Chapter 1

Introduction to Macro Economics

Part – A
Multiple Choice Questions

Question 1.
The branches of the subject Economics is –
(a) Wealth and welfare
(b) production and consumption
(c) Demand and supply
(d) micro and macro
Answer:
(d) micro and macro

Question 2.
Who coined the word ‘Macro’?
(a) Adam Smith
(b) J M Keynes
(c) Ragnar Frisch
(d) Karl Matrix
Answer:
(c) Ragnar Frisch

Question 3.
Who is regarded as Father of Modem Macro Economics?
(a) Adam Smith
(b) J M Keynes
(c) Ragnar Frisch
(d) Karl Matrix
Answer:
(b) J M Keynes

Question 4.
Identify the other name for Macro Economics?
(a) Price Theory
(b) Income Theory
(c) Market Theory
(d) Micro Theory
Answer:
(b) Income Theory
Question 5.
Macro economics is a study of –
(a) individuals
(b) firms
(c) a nation
(d) aggregates
Answer:
(d) aggregates

Question 6.
Indicate the contribution of JM Keynes to economics?
(a) Wealth of Nations
(b) General Theory
(c) Capital
(d) Public Finance
Answer:
(b) General Theory

Question 7.
A steady increase in general price level is termed as –
(a) Wholesale price index
(b) Business Cycle
(c) Inflation
(d) National Income
Answer:
(c) Inflation

Question 8.
Identify the necessity of Economic policies?
(a) To solve the basic problems
(b) To overcome the obstacles
(c) To achieve growth
(d) All the above
Answer:
(d) All the above

Question 9.
Indicate the fundamental economic activities of an economy?
(a) Production and Distribution
(b) Production and Exchange
(c) Production and Consumption
(d) Production and Marketing
Answer:
(c) Production and Consumption
Question 10.
An economy consists of –
(a) consumption sector
(b) Production sector
(c) Government sector
(d) All the above
Answer:
(d) All the above

Question 11.
Identify the economic system where only private ownership of production exists.
(a) Capitalistic Economy
(b) Socialistic Economy
(c) Globalisic Economy
(d) Mixed Economy
Answer:
(a) Capitalistic Economy

Question 12.
Economic system representing equality in distribution is –
(a) Capitalism
(b) Globalism
(c) Mixedism
(d) Socialism
Answer:
(d) Socialism

Question 13.
Who is referred as ‘Father of Capitalism’?
(a) Adam Smith
(b) Karl Marx
(c) Thackeray
(d) JM Keynes
Answer:
(a) Adam Smith

Question 14.
The country following Capitalism is –
(a) Russia
(b) America
(c) India
(d) China
Answer:
(b) America
Question 15.
Identify The Father of Socialism?
(a) JM Keynes
(b) Karl Marx
(c) Adam Smith
Answer:
(b) Karl Marx

Question 16.
An economic system where the economic activities of a nation are done both by the private
and public together is termed as –
(a) Capitalistic Economy
(b) Socialistic Economy
(c) Globalisic Economy
(d) Mixed Economy
Answer:
(b) Socialistic Economy

Question 17.
Quantity of a commodity accumulated at a point of time is termed as –
(a) production
(b) stock
(c) variable
(d) flow
Answer:
(b) stock

Question 18.
Identify the flow variable?
(a) money supply
(b) assests
(c) income
(d) foreign exchange reserves
Answer:
(c) income

Question 19.
Identify the sectors of a Two Sector Model?
(a) Households and Firms
(b) Private and Public
(c) Internal and External
(d) Firms and Government
Answer:
(a) Households and Firms
Question 20.
The Circular Flow Model that represents an open Economy?
(a) Two Sector Model
(b) Three Sector Model
(c) Four Sector Model
(d) All the above
Answer:
(c) Four Sector Model

Part – B
Answer The Following Questions In One or Two Sentences.
Question 1.
Define Macro Economics?
Answer:

1. Macro Economics is the study of the economy as a whole.

2. In other words, macro economics deals with aggregates such as national
income, employment and output.
3. Macro Economics is also known as ‘Income Theory’.

