Your ` 100 of Jan 2009, was worth less than

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MT EDUCARE LTD. Your ` 100 of Jan 2009, was worth less than ` 93 in Jan 2010. Q.1 Fill in the blanks by selecting appropriate alternative : 1. Inflation is a... phenomenon. (local, national, global) 2. As per Crowther inflation is a state in which the value of money is... (falling, increasing, constant) 3. Inflation is caused by... in demand for goods and services. (full, increase, elasticity) 4.... of goods creates a situation of shortage in the economy. (Import, Export, Government) 5. The traders hoard essential goods for earning... (money, interest, profit) 6. The prices of the factors of production shows... trend during inflation. (constant, increasing, decreasing) 7. Supply of goods and services is highly... in the short run. (available, scarce, lacking) 8. Increase in... creates a situation of shortage in the economy giving rise to the inflationary pressure. (import, export, production) (increase, decrease, stability) 9. Sometimes... declare lockouts. (employers, workers, consumers) 10.... arises when demand for goods and services in an economy exceeds the supply of the same. (Economic growth, Economic development, Inflation) 11. When Government repays its past internal debts to the public,... income of public increases.(disposable, taxable, spendable) Q.2 Answer the following questions in one or two sentences : (2 Marks) 1. What is the meaning of inflation in simple terms? (Sept. 09) Ans. (i) In simple terms inflation means rapidly rising prices of goods and services, which causes decline in the value of money. (ii) Inflation arises when the demand for goods and services in an economy exceeds supply of the same. 2. Which is the cause and effect of inflation according to monetary definitions? (March 09) Ans. According to the monetary definitions, increase in the supply of money is the cause and rise in the price level is the effect of inflation. 141

MT EDUCARE LTD. 3. Why is an increase in public expenditure inflationary? Ans. (i) An increase in public expenditure due to Public Works Programme, like construction of roads, dams etc. transfers addtional purchasing power to the households. (ii) This increases the demand for goods and services which ultimately leads to inflation. 4. Which type of monetary policy affects the supply of money? Ans. The monetary policy of Deficit Financing increases the supply of money. 5. State the causes of decrease in supply of goods and services? Ans. (i) The causes of decrease in supply of goods and services are : (a) Industrial disputes (b) Shortage of factors of production (c) Natural calamities (d) Hoarding of goods. (ii) Decrease in the supply of goods and services leads to inflation. 6. Which are the factors that lead to inflation? OR Write two causes of inflation. (March 08, 09, 11) Ans. Inflation is caused by two main factors : (i) a) Increase in the demand for goods and services. b) Decrease in the supply of goods and services. (ii) Inflation arises when the demand for goods and services in an economy exceeds supply of the same. 7. What is Deficit Financing? (Sept. 08, 10 ) Ans. (i) Deficit Financing is a financial scheme of governmental expenditure in which deficit is met by utilising cash balances with the Reserve Bank or by taking loans from the Reserve Bank. (ii) Deficit Financing increases the supply of money, raising the demand for goods and services. 8. What is the difference between the value of money before and after inflation? Ans. The value of money and purchasing power is more before inflation and less after inflation. 9. What are the consequences of Repayment of past internal debt? Ans. (i) When Government repays its past internal debts to the public, disposable income of the public increases. (ii) This increases the purchasing power of the people leading to a rise in demand for goods and services. 10. How does an increase in exports affect inflation? Ans. (i) When more goods are exported to foreign countries, less are available for home consumption. (ii) This increases the demand for goods in the home economy. 11. What are the consequences of reduction in the direct tax rates? Ans. (i) Reduction in the direct tax rates leaves more disposable income in the hands of public, increasing the demand for consumer goods and services. (ii) Reduction in the direct tax rates also causes an increase in the demand for capital goods. 142

MT EDUCARE LTD. Inflation can be classified into : 1. Creeping - Price rise of less than 5%. 2. Walking - Price rise between 5% to 10% 12. How does an increase in Consumer Spending lead to inflation? Ans. (i) An increase in consumer spending takes place due to a rise in the money income of the factors of production and also due to easy consumer credit facilities. (ii) This leads to an increase in demand leading to inflation. Q.3 Answer the following questions in five or six sentences : (4 Marks) 1. Explain Crowther and Kemmerer s definitions of inflation. (Oct. 11) Ans. (i) Prof. Crowther has defined inflation as a state in which the value of money is falling, i.e., prices are rising. (ii) But this definition is rather incomplete because it emphasises on the symptoms rather than the causes of inflation. (iii) Prof. Kemmerer has defined inflation as, too much currency in relation to the physical volume of business being done. (iv) This definition compares the volume of money supply with the supply of physical goods and services. (v) Thus, both the definitions look upon inflation as a purely monetary phenomenon, caused due to increase in supply of money. 2 How is private expenditure inflationary? (Oct. 11) Ans. (i) Increase in private expenditure is an important cause for excess demand in the country. (ii) If the business conditions are favourable, private entrepreneurs start investing more funds in new business enterprises. (iii) This leads to a rise in demand for the factors of production such as land, labour, capital and entrepreneur. (iv) Next, the prices of factors of production such as rent, wages, interest and profit also increases. (v) Finally, the money income of factors of production increases leading to an increase in demand for goods and services (vi) As the supply of goods is highly scarce in the short run, excess demand leads to inflation. 143

