation: Credit is the lifeline of the farming activity. Rural credit means providing credit for the farmer’s community. Farmers need credit because most farmers in India are small and marginal land holders who practice subsistence farming. They have no surplus for further production. The gestation period between sowing and harvesting is quite high. So, farmers have to borrow to fulfil their various needs during this period 8. Option (1) is correct. Explanation: In India, it is very difficult for women to work in a regular salaried employed jobs. The reason being the women work force is not allowed mobility so they are not allowed to move away from their native place leading them to be selfemployed. 9. Option (4) is correct. Explanation: Power generation and distribution typically fall under the category of economic infrastructure, as they directly support economic activities, trade, and overall development. Social infrastructure primarily encompasses services such as education, healthcare, housing, and cultural and recreational facilities that contribute to the well-being and quality of life of a society’s citizens. 10. Option (1) is correct. Explanation: Despite a steady decline in the poverty rate over the last two decades, the total number of poor people

CURRENT CHALLENGES FACING THE INDIAN ECONOMY

has remained constant. This phenomenon is primarily due to significant population growth. The reduction in the percentage of people living in poverty can be offset by the increase in the overall population, leading to a consistent number of individuals experiencing poverty.

[C] CASE BASED QUESTIONS 1. Option (2) is correct. Explanation: Andhra Pradesh had the lowest population of poor in 2011 – 12. It was 9% in the year 2011 - 2012. 2. Option (1) is correct. Explanation: Odisha had the highest population in 1973-74. It was 66% as compared to other states. 3. Option (4) is correct. Explanation: Madhya Pradesh had the highest population of poor in 2011 – 12. It was 36% in the year 2011 – 2012 as compared to other states. 4.  Option (3) is correct. Explanation: Bihar and Madhya Pradesh had the same proportion of people below the poverty line in 1973-74. It was 62%. 5. Option (1) is correct. Explanation: Tamil Nadu has reduced the poverty level much better than other states. It has reduced from 55% in 1973 – 74 to 11% in 2011-12 as compared to other states. 6.  Option (3) is correct. Explanation: Providing access to affordable formal sector credit is crucial for safeguarding the rural poor from falling into predatory lending practices. When rural individuals lack access to low-cost credit, they may resort to borrowing from informal lenders or moneylenders who often charge exorbitant interest rates, leading to debt traps and financial vulnerabilities.

87 Access to cheap formal sector credit helps protect them from such exploitative lending practices and allows them to borrow at reasonable interest rates, reducing the risk of indebtedness. 7. Option (3) is correct. Explanation: The most important area for rural banking is the culture of deposit mobilisation because money deposited by savers can be utilised properly by providing loans to the farmers who need it the most to buy implements, seeds, other inputs etc. 8. Option (2) is correct Explanation: The income level of the target population is a critical factor that can determine eligibility and the number of people who benefit from a program. Programs that target lowincome individuals, for example, will have more beneficiaries. 9. Option (2) is correct. Explanation: When the repayment rate is low, banks become reluctant to sanction fresh loans because it affects their financial sustainability. CBRMs are established to improve the repayment rates and ensure that loans are repaid consistently, reducing the risk of defaults. This mechanism helps enhance the credibility of borrowers and enables banks to continue providing financial support to rural communities. 10. Option (4) is correct. Explanation: The program aims to enable credit access for the rural poor, which is a critical aspect of improving the economic well-being of disadvantaged rural communities. While other objectives like providing livelihood opportunities to women, promoting financial literacy, and building communitybank partnerships may also be important components of the program, enabling credit access for the rural poor is often the primary goal to help them overcome poverty and enhance their economic prospects.

