1. What is the difference between microeconomics and macroeconomics?

Answer:

Microeconomics: Focuses on individual economic units such as consumers,

firms, and markets. It studies decisions made by households and businesses
regarding resource allocation, pricing, and production. Example: How a
consumer decides to spend their income.

Macroeconomics: Focuses on the economy as a whole. It studies aggregate

indicators such as national income, inflation, unemployment, and economic
growth. Example: National income accounting and monetary policy.

2. Define Gross Domestic Product (GDP). How is it calculated?

Answer:
Gross Domestic Product (GDP): GDP is the total monetary value of all final
goods and services produced within a country's borders during a specific time
period, usually a year.

Calculation Methods:

Expenditure Method:

= Consumption expenditure

= Investment expenditure

= Government spending

= Net exports (Exports - Imports)

Income Method:

Production Method: GDP is calculated by summing the value-added at each

production stage of goods and services.

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3. Explain the concepts of GDP, GNP, NNP, NDP, and Personal Income.

Answer:

GDP (Gross Domestic Product): Total market value of goods and services
produced within a country’s borders.

GNP (Gross National Product): GDP + Net factor income from abroad.

NNP (Net National Product): GNP - Depreciation.

NDP (Net Domestic Product): GDP - Depreciation.

Personal Income: Income received by individuals and households before

personal taxes are deducted.

4. What is the difference between nominal GDP and real GDP? Why is the
distinction important?

Answer:

Nominal GDP: Measured at current market prices, without adjusting for

inflation.

Real GDP: Adjusted for inflation using base year prices, reflecting the true
value of goods and services produced.
Importance:
Real GDP provides a more accurate measure of economic growth since it
accounts for price level changes, unlike nominal GDP which can be misleading
during inflation.

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5. Explain the components of GDP using the expenditure method.

Answer:
The expenditure method calculates GDP by summing all spending on final
goods and services in an economy.

Components:

C (Consumption): Spending by households on goods and services.

I (Investment): Spending by businesses on capital goods like machinery.

G (Government Spending): Spending on public services and infrastructure.

X - M (Net Exports): Difference between exports and imports.

Formula: .

Income inequality: GDP doesn't reflect wealth distribution.

Environmental impact: Negative effects like pollution are not deducted.

Quality of life factors: Doesn't measure happiness, health, or education

quality.

Excludes underground economy: Informal or black market activities aren't

counted.
7. What is money? Explain its functions.

Answer:
Money is any medium that is generally accepted in exchange for goods and
services and as a standard for measuring value in economic transactions.

Functions of Money:

Medium of Exchange: Facilitates buying and selling of goods and services.

Unit of Account: Provides a standard measure of value for goods and services.

Store of Value: Retains purchasing power over time, allowing savings.

Standard of Deferred Payment: Enables transactions involving future

payments.

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8. What is the difference between narrow money (M1) and broad money
(M3)?

Answer:

Narrow Money (M1): Includes the most liquid forms of money.

Currency in circulation

Demand deposits (current and savings account balances)

Other liquid assets like traveler's checks

Broad Money (M3): Includes M1 plus less liquid assets.

M1 + Time deposits (fixed deposits) + Certificates of deposit

Key Difference:
M1 is more liquid and easily accessible for transactions, while M3 includes
long-term savings instruments and is less liquid.

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9. Explain the credit creation process by commercial banks.

Answer:
Commercial banks create credit through the process of accepting deposits and
lending a portion of these deposits while keeping a fraction as reserves.

Steps:

1. Primary Deposit: A customer deposits money in the bank.

2. Required Reserve Ratio (CRR): Bank keeps a fraction of the deposit (e.g.,
10%).

3. Lending: The remaining amount is lent to borrowers, creating secondary

deposits.
4. Credit Multiplier Formula:

Example: If CRR is 10%, the credit multiplier would be . A deposit of ₹1000

would create ₹10,000 in total credit.

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10. What is the role of the central bank in regulating money supply?

Answer:
The central bank (e.g., Reserve Bank of India) regulates the money supply
through monetary policy tools:

CRR (Cash Reserve Ratio): Mandates the percentage of deposits banks must
keep with the central bank.

