Top 60 Important Questions for Class 12 Macroeconomics Chapter 9 | Deficient & Excess Demand Notes PDF| Economics Class 12 |
Class 12 Macroeconomics
Chapter 9: Problem of Deficient Demand & Excess Demand
Complete Guide: 60 Important Q&A for Boards
I. Excess Demand & Inflationary Gap
Q1
What is Excess Demand?
Answer: It refers to the situation when Aggregate Demand (AD) is more than Aggregate Supply (AS) corresponding to the full employment level in the economy.
Q2
What is an Inflationary Gap?
Answer: It is the gap by which the actual Aggregate Demand exceeds the Aggregate Demand required to establish full employment equilibrium.
Q3
What is the relationship between Excess Demand and Inflationary Gap?
Answer: Excess demand leads to an inflationary gap. The size of the inflationary gap is exactly equal to the amount of excess demand.
Q4
Does excess demand lead to an increase in the output level?
Answer: No, because the economy is already operating at full employment and resources are fully utilized.
Q5
What is the impact of excess demand on employment?
Answer: There is no change in the level of employment as the economy is already at the full employment level.
Q6
What is the impact of excess demand on the general price level?
Answer: Excess demand leads to a continuous rise in the general price level, resulting in inflation.
Q7
Mention two main causes of excess demand.
Answer: 1. Increase in Marginal Propensity to Consume (MPC). 2. Increase in Government Expenditure.
Q8
How does deficit financing contribute to excess demand?
Answer: Deficit financing (printing new currency) increases the money supply in the economy, which boosts purchasing power and increases AD.
Q9
What happens to producers' inventories during excess demand?
Answer: Inventories fall below the desired level because the demand for goods is higher than their production.
Q10
Can excess demand exist in an underemployed economy?
Answer: No, excess demand strictly refers to AD being greater than AS after reaching the full employment level.
II. Deficient Demand & Deflationary Gap
Q11
What is Deficient Demand?
Answer: It refers to the situation when Aggregate Demand (AD) is less than Aggregate Supply (AS) corresponding to the full employment level.
Q12
What is a Deflationary Gap?
Answer: It is the gap by which the actual Aggregate Demand falls short of the Aggregate Demand required to establish full employment equilibrium.
Q13
What is the impact of deficient demand on output?
Answer: The level of output and production falls due to a lack of sufficient demand in the economy.
Q14
What is the impact of deficient demand on employment?
Answer: It leads to a rise in involuntary unemployment because producers cut back on production and lay off workers.
Q15
What is the impact of deficient demand on prices?
Answer: The general price level tends to fall due to low demand, leading to deflation.
Q16
Give two primary causes of deficient demand.
Answer: 1. Decrease in Marginal Propensity to Consume (MPC) resulting in higher savings. 2. Decrease in Investment Expenditure.
Q17
What happens to inventories during deficient demand?
Answer: There is an unplanned accumulation of unsold stock (inventories) with the producers.
Q18
Does deficient demand lead to an underemployment equilibrium?
Answer: Yes, the economy reaches equilibrium at a level lower than full employment, leaving resources idle.
Q19
What is the relation between deficient demand and deflationary gap?
Answer: Deficient demand causes a deflationary gap. The magnitude of deficient demand equals the deflationary gap.
Q20
How does a fall in exports affect deficient demand?
Answer: A fall in exports reduces the inflow of foreign income, which further decreases Aggregate Demand, worsening the deficiency.
III. Monetary Policy Measures (Quantitative)
Q21
What is Monetary Policy?
Answer: It is the policy adopted by the Central Bank to regulate the money supply and cost of credit in the economy.
Q22
Name the Central Bank of India.
Answer: The Reserve Bank of India (RBI).
Q23
What is the Bank Rate?
Answer: It is the rate at which the Central Bank lends money to commercial banks for long-term needs without collateral.
Q24
How is the Bank Rate used to correct excess demand?
Answer: RBI increases the Bank Rate, which makes borrowing expensive, reducing money supply and Aggregate Demand.
Q25
How is the Bank Rate used to correct deficient demand?
Answer: RBI decreases the Bank Rate, making borrowing cheaper, which encourages investment and consumption, raising AD.
Q26
What are Open Market Operations (OMO)?
Answer: The buying and selling of government securities by the Central Bank in the open market.
Q27
How does OMO correct excess demand?
Answer: RBI sells securities to commercial banks and the public, soaking up excess liquidity and reducing purchasing power.
Q28
How does OMO correct deficient demand?
Answer: RBI buys securities from the market, injecting liquidity and increasing the money supply to boost demand.
Q29
What is the Repo Rate?
Answer: The rate at which the Central Bank lends money to commercial banks for short-term needs against approved securities.
Q30
To correct deficient demand, should the Repo Rate be increased or decreased?
Answer: It should be decreased to make short-term borrowing cheaper and encourage credit expansion.