Study Time

CHAPTER

10

Max. Time: 1:25 Hours Max. Questions: 40

DEVELOPMENT EXPERIENCE OF INDIA

 Revision notes

 India, China, and Pakistan initiated their development strategies in the mid-20th century, with India’s Five-Year Plan in 1951, Pakistan’s Medium-Term Plan in 1956, and China’s First Five-Year Plan in 1953. Their early growth rates and per capita incomes were comparable. Scan to know  Development Strategies: more about this topic

 India:  Open Trade System  Poverty Reduction Programs  Rural Development Initiatives Development  Employment Generation Experience of India  China:  Great Leap Forward (GLF) Scan to know more about  Cultural Revolution this topic  1978 Reforms  Industrial Sector Reforms  Special Economic Zones (SEZs)  Pakistan: Development  Mixed Economy Experience of India with its  Import Substitution Neighbours  Green Revolution  Policy Shift towards the Private Sector  Successes in China:  Infrastructure development improved well-being.  Decentralised planning and small enterprises fueled the economic growth.  The commune system promoted food grain distribution and reduced poverty.  Healthcare access improved through the rural health services.  Failures in China:  Slow growth and lack of modernisation under Maoist rule.  Mao’s self-sufficiency approach did not yield desired results.  Stagnation in per capita grain output despite reforms.  China’s Edge Over India:  Comprehensive 1980s, reforms accelerated an economic growth. Country

Estimated Population (in million)

Significant reduction in rural poverty compared to India. Robust export-driven manufacturing and global exposure.  Common Successes in India and Pakistan:  Per capita incomes doubled despite the high population growth.  Poverty reduction and self-sufficiency in the food production.  Progress in service, industry, and modern technology.  Common Failures in India and Pakistan:  Decline in GDP growth rates and sectoral constituents during the 1990s.  Persistent concerns about poverty and unemployment.  Areas Where Pakistan Excels:  Successful workforce migration from agriculture to industry.  Improved access to water sources and poverty reduction.  Areas Where India Excels:  Skilled manpower and R&D in various sectors.  Advancements in healthcare facilities and infant mortality reduction.  Comparative Analysis Demographic Overview:  India and China, both are highly populous nations, collectively represent approximately one-third of the world’s population.  In contrast, Pakistan’s population is significantly smaller, accounting for roughly 10% when compared to the populations of China and India.  When it comes to the population density, China boasts the lowest density as compared to Pakistan and India.  China exhibits a low fertility rate, while Pakistan experiences a high fertility rate, contributing to demographic distinctions.  Both China and Pakistan have experienced substantial urbanisation trends, with a notable portion of their populations residing in urban areas.  India’s urbanisation rate is slower at 34% compared to Pakistan (36.7%) and China (60%), highlighting variations in the pace of urban development across these countries.  Select Demographic Indicators, 2017-18 

Annual Growth of Population



Density (per sq.km)

India 1352 1.03 455 China 1390 0.46 148 Pakistan 212 2.05 275 Source: World Development Indicators 2019, vvww.worldbank.org

Ratio

Fertility Rate

Urbanisation

924 949 943

2.2 1.7 3.6

34 59 37

DEVELOPMENT EXPERIENCE OF INDIA

89

90 Oswaal CUET (UG) Chapterwise Question Bank

ECONOMICS

24% to GVA, respectively, employing 43% and 41% of their respective workforces.  The service sector is emerging as a pivotal contributor in all three countries, contributing the highest share to GVA and serving as a major employer.  In China, the workforce is transitioning directly to the service sector, while in India and Pakistan, the shift from agriculture to services occurs through the industrial sector.  In the 1980s, Pakistan led in transitioning its workforce to the service sector compared to India and China. Annual Growth of Gross Domestic Product (%), 1980-2017

 Economic Landscape and Sectors:  China boasts the world’s second-largest GDP (PPP) at $22.5 trillion, with India’s GDP (PPP) at $9.03 trillion and Pakistan’s GDP approximately at $0.94 trillion, which is roughly 11% of India’s GDP.  India’s GDP constitutes about 41% of China’s GDP.  China has consistently maintained nearly double-digit growth rates, even during periods when developed nations struggled to attain 5% growth.  In the 1980s, Pakistan’s growth rate surpassed that of India, while China experienced double-digit growth.  In recent years (2015-2017), both Pakistan and China have experienced a downturn in growth rates, while India’s growth rate has moderately improved. Annual Growth of Gross Domestic Product (%), 1980-2017

