Scanner - Problem & Measure To Correct Excess Demand, (2015 - 2018) | Crash Course of Macro Economics -Class 12 - Commerce PDF Download

CBSE 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)

(a) Reducing Repo Rate
(b) Both (i) and (ii)

(c) Reducing CRR
(d) None of (i) and (ii)
Ans: 1(a)     

(Q2) What is ‘deficient demand’ ? Explain the role of ‘Bank Rate’ in removing it.    (6 M)    

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) 

(Q3) What is ‘excess demand’ ? Explain the role of ‘Reverse Repo Rate’ in removing it.

Ans: Excess Demand: is the amount by which the aggregated demand exceeds aggregate supply at full employment leve  l. 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),     

(Q4) (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: (a) 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.        

(b) 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 

(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 GDP to rise 

(Q6) What is meant by Cash reserve ratio? How does it increase the money supply in the economy ? (3M)

Ans: Cash reserve ratio is the ratio of bank deposits that commercial banks must keep as reserves with the Central Bank. 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)

(Q7) What is meant by Open market operation ? How does it reduce the money supply in the economy?  (3M)

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

CBSE 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 ?    

(Q8) What is repo rate? (1M)

Ans: Repo rate or repurchase rate is the rate at which commercial banks borrow money from the   Central Bank for a short period by selling their financial securities to the Central Bank.    

(Q9) Which of the following is not a Quantitative Method of credit control?  (1)

(a) Open Market Operation  
(b)  Margin Requirements

(c) Variable Reserve Ratio  
(d) Bank Rate Policy

Ans: Margin Requirements

CBSE 2017

(Q1) How will ‘Reverse Repo Rate’ and ‘Open Market Operations’ control excess money supply in an economy ?          (4M) 

Ans: Reverse Repo rate is the rate at which Central Bank borrows money funds commercial banks Increase in Reverse Repo Rate induces banks to transfer more funds to Central Bank and reduces banks’ ability to create credit.Open Market Operations refers to buying and selling of government securities by Central Bank from/to public and commercial banks. Sale of such securities reduces the reserve of commercial banks and adversely affects bank’s ability to create credit and hence decreases the money supply in the economy.

(Q2) Explain the “varying reserve requirements” method of credit control by the central bank.

(Q3) The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called : (choose the correct alternative) 

(a) Statutory liquidity ratio    
(b) Deposit ratio    
(c) Cash reserve ratio  
(d) Legal reserve ratio
Ans: (c)

(Q4) Aggregate demand can be increased by : (choose the correct alternative)

(a) increasing bank rate
(b) selling government securities by Reserve Bank of India

(c) increasing cash reserve ratio
(d) none of the above
Ans: (d)

(Q5) Repo rate is the rate at which 

(a) commercial banks purchase government securities from the central bank

(b) commercial banks can take loans from the central bank

(c) commercial banks can keep their deposits with the central bank

(d) short-term loans are given by commercial banks

Ans: (b)

(Q6) What is monetary policy ? State any three instruments of monetary policy

(Q7) Explain the role of Cash Reserve Ratio in increasing money supply.

(Q8)  Explain the role of bank rate in decreasing money supply.

(Q9) Explain the role of statutory liquidity ratio in increasing money supply.

(Q10) Explain the role of Repo Rate in reducing money supply.

CBSE 2018

(Q1) The central bank can increase availability of credit by : (Choose the correct alternative) 

(a) Raising repo rate
(b) Raising reverse repo rate

(c) Buying government securities
(d) Selling government securities

(Q2) What is meant by inflationary gap ? State three measures to reduce this gap.    (4M)

Ans: Instruments of Monetary Policy are Bank Rate, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio.(any three)  (1 X 3) 

Previous C.B.S.E & N.C.E.R.T QUESTION ’S 

(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)

(Q3) Explain the role of the following in correcting the deflationary gap in an economy : (6 marks)

(i) Open market operations
(ii) Margin requirements    

(Q4) Explain the concept of ‘inflationary gap’. Also explain the role of ‘legal reserves’ in     reducing it.                        

(Q5) Explain the concept of ‘deflationary gap’. Also explain the role of ‘margin requirements’ in reducing it.        

(Q6) Distinguish between inflationary gap and deflationary gap. State two measures by which these can be corrected.  (6 M)

(Q7) Explain the meaning of under-employment equilibrium. Explain two measures by which full-employment equilibrium can be reached.  (6 M)

(Q8) Does Deficient Demand or Deflation gap always causes Involuntry unemployment ? What are its impact on output and price ?

 (Q9) 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

(Q10) Does a situation of  increasing AD always refer to Excess Demand  or Rise in Price ?

(Q11) 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 )

(Q12) ‘An excess of aggregate demand over aggregate supply always implies a situation of inflationary gap.’ Defend or refute.

(Q13)  Differentiate between Cash reserve ratio and Statutory Liquidity Ratio ?