MT EDUCARE LTD. 3. Explain any five causes responsible for increase in demand. (Sept. 09) Ans. The causes responsible for increase in demand for goods and services : (i) Increase in Public Expenditure : (a) An increase in public expenditure due to public programmes like, construction of roads, dams, etc. transfers additional purchasing power to the households. (b) This increases the demand for goods and services. (ii) Increase in Private Expenditure : Refer to Q. 3 (2) (iii) Increase in Population : (Sept. 09) The rapidly growing population increases the demand for goods and services. (iv) Increase in Exports : (a) When more goods are exported to foreign countries, less are available for home consumption. (b) This increase the demand for goods in the home economy. 144 (v) Reduction in Taxation : (a) (b) Reduction in the direct tax rates leaves more disposable income in the hands of public, increasing the demand for consumer goods and services. Reduction in the direct tax rates also causes an increase in the demand for capital goods. (vi) Deficit Financing : (a) (b) Public Expenditure Deficit Financing is a financial scheme of governmental expenditure in which deficit is met by utilising cash balances with the Reserve Bank or by taking loans from the Reserve Bank. Deficit Financing increases the supply of money, raising the demand for goods and services. 4. Explain any five causes responsible for decrease in supply of goods. Ans. The causes responsible for decrease in the supply of goods are as follows:- (i) Industrial disputes : a) During industrial disputes, either the workers go on strikes or employers declare lockouts. b) In both the situations, there is a decrease in production and supply of goods. (ii) Shortage of factors of production : Shortage of the factors of production such as land, labour, capital and entrepreneurs leads to a fall in supply of goods and services.

MT EDUCARE LTD. Inflation can be classified into : 3. Running - Price rise of over 10% 4. Galloping - Price rise of over 50% (Hyper) (iii) Natural Calamities : a) Natural Calamities such as floods, droughts etc., reduces the supply of agricultural products. b) It creates shortage of raw materials reducing the production of industrial goods. (iv) Hoarding of goods : a) Traders hoard essential goods to earn more profit. b) Hoarding of essential goods by traders creates artificial scarcity of goods in the market. c) Individual consumers also hoard essential commodities to avoid paying higher prices in future and to satisfy their wants without delay. d) Hoarding of essential goods by consumers further creates artificial scarcity of goods in the market. 5. How is the hoarding of goods by the traders and consumers inflationary? Ans. Refer to Q. 3 (4) (iv) 145

MT EDUCARE LTD. Unscramble the words : 1. E M R E E K M R = 2. O R I H A D G N = 3. N P E R T E N E R U R E = 4. E F I D C I T I A N C F N N G I = 5. R O H C W T R E = 6. C C S R A E = 7. I E T E N R T S = Hints: 1. This Professor has compared supply of money with supply of goods and services. 2. Illegal stocking of goods. 3. A person who is willing to launch new enterprise. 4. One of the financial schemes undertaken by the RBI. 5. This Economist s definition was incomplete. 6. Supply of goods and services is highly in short run. 7. Price paid for capital. 146

Std. : SSC Marks : 20 CHAPTER 2 : MEANING AND CAUSES OF INFLATION (SET A) Duration : 1 hr. Q.5 Fill in the blanks by selecting appropriate alternative : 1. Deficit financing leads to... in the supply of money. (increase, decrease, stability) 4 2. Inflation is caused by... in demand for goods and services. (full, increase, elasticity) 3.... of goods creates a situation of shortage in the economy. (Import, Export, Government) 4. The traders hoard essential goods for earning... (money, interest, profit) Q.6 Answer in 1 or 2 sentences each : (Any 4) 1. What is the meaning of inflation in simple terms? 2. What is Deficit Financing? 3. Write two causes of inflation. 4. Which type of monetary policy affects the supply of money? 5. How does Prof. Crowther define inflation? Q.7. Answer in 5 or 6 sentences each : (Any 2) 1. Explain any five causes responsible for increase in demand. 2. How is the hoarding of goods by the traders and consumers inflationary? 3. How is private expenditure inflationary? 8 8 Best Of Luck

Std. : SSC Marks : 20 CHAPTER 2 : MEANING AND CAUSES OF INFLATION (SET B) Duration : 1 hr. Q.5 Fill in the blanks by selecting appropriate alternative : 1. Inflation is a... phenomenon. (local, national, global) 4 2. Supply of goods and services is highly... in the short run. (available, scarce, lacking) 3.... of goods creates a situation of shortage in the economy. (Import, Export, Government) 4. Sometimes... declare lockouts. (employers, workers, consumers) Q.6 Answer in 1 or 2 sentences each : (Any 4) 1. Which is the cause and effect of inflation according to monetary definitions? 2. Why is an increase in public expenditure inflationary? 3. State the causes of decrease in supply of goods and services? 4. What is the meaning of inflation in simple terms? 5. What is Deficit Financing? Q.7. Answer in 5 or 6 sentences each : (Any 2) 1. Explain Crowther and Kemmerer s definitions of inflation. 2. How is private expenditure inflationary? 3. Explain any five causes responsible for decrease in supply of goods. 8 8 Best Of Luck