Class 12 Economics (Macroeconomics) Chapter 1 Introduction Important Questions with Answers in English

Q. Define macroeconomics.

Answer: The branch of economics that studies the aggregate economic variables of an economy (total output, general price level, employment) and the interlinkages between its sectors.

Q. What are economic agents?

Answer: Individuals or institutions which take economic decisions, such as consumers, producers, government, corporations and banks.

Q. Define the unemployment rate.

Answer: The number of people who are not working and are looking for jobs, divided by the total number of people who are working or looking for jobs.

Q. What was the main belief of the classical tradition?

Answer: All labourers who are ready to work will find employment and all factories will work at full capacity.

Q. What is investment expenditure?

Answer: Expenditure that raises productive capacity, such as buying new machinery or building new factories out of profits.

Q. What is meant by General Equilibrium?

Answer: The equilibrium of supply and demand in each market of the economy.

Q. After which economist’s book did macroeconomics become a separate branch?

Answer: After John Maynard Keynes’ The General Theory of Employment, Interest and Money (1936).

Q. What is a representative good? Why is it used in macroeconomics?

Answer: A representative good is a single imaginary commodity taken to represent all goods and services; its production level corresponds to the average production level and its price/employment level reflects the general level. (1)
It is used because outputs, prices, wages and profits of different goods usually move together in the same direction, so each good need not be studied separately. (1)

Q. Who is an entrepreneur? State the entrepreneur’s role in a capitalist firm.

Answer: An entrepreneur controls the major decisions of a firm and bears a large part of its risk. (1)
The entrepreneur hires wage labour, employs capital and land, produces output and sells it to earn profits, facing risk and uncertainty. (1)

Q. In a town, 1,900 people are working and 100 people are not working but are looking for jobs. Find the unemployment rate.

Answer: Formula: Unemployment rate = Unemployed looking for jobs ÷ (Working + Looking for jobs) × 100 (½)
Substitution: = 100 ÷ (1,900 + 100) × 100 = 100 ÷ 2,000 × 100 (½)
Answer: 5 per cent (1)

Q. Write any four basic questions of macroeconomics.

Answer: 1. Will prices as a whole rise or come down? 2. Is employment in the country as a whole, or in some sectors, getting better or worse? (1)
3. Which indicators would show that the economy is better or worse? 4. What steps can the State take, or people ask for, to improve the economy? (1)

Q. What are variables? Give one example of interdependence of sectors.

Answer: Variables are attributes whose values change, such as prices, the rate of interest, wage rates and profits; macroeconomics studies how total output and employment relate to them. (1)
Example: the interdependence (or rivalry) of agriculture and industry; similarly, the relations between the household sector, the business sector and government in a democratic set-up. (1)

Q. Why is even a large company treated as a microeconomic agent? Explain.

Answer: 1. Microeconomics studies individual decision makers who try to maximise their own profit or satisfaction. (1)
2. A large company acts in the interest of its own shareholders, which is not necessarily the interest of the country as a whole. (1)
3. It cannot change aggregates like inflation or unemployment and takes them as given. So ‘micro’ refers to the private aim of the decision, not size. (1)

Q. Why did economists have to look beyond Adam Smith’s view? Give three reasons.

Answer: 1. In some cases markets did not, or could not, exist. (1)
2. In some cases markets existed but failed to produce equilibrium of demand and supply. (1)
3. Most important: society or the State pursued social goals (employment, administration, defence, education, health), for which the aggregate effects of individual decisions had to be modified. (1)

Q. Who are the macroeconomic decision makers and what do they try to do?

Answer: 1. Decision makers: the State itself or statutory bodies such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). (1)
2. Their public goals are defined by law or the Constitution of India; they are not agents maximising private profit. (1)
3. They go beyond economic objectives and direct resources to public needs, for the welfare of the country and its people as a whole. (1)

Q. What are the limits of the representative good? How are they handled?

Answer: 1. Production conditions of agricultural and industrial goods differ, which one good overlooks. (1)
2. One category of labour cannot distinguish the labour of a firm’s manager from its accountant’s. (1)
3. Remedy: take three general kinds of goods, agricultural goods, industrial goods and services, with different technology and prices. (1)

Q. In an economy 4,80,000 people are working and 20,000 people are not working but are looking for jobs. Find the unemployment rate and interpret it.

Answer: Given: working = 4,80,000; unemployed looking for jobs = 20,000 (½)
Formula: Unemployment rate = Looking for jobs ÷ (Working + Looking for jobs) × 100 (½)
Substitution: = 20,000 ÷ (4,80,000 + 20,000) × 100 = 20,000 ÷ 5,00,000 × 100 (½)
Answer: 4 per cent (1)
Interpretation: 4 out of every 100 people working or seeking work cannot find work. (Dividing by 4,80,000 alone, giving 4.17%, would be wrong.) (½)

Q. A firm’s annual revenue is ₹1,200 crore. It paid wages ₹450 crore, rent ₹150 crore and interest ₹300 crore. Find its profit and state how profit relates to investment expenditure.

