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ASSIGNMENT


SEMESTER - 1
SUBJECT CODE AND NAME - MB0042 &
MANAGERIAL ECONOMICS
ROLL NUMBER - 1308013809













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QUESTION1
Economic stability implies avoiding fluctuations in economic activities. It is important to avoid the
economic and financial crisis. The challenge is to minimize the instability without affecting
productivity, efficiency, employment. Find out the instruments to face the challenges and to maintain
an economic stability?
ANSWER 1. Economic stability is fostered by robust economic and financial institutions and regulatory
frameworks. It implies avoiding fluctuations in the level of economic activities as 100% stability is neither
possible nor desirable. It implies only relative stability in the overall level of economic activities.
Following are the instruments of economic stability:
1. Monetary Policy: deals with total supply of legal tender money i.e, currency notes and coins, total
amount of credit money, level of interest rates, exchange rate policy and general liquidity position of
the country.
The general objectives of monetary policy are:
a) Neutral money policy
b) Price stability
c) Exchange rate stability
d) Control of trade cycles
e) Full employment
f) Equilibrium in the balance of statements
g) Rapid economic growth
The 2 instruments through which monetary policy operates is-
*Quantitative techniques of credit controls-will have general impact on the entire economy by regulating the
supply of credit made available to different activities. They include Bank Rate policy, open market
operations and variable reserve ratio.
*Qualitative techniques of credit controls-they include changes in the margin requirements, direct action,
moral suasion, rationing of credit, issues of directives and regulation of consumer credit are some of the
techniques which are generally in practice.
2. Fiscal Policy: is concerned with the manner in which all the different elements of public finance, while
still primarily concerned with carrying out their own duties. It involves alterations expenditures for goods
and services or the level of tax rates. These measures involve direct Government interference in the market
for goods and services and direct impact on private demand.
The general objectives of monetary policy are:
a) To help in optimum allocation of scarce resources and its maximum utilization
b) To accelerate the rate of capital formation
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c) To encourage investment
d) To ensure price stability
e) To control the operation of business cycles
f) To ensure full employment condition
g) To accelerate the rate of economic growth
The instruments of fiscal policy include: Public revenue, Public expenditure policy, Public debt or
public borrowing policy, Deficit financing, Built in stabilizers or automatic stabilizers (BIS).

3.Physical Policy or Direct Controls: are imposed by Government to ensure proper allocation of scarce
resources like food, raw materials, consumer goods and capital goods. Government can strictly forbid o
restrict certain kinds of investments or economic activity. During the period of inflation, Government can
directly exercise control over prices and wages. They are of 3 forms:
a) Control over consumption and distribution through price control and rationing
b) Control over investment and production through licensing and fixing of quotas
c) Control over foreign trade through import control, import quotas, export control

QUESTION 2
Explain any eight macro 0economics ratios?
ANSWER 2. Macroeconomics is that branch of economics, which deals with the study of aggregative or
average behavior of the entire economy.
The 8 macroeconomic ratios are:
1. Consumption income ratio: indicates the percentage of consumption out of a given level of income.
This can be expressed as C=f[Y] where C=consumption, Y=income, f=function.Consumption is an
increasing function of income. Higher the income, higher would be the consumption and vice versa.
This ratio helps business personnel to forecast his/her sales in the market.

2. Saving income ratio: indicates the amount of savings made out of a given level of income. This can
be expressed as S=f[Y] where S=saving, Y=income, f=function.It is the function of income. Higher
the income, higher would be the savings and vice versa. This ratio enable a business to plan its
production schedule and derive sales forecasts.


3. Capital output ratio[COR] :It is a ratio of increase in output or real income to an increase in capital. It
refers to the amount of capital required to produce a unit of output.
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COR would be higher in case of capital goods industries and industries using capital intensive
techniques of production, and lower in case of consumer goods industries using labour intensive
techniques of production.
4. Capital labour ratio: explains the ratio between the numbers of labourers required for a given amount
of capital invested in any business. It can be expressed as K/L where K=capital and L=labour.
This ratio is useful to work out the least cost combination by substituting one factor input to another.
5. Output labour ratio: expresses the relationship between the quantity of output produced and the
number of labourers employed for a specific time period. It can be expressed as- Output labour
ratio=(Total output)/(Number of labourers employed) or Q/L.
This ratio helps the management of an organization to employ the right types of labour in the right
quantity.
6. Input output ratio: indicates the quantity of inputs employed and the quantity of outputs obtained. It
can be expressed as-Q=f[L,N,Ketc] where Q=quantity of output per unit of time and L,N,K etc are
different factor inputs like land, capital, labour, etc which are used in production process.
This ratio helps a producer to work out the most ideal combinations to maximize output and
minimize cost.
7. Value added output ratio: is a ratio of increase in the quality of inputs employed and the
corresponding increase in output obtained.
This will help in deciding whether to increase the employment of additional factor input units in the
production process.
8. Cash reserve ratio [CRR] : indicates the percentage of total deposits which the bank is required to
hold in the form of cash reserves for meeting the depositors demand for cash.
This will help the commercial banks to make profits for the sake of liquidity and safety.

