Economics - I : Previous Year Questions (2017)

2017

Time: 3 Hours                  

Max Marks: 50

PART – A

Answer the following question in one sentence each. (10 x 1 = 10)

Q1. Define Utility

Ans. Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service.

Q2. What is Supply Function?

Ans. Supply function explains as to how the quantity supplied of a commodity changes on account of changes in determinants of supply.

This function expresses the relationship between supply and price. It also gives us an idea that quantity of a commodity supplied varies directly with its price, other determinants of supply remaining constant. Supply and price has a positive relationship. Therefore, they move in the same direction.

It can be expressed as S(x) = f (Px).

Q3. Define Market.

Ans. Market is the set of conditions or situation where buyers and sellers meet and conduct exchange transactions.

According to Benham, “any area where buyers and sellers of a commodity are in close touch with each other, either directly or indirectly, that the price obtainable in part of market affects the price paid in other part.”

Q4. What is Deflation?

Ans. Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

Q5. Define Macro Economics.

Ans. Macroeconomics is a branch of economics dealing with performance, structure, behaviour, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability.

Q6. What is National Income?

Ans. National income means the value of goods and services produced by a country during a financial year. Thus, it is the net result of all economic activities of any country during a period of one year and is valued in terms of money.

Q7. What is Mixed Economy'?

Ans. A mixed economic system is a system that combines aspects both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.

Q8. What is CRR?

Ans. The Cash Reserve Ratio (CRR) is the percentage of a commercial bank's total deposits that must be held as cash reserves with the central bank (Reserve Bank of India) and cannot be lent out. 

The central bank can adjust the CRR, influencing the amount of money banks can lend to the public and businesses.

A higher CRR reduces money available for lending, tightening liquidity and curbing inflation, while a lower CRR increases lending capacity, injecting liquidity to boost economic growth.

Q9. Define Stock & Flow.

Ans. Stock is the quantity that can be measured at a particular point of time. Their value can be ascertained at a point of time such as October 02, 2025.

For Eg.: national capital, money supply, total debt, stock of inventories.

Flow -This fconcept refers to an economic variable that is measured over a period of time, such as a month, quarter, or year.

For eg.: income, expenses, investment, consumption, and national income.

Q10. What is Demand Pull Inflation?

Ans. It is caused by an increase in the aggregate demand for goods and services whereas, the aggregate supply is not increasing. It is a situation where too much money is chasing too few goods.

PART – B

Answer the following questions in 4-5 lines each. (4 x 4 = 16)

Q11. Differentiate between Money & Capital Market.

Ans.

Q12. Write any four properties of Indifference curve.

Ans. Properties of Indifference Curve:

1. Slopes downward from left to right.
2. Convex to the origin; IC tends to decline.
3. Higher IC gives higher satisfaction.
4. IC never touches ‘x’ and ‘y’ axis.

Note:- Draw diagram for the same.

Q13. Mention basic Economic Problems of an Economy.

Ans. Four basic problems of an economy are as follows:

1. What to Produce?

What does a society do when the resources are limited? It decides which goods/service it wants to produce. Further, it also determines the quantity required.

2. How to Produce?

The production of a good is possible by various methods. For example, you can produce cotton cloth using handlooms, power looms or automatic looms. While handlooms require more labour, automatic looms need higher power and capital investment. society must choose between the techniques to produce the commodity.

3. For whom to Produce?

It has to decide on who gets what share of the total output of goods and services produced. In other words, society decides on the distribution of the goods and services among the members of society.

4. What provision should be made for economic growth?

Can a society use all its resources for current consumption? Yes, it can. However, it is not likely to do so. The reason is simple. If a society uses all its resources for current consumption, then its production capacity would never increase. Therefore, the standard of living and the income of a member of the society will remain constant. Subsequently, in the future, the standard of living will decline. Hence, society must decide on the part of the resources that it wants to save for future progress.

Q14. What is Inflation? Mention its causes.

Ans. Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

Causes of Inflation –

Inflation arises from demand-pull factors, cost-push factors, supply shocks, increased money supply, wage-price spirals, inflation expectations, and certain fiscal policies. These elements collectively drive price increases, impacting purchasing power.

