BLS LLB 5 Years Sem 1 Economics 2021-22 Question Paper with Solutions

Answer: (b) Call money Market

The call money market is the market for overnight and very short-term interbank funds, repayable on demand. Its rate, the call rate, moves more sharply than any other rate in the money market, and it does so for three reasons:

1. The term is one day. A lender parting with money for a single night demands whatever the day's scarcity justifies, and there is no time for the rate to average out.
2. The loans are unsecured. No collateral is pledged, so the rate carries a credit element as well as a liquidity element.
3. It absorbs the whole day's imbalance. Banks come to it to meet their cash reserve ratio at the close of business, so a shortage anywhere in the banking system shows up here first and in full.

Answer: (a) Short term funds

The money market is the market for funds lent and borrowed for short periods, up to one year. Its purpose is liquidity: it lets an institution with a temporary surplus of cash lend to one with a temporary shortage.

Its instruments are all short-dated: call and notice money for one day to fourteen days, treasury bills of 91, 182 and 364 days, commercial paper, certificates of deposit, commercial bills and repo transactions. Its regulator is the Reserve Bank of India.

Why the others are wrong:

• (b), (c) and (d) all involve medium or long-term funds, which belong to the capital market, not the money market. The capital market deals in shares, debentures, bonds and government securities of more than a year, and is regulated by SEBI.

• (c) Money market is a market, not a regulator, so it cannot regulate anything.
• (d) IRDA, now the Insurance Regulatory and Development Authority of India (IRDAI), regulates insurance.

Why the others are wrong: poverty, unemployment and inequality are addressed by other programmes, MGNREGA, the National Food Security Act, skill missions and the livelihood missions. RAY was specifically a housing and slum programme, and the word Awas, meaning dwelling, is the clue in the name itself.

Answer: (b) Balances

The Balance of Payments is prepared on the double-entry principle: every transaction is entered twice, once as a credit and once as a debit. The totals of the two sides are therefore always equal, and in the accounting sense the BoP always balances.

Any residual difference caused by unrecorded transactions is absorbed by the balancing item "errors and omissions", which exists precisely so that the account closes.

Why the others are wrong:

• (a) Equals is loose. The accounts are equal in total, but "balances" is the term of art for the accounting identity, and the question is testing that term.
• (c) Surplus and (d) Deficit describe particular conditions, not what the BoP always does. Neither is always true.

• (a) Deficit on both accounts would leave the BoP unbalanced, which is impossible.
• (c) No change would leave the current account gap unfinanced.
• (d) Equal is not a description of a balancing entry.

How information is being supplied in India: e-NAM, the electronic national agriculture market, which publishes prices and allows bidding across mandis; AGMARKNET, which reports mandi prices; Kisan Call Centres; price display boards in regulated markets under the APMC Acts; and mobile advisories.

Answer: (a) Relation between quantity demanded and price of a commodity

A demand curve is the graphical representation of a demand schedule, and a demand schedule shows the quantities of a commodity a consumer will buy at different prices, all other things remaining equal. Price is plotted on the vertical axis and quantity demanded on the horizontal, and the curve slopes downward from left to right because of the inverse relation between the two.

Why the others are wrong:

• (b) Relation between supply and demand is shown by putting the demand curve and the supply curve on the same diagram, which gives market equilibrium, not the demand curve alone.

Answer: (d) Income of customers

The income of the buyer is a determinant of demand, not of supply. A richer buyer will buy more at each price, which shifts the demand curve rightward. It tells a producer nothing about the cost or the ease of producing the good, and the supply curve does not move because customers have become richer.

Why the others do affect supply:

• (a) Price of the commodity is the central determinant. The law of supply states that, other things remaining equal, quantity supplied varies directly with price, which is why the supply curve slopes upward.

Answer: (d) Tea and coffee

Substitutes are goods that satisfy the same want, so one can be used in place of the other. A rise in the price of one raises the demand for the other, which means the cross elasticity of demand between them is positive.

Tea and coffee are the textbook example: both are hot beverages serving the same purpose, and a drinker who finds tea dearer will switch to coffee.

