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Question1- Economic stability implies avoiding fluctuations in economic activities. It is important to

avoid the economic and financial crisis. The challenge is to minimize the instability without affecting
productivity, efficiency, employment. Find out the instruments to face the challenges and to maintain
an economic stability.
Answer: Promoting economic stability is partly a matter of avoiding economics and financial crisis. A
dynamic market economy necessarily involves some degree of instability, as well as gradual structural
change. The challenge for policy makers is to minimize this instability without reducing the ability of the
economic system to raise living standards through increasing productivity, efficiency and employment.
Economic stability is fostered by robust economic and financial institutions and regulatory frameworks.
A stabilization policy is a set of measures introduced to stabilize a financial system or economy. It can
refer to correcting the normal behavior of business cycle. In this case the term generally refers to
demand management by monetary and fiscal policy to reduce normal fluctuation in output, sometimes
referred as "keeping the economy on an even keel".
The instruments to face the challenges and to maintain an economic stability are:
1. Monetary policy:
Monetary policy deals with the total money supply and its management in an economy. It is
essentially a program of action undertaken by the monetary authorities, generally the central bank, to
control and regulate the supply of money with the public, and the flow of credit with the view to
achieving economic stability and certain predetermined macroeconomic goals.
Monetary policy has to play a major and constructive role on developing countries in order to accelerate
and promote economic development. Monetary authorities have to take number of steps to increase
investment, such as provide incentives to saving, increase the rate of saving, increase the rate of capital
formation, mobilize more funds, both in urban and rural areas, set up various financial institutions,
channelize them into productive areas and offer interest rate. It has to follow a flexible and elastic
monetary policy to suit particular condition.
2. Fiscal policy:
Fiscal policy is a policy concerning the receipts and expenditure of the government. It refers to
the budgetary policy of the government. It operates through changes in the government expenditure,
taxation and public borrowings. It is used as balancing device in the development of an economy. The
modern fiscal policy is a technique to attain and maintain full employment by manipulating public
expenditure and revenue in such a way as to keep equilibrium between effective demand and supply
services at a particular time.


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3. Physical policy or direct control:
Physical policy refers to direct control on different activities by the government to achieve
desire goal. It is more specific, simple and direct compared to the monetary and fiscal policies.
Government controls consumption and distribution of essential goods like food and raw material
through price control and rationing. Direct control are used generally to tide over a situation of shortage
or surplus and, to avoid large fluctuation in the price of essential commodities.


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Question2- Explain any eight macroeconomic ratios.
Answer: Macroeconomics may be defined as that branch of economic analysis which studies the
behavior of the entire unit combined together. It deals with the functioning of the economy as a whole,
therefore it studies aggregate form of the economy and also called as aggregate economics and income
theory. It deals not with individual income but with the national income, not with the individual price
but with the general price level, not with individual output but with the national output.
The macroeconomics ratios are as follows:
1. Consumption income ratio: The consumption income ratio explains the relationship the relationship
between two variable, i.e., the amount of income and the amount of consumption. Mathematically it
can be expressed as :
Y= C+S
2.Saving ratio: Excess of income over expenditure is saving. The saving function can be easily derived by
subtracting spending from income. Hence, S = Y - C where S = saving, Y = income and C = consumption.
It is a function of income.
3. Capital output ratio: Capital output ratio explains the relationship between the value of capital
investment and the value of output. It is a ratio of increase in output or real income to an increase in
capital. It can be define as the ratio of investment in a given economy or industry for a given time period
to the output of that economy or industry for a similar time period.
4. Capital labor ratio: Capital labor ratio is the ratio of two factor of inputs that tells us the ratio
between the numbers of laborers required for a given amount of capital invested in any business. This
ratio can be expressed as K/L Where k = capital and L = labor.
5. Output labor ratio: Output labor ratio express the relationship between the quantity of output
produced and the number of laborers employed for a specific time period. i.e.
Output labor ratio=(Total output(o))/(Number of labors employed(L))
6. Value added output ratio: Value added output ratio is the ratio of increases in the quality of inputs
employed and the corresponding increase in the output obtained. It is the difference between the value
of output produced and the value of input employed.
7. Cash reserve ratio: It is the percentage of total deposits which the bank is required to hold in the
form of cash reserve for meeting the depositors' demand for cash. It indicates the ratio between the
liquid cash with that of the total deposits of the bank.
8.Capital's share of income: Capital's share of income indicated, by the percentage of income earned by
capital in the form of interest, out of total national income is called as capital's share of income.