1. Demand-Pull Factors: When demand for goods and services exceeds supply, prices increase. This often happens when there is an influx of cash or credit in the economy, stimulating purchasing beyond the economy’s capacity.

2. Cost-Push Factors: Rising production costs can also cause inflation. When the costs of inputs like raw materials and labour increase, companies pass these costs on to consumers through higher prices.

3. Supply Shocks: Sudden disruptions to supply, such as natural disasters, conflicts, or pandemics, can significantly reduce the availability of critical goods.

For example, supply chain issues during COVID-19 led to price spikes across sectors.

4. Increased Money Supply: A significant increase in the money supply can drive inflation, as more cash circulating in the economy fuels higher demand. With too much money chasing too few goods, prices tend to rise.

5. Wage-Price Spirals: When workers demand higher wages to cope with rising prices, businesses often raise prices to cover these increased labour costs. This cycle, known as the wage-price spiral, can fuel sustained inflation.

6. Inflation Expectations: When people expect inflation to persist, they may demand higher wages and buy goods now to avoid future price increases, reinforcing inflation. Central banks aim to keep these expectations stable to control inflation.

7. Fiscal Policies: Government policies like tax cuts or increased public spending can raise overall demand, leading to inflation if the economy is already operating at full capacity and supply cannot keep pace.

PART – C

Answer the following questions in 400 words each. Attempt any three of your choice. (3 x 8 = 24)

Q15. Explain Law of Demand with the help of diagram.

Ans. The law of demand simply expresses the relation between quantity of a commodity demanded and its price. It states the inverse relationship between the price and quantity demanded of a commodity.

According to Law of Demand, “all other things being equal, the quantity demanded of a good or service decreases as its price increases, and vice versa.”

In simpler terms, people tend to buy less of something when its price goes up and more when its price goes down. 

Law of Demand, as described by some eminent economists:

1. According to Bilas, “the law of demand states that other things being equal, the quantity demanded per unit of time will be grater, lower the price and smaller, higher the price.”
2. According to Marshall, “the amount demanded increases with a fall in price and diminishes with a rise in price.”
3. According to Professor Samuelson, “law of demand states that people will buy more at lower prices and buy less at higher prices, other things being constant.”
4. According to Ferguson, “according to law of demand, the quantity demanded varies inversely with price.”

Assumption of Law of Demand:

Some assumptions related to the Law of Demand are as follows: -

1. No change in tastes and preferences.
2. Consumer’s income, both money and real income must remain the same.
3. Prices of other commodities related to the commodity in demand should not change.
4. No change in the wealth of consumers.
5. Substitutes are not discovered.
6. There should be perfect competition in the market.

Importance of Law of Demand:

1. Price determination in perfect competition.
2. Tax imposition.
3. Planning for individual purchase of commodities.
4. Planning of industries regarding the production of output.

Exceptions / Limitations of Law of Demand:

Some exceptions of Law of Demand are as follows: -

1. Giffin Goods / Special type of inferior goods –

Sir Giffin pointed out that Law of Demand does not apply to inferior goods. This is called Giffin Paradox.

Inferior Goods refer to those goods whose demand decrease with an increase in income.

Eg.: toned milk and full cream milk; bread and meat.

2. Veblen Effect / Articles of Distinction –

There are some commodities which are purchased by the upper section of the society. If the price of such commodities is increasing, then there will be more demand for them.

Eg.: antique items, artistic goods, diamonds etc.

3. Fear of shortage –

When there is fear of shortage due to a war like situation or an emergency, people buy more of a commodity given at a higher price, due to panic situation.

4. Expectation of change in price in future / Speculative Effect –

If people expect a rise in price in future, they will rush to purchase more of the commodity at present price.

If they expect the price to fall, they will purchase less of the commodity to enjoy benefit from the fall in price later.

5. Ignorance on the part of consumers about quality –

A lower price commodity may be considered inferior and people buy lesser amount of it. But when its price is more, they consider it to be superior and purchase more.

6. Necessities of Life –

In case of the basic necessity like food items, medicines, water, clothes etc. people purchase the same quantity even at high price.

By adding up all the units of a good that consumers are willing to buy at any given price we can describe a market demand curve, which is always downward-sloping. At higher prices, consumers demand less of the good, and at lower prices, they demand more.