Why the others are wrong:

• (b) Pen and Paper and (c) Ink and Pen are complements, goods used together. A rise in the price of one reduces the demand for the other, so their cross elasticity is negative.

Answer: (a) Satisfaction and wants

Utility is the power of a commodity to satisfy a human want. It is the satisfaction a consumer expects to derive from consuming a good or service, so the two ideas the term joins are exactly satisfaction and wants.

Its important features:

1. Utility is subjective: it differs from person to person, and for the same person at different times.
2. Utility is not the same as usefulness. Liquor and tobacco are harmful but have utility for the person who wants them.
3. Utility has no moral or ethical content. Economics asks whether a want exists, not whether it ought to.
4. Utility cannot be measured directly, though Marshall assumed a cardinal measure in "utils" for the sake of analysis.

Answer: (c) Quantity demanded equal to quantity supplied

Market equilibrium is the state in which the quantity demanded equals the quantity supplied at the ruling price, so there is no tendency for the price to change. It is found where the demand curve and the supply curve intersect, and the price at that point is the equilibrium price, the quantity the equilibrium quantity.

Why the others are wrong:

• (a) Quantity demanded greater than quantity supplied is a shortage, or excess demand, which pushes the price up.

Answer: (c) Increase in cost due to increase in extra unit of output

Marginal cost (MC) is the addition made to total cost by producing one more unit of output.

MC = TCn − TCn−1, or MC = ΔTC ÷ ΔQ

Because total fixed cost does not change with output, marginal cost is also the addition made to total variable cost, so MC = ΔTVC ÷ ΔQ, and fixed cost never enters it.

Example: if the total cost of producing 10 units is ₹500 and of 11 units is ₹540, the marginal cost of the eleventh unit is ₹40.

Why the others are wrong:

Answer: (b) Agriculture

Agriculture and allied activities employ about 45% of India's workforce, more than any other sector. Manufacturing and services each employ far fewer, though services now contribute more than half of Gross Value Added.

Why the others are wrong:

• (a) Manufacturing employs a comparatively small share, and its failure to grow is one of the central problems of the Indian economy.
• (c) Services produce the largest share of output but not of employment, which is the trap in this question.
• (d) Tourism is a part of services and is far smaller than any of the three broad sectors.

Answer: (c) Money earned by resident abroad

Gross National Product (GNP) is the total value of final goods and services produced by the residents (nationals) of a country, wherever in the world they produce it, in a given year.

GNP = GDP + Net factor income from abroad

Net factor income from abroad is income earned by a country's residents abroad minus income earned by foreigners within the country. Money earned by a resident abroad is therefore exactly the item that GNP adds and GDP does not, which is what the question is testing.

Why the others are wrong:

• (a) Imports are deducted, not added. Goods produced abroad are not part of India's product.

Answer: (c) Minimum government intervention in trade and minimum regulations

A free market economy is one in which economic decisions, what to produce, how to produce and for whom, are taken by private individuals and firms through the price mechanism, with the government's role kept to a minimum. Both halves of the statement must therefore be "minimum": minimum intervention and minimum regulation.

Its features: private ownership of the means of production; freedom of enterprise and of choice; profit as the motive; competition; and the price mechanism as the signal that allocates resources, what Adam Smith called the "invisible hand".

Answer: (a) CSO

The Central Statistics Office (CSO) compiles India's national income accounts, including GDP, under the Ministry of Statistics and Programme Implementation (MoSPI). It is responsible for national accounts, the Index of Industrial Production and the Consumer Price Index.

Why the others are wrong:

• (b) NSSO, the National Sample Survey Office, collects survey data, on employment, consumption expenditure and enterprises. That data feeds into the national accounts, but the NSSO does not compile GDP.

Examples

Positive: "India's inflation rate was 5% last year." "A rise in the price of petrol reduces the quantity demanded." "GST replaced most indirect taxes in 2017."

Normative: "The government ought to reduce the tax on petrol." "Income inequality in India is too high." "Free education should be provided to every child."