Country

1980-90

2015-2017

India 5.7 7.3 China 10.3 6.8 Pakistan 6.3 5.3 Source: Key Indicators for Asia and Pacific 2016, Asian Country 1980-90 2015-2017 Development Bank. Philippines; World India 5.7 7.3 Development Indicators 2018 China 10.3 6.8  Over the past five decades, the agriculture sector, which Pakistan 6.3 5.3 engages the largest workforce in all the three countries, has Source: Key Indicators for Asia and Pacific 2016, Asian experienced a diminished growth. Development Bank, Philippines; World  China’s industrial sector maintained nearly double-digit Development Indicators 2018 growth in the 1980s but has witnessed a decline in recent years.  China and Pakistan have a higher proportion of urban  China’s growth was equally attributed to both the manufacresidents compared to India. turing and service sectors during the 1980-1990 period.  China’s arable land represents only about 10% of its total  India’s growth was primarily propelled by a positive land area. output in the service sector during the same period.  In the 1980s, over 80% of China’s population relied on  Pakistan encountered a slowdown across all the three agriculture, but the government encouraged the diversification sectors (agriculture, manufacturing, and services) during this into other livelihoods. period.  In 2018-19, China’s agriculture sector contributed 7% to  China’s growth was contributed by both the manufacturGross Value Added (GVA), employing 26% of the workforce. ing and service sectors, whereas India’s growth was primarily  In India and Pakistan, agriculture contributes 16% and powered by the service sector. Trends in Output Growth in Different Sectors, 1980—2018 Country

1980-90 Agriculture

India China Pakistan

3.1 5.9 4

Industry

2014-18 Service

7.4 10.8 7.7

 Human Development Indicators:  China surpasses India and Pakistan in various key human development indicators, including GDP, per capita, poverty reduction, health outcomes, sanitation access, literacy rates, life expectancy, and malnourishment.  Among these countries, Pakistan outperforms India in

6.9 13.5 6.8

Agriculture

Industry

Service

3.1 3.1 1.7

6.9 5.3 4.8

7.6 7.1 5.0

reducing the proportion of people living below the poverty line and in providing access to clean water.  China’s situation regarding the proportion of its population below the poverty line is notably better than that of India and Pakistan, indicating a lower severity of poverty in China.Top of Form

Some Selected Indicators of Human Development. 2017-2019 Item Human Development Index (Value) Rank (based on HOI) Life Expectancy at Birth (years) Mean years of Schooling (% aged 15 and above) Gross National Income per capita (PPP US$) Percentage of People living Below Poverty Line (National)

India 0.645 130 69.7 6.5 6.681 21.9•

China 0.761 87 76.9 8.1 16.057 1.7**

Pakistan 0.557 154 67.3 5.2 5.005 24.3*

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DEVELOPMENT EXPERIENCE OF INDIA

Infant Mortality Rate (per 1000 live births) 29.9 7.4 57.2 Maternal Mortality Rate (per I lakh births) 133 29 140 Population using at least basic Sanitation (%) 60 75 60 Population using at least basic drinking 93 96 91 Water Source (%) 37.9 8.1 37.6 Percentage of Undernourished Children Note: • for the year 2011; for the years 2015. Sources: Human Development Report 2019 and 2020 and World Development Indicators (www.worldbank.org): Key indicators for Asia and the Pacific 2019. Asian Development Bank (ADB).