Question 2.
Define the term ‘Inflation’?
Answer:

1. Inflation refers to steady increase in general price level.

2. Estimating the general price level by constructing various price index
numbers such as wholesale Price.
3. Index, Consumer Price Index, etc, are needed.

Question 3.
What is meant by an ‘Economy’?
Answer:

1. An economy is referred to any system or area where economic activities are

carried out. Each economy has its own character. Accordingly, the functions
or activities also vary.
2. An economy, the fundamental economic activities are production and
consumption.

Question 4.
Classify the economies based on status of development?
Answer:
Status of Development:
Developed, underdeveloped, undeveloped and developing economies.

Question 5.
What do you mean by Capitalism?
Answer:

1. Capitalism, is total freedom and private ownership of means of production.

2. Capitalistic economy is also termed as a free economy (Laissez faire, in Latin)
or market economy where the role of the government is minimum and
market determines the economic activities.

Question 6.
Define ‘Economic Model’?
Answer:

1. A model is a simplified representation of real situation.

2. Economists use models to describe economic activities, their relationships
and their behaviour.
3. A model is an explanation of how the economy, or part of the economy,
works.
4. Most economic models are built with mathematics, graphs and equations,
and attempt to explain relationships between economic variables.

Question 7.
‘Circular Flow of Income’ – Define?
Answer:

1. The circular flow of income is a model of an economy showing connections

between different sectors of an economy.
2. It shows flows of income, goods and services and factors of production
between economic agents such as firms, households, government and
nations.
3. The circular flow analysis is the basis of national accounts and
macroeconomics.

Part – C
Answer The Following Questions In One Paragraph.

Question 1.
State the importance of Macro Economics?
Answer:
The importance and the need for introducing a macro outlook of an economy are given
below:

1. There is a need to understand the functioning of the economy at the

aggregate level to evolve suitable strategies and to solve the basic problems
prevailing in an economy.
2. Understanding the future problems, needs and challenges of an economy as a
whole is important to evolve precautionary measures.
3. Macro economics provides ample opportunities to use scientific investigation
to understand the reality.
4. Macro economics helps to make meaningful comparison and analysis of
economic indicators.
5. Macro economics helps for better prediction about future and to formulate
suitable policies to avoid economic crises, for which Nobel Prize in Economic
Sciences is awarded.

Question 2.
Describe the different types of economic systems?
Answer:
There are three major types of economic systems. They are:

1. Capitalistic Economy (Capitalism):

1. Capitalistic economy is also termed as a free economy (Laissez faire, in Latin)

or market economy where the role of the government is minimum and
market determines the economic activities.
2. The means of production in a capitalistic economy are privately owned.
3. Manufacturers produce goods and services with profit motive.
4. The private individual has the freedom to undertake any occupation and
develop any skill.
5. The USA, West Germany, Australia and Japan are the best examples for
capitalistic economies.
6. However, they do undertake large social welfare measures to safeguard the
downtrodden people from the market forces.

2. Socialistic Economy (Socialism):

1. The Father of Socialism is Karl Marx. Socialism refers to a system of total

planning, public ownership and state control on economic activities.
2. Socialism is defined as a way of organizing a society in which major
industries are owned and controlled by the government.
3. A Socialistic economy is also known as ‘Planned Economy’ or ‘Command
Economy’.
 4. In a socialistic economy, all the resources are owned and operated by the
government.
5. Public welfare is the main motive behind all economic activities. It aims at
equality in the distribution of income and wealth and equal opportunity for
all.
6. Russia, China, Vietnam, Poland and Cuba are the examples of socialist
economies. But, now there are no absolutely socialist economies.

3. Mixed Economy (Mixedism):

1. In a mixed economy system both private and public sectors co-exist and
work together towards economic development.
2. It is a combination of both capitalism and socialism. It tends to eliminate the
evils of both capitalism and socialism.
3. In these economies, resources are owned by individuals and the government.
4. India, England, France and Brazil are the examples of mixed economy.