The Law of Demand tells us that if more people want to buy something, given a limited supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the quantity that will be purchased by consumers.

Q16. Explain in detail the features of Perfect Competition.

Ans. Features of perfect competition are as follows:

1. Large Number of Buyers and Sellers –

There exists a large number of buyers and sellers in a perfectly competitive market. The number of buyers and sellers are so large that a single buyer or a single seller cannot influence the price or output through his influence.

2. Homogenous Product –

The products sold in the market are homogenous, i.e., identical in its shape, size, colour, design, quality etc.

3. Freedom of Entry and Exit –

There is freedom of entry and exit to the firms under perfectly competitive market. Any firm (buyer or seller) can enter the market or exit from the market as and when required.

4. Perfect Knowledge –

Buyers and sellers must have a perfect knowledge about the market conditions. They should have complete information about the price at which goods are bought and sold and the places where the transactions take place etc.

5. Perfect mobility of factors of production –

The factors of production are perfectly mobile in the sense that they are completely free to move from one industry to another or from one market to another or from one occupation to another.

6. Absence of Transportation Cost –

It is assumed that all the sellers are equally near or far away from the markets, and as such there are uniform transport costs to all the sellers. So, ti is assumed that the transport cost is absent or constant for all sellers.  

7. Absence of Government Intervention –

There is no government intervention in respect of production, transportation, and exchange of goods.

8. Uniform Price –

There exists a single uniform price in the market and it is determined by the force of demand and supply.

Q17. Differentiate between Micro and Macro Economics.

Ans. Microeconomics and Macroeconomics are the two principal branches of economics. The core difference lies in their scope and scale of analysis. Microeconomics (from the Greek word 'micro', meaning small) focuses on individual economic units, while Macroeconomics (from 'macro', meaning large) studies the economy as a whole.

The distinction can be clearly outlined based on several parameters:

Q18. Define Unemployment and mention some of the employment generation schemes in India.

Ans. Unemployment is the situation where people actively looking for paid work are unable to find a job. It indicates an underutilization of the labour force and can negatively impact individual well-being through reduced income and morale, and harm the economy by decreasing spending and output. The unemployment rate is a key economic indicator measuring the percentage of the total labour force that is unemployed.

Types of Unemployment –

Unemployment can be categorised into various forms such as: -

1. Seasonal Unemployment –

It is caused by time pattern of a particular occupation. It is found in particular industries or in agriculture sector through seasonal variation in their activity brought about by climate change. It occurs due to lack of productive work during certain period of the year.

2. Frictional Unemployment –It occurs due to economical friction or bottleneck. It takes place due to several reasons.

For eg.: it may occur due to change in demand. Such changes in demand may take pace due to mere changes in consumer’s taste and preferences.

It may also occur due to economic progress or introduction to new machinery or techniques. It occurs only for a temporary period and it should not be considered as an unhealthy sign of economy.

3. Disguised Unemployment –

Disguised unemployment, also known as hidden unemployment, occurs when more people are engaged in a job or task than are actually required, resulting in some workers having little to no impact on the overall productivity or output of that job.

This situation, common in the agricultural and informal sectors of developing economies, appears as employment but represents underemployment, where individuals are working below their capacity or on redundant tasks.

4. Structural Unemployment –

Structural unemployment is the mismatch between the skills workers have and the skills employers need, caused by long-term shifts in the economy like technological advancements, globalization, or changes in industries. This leads to persistent joblessness because workers may lack the necessary qualifications for available positions, forcing them to acquire new skills or relocate to find suitable work.

5. Cyclical Unemployment –

It is a common type of unemployment in an industrially developed capital economy. It occurs due to changes in trade cycle or business cycle.

It refers to the joblessness that results from downturns in the economic cycle, such as recessions, when businesses reduce hiring and lay off workers due to decreased consumer demand and production. It fluctuates with the economy's ups and downs, rising during economic contractions and falling during expansions.   

For eg.: mass layoff during Covid-19 pandemic, when overall economic activity slowed significantly, leading to widespread unemployment.

6. Technological Unemployment –

It occurs due to rapid technological improvements, that replace human labour with automation or machines, essentially reducing the need for workers in certain sectors. As a result, causing loss of jobs.

