Scanner Chapter 7-11 Deficient And Excess Demand (Macro Economics) Commerce Notes | EduRev

Economics for CBSE Class 12 Board Examinations

Commerce : Scanner Chapter 7-11 Deficient And Excess Demand (Macro Economics) Commerce Notes | EduRev

The document Scanner Chapter 7-11 Deficient And Excess Demand (Macro Economics) Commerce Notes | EduRev is a part of the Commerce Course Economics for CBSE Class 12 Board Examinations.
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C.B.S.E PAPER 2011 & 2012


(Q1) Define ‘Statutory Liquidity Ratio’.

(1 mark)

(Q2) Explain the role of the following in correcting the inflationary gap in an economy :
(i) Legal reserves (ii) Bank rate

(6 marks)

OR
Explain the role of the following in correcting the deflationary gap in an economy :

(6 marks)

(i) Open market operations (ii) Margin requirements

(Q3) Explain the concept of ‘inflationary gap’. Also explain the role of ‘legal reserves’ in reducing it.

OR

Explain the concept of ‘deflationary gap’. Also explain the role of ‘margin requirements’ in reducing it.

C.B.S.E PAPER 2013


(Q1) Distinguish between inflationary gap and deflationary gap. State two measures by which these can be corrected.

(6 M)

(Q31) Explain the meaning of under-employment equilibrium. Explain two measures by which full-employment equilibrium can be reached.

(6 M)

(Q3) How does central bank control credit creation by commercial banks through open market operations ? Explain.

(4 M)

(Q4) Explain any two methods of credit control used by central bank.

(4 M)

(Q5) What is Cash Reserve Ratio ?

(1 mark)

Explain the role of “open market operations” in controlling the inflationary gap.

(4 M)

C. B. S. E PAPER 2014


(Q1) Define inflationary gap and deflationary gap

(1M)

(Q2) What is ‘excess demand’ in macroeconomics ?

(1 M)

(Q3) What is ‘deficient demand’ in macroeconomics ?

(1 M)

C. B. S. E 2015 & SAMPLE PAPER


(Q1) If an economy is to control recession like most of the Euro-Zone nations, which of the following can be appropriate:

(1M)

(i) Reducing Repo Rate (iii) Both (i) and (ii)
(ii) Reducing CRR (iv) None of (i) and (ii)

Ans :: (iii)

(Q2) What is ‘deficient demand’ ? Explain the role of ‘Bank Rate’ in removing it.

(6 M)

OR
What is ‘excess demand’ ? Explain the role of ‘Reverse Repo Rate’ in removing it.

Ans :: Deficient Demand: is the amount by which the aggregated demand falls short of aggregate supply at full employment level. It causes fall in price level.

(2M)


Bank Rate: is the rate of interest at which central bank lends to commercial banks for long term. The central bank can reduce deficient demand by lowering Bank Rate. When central bank lowers bank rate. Commercial banks also lower their lending rates. Since borrowing becomes cheaper, people borrow more. This leads to rise in aggregate demand and thus helps in reducing deficient demand.

(4M)

or

Excess Demand: is the amount by which the aggregated demand exceeds aggregate supply
at full employment level. It causes inflation.

(2M)

Reverse Repo Rate: is the rate of interest paid by the central bank on deposits by commercial banks. Central Bank can reduce excess demand by raising the Reverse Repo Rate. When the
rate is raised, it encourages the commercial banks to park their funds with the central bank.
This reduces lending capacity of the commercial banks. Lending by the commercial banks to
public declines leading to fall in aggregate demand.

(4M)


(Q3) (a) What is meant by Repo Rate? How does the Central Bank use this measure to control
inflationary conditions in an economy?

(b) What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?

(3+3)

Ans :: Repo rate is the rate of interest at central bank lends money to commercial banks for a short term. The central bank fixes the Repo Rate and it plays the role of an indicator of lending rate and deposit rate fixation by the banks. Under inflationary conditions central bank increases the Repo Rate.

