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Class 12 Economics Chapter 1 Introduction
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PART – A
VERY SHORT TYPE QUESTIONS ANSWERS
- What is general equilibrium?
Ans : It is state where economic variables and their interrelationships are studied.
- Who are the macroeconomic decision makers?
Ans : society or Govt.
- Name the school of through who believes that all the labourers who are ready to work get employment and all the factories work at their full capacity.
Ans : Classical School.
- Who is the author of the book ‘The general theory of Employment, Interest and Money ’?
Ans : J.M Keynes.
- In which year the book ‘The general theory of employment interest and money ‘was published?
Ans : 1936.
- Choose the correct answer :
The author of the book ‘The General theory of Employment, Interest and Money ‘is –
(a) Adam Smith (b) J.M. Keynes
(c) J.B. Say (d) None of above
Ans : (b) J.M. Keynes
- Which of the following is not included in the subject matter of macroeconomics –
(a)Balance of Payment (b) National Income
(c) Demand for money (d) Consumer’s surplus
Ans : (c) Demand for money
- Write true or false :
Macroeconomics deals with the aggregate economics variables of an economy.
Ans : True.
- What is macroeconomics?
Ans : The term macro has been derived from a Greek word macros meaning large. Thus macroeconomics is concerned with the economical as a whole.
- What do you mean by Economic agents?
Ans : Economic agents are individuals or institutions which take economic decisions.
- In which year the great depression was occurred?
Ans : 1930 (1920-1937)
- Name any one of the four sectors of an economy?
Ans : Household sector.
B. SHORT ANSWER QUESTION TYPE – II : (MARK :3 )
- Mention the characteristics of a capitalist economy.
Ans : The important features are : (a) Class conflict, (b) profit motive, (c) Consumer sovereignty, (d) Market economy, (e) Introduction of new technology/Innovative process, (f) Production activities are mainly carried out by capital enterprises.
- What are the economic functions of a state?
Ans : The functions are : (a) Distribution of national income, (b) Allocations of resources, (c) Maintain economic stability.
- State the kinds of trade that are associated with the external sector of an economy.
Ans : The trade that is associated with the external sector of an economy is known as international or foreign trade. Exports and Imports are the two medium of foreign trade.
- Fill in the blank :
Macro economics deals with the ——- variables of an economy.
Ans : Aggregate.
- Mention any three economic functions of a state.
Ans : See Q. No.2 (Shorts Type II).
- Do you see any relation between the Great Depression of 1929 and Macroeconomics? State briefly.
Ans : See Q. No.2 (Shorts Type I).
- Name some macroeconomic decision agent.
Ans : Some macroeconomic decision agents are – (i) Firms, (ii) Households, (iii) The Government, (iv) External Sector
- State how the household sector makes impact on an economy.
Ans : By household we mean a single individual or group of individuals who jointly take decisions. Household sector buy various consumer goods for their own consumption, and pay prices for these goods. They are also the owners of different factors of production and sell these factors to the firms. The household sector Create demand for various products on the one hand and provide different factors of production on the other household also save and pay taxes. This is how the household sector makers impact on economy.
- Explain the role of the state in a development economy.
Ans : (i) Provides internal and external security.
(ii) Engaged in the activities of welfare state .Such as creating infrastructures, expansion of education and culture etc.
(iii) Maintain law and order situation and provides social justice and equity.
- Explain how macroeconomics is related to microeconomics.
Ans : The foundations of macroeconomics theory are in microeconomics, as the aggregate economy is made of small economic units such as individuals, firms and markets. The aggregate demand of the economy depends upon the individual demand of different household and national income is the sum total of factors income at micro level. Likewise micro variables depends on the behaviour of macro variables. For example wage rate is a particular industry will be influenced by overall wage rate in an economy.
C. SHORT ANSWER QUESTION TYPE – I: (MARK:4)
- Briefly explain the birth history of macroeconomics.