The test: a statement containing should, ought, must, good, bad, fair or unjust is normative.

Their relationship

The two are complementary, not opposed. Good normative argument depends on sound positive analysis, because deciding what ought to be done requires knowing what a measure will actually do. A policy recommendation resting on a false factual claim is worthless however good its intentions.

Meaning of demand

Demand in economics is not merely a desire. It is the quantity of a commodity that a consumer is willing and able to buy at a given price during a given period of time. It requires three things together: desire, ability to pay and willingness to pay. A beggar's desire for a car is not demand.

Statement of the law

The law was stated by Alfred Marshall in Principles of Economics (1890):

"The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price and diminishes with a rise in price."

In short: other things remaining equal, the quantity demanded of a commodity varies inversely with its price.

Price ↑ → Quantity demanded ↓
Price ↓ → Quantity demanded ↑

6. No change in the distribution of income.
7. No change in climate or season.
8. The commodity is not a prestige or status good.

If any assumption fails, the whole curve shifts, and what is being observed is not a test of the law at all.

Why the demand curve slopes downward

1. Law of diminishing marginal utility. Each successive unit yields less satisfaction, so a buyer takes more only at a lower price. This is the fundamental reason.
2. Income effect. A fall in price raises the consumer's real income, so more can be bought.
3. Substitution effect. A fall in the price of one good makes it cheaper relative to substitutes, so buyers switch to it.
4. New buyers enter the market at the lower price.
5. Multiple uses. A cheaper commodity is put to uses not worth it at the higher price.

Meaning

The law of demand tells us only the direction of the change. Elasticity of demand, a concept developed by Alfred Marshall, tells us by how much: it measures the degree of responsiveness of quantity demanded to a change in any of its determinants.

There are three kinds of elasticity of demand, according to which determinant changes, and the first of them has five degrees.

A. Price elasticity of demand

The responsiveness of quantity demanded to a change in the price of the commodity itself.

Ep = Percentage change in quantity demanded ÷ Percentage change in price

The coefficient is negative, but by convention the minus sign is ignored. Its five degrees:

• Zero (Ey = 0): neutral goods, such as salt.
• Negative (Ey < 0): inferior goods, such as coarse cereals, whose demand falls as income rises.

C. Cross elasticity of demand

The responsiveness of the quantity demanded of one commodity to a change in the price of another.

Ec = Percentage change in quantity demanded of X ÷ Percentage change in price of Y

• Positive: substitutes, such as tea and coffee.
• Negative: complements, such as car and petrol.
• Zero: unrelated goods.

Methods of measuring price elasticity

1. Percentage or proportionate method, the formula above.
2. Total outlay method (Marshall). If total expenditure moves in the opposite direction to price, demand is elastic; in the same direction, inelastic; unchanged, unity.

The principle

Price is determined by the interaction of demand and supply. Neither alone fixes it. Alfred Marshall put it in the sentence every answer on this topic should quote:

"Value is determined by both demand and supply, just as a piece of paper is cut by both blades of a pair of scissors."

The price at which the quantity demanded equals the quantity supplied is the equilibrium price, and the quantity bought and sold at it is the equilibrium quantity.

The two schedules

Below the equilibrium price (at P2): quantity demanded exceeds quantity supplied, so there is a shortage. Buyers compete against each other and bid the price up, which lowers the quantity demanded and raises the quantity supplied. Price rises towards E.

At E alone neither side has any reason to move, which is why the equilibrium is stable and why the market is described as self-correcting.

What happens when a curve shifts

The equilibrium is not permanent. It moves whenever either curve shifts:

1. Increase in demand (curve shifts right): both price and quantity rise.
2. Decrease in demand: both price and quantity fall.
3. Increase in supply (curve shifts right): price falls, quantity rises.
4. Decrease in supply: price rises, quantity falls.

That is why the onion price rises when the crop fails, supply has decreased, and falls in a glut.

Meaning

Monopoly comes from the Greek monos, single, and polein, to sell. It is a market in which there is a single seller of a commodity that has no close substitutes, and in which entry by new firms is blocked.