Answer: Formula: Profit = Revenue − (Rent + Interest + Wages) (½)
Substitution: = 1,200 − (150 + 300 + 450) = 1,200 − 900 (½)
Answer: Profit = ₹300 crore (1)
Relation: producers use profits in the next period to buy new machinery or build new factories; this expenditure, which raises productive capacity, is investment expenditure. (1)

Q. From which sources do households get their income?

Answer: 1. Wages by working in firms; salaries by working in government departments. (1)
2. Profits as owners of firms. (1)
3. Rent by leasing land and interest by lending capital. Out of this income households consume, save and pay taxes. (1)

Q. In which three ways does the external sector affect a country’s economy?

Answer: 1. Exports: the country sells goods to the rest of the world. (1)
2. Imports: the country buys goods from the rest of the world. (1)
3. Capital flows: foreign capital may flow into the country, or the country may export capital. (1)

Q. Give four differences between microeconomics and macroeconomics.

Answer: 1. Meaning: micro = small, individual markets and units; macro = large, the economy as a whole. (1)
2. Variables: micro looks at demand, supply and price of one good; macro at total output, general price level, employment. (1)
3. Decision makers and aims: micro has consumers and producers seeking private profit or satisfaction; macro has the State, RBI, SEBI with public goals. (1)
4. Outlook: micro studies one sector assuming the rest unchanged and takes inflation and unemployment as given; macro considers the interlinkages between sectors. (1)

Q. Define a capitalist economy and explain its three features.

Answer: Definition: an economy in which production is mainly by capitalist enterprises and most economic activities have the three features below. (1)
1. Private ownership of means of production. (1)
2. Production for selling the output in the market. (1)
3. Sale and purchase of labour services at a price called the wage rate (wage labour). (1)

Q. Briefly describe the Great Depression of 1929.

Answer: 1. In 1929 and the years after, output and employment fell hugely in Europe and North America; other countries were affected too. (1)
2. Demand for goods was low, factories lay idle, workers were thrown out of jobs. (1)
3. In the USA from 1929 to 1933 unemployment rose from 3% to 25% and aggregate output fell by about 33%. (1)
4. This broke the classical belief; Keynes’ General Theory (1936) followed and macroeconomics was born. (1)

Q. State the economic functions of the government (the State).

Answer: 1. Framing laws, enforcing them and delivering justice. (1)
2. In many instances, undertaking production. (1)
3. Imposing taxes. (1)
4. Spending on public infrastructure, running schools and colleges and providing health services. These functions must be included when describing the economy. (1)

Q. How does an entrepreneur carry out production in a capitalist firm? What risks does the entrepreneur face?

Answer: 1. The entrepreneur hires wage labour from the market and employs the services of capital and land. (1)
2. With these inputs the entrepreneur produces goods and services (output) and sells them in the market to earn profits. (1)
3. Out of revenue, rent, interest and wages are paid; the rest is profit, which funds investment expenditure. (1)
4. Risk and uncertainty: the entrepreneur may not get a high enough price, which lowers profits. (1)

Q. Why does the book’s analysis not apply to peasant families and tribal societies?

Answer: 1. Peasant families seldom use wage labour; family members do most of the work. (1)
2. Production is not solely for the market; a great part is consumed by the family. (1)
3. Many peasant farms do not see a significant rise in capital stock. (1)
4. In many tribal societies land is not privately owned and may belong to the whole tribe. These are the opposite of the features of a capitalist economy. (1)

Q. Distinguish between the classical tradition and Keynes’ approach.

Answer: 1. Classical: everyone ready to work finds employment. Keynes: an economy may have long-lasting unemployment. (1)
2. Classical: all factories work at full capacity. Keynes’ view, after the Depression: demand for goods can be low, so factories may lie idle. (1)
3. Keynes examined the working of the economy in its entirety. (1)
4. Keynes examined the interdependence of sectors; this gave birth to macroeconomics (General Theory, 1936). (1)

Q. In a country, the total number of people working or looking for jobs is 100 lakh. (a) If the unemployment rate is 25 per cent, how many are unemployed and how many are working? (b) If the rate is 3 per cent, how many are unemployed? Compare the results.

Answer: (a) From the formula: unemployed looking for jobs = rate × (working + looking for jobs) ÷ 100 (½)
= 25 × 100 ÷ 100 = 25 lakh unemployed (1); working = 100 − 25 = 75 lakh (½)
(b) = 3 × 100 ÷ 100 = 3 lakh unemployed (1)
Comparison: a rise from 3% to 25% means unemployed people rise from 3 lakh to 25 lakh, about every fourth person; these were the US rates in 1929 and 1933. (1)