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Question3- Define Inflation and explain the types of inflation.
Answer: Inflation is an increase in the overall price level or it is a state in which the value of money is
falling i.e. the price is rising. In short inflation can be defined as the persistent rise in the general price
level across the economy over time. It is situation of persistent and appreciable increase in the general
level of price over a time period of time in the economy. It is measured in terms of annual percentage
increase in the general price level. The relationship between price level and inflation can be written as:
percentage rate of inflation, P[t] =( change in price [t])/(price [t-1]) X 100
Types of inflation:
1. Creeping inflation: This is the mildest type of inflation. In this situation price level rises within a range
of 1 - 3 % per annum.
2. Walking inflation: This is the situation when price rises by more than from 3 % and within the range
of 3% to 7 % per annum. It is a warning single to the economy. This is of single digit and should be
controlled before it turns into running inflation.
3. Running inflation: This is the situation when prices rise rapidly. Here price rises at the rate of 10 -20%
per annum. This inflation affects the poor and middle classes adversely. It requires strong monetary and
fiscal policy measures otherwise it can lead to hyperinflation.
4. Hyperinflation: This is also called Galloping inflation. In this case prices rises very fast at the rate of 20
to 100% per annum and can become absolutely uncontrollable. Such situation brings a total collapse of
the monetary system because of the continuous fall in the purchasing power of money.
5. Demand pull inflation: Demand pull inflation occurs when aggregate demand for goods and services
is greater than the available supply of these goods and services at the existing price level. So the price
are pulled upward by the upward shift of demand function.


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6. Cost push inflation: When the cost of production pushed up the price to rise due to the increase in
the cost of production this situation is called cost push inflation. It occurs due to increase in cost of
production of goods and services in the economy.


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Question4- Define Fiscal Policy and the instruments of Fiscal policy
Answer: Fiscal policy is a policy concerning the receipts and expenditure of the government. It refers to
the budgetary policy of the government. It operates through changes in the government expenditure,
taxation and public borrowings. It is used as balancing device in the development of an economy. The
modern fiscal policy is a technique to attain and maintain full employment by manipulating public
expenditure and revenue in such a way as to keep equilibrium between effective demand and supply
services at a particular time.
The instruments of fiscal policy are as follows:
1. Public revenue: It refers to the income or receipts of public authorities. It is classified into two parts -
tax revenue and non tax revenue. Taxes are the main source of revenue to a government. There are two
types of taxes. They are direct taxes and indirect tax. Administrative revenue are the bi-product of
administrative function of the government. They include fees, license fees, price of public goods and
services, fines, escheats and special assessment.
2. Public expenditure policy: It refers to the expenses made by the public authorities and central and
local governments. The expenditure incurred by the central authorities in the form of expenditure on
administrative and maintenance of law and order are example of public expenditure. It is of two kind
development/plan expenditure and non-development/non-plan expenditure.
3. Public debt or public borrowing policy: All loans taken by the government constitute public debt. It
refers to the borrowings made by the government to meet the ever-rising expenditure. It is of two
types, internal borrowings and external borrowings.
4. Deficit financing: it is an extraordinary technique of financing the deficit n the budget. It implies
printing of fresh and new currency notes by the government by running down the cash balances with
the central bank. The amount of new money printed by the government depends on the absorption
capacity of the economy.
5. Built in stabilizers or automatic stabilizers: The automatic or built in stabilizers imply automatic
changes in tax collection and transfer payments of public expenditure programmers so that it may
reduce the destabilizing effect on aggregate effective demand. When income expands, automatic
increase in tax or reduction in transfer in payments or government expenditure will tend to moderate
the rise in income. When the income declines, tax falls automatically and transfer and government
expenditure will rise and thus build in stabilizers cushion the fall in income.