,or

Marginal requirement refers to the difference between market value of the security offered for
loans and the amount of loans offered by the commercial banks. The central bank fixes the
margin requirements and under deflationary conditions central bank reduces the margin requirements.

(Q4) (a) What is meant by Cash reserve ratio? How does it increase the money supply in the
economy ?

(3 + 3 M)

(b) What is meant by Open market operation? How does it reduce the money supply in the
economy?
Ans :: Cash reserve ratio is the ratio of bank deposits that commercial banks must keep as
reserves with the Central Bank.

(1M)

When CRR falls, commercial banks keep lower reserves with the Central Bank. This releases
funds that were earlier held with the Central Bank for commercial banks to lend. As lending
increases, the money creation in the economy expands and money supply in the economy
increases.

(2M)

Open market operations refers to the sale and purchase of government securities by the Central
Bank in the open market

(1M)

When there is a need to reduce the money supply in the economy, the Central Bank starts selling government securities. Those who buy make payments by cheques to the central bank. The money flows from commercial banks to the Central Bank. This reduces the deposits held by commercial banks. This reduces money supply as well as the money creation power of the commercial banks.

(2M)


(Q5) RBI lowers repo rate from 8 % to 7.75% . Analyse the statement from view point of
(a) Household (b) investors (c) the economy ?

Ans :: Rate and equilibrium GDPto rise

C. B. S. E 2016


(Q1) Explain how ‘margin requirements’ are helpful in controlling credit creation ?

(4M)


(Q2) Explain the role of taxation in reducing excess demand.
(Q3) Explain the role of Reverse Repo Rate in controlling credit creation.

(4M)

(Q4) Explain the role of Cash Reserve Ratio in controlling credit creation.

(4M)

(Q5) Explain how ‘Repo Rate’ can be helpful in controlling credit creation.

(4M)

(Q6) Explain how controlling money supply is helpful in reducing excess demand.
(Q7) Explain how ‘government spending are helpful in removing deficient demand ?

EXTRA QUESTION’S

(Q1) Does Deficient Demand or Deflation gap always causes Involuntry unemployment ? What
are its impact on output and price ?

(Q2) Can output increase beyond full utilisation of resources ?

Yes , (1) Some new technology is discovered that can cause greater output with same
resources or input
(2) Productivity of labour increases and hence they produces more with given input However in KEYNESIAN framework due to short run analysis both these factor were assumed to be constant and hence output cannot be increased beyond full employment level

(Q3) Does a situation of increasing AD always refer to Excess Demand or Rise in Price ?

(Q4) Distinguish between DEFLATION GAP and INFLATION GAP (deficient demand and
excess demand) ?  ( use B.O.D (a) Meaning (b) Effect (c) Related to (d) Diagram )

(Q5) Show deflation gap on a diagram. Can this gap exist at equilibrium level of income ?
Explain.

(Q6) Explain with the help of diagram the situation of (a) under-employment equilibrium
(b) excess demand

(Q7) Explain the meaning of inflationary and deflationary gap with diagram ?

(Q8) Explain any two fiscal policy measure to remedy the problem of Excess demand ?

(Q9) What is bank rate and how does it affect the availability of credit control or combat
economic instability ?

(Q10) How does a central bank control the availability of credit by open market operation ?

(Q11) What is deflation Gap and how this problem can be rectified ?

(Q12) Explain two fiscal and monetary policy measure for increasing AD in an economy ?

(Q13) What is deficient demand in macro economics ? Show it on a diagram. Explain the role
of open market operation in correcting it.

(Q14) What are open market operations ? What is their effect on availibility of credit ?

(3M) (s)

(Q15) ‘An excess of aggregate demand over aggregate supply always implies a situation of
inflationary gap.’ Defend or refute.

(Q16) Differentiate between Cash reserve ratio and Statutory Liquidity Ratio ?
 

(Q17) Why should price rise only after full employment ?