OBJECTIVE TYPE QUESTIONS [A] MULTIPLE CHOICE QUESTIONS

1. In China, a campaign initiated in 1958 aimed at industrialising the country on a massive scale. People were encouraged to set up industries in their backyard. This campaign is called [CUET 2023] (1) Great Show Forward (2) Great Dragon Forward (3) Great Run Forward (4) Great Leap Forward 2. The Great Leap Forward (GLF) campaign in China aimed at increasing ............... in the country on a massiue scale  [CUET 2023] (1) industrial sector output (2) agriculture sector output (3) service sector output (4) cyber security 3. More than ________ of Asia’s GDP is shared by India and China.  (1) Half (2) Quarter (3) One-third (4) None of these 4.  Which of the following has the highest FDI? (1) India (2) China (3) Sri Lanka (4) Pakistan 5. When was, ‘One Child Norm’ introduced in China? (1) Late 1970s (2) Late 1960s (3) Late 1980s (4) None of these 6.  In 1970, Pakistan introduced nationalisation of capital Good industries, but later due to international pressure they shifted the policy to: (1) Demarketisation (2) Denationalisation (3) Derecognition (4) Deforming 7. Introduction of Economic Reform in Pakistan took place in _____________. (1) 1978 (2) 1980 (3) 1988 (4) 1991 8. Which of the following countries initiated its process of Economic Reforms in the year 1991? (1) Pakistan (2) India (3) Russia (4) China 9. From the following statements given in Column A & Column B , match the correct statements: Column A

Column B

I. Adult literacy rate

1 Liberty indicator

II. Participation in social- 2. Poverty indicator political decision-making III. GDP

3. HDI indicator

IV. Headcount ratio

4. Indicator of economic growth

(1) 1, 2, 3, 4 (2) 3, 1, 4, 2 (3) 4, 3, 2, 1 (4) 2, 4, 1, 3

10.  India is not a member of which of the following regional economic groups? (1) SAARC (2) BRICS (3) G-7 (4) G-20 11. The implementation of Economic Reforms in China occurred in which year? (1) 1978 (2) 1980 (3) 1988 (4) 1991 12. The economies of India and Pakistan are currently relying more on which sector for their contribution to GDP? (1) Primary sector (2) Secondary sector (3) Tertiary sector (4) None of these 13. China’s economy is relying more on which sector for its contribution to GDP? (1) Primary sector (2) Secondary sector (3) Tertiary sector (4) None of these 14.  The First Five Year Plan of Pakistan in 1956 was also known by which alternative name? (1) Long-term plan (2) Medium-term plan (3) Short-term plan (4) None of these 15. Which of the following topics is not typically covered in a discussion of India’s development experience when compared to its neighbors? (1) Economic Growth (2) Political Stability (3) Human Development Indicators (4) Sectoral Development 16. In the context of development, what makes India and China standout when compared to their neighbours? (1) Similarities in economic policies (2) Different approaches to population control (3) Collaborative efforts on trade (4) Shared political ideologies 17. Which Human Development Indicator measures the average life expectancy at birth in India? (1) Gini Coefficient (2) Literacy Rate (3) HDI (Human Development Index) (4) Life Expectancy Index 18.  In the context of India’s development, what is the significance of the “Demographic Dividend”? (1) A surge in population growth (2) A decline in workforce productivity (3) A young and growing workforce (4) An aging and declining workforce

92 Oswaal CUET (UG) Chapterwise Question Bank 19. Identify the policy of China shown in the below image:

(1) Great Proletarian Cultural Revolution (2) Commune System (3) One Child Policy (4) Great Leap Forward (GLF) 20. Match the following and choose the correct option: Column I

