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BA5101- Economics Analysis For Business

2 Marks Question with Answer

Unit- V

1. Define demand for money (or) liquidity preference?

According to J.M. Keynes defined as the term liquidity preference to refers to

demand for money “liquidity preference refers to the preference or desire of the
people to hold a part of their of wealth in the form of liquid cash asset”.

2. What is supply of money?

The total stock of money is an economy is the total of all money reserves held
by individual and organization.

3. What are the motives of demand for money?

1) Transaction motive
2) Precautionary motive
3) Speculative motive

4. What is speculative motive?

Keynes define speculation motive for holding money as “the object of

securing profit from knowing better than the market what the future will bring forth”.

5. What are the factors governing supply of money?

1) Gold stock
2) Reserve assets with central ban
3) Govt Borrowings
4) Public sector borrowing
5) Foreign assets
6) Cash reserve ratio
7) People’s choice regarding cash credit proportions
8) Deficit financing
9) Velocity of circulation of money

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6. State the OKUN’S law?

According to okun’s law every two present GDP falls relative to potential gap,
the unemployment rate about one percentage point.

7. State the Phillip’s curve?

According to Phillip’s “workers are relevant to offer their services at less than
the prevailing rates when the demand for labour is low and unemployment is high so
that usage rates fall very slowly”.

8. Role of monetary policy in a developing economy?

1) Control Inflationary pressures
a) Open market operation
b) The bank rate policy
c) The use of variable reserve ratio
d) Qualitative credit control
2) To achieve price stability
3) To bridge balance of payment deficit
4) Interest rate policy
5) To create banking and financial institutions

9. Define inflation?

According to Pigou and Keynes “Inflation refers to a state of rise in prices

after the stage of full employment is reached”.

10. Explain the various type of inflation?

1) Basis of causes
a) Currency inflation
b) Credit inflation
c) Purchasing inflation
d) Deficit- induced inflation
e) Over investment inflation
f) Gold finance
g) Over-full employment inflation
h) Cost-push inflation

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i) Profit or wage induced inflation

j) Inflation through defilation
2) Basis of periods of occurrence
a) War-time inflation
b) Post-war inflation
c) Peace-time inflation
3) Basis of intensity of price changes
a) Creeping inflation
b) Running inflation
c) Suppressed inflation
d) Latent inflation

11. Define inflationary gap?

Prof. Kuribara defined inflationary gap as the “excess of anticipated

expenditures over the available output at base prices.

12. What is supply side economics?

A view emphasizing policy measures to affect aggregate supply or potential

output, This approach holds that high marginal tax rates on labour and capital
incomes reduce work effort and saving.

13. What are the reason (or) causes for inflation?

1) Decline in productivity
2) Increase in public expenditure
3) War
4) Growth of made union
5) Trade cycle
6) Speculation
7) Inflow of gold
8) Expansion of credit
9) Increase in profits
10) Increasing cost of production
11) Bottlenecks in production
12) Policy of protection
13) Industrial policy
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14) Taxation policy

15) Weak administration
16) Increasing demand

14. What is Galloping (or) Hyper Inflation?

Hyper inflation is the highest degree of abnormality in the monetary system

and under such conditions all assets having fixed income lose their real value.

15. What are the effects/ Impact of inflation?

1) Effects on Redistribution of income and wealth
a) Debtors and creditors
b) Salaried persons
c) Wage earners
d) Fixed income grove
e) Equity holders (or) investors
f) Business man
g) Agriculturists
2) Effects on production
a) Misallocation of resources
b) Changes in the system of transaction
c) Reduction in production
d) Fall in quality
e) Hoarding and black marketing
f) Reduction in saving
g) Hinders foreign capital
3) Other effects
a) Government
b) Balance of payment
c) Exchange rate
d) Social

16. What is meant by money?

The means of payment or medium of exchange for the items constituting

money.

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17. What are the kinds of money?

1) Money of account
2) Common money
3) Commodity money
4) Metallic money
5) Paper money

18. Define Demand-pull Inflation?

According to J.M. Keynes Inflation occurs because of an increase in

aggregate effective demand for goods and services at a period of full employment.

19. What is cast- push inflation?

Inflation occurs due to increase in the cost production of goods and services
due to a variety of reasons.

20. What is liquidity trap?

Keynes hinted as a remote possibility of a situation when the market rate of

interest falls to a ‘critical’ minimum level.

21. What is meant by fait money?

Another important thing to note is that paper currency or coins are fait money,
which means that currency notes and metallic coins serves as money on we fait of
the governments is also called legal lender.

22. Explain the various measures money supply?

1) Money supply M1 (or) narrow money
2) Money supply M2
3) Money supply M3 (or)broad money
4) Money supply M4

23. State the factors determining money supply?

a) Bank credit to the government
b) Bank credit to the commercial (or) private sector
c) Changes in net foreign exchanges assets
d) Government’s currency liabilities to the public

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24. What is product market?

The product market is an equilibrium when saving and investment are equal
s= f(y).

25. What are the objectives of monetary policy?

1. Maximum feasible output
2. High rate of growth
3. Fuller employment
4. Price stability
5. Greater equality in the distribution of income and wealth
6. Health balance in balance of payments

26. What is debt management?

It refers to the rate of interest at which the central bank rediscounts approved
bills of exchange.

27. What is debt management?

It is one of the important function of monetary policy in an under developed

country. It aims at proper timing and issuing of government bonds, stabilizing their
prices and minimizing the cost of servicing the public debt.

28. Define full employment?

According to Pigou full employment is defined as on when “everybody who at

the ruling rate of wages wishes to be employed is in fact employed”.

29. What is unemployment?

It refers to a situation in which those who are willing to world at the prevailing
wage rate are unable to get job.

30. State the type of unemployment?

1. Voluntary unemployment
2. Involuntary unemployment
a) Seasonal unemployment
b) Structural unemployment
c) Cyclical unemployment

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d) Frictional unemployment
e) Disguised unemployment

31. What is disguised unemployment?

This refers to those men who appear to be employed, but make no

contribution to the total output.

32. What are the causes of unemployment?

1) Dependence on agriculture
2) Mechanization of agriculture
3) Failure of monsoon
4) Absence of non-farm employment
5) Capital-intensive techniques
6) Decay of village and cottage industries
7) Rural economy
8) Change in tastes of fashion
9) Defective planning
10) In abdicate financial sources.

33. Define money market?

According to Crowther “the money market, properly speaking, is the market

for short-term and day-to-day loans”.

34. State the lenders and borrowers?

Lenders are central bank, commercial bank, financial institutions, non-banking

financial companies.

Borrowers are merchants, traders, speculators, brokers, manufactures, the

government and other institutions.

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