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Question5- Investment is a part of income which can be used for various purposes. It is necessary to
create employment in an economy and to increase national income. To understand the benefits of
income, study the various types of investment.
Answer: Investment is defined as the value of that part of the economy's output for any time period that
takes the form of new structures, new producers durable equipment, and change in inventories.
Investment, according to Keynes, refers to real investment. It implies creation of new capital assets or
additions to the existing stocks of productive assets. It refers to that part of the aggregate income, which
is used for the creation of new structures, new capital equipments, machines, etc that helps in the
production of final goods and services in an economy. The various types of investment are :
1. Private investment: It is made by the private entrepreneurs on the purchase of different capital
assets like machinery, plants, construction of houses and factories, offices, shops, etc. It is influenced by
MEC and interest rate. Profit motive is the basis for private investment.
2. Public investment: It is undertaken by the public authorities like central, state and local authorities. It
is made on building infrastructure of the economy, public utilities and on social goods, for example
expenditure on basic industries defense industries, construction of multipurpose river valley projects,
etc.
3. Foreign investment: It consists of excess of exports over the imports of a country. It depends on many
factors such as propensity to export of a given country, foreigners capacity to import, prices of exports
and imports, state trading and others factors.
4. Induced investment: Induced investment varies positively with level of income. It increases as income
increases and decreases as income decreases. It is guided by profit motive or income elastic. It is
generally influenced by demand and profit resulted from the change in wages, price and rate of interest,
etc.
5. Autonomous investment: The investment which is independent of the level of income is called as
autonomous investment. It is independent of the level of income and is not guided by profit motive and
it is income inelastic. It is influenced by exogenous factor like innovation, growth of a population and
labor , social and legal institution, natural calamities, etc.

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Question6- Discuss any two law of returns to scale with example.
Answer: The law of return to scale explain the behavior of output in response to a proportional and
simultaneous change in inputs. Increasing inputs proportionately and simultaneously is, in fact an
expansion of the scale of production.
There are three kinds of return to scale, Increasingly return to scale, Constant return to scale and
Decreasing return to scale.
1. Constant return to scale: Constant return to scale is operating when the factor inputs are increased in
a given proportion leading to an equal-proportional increase in output. When the quantity of all the
outputs is increased by 10 % and output also increased exactly by 10%, then we say that constant return
to scale are operating. Figure below depicts a graph for constant return to scale. In the figure, it is clear
that the successive isoquant curves are equidistant from each other along the scale line OP. it indicates
that as the producer increases the quantity of both factors X and Y in a given proportion, output also
increases in the same proportions.
Y P

e
c d 500 units
b300 units
a 200 units
O 100 uniits X
Fig: constant return to scale
For example: If the all factor of production input (like raw materials, manpower, etc) in a oil mill is
increased by 10% and the output also increase by 10%, than we say that constant return to scale is
operating.
2. Diminishing return to scale: Diminishing returns to scale is operating when output increases less than
proportionately when compared to the quantity of inputs used in the production process. When the
quantity of all inputs are increased by 10% and output increased by 5% then we say that diminishing
returns to scale is operating.




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P



d 400 units
factor'Y' c300 units
a 100 b200 units

factor 'X'
fig: diminishing return to scale
For example: If the quantity of input(like raw materials, manpower, etc) in a oil mill is increased by 10%
and the output increase by 5%, than we say that diminishing return to scale is operating.
3. Increasingly return to scale: Increasing return to scale is said to operate when the producer is
increasing the quantity of all factors in a given proportion leading to a more than proportionate
increase in output.