Ans : Macroeconomics gets its new height with J.M. Keynes publishing the book “The general theory of employment, Interest and Money”. Before Keynes it were the classical economist like Marshall, Ricarde etc .Which has also contributed a lot in the development of macro economics. The classicalist was of the view that in an economy there always prevails full employment and if any problems occurs then it will automatically adjusted. But this view fails during the ‘Great Depression’ of 29 and Keynes came with his view to overcome this difficulty and then the birth of more economics took place.
- Describe briefly the Great Depression of 1929.
Ans : The ‘Great Depression’ of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts. It affected other countries of the world as well. Demand for goods in the market was low, many factories were lying idle, workers were thrown out of jobs. In USA, during the Great Depression, from 1929 to 1933, the unemployment rate rose from 3% to 25%.
Above all, during ‘Great Depression’, economists of the time face a challenge in the problem of increasing unemployment, shrinking national income, falling prices and failing firms. It was a man-made calamity, a situation of poverty amidst plenty. Machines, workers and raw materials were available for production but were not being used simply because the employers feared losses in the production of goods. It seemed clear that these was something seriously wrong with the capitalist way of economic organisation. Most governments were helpless spectators to the deepening economic crisis of ‘Great Depression’.
It was in this type of situation that economist Keynes was provoked to bring out his ‘General Theory’ to justify taking up some new economic measures to tackle the situation of ‘Great Depression’. He advocated the policy of starting public works and financing them with flat money with an unbalanced budget. Wherever these policies were adopted, recovery from the ‘Great Depression’ was rapid.
- State and describe the four major sectors in an economy from macroeconomic point of view.
Ans : According to the macroeconomic point of view, in an economy, there are four major sectors. They are describes below- The one major sector is the capitalist economy. The capitalist countries have came into being only during the last three to four hundred years. At present, a handful of countries in North America, Europe and Asia will qualify as capitalist countries. A capitalist economy have some characteristics, (a) there is private ownership of means of production, B) production takes place for selling the output in the market, (c) there is a sale and purchase of labour services at a prickle, which is called the wage rate. In may underdeveloped countries, production is carried out by peasant families. Wage labour is seldom used and most of the labour is performed by the family member themselves. Production is not solely for the market, a great part of it is consumed by the family. But many developing countries have a significant presence of production units which are organised according to capitalist principles. The production units are called the firms. In a firm the entrepreneur is at the helm of affairs. She hires wage labour from the market, she employs the services of capital and land as well. After hiring these inputs she undertakes the task of production. Her motive for producing goods and services is to sell them in the market and earn profits. In the process she undertakes risks and uncertainties. In a capitalist country the factors of production earn their incomes through the process of production and sale of the resultant output in the market.
In both the developed and developing countries, apart from the private capitalist sector, there is the institution of state. The role of the state includes framing laws, enforcing them and delivering justice. The state, in many instances, undertakes production – apart from imposing taxes and spending money on building public infrastructure running school, colleges, providing health service etc. These economic functions of the state have to be taken into accountant when we want to describe the economy of the country.
Apart from the capitalist and the government (socialist), there is another major sector in an economy which is called the household sector. By household, we mean a single individual, who takes decisions relating to her own consumption, or a group of individual for whom decisions relating to consumption are jointly determined. Household also save and pay taxes. The household individuals are the ones, who work in the government department and earn salaries, or they are the owner of firm and earn profits. Indeed the market in which the firms sell their products could not have been functioning without the demand coming from household.
Above mentioned three sectors are the major players in the domestic economy. But all the countries of the world re also engaged in external trade. The external sector is the fourth important sectors. Trade with the external sector can be of two kinds.
- The domestic country may sell goods to the rest of the world. These are called exports.
- The economy may also buy goods from the rest of the world. These are called imports. The rest of the world affects the domestic economy in other ways as well.
Capital from foreign countries may flows into the domestic country, or the domestic country may be exporting capital to foreign countries.
- Explain briefly the areas that macroeconomics deals with.
Ans : scope of macroeconomics means the areas of study under macroeconomics.
Macroeconomics largely deals with the following areas of study :
- Theory national income: Macroeconomics studies the concepts of national income, its different elements, method of measurement and social accounting.