Column II

A. Economic Development in China

a. 1991

B. India’s New Development Policy

b. 1958

C. Great Leap Forward

c. 1978

D. First contribution in 1956

d. Pakistan

(1) A-c, B-a, C-b, D-d (3) A-c, B-a, C-d, D-b

(2) A-a, B-c, C-b, D-d (4) A-c, B-b, C-a, D-d

[B] ASSERTION & REASON Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as: (1) Both Assertion (A) and Reason (R) are true, and reason (R) is the correct explanation of assertion (A). (2) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of assertion (A). (3) Assertion (A) is true, but Reason (R) is false. (4) Assertion (A) is false, but Reason (R) is true. 1. Assertion (A): India and Pakistan adopted mixed economic models.  Reason (R): Mixed economic models were successful. 2.  Assertion (A): The aim of the Great Leap Forward Campaign initiated in China was to transform the agrarian economy into a modern economy through rapid industrialisation.  Reason (R): Under the Great Leap Forward Campaign, students and professionals were sent to work and learn from the countryside. 3.  Assertion (A): Dual Pricing policy was initiated in the reform process of China.  Reason (R): In order to attract foreign investors, SEZ was set up. 4. Assertion (A): India and Pakistan are agricultural economies.  Reason (R): A lot of people are employed in India and Pakistan in the primary sector that is agriculture and allied activities. 5. Assertion (A): China and Pakistan both are showing brighter sign of urbanisation than India.

ECONOMICS

 Reason (R): Urbanisation is closely linked with structural transformation in the country. 6. Assertion (A): China is the most populated country, but its annual growth rate of population is the lowest as compared to India and Pakistan.  Reason (R): “One Child policy” of China has successfully reduced the growth rate of the population. 7. Assertion (A): China has done better than India and Pakistan, as it is a socialist economy.  Reason (R): In socialism, the government can implement policies that are in the best interest of the people. 8. Assertion (A): GLF campaign initiated in 1958 aimed at industrialising by removing the agricultural sector.  Reason (R): Under the Commune system, farmer opted for cooperative farming methods. 9. Assertion (A): HDI ranking of India is low as compared to China.  Reason (R): HDI does not include parameters of political liberty, social liberty, and related human rights. 10. Assertion (A): India’s human development indicators are among the best in the world.  Reason (R): India has performed relatively well visà-vis other developing countries (including its Asian neighbours) in forms of economic growth.

[C] CASE BASED QUESTIONS I.  Read the following information and answer the given questions: India’s development experience is a multifaceted narrative that has evolved over the decades. When we compare India to its neighbouring countries, Pakistan and China, we can see the intricate web of factors that have shaped each nation’s journey. India’s democratic traditions, firmly rooted in its history, have provided a stable political framework, fostering diversity and inclusive development. China, in contrast, has achieved remarkable economic growth under a unique political system that emphasises centralised planning and state-led initiatives. Pakistan, with its own set of historical and political challenges, has grappled with periods of instability and shifting governance structures. As we delve into these diverse paths of development, we gain insights into the myriad factors that influence a nation’s growth, be it economic, political, or social. 1. (1) (2) (3) (4)

What is the primary focus of the passage? India’s democratic traditions China’s economic growth Comparing India with Pakistan The complexity of development factors

2. What is the unique feature of India’s political framework mentioned in the passage? (1) Centralized planning (2) Diversity and inclusivity (3) State-led initiatives (4) Historical challenges 3. Under which political system, has China achieved remarkable economic growth? (1) Democracy (2) Centralised planning (3) Shifting governance structures (4) Historical traditions

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DEVELOPMENT EXPERIENCE OF INDIA

4. What has Pakistan grappled with, according to the passage?

6. Which sector has significantly contributed to India’s economic growth according to the news extract?

(1) Centralised planning

(1) Agriculture

(2) Manufacturing

(2) Rapid economic growth

(3) Service

(4) Healthcare

(3) Diversity and inclusivity (4) Periods of instability and shifting governance structures

7. What is the dominant sector of Pakistan’s economy, as mentioned in the extract?

5. What insights can be gained by comparing the development experiences of India, China, and Pakistan?

(1) Primary

(2) Secondary

(3) Tertiary

(4) None of these

(1) The superiority of democracy

8. What has primarily driven China’s economic growth, according to the extract?

(2) The importance of centralised planning (3) Factors influencing a nation’s growth (4) The impact of historical traditions II. Read the following text and answer the given question. In the current global economic landscape, India continues to stand out for its impressive economic growth, particularly in the IT and business outsourcing sectors. This has contributed significantly to the country’s overall GDP. Meanwhile, Pakistan’s economy relies heavily on its agriculture sector, providing employment to a substantial portion of its population. However, industrial development has been relatively slow, affecting economic growth. On the other hand, China’s economy has been primarily driven by its booming manufacturing and industrial sectors, solidifying its position as a global manufacturing hub. Nevertheless, it faces challenges related to environmental concerns and income disparities.”