SLR (Statutory Liquidity Ratio): Requires banks to maintain reserves in cash

or liquid assets.

Repo Rate: Interest rate at which the central bank lends to commercial banks.

Open Market Operations (OMO): Buying/selling government securities to

influence liquidity.

Bank Rate: Long-term lending rate by the central bank.

Objective: Control inflation, stabilize currency, and promote economic

growth.
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11. Explain the concepts of CRR and SLR.

Answer:

CRR (Cash Reserve Ratio):

The percentage of a bank's total deposits that must be kept with the central
bank as reserves.

Used to control liquidity and credit in the market.

SLR (Statutory Liquidity Ratio):

The percentage of a bank's total deposits that must be maintained in the form
of liquid assets like cash, gold, or government securities.

Helps ensure the bank’s solvency and regulate credit flow.

Example: If CRR is 5% and SLR is 20%, a bank must hold 25% of its total
deposits as reserves and can lend out the remaining 75%.

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12. Explain the concept of aggregate demand and aggregate supply.

Answer:
Aggregate Demand (AD): The total demand for goods and services in an
economy at a given price level during a specific period.
Components: AD = C + I + G + (X - M)

Aggregate Supply (AS): The total quantity of goods and services that
producers are willing and able to supply at a given price level.

Equilibrium:

The economy reaches equilibrium when AD = AS.

If AD > AS, it leads to inflation.

If AD < AS, it results in unemployment and underproduction.

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13. What is the consumption function? Explain the concept of Marginal

Propensity to Consume (MPC).

Answer:

Consumption Function: Shows the relationship between consumption and

disposable income.

Formula:

= Autonomous consumption (consumption when income is zero)

= Marginal Propensity to Consume (MPC)

= Disposable income
Marginal Propensity to Consume (MPC):

The proportion of additional income spent on consumption.

Formula:
If income rises by ₹100 and ₹80 is spent, MPC = 0.8.

14. What is the investment multiplier? How does it work?

Answer:
Investment Multiplier: Measures the effect of an initial investment on total
income.

Formula:

k = \frac{1}{1 - MPC}

Working:

If MPC = 0.8, then:

k = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5

Explanation: An increase in investment raises income, which further increases

consumption, leading to multiple rounds of income generation.

15. Explain the concept of full employment and involuntary unemployment.

Answer:
Full Employment: A situation where all able and willing individuals who seek
work at the prevailing wage rate are employed.

Involuntary Unemployment: When people are willing to work at the current

wage rate but are unable to find jobs.

Key Difference: Full employment means no cyclical unemployment, while

involuntary unemployment indicates underutilization of labor resources.

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16. Discuss the role of government spending in influencing aggregate demand.

Answer:
Government spending plays a crucial role in increasing aggregate demand:

Direct Spending: On infrastructure, education, healthcare, creating jobs and

income.

Transfer Payments: Unemployment benefits and subsidies increase

consumption.

Public Investment: Boosts production capacity and future growth.

Example: Building highways generates jobs and income, increasing AD.

17. What is inflation? Explain its types and causes.

Answer:
Inflation is the sustained rise in the general price level of goods and services
over a period of time, leading to a decrease in purchasing power.

Types of Inflation:

Demand-Pull Inflation: Caused by excessive demand in the economy.

Cost-Push Inflation: Caused by rising production costs, such as wages and

raw materials.

Hyperinflation: Extremely rapid and out-of-control price increases.

Stagflation: Simultaneous occurrence of inflation and stagnation (low growth).

Causes of Inflation:

Increase in money supply.

Rising wages and production costs.

Excessive government spending.

Supply chain disruptions.

18. What are the effects of inflation on an economy?

Answer:
Positive Effects:

Moderate inflation can encourage spending and investment.

Can reduce the real burden of debt.

Negative Effects:

Reduces purchasing power.

Hurts fixed-income earners.

Increases production costs, reducing business profits.

Can lead to uncertainty and reduced economic growth if uncontrolled.

19. What is deflation? How does it differ from disinflation?

Answer:

Deflation: A persistent decline in the general price level of goods and services,
leading to reduced consumer spending and economic slowdown.