QUESTION 3
Define inflation and explain the types of inflations?
ANSWER 3 Inflation is commonly understood as a situation of substantial and rapid increase in the level of
prices and consequent deterioration in the value of money over a period of time. It refers to the average rise
in the general level of prices and in the fall of money. Inflation is an upward movement in the average level
of prices. It is statistically measured in terms of percentage increase in the price index, as a rate(percent) per
unit of time-usually a year or a month.
Whole Price Index (WPI) numbers are used to measure inflation and Consumer Price Index (CPI)
or the cost of living index to measure the rate of inflation.
Percentage rate of inflation, P[t]= (Change in Price[t] / Price[t-1])*100
Where Change in Price[t] = P[t] P[t-1] and price level
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[t], [t-1] = periods of calendar time in which the observations are made.
Depending upon the rate of rise in prices and the prevailing situation, inflation has been classified
into 6 types:
*Creeping inflation- When the rise in prices is very slow (less than 3%) like that of a snail or a creeper it is
called creeping inflation.
*Walking inflation When the rise in prices is moderate (in the range of 3 to 7%) and the annual inflation
rate is of single digit is called walking inflation. It is a warning for the Government to control it before it
turns into running inflation.
* Running inflation When the prices rise rapidly at a rate of 10 to 20% per annum it is called running
inflation. Such inflation affects the poor and middle classes adversely. Its control requires strong monetary
and fiscal measures, otherwise it can lead to hyperinflation.
* Hyperinflation is also called in various names like jumping, runaway or galloping inflation. During this
period, prices rise very fast (double or triple digit rates) at a rate more than 20 to 100% per annum and
become absolutely uncontrollable. Such a situation brings a total collapse of the monetary system because of
the continuous fall in the purchasing power of money,
* Demand-pull inflationThe total monetary demand persistently exceeds the total supply of goods and
services at current prices so that prices are pulled upwards by continuous upward shift of the aggregate
demand function. It arises as a result of an excessive aggregate effective demand over aggregate supply of
goods and services in a slowly growing company. It is the result of increase in money supply.
*Cost-push inflation Prices rise on account of increasing cost of production. Thus in this case, rise in price
is initiated by growing factor costs. Hence it is termed as Cost-push inflation as prices are being pushed by
rising factor costs.

QUESTION 4
Define Fiscal Policy and its instruments?
ANSWER 4
Fiscal Policies concerned with the manner in which all the different elements of public finance, while still
primarily concerned with carrying out their own duties. It involves alterations expenditures for goods and
services or the level of tax rates. These measures involve direct Government interference in the market for
goods and services and direct impact on private demand.
The instruments of fiscal policy include:
*Public revenue - It refers to the income or receipts of public authorities. It is classified into 2 parts Tax
revenue and Non-tax revenue. Taxes are the main source of revenue for the Government. There are 2 types
of taxes Direct taxes such as personal and corporate income tax, property tax, expenditure tax, and Indirect
taxes such as customs duties, excise duties, sales tax (now called VAT). Administrative revenues are the bi-
products of administrative functions of the Government. They include fees, license fees, price of public
goods and services, fines and special assessment.
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*Public expenditure policy It refers to the expenditure incurred by the public authorities like central, state
and local Governments. It is of 2kinds- Development or Plan expenditure and Non-development or Non-
plan expenditure. Plan expenditure includes income-generating projects like development of basic
industries, generation of electricity, development of transport and communications and construction of
dams. Non-plan expenditure includes defense expenditure, subsidies, interest payments and debt servicing
changes.
*Public debt or public borrowing policy All loans taken by the Government constitutes public debt. It
refers to the borrowings made by the Government to meet the ever-rising expenditure. It is of 2types-
Internal and External Borrowings.
*Deficit financing It is an extraordinary technique of financing the deficits in the budgets, It implies
printing of fresh and new currency notes by the Government by running down the cash balances with the
central bank. The amount of new money printed by the Government depends on the absorption capacity of
the economy.
*Built in stabilisers or automatic stabilizers (BIS) : The automatic or built-in stabilisers imply automatic
changes in tax collections and transfer payments or public expenditure programmes so that it may reduce the
destabilizing effect on aggregate effective demand. When income expands, automatic increase in taxes or
reduction in transfer payments or Government expenditures will tend to moderate the rise in income. On the
contrary, when the income declines, tax falls automatically and transfers and Government expenditure will
rise and thus built-in stabilisers cushion the fall in income.