(1) Primary

(2) Secondary

(3) Tertiary

(4) Energy production

9. What challenge has India been grappling with despite its progress in the services sector, as mentioned in the extract? (1) Slow industrial development (2) Lack of technological advancements (3) Environmental concerns (4) Gender inequality 10.  What is a common challenge faced by both China and India, as mentioned in the passage? (1) Slow industrial development (2) Lack of technological advancements (3) Environmental concerns (4) Overreliance on agriculture

ANSWER KEY [A] MULTIPLE CHOICE QUESTIONS 1. (4)

2. (1)

3. (1)

4. (2)

5. (1)

6. (2)

7. (3)

8. (2)

9. (2)

10. (3)

11. (1)

12. (3)

13. (2)

14. (2)

15. (2)

16. (2)

17. (3)

18. (3)

19. (3)

20. (1)

8. (4)

9. (2)

10. (4)

8. (2)

9. (1)

10. (3)

[B] ASSERTION & REASON 1. (3)

2. (3)

3. (2)

4. (1)

5. (2)

6. (1)

7. (1)

[C] CASE BASED QUESTIONS 1. (4)

2. (2)

3. (2)

4. (4)

5. (3)

6. (3)

7. (1)

ANSWERS WITH EXPLANATION [A] MULTIPLE CHOICE QUESTIONS 1. Option (4) is correct. Explanation: The campaign initiated in China in 1958 aimed at massive industrialisation and encouraged people to set up industries in their backyards is called the “Great Leap Forward.” This campaign, led by Mao Zedong, sought to rapidly transform China’s agrarian economy into a modern industrialised one by mobilising the population for large-scale industrial and agricultural projects. The “Great Leap Forward” was a significant and ambitious initiative in China’s history, although it had mixed results and had notable social and economic consequences. 2. Option (1) is correct.

Explanation: The Great Leap Forward (GLF) campaign initiated in 1958 aimed at industrialising the country on a massive scale. People were encouraged to set up industries in their backyards. In rural areas, communes were started. Under the Commune system, people collectively cultivated lands. In 1958, there were 26,000 communes covering almost all the farm population. 3. Option (1) is correct. Explanation: China and India are the two emerging economies in the world. As of 2021, China and India are the 2nd and 5th largest economies in the world, respectively, on a nominal basis. On a PPP basis, China is at 1st, and India is at 3rd place. Both countries share 21% and 26% of the total global wealth in nominal

94 Oswaal CUET (UG) Chapterwise Question Bank and PPP terms, respectively. Among Asian countries, China and India together contribute more than half of Asia’s GDP. 4. Option (2) is correct. Explanation: China’s large and rapidly growing economy, along with its policies to attract foreign investment, have made it a top destination for FDI. 5. Option (1) is correct. Explanation: The “one child norm” was introduced in China in the late 1970s as part of the government’s population control policy. This policy restricted most urban couples to having only one child. 6. Option (2) is correct. Explanation: In 1970, Pakistan introduced nationalisation of capital goods industries, but later, due to international pressure and changing economic policies, they shifted the policy to “Denationalisation.” Denationalisation involved returning previously nationalised industries to private ownership and management. 7. Option (3) is correct. Explanation: The introduction of economic reforms in Pakistan took place in 1988. This period saw economic policy changes and reforms aimed at addressing various economic challenges in the country. 8. Option (2) is correct. Explanation: The process of economic reforms were initiated in the year 1991 in India. This period marked a significant turning point in India’s economic policies, often referred to as the “1991 economic reforms” or “liberalisation and globalisation reforms.” 9. Option (2) is correct. Explanation: I. Adult literacy rate, which reflects education levels, corresponds with the HDI indicator, as education is a key component of the Human Development Index. II. Participation in social-political decision-making is associated with the Liberty indicator, which assesses the extent of political freedoms and participation in decision-making. III. GDP, as a measure of a country’s economic output, is a standard indicator of economic growth. IV. Headcount ratio, which measures the incidence of poverty, matches with the Poverty indicator, as it assesses a nation’s poverty levels. 10. Option (3) is correct. Explanation: The Group of Seven (G7) is an informal grouping of seven of the world’s advanced economies, including Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union. 11. Option (1) is correct. Explanation: The implementation of economic reforms in China began in the year 1978. These reforms, often associated with Deng Xiaoping, marked the beginning of China’s transition from a centrally planned economy to a more marketoriented and open economic system. 12. Option (3) is correct. Explanation: India and Pakistan have been relying more on the tertiary sector for their contribution to GDP. The tertiary sector, also known as the service sector, includes activities such as