IV. Legal Reserve Requirements (CRR & SLR)
Q31
What is the Cash Reserve Ratio (CRR)?
Answer: It is the minimum percentage of net demand and time liabilities (deposits) that commercial banks must keep with the RBI as a cash reserve.
Q32
How is CRR used during inflation/excess demand?
Answer: RBI increases the CRR, leaving commercial banks with less money to lend, which reduces credit creation and AD.
Q33
What is the Statutory Liquidity Ratio (SLR)?
Answer: It is the minimum percentage of total deposits that banks are required to maintain with themselves in the form of liquid assets (cash, gold, govt securities).
Q34
How does increasing SLR affect credit creation?
Answer: It reduces the lending capacity of commercial banks, thereby restricting credit creation in the economy.
Q35
To fight deflation, what should the RBI do to CRR and SLR?
Answer: RBI should decrease both CRR and SLR to free up funds for commercial banks to lend.
Q36
What is the combined name for CRR and SLR?
Answer: Legal Reserve Ratio (LRR) or Variable Reserve Ratio.
Q37
How does a fall in LRR impact Aggregate Demand?
Answer: A fall in LRR increases the money multiplier and credit creation capacity, which increases AD.
Q38
Does raising CRR directly reduce the total money supply?
Answer: It restricts the credit creation ability of banks, which indirectly leads to a contraction in the overall money supply.
Q39
What is the Reverse Repo Rate?
Answer: It is the interest rate at which commercial banks can park their surplus funds with the Central Bank.
Q40
How is the Reverse Repo Rate used to correct excess demand?
Answer: It is increased, encouraging commercial banks to deposit more funds with RBI rather than lending to the public, thus reducing AD.
V. Monetary Policy (Qualitative) & Fiscal Policy
Q41
What is Margin Requirement?
Answer: It is the difference between the current market value of the security offered for a loan and the actual amount of the loan granted.
Q42
How are margin requirements adjusted during excess demand?
Answer: Margin requirements are increased, meaning borrowers get less loan amount against the same collateral, reducing borrowing.
Q43
What is Moral Suasion?
Answer: A qualitative tool where the Central Bank advises, requests, or persuades commercial banks to restrict or expand credit based on economic conditions.
Q44
What is Selective Credit Control (Credit Rationing)?
Answer: The RBI fixes credit quotas for different business activities to restrict the flow of credit to speculative sectors.
Q45
What is Fiscal Policy?
Answer: It is the revenue and expenditure policy of the government aimed at achieving economic stability.
Q46
Mention the two main instruments of Fiscal Policy.
Answer: 1. Government Expenditure and 2. Taxation (Government Receipts).
Q47
How should Government Expenditure be adjusted during excess demand?
Answer: The government should reduce its expenditure on public works, defense, etc., to bring down Aggregate Demand.
Q48
How should Taxation be adjusted during deficient demand?
Answer: Taxes should be decreased. This leaves more disposable income with people, increasing their consumption and boosting AD.
Q49
How does Public Borrowing affect the economy during inflation?
Answer: The government increases its borrowing from the public (e.g., selling bonds) to soak up excess purchasing power and reduce AD.
Q50
Should deficit financing be used during inflation?
Answer: No, deficit financing must be restricted or stopped during inflation, as it injects more money into the economy and worsens excess demand.
VI. Application & Logic Tests
Q51
If full employment AD is 5000 and actual AD is 4500, what is the deflationary gap?
Answer: The deflationary gap is 500 (5000 - 4500).
Q52
If an economy is facing involuntary unemployment, which OMO measure is suitable?
Answer: Buying of government securities by the Central Bank to increase money supply.
Q53
"A cut in the repo rate is a remedy for excess demand." True or False?
Answer: False. A cut in the repo rate expands credit and is used as a remedy for deficient demand.
Q54
How does a sudden rise in imports affect AD?
Answer: Since Net Exports (X - M) is a component of AD, a rise in imports reduces Net Exports, leading to a fall in Aggregate Demand.
Q55
To curb inflation, should the government run a surplus budget or a deficit budget?
Answer: A surplus budget. The government should spend less than it collects in taxes to reduce purchasing power.
Q56
Does a decrease in margin requirements increase or decrease AD?
Answer: It increases AD because borrowers can get larger loans against the same collateral, encouraging borrowing.
Q57
If actual AD = full employment AD, what is the size of the inflationary gap?
Answer: Zero. The economy is in perfect full employment equilibrium without any excess demand.
Q58
What is the impact of a decrease in public borrowing on excess demand?
Answer: It worsens excess demand. Decreasing public borrowing leaves more money in the hands of the public, which increases spending.
Q59
What happens to the wage-price spiral during an inflationary gap?
Answer: It gets activated. High prices lead workers to demand higher wages, which increases production costs, further increasing prices.
Q60
Is excess demand a short-run or long-run phenomenon in the Keynesian framework?
Answer: It is a short-run phenomenon.
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