Q. Distinguish between microeconomics and macroeconomics. When does microeconomics come nearest to macroeconomics?

Answer: 1. Meaning: micro = small; macro = large, the economy as a whole. (1)
2. Study: micro studies individual markets and individual agents; macro studies aggregate variables (total output, price level, employment). (1)
3. Decision makers: micro has consumers, producers, companies (even large ones); macro has the State and statutory bodies (RBI, SEBI). (1)
4. Aims: micro seeks private profit or satisfaction; macro pursues public goals set by law or the Constitution, the welfare of the whole country. (1)
5. Micro takes inflation and unemployment as given and studies one sector assuming the rest unchanged; macro considers the interlinkages between sectors. (1)
6. Microeconomics comes nearest to macroeconomics when it looks at General Equilibrium, the equilibrium of supply and demand in each market. (1)

Q. How did macroeconomics emerge? Explain the role of the Great Depression and Keynes.

Answer: 1. Before Keynes the classical tradition dominated: everyone ready to work finds work, all factories run at full capacity. (1)
2. In the Great Depression of 1929 output and employment fell hugely in Europe and North America; demand was low, factories idle, workers jobless. (1)
3. In the USA from 1929 to 1933 unemployment rose from 3% to 25% and output fell by about 33%. (1)
4. Long-lasting unemployment had to be theorised about and explained. (1)
5. The British economist Keynes (born 1883) wrote The General Theory of Employment, Interest and Money (1936) as an attempt in this direction. (1)
6. Keynes examined the working of the economy in its entirety and the interdependence of sectors; macroeconomics emerged as a separate branch in the 1930s. (1)

Q. Describe, with a diagram, the four major sectors of an economy from the macroeconomic point of view.

Answer: Diagram: four boxes (households, firms, government, external sector); factor services and consumption spending from households to firms, incomes and goods from firms to households; taxes from households to government; exports and imports between firms and the external sector. (1)
1. Firms: production units on capitalist principles; the entrepreneur hires wage labour, capital and land, produces and sells for profit. (1)
2. Government: frames and enforces laws, delivers justice; sometimes produces; imposes taxes; spends on infrastructure, schools, colleges, health. (1)
3. Households: a single individual or a group with jointly determined consumption; they consume, save and pay taxes. (1)
Household income: wages, salaries, profits, rent, interest; firms’ market depends on household demand. (1)
4. External sector: exports, imports and capital flowing in and out. (1)

Q. How does production take place in a capitalist economy? Explain the sharing of revenue and investment expenditure, and state its features.

Answer: 1. Production is carried out by capitalist enterprises; the entrepreneur controls major decisions and bears a large part of the risk. (1)
2. The entrepreneur uses capital (own or borrowed), natural resources (raw materials, plots of land) and labour to produce output. (1)
3. Money earned by selling output is revenue: rent to land, interest to capital, wages to labour; the rest is profit. (1)
4. Profits buy new machinery or build new factories in the next period; this expenditure raising productive capacity is investment expenditure. (1)
5. Features: private ownership of means of production; production for sale in the market. (1)
6. Labour bought and sold at the wage rate (wage labour); factors earn incomes through production and sale of output. (1)

Q. Why did macroeconomics become necessary? Also write two characteristics of its decision makers.

Answer: 1. Adam Smith held that if everyone follows self-interest, the country’s wealth and welfare need no separate thought. (1)
2. But in some cases markets did not exist; in others they existed but failed to reach equilibrium. (1)
3. Most important: society chose social goals (employment, administration, defence, education, health); so the effects of taxation, budgetary policies, money supply, interest, wages, employment and output had to be studied. (1)
4. In a developing country like India such choices are made to reduce unemployment, give education and primary health care to all, provide good administration and defence. (1)
5. Characteristic 1: decision makers are the State or statutory bodies (RBI, SEBI) with goals set by law or the Constitution. (1)
6. Characteristic 2: they go beyond economic objectives and deploy resources for public needs, for the welfare of the whole country. (1)

Q. What is macroeconomics? Distinguish it from microeconomics, describe its emergence and explain the four sectors of an economy. (UP Board 10 marks)

Answer: Definition (1): macroeconomics studies the aggregate variables of an economy (total output, general price level, employment) and the interlinkages between sectors, using one representative good or, if needed, agricultural goods, industrial goods and services.
Differences from microeconomics (3): (i) micro studies individual markets, macro the whole economy; (ii) micro decision makers are consumers and producers, macro the State, RBI, SEBI; (iii) micro aims at private profit, macro at public welfare; (iv) micro takes inflation and unemployment as given; (v) micro comes nearest to macro in General Equilibrium.
Emergence (3): classical tradition (full employment, full capacity); Great Depression of 1929: output and employment fell in Europe and North America, US unemployment 3% to 25%, output down about 33%; Keynes’ General Theory (1936) looked at the whole economy and the interdependence of sectors; macroeconomics became a separate branch.
Four sectors with a diagram (3): firms (entrepreneur, wage labour, production for the market, profit); government (laws, justice, production, taxes, infrastructure, schools, health); households (consume, save, pay taxes; income from wages, salaries, profits, rent, interest); external sector (exports, imports, capital flows). Draw the four boxes and the flows between them.