ECONOMICS

retail, healthcare, education, IT services, and financial services. In both countries, the service sector has seen significant growth and has become a major driver of their respective economies. 13. Option (2) is correct. Explanation: China’s economy has been increasingly relying on the secondary sector for its contribution to GDP. The secondary sector includes manufacturing and industry, which have played a significant role in China’s economic growth over the past several decades. 14. Option (2) is correct. Explanation: The First Five Year Plan of Pakistan, which was implemented in 1956, was often referred to as the “Mediumterm plan.” This is because, unlike long-term plans that might span several decades or short-term plans that typically cover a few years, the First Five Year Plan had a duration of five years, making it a medium-term plan. The purpose of this plan was to outline the economic and development goals for Pakistan over this five-year period and to guide government policies and investments to achieve these objectives. 15. Option (2) is correct. Explanation: Discussions about India’s development experience often focus on economic growth, human development indicators, and sectoral development, but political stability is not the central theme. 16. Option (2) is correct. Explanation: India and China have notably different approaches to population control, with China implementing the “One-Child Policy” while India has focused on voluntary family planning. 17. Option (3) is correct. Explanation: The Human Development Index (HDI) includes life expectancy at birth as one of its key components to measure human development. 18. Option (3) is correct. Explanation: The “Demographic Dividend” refers to a period when a large portion of the population is in the working-age group, which can contribute to economic issue of growth if harnessed effectively. This is currently significant in India. 19. Option (3) is correct. Explanation: The one-child policy was a national program based in China, introduced by the Chinese government in 1980 with the aim of placing most Chinese families to one child each. The policy was enacted to address the growing, issue of population growth rate in the country rapidly. 20. Option (1) is correct. Explanation: A. Economic Development in China corresponds to the year 1978, marking the initiation of significant economic reforms in China. B. India’s New Development Policy aligns with 1991 when India embarked on a path of economic liberalisation and globalisation, ushering in a new era of economic development. C. Great Leap Forward, a campaign for rapid industrialisation and collectivisation, was initiated in China in 1958. D. The First contribution in 1956 is associated with Pakistan’s early involvement in economic development efforts during that year.