QUESTION 5 -

Investment is a part of income which can be used for various purposes. It is necessary to create
employment in an economy and to increase national income. To understand the benefits of income,
study the various types of investment?

ANSWER 5 Creation of income earning assets is called investment. Investment according to Keynes,
refers to real investment. It implies creation of new capital assets or additions to the existing stock of
productive assets. It refers to that part of the aggregate income, which is used for the creation of new
structures, new capital equipments, machines, etc; that help in the production of final goods and services in
an economy.
Keynes speaks of 5types of investment-
1] Private investment- It is made by private entrepreneurs on the purchase of different capital assets like
machinery, plants, construction of houses and factories, offices, shops, etc; It is influenced by MEC and
interest rate. It is profit-elastic. Profit motive is the basic for private investment. Private entrepreneurs would
take up only those projects which yield quick results and those that have a small gestation period.
2] Public investment- It is undertaken by the public authorities like central, state and local authorities. It is
made on building the infrastructure of the economy, public utilities and on social goods, for example,
expenditure on basic industries, defense industries, construction of multipurpose river valley projects, etc. In
this case basic criterion and motto is social net gain, social welfare and not profits. Is influenced by social
and political considerations.
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3] Foreign investment- It consists of excess of exports over the imports of a country. It depends on many
factors such as propensity to export of a given country, foreigners capacity to import, prices of exports and
imports, state trading and other factors.
4] Induced investment- It is another name for private investment. Investment, which varies with the changes
in the level of national income is called induced investment. When national income increases, the aggregate
demand and level of consumption of the community also increases. In order to meet this increased demand,
investment has to be stepped up in capital goods sector which finally leads to increase in the production of
consumption goods. Therefore we can say that induced investment is income-elastic i.e, it increases as
income increases and vice-versa. Y

I I
Investment
Income X
FIG: Induced Investment Curve
4] Autonomous investment Is another name for public investment. The investment, which is independent
of level of income, is called as autonomous investment. Such investments do not vary with the level of
income. Therefore it is called income-inelastic. It does not depend on changes in the level of income,
consumption, rate of interest or expected profit.
Y

I I
Investment

Income X
FIG: Autonomous Investment Curve

QUESTION 6 -
Discuss any two law of returns to scale with example?
ANSWER 61] Law of Increasing returns to scale The law of increasing return to scale is operating when
the producer is increasing the quantity of all factors[scale] in a given proportion leading to a more than
proportionate increase in output.
For example, when the quantity of all inputs are increased by 10% and output increases by
15%,then we say that increasing returns to scale is operating.
The FIG depicts the operation of this law. Factor X is represented along OX axis and Factor Y along
OY axis. The scale line OP is a straight line passing through the origin indicates the increase in scale
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as we move upward. The scale line OP represent different quantities of inputs where the proportion
between factor X and factor Y remains constant. When the scale is increased from A to B, the return
increases the output from 100 to 200 units. The scale line OP passing through origin is called as the
expansion path. Any line passing through the origin will indicate the path of expansion or increase
in scale with definite proportion between the two factors. It is very clear that the increase in the
quantities of factor X and Y[scale] is small as we go up the scale and the output is larger. The
distance between each isoquant curve is progressively diminishing. It implies that an order to get an
increase in output by another 100units, a producer is employing lesser quantities of inputs and his
production cost declining. Thus the law of increasing returns to scale is operating.

Y



P

Scale Line




Factor Y(Capital) F
E 600
D 500
C 400
B 300
200
A
100


O X
Factor X (Labour)

FIG: Increasing Returns to Scale

2] Law of Constant returns to scale The law of constant returns to scale is operating when all factor inputs
[scale] are increased in a given proportion leading to an equi-proportional increase in output. When the
quantity of all inputs is increased by 10% and output also increases exactly by 10%, we can say that constant
return to scale is operating.
FIG depicts a graph for constant returns to scale. In this it is clear that the successive isoquant curves
are equidistant from each other along the scale line OP. It indicates that as the producer increases the
quantity of both factors X and Y in a given proportion, output also increases in the same proportion.
Economists also describe constant returns to scale as the linear homogeneous production function. It shows
that with constant returns to scale, there will be one output proportion which does not change, whatever be
the level of output.






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Y



P
Scale Line




Factor Y(Capital)

E 500 units
D
C 400
300
B 200
A
100units


O X
Factor X (Labour)

FIG: Constant Returns to Scale






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