Features

1. A single seller and a large number of buyers. One firm constitutes the whole industry, so the distinction between the firm and the industry disappears and the firm's demand curve is the industry's demand curve.

2. No close substitutes. The product has no substitute a buyer would readily switch to, so the cross elasticity of demand for it is very low. This is the test that distinguishes monopoly from every other market form.

3. Strong barriers to entry. This is the feature that keeps a monopoly alive. Barriers arise from:

• A patent or copyright held by the firm
• A licence or statutory monopoly granted by the State
• Exclusive control of a raw material or of a technique

7. Price discrimination is possible. Because the monopolist controls supply, it can charge different prices to different buyers for the same good where the markets can be kept separate and their elasticities differ. Railway fare classes and separate tariffs for domestic and industrial electricity are examples.

8. No supply curve. A monopolist has no supply curve in the ordinary sense, since price and quantity are decided together from the demand curve rather than read off a schedule.

Kinds of monopoly

Natural, legal, technological, State and simple monopoly, distinguished by the source of the barrier.

Examples

Indian Railways in long-distance rail transport; a patented medicine during the life of the patent; municipal water supply.

4. Low rate of capital formation. Low incomes give low savings, low savings give low investment, and low investment keeps incomes low: Ragnar Nurkse's vicious circle of poverty.

5. Poverty and inequality. Poverty has fallen substantially, on the multidimensional measure from 24.85% in 2015-16 to 14.96% in 2019-21, but persists, and inequality of income and of assets remains high.

6. Low level of technology in large parts of the economy, coexisting with world-class capability in others.

7. Infrastructure deficits in power, transport, storage and logistics, improving from a low base.

8. Population pressure. A very large population, though the total fertility rate has fallen to about 2.0, below the replacement level of 2.1.

B. Features of a mixed economy

9. Coexistence of the public and private sectors, with a joint sector as a third form. Since the New Industrial Policy 1991 the industries reserved for the public sector fell from 17 to a handful.

10. Economic planning alongside the market. Five Year Plans directed the economy from 1951 to 2017; NITI Aayog replaced the Planning Commission in 2015.

18. Rapid digital and financial inclusion, through Jan Dhan, Aadhaar, UPI and Direct Benefit Transfer.

Conclusion

The Indian economy is best described as a large, fast-growing, services-led mixed economy carrying an unfinished structural transition. Its central task is unchanged since independence: to move workers out of low-productivity agriculture into higher-productivity industry and services fast enough to raise incomes before the demographic window closes.

B. Institutional causes

3. Small and fragmented holdings. The average operational holding is about 1.08 hectares, and more than 86% of holdings are small or marginal. Such a holding cannot justify a tractor, a tube well or a bank loan, and the plots are often scattered. The cause is the law of inheritance operating on land over generations. 4. Insecure tenancy and unclear title, so a tenant will not invest and land is poor security for credit. 5. Inadequate institutional credit and rural indebtedness, with many small farmers still borrowing from moneylenders at very high rates. 6. Defective marketing, with a chain of intermediaries each taking a margin, so little of the consumer's rupee reaches the farmer. 7. Absence of storage and cold chain, so post-harvest losses are large and the farmer must sell at harvest when prices are lowest.

C. Technical causes

8. Old techniques and low mechanisation on holdings too small to justify machinery. 9. Poor quality seed and imbalanced fertiliser use, urea being subsidised far more heavily than phosphatic and potassic fertiliser, which distorts the soil nutrient balance. 10. Weak extension services, so research does not reach the field. 11. Inadequate plant protection against pest and disease.

Remedies in brief

Irrigation and micro-irrigation under the PMKSY; soil health cards; Farmer Producer Organisations; consolidation of holdings and digitised land records; e-NAM and APMC reform; Kisan Credit Cards; crop insurance under PMFBY; diversification into horticulture, dairy and fisheries; food processing; and above all non-farm employment.

Its main features

1. Abolition of industrial licensing for all industries except a short list, now reduced to a handful concerned with