95

DEVELOPMENT EXPERIENCE OF INDIA

[B] ASSERTION & REASON 1. Option (3) is correct. Explanation: India and Pakistan adopted mixed economy models to address historical economic disparities, promote social justice, encourage industrialisation, achieve selfsufficiency, and balance capitalist and socialist elements in their economic systems. 2. Option (3) is correct.  xplanation: As part of the Great Leap Forward campaign E initiated in 1958 in China, people were encouraged to set up small-scale backyard steel production facilities in their homes and communes. This was done in an attempt to rapidly increase steel production and industrialize the country on a massive scale. However, these backyard furnaces often produced poor-quality steel and diverted resources away from agriculture, contributing to the campaign’s overall failure and the subsequent famine. 3. Option (2) is correct  xplanation: Dual pricing was indeed initiated in the reform E process of China as part of market-oriented reforms, and the establishment of Special Economic Zones (SEZs) was aimed at attracting foreign investors and promoting economic experimentation. 4. Option (1) is correct. Explanation: As agricultural sector is the largest employer in both India and Pakistan, they are termed as agrarian economies. 5. Option (2) is correct.  xplanation: Urbanisation is intricately tied to the process of E structural transformation within a nation, stemming from the shift of the workforce from agriculture towards the industrial and service sectors. When comparing urbanisation rates, it’s evident that both Pakistan and China have higher rates in contrast to India. In India, only 30% of the population resides in urban areas, whereas in China, the urban population stands at 47%, and in Pakistan, it’s 36%. 6. Option (1) is correct. Explanation: The “One Child policy” was a government policy in China that was implemented to control the country’s population growth. It was successful in reducing the growth rate of the population by limiting most urban couples to having only one child. 7. Option (1) is correct.  xplanation: China’s socialist economic policies have been E more effective in achieving economic growth and development than the economic policies of India and Pakistan. 8. Option (4) is correct.  xplanation: During the Great Leap Forward in China, there E was a push to rapidly industrialise the country, and this often involved the collectivisation of agriculture. The Commune system implemented during this time encouraged farmers to work collectively on large-scale farms, which aimed to increase agricultural productivity and free up labor for industrialisation. 9. Option (2) is correct.  xplanation: India’s lower HDI ranking compared to China E is primarily due to income disparities, challenges in healthcare and education, regional development disparities, and income inequality. China has made more equitable economic advancements and invested significantly in healthcare and

education, leading to better overall human development indicators. 10. Option (4) is correct. Explanation: India’s human development indicators, as measured by the Human Development Index (HDI), are in the medium category and are not among the best in the world. While India has experienced significant economic growth, it does not automatically imply top-tier human development indicators. Development is a multidimensional concept that encompasses factors beyond just economic growth, such as education, healthcare, and income inequality. India still faces substantial challenges in these areas.

[C] CASE BASED QUESTIONS 1. Option (4) is correct. Explanation: The passage primarily focuses on the complexity of various factors influencing the development experiences of India, China, and Pakistan. 2. Option (2) is correct. Explanation: India’s democratic traditions have fostered diversity and inclusivity in its political framework, setting it apart from some other countries like China, which emphasise centralised planning, and Pakistan, which has faced periods of political instability. India’s democratic system encourages the inclusion of diverse voices and ensures that a wide range of groups and perspectives are considered in the political process, making diversity and inclusivity a distinctive characteristic of India’s political framework. 3. Option (2) is correct. Explanation: China has achieved remarkable economic growth under a political system emphasising centralised planning. This means that the Chinese government, particularly the Chinese Communist Party, has been heavily involved in making key economic decisions, allocating resources, and planning the country’s economic development. 4.  Option (4) is correct. Explanation: Pakistan has faced political instability and has undergone periods of shifting governance structures. This indicates that Pakistan has experienced changes in its government and political leadership, which can disrupt the stability of the country and its development trajectory. 5. Option (3) is correct. Explanation: The passage suggests that comparing these development experiences provides insights into the myriad factors influencing a nation’s growth, including economic, political, and social factors. 6.  Option (3) is correct. Explanation: India’s economic growth is significantly attributed to the IT and business outsourcing sectors. These sectors have experienced substantial growth and have made a significant contribution to India’s GDP in recent years. 7.  Option (1) is correct. Explanation: Pakistan’s economy relies heavily on its agriculture sector, which means that agriculture is the dominant sector in Pakistan’s economy. 8. Option (2) is correct Explanation: China’s economic growth is primarily driven by its booming manufacturing and industrial sectors. This has led to China’s prominence as a global manufacturing hub.

96 Oswaal CUET (UG) Chapterwise Question Bank 9. Option (1) is correct. Explanation: Despite progress in other sectors, India has faced difficulties in achieving rapid industrial growth. This can impact the diversification of the economy and may contribute to disparities in economic development

ECONOMICS

10. Option (3) is correct. Explanation: The common challenge is environmental concerns, as both China and India are grappling with issues related to the environment, despite their economic growth.