(Q18) During inflation, credit creation by the commercial banks is beneficial for the banks, but
not for the economy. Comment.

Ans. The given statement is correct. Money creation by the commercial banks during inflation
further increases the money supply. It creates the situation of excess demand and leads to
further increase in the price level in the economy.

(Q19) Increase in money supply in the economy is one of the reasons for rising price level.
Mention three measures, which can be used by central bank to control money supply ?

(Q20) Even when the general price level is rising (in the wake of inflation) industrial production
is shrinking. How do you explain such a situation of stagflation in India ?

Ans.: During inflation, real income of the people tends to shrink. This causes a fall in AD, prompting a cut in production. Planned output becomes lower than the potential output and a situation of excess capacity (unutilised capacity) emerges in the economy. This is aggravated by the high cost of inputs in the wake of inflation. Thus, industrial production starts shrinking even when the general price level is rising. The economy slides towards stagflation - a situation of stagnation in the midst of inflation.

(Q21) How, in your opinion, the engine of GDP growth can gain momentum, breaking the
deadlock of deflation ? Write two points.

(Q22) Underemployment is a critical feature of the Indian economy. Can we really explain it in
terms of the deficiency of demand ?

Ans. Prof. Keynes blames deficiency of demand for underemployment. But in countries like, India, underemployment is not related to excess capacity. Instead, it is related to the lack of production capacity. What India lacks is not demand to generate employment, but production capacity (capital) to engage the surplus labour force. Which is why the government is encouraging FDI (Foreign direct investment).

(Q23) Finance Minister says : If rate of interest goes up, demand for loans will fall. Industry Minister says : If demand for loans falls, rate of interest will go down. Who among the two is correct ?

Ans. Both are correct. Finance Minister is taking interest rate as a cause and is examining its impact. Industry Minister is taking demand for loans as a cause and examining its impact.
Interests of one section of society always need to be balanced with other sections of the society.

(Q24) If income of a consumer rises by Rs. 1,20,000 then expenditure will be increased by
consumer. What will be his thinking in case of increase in consumption ?

Ans. He would like to increase his consumption but such increase in consumption will be less
than increase in income. This is known as Keynesian Psychological Law of Consumption
 

(Q25) If in an economy seasonal unemployment exists with voluntary unemployment, then what
do you think is the situation of full employment ?

Ans. Yes, it is a situation of full employment with existence of seasonal as well as voluntary
unemployment.

(Q26) In an economy, total demand made by all households is 2000 quintals of rise, but by
employing all its available resources it can produce only 1500 quintals of rice. What is this
situation called and what will be its impact on economy ?

Ans. inflationary gap.

(Q27) If Mr. Bharat takes a loan @ 10% which he wants to invest in a new project which will give
him a return @10% he should go for this investment or not.

Ans. He may go for the investment Only with the expectation of future prospects he can do so.

(Q28) The consumption expenditure of an involuntary unemployed worker is not zero, even at
zero level of income. Why ?

Ans. It happens because minimum consumption (known as autonomous consumption) is
needed for survival, even at zero level of income.

(Q29) In India, unemployment is a major problem. If aggregate demand is equal to aggregate
supply, can it be said that economy has full employment equilibrium ?

Ans. No. Equality between aggregate demand (AD) and aggregate supply (AS) only indicates the equilibrium position of the economy. It is not necessary that this equality is always achieved at full employment level. It means, equality between AD and AS can occur at full employment level, underemployment level or over full employment level.

(Q 30) Would consumption function be linear in case MPC is found to be constant ? Give
reason in support of your answer.

Ans. Yes. Consumption function would be linear in case MPC is constant. This is because a linear consumption function is a straight line consumption function. The slope of a straight line is constant. And, the slope is indicated by MPC. Constant MPC constant slope and therefore, a straight line linear consumption function.

(Q31) “Rate cuts might not be imminent” RBI .
Why RBI is not ready to cut the rates ? Write your opinion ?

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