- Theory of employment: Macroeconomics is concerned with determination of level of employment in the whole economy. It studies aggregate demand, aggregate supply, consumption, savings and investment etc.
- Theory of money: Macroeconomics deals with the various components of money supply, functions of money and their effects in the economy. Banks and other financial institutions are also part of it study.
- Theory of general price level: Determination of and change in general price-level are also studied under macroeconomics problems concerning inflation or general rise in prices and deflation or general fall in price are also studied under macroeconomics.
- Theory of economic growth: Study of problems relating to economic growth or increase in per capita real income forms part of macroeconomics. It studies the economic growth of underdeveloped economics. Monetary and fiscal policies of the government are also tidied therein.
- Theory of international trade: Macroeconomics also studies trade among different countries. Theory of international trade tariff, protection etc. Are subject of great significance to macroeconomics.
- Distinguish between micro economics and macroeconomics.
Ans : The main differences between Microeconomics and Macroeconomics are as follows:
- Focus of the study: Microeconomics studies problems of scarcity and choice at the level of n individual a household, a firm or an industry.
Macroeconomics studies problems of scarcity and choice at the level of an economy as a whole.
- Degree of aggregation: In microeconomics, there is a limited degree of aggregation of economic variable, compared to macro economics.
- Different set of assumption: Micro and macroeconomics are based on a different set of assumptions. Certain variables re assumed to be constant in microeconomics, whereas they are assumed to be in macro. Similarly, certain variables that are assumed to be constant in macro are assumed to be changing in microeconomics.
- Central issue: determination of price is the central issue in microeconomics, while determination of output/employment is the central issue in macroeconomics.
- Micro-macro paradox: What is logical at the micro level may not be logical at the macro level.
- “Macroeconomics deals with the aggregate economic variable of an economy.” Explain.
Ans : “macroeconomics deals with the aggregate economic variable of an economy. “Macroeconomic simplify the analysis of how the country’s total output and the level of employment are related to variable like prices, rate of interest, wage rates, profits and so on. It focus on macroeconomic variables. Macroeconomic variable refers to those economic issues or problems which are studied at the level of an economy as a whole. These include national income, aggregate demand, aggregate supply, total consumption, expenditure problems of unemployment, general price level etc. Macroeconomics has also been called ‘aggregate economics.”
- What is capitalist economy? Mention the characteristic of a capitalist economy.
Ans : A capitalist economy is one where i the market forces demand and supply determines the prices of goods and services. The government has no role to play in it. Producers are free to choose occupations of their choice. Similarly consumers are free to buy whatever they can afford and which gives them maximum satisfaction. The decision taken by the producers and consumers are governed by the price system. Individual gain is the guiding factor for economic decision. In a capitalist economy those goods will be produced which are in demand both in the domestic as well as in the foreign market and relatively cheaper techniques of production will be used.
The characteristics of capitalist economy are as follows:
- All decisions are taken by price mechanism.
- People are motivated by profits.
- Prices are set in open markets.
- Means of production are owned by private individuals.
- Explain the working of the economy of a capitalist country.
Ans : A capitalist economy is one where is one where in the market forces of demand and supply determine the price of goods and services. The government has no role to play in it. Producers are free to choose occupations of their choice. Similarly consumers are free to buy whatever they can afford and which gives them maximum satisfaction. The decisions taken by the producers and consumers are general by the price system. Individual gain is the guiding factor for economic decision. In a capitalist economy those goods will be produced which are in demand both in the domestic as well as in the foreign markets. Similarly that technique of production will be used which is relatively cheaper. In such an economy, produced goods are distributed among people on the basis of their purchasing power instead on the basis all their need.
- Mention two subject matters of Macroeconomics.
Ans : There is no clear cut division between micro and macro economics. The scope of macro- economics can be stated by giving a list of most important problems with which it is concerned.
Macroeconomics is income and employment, inflation balance of payment problems etc.
The purpose of macroeconomics is to present a logical framework for the analysis of these phenomena. What does determine income and employment? What dos determine the price level? How are these related?
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