Disinflation: A decrease in the rate of inflation (prices are still rising but at a
slower rate).

Difference:

Deflation involves a negative inflation rate, while disinflation involves a

positive but slowing inflation rate.

Deflation often leads to recession, while disinflation can be a sign of controlled

inflation.

20. Explain the Phillips Curve and its significance.

Answer:
The Phillips Curve illustrates the inverse relationship between inflation and
unemployment.

Key Concept:

When unemployment is low, inflation tends to be high.

When unemployment is high, inflation tends to be low.

Significance:

Helps policymakers understand trade-offs between inflation control and

employment generation.

However, in the long run, the relationship may break down due to factors like
supply shocks.

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21. What is fiscal policy? Explain its instruments.

Answer:
Fiscal Policy: Refers to the government's use of taxation and public spending
to influence the economy.

Instruments of Fiscal Policy:

Taxes: Adjusting tax rates to influence consumer spending and investments.

Government Spending: Increasing or decreasing public expenditure on

infrastructure and services.
Transfer Payments: Subsidies, unemployment benefits, and pensions to
support demand.

Types:

Expansionary (increasing spending, lowering taxes)

Contractionary (decreasing spending, increasing taxes)

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22. What is monetary policy? Explain its objectives and tools.

Answer:
Monetary Policy: Controlled by the central bank to regulate money supply
and interest rates for economic stability.

Objectives:

Control inflation.

Stabilize currency.

Promote economic growth.

Ensure employment.

Tools:

Quantitative Tools:
CRR, SLR, Repo Rate, Reverse Repo Rate

Qualitative Tools:

Moral suasion, credit rationing

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23. What is the balance of payments (BOP)? Explain its components.

Answer:
Balance of Payments (BOP): A financial statement summarizing a country's
economic transactions with the rest of the world over a specific period.

Components:

Current Account:

Goods and services trade.

Income from abroad.

Transfer payments (remittances).

Capital Account:

Foreign investments.

Loans and borrowings.

Financial Account:

Foreign exchange reserves.

Balanced BOP: When inflows = outflows.

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24. What is the difference between a trade deficit and a current account
deficit?

Answer:

Trade Deficit: When the value of imports exceeds the value of exports in goods
and services.

Current Account Deficit: When the value of total imports (goods, services,
income, and transfers) exceeds total exports.

Key Difference:
A trade deficit focuses only on goods and services, while a current account
deficit includes all current transactions.

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25. Explain the concept of exchange rate and its types.

Answer:
Exchange Rate: The value of one currency in terms of another currency.
Types:

Fixed Exchange Rate: Government sets the rate and maintains it through
intervention.

Flexible (Floating) Exchange Rate: Market forces determine the rate.

Managed Float: Partially controlled by the central bank with limited

intervention.

Example: ₹1 = $0.012 indicates the exchange rate between INR and USD.

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26. What are the causes and effects of exchange rate fluctuations?

Answer:
Causes:

Changes in demand for exports and imports.

Interest rate changes.

Political stability and economic performance.

Effects:

Depreciation: Makes exports cheaper but imports costly.

Appreciation: Makes imports cheaper but exports costly.

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27. What is economic growth and how is it measured?

Answer:
Economic Growth: An increase in a country's production of goods and
services over time.

Measurement:

GDP Growth Rate: Percentage increase in real GDP.

Per Capita Income: GDP divided by population.

Productivity Metrics: Output per worker or per hour worked.

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28. What is the Human Development Index (HDI)? How is it calculated?

Answer:
HDI: A composite index measuring a country's social and economic
development.

Components:

Health: Life expectancy.

Education: Mean and expected years of schooling.

Standard of Living: GNI per capita.

Formula: HDI = Average of normalized indices for each component.

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29. Explain the concept of sustainable development.

Answer:
Sustainable Development: Development that meets the needs of the present
without compromising the ability of future generations to meet their own
needs.

Key Principles:

Environmental protection.

Social inclusion.

Economic growth.

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30. What are public goods and private goods? Give examples.

Answer:

Public Goods: Non-excludable and non-rivalrous goods.

Example: Streetlights, National Defense.

Private Goods: Excludable and rivalrous goods.

Example: Food, Cars.