MACRO ECONOMICS - CHAPTER 1 - INTRODUCTION

I Choose the correct answer. (each question carries 1 mark)

1. The individuals or institutions which take economic decisions are:

Economic
a) variables c) Economists
Economic
b) Agents d) none of the above.
Ans: b) Economic Agents.
2. In 1936 British economist J.M.Keynes published his celebrated book
Wealth of
a) Nations b) General theory of employment, interest and Money.
b) Theory of interest d) Theory of employment
Ans: (b) General theory of employment, interest and Money.
All the labourers who are ready to work will find employment and all the
3. factories will be
working at their full capacity, this school of thought is known as
a) Modern thought b) Contemporary thought
c) Classical thought d) none of these
Ans: (c) Classical thought
4. The year of Great Depression
a) 1920 b) 1889 c) 1929 d) 2018
Ans: (c) 1929
5. In a capitalist country production activity are mainly carried out by
Private
a) enterprises c) Government authority
Planning
b) authority d) None of the above
Ans: (a) Private enterprises.

II Fill in the blanks:(each question carries 1 mark)

1. ____________ tries to address situation facing the economy as a whole.

Ans: Macroeconomics.
2. Sale of goods by the domestic country to the rest of the world is called
________.
Ans: Exports.
3. The domestic country may sell goods to the rest of the world. These are
called_______.
Ans: Exports.
 4. ________ will be called as firms.
Ans: Production units.
5. _________ Policies are pursued by the state itself or statutory bodies like RBI,
SEBI etc.
Ans: Macroeconomic.

III Answer the following questions in a sentence or word. (each question carries
1 mark)
1. Who are economic agents?
Ans: Economic agents are those individuals or institutions which take
economic decisions. They can be consumers, producers,
Government, Corporation, Banks etc.
2. What does classical school of thought say?
Ans: The classical school of thought says that all the labourers who are
ready to work will find employment and all the factories will be
working at their full capacity.
3. Give the meaning of imports.
Ans: When the economy buys goods from the rest of the world, they are
called imports.
4. Name the well-known work of Adam Smith.
Ans: The well-known work of Adam Smith is “An Enquiry into the Nature
and Cause of the Wealth of Nations”.
5. What do you mean by wage rate?
Ans: The price paid for the purchase of labour services is called wage rate.
IV Answer the following questions in 4 sentences. (each question carries 2
marks)

1. What are the features of capitalistic economy?

Ans: The important features of a capitalist of economy are as follows:
• Market oriented economy is governed by the market mechanism of
“Demand (dd) and Supply (ss).
• Price governs the market and in-turn balances the wheel of profit
mechanism.
• The consumers have variety of choices. Both the consumer and
producers enjoy the benefits of market mechanism.
• It enters the global competition for profit maximization.
• There is sale and purchase of labour services at a price which is
called wage rate.
• There is private ownership of means of productions.
 2. Name and write the meaning of two kinds of trade in
external sector. Ans: A country may sell goods to the rest
of the world – Exports. External trade means trade with
foreign countries. It implies buying and selling of goods
beyond the national boundary of a country.
The two kinds of Trade in external sector are:
• Import Trade: It refers to the purchase of goods from foreign
countries.
• Export trade: It refers to selling goods to the rest of the world.
3. Who are the macroeconomic decision makers?
Ans: The macroeconomic decisions makers are State itself or statutory
bodies like the Reserve Bank of India, Securities and Exchange Board
of India and similar institutions.
Each such statutory body will have one or more public goals to pursue
as defined by law or the constitution of India itself. Such goals are not
aimed at serving individual interest but are pursued for the welfare of
the country.

V Answer the following questions in 12 sentences. (each question carries 4

marks)
1. Briefly explain in what way Macro Economics is different
from Micro Economics.
Ans: The micro and macro Economics are distinguished on the
following grounds:
Scope:
• Micro Economics study in individual units so its scope is narrow.
• Macro Economics study in aggregates, so its scope is wider.

Method of study:
• The Micro Economics follows slicing method as it studies individual
unit.
• The Macro Economics follows lumping method as it studies in
aggregates.

Economic Agents:
• In Micro Economics, each individual economic agent thinks about
its own interest and welfare.
• In Macro Economics, economic agents are different among
individual economic agents and their goal is to get
maximum welfare of a country.
 Equilibrium:
• Micro economics studies the partial equilibrium in the country.
• Macro Economics studies the general equilibrium in the economy.

Domain:
• Micro economics consists of theories like consumer’s behaviour,
production and cost,
Rent, Wages, Interest, etc.
• Macroeconomics comprises of theories of income, output and
employment, Consumption Function, Investment function,
Inflation, etc.

2. Explain the working of the economy of a capitalist country.

Ans: Capitalist economy can be defined as an economy in
which most of the economic activities have the following
characteristics:
o Capitalist or Market oriented economy is governed by the market
mechanism of “Demand (dd) and Supply (ss).
o Price governs the market and in-turn balances the wheel of profit
mechanism.
o The consumers have variety of choices. Both the consumer and
producers enjoy the benefits of market mechanism.
o It enters the global competition for profit maximization.
o There is sale and purchase of labour services at a price which is
called wage rate.
o There is private ownership of means of productions.
o Production takes place for selling the output.

❖ In a capitalist country production activities are mainly carried out by

capitalist enterprises. A typical capitalist enterprise has one or several
entrepreneurs. Entrepreneurs are those who exercise control over major
decisions and bear a large part of the risk associated with the firm. They
may themselves supply the capital needed to run the enterprise or they
may borrow the capital.

❖ To carry out the production they need factors of production. After

producing output with the help of land, labour and capital, the
entrepreneur sells the product in the market to earn money called revenue.
Part of the revenue is paid out as rent for land, interest for capital and
wage for labour and keeps the rest of the revenue as profit.
❖ Profits are often used by the producers in the next period to buy new
machinery or to build new factories, so that production can be expanded.
These expenses which raise productive capacity are examples of
investment expenditure.

3. Explain the role of the Government (State) and household

sector in both developed and developing countries.
Ans:
❖ Role of Government: In both the developed and developing countries,
apart from capitalist sector, there is an institution of State. The role of the
state includes framing laws, enforcing them and delivering justice.
• The State here refers to the Government which performs various
developmental functions for the society as whole. It undertakes
production, apart from imposing taxes and spending money on building
public infrastructure, running schools, providing health services etc. These
economic functions of the state have to be taken into account when we
want to describe the economy of the country.
❖ Role of Household sector: By household we mean a single individual
who takes decisions relating to her own consumption or a group of
individuals for whom the decisions relating to consumption are jointly
determined.
• Households consist of people. These people work in firms as workers
and earn wages. They are the ones who work in government
departments and earn salaries, or they are the owners of firms and earn
profits.
• Therefore, the market in which the firms sell their products could not
have been functioning without the demand coming from the
households. Further, they also earn rent by leasing land or earn interest
by lending capital.

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