Question 3.
Outline the major merits of capitalism?
Answer:
Merits of Capitalism:

1. Automatic Working:
Without any government intervention, the economy works automatically.
2. Efficient Use of Resources:
All resources are put into optimum use.
3. Incentives for Hard work:
Hard work is encouraged and entrepreneurs get more profit for more
efficiency.
4. Economic Progress:
Production and productivity levels are very high in capitalistic economies.
5. Consumers Sovereignty:
All production activities are aimed at satisfying the consumers.
6. Higher Rates of Capital Formation:
Increase in saving and investment leads to higher rates of capital formation.
7. Development of New Technology:
As profit is aimed at, producers invest on new technology and produce
quality goods.

Question 4.
Indicate the demerits of socialism?
Answer:
Demerits of Socialism:
1. Red Tapism and Bureaucracy:
As decision are taken by government agencies, approval of many officials and movement of
files from one table to other takes time and leads to red tapism.

2. Absence of Incentive:
The major limitation of socialism is that this system does not provide any incentive for
efficiency. Therefore, productivity also suffers.

3. Limited Freedom of Choice:

Consumers do not enjoy freedom of choice over the consumption of goods and services.

4. Concentration of Power:
The State takes all major decisions. The private takes no initiative in making economic
decisions. Hence, the State is more powerful and misuse of power can also take place.

Question 5.
Enumerate the features of mixed economy?
Answer:
Features of Mixed Economy:
1. Ownership of Property and Means of Production: The means of production and
properties are owned by both private and public. Public and Private have the right to
purchase, use or transfer their resources.

2. Coexistence of Public and Private Sectors:

In mixed economies, both private and public sectors coexist. Private industries undertake
activities primarily for profit. Public sector firms are owned by the government with a view
to maximize social welfare.

3. Economic Planning:
The central planning authority prepares the economic plans. National plans are drawn up
by the Government and both private and public sectors abide. In general, all sectors of the
economy function according to the objectives, priorities and targets laid down in the plan.

4. Solution to Economic Problems:

The basic problems of what to produce, how to produce, for whom to produce and how to
distribute are solved through the price mechanism as well as state intervention.

5. Freedom and Control:

Though private has freedom to own resources, produce goods and ‘ services and distribute
the same, the overall control on the economic activities rests with
the government.
Question 6.
Distinguish between Capitalism and Globalism?
Answer:
Capitalism:
The system where the means of production are privately owned and market determines
the economic activities.

Globalism:
An economic system where the economic activities of a nation are inter connected and
inter dependent on each other nation.

Question 7.
Briefly explain the two sector circular flow model?
Answer:
Circular Flow of Income in a Two-Sector Economy:
There are only two sectors namely, household sector and firm sector.

1. Household Sector:

1. The household sector is the sole buyer of goods and services, and the sole
supplier of factors of production, i.e., land, labour, capital and organisation.
2. It spends its entire income on the purchase of goods and services produced
by the business sector.
3. The household sector receives income from firm sector by providing the
factors of production owned by it.

2. Firms:

1. The firm sector generates its revenue by selling goods and services to the
household sector.
2. It hires the factors of production, i.e., land, labour, capital and organisation,
owned by the household sector.
3. The firm sector sells the entire output to households.
4. In a two – sector economy, production and sales are equal and there will be a
circular flow of income and goods.
5. The outer circle represents real flow (factors and goods) and the inner circle
represents the monetary flow (factor prices and commodity prices).
6. Real flow indicates the factor services flow from household sector to the
business sector, and goods and services flow from business sector to the
household.
7. The basic identities of the two-sector economy are as under:
Y=C+1
Where
Y is Income; C is Consumption; I is investment.
Part – D
Answer The Following Questions In One Page.

Question 1.
Discuss the scope of Macro Economics?
Answer:
The study of macro economics has wide scope and it covers the major areas as follows:
1. National Income:
Measurement of national income and its composition by sectors are the basic aspects of
macroeconomic analysis. The trends in National Income and its composition provide a long
term understanding of the growth process of an economy.

2. Inflation:
It refers to steady increase in general price level. Estimating the general price level by
constructing various price index numbers such as Wholesale Price Index, Consumer Price
Index, etc, are needed.

3. Business Cycle:
Almost all economies face the problem of business fluctuations and business cycle. The
cyclical movements (boom, recession, depression and recovery) in the economy need to be
carefully studied based on aggregate economic variables.

4. Poverty and Unemployment:

The major problems of most resource – rich nations are poverty and unemployment. This is
one of the economic paradoxes. A clear understanding about the magnitude of poverty and
unemployment facilitates allocation of resources and initiating corrective measures.

5. Economic Growth:
The growth and development of an economy and the factors determining them could be
understood only through macro analysis.

6. Economic Policies:
Macro Economics is significant for evolving suitable economic policies. Economic policies
are necessary to solve the basic problems, to overcome the obstacles and to achieve
growth.

Question 2.
Illustrate the functioning of an economy based on its activities?
Answer:
An economy is referred to any system or area where economic activities are carried out.
Each economy has its own character. Accordingly, the functions or activities also vary. The
functioning of an economy by its activities is explained in flow chart.
 1. In an economy, the fundamental economic activities are production and
consumption.
2. These two activities are supported by several other activities.
3. The ultimate aim of these activities is to achieve growth. The ‘exchange
activity’ supports the production and consumption activities. These activities
are influenced by several economic and non – economic activities.
4. The major economic activities include transportation, banking, advertising,
planning, government policy and others.
5. The major non – economic activities are environment, health, education,
entertainment, governance, regulations etc.
6. In addition to these supporting activities, external activities from other
economies such as import, export, international relations, emigration,
immigration, foreign investment, foreign exchange earnings, etc. also
influence the entire functioning of the economy.

Question 3.
Compare the features of capitalism and socialism?
Answer:
Features of Capitalistic Economy:
1. Private Ownership of Property and Law of Inheritance:
The basic feature of capitalism is that all resources namely, land, capital, machines, mines
etc. are owned by private individuals. The owner has the right to own, keep, sell or use
these resources according to his will. The property can be transferred to heirs after death.

2. Freedom of Choice and Enterprise:

Each individual is free to carry out any occupation or trade at any place and produce any
commodity. Similarly, consumers are free to buy any commodity as
per their choice.

3. Profit Motive:
Profit is the driving force behind all economic activities in a capitalistic economy. Each
individual organization produce only those goods which ensure high profit. Advance
technology, division of labour, and specialisation are followed. The golden rule for a
producer under capitalism is ‘to maximize profit.’

4. Free Competition:
There is free competition in both product and factor market. The government or any
authority cannot prevent firms from buying or selling in the market. There is competition
between buyers and sellers.

5. Price Mechanism:
Price mechanism is the heart of any capitalistic economy. All economic activities are
regulated through price mechanism i.e., market forces of demand and supply.

6. Role of Government:
As the price mechanism regulates economic activity, the government has a limited role in a
capitalistic economy. The government provides basic services such as, defense, public
health, education, etc.

7. Inequalities of Income:
A capitalist society is divided into two classes – ‘haves’ that is those who own property and
‘have-nots’ who do not own property and work for their living. The outcome of this
situation is that the rich become richer and poor become poorer. Here, economic inequality
goes on increasing.

Features of Socialism:

1. Public Ownership of Means of Production:

All resources are owned by the government. It means that all the factors of production are
nationalized and managed by the public authority.
2. Central Planning:
Planning is an integral part of a socialistic economy. In this system, all decisions are
undertaken by the central planning authority.

3. Maximum Social Benefit:

Social welfare is the guiding principle behind all economic activities. Investments are
planned in such a way that the benefits are distributed to the society at large.

4. Non – existence of Competition:

Under the socialist economic system there is absence of competition in the market. The
state has full control over production and distribution of goods and services. The
consumers will have a limited choice.

5. Absence of Price Mechanism:

The pricing system works under the control and regulation of the central planning
authority.

6. Equality of Income:
Another essential feature of socialism is the removal and reduction of economic
inequalities. Under socialism private property and the law of inheritance do not exist.

7. Equality of Opportunity:
Socialism provides equal opportunity for all through free health, education and
professional training.

8. Classless Society:
Under socialism, there is a classless society and so no class conflicts. In a true socialist
society, everyone is equal as far as economic status is concerned.

Question 4.
Compare the feature among Capitalism, Secularism and Mixedism?
Answer: