Category: Inter 1st Year

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 7th Lesson Journal Proper Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 7th Lesson Journal Proper

Questions

Question 1.
What is Journal Proper?
Answer:
There are some transactions which cannot be recorded in any of the remaining seven subsidiary books, are entered in special book known as “Journal proper”.

Question 2.
Explain various kinds of transactions that are recorded in Journal Proper.
Answer:
The following are the transactions recorded in journal proper.
1) Opening entries : Opening entries are passed at the commencement of the new year, to record the balances of assets and liabilities brought forward from the previous year.
The rule to be applied as
Assets A/C
To Liabilities a/c
To Capital a/c
(Being last year balance brought forward).

2) Purchase and sale of fixed assets: Business organisations either purchase or sell the assets for cash and sometimes on credit. If it is purchased on credit, then the entry should be recorded in the journal proper.
Example : Purchased machinery from Godrej Company 40,000.

3) Rectification entries : Sometimes errors may occur while recording transactions, posting them into the ledger or while balancing the ledger accounts. In such cases certain entries should be passed in order to rectify the errors. Such entries are called “Rectification entries”.
Example : Rama paid Rs. 1000. This was credited to Bheema’s A/c.

4) Adjustment entries: At the time of preparation of final accounts of the business firm some adjustments are to be made. The journal entries relating to these adjustments are known as “Adjustment entries”.
Example: Outstanding expenses, prepaid expenses, incomes receivable, income received in advance, depreciation, etc.

5) Closing entries: At the end of every financial year the balances of all the Nominal accounts are transferred to the Trading and Profit & Loss accounts. These transferred entries are known as Closing entries. All expenses and losses are debited and incomes and gains are credited to Trading, Profit & Loss account.

6) Transfer entries: Sometimes the trader transfers the amount from one account to another account. This type of journal entries are known as ‘Transferred journal entries’.
Example : Transfer of Profit to Reserve Fund.

7) Other entries : It is not possible to enter same transactions in journal and hence they are recorded in Journal Proper.
Example: Interest on drawings, interest on capital, goods lost due to fire & theft, goods sent on consignment, etc.

Question 3.
Explain the following in not more than 5 lines.
a) Opening Entries
b) Rectification Entries
c) Adjustment Entries
d) Closing Entries
Answer:
a) Opening Entries : Opening entries are passed at the commencement of the new year, to record the balances of assets and liabilities brought forward from the previous year.
The rule to be applied as
Assets a/c Dr
To Liabilities a/c
To Capital a/c
(Being the last year balance brought forward).

b) Rectification Entries : Sometimes errors may occur while recording transactions, posting them into the ledger or while balancing the ledger accounts. In such cases certain entries should be passed in order to rectify the errors. Such entries are called “Rectification entries”.
Example : Rama paid Rs. 100. This was credited to Somu’s A/c.

c) Adjustment Entries: At the time of preparation of final accounts of the business firm some adjustments are to be made. The journal entries relating to these adjustments are known as “Adjustment entries”.
Example: Outstanding expenses, prepaid expenses.

d) Closing Entries: At the end of every financial year the balances of all the Nominal accounts are transferred to the Trading and Profit & Loss accounts. These transferred entries are known as Closing entries. All expenses and losses are debited and incomes and gains are credited to Trading, Profit & Loss account.

Problems

Question 1.
Record the Opening entry from the following particulars on 1st April 2013: (Mar. 2019 – T.S.) (Mar. 2018 : May 17 – A.P.)

Answer:

Question 2.
Write the Opening entry on 1st Jan. 2013 in the books of Ram from the following:

Answer:

Question 3.
Record the Opening entry from the following assets and liabilities as on Jan. 1st, 2014:

Answer:

Question 4.
Pass Opening Journal Entry from the following particulars on 1^st April, 2013.

Question 5.
Record Opening entry on 1^st Jan. 2014 from the following assets and liabilities:


Answer:

Question 6.
Rectify the following errors dated on Dec. 31^st, 2013:
1. Machinery purchased Rs. 20,000, wrongly debited to Purchases a/c,
2. Commission received Rs. 3,000, wrongly credited to Interest received a/c,
3. Salaries paid to Accountant Prakash Rs. 10,000, debited to his personal a/c,
4. Purchased goods for Rs. 8,000, recorded as Rs. 80,000,
5. Paid cash to Rohit Rs. 5000, wrongly debited to Mohit a/c.
Answer:

Question 7.
Pass adjustment journal entries for the following:
1. Salaries Outstanding Rs. 2,000,
2. Insurance Paid in Advance Rs. 500,
3. Credit 5% Reserve for Bad and Doubtful Debts on Debtors amounted to Rs. 10,000,
4. Provide 10% Depreciation on Machinery. Machinery Value Rs. 20,000,
5. Closing Stock Rs. 15,000.
Answer:

Question 8.
Record the Closing Entries from the following Ledger Balances ofAshrith :

Answer:

Question 9.
Write Opening Entry as on Jan. 1^st 2014 from the following balance sheet of Venkat: Balance Sheet of Venkat as on 31^st Dec. 2013

Answer:

Question 10.
Write Opening Journal Entry from the following as on 1^st April 2013 : (Mar. 2018-T.S.)

Answer:

Student Activity

Visit any organisation/firm and record opening, closing and other entries of Journal proper.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 6th Lesson Subsidiary Books Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 6th Lesson Subsidiary Books

Questions

Question 1.
Explain the various Subsidiary Books with suitable examples.
Answer:
Separate Books or special books which are maintained to record a particular category of trans¬actions are known as “Subsidiary books”.
The journal is divided into eight subsidiary books. They are :
a) Purchase book : This book records all the goods purchased on credit. Cash purchases and purchase of assets are not recorded in this book.
Whenever goods are bought on credit we receive an invoice from the seller. It is called “Inward Invoice”. It is evidence for recording in purchase book.

b) Sales book : The goods sold on credit are recorded in this book. Cash sales and assets sold for cash or credit are not recorded in this book.
Whenever goods are sold on credit we send an Invoice to the customer. It is called “Outward Invoice”. It is evidence for recording in sales book.

c) Purchase returns book: This book is also known as returns outward book. This book records the goods returned to the suppliers. When goods are returned to their sellers a Debit Note’ is prepared and sent to the suppliers along with goods.

d) Sales returns book: This book is also known as returns inward book. This book records the goods returned by the customers. When the sellers receive goods back from the customer along with a debit note, then he prepares a credit note and sends to the customer.

e) Cash book: Cash book is used for recording all cash transactions i.e. cash receipts and cash payments either in cash or by cheque are recorded in this book.

f) Bills receivable book: This book is used to record all the bills received from the customers for the amount due. It contains details of acceptor of the bill, its due date, date bill, the amount due, etc.

g) Bills payable book: If the goods are purchased on credit and bills are accepted for the due amounts, all these bills payable are recorded in this book. It contains the amount due, date of bill, place of payment, due date, etc .

h) Journal proper : This book is used to record only those transactions, which cannot be recorded in any one of the seven subsidiary books side above.

Question 2.
Give the advantages of subsidiary books.
Answer:
Subsidiary Book Advantages:
a) Saving of Time : No need of writing the Journal Entries. Transactions are directly entered into their respective journals.
b) Division of Work: By entrusting different Subsidiary Books to different persons, division of principle can be implemented.
c) Easy Recording: Transactions can be recorded very fast and easy.
d) Improves Efficiency: Accounting work will be done efficiently by allotting work to different experts who prepare the Special Books.
e) Detection of Errors : Since Separate Books are maintained to record a particular set of transactions, errors can be easily noticed.

Question 3.
Explain about Purchases book and draw the pro forma of it.
Answer:
This book records all the goods purchased on credit. Cash purchases and purchase of assets are not recorded in this book.

Whenever goods are bought on credit we receive an invoice from the seller. It is called “Inward Invoice”. It is evidence for recording in purchase book. It is numbered serially and filed in a separate file.
Proforma of purchase book:

Purchase book contains five columns, such as Date, Particulars, Invoice No., L.F.No. and Amount.

Question 4.
Explain about Sales book and draw the pro forma of it.
Answer:
The goods sold on credit are recorded in this book. Cash sales and assets sold for cash or credit are not recorded in this book.
Whenever goods are sold on credit we send an invoice to the customer. It is called “Outward invoice”. It is evidence for recording in sales book. It is serially numbered and kept in a separate file.

Proforma of sales book:

Sales book contains five columns, such as Date, Particulars, Invoice No., L.F.No. and Amount.

Question 5.
Answer the following in not more than 5 lines. (Mar. ’17 – A.P.)
a) Invoice
b) Debit Note
c) Credit Note
d) Trade Discount
e) Journal Proper
Answer:
a) Invoice:
It is the document prepared by the supplier of goods with all the details like quantity, price discount offered and other terms and conditions. This is also known as “Inward Invoice”.

b) Debit Note: (Mar. 2019 – A.P.) (Mar. 2018 – T.S.)
If goods are returned to the supplier, a debit note or letter is sent along with goods, informing the supplier about the debit given to his account for the value of the goods returned. This note is known as debit note.

c) Credit Note:
If the customer returned the goods, a credit note is sent to him by the traders informing the customer that his account has been credited with the value of the goods returned.

d) Trade Discount:
It is a reduction in the catalogue price of an article. This is given by the wholesaler to the retailer to enable him to sell at a catalogue price and make a profit. It is not entered in books.

e) Journal Proper: (May ’17 – A.P.)
This book is used for recording only those transactions which cannot be recorded in any one of the seven subsidiary books said above.
Examples: Opening entries, closing entries, adjustment entries, transfer entries.

Problems

Question 1.
Record the following transactions in the purchase book.

Hint 1: For transaction dated on 11^th Calculate trade discount @ 10% on Rs. 5,000/- i.e. 5000 × \(\frac{10}{100}\) = 500, and take net purchases as 5000 – 500 = 4500.
Hint 2: Transaction dated 17^th March is a cash transaction. So, it is not to be taken in purchase book.
Answer:

Question 2.
Prepare Purchase Book from the following:

Hint 1: For transaction dated on 10^th calculate discount @ 10% on 10,000/-
i.e. 1,000 and takes net purchases as 10,000 – 1,000 = 9,000.
Hint 2: Transaction dated on 12^th is a cash transaction. So, it is not entered in purchases book.
Answer:

Question 3.
Record the following in Purchases Book:
2012
March 1^st Purchase goods on credit from Chand traders Invoice No. 301.
120 reams of white paper @15 per ream
60 dozen ink pots @ 25 per dozen

March 8^th Purchased from Gupta traders Invoice No. 403
10 Drawing boards @ 30 each
40 Notebooks @ 20 each

March 10^th Purchased goods from Goyal and Company for cash 3,000.

March 15^th Purchased goods from Ankit Rs. 10,000 as per Invoice No. 450.

Hint 1 : Transaction dated on March 1^st Net Purchases amount is to be calculated as, (120 × 15) + (60 × 25) = 1800 + 1500 = 3300
Hint 2 : Transaction dated on March 8^th Net Purchases amount is,
(10 × 30) + (40 × 20) = 300 + 800 = Rs. 1100
Answer:

Question 4.
Enter the following in Purchase Book and Purchase Returns Book: (Mar. 2019 – A.P. & T.S.)

Answer:

Question 5.
Prepare Sales Book (May 17 – T.S.)

Hint 1: Trade discount is 4000 × 5/100. Net sales = 3,800.
Hint 2: Transaction dated on 14th is a Cash transaction.
Answer:

Question 6.
Enter the following transactions in Sales Book and prepare Ledger.

Hint 1: For transaction dated on 18^th calculate trade discount i.e. 8000 × 10/100 = 800, net sales = 7200.
Hint 2: Transaction dated on 20th is a cash transaction.
Answer:

Ledgers:

Question 7.
Prepare Sales Book and Sales Returns Book from the following. (Mar. 2018 – A.P. & T.S.)

Answer:

Question 8.
Record the following transactions in Proper Subsidiary Books.

Answer:

Question 9.
Enter the following transactions in the related Subsidiary Books.

Hint 1: For transaction dated on 10^th Trade discount is 15000 × 10/100 = 1500
Net purchases = 13500
Hint 2: Transaction dated on 18^th is a cash transaction.
Hint 3: For transaction dated on 20^th Trade discount is 3000 × 5/100 = 150
Net sales = 2850
Hint 4: Transaction dated on 26^th is to be entered in journal proper.
Hint 5: For transaction dated on 27^th Trade discount is 8000 × 15/100 = 1200
Net sales = 6,800
Answer:

Question 10.
Prepare Purchases Book.

Answer:

Question 11.
Enter the following transactions in Purchases Book and post them in Ledger.

Answer:

Ledgers:

Question 12.
Record the following in Sales Book and Sales Returns Book.


Answer:

Question 13.
Enter the following transactions in Proper Subsidiary Books: (May ’17 – A.P.)

Hint : Transaction dated Nov. 19^th trade discount 15% of 10000 i.e.,
10000 × 15/100 = 1500 is to be deducted from purchase amount Rs. 10000.
Net purchases 10000 – 1500 = 8500

Question 14.
From the following transactions prepare Sales Book and Sales Returns Book. (IPE. Mar. 14)

Answer:

Question 15.
Enter the. following transactions in proper Subsidiary Books. (IPE. Mar. 14)

Answer:

Student Activity

Collect the invoices, debit notes, credit notes from any business organization.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 5th Lesson Ledger Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 5th Lesson Ledger

Short Answer Questions

Question 1.
Define ledger and explain the advantages of ledger.
Answer:
Ledger is a book which facilitates recording of all types of transactions related to Personal, Real and Nominal. All the debit and credit aspects which are recorded in the journal are transferred to the respective accounts in the ledger.
According to L.C.Cropper, “the book which contains a classified and permanent record of all transactions of a business is called the Ledger”.

Advantages:

The following are the advantages of ledger.

1. Complete information at a glance : All the transactions pertaining to an account are collected at one place in the ledger. By looking at the balance of that account, one can understand the collective effect of all such transactions at a glance.
2. Arithmetical accuracy: With the help of ledger balances, Trial balance is prepared to know the arithmetical accuracy of accounts.
3. Result of business operations: It facilitates the preparation of final accounts for ascertaining the operating result and the financial position of the business concern.
4. Accounting information : The data supplied by various ledger accounts are summarized, analyzed and interpreted for obtaining various accounting information.

Question 2.
What do you mean by posting ? Explain the rules relating to posting.
Answer:
The process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the ledger is called ‘Posting’. In other words’, posting means process of grouping of all the transactions relating to a particular account at one place.

RULES:

Following steps should be taken into account while making posting.

A) Opening of separate accounts: Each transaction affects minimum two accounts for which separate accounts are to be opened in the ledger. All transactions relating to an account, debit as well as credit, are to be posted to know the net position of the account.

B) Posting journal entry to concerned side: If an account is debited in the journal, posting will be made on the debit side of the account in the ledger. Similarly, if an account is credited in the journal, that account would be credited in the ledger.

C) Use of word ‘To” and “By” : While writing the debit side, commence with word “To” and write the name of the account, which is credited in the journal. Write the word “By” on the credit side before writing the name of the account that is debited in the journal.

D) Balance in account: The difference between debit and credit totals of an account is the net position of the account, known as balance of the account.

Very Short Answer Questions

Question 1.
What is ledger ? (Mar. ’15 – T.S.)
Answer:
Ledger is a book which facilitates recording of all types of transactions related to Personal, Real and Nominal accounts separately in related accounts. In other words, the group of accounts recorded in a book is called Ledger’. Ledger is also called ‘Book of Final Entry’.

Question 2.
What is posting ? (Mar. ’17 – T.S.)
Answer:
The process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the ledger is called Posting’. It is also process of grouping of all the transactions relating to a particular account at one place.

Question 3.
What do you mean by balancing of an account ?
Answer:
Balancing means the writing of the difference between the amount columns of the two sides in the ledger (smaller total) side, so that the totals of the two sides become equal.

Question 4.
What is debit balance ?
Answer:
The excess of debit total over the credit total is called the debit balance.

Question 5.
What is credit balance ?
Answer:
The excess of credit total over the debit total is called the credit balance.

Problems

Question 1.
Journalise the following transactions of Mr. Prahlad and post them in the ledger and balance the same.
2013
February 01 Prahlad invested Rs. 5,00,000 cash in the business
February 03 Paid into Bank Rs. 60,000
February 05 Purchased building for Rs. 2,00,000
February 07 Purchased goods for Rs. 50,000
February 10 Sold goods for Rs. 80,000
February 15 Withdrew cash from bank Rs. 12,000
February 25 Paid internet Rs. 2,000
February 28 Paid Salary Rs. 18,000
Answer:
Journal Entries in the books of Mr. Prahlad


Ledger Accounts :

Question 2.
Prepare Pavan account from the following: (May ’17 – T.S.)

Answer:

Question 3.
Prepare Sudha account from the following: (Mar. 2019 – T.S.) (May 17 – A.P.)

Answer:

Question 4.
Prepare Swami’s account from the following: (Mar. 2018 – T.S.)

Answer:

Question 5.
Prepare Machinery account from the following:

Answer:

Question 6.
Prepare the Ledger account of Bhavya from the following particulars:

Answer:
Journal Entries in the books of Bhavya

Question 7.
From the following information prepare Praveen’s Account as on 31-3-2014. (Mar. 2018 – A.P.)

Answer:

Question 8.
Prepare Vamsi’s Account from the following.

Answer:

Question 9.
Prepare Anurudh ‘s Account from the following. (Mar. 2019 – A.P.)

Answer:

Student Activity

Visit any bank or any organisation and find the process of preparation of accounts.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 4th Lesson Journal Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 4th Lesson Journal

Very Short Answer Questions

Question 1.
What is Journal ?
Answer:
The word ‘Journal, is derived from the Latin word Journ’ which means a day. Therefore journal means a day book where in day-to-day business transactions are recorded in chronological order. This is also known as ‘Book of original entry’ or ‘Book of primary entry’.

Question 2.
What is Journalizing ?
Answer:
The process of recording the transaction in the Journal is called “Journalizing”.

Question 3.
What is Journal Entry ?
Answer:
The entry made in the Journal is called “Journal entry”.

Question 4.
What is Narration ?
Answer:
Narration means a brief explanation of the transaction for which the entry is recorded is written within the brackets known as ’narration’.

Problems

Question 1.
Mr. Anil started business with cash Rs. 75,000 on 1^st January 2014. The details of business transactions for the month of January are as follows.

Answer:

Question 2.
Pass journal entries in the books of Mr. Varan.

Answer:

Question 3.
Journalize the following transactions.

Answer:

Question 4.
Journalize the following transactions in the books of Bhagat.

Answer:

Question 5.
Journalize the following transactions.

Answer:

Question 6.
Journalize the following transactions in the books of Atma Ram.

Answer:
Journal Entries in the books of Atma Ram

Question 7.
Journalize the following transactions.
March 01 Commenced business with cash Rs. 13,000 and stock 7,000
March 02 Bought plant Rs. 5,000
March 03 Paid for postage Rs. 500
March 04 Withdrew cash for office use Rs. 1000
March 05 Paid for Sundry Expenses Rs. 500
March 06 Paid into bank Rs. 10,000
March 07 Paid salaries Rs 5,000
Answer:

Question 8.
Write journal entries in the books of Sudha & Co.

Answer:
Journal Entries in the book of Sudha & Co

Student Activity

Visit any organisation and find journal entries from its journal.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 3rd Lesson Double Entry Book Keeping System Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 3rd Lesson Double Entry Book Keeping System

Short Answer Questions

Question 1.
Define double entry system Of accounting and explain its features.
Answer:
According to J.R. Batliboi “Every business transaction has two-fold effect and that it affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. This recording of the two-fold effect of every transaction has given rise to the term Double Entry System”.

Features:

1. Every business transaction affects two accounts.
2. Each transaction has two aspects i.e. debit and credit.
3. It is based upon accounting assumptions, concepts and principles.
4. It helps in preparing balance which is a test arithemetical accuracy in accounting.
5. Finally it helps in preparation of final accounts with the help of trial balance.

Question 2.
Explain different types of accounts along with their debit, credit rules. (Mar. 2019; May ’17 – A.P. & T.S.) (Mar. 2018, ’17 – A.P.)
Answer:
All the transactions are divided into two types of accounts. Personal accounts and Impersonal accounts. The impersonal accounts are further subdivided into Real accounts and Nominal accounts. There are three types of accounts in all. They are Personal accounts, Real accounts and Nominal accounts.

1) Personal accounts : The accounts which relate to individuals or persons are known as “Personal accounts’. Personal accounts are of two types. They are Natural persons and Artificial persons.
Ex: Ramesh a/c, Sita a/c, Andhra bank a/c, capital a/c, drawing a/c, outstanding salaries a/c.
Rule :
Debit the receiver
Credit the giver

2) Real accounts : Accounts relating to properties and assets which are owned by the business concern are, real accounts which include tangible and intangible assets.
Ex: Cash a/c, bills receivable a/c, goods a/c, furniture a/c, goodwill a/c.
Rule : Debit what comes in
Credit what goes out

3) Nominal accounts : These accounts do not have any existence, form or shape. They relate to incomes and expenses or gains and loss of a business concern.
Ex : Salaries a/c, commission a/c, rent a/c, discount a/c, bad debts a/c.
Rule : Debit all expenses and losses
Credit all incomes and gains

Question 3.
Explain the advantages of double entry system.
Answer:
Advantages : The following are the main advantages of double entry system.

1. Complete record of transactions : Double entry system maintains a complete record of all business transactions, because it records both the aspects of financial transaction.
2. Scientific system : This is the only scientific system of recording business transactions. It helps to attain the objectives of accounting.
3. Ascertainment of profit or loss : It helps in ascertainment of profit or loss for a particular period by preparing the profit and account.
4. Ascertainment of the financial position : The financial position of the concern can be as¬certained at the end of each period by preparing balance sheet.
5. Full details for control : This system permits accounts to be kept in a very detailed form, and thereby provides sufficient information for the purpose of control.
6. Comparative study: The results of one year may be compared with those of previous years and the reasons for change may be ascertained.
7. Helps in decision making: This system provides sufficient information to the management for making decision.

Very Short Answer Questions

Question 1.
Double entry book keeping system (May. ’17 – A.P. ; Mar. ’15 – T.S.)
Answer:
According to J R. Batliboi Every business transaction has a two-fold effect that it affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. This recording of the two-fold effect of every -transaction has given rise to the term Double Entry System”.

Question 2.
What is an account ? (Mar. 2019 – T.S.)
Answer:
Every transaction has two aspects and each aspect has an account. It is stated that an account is ‘a summary or relevant transactions at one place relating to a particular head’.

The common form of an account has three parts.

1. A Title’ that describes the name of the asset, liability or equity account.
2. A ‘left side’ or the “debit” side
3. A right side’ or the “credit” side

Format of Account

Question 3.
Explain accounting equation.
Answer:
Accounting equation is based on dual aspect concept (Debit and Credit). The accounting equa¬tion shows the relationship between the economic resources of a business and the claims against those resources.
Economic Resources = claims
Another term for economic resources is assets.
The claims consist of liabilities and owners claims or equity.
Assets = Equities or Capital + Liabilities

Question 4.
Impersonal accounts
Answer:
Impersonal accounts are two types i.e. Real accounts and Nominal accounts.

1. Real accounts: Accounts relating to properties and assets which are owned by the business concern are, Real accounts, which include tangible and intangible accounts.
   Ex: Cash a/c, bill receivable a/c, goodwill a/c, goods a/c, furniture a/c.
2. Nominal accounts: These accounts do not have any existence, form or shape. They relate to incomes and expenses or gains, and losses of a business concern.
   Ex: Salaries a/c, bad debts, rent a/c, commission a/c, discount a/c etc.

Student Activity

Visit a nearest business organization and make a list of various personal, real and nominal accounts from the books of accounts.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 2nd Lesson Accounting Principles Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 2nd Lesson Accounting Principles

Essay Type Questions

Question 1.
What are accounting concepts? Explain any four accounting concepts in detail.
Answer:
The term concept means an idea or thought. Basic accounting concepts are the fundamental ideas underlying the theory and practice of financial accounting. The Ifnpdftant accounting concepts are –

1. Business Entity Concept: Business is treated as separate form the proprietor. All the transactions are recorded in the books of business and not in the books of the proprietor. The accounting system gives information only about the business and not its owner. The proprietor is also treated as a creditor for the business.
2. Dual Aspect Concept: Dual aspect concept principle is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects : receiving benefit and giving benefit.
   For example, when a business acquires as asset: receiving of benefit. It must pay cash : giving of benefit.
3. Going Concern Concept: According to this concept it is assumed that the business will continue for long time. All transactions are recorded from this point of view. The investors lend money and the creditors supply goods with the expectation that the enterprise would continue for long period of time. Hence financial statements are prepared on a going concern basis and not on liquidation basis.
4. Money Measurement Concept: This concept suggests that accountancy should record only the transactions which can be measured in terms of money. The transactions which cannot be measured in terms of money fall beyond the scope of accountancy.
   For example the events of machinery breakdown is not recorded as it does not have monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value.

Question 2.
What are accounting conventions ? Explain them briefly.
Answer:
Conventions mean customs or traditions. These conventions provide useful guidance in preparing accounts or financial statements. The important accounting conventions are –

1. Convention of Disclosure : Accounting statements should disclose fully and completely and significant information, based on which, decisions can be taken by various interested parties. It involves proper classification and explanations of accounting information which are published in the financial statements.
2. Convention of Materiality : According to this convention only those events should be recorded which have a significant bearing and insignificant things should be ignored. The avoidance of insignificant things will not materially off the records of the business.
3. Convention of Consistency: The accounting practices should be remained same from one year to another year. This is useful to the entrepreneur to compare the financial statements of one year with that of the other years. For example, an organization should not change its method of depreciation every year.
4. Convention of Conservation : According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for. Example : While taking the value of the closing stock the market cost or actual cost which ever is less is to be taken into the books of accounts.

Short Answer Questions

Question 1.
Explain business entity concept of accounting. (Mar. 2018 – A.P. & T.S.; Mar. ’17 – A.P.; May 17 – T.S.)
Answer:
Business is treated as separate from the proprietor. All the transactions are recorded in the books of business and not in the books of the proprietor. The accounting system gives information only about the business and not its owner. The proprietor is also treated as a creditor for the business.

Question 2.
Explain money measurement concept. (Mar. 2019 – T.S.)
Answer:
This concept suggests that accountancy should record only the transactions which can be measured in terms of money. The transactions which cannot be measured in terms of money fall beyond the scope of accountancy.
For example the event of machinery breakdown is not recorded as it does not have monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value.

Question 3.
Explain convention of conservatism. (Mar. ’17 – T.S.)
Answer:
According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for.
Example : While taking the value of the closing stock the market cost or actual cost whichever is less is to be taken into the books of accounts.

1. Convention of Disclosure : Accounting statements should disclose fully and completely and significant information, based on which, decisions can be taken by various interested parties. It involves proper classification and explanations of accounting information which are published in the financial statements.
2. Convention of Materiality : According to this convention only those events should be recorded which have a significant bearing and insignificant things should be ignored. The avoidance of insignificant things will not materially off the records of the business.
3. Convention of Consistency: The accounting practices should be remained same from one year to another year. This is useful to the entrepreneur to compare the financial statements of one year with that of the other years. For example, an organization should not change its method of depreciation every year.
4. Convention of Conservation : According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for.
   Example : While taking the value of the closing stock the market cost or actual cost which ever is less is to be taken into the books of accounts.

Short Answer Questions

Question 1.
Explain business entity concept of accounting. (Mar. 2018 – A.P. & T.S.; Mar. ’17 – A.P.; May 17 – T.S.)
Answer:
Business is treated as separate from the proprietor. All the transactions are recorded in the books of business and not in the books of the proprietor. The accounting system gives information only about the business and not its owner. The proprietor is also treated as a creditor for the business.

Question 2.
Explain money measurement concept. (Mar. 2019 – T.S.)
Answer:
This concept suggests that accountancy should record only the transactions which can be measured in terms of money. The transactions which cannot be measured in terms of money fall beyond the scope of accountancy.
For example the event of machinery breakdown is not recorded as it does not have monetary value. However, the expenditure incurred for the repair of the machinery can be measured in monetary value.

Question 3.
Explain convention of conservatism. (Mar. ’17 – T.S.)
Answer:
According to this convention the accountant has to record the actual financial position. We should be careful in calculating profits. Profits should never be anticipated or exaggerated. But losses should be anticipated and provided for.
Example : While taking the value of the closing stock the market cost or actual cost whichever is less is to be taken into the books of accounts.

Question 4.
Explain convention of consistency.
Answer:
The accounting practices should be remained same from one year to another year. This is useful to the entrepreneur to compare the financial statements of one year with that of other years. For example, an organization should not change its method of depreciation every year.

Question 5.
Write a brief note on accounting standards.
Answer:
Accounting standard is a principle that guides and standardizes accounting practices. The Generally Accepted Accounting Principles (GAAP) are a group of accounting standards that are widely accepted as appropriate to the field of accounting. Accounting standards are necessary so that financial statements are meaningful across a wide variety of businesses; otherwise, the accounting rules of different companies would make comparative analysis almost impossible.

Student Activity

Visit a nearest business organization and observe the book keeping and accounting systems adopted by it.

Andhra Pradesh BIEAP AP Inter 1st Year Accountancy Study Material 1st Lesson Book Keeping and Accounting Textbook Questions and Answers.

AP Inter 1st Year Accountancy Study Material 1st Lesson Book Keeping and Accounting

Short Answer Questions

Question 1.
Explain the advantages and limitations of Accounting.
Answer:
Advantages of Accounting: The following are the main advantages of accounting.

1. Permanent and Reliable Record : Accounting provides permanent record for all business transactions and provides reliable information to different interested parties.
2. Net Result of Business Operations: Accounting provides the final result (Profit or Loss) of business for a given period of time.
3. Ascertainment of Financial Position: It is not enough to know only the profit or loss, but the proprietor requires a full picture of his financial position to plan for the next year’s business.
4. Facility of Comparative Study: Accounting provides the facility of comparative study of the various aspects of the business such as profits, sales, expenses, etc.
5. Control over Assets: In the course of business, the proprietor acquires various assets like building, machinery, furniture, etc. which are well protected by generating records.

Limitations of Accounting: The following are the limitations of Accounting.

1. Records only monetary transactions : Accounting considers monetary transactions only, non-monetary transactions like quality, organization culture, units of production sales, etc. are ignored in accounting.
2. Historical in nature : Accounting considers only historical transactions, i.e transactions which have occurred in the past only recorded in accounting books.
3. Price level changes are not considered: Accounting does not consider price level changes which may occur from time to time, thus, it does not reflect the current position.
4. Does not provide realistic information: While preparing the books of account, subjectivity of the accountant may influence the final results of the business enterprise. This may not provide realistic information which in turn affects the overall results of the business concern.

Question 2.
Distinguish between Book-keeping and Accounting.
Answer:

Question 3.
Explain the steps involved in Accounting process.
Answer:
Accounting process:

1. Identifying: Identifying the business transactions from the source documents.
2. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are identified in an orderly manner, soon after their occurrence in the journal or subsidiary books.
3. Classifying : This is concerned with the classification of the recorded business transactions so as to group the transactions of similar type at one place.
4. Summarizing : It is the process of finding the totals of balances of all accounts so as to prepare trial balance.
5. Reporting : The classified information available from the trial balance is used to prepare – profit and loss account and balance sheet in a manner useful to the users of accounting
   information.
6. Analysing: It establishes the relationship between the items of the profit and loss account and the balance sheet.
7. Interpreting : It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Interpretation should be useful to the users.

Very Short Answer Questions

Question 1.
What is Book-keeping ? (Mar. 2018 – A.P. ; Mar. ’17 – T.S. ; May ’17 – A.P. & T.S.)
Answer:
Book-keeping is the art of recording business transactions in a systematic manner. It covers four activities i.e. identifying the transactions, measuring the identified transactions, recording in a chronological order and classifying the recorded transactions.

Question 2.
Define Accounting. (Mar. 2019, ’17 – A.P.)
Answer:
The American Institute of Certified Public Accountants has defined the Accounting as “the art of recording, classifying and summarizing in a significant manner in terms of money transactions and events which in part, at least of a financial character and interpreting the results thereof”.

Question 3.
What is an Accounting cycle ? (Mar. 2018 – T.S. ; Mar. ’15 – A.P. & T.S.)
Answer:
An accounting cycle is a complete sequence beginning with the recording of transaction and ending with preparation of financial statements. It involves journalizing, ledger posting, balancing, trial balance, preparation of trading, profit and loss account and balance sheet.

Student Activity

1. Goto nearest business organizations and observe the book keeping and accounting systems adopted by them.
2. Observe the accounting procedures adopted by large size or medium size organizations located nearby them.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 10th Lesson Economic Statistics Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 10th Lesson Economic Statistics

Essay Questions

Question 1.
What is the relationship between Economics and Statistics? [March 18, 16]
Answer:
There is a close relationship between statistics and economics. In the words of Tugwell “The science of economics is becoming statistical in its method”. All economic laws are pronounced on the basis of statistical facts and figures. The theory of the population of Malthus, the law of family expenditure of Engels, etc., were propounded after statistical tests. Statistics help economics to become an exact science.

In the study of theoretical economics, the application and use of statistical methods are of great importance. Most of the doctrines of economics are based on the study of a large number of units and their analysis. This is done through statistical methods. The Law of demand was formulated because of statistical methods.

The importance of statistics is felt in all branches of knowledge- in accountancy and auditing in banking, in insurance in research, and many fields. Without statistics no branch of knowledge is complete.

Question 2.
Explain the Geometric diagrams. What are Bar diagrams and Pie diagrams ?
Answer:
Diagrams are more suitable to illustrate the data which is discrete, while continuous data is better represented by graphs.

BAR DIAGRAM and PIE DIAGRAM come in the category of geometric diagrams.
The bar diagram are 3 types. Simple, Multiple and Component bar diagrams.

Simple Bar Diagrams : Bar diagrams are very commonly used and is better for representation of quantitative data. Bars are simply
corresponding numerical values.
Ex: Maximum temperature recorded in Hyderabad in the 1st six months in a year in a bar diagram.

Multiple Bar Diagram : Multiple bar diagrams are used for comparing two or more sets of data.
Ex : The multiple bar diagram depicts the number of students in a college studying two foreign languages, French and German for the period 1960 – 2010 is given below.

Component Bar Diagram : Component bar diagram charts also called sub-divided bar diagram, are very useful in comparing the sizes of different component parts.
Ex : Enrolment at primary level in a district of Bihar. Boys, girls and total children in the given age group are denoted in the component bar diagram is given below.

Pie – Diagram : This diagram enables us to show the partitioning of total into component parts. It is also called a pie chart.
Ex : Draw the pie digram for following data.

Total area = 16 + 24 + 10 + 8 + 5 = 63
Area changed into Degrees =
Paddy =\(\frac{16 \times 360}{63}\) = 91°
Wheat = \(\frac{24 \times 360}{63}\) = 137°
Maize = \(\frac{10 \times 360}{63}\) = 57°
Jower = \(\frac{8 \times 360}{63}\) = 46°
Millets = \(\frac{5 \times 360}{63}\) = 29°
Total = 360°

Question 3.
Calculate the AM in direct method of the following data.

Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{fx}}{\mathrm{N}}\)
Where N is total frequency
Σfx = 7160; N = 200
\(\overline{\mathrm{X}}\) = \(\frac{7160}{200}\) = 35.8
∴ \(\overline{\mathrm{X}}\) = 35.8

Question 4.
Calculate the A.M. in Direct method.

Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{fx}}{\mathrm{N}}\)
\(\overline{\mathrm{X}}\) = \(\frac{3300}{100}\) = 33
∴ \(\overline{\mathrm{X}}\) = 33

Question 5.
Calculate the A.M. in Deviation method or Shortcut method.

Answer:

Here class interval (C) = 10
Assumed mean = 55
A.M. (or) \(\overline{\mathrm{X}}\) = A + \(\frac{1}{N}\) Σfiμi × C
= 55 + \(\frac{1}{90}\) (-44) × 10
= 55 + (-4.8)
∴ \(\overline{\mathrm{X}}\) = 50.2

Question 6.

Answer:
Calculation of Mean :

\(\overline{\mathrm{X}}\) = \(\frac{\Sigma \text { fixi }}{\mathrm{N}}=\frac{4530}{100}\) = 45.3
∴ \(\overline{\mathrm{X}}\) = 45.3
Calculation of Median :

Here N = 100; \(\frac{\mathrm{N}}{2}\) = \(\frac{100}{2}\) = 50
50^th value included in the cumulative frequency 40-49 class intervals. But here class intervals are unequal. So we can adjust that lower limit is \(\frac{39+40}{2}=\frac{79}{2}\) = 39.5.
F = 31; f = 38, C = 10
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
Median = 39.5 + \(\left[\frac{50-31}{38}\right]\) × 10
= 39.5 + \(\left[\frac{19}{38}\right]\) × 10
= 39.5 + 0.5 × 10
= 39.5 + 5
= 44.5
∴ Median = 44.5
Calculation of Mode:

Here the maximum frequency occurs in 40 – 49 class.
f = 38; f₁ = 16; f₂ = 15; C = 10
L = \(\frac{39+40}{2}=\frac{79}{2}\) = 39.5 (Lower boundary of the model class)
Mode = L + \(\left[\frac{f-f_1}{2 f-f_1+f_2}\right]\) × C
= 39.5 + \(\left[\frac{38-16}{2(38)-(16+15)}\right]\) × 10
= 39.5 + \(\left[\frac{22}{76-31}\right]\) × 10
= 39.5 + 0.48 × 10
= 39.5 + 4.5
Mode = 44.38

Short Answer Questions

Solve the problems for the following datas.

Question 1.
Calculate the Median for the following data.

Answer:

Here N = 100 ; \(\frac{\mathrm{N}}{2}=\frac{50}{2}\) = 25
25^th value included in the cumulative frequency 21-30 class intervals.
Lower limit = \(\frac{20+21}{2}=\frac{41}{2}\) = 20.5
F = 15; f = 16; C = 10 N
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
Median = 20.5 + \(\left(\frac{25-15}{16}\right)\) × 10
= 20.5 + \(\left(\frac{10}{16}\right)\) × 10
= 20.5 + 0.62 × 10
= 20.5 + 6.25 = 26.75
Median = 26.75

Question 2.
Calculate the Median for the following data.

Answer:

Here N = 125 ; \(\frac{\mathrm{N}}{2}=\frac{125}{2}\) = 62.5
65^th value included in the cumulative frequency 7.6
Therefore 30 – 40 in the median class
65^th value appears in 30 – 40 class.
Lower limit = 30; F = 40; f = 36; C = 10 N
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
Median = 30 + \(\left(\frac{62.5-40}{36}\right)\) × 10
= 30 + \(\left(\frac{22.5}{36}\right)\) × 10
= 30 + 0.625 × 10
= 30 + 6.25
= 36.25

Question 3.
Calculate the Mode for the following data.

Answer:

Here the maximum frequency occurs in 59 – 60 class.
L = \(\frac{59+60}{2}=\frac{119}{2}\) = 59.5
f = 31, f₁ = 20; f₂ = 17; C = 10
Mode = L + \(\left[\frac{f-f_1}{2(f)-\left(f_1+f_2\right)}\right]\) × C
= 59.5 + \(\left[\frac{31-20}{2(31)-20+17}\right]\) × 10
= 59.5 + \(\left(\frac{11}{62-37}\right)\) × 10
= 59.5 + \(\left(\frac{11}{25}\right)\) × 10
= 59.5 + 0.44 × 10
= 59.5 + 4.4
= 63.9

Additional Questions

Question 4.
Marks of 10 students 43, 45, 68, 55, 33, 57, 40, 48, 77, 60. Calculate A.M by direct method.
Answer:
\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{x}}{\mathrm{N}}\)
Where Σx = 526 ; N = 10
∴ \(\overline{\mathrm{X}}\) = 52.6

Question 5.
Calculate A.M from the following data by direct method.

Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \text { fixi }}{\mathrm{N}}\) (or) \(\frac{\Sigma \mathrm{fx}}{\mathrm{n}}\)
where = Σfixi = 1870; N = 100
\(\overline{\mathrm{X}}=\frac{1870}{100}\) = 18.7

Question 6.
Find Median from the following data.
10, 15, 18, 21, 25, 30, 35
Answer:
Arrange asscending order
10, 15, 48, 21, 25, 30, 35
Median = \(\left(\frac{N+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{7+1}{2}\right)^{\text {th }}\) item = \(\left(\frac{8}{2}\right)^{\text {th }}\) item = 4^th item
4^th item = 21
∴ Median = 21

Question 7.
Find median from the following data.

Answer:

Where \(\) = 32.5 it lies in the 20 – 30 class interval.
So lower limit = 20; F = 15; f = 18; N = 65; C = 10
Median = L + \(\left[\frac{\frac{N}{2}-F}{f}\right]\) × C
= 20 + \(\left[\frac{32.5-15}{18}\right]\) × 10
= 20 + 9.722 = 29.72
∴ Median = 29.72

Question 8.
Find the mode when median is 125.6 and mean is 128
Answer:
Mode = 3 Median – 2 Mean
= (3 × 125.6) – (2 × 128)
= 376.8 – 256
= 120.8

Very Short Answer Questions

Question 1.
What is meant by Arithmetic Mean ? [March 16]
Answer:
Arithmetic Mean of a statistical data is defined as the quotient of the sum of all, the items or entries divided by the number of items.

Question 2.
Find the A.M. for the data 30, 20, 32, 16, 27. [March 18, 17, 16]
Answer:
\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{x}}{\mathrm{N}}=\frac{30+20+32+16+27}{5}=\frac{125}{5}\) = 25
∴ \(\overline{\mathrm{X}}\) = 25

Question 3.
Find the Median for the data 10, 20, 15, 29, 35, 42.
Answer:
The values arranged in ascending order
(i.e,) 10, 15, 20, 29, 35, 42
Median = \(\left(\frac{n+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{6+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{7}{2}\right)^{\text {th }}\) item = 3.5^th item
= \(\frac{20+29}{2}\) = 24.5

Question 4.
Find the value of Median for the data 19, 1, 3, 17, 6, 12, 11, 8.
Answer:
The values arranged in ascending order
i.e., 1, 3, 6, 8, 11, 12, 17, 19
Median = \(\left(\frac{n+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{8+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{9}{2}\right)^{\text {th }}\) item = 4.5^th value
= \(\frac{8+11}{2}=\frac{19}{2}\) = 9.5
∴ Median = 9.5

Question 5.
Find the Mode for the data 17, 6, 19, 14, 8, 6, 12, 15, 6, 10.
Answer:
Mode is 6 is occuring many items i.e., 3

Question 6.
Find the Mode for the data 12, 11, 15, 11, 12 ,12, 15, 12, 9, 12. [March 18]
Answer:
Mode is 12 is occuring many items i.e 5

Question 7.
What is a Pie diagram ? [March 18, 17, 16]
Answer:
It is also called a pie chart. The circle is divided into many parts as there are compo-nents by drawing straight lines from the centre to the circumference.

Question 8.
What is a Bar diagram ?
Answer:
Bars are simply vertical lines, where the lengths of bars are proportional to their corresponding numerical values.

Question 9.
Find the median of the observation – 3,- 5, -8, 0, 2, -10,
Answer:
Arrange data in ascending order – 10, – 8, – 5, – 3, 0, 2
Median = \(\left(\frac{n+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{6+1}{2}\right)^{\text {th }}\) item
= \(\left(\frac{7}{2}\right)^{\text {th }}\) item = 3.5
= \(\frac{-5+(-3)}{2}=\frac{-8}{2}\) = -4
∴ Median = – 4

Additional Questions

Question 10.
What is mode if data is Bio-modal?
Answer:
Mode = 3 Median – 2 Mean

Question 11.
What is Median ?
Answer:
The median is a measure of central tendency, which appears in the centre of an ordered data. It is aften described as the “middle most” value. It is called a position average.

Question 12.
What is Mode?
Answer:
Mode is most frequently occuring value in data.

Question 13.
What is Simple Bar Diagram ?
Answer:
Bar diagram comprising a group of equi-spaced and equi-width rectangular bars for each class of data.

Question 14.
What is Multiple Bar Diagrams ?
Answer:
Multiple bar diagrams are used for comparing two or more set of data.

Question 15.
What is Component Bar Diagram or Sub-Divided Bar Diagram ?
Answer:
These diagrams are used to represent various parts of the total.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation

Essay Questions

Question 1.
Examine the difficulties of the barter system.
Answer:
Barter system means exchange of goods. This system was followed in old days. But the population and its requirements are increasing, the system became very complicated. The difficulties of barter system are :

1) Lack of coincidence of wants : Under the barter system, the buyer must be willing to accept the commodity which the seller is willing to offer in exchange. The wants of both the buyer and the seller just coincide. This is called double coincidence of wants. Suppose the seller has a good and he is willing a exchange it for rice. Then the buyer must have rice and he must be willing to exchange rice for goat. If there is no such coincidence direct exchange between the buyer and the seller is not possible.

2) Lack of store value : Some commodities are perishables. They perish within a short time. It is not possible to the value of such commodities in their original form under the barter system. They should be exchanged before they actually perish.

3) Lack of divisibility of commodities : Depending upon its quantity and value, it may become necessary to divide a commodity into small units and exchange one or more units for other commodity. But all commodities are not divisible.

4) Lack of common measure of value : Under the barter system, there was no common measure value. To make exchange possible, it was necessary to determine the value of every commodity interms every other commodity.

5) Difficulty is making deferred,payments : Under barter system furture payments for present transaction, was not possible, because future exchange involved some difficulties. For example suppose it is agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view the recent value of the goat. But the value of goat may decrease or increase by that date.

Question 2.
Explain the functions of money.
Answer:
Money plays a vital role in modem economy. A modem economy is rightly known as monetary economy because of the crucial position that money occupies.

1. According to ‘Robertson’ – “Anything which is widely accepted in payment for goods or it discharges of other kinds of business obligations”
2. According to ‘Seligman’ – “One that possesses general acceptability”.
3. According to Waker’ – “Money is what money does”.

Functions of money :
1. Primary functions :
a) Medium of exchange : Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodities without double coincidence watns. Any commodity can be exchange for money. People can exchange goods and services through the medium of money.

b) Measure of value : Money serves as a measure of the value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money. We call if the price.

2. Secondary functions : .
a) Store of value : The value of commodities and services can be stored in the form of more. Certain commodities are perishable. If they are exchanged for money before they perish, their value be preserved in .the form of money.

b) Standard of deferred payments : Money serves as a standard of deferred payments. The modern economies most of the business transactions take place on the basis of credit. An individual consumer or a business man may now purchase a commodity and pay for it in future as this function makes it possible to express future payments in terms of money.

c) Transfer of money : Money can be transferred from one person to another at any time at any place.

3. Contingent functions :
a) Measurement and distribution of National income : National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production making payment them in money.

b) Money equalises marginal utilises / productivities : The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit : Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is dependent on the supply of nominal money

d) Liquidity : Money is the most important liquid asset. Interms of liquidity it is superior other assets. Money is centpercent liquid.

Question 3.
Write a note on the supply of money.
Answer:
The term supply of money is related to stock concept. There may be increase or decrease in the money stock over a period of time. Money supply determines the various factors i.e., rate of interest, credit availability, investment, national income and employment. This affects the general price level.
Components of money supply :
1) Currency issue by the Central Bank : Central Bank is the apex bank and enjoys the power of issue of currency. Currency consists of paper notes and coins. In India, RBI is the Central Bank and issue notes in the denominations of 1000, 500, 100, 50, 20, 10, 5 and 2 rupees. The one rupee note and coins are issued by the finance department of the government of India.

2) Demand deposits created by Commercial banks : Bank deposits are also considered as money supply. Commercial banks collect deposits from the public and creates credit out those deposits. Credit in this form is called derived or secondary deposits. This constitute nearly 80% of total money supply.
Monetary aggregates : In India money supply measured in terms of the following monetary aggregates.
M₁ = Currency + demand deposits + other deposits
M₂ = M₁ + time liability portion of saving deposits with banks + certficates of deposits issued by banks + terms deposits maturing within one year.
M₃ = M₂ + term deposits over one year maturity + call term borrowings of banks,
M₁, M₂ and M₃ as monetary measures.

Question 4.
Describe the functions of the commercial banks.
Answer:
Functions of commercial banks :
Primary functions :
a) Accepting deposits : The commercial bank just like any other money lender is doing money lending business bank receives public money in the form of deposits. The deposits mainly are of the following steps.

1) Current deposits : These deposits have two characteristics. One, there are no restrictions with regard to the amount of withdrawl and number of withdrawls. Banks normally do not pay any interest on current account deposits.

2) Savings deposits : The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics :

1. two or three withdrawls per week are permited
2. banks pay 4 to 5% interest (nominal) per annum or savings deposits.

3) Recurring deposits: People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the savings deposits.

4) Fixed deposits : Deposits received on fixed accounts are called fixed or time deposits. They are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before the expiry of the fixed period.
2. Banks pay high rate of interest than any other deposits.

b) Advancing loans : Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credits, overdrafts and by discounting bills of exchange.
1) Cash credit: In this case, the borrower is given a loan. The amount of the loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of this account as per his needs.

2) Overdraft: It means allowing the depositor to overdraw his account upto a previous agreed limit. Banks allow overdrafts only to those persons who have their accounts in the bank. The overdraft is granted only for short period for customers.

3) Loans : Usually a loan is granted against the securities of assets or the personal security of the borrower bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period, term loans for longer period and also grant consumer credit for buying durable goods.

4) Discounting bills of exchange : The banks facilitate trade and commerce by dis-counting the bills of exchange. This is the most popular form of bank lending.

Secondary functions :
a) Agency services : Banks act as agents, correspondents and representatives of their
customer. As an agent a commercial bank collect and pay cheques, drafts, bills and pay insurance premium subscriptions, rent, income tax etc, as per the instruction of their customers, Banks also act as trusties executors and attorneys. .

b) General utility services : Banks provide some general utility services like :

1. Locker facility the safe custody and valuables.
2. Issue traveller’s cheques and drafts
3. Transfer of funds.
4. Acting a referee to the financial standing of customers
5. Issue letters of credit
6. Finance foreign trade by discounts foreign bills of exchange.

Question 5.
Explain the functions of the central bank.
Answer:
Central bank is the apex bank of the banking system of a country. It controls, regulates, monitors all the activities of the banks in the banking system. The following are the functions performed by the central bank.
a) Note issue : In any country central bank alone is authorised to issue the currency notes. It has monopoly power of note issue. It not only issue the currency. It also controls the supply of money in the economy.

b) Banker to government: Central bank renders certain services to the government it acts as a banker, agent and financial advisor to the government. It maintains the accounts of the government funds, receives money and pay money on behalf of the government. It performs all foreign exchange transactions on behalf of the government and maintains the public debt and advises the government on all financial matters.

c) Banker’s bank : Central bank acts as banker’s bank it controls all the transactions of all banks and every bank must maintain a certain minimum cash reserve with central bank.

d) Lender of last resort: It serves as a lender of last resort to all the financial institutions viz. Commercial banks discount houses and other credit institutions. All these institutions approach central bank if they face the problem of liquidation. It also help the banks and other financial institutions by providing loans and advances against certain approved securities and rediscounts the bills on certain terms and conditions.

e) Controller of credit: This is the most important function of central bank. It controls the volume of credit in the economy through various monetary and fiscal policies. It takes some steps to increase or reduce the volume of credit as per the inflationary conditions of the economy. It controls the inflation by reducing the volume of credit and recession by expanding the supply in the economy.

f) Custodian of foreign exchange reserve : Central bank regulates all foreign exchange transactions in a country. It is responsible for exchange rate so it acts against the fluctuations in exchange rates and maintain standard exchange rate.

Question 6.
Describe the role played by the Reserve Bank of India.
Answer:
The Central Bank of our country is Reserve Bank of India. It was established in April 1935, with a share capital of ₹ 5 crores. It was originally owned by private shareholders but was nationalised by the government of India in 1949. It performs all its activities under the Reserve Bank of India Act 1934.

The main aim of. RBI is to achieve the monetary stability and to control the credit system of an economy. It performs the following functions.
1) Note issue : Reserve Bank of India enjoys the monopoly of note issue in the country. It maintains a minimum ₹ 200 crores of gold and foreign exchange reserves of which gold should be ₹ 115 crores. It issue notes in the denominations of ₹ 1,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10, ₹ 5 and ₹ 2. One rupee note and coins are issued by the finance department of the Government of India. Reserve Bank of India prints all the currency notes in the security press of the Government of India.

2) Banker to Government : Reserve Bank of India acts as the banker, agent and adviser to the Government of India. It receives money and makes payments on behalf of the government and gives temporary advances to the government. It advises the government in all financial matters.

3) Banker’s Bank : Reserve Bank serves as a banker not only to the government but also to the banks. It provides financial assistance to the commercial banks by giving loans and rediscounting the bills of exchange. It helps the banks by acting as a clearing house for settlement of inter bank transactions and controls the supply of money in the economy through cash reserve ratio.

4) Lender of last resort : It acts as lender of last resort by granting loans and advances to the commercial banks against some securities viz., treasury bonds, treasury bills and other approved securities. It also provides financial help to banks by rediscounting the eligible bills of exchange.

5) Custodian of foreign exchange reserves : Reserve Bank of India as a member of the International Monetary fund. It regulates all foreign exchange transactions in the country. It controls and regulates the purchase and sale of foreign exchange through restrictions on exports and imports to maintain the official rate of exchange.

6) Credit controller : Reserve Bank of India controls the volume of credit in the country. It controls the credit through different methods by appropriate monetary or fiscal policies. It announces credit policy for every six months based on the credit needs of the country. Through this it controls the inflation and deflation.

7) Promotional and development functions: Reserve Bank of India inorder to achieve economic development performs certain promotional and developmental functions.
They are :

1. Promoting various financial institutions to provide industrial finance.
2. It takes steps for establishment of banks throughout the country and expansion of their branches.
3. Encourage the financial institution to provide financial help to agriculture and rural credit.

Question 7.
Define inflation. Explain the causes of inflation.
Answer:
Inflation means a rise in the general price level over a long period of time. It occur due to the following reasons.

1. Increase in the aggregate demand of commodities.
2. Inadequate supply of commodites.
3. Increase in the cost of production.

I. The factors that the effect the increase in demand.

1. Heavy pressure of population.
2. Increase in economy’s money supply.
3. More public expenditure towards various welfare schemes.
4. Reduce in rates of direct taxes.
5. Increase in the income levels of individuals.
6. Deficit financing by government.
7. Conspicious spending by the people having black money.
8. Production in direct tax rates.

II. Factors that increase the cost of production :

1. Increase in costs of various factors of production.
2. Increase in tax rates.
3. Increase in the prices of technology.
4. Devaluation of domestic currency.
5. Inefficient management and no control on expenditure.
6. Lack of optimum allocation of resources.
7. Devaluation of domestic currency.

III. Factors that cause inadequate supply :

1. Irregular monsoons, floods, interior seeds in agriculture.
2. Non-availability of scarcity of inputs and raw materials.
3. Under-utilisation of productive capacity.
4. Shortage of investment due to non-availability of institutional credit.
5. Artificial scarcity due to black-marketing.
6. Exports at the cost of domestic supply.
7. Long gestation period of certain industries.

Question 8.
Discuss the impact of inflation.
Answer:
Inflation refers to a persistent upward movement in the general price level rather than once for all rise in it.
The effects of inflation can be divided into two sub-heads.

1. Effects of production
2. Effects of distribution

It will affect all economic activities in the economy.
A) On production :
a) Mild inflation stimulates production and it increases the profit margin of entrepreneurs.
b) High inflation rate hinders production. ;
c) Inflation discourages savings. This affects the capital formation which in turn affects production.

B) On distribution :
Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of rich and affluent classes of society. The concrete effects of inflation on various groups of society are as follows.

Effects on distribution : Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of inflation on various groups of society are as follows.
1) Debtors and creditors : During inflation debtors are generally the gainers while the creditors are the losses. The reason is that the debtors had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to rising prices.

2) On fixed income groups : Those who get fixed income lose from inflation. Salaried persons people living oh past savings, pensioners, interest earners are the worst suffers during inflation because their income remain fixed.

3) On working class: During inflation working class also suffers worst because wages do not rise as much as the prices of commodities. In addition there is a time lag between the rise in prices and rise in wages. If the trade unions are strong they may get equal increase in money incomes compared to rise in prices.

4) Entrepreneurs : They experience windfall gains as the prices at their stocks suddenly go up. Inflation thus re-distributes income and wealth in such away as to harm the interest of creditors, labours, fixed income groups and favours the businessmen, traders and debtors. By meaning the rich richer and poor poorer, inflation is socially undesirable.

C) Social impact: Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) Political effect: Inflation widens social and economic disparities. It leads to for political movements and if government is not responsive. This movement may threaten the stability of governments. .

Short Answer Questions

Question 1.
State any three definitions of money, which definition do you consider better and why ?
Answer:
Money plays a vital role in modem economy. A modem economy is rightly known as monetary economy because at the crucial position that money occupies. In the olden days goods were exchanged for goods. Such system is called barter system. However when economics grew there was a tremendous increase in the wants of the people as well as in the number of transactions then barter system became more difficult, in order to eliminate the difficulties in the barter system money came into existence.

Definition of money: Several economists have defined money in several ways. Some of the prominent definitions are given below.
According to Waker’ – “Money is what money does”.
According to ‘Robertson’ – Money as” anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.
According to ‘Seligman’ – Money as “one that possesses general acceptability”.
According to “Crowther” – Money as “anything that is generally acceptable as a medium of exchange and which at the same time acts as a measure and store of value”.

It may be found from the above definitions that the main focus is on general acceptability. Anything that used as money should have the general acceptance of the public as medium of exchange because it is for direct exchange of commodities money is fundamentally required. It acts as a common measure of value. However its suitability as a store of value is equally important. Therefore we can consider Crowther’s definition as relatively more comprehensive. It is elaborate and covers the most important functions of money.

Question 2.
Distinguish between different types of money.
Answer:
Money can be grouped into various items based on the value, material used and the legal status. They are :
1) Commodity money and representative money: Money is classified into commodity money and representative money on the basis of the intrinsic value it possess. If the intrinsic value is equal to the face value of coin is called commodity money and if the value is less than the face value is called representative money.

2) Legal tender money and optional money : On the basis of legality money is divided into legal tender money and optional money. If money is accepted as per law by every one is called legal tender money. If the acceptance is optional and not according to law is called optional money.
Ex: Cheques.

3) Metallic money and paper money : Based on the material used money can be divided into metallic and paper money. If money is made up of metals such as silver, nickle, steel etc., all coins are metallic money and if money is printed on papers is called paper money. ^

4) Standard money and token money: If the face value and intrinsic value are same. The money is called standard money and if the face Value is higher than the intrinsic value is called token money.

5) Credit money : It is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and can be transferred from one person to other through cheques.

Question 3.
Explain the concept of the legal tender money.
Answer:
Based on the legality money is divided into legal tender money and optional money.
Legal tender money is that money which is accepted by the people as per Jaw while paying the amount for goods and services. This is further divided into two types. They are :

1. Limited legal tender money.
2. Unlimited legal tender money.

1) Limited legal tender money : The money which no persons can be forced to accept beyond a certain limit. The maximum limit for acceptance will be decided by the government.
Ex : 5 paise, 10 paise, 25 paise. The limit in case of these Coins is 25 rupees.

2) Unlimited legal tender money : This money which everyone should accept without any limit in payment of goods and services.
Ex : 1 rupee paper note, 5 rupee coins, 2 rupee coins, 1 rupee and 50 paise coins.

Question 4.
State the contingent functions of money.
Answer:
Money plays a vital role in modem economy.
According to Waker’ – “Money is what money does”.
According to ‘Robertson’ – “Anything which is widely accepted in payment for goods discharge of other kinds of business obligations”.
Contingent functions :
a) Measurement and distribution of National income: National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making payment then in money.

b) Money equalises marginal utilises / productivities : The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit: Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is dependent on the supply of nominal money.

d) Liquidity : Money is the most important liquid asset. Interms of liquidity it is superior other assets. Money is cent percent liquid.

Question 5.
Explain different hinds of deposits accepted by the commercial banks.
Answer:
Commercial banks pay a very important role in the economic growth of a country. Commercial banks are the most important source of institutional credit in the money market. Banks attract savings from the people and encourage investment in industry, trade and commerce. Bank is a profit seeking business firm dealing in money and credit.

The word bank is derived from the “German” word “bankco” which means joint stock or joint fund. Banking in Britain originated with the lending of money by wealthy individuals to merchants who wished to borrow.

According to ‘Richard Sydney’ sayers – “Banks are institutions whose debts .usually referred to as “Bank deposits” are commonly accepted in final settlement of other people’s debts”.
Accepting deposits : The commercial bank just like any other money lender is doing money lending business. Bank receives public money in the form of deposits. The deposits mainly are of the following types.
a) Current deposits : These deposits have two characteristics.

1. There are no restrictions with regard to the amount of withdrawal and number of withdrawls.
2. Banks normally do not pay any interest on current account deposits.

b) Savings deposits : The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics :

1. Two or three withdrawals per week are permitted.
2. Banks pay 4% to 5% interest per annum on savings deposits.

c) Recurring deposits : People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the saving deposits.

d) Fixed deposits : Deposits are fixed accounts are called fixed or time deposits they are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before expiry of fixed period.
2. Bank pay high rate of interest than any deposits.

Question 6.
Explain different types of loans and advances paid by the commercial banks.
Answer:
According to “Crowther”- “A bank is a dealer in debts his own and other people”.
Banking means the accepting for the purpose of lending or investment of deposits of money from the public repayable or demand or otherwise and withdrawable by cheque, draft or otherwise.

Advancing loans : Commercial banks refease funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credit, overdrafts and by discounting bills of exchange. ‘

a) Cash credit: In this case, the borrower is given a loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of this account as per his needs.

b) Overdraft: It means allowing the depositor to overdraft his account upto a previously agreed limit. Banks allow overdraft only to those persons who have their accounts in the bank. The overdraft is granted only for a short period for customers.

c) Loans : Usually a loan is granted against the securities of assets or personal security of the borrowed bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period: Term loans for longer period and also grant consumer credit for buying durable goods.

d) Discounting bills of exchange : The bank facilitates ‘trade and commerce’ by ‘ discounting the bills of exchange. This is the most popular form of bank lending.

Question 7.
Distinguish between the roles of a commercial bank and a central bank with reference to credit.
Answer:
Controlling credit is the most important function of the central bank. It controls the volume of credit in the economy through various monetary and fiscal policies. It takes . some qualitative and quantitative step to increase or reduce the volume of credit as per the conditions of the economy.

It controls the inflation by reducing the volume of credit and controls recession by expanding the supply of credit in the economy.

Commercial bank also provide credit facilities in the form of loans and .advances. Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credits, overdrafts and by discounting bills of exchange.
a) Cash credit: In this case, the borrower is given a loan. The amount of the loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of his account as per his needs.

b) Overdraft: It means allowing the depositor to overdraft his account upto a previously agreed limit. Bank allow overdraft only to those persons who have their accounts in the bank. The overdraft is granted only for short period for customers.

c) Loans : Usually a loan is granted against the securities of assets or the personal security of the borrower bank loans and advances carry a high rate of interest. In addition, bank grant call loans for every short period. Term loans for a longer period and also grant consumer credit for buying durable goods.

d) Discounting bills of exchange : The bank facilitates trade and commerce by discounting th,e bills of exchange. This is the most popular form of bank lending.

Question 8.
Explain why the central bank is called banker’s bank ?
Answer:
The central bank acts as a banker’s bank because of the following functions.
a) Every bank maintained a certain minimum of cash reserves with the central bank as a statutory obligation. The ratio of cash reserve to the deposits of the commercial banks will be prescribed by the central bank.

b) It serves as a lender of last resort and provides financial assistance to the scheduled bank by rediscounting the eligible bills of exchanges and provides loans and advances, against approved securities. This helps the commercial banks to over come the problems of liquidity.

c) It acts as cleaning house for The commercial banks to settle their inter bank accounts. Each and every commercial banks to maintains accounts with the central bank. Because of this central bank transfer funds from one bank to another bank very easily.

Question 9.
What do you understand by lender of last resort’ ?
Answer:
The central bank serves as a lender of last resort to all the financial institutions i.e., commercial banks, discount houses and other credit institutions. These institutions can also approach the central bank when they face the problem of liquidity. The central bank helps the commercial banks by providing loans and advances against some approved securities and also help to rediscount the commercial banks bills subject to certain terms and conditions.

Question 10.
State the objectives of a central bank. [March 18, 17, 16]
Answer:
Central bank is the apex bank of the baning system in a country. It controls, regulates and supervises the activities of the banks in the banking system of a country. The following are the objectives of the central bank.

1. Maintaining the internal value of currency.
2. Preserve the external value of currency.
3. Ensure price stability.
4. Promote economic development.
5. Develop financial institutions.

Question 11.
Write a note on the Reserve Bank of India. [March 18, 16]
Answer:
Reserve Bank of India is the central bank of India. It was established in April 1935, with a share capital of ₹ 5 crores. It was originally owned by private shareholders and was nationalised by the government of India in 1949. It performs all the functions of central bank according to the “Reserve Bank of India Act 1934”. .
The main objectives of Reserve Bank of India are :

1. Regulating the issue of currency notes.
2. Providing guidance to the commercial banks.
3. Controlling the credit system of the economy
4. Achieving the monetary stability in the economy.
5. Implementing the uniform credit policy throughout the country.

Question 12.
Explain any three definitions of inflation.
Answer:
Inflation we mean a general rise in the prices in the ordinary language it is rapid upward movement of prices in a broader sense. The term inflation refers to persistent rise in the general price level over a long period of time.
According to Prof.Hawtrey “Issue of too much currency”
According to ’Dalton’: Defined inflation as “Too much Money is chasing too few goods”.
According to ‘Pigou’: “Inflation exists when money income is expanding more than in proportion to increase in earning activity”.
According to Irving Fisher : “Inflation occurs when the volume of money increases faster than the available supply of goods”.
According to Samuelson : “Inflation denotes a rise in the general level of prices”.

Question 13.
Distinguish between demand – pull and cost – push inflation.
Answer:
It refers to a persistent upward movement in the “general price level rather than once for all rise in it. If results in a decline of the purchasing power. There is no generally accepted definition to inflation.

According to “Hawtrey” is “issue of too much currency”.

According to “Dalton” as “too much money chasing too few goods”.

Demand – pull inflation : The most common cause of inflation is pressure of even increasing aggregate demand for goods and services compared to the rise of aggregate supply. If aggregate demand for goods and services exceeds aggregate supply of goods and services prices rise. This is called “demand – pull inflation”.

Cost – push inflation : As the result of rise in the cost of production of goods and services, prices. This is. called cost – push inflation. It is caused by increase in wage enforced by trade unions through strikes or increase in other factor costs.

On this two types of inflations – cost – push inflation is much more difficult to control than demand – pull inflation the reason is obvious. Any attempt to cutdown wages by the authorities will be met by stiff resistance on the part of the workers.

Question 14.
State the types of inflation. [March 17]
Answer:
Inflation means a general rise in prices. Based on the rate of inflation, it may be divided into four types.

1. Creeping inflation : When rise in the prices is very slow and small, it is called creeping inflation.
2. Walking inflation : This is the second stage of inflation. The inflation rate will be between 2% and 4%.
3. Running inflation : When the rate of inflation is in the range of 4-10% per annum, it is called running inflation.
4. Galloping inflation or hyper inflation : If the inflation rate exceeds 10%, gallop-ing inflation occurs. It may also called hyper inflation.

Question 15.
Explain the effects of inflation on distribution.
Answer:
Effects of inflation : A period of prolonged persistent and continuous inflation affects everyone in the economy it effects production and distribution. Income and employment etc., it is goods so long as it is under control of the economy.The effects of inflation can be discussed under two sub-heads.

1. Effects on production
2. Effects on distribution

Effects on distribution : Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of inflation on various groups of society are as follows.
1) Debtors and creditors : During inflation debtors are generally the gainers while the creditors are the losses. The reason is that the debtors had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to rising prices.

2) On fixed income groups : Those who get fixed income lose from inflation. Salaried persons people living on past savings, pensioners, interest earners are the worst suffers during inflation because their income remain fixed.

3) On working class: During inflation working class also suffers worst because wages do not rise as much as the prices of commodities. In addition there is a time lag between the rise in prices and rise in wages. If the trade unions are strong they may get equal increase in money incomes compared to rise in prices.

4) Entrepreneurs : They experience windfall gains as the prices at their stocks suddenly go up. Inflation thus re-distributes income and wealth in such away as to harm the interest of creditors, labours, fixed income groups and favours the businessmen traders and debtors. By meaning the rich richer and poor poorer, inflation is socially undesirable.

Question 16.
Enumerate the measures for control of inflation. [March 18, 16]
Answer:
To control the inflation the government has taken various steps. They are :

1. Increase the production in the long run.
2. Implementing proper monetary and fiscal policies to reduce the supply of money • and credit.
3. Controlling prices and eliminating black markets.
4. Importing the goods which are scares in supply from outside countries.
5. Introducing rationing and quota system in case of mass consumption of goods.
6. Distribution of goods to all the needy sections of the people.

Very Short Answer Questions

Question 1.
Double coincidence of wants
Answer:
Under Barter system a buyer should be able to find a seller who is not only requires the same commodity but should possess the commodity required by the buyer the want of both the buyer and the seller must coincide. This is called coincidence of wants.

Question 2.
Standard of deferred payments
Answer:
Money serves as a measure of deferred payments. Deferred payments refers to future payments. As such money is helpful not only in current transaction but also in conducting future transaction thus money acts as a bridge from present to the future, i.e., an efficient store of value.

Question 3.
Store of value
Answer:
Money acts par excellence as a store of value money preserves and carries values through time and place it is convenient to store money rather than goods. Money does not come down in value by being stored up like commodities.

Question 4.
Liquidity [March 18, 17, 16]
Answer:
Liquidity means the ease with which one can convert a financial asset into a medium of exchange. Liquidity is greatest for money as an asset because money itself is a medium of exchange. In fact money is the only asset which possess perfect liquidity.

Question 5.
Currency
Answer:
Currency consists of paper notes and coins. Paper notes are. issued by government or the central bank of a country. In India, the Reserve Bank which is the central bank of India issue currency notes at all denominations. Except one rupee notes. The government of India issues them coins are metallic tokens and are produced in the limits of government.

Question 6.
Near money
Answer:
The near money refers to those highly liquid assets which are not accepted as money but then can be easily converted into money within a short period.
Ex : Saving bank deposit, shares, treasury bills, bonds etc.

Question 7.
Credit money
Answer:
This is also called bank money. This is created by commercial banks. This is refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 8.
Limited legal tender
Answer:
Money which no person can be forced to accept beyond certain limit. The maximum limit for acceptance is decided by the government. In India small coins 5 paise, 10 paise, 25 paise are limited legal tender the maximum limit of ₹ 25.

Question 9.
Token money
Answer:
It is the money or unit of currency whose face value is higher than the intrinsic value. It is not convertible it facilitates transactions and accepted by the public as medium of exchange.

Question 10.
Time deposits
Answer:
Time deposits are deposits that are not payable on demand. They are repayable only after their maturity period. These deposits are called term deposits. They are two types, i) Fixed deposits ii) Recurring deposits.

Question 11.
Recurring deposits
Answer:
These are called fixed deposits but the deposits money is paid not in lumpsum. But every month for various periods from 12 to 120 months.

Question 12.
Demand deposits
Answer:
The deposits which are payable on demand without any prior notice demand deposits they can be transferred from one person to person. All current deposits are demand deposits.

Question 13.
Cash credit
Answer:
Bank give cash credit to business form and industries against current assets. Such as shares, bonds, etc., cash credit is an open credit.

Question 14.
Overdraft [March 18, 17, 16]
Answer:
Overdraft is allowed on current account only the current account holders are given the facility overdraft by which they are allowed to draw an amount above their balances.

Question 15.
Discounting of bills of exchange
Answer:
Bills of exchange are the written undertaking received by the seller from the buyer against the credit transaction. The person one who possesses bill can discount the bill in the bank. If they need money.

Question 16.
Creation of credit [March 18]
Answer:
It means the process of creating credit from the depositor received by the bank from the customers to those who is in need of money in the form of loans and advances.

Question 17.
Clearance house
Answer:
Central Bank acts as a clearing house for the commercial banks to settle their interbank accounts all commercial banks maintain their accounts with the central bank.

Question 18.
Lender of last resort
Answer:
The central bank serves as lender of last resort not only to commercial banks but also other credit institutions they approach central bank when they face the problem of liquidity and rediscounting the bills and taking loans.

Question 19.
Reserve money
Answer:
The amount kept by the banks in the bank to use in the future to face the unfore seen events these reserves will be used by banks to lend loans and reduce the losses in the future.

Question 20.
Reserve Bank of India
Answer:
Reserve Bank of India is the Central Bank of India. It was established in April 1935 with a share capital of ₹ 5 crore. It was nationalised by government of India in 1949 it acts under the Reserve Bank of India 1934.

Question 21.
Meaning of inflation
Answer:
The term inflation refers to persistent rise in the general price level over a long period of time. Money supply increase, money value will be fallen, result in purchasing power will be decline.

Question 22.
Consumer Price Index (CPI)
Answer:
This is the index of prices of a given basket of commodities which are brought by the representative consumer. CPI is expressed in percentage terms.

Question 23.
Wholesale Price Index (WPI)
Answer:
Whole sale price is that price at which goods are traded in bulk. The index for wholesale price is called Wholesale Price Index (WPI).

Question 24.
Demand – Pull inflation
Answer:
Inflation caused by the increase in the aggregate demand for commodities over aggregate supply is called demand – pull inflation. Aggregate demand increases due to increase in the income level of the people.

Question 25.
Cost-push inflation
Answer:
Inflation caused by the rise in cost of production is called cost – push inflation. Cost of production may rise due to the increase in wages forced by the trade unions of government.

Question 26.
Hyper inflation [March 16]
Answer:
Hyper inflation is also known as galloping inflation. If the inflation rate exceeds 10% per annum is called hyper inflation.

Question 27.
Inflation and value of money.
Answer:
Inflation and value of money are important aspects of macro economics. They play a major role in the functioning of the economy and bear large influence on all economic activities affecting the levels of output, income, employment etc.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 8th Lesson Macro Economic Aspects Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 8th Lesson Macro Economic Aspects

Essay Questions

Question 1.
Discuss the implications of the classical theory of employment
Answer:
The theory of output and employment developed by economists such as Adam Smith, David Ricardo, Malthus is known as classical theory. lt is based on the famous “Law of markets” advocated by J.B. Say. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources. The classical economists ruled out any general unemployment in the long run. These views are known as the classical theory of output and employment.
The classical theory of employment can be three dimensions.
A. Goods market equilibrium → Say’s market law
B. Money market equilibrium → Say’s market law
C. Equilibrium of the labour market (Pigou wage cut policy)

A) Goods market equilibrium: The 1^st part of Say’s law of markets explains the goods market equilibrium. According to Say “supply creates its own demand”. Say’s law states that supply always equals demand. Whenever additional output is produced in the economy, the factors of production which participate in the process of production. The total income generated is equivalent to the total value of the output produced. Such income creates additional demand for the sale of the additional output. Thus there could be no deficiency in the aggregate demand in the economy for the total output. Here every thing is automatically adjusting without need of government intervention.

The classical economists believe that economy attains equilibrium in the long run at the level of full employment. Any disequilibrium between aggregate demand and aggregate supply equilibrium adjusted automatically. This changes in the general price level is known as price flexibility.

B) Money market equilibrium : The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that total income spent the classical economists agree that part of the income may be saved. But the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment is brought by the flexible rate of interest. This can be explained by the following diagram.

In the diagram savings and investment are measured on the ‘X’ axis and rate of interest on Y axis. Savings and investments are equal at ‘Oi’ rate of interest. So money market equilibrium can be automatically brought through the rate of interest flexibility.

C) Labour market equilibrium : According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions. A.C. Pigou suggests that reduction in the wages will remove,unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

According to the classical theory supply of and demand for labour are determined by real wage rate. Demand for labour is the inverse function of the real wage rate. The supply of labour is the direct function of real wage rate. At a particular point real wage rate the supply of and the demand for labour in the economy become equal and thus equilibrium attained in the labour market. Thus there is full employment of labour. This can be ex-plained with the help of diagram.

In the above diagram supply of and demand for labour is measured on the X – axis. The real wage rate is measured on the Y axis. If the wage rate is OW₁, the supply of labour more than the demand for labour. Hence the wage rate falls. If the real wage rate is OW₂, the demand for labour is more than supply of labour. Hence the wage rate rises. At OW, real wage rate the supply and demand are equal. This is equilibrium.
Assumptions:

1. There is no interference of government of the economy.
2. Perfect competition in commodity and labour market.
3. Full employment.
4. Wage flexibility.
5. Money does not matter.
6. Savings and investment depends on the rate of interest.
7. Supply of and demand for labour depends on real wage rate.

Question 2.
Explain the Keynesian theory of employment. [March 18, 17, 16]
Answer:
Keynes theory of employment is the principle of effective demand. He called his theory, general theory because it deals with all levels of employment. Keynes explains that lack of aggregate demand is the cause of unemployment. He used the terms aggregate demand, aggregate supply. It means total. The term effective demand is used to denote that level of aggregate demand which is equal to aggrerate supply.

According to Keynes where, aggregate demand and aggregate supply are intersected at that point effective demand is determined. This effective demand will determine the level of employment.

Aggregate supply schedule : The aggregate supply schedule shows the various amounts of the commodity that will be offered for sale at a series of price. As the level of output increases with the level of employment. The aggregate supply price also increases with every increase in the level of employment. The aggregate supply curve slopes upwards from left to right. But when the economy reaches the level of the full employment, the aggregate supply curve becomes vertical.

Aggregate demand schedule: The various aggregate demand prices at different level of employment is called aggregate demand price schedule. As the level of employment rises, the total income of the community also rises and therefore the aggregate demand price also increases. The aggregate demand curve slopes upward from left to right.

Equilibrium level of income : The two determinants of effective demand aggregate supply and aggregate demand prices combined schedule is shown in the following table.

The table shows that so long as the demand price is higher than the aggregate supply price. The level of employment 40 lakh workers aggregate demand price is equal to aggregate supply price i.e., 300 crores. So effective demand in the above table is ₹ 300 crores. This can be shown in the following diagrams.

In the diagram X’ axis represents the employment and Y axis represents price. A.S is aggregate supply curve A.D is aggregate demand curve. The point of intersection between the two ‘E₁‘ point. This is effective demand where all workers are employed at this point the entrepreneur’s expectation of profits are maximised. At any other points the entrepreneurs will either incur losses or earn sub-normal profits.

Question 3.
How does Keynes advocate government expenditure to reduce unemployment ? Explain.
Answer:
The role of the state has become almost all pervasive in the economic organisation of the country. Whether it may be developed or underdeveloped country.
The activities undertaken by the modem State in the economic organisation of a country may be discussed under the following heads.

1) The State and Industry: The activities of the State in the industrial sphere may be considered under three groups namely, the regulatory functions, control of monopolies and lastly nationalisation or public ownership.

The state is taking an increasing role in regulating the manner of forming and operating industrial undertakings. The undertakings will probably have to take out licenses from the government before they can start operation. To check the growth of few giant concerns, the state has been forced to adopt measures for fixing prices and other terms of sale of the monopolised products. All the methods of controlling monopolies have ineffective, then the State take over the ownership of the monopolistic concerns.

2) State and Labour : The modem state has also been forced to take a number of steps for protecting the interests of labour. In this respect the state has passed factory laws prohibiting the employment of children and women under certain circumstances, fixing of reasonable hours of work etc.

3) The State and the Social Services : State has adopted schemes of social insurance according tp which all persons get free medical treatment and cash payments during periods of sickness, receive unemployment benefits if they are out of work, enjoy pensions in their oldage or in case of disablement. The widows and orphans also receive pensions from the State. The purpose behind these schemes is to relieve the poverty of the citizens and to provide security against the various risks of life.

4) The State and Foreign Trade : The state interferes with the course of foreign trade for the protection of home industries and for curing deficits in the balance of payments. The deficits in balance of payments will be cured by the State through the system of import control and exchange restrictions.

5) State and Inequalities of Income : It is the duty of the state to take all reasonable steps for the reduction of inequalities of income. Therefore, the state has adopting the system of progressive taxation of incomes, imposing levy of death duties or inherited proper ties at progressive rates and distributing the proceeds of the taxes among the poorer sections of the community.

6) The State and War : The expenses of modem war have forced the state to assume a good deal of control over the economic lifd of a country. If the economic system is to be organised fully for the successful prosecution of the war, it may be necessary for the state to exercise an all – round control over the economy of the country.

7) The State and the Trade Cycles : Both monetary policy and budgetary policy can be utilised by the State to check the course of the trade cycle.

8) The State and Economic Planning : An economic plan is a method of organising and utilising .the available resources of a country for the purpose of fulfilling certain desirable end. The modem state is expected to formulate such an economic plan or plans. It is necessary or desirable for the state to formulate a plan for rapid economic development especially in underdeveloped economies, to secure a better distribution of the national income among all classes of people, for the development of resources of the community so on to ensure full employment for everybody etc. All these activities of the state will increase the public expenditure.

Question 4.
Discuss how the Keynesian theory is an improvement over the classical theory of employment ?
Answer:
Classical theory of employment was stated by Adam Smith, David Ricardo, Robert Malthus etc. It is based on the Say’s law of market. According to this law “Supply creates its own demand”. The classical theory of employment assumed that there is always full employment of labour and other resources.

Infact full – employment is considered to be the normal situation and any lapses from full employment are considered to be abnormal. Even if at any time there is not actual full employment. The classical theory asserts that there is always a tendency towards full employment.

The free play of economic resources itself bring about the fuller utilization of economic resources including labour. Any interference of government in economic activities shall fail to bring about full employment.

Criticism on classical theory: J. M Keynes criticized the basic assumptions of classical theory. According to him the assumptions of classical theory are far from reality.
1) Full employment: According to classicals full employment is a general condition in the economy but for Keynes full employment is a special situation and not a general situation. The 1930’s economic depression proved that the classical assumption of full employment equilibrium was wrong.

2) Automatic adjustment: Classicals believed that the economic forces automatically adjust by them self without interference of the government. But automatic adjustment mecha-nism faild to restore. Full employment during the period of economic depression.

3) Money is neutral: J.M Keynes denounced the classical assumption that money is neutral. He integrated monetary variables with real variable through rate of interest and successfully demonstrated the effect of changes in money supply on real variables.

4) Wage-cut-policy : Classicals suggested the wage cut policy to solve the problem of involuntary unemployment. But according to Keynes it is impossible to cut money wage. The unions always fight for a hike in money wage and never accept a cut in money wage.

5) Savings and investment: According to classicals the saving and investment are the function of interest rate. But Keynes argued that savings is a function of level of income rather than that the rate of interest.

6) Labour supply: The supply of labour depends upon the money wage rate and not on real wage rate because workers suffer from money illusion i.e., they are interested in the amount of money they receive rather than its purchasing power.-

7) Long run analysis : Keynes also criticized the long run analysis of classical by saying that we are all dead in the long run. He emphasised the need for the analysis of short run problems and providing solution for them.

8) According to Keynes existence of perfect competition is also wrong.
Having made such a frontal attract on the classical theory. Keynes offered his own theory in its place. So his theory is treated as an improvement over the classical theory of employment.

Question 5.
Explain the concept of under – employment equilibrium with the help of a diagram.
Answer:
Under employment equilibrium is a situation when all resources are not fully used and same resources are lying idle or under utilised.
In case of under employment, equilibrium increase in aggregate demand brought about by expansionary fiscal and monetary policies will lead to increase in aggregate supply.

Keynesian employment theory states that in general there is unemployment in the economy in the short run that is caused by deficiency of aggregate demand. This can be shown in the side diagram.

Output is shown on X-axis as national income on the Y- axis consumption expenditure (Q and investment I are measured. AS is the aggregate supply curve. E represents the equilibrium point. ON output represents low level employment and to ensure full employment. The output should reach ON₁ level. The aggregate demand helps determine output in the Keynesian approach. AS is upward sloping curve. AD and AS intersects at point A. It implies that a modem market economy can get trapped in an under employment equilibrium. Thus Keynes’s analysis created a revolution in macro economics.

Question 6.
Describe the various methods of redemption of public debt.
Answer:
Redemption of public debt means repayment of public debt. All government debts should be rapid promptly. There are various methods of repayment which may be discussed under the following heads.

1. Surplus budget: Surplus budget means having public revenue in excess of public expenditure. If the government plans for a surplus budget, the excess revenue may be utilized to repay public debt.
2. Refunding : Refunding implies the issue of fresh bands and securities by government so that the matured loans can be used for repayment of public debt.
3. Annuities : By this method, the government repays past of the public debt every year. Such annual payments are made regularly till the debt is completely cleared.
4. Sinking fund: By this method, the government creates a separate fund called ’Sinking fund’ for the purpose of repaying public debt. This is considered as the best method of redemption.
5. Conversion: Conversion means that the existing loans are changed into new loans before the date of their maturity.
6. Additional taxation : Government may resort to additional taxation so as to raise necessary funds to repay public debt under this method new taxes are imposed.
7. Capital levy: Capital levy is a heavy one time tax on the capital assets and estates.
8. Surplus Balance of payments : This is useful to repay external debt for which foreign exchange is required surplus balance of payment implies exports in excess of imports by which reserves of foreign exchange can be created.

Short Answer Questions

Question 1.
“Supply creates its own demand” comment on the statement. [March 18, 17]
Answer:
Classical theory of employment or the theory of output and employment developed by economists such as Adam Smith, David Ricardo, Robert Malthus etc., it is based on the J.B Say’s law of market’. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources.

According to this law the supply always equals to demand it can be expressed as S = D. Whenever additional output is produced in the economy. The factors of production which participate in the process of production. Earn income in the form of rent, wages, interest and profits.

The total income so generated is equivalent to the total value of the additional output produced. Such income creates addition demand necessary for the sale of the additional output. Therefore the question of addition output not being sold does not arise.

Question 2.
Enumerate the assumptions of Classical theory of employment.
Answer:
The classical theory of employment is based on the Say’s law of markets. The famous law of markets, propounded by the J.B Say states that “Supply creates its own demand”.
Assumptions : The Say’s law is based on the following assumptions.

1. There is a free enterprise economy.
2. There is perfect competition in the economy.
3. There is no government interference in the functioning of the economy.
4. The equilibrium process is considered from the long term point of view.
5. All savings are automatically invested.
6. The interest rate is flexible.
7. The wage rate is flexible.
8. There are no limits to the expansion of the market.
9. Money acts as medium of exchange.

Question 3.
Explain the criticism against the classical theory of employment.
Answer:
The classical theory of employment came in for severe criticism from J.M. Keynes. The main points of criticism are as follows :

1. The assumption of full employment is unrealistic. It is rare phenomenon and not a normal features.
2. The wage cut policy is not a practical policy in modem times. The supply of labour is a function of money wage and not real wage. Trade unions would never accept any reduction in the money wage rate.
3. Equilibrium between savings and investment is not brought about by a flexible rate of interest. Infact, saving is a function of income and not interest.
4. The process of equilibrium between supply and demand is not realistic. Keynes commented the self adjusting mechanism doesn’t always operate.
5. Long run approach to the problem of unemployment is also not realistic. Keynes commented, “we are all dead in the long run”. He considered unemployment as a short- run problem and offered immediate solution through his employment theory.
6. It is not correct to say that money is neutral. Money acts not only as a medium of exchange but also as a store of value. Money influences variables like consumption, investment and output.

Question 4.
Explain the wage cut policy.
Answer:
Wage cut policy is one of the assumption of classical theory of employment which was started by “AC Pigou” who defended the classical theory and its full employment assumption. To Pigou and others the wage fund is given. The wage rate determined by dividing the wage fund with the number of workers. Pigou advocated a general cut in money wages in times of depression to restore full employment.

If there is a problem of unemployment in the economy. It is possible to solve this problem by reducing the money wages of the workers. This is known as “wage cut policy”. The given wage fund can offer more employment at a lower wage rate. The classicals believe that involuntary unemployment all involuntary unemployment would disappear.

According to classical theory of the labour supply and its demand depends on real wage rate. Real wage rate indicates the purchasing power of labourers. Because of existence of perfect competition in labour market real wage rate always equals to marginal productivity of labour. Labour supply is positively related to real wage rate and the demand for labour is inversely related to real Wage rate.

Question 5.
Distinguish between aggregate supply price and aggregate demand price.
Answer:
Aggregate supply price : When an entrepreneur gives employment to certain amount of labour. It requires the use of other factors of production or inputs. All these inputs have to be paid remunerations. When all these are added what we get is the value of the output produced or the expenditure incurred to supply employment for a specific number of labourers. By selling the output the entrepreneurs must expect to receive atleast what they have spent. This is known as the “Aggregate supply price” of the output or level of employment. As the level of output increases with the level of employment, aggregate supply price also increases with every increase in the level of employment.

Aggregate demand price : In Keynes theory the aggregate demand determines the level of employment. The aggregate demand price for a given output is the amount of money which the firms expect to receive from the sale of that output. Then aggregate demand will be equal to the sum of consumption (C) investment (I) and Government expenditure (G) for goods and services.
Therefore, Aggregate demand (AD) = C + I + G.
As the level of employment rises, the total income of the community also rises and therefore the aggregate demand, price also increases.

Question 6.
Explain the concept of effective demand.
Answer:
Effective demand means where aggregate demand equals the aggregate supply. When aggregate demand is equal to aggregate supply the economy is in equilibrium. This can be shown in the table.

In the table when the level of employment is 14 lakh workers, aggregate demand price is equal to aggregate supply price i.e ₹ 700 crores. This can be shown in the following diagram.

In the above diagram aggregate demand price curve (AD) and the aggregate supply price curve (AS) interest each other at point E₁. It shows the equilibrium point. The equilibrium has been attained at ON₁ level of employment. It is assumed that ON₁ in the above diagram does not indicate full employment as the economy is having idle factors of production. So it is considered as under-employment equilibrium.

According to Keynes, to achieve full employment an upward shift of aggregate demand curve is required. This can be possible through government expenditure on goods and services supplied in the economy, whenever private entrepreneurs may not show interest to invest. With this the AD₁ curve (C + I) shift as AD₂ (C + I + G) at new point of effective demand E₂, where the economy reaches full employment level i.e., ONE

Question 7.
What are the sources of public Revenue. [March 18, 17, 16]
Answer:
Revenue received by the government from different sources is called public revenue.
Public revenue is classified into two kinds.

1. Tax revenue
2. Non-Tax revenue.

1) Tax Revenue : Revenue received through collection of taxes from the public is called tax revenue. Both the state and central government collect taxes as per their allocation in the constitution.
Taxes are two types.
a) Direct taxes:

1. Taxes on income and expenditure. Ex : Income tax, Corporate tax etc.
2. Taxes on property and capital assests. Ex : Wealth tax, Gift tax etc.

b) Indirect taxes : Taxes levied on goods and services. Ex : Excise duty, Service tax.

2) Non – tax revenue: Government receives revenue from sources other than taxes and such revenue is called non-tax revenue. They are
a) Administrative revenue : Government receives money for certain administrative services. Ex : License fee, Tution fee etc.

b) Commercial revenue : Modern governments establish public sector units to manufacture certain goods and offer certain services. The goods and services are exchanged for the price. So such units earn revenue by way of selling their products. Ex : Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Indian Air lines etc.,

c) Loans and advances : When the revenue received by the government from taxes and from the above non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modem government also taken loans from international financial institutions.

d) Grants-in-aid : Grants are amount received without any condition of repayment. They are not repaid.
These are two types.

1. General grant,
2. Specific grant.

Question 8.
List out various items of public expenditure. [March 16]
Answer:
Public expenditure is an important constituent of public finance. Modem governments spend money from various welfare activities. The expenditure incurred by the government on various economic activities is called public expenditure.
Governments incur expenditure on the following heads of accounts.

1. Defence
2. Internal security
3. Economic services
4. Social services
5. Other general services
6. Pensions
7. Subsidies
8. Grants to state governments
9. Grants to foreign governments
10. Loans to state governments
11. Loans to public enterprises
12. Loans to foreign governments
13. Repayment of loans
14. Assistance to states on natural calamities etc.

Very Short Answer Questions

Question 1.
Classical economics.
Answer:
The term classical economics refers to the body of economic group which held their influence from the letter half of the 18^th century to the early part of the 20^th century. The most important principle of classicism are personal liberty Private property and freedom of private enterprise.

Question 2.
Laissezf aire
Answer:
According to classicals the role of government in economic activities should be nominal or very less. The free play of economic forces it self bring about the fuller utilization of economic resources including labour. Any interference with the free play of market forces under such circumstances the state shall not interfere in economic matter. It should pursue a policy of laissez fair-a policy of, non-intervention in economic matters.

Question 3.
Say’s law of market [March 16]
Answer:
J.B Say a french economist advocated the famous ‘Law of markets’ on which the classical theory of employment is based. According to this law “supply creates its own demand”. According to this law whenever additional output is created. The factors of production which participate in that production receive incomes equal to that value of that output. This income would be spent either on consumption goods or on capital goods. Thus additional demand is created matching the additional supply.

Question 4.
Market mechanism
Answer:
Market mechanism is the method of solving the central problems of an economy viz., what to produce, how to produce, whom to produce use through the forces of demand and supply. This mechanisms used by a free enterprise capitalist economy.

Question 5.
Full employment [March 17]
Answer:
Full employment is a situation in which all those who are willing to work at the existing wage rate are engaged in work.

Question 6.
Aggregate demand function
Answer:
The schedule showing aggregate demand prices at different levels of employment in the economy is called as aggregate demand function.

Question 7.
Aggregate supply function
Answer:
The schedule showing the aggregate supply price at different levels of employment is called the aggregate supply function.

Question 8.
Effective demand [March 16]
Answer:
Effective demand is that aggregate demand which becomes equal to the aggregate supply. This refers to the aggregate demand at equilibrium.

Question 9.
Difference between revenue account and capital account
Answer:
Revenue account consists of the current transactions and includes value of transactions relating to export import travel expenses, insurance, investment, income etc. The capital account refers to the transactions of capital nature such as borrowing and lending of capital repayment of capital sale and purchase of shares and securities etc.

Question 10.
Difference between internal debt and external debt
Answer:
Internal debt is the debt which is borrowed by a government from the people and institutions with in the country is called internal debt.
External debt is amount borrowed by a government from institutions and government of other countries is called external debt.

Question 11.
Structure of budget
Answer:
Budget is the annual statement showing the estimated receipts and expenditure of the government for a financial year in the budget. The budget estimates and revised estimates of the current financial year and actual expenditure of the preceding financial year are shown.

Question 12.
Deficit budget [March 18]
Answer:
Deficit budget arises when the total expenditure in the budget exceeds the total receipts in the budget technically there are four types of deficit budgets.

1. Revenue deficit
2. Budget deficit
3. Fiscal defict
4. Primary defict

Question 13.
Fiscal deficit
Answer:
Fiscal deficit is the difference between total revenue and total expenditure plus the market borrowings.
Fiscal deficit = (Total revenue – total expenditure) + Other borrowing and other liabilities.

Question 14.
Primary deficit
Answer:
Primary deficit is the fiscal deficit minus the interest payments.

Additional Questions

Question 15.
Wage – cut policy
Answer:
This is the policy advocated by A.C Pigou to reduce unemployment in the economy. It suggests that the wages of the labour should be reduced so that the unemployed can be employed.

Question 16.
Vote on account
Answer:
Vote on account is an interium budget presented for a few months pending presentation of the regular budget.

Question 17.
Surplus budget
Answer:
It refers to the budget in which the total receipts exceed the total expenditure.

Question 18.
Balanced Budget
Answer:
It is the budget in which the total receipts and total expenditure are equal.

Question 19.
Revenue deficit
Answer:
Revenue deficit is the difference between the revenue receipts and the revenue ex-penditure.

Question 20.
Redemption of debt
Answer:
Redemption of public debt means repayment of public debt.

Question 21.
Budget.
Answer:
Budget is the annual statement of the estimated receipts and estimated expenditure of the government for the ensuing financial year.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 7th Lesson National Income Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 7th Lesson National Income

Essay Questions

Question 1.
Define National Income and explain the various concepts of National Income.
Answer:
National Income means the aggregate value of all the final goods and services produced in the economy in one year.
Concepts of National Income :
1) Gross National Product (GNP) : It is the total value of all final goods and services produced in the economy in one year.
The main components of GNP are :
a) The goods and services purchased by consumers – C.
b) Investments made by public and private sectors – I.
c) Government expenditure on public utility services – G.
d) Incomes earned through International Trade (x – m).
e) Net factor incomes from abroad.
GNP at market prices = C + I – G + (x – m) + Net factor income from abroad.

2) Gross Domestic Product (GDP) : The market value of the total goods and services produced in a country in one particular period usually in a year is the GDP
GDP = C + I + G

3) Net National Product (NNP) : Firms use continuously machines and tools for the production of goods and services. This result in a loss of value due to wear and tear of fixed capital. The loss suffered by fixed capital is called depreciation. When we substract depreciation from GNP we get NNP
NNP = GNP – depreciation.

4) National Income at factor cost: The cost of production of a good is equal to the rewards paid to the factors which participated in the production process. So the cost of production of a firm is the rent paid land, wages paid labour, interest paid on capital and profits of the entrepreneur.
National Income at factor cost = NNP + Subsidies – Indirect Taxes – Profits of Govt, owned firms.

5) Personal Income: It is the total of incomes received by all persons from all sources in a specific time period. Personal income is not equal to National Income. Because social security payments. Corporate taxes, undistributed profits are deducted from national income and only the remaining is received by persons.
Personal Income = National Income at factor cost – Undistributed profits – Corporate taxes – Social security contributions + Transfer payments.

6) Disposable income : Personal income totally is not available for spending income tax is a payment which must be, deducted to obtain disposable income.
Disposable income = Personal income – Personal taxes
D.I = Consumption + Savings

7) Per capita income : National Income when divided by country’s population. We get per capita income.
Per capita Income = \(\frac{\text { National Income }}{\text { Total Population }}\)
The average standard of living of a country is indicated by per Capita income.

Question 2.
Explain the various methods of calculating National Income. [March 18, 17, 16]
Answer:
There are three methods of measuring National Income.

1. Output method or Product method
2. Expenditure method
3. Income method

‘Carin cross’ says National Income can be looked in any one of the three ways. As the national income measured by adding up everybody’s income by adding up everybody’s output and by adding up the value of all things that people buy and adding in their savings.

1) Output method (Product method) : The market value of total goods and services produced in an economy in a year is considered for estimating National Income. In order to arrive at the value of the product services, the total goods and services produced are multiplied with their market prices. .
Then National Income = (P₁Q₁ + P₂Q₂ + ……….. P_nQ_n) – Depreciation – Indirect taxes + Net income from abroad.
Where P = Price
Q = Quantity
1, 2, 3 n = Commodities & services
There is a possibility of double counting. Care must be taken to avoid this. Only final goods and services are taken to compute National Income but not the raw materials or intermediary goods. Estimation of the National Income through this method will indicate the contribution of different sectors, the growth trends in each sector and the sectors which are lagging behind.

2) Expenditure method : In this method we add the personal consumption expenditure of households, expenditure of the firms, government purchase of goods and services net exports plus net income from abroad.
NI – EH + EF + EG + Net exports + Net income from abroad.
Here National Income = Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Net exports + Net income from abroad
EH = Expenditure of households
EF = Expenditure of firms
EG = Expenditure of Government
Care should be taken to include spending or expenditure made on final goods and services only.

3) Income method : In this method, the incomes earned by all factors of production are aggregated to arrive at the National Income of a country. The four factors of production receive incomes in the form of wages, rent, interest and profits. This is also national income at factor cost.
NI = W + I + R + P + Net income from abroad
NI = National income
W = Wages I = Interest
R = Rent
P = Profits
This method gives us National Income according to distribute shares.

Question 3.
Describe the components of National Income.
Answer:
The total quantity of goods and services produced in the economy in a year is the National Income. The various components of the National Income are :

1. Consumption (C)
2. Gross Domestic Investment (I)
3. Government Expenditure (G)
4. Net foreign Investment (x – m) ‘

1) Consumption : By consumption, we mean the expenditure’ made on goods and services which directly satisfy our wants. Ex : Cloth, food products, education and health services etc. A major portion of the National Income comprises Only consumption goods and services.

Consumption expenditure depends on the level of income. Consumption and savings are the two parts of disposable income. Income which is left after consumption is the saving.

Consumption goods can be perishable or durable. Perishable goods are single use goods. Ex : Food. Durable goods can be used more than once for a longer time.
Ex : Vehicles, fans etc.

2) Gross Domestic Investment : The expenditure made on producer goods by the firms to produce goods and services is the investment expenditure. Ex : Machinery and tools etc. They satisfy wants indirectly. For instance, the plough used for producing rice cannot give us satisfaction directly. Producer goods are most essential for the growth in National Income.

3) Government expenditure : The expenditure incurred on various goods and services by the government is the public expenditure. This is what is meant by government consumption. Government provides roads, schools, medical facilities, irrigation, electricity, infrastructure facilities etc., to the society.
It also provides administrative services, defence services etc. The public expenditure is determined by the nature of economic system.

4) Net foreign Investment: Some goods produced in the economy are exported to other countries. In the same way, some goods which are required in the economy are imported into the country. If the value of exports is more than the value of imports, other countries are indebted to our country. So, it must be added to National Income. If the value of imports is more than exports, that difference must be deducted from National Income.
Exports – Imports = Net foreign investment National Income = C + I + G + (x – m)

Short Answer Questions

Question 1.
What are the factors that determine National Income ? [March 17]
Answer:
National Income is the total market value of all goods and services produced in a country during a given period of time. There are many factors that influence and determine the size of national income country.
a) Natural resources : The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of National Income.
b) Quality and Quantity of factors of production : The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production.
c) State of technology : Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s national resources.
d) Political will and stability: Political will and stability in a country helps in planned economic development and for a faster growth of National Income.

Question 2.
What is National Income at factor cost ? [March 18, 16]
Answer:
The cost of production of good is equal to the rewards paid to the factors which participated in the production process. So the cost of production of a firm is the rent paid to land, wages paid to labour, interest paid on capital and profits of the entrepreneur. These are received by suppliers of factors of production. There is a difference between net National Income at market prices and National Income at factor of cost. Imposition of tax increases the market prices. When these taxes deducted from net National Income, remaining income gets distributed among the factors of production.

Sometimes, the government may offer subsidies to encourage production of certain goods. The market prices of such goods will decrease to that extent. The value of subsidies is not included in net national product. So, it is to be added.
National Income at factor cost = NNP + Subsidies – Indirect taxes.

Question 3.
Mention any three definitions of National Income.
Answer:
National Income is the total market value of all goods and services produced in a country during a given period of time. ,
Several economists have defined National Incomes as follows :
Pigou’s definition : According to Pigou “National Income is that part of the objective income of the community including of course income derived from abroad which can be measured in money”.

Fisher’s definition : “The National dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment.

Marshall’s definition : “The labour and capital of country acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the net annual income or revenue of a country”.

Kuznet definition : According to Kuznets, National Income is the net output of commodities and services flowing during the year from the country’s productive system into the hands of the ultimate consumers or into the net additional to country’s capital goods”.

Question 4.
What is the relationship between per capita income and population ?
Answer:
There is a close relationship between national income and population. These two together determine the per capita income. If rate of growth of national income is 6% and rate of growth of population is 3% the rate of growth of per capita income will be 3% and it can be expressed as follows.
QPC = Q – QP
QPC = Rate of growth of per capita income
Q = Rate of growth of national income
QP = Rate of growth of population
A rise in the per capita income indicates a rise in standard of living. The rise in per capita income is possible only when the rate of growth of population is less than the rate of growth of that national income.

Additional Questions

Question 5.
Importance of National Income estimates.
Answer:
The importance of national income studies is growing because of several reasons.

1. The national income estimates are very important for preparing economic plans.
2. It is a very important tool for framing economic policies. .
3. It is very useful in making budgetary allocations.
4. It helps us to compare economic growth with other countries.
5. It is essential to calculate per capita incomes in a country and income inequalities.
6. It helps the government in macroeconomic policy making.

Question 6.
Explain circular flow of goods, services and incomes.
Answer:
Income is flow from wealth where as wealth is a stock. In every economy income flows from households to firms and vice versa. Thus the factor market and the product market are closely related to each other.

The process of circular flow of income of income makes to understand that income flows from households, firms and firms to households. The same can be understood from the following diagram.

In this diagram from households to firms shows the spending of households on goods and services produced by firms. The second arrow from firm to households shows the flow of goods and services from firm to households. These two arrows show the goods and services market. The other two arrows in second half of the diagram (lower part) represents the factors of production market.

Very Short Answer Questions

Question 1.
GNP (Gross National Product)
Answer:
It is the total value of all final goods and services produced in the economy in one year.
GNP = C + I + G + (x – m) where
C = Consumption
I = Gross National Investment
G = Government Expenditure
X = Exports
M = Imports
x – m = Net foreign trade.

Question 2.
Per capita Income [March 18, 17, 16]
Answer:
National Income when divided by country’s population, percapita income is obtained.
Per capita Income = \(\frac{\text { National Income }}{\text { Total Population }}\)
The average standard of living of country is indicated by per capita income.

Question 3.
Depreciation
Answer:
Firms use continuously machines and tools for the production of goods and services. This results in a loss of value due to wear and tear of fixed capital. This loss suffered by fixed capital is called depreciation.

Question 4.
Disposable Income
Answer:
Personal income totally is not available for spending. Income tax is payment which must be deducted to obtain disposable income.
Disposable Income = Personal income – Personal taxes
DI = Consumption + savings

Additional Questions

Question 5.
Circular flow of income
Answer:
Flow of income from firms to households and from households to firms.

Question 6.
Subsidies
Answer:
Share of government in price of a commodity.
Ex : Agriculture products.

Question 7.
National Income
Answer:
The total value of all final goods and services produced in the economy in a year.

Andhra Pradesh BIEAP AP Inter 1st Year Economics Study Material 6th Lesson Theory of Distribution Textbook Questions and Answers.

AP Inter 1st Year Economics Study Material 6th Lesson Theory of Distribution

Essay Questions

Question 1.
Define Rent and explain the Ricardian theory of Rent.
Answer:
David Ricardo was a 19th-century economist of England, who propounded a systematic theory of rent. Ricardo defined rent as “that portion of the procedure of earth which is paid to the landlords for the use of the original and indestructible powers of soil”. According to Ricardo, rent arises due to a differential in surplus occurring to agriculturists resulting from the differences in fertility of the soil of different grades of land.

Ricardiarz’s theory of rent is based on the principle of demand and supply. It arises in both extensive and intensive cultivation of land. When land is cultivated extensively, rent on superior land equals the excess of its produce over that of the inferior land. This can be explained with the following illustration.

We can imagine that a new island is discovered. Assume a batch of settlers goes to that Island. Land on this Island is different in fertility and situation. We assume that there are three grades of land A, B, and C. With a given application of labour and capital superior lands will yield more output than others. The difference in fertility will bring about differences in the cost of production, on the different grades of land. They first settle on A’ grade land for cultivation of com. A’ grade land yields say 20 quintals of corn with the investment of ₹ 300. The cbst of production per quintal is ₹ 15 (300/20). The price of corn in the market has to cover the cost of cultivation.

Otherwise the farmer will not produce com. Thus the price in the present case should be atleast ₹ 15 per quintal. As time passes, population increases and demand for land also increases. In such a case people have to cultivate next best land, i.e., ’B’ grade land. The same amount of Rs. 300 is spent of ‘B’ grade land gives only 15 quintals of corn as ‘B’ grade land is less fertile. The cost of cultivation on ‘B’ grade land risen to ₹ 20 (300/15) per quintal of corn. If the price of com per quintal in the market is then ₹ 20, the cultivator of ‘B’ grade and will be not cultivated. Therefore, the pride has to be high enough to cover the cost of cultivation on ‘B’ grade land. Hence the price also rises to ₹ 20. There is no surplus on B’ grade land. But on A grade land. But on A grade land, the surplus is 5 quintals or ₹ 100 (5 × 20).

Further, due to growth of population demand for land and corn increased. This necessitates, the cultivation of ‘C’ grade land with ₹ 300 investment cost. It yields only 10 quintals of com. Therefore the per quintal production cost rises to 30 (300/10). Then the price per quintal must be atleast ₹ 30 to cover the cost of production. Otherwise ‘C’ grade land will be withdrawn from cultivation. At price ₹ 30. ‘C grade land yield no surplus or rent. But A grade land yields still layer surplus of 10 quintals or ₹ 300 (10 × 30). But surplus or rent on ‘B’ grade land has 5 quintals or ₹ 150 (5 × 30). But there is no surplus or rent on ‘C’ grade land. It covers just the cost of cultivation. Hence, ‘C’ grade land is a marginal land which earns no rent or surplus.
This can also be explained with the following table.

The essence of Ricardian theory of rent.

1. Rent is a pure surplus.
2. Rent is differential surplus.
3. Rent does., not determine or enter into price.
4. Diminishing returns applies to agricultural production.
5. Land is put to only one use i.e., for cultivation.

Ricardian theory of rent can be explained with the help of diagram.
In the above diagram the shaded area represents the rent or differential surplus. The least fertile land i.e., C does not carry any rent. So it is called marginal land or no rent land.

Question 2.
Explain Marginal Productivity Theory of Distribution.
Answer:
This theory was developed by J.B.Clark. According to his theory, the remuneration of a factor of production will be equal to its marginal productivity. The theory assumes perfect competition in the market for factors of production. In such a market, average cost and marginal cost of each unit of factor of production are the same as they are equal to the price or cost of a factor of production.

For example if four tailors can stitch ten shirts in a day and five tailors can stitch thirteen shirts in a day, then the marginal physical product of the 5^th tailor is 3 shirts. If stitching charge for a shirt is ₹ 100/-, then the marginal value product of three shirts is ₹ 300/-. According to this theory the 5^th person will be remunerated ₹ 300/- marginal physical product is the additional output obtained by using an additional unit of the factor of production. If we multiply the additional output by market price we will get marginal value product or marginal revenue product.

At first stage when additional units of labour are employed the marginal productivity of labourer increases up to certain extent due to economies of scale. If additional units of labour are employed beyond that point the marginal productivity of labour decreases. This can be shown in the following figure.

In the figure OX axis represent units of labour and OY represent price/revenue/cost. At a given price OP the firm will employ OL units of labour where price OP = L. If it employees less than ‘OL’ i.e., OL₁ units MRP will be E₁L₁ which is higher than the price OR If firm employers more than OL units upto OL₂ price is OP is more than E₂L₂. So the firm decreases employment until price = MRP till OL. At that point ‘E’ the additional unit of labour is remunerated equal to his marginal productivity.

Question 3.
What is meant by Real Wages ? And what are the factors that determine Real wages ?
Answer:
The amount of goods and services that can be purchased with the money wages at any particular time is called real wage. Thus real wage is the amount of purchasing power received by worker through his money wage.
Factors determining the real wage :
1. Methods of form of payment: Besides money wages, normally the labourers get same additional facilities provided by their management. Ex : Free housing, free medical facilities etc. As a result this real wage of the worker will be high.

2. Purchasing power of money : An important factor which determines the real wage is the purchasing power of money which depends upon the general price level. A rise in general price level will mean a full in the purchasing power of money, causes decline in real wages.

3. Nature of work: The working conditions also determine the real wages of labourer. Less duration of work, ventilation fresh air etc., result in high real wages, lack of then facilities real wages are low eventhough money wages are high.

4. Future prospects : Real wage is said to be higher in those jobs where there is possibility of promotions hike in wages and vice-versa.

5. Nature of work : Real wages are also determined by the risk and danger involved in the work. If work i$ risky wages of labourer will be low though money wages are high. Ex : Captain in a submarine.

6. Timely payment : If a labourer receives payment regularly and timely the real wages of the labourer is high although his money wage is pretty less and vice-versa.

7. Social prestige : Real wage depends on social prestige. The money wages of Bank officer and judge are equal, but the real wage of a judge is higher than bank officer.

8. Period and expenses of education : Period and expenses of training also affect real wages.

Question 4.
What is meant by wages ? Explain briefly various theories of wages.
Answer:
Wages are a payment made for the services of labour, either mental or physical.
According to Benham “sum of money paid under contract by an employer to a worker for the services rendered”.
Theories of wages:
1. Subsistence theory of wages : This theory was formulated by a group of French Economics known as Physiocrats. This theory is also termed as “Iron Law of wages”. According to this theory, wages will always be at a level to enable the labourer and his family to fulfill the minimum subsistence level. If the wages are raised above the subsistence level, supply of labour will increase. If wages will decrease to the subsistence level, the supply of labour will decrease. Hence wages will always be at the subsistence level.

2. Wage fund theory : This theory developed by J.S.Mill. According to this theory every entrepreneur will keep aside a part of the variable capital to pay wages as the labourers cannot wait for their wages till goods are sold. Such part of variable capital is known as ‘Wages fund” or “Circulating capital”.
Average wage rate = \(\frac{\text { Amount of wage fund }}{\text { Number of labourers }}\)

3. Residual claimant theory of wages : This theory proposed the residual claimant theory of wages. According to Walker is a residual claimant. After paying rent, interest and profit from total revenue, the balance will be paid as wages to labourers.
Wages = Total Revenue – (Rent + Interest + Profit)

4. Taussig’s theory of wages: This theory modified by Taussig. According to Taussig, wages are equal to the discounted marginal product of labour. According to him, the labourer cannot get full value of the marginal productivity. In order to meet the expenditure of labourer in course of production, the employer will have to pay wages in advance. Hence, the employers deducts a certain percentage from the final output inorder to compensate the risk involved in advance payments to the labourers.

5. Modern theory of wages : This theory proposed by Marshall and J.R.Hicks. According to this theory, the wages of labourers are determined by the demand for and supply of labourers wage is determined at that point where the demand and supply of labourer are equal.

Question 5.
What is meant by interest ? Explain briefly various theories of interest.
Answer:
In Economics, interest is regarded as the payment for the use of the service of capital.
Carver said “Interest is the income which goes to capital”.
Theories of interest:
1. Abstinence or Waiting theory of interest: Nassau Senior proposed the Ah f inence theory of interest. According to him capital can be created by postponing consumption. It means when people save, they abstain from consumption. Abstaining from consumption is disagreeable and painful. As lending involves sacrifice, it is necessary to reward the lender in the form of interest.

2. Agio theory of interest or Bohm – Bawerk’s theory: According to Bohm – Bawerk, interest arises because people prefer present goods to future goods of the same kind and quantity. People prefer present enjoyment to future enjoyment. As a result of saving, people lose present enjoyment.
Bohm-Bawerk gave three reasons for the emergence of rate of interest. They are :

1. The demand for goods is greater now than in future as people have different demands for goods in the present than in the future.
2. People under estimate future wants due to lack of imagination to judge the intensity of their future wants, lack of will to resist temptation of satisfying present wants and they think they may not be alive to satisfy wants as future is uncertain.
3. Present goods are considered technically superior over future goods. By consuming goods at present lead to accumulation of productive capital for future. Hence interest is paid as a premium for the postponement of consumption.

3. Productivity theory of interest : According to Classical Economists, capital is demanded because of its productivity. Whenever additional units of capital are used, productivity will increase upto a certain point and later decreases beyond that point. Additional units of capital are not as productive as the earlier units as a result of the law of variable proportions.

According to this theory, rate of interest is just equal to the productivity of capital. Hence, higher the demand for capital, lower will be the rate of interest and vice versa. As per the theory, rate of interest is inversely related to the demand for capital.

4. Loanable funds theory of interest: The lonable funds theory or the neo classical theory was first formulated by Knutt Wicksell. According to this theory, interest is determined by the equilibrium of demand for and supply of loanable funds in the market.

5. Time preference theory : Irvin’g Fisher proposed the time preference theory of ! interest. Fisher’s theory emphasized time preference as a cause of interest. He also considered the role of marginal productivity or “rate of return over cost that determines interest”. Hence, rate of interest is determined by time preference.

6. Keynes’ liquidity preference theory: Keynes proposed a monetary explanation of the rate of interest. According to Keynes, interest is determined by both the demand for and supply of money.
According to Keynes “Interest is the reward paid for paring with liquidity for the specified period”.

7. Supply money: Supply of money refers to the total quantity of money in circulation. Supply of money is fixed or perfectly inelastic at a given point of time. Supply of money is determined by the central bank of a country.

8. Demand for money : People demand money for its liquidity. The desire to hold ready cash is liquidity preference. Liquidity preference is positively related to the rate of interest. People demand money basically for these reasons.

1. Transactions motive
2. Precautionary motive
3. Speculative motive.

Question 6.
What is meant by profit ? Explain briefly various theories of profit.
Answer:
Profit is the reward paid to the entrepreneur for his services as an organizer in the process of production.
Theories of profit:
1. Dynamic theory of profit: This theory was propounded by J.B. Clark. According to Clark “Profit is the difference between the price and cost of production of commodity”. He viewed that profit as a reward for entrepreneurial dynamism. Dynamic changes like increase in population, new method of production etc., result increase in profit. In a static economy due to lack of these changes entrepreneurs receive only wages but not profit. Hence profits are the result of the dynamic changes only.

2. Innovation theory: This theory was developed by Joseph Schumpeter. According to Schumpeter, “profit is the reward paid to the entrepreneur for his inventive skills”. Because of these inventions profits arise as a difference between prices and costs of production.
According to Schumpeter, entrepreneur must break the circular flow by introducing innovations they are :

1. Introduction of new good.
2. Introduction of new method of production.
3. Reorganisation of industry.
4. Opening up of a new market.
5. Discovery of new source of raw materials.

So these innovations, the cost of production remains below its selling price and thus profit arises.
Thus profit is paid to entrepreneur for innovating but not for risk taking.

3. The risk theory of profit: This theory was proposed, by Prof. Hawley. Profits are the reward for an entrepreneur for risk-taking. So the residual part of income after paying all factors of production goes to the entrepreneur for risk taking. Fluctuations in future prices, demand etc., are involved in risk taking.
According to Prof. Hawley those who face risks in business will be able to earn an excess of payment above the actual value of risk in the form of profit.

4. Uncertainty theory of profit: This theory formulated by Prof. Knight. It is a modified version of risk bearing theory of profits. According to him profit as the reward for bearing uninsurable risks and uncertainties. He classified risks into two types.

1. Unforseen insurable risks like fire, theft.
2. Unforseen non insurable risks like changes in prices, demand and supply. These uninsurable risks cannot be calculated.

According to Prof. Knighit, “Profit cannot be treated as the reward for risk taking only for reward for uncertainty bearing”.

5. Walker’s theory of profit: This theory developed by Walker. According to Walker “Profits are a rent paid for the abilities of entrepreneur”. Walker theory states that profits arise due to the differences in efficiency and ability of entrepreneurs. Hence efficient and able entrepreneurs’ are paid profits.

Short Answer Questions

Question 1.
Explain the concept of Distribution.
Answer:
Distribution refers to that branch of economies which analyses how the national income of a community is divided among the various factors of production, distribution then refer to the sharing of the wealth that is produced among factors of production. It is the pricing of factors of production. The distribution of income may be personal or functional economies is concerned with functional distribution. The distinction between them is briefly explained here.

1. Functional distribution : Functional distribution deals with the study of factor incomes. It means the theory of factor pricing. The prices of land, labour, capital and organisation are called rent, wages, interest and profit respectively. Therefore, it is the study and determination of rent, wages, interest and profit. It concern the pattern of distribution of national income as rent, wage, interest and profits. Thus it is not concerned with individuals and their individual income, but with the agents’of production. The study of functional shares has been carried on both at the macro and micro levels.
Micro-distribution: The theory of micro-distribution explains how the prices of factors of production are determined.
Ex : Micro-distribution we study how wage rate of labour is determined.

Macro-distribution : Macro distribution explains the share of a factor of production in the national income.
Ex : The share of labour in the national income.

2. Personal distribution: It refers to the distribution of income or wealth of a country among its people. It studies how income or wealth is distributed among individuals or persons. It studies how much income is earned by an individual, but not how it is earned or in how many forms it is earned. The causes of income inequalities can be known by studying personal distribution.

Question 2.
What are the factors that determine factor prices ? [March 16]
Answer:
The demand and supply of a factor of production determine its price. The demand for a factor of production depends on the following.

1. It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors or co-operative factors determine the demand for a factor.
4. Technological changes determine the demand for a factor.
5. The demand for a factor increases due to increase in its production.

Factors that determine the supply of a factor of production.

1. The size of the population and it’s age composition.
2. Mobility of the factor of production.
3. Efficiency of the factor of production.
4. Geographical conditions,
5. Wage also determines the supply of this factor.
6. Income.

Question 3.
Explain the concept of Quasi-rent. [March 17]
Answer:
The concept of Qliasi rent was first introduced by Marshall. According to Marshall, quasi rent is the income derived from machines and other man made appliances of production. Whose supply is inelastic in the short run in relation to their demand. If the demand for these factors increases, their prices will also increase due to their inelasticity of supply in R the short period. The rent or surplus above the factor price will disappear in the long run.

In the above diagram man made appliances are shown in ‘OX’ axis and ‘OY’ axis shown rent SPS is short period supply curve. LPS is long period supply curve. In the above diagram it is observed that rent will disappear in the long run.

Question 4.
Explain the concept of Scarcity rent. [March 18]
Answer:
Marshall explained the concept of scarcity rent on the basis of demand and supply. In general land has indirect demand or derive demand. If there is an explosion of population demand for land increases this result rise in its price. The surplus earned by land above its price is called scarcity rent.

The supply of land is fixed and inelastic. The demand for land will determine the rent by influencing its price. Hence rent arises due to the scarcity in the supply of factors of production.

In the given diagram on ‘OX’ axis represent supply and demand for land. ‘OY axis represents Rent. SL is supply of land. It is perfectly inelastic. When DD curve shifts upward to D₁D₁. So price increases from OR to OR₁. Similarly if demand curve further shifts from D₁D₁ to D₂D₂ rent price further increases from OR₁ to OR₂.

Question 5.
Explain the concepts of Gross interest, Net interest and their components.
Answer:
Gross interest: The payment which the lender receives from the borrower excluding the principal is gross interest. Gross interest includes net interest or pure interest also.
Gross interest include the following four elements :
a) Net interest: Net interest is the reward for the services of the capital alone. Interest paid on government bonds and government loans is the net interest. If capital has mobility. The net interest any where will be the same.

b) Insurance against risk : Lending money as alone to somebody always involves a risk that the borrower may not repay it. These risks are two types :
1. Trade risk
2. Personal risk
In order to cover these risks. The lender charges some extra amount in addition to the net interest.

c) Compensation for inconvenience: Lending may also some inconvenience because the lender lends money only by saving i.e. by restricting his consumption out of income. In addition to this the lender may not get back his money when he requires for his own use.. He thus suffers from certain inconveniences. In order to compensate this sort of inconvenience he charge some extra over and above net interest.

d) Reward for management services : The lender has to maintain a record of all repayments and charges. He has to remind the debtors about the repayment of loan by post or by personal visits. He has maintain an office and clerical staff. Sometimes he has to approach the court also in case of non-payment of loan by the debtor for all these sorts of management work. He deserves some payment.

Question 6.
Explain the components of Gross profits and Net profits.
Answer:
Gross profit is considered as a difference between total revenue and cost of production. The following are the components of gross profit.

1. The rent payable to his own land or buildings includes gross profit.
2. The interest payable to his own business capital.
3. The wage payable to the entrepreneur for his management includes gross profit.
4. Depreciation charges or user cost of production and insurance charges are include in gross profit.
5. Net profits are reward paid for the organiser’s entrepreneurial skills.

Components :

1. Reward for risk bearing : Net profit is the reward for bearing uninsurable risks and uncertainities.
2. Reward for coordination : It is the reward paid for co-ordinating the factors of production in right proportion in the process of production.
3. Reward for marketing services : It is the profit paid to the entrepreneur for his ability to purchase the services of factors of production.
4. Reward for innovations: It is the reward paid for innovations of new products and alternative uses to natural resources.
5. Wind fall gains : These gains arise as a result of natural calamities, wars and artificial scarcity are also include in net profits.

Very Short Answer Questions

Question 1.
Contract rent [March 16]
Answer:
It is the hire charges for any durable good. Ex : Cycle rent, room rent etc. It is a periodic payment made for the use of any material good. The amount paid by the tenant cultivator to the landlord annually may be also called contract rent. Ex. : The rent that a tenant pays to the house owner monthly as per an agreement made earlier or the hiring charges of a cycle ₹ 10 per hour is also contract rent.

Question 2.
Economic rent
Answer:
The ordinary use of the term ‘rent’ means any periodic payment for the hire of anything such as garriages, .buildings etc. Economic rent is the pure rent payable as a reward for utilising the productivity of land. It is derived by subtracting the elements like interest, wages, profits and depreciation from the gross rent 6r contract rent. To David Ricardo; it is surplus over costs or expenses of cultivation.

Question 3.
Scarcity rent
Answer:
Prof. Marshall explained the concept of scarcity rent on the basis of demand and supply. Scarcity rent is the surplus earned by land which has inelastic supply. In general land has indirect demand or derived demand. If there is an explosion of population, demand for land increases resulting in a rise in its price. The surplus earned by land above its price is called scarcity rent.

Question 4.
Quasirent
Answer:
The concept of quasi-rent was first introduced by Marshall. Quasi rent according to Marshall is the surplus earned by instruments of production other than land. It is the income earned from man made factors of production! Such as machinery, buildings, tools etc. This is short term concept.

Question 5.
Transfer earnings [March 18]
Answer:
Transfer earnings refer to the surplus earned by a factor of production is its present use-over its next best use.

Question 6.
Money wages
Answer:
Money ’ ages are the remuneration received by the labourer in the form of money for the physical and mental service rendered by him or her in the production process.
Ex : If a labourer is paid ₹ 30/- per day. ₹ 30/- is the money wage.

Question 7.
Real wages [March 16]
Answer:
Real wage is the purchasing power of money wages in terms of goods and services.

Question 8.
Time wages
Answer:
Time wage is the amount paid for labourers for a fixed period of work i.e. weakly, daily, monthly etc.

Question 9.
Piece wages
Answer:
Piece wage is the amount paid for labourers according to volume of work done by them.

Question 10.
Gross interest
Answer:
The payment which the lender receives from the borrower excluding the principal is gross interest.
Gross interest = Net interest + [Reward for risk taking + Reward for Inconvenience + Reward for management]

Question 11.
Net interest [March 18, 17]
Answer:
Net interest is tjie reward for the service of the capital loan.
Ex : Net interest paid on government bonds and government loans.

Question 12.
Gross profit
Answer:
Gross profit is considered as a difference between total revenue and cost of production.
Gross profit = Net profit + [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance premium]

Question 13.
Net profit
Answer:
Net profit is the reward paid for the organizer’s entreprenurial skills.
Net profit = Gross profit – [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance premium]