Employment Generation Schemes in India:

Various employment generation schemes in India are as follows: -

1. Swarna Jayanti Gram Swarozgar Yojana (SGSY) –

1. Launched – April 1, 1999
2. Objective – to organize rural below poverty line households into self-help groups and link them with training, credit, technology and markets so that they can take up self-employment and create income-generating assets.
3. The scheme was implemented on a cost-sharing basis of 75:25 between the Centre and State Governments and had special focus on vulnerable sections such as Scheduled Castes, Scheduled Tribes, women and persons with disabilities. 
4. It was restructured and renamed the National Rural Livelihoods Mission (NRLM) and subsequently Deendayal Antyodaya Yojana - National Rural Livelihoods Mission (DAY-NRLM) in 2016.

2. Swarna Jayanti Shahari Rozgar Yojana (SJSRY) –

1. Operated from – December 1, 1997
2. The scheme provides gainful employment to the urban unemployed and underemployed poor by encouraging the setting up of self – employment ventures by the urban poor and also by providing wage employment and utilising their labour for construction of socially and economically useful public assets.
3. It has five components –
4. The Urban Self – Employment Programme;
5. The Urban Women Self – Help Programme;
6. Skill Training for Employment Promotion amongst Urban Poor;
7. Urban Wage Employment Programme; and
8. Urban Community Development Network.
9. it was restructured and renamed the National Urban Livelihood Mission (NULM) in 2014-15. The NULM is the current program that provides gainful employment to the urban poor through self-employment and wage employment opportunities. 

3. Pradhan Mantri Rozgar Yojana (PMRY) –

1. Launched on – October 2, 1993
2. It was designed to provide self – employment to more than a million educated unemployed youth by setting up of 7 lakh micro – enterprises under 8^th five - year plan.
3. PMRY was replaced with Swarna Jayanti Shahari Rozgar Yojana (SJSRY) in 1997.

4. National Rural Employment Programme (NREP) –

1. Launched in – October 1980
2. Aimed at – generating employment opportunities in rural areas by creating durable community assets.
3. NREP was a centrally sponsored scheme, with the central and state governments sharing the financial burden.
4. It focused on providing wage employment to the rural poor, thereby improving their income levels and quality of life.
5. NREP was later merged with Rural Landless Employment Guarantee Programme in 1989 to form Jawahar Rozgar Yojana.

5. Rural Landless Employment Guarantee Programme –

1. Launched on – August 15, 1983
2. Aim – at providing guarantee of employment to at least one member of the landless household for 100 days in a year.
3. Infrastructural development was undertaken with a view to create employment opportunities for rural landless households.

6. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) –

1. Launched in – 2005
2. It provides at least one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work.
3. Workers are entitled to the statutory minimum wage.
4. MGNREGA acts as a safety net, providing employment when other opportunities are scarce.

7. Atmanirbhar Bharat Yojana (ABRY) –

1. Launched on – 1^st October 2020
2. Aim/Objective - to incentivize employers for creation of new employment and restoration of loss of employment during Covid-19 pandemic.
3. Since inception of the scheme, as on 31.03.2024, benefits have been provided to 60.49 lakhs beneficiaries in the country.

8. Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) –

1. Launched on – 1 April 2016
2. Aim/Objective - to incentivise employers for creation of new employment.

9. National Career Service (NCS) Project –

1. Ministry of Labour and Employment, Government of India, is running the National Career Service (NCS) Portal which is a one-stop solution for providing career related services including jobs from private and government sectors, information on online & offline job fairs, job search & matching, career counselling, vocational guidance, information on skill development courses, skill/training programmes etc. through a digital platform.

10. Rural Self Employment and Training Institutes (RSETIs) –

1. Rural Self Employment and Training Institutes (RSETIs) is a Bank led Ministry of Rural Development (MoRD) funded training institution established by the Sponsor Banks in their Districts, to provide training for Skill and Entrepreneurship Development.
2.  MoRD extends financial support for the construction of RSETI building and also bears the cost of training the Rural Poor candidates. 
3. Any unemployed youth in the age group of 18-45 years having an aptitude to take up self-employment or wage employment and having some basic knowledge in the related field can undergo training at RSETI. Some of the trained candidates may also seek regular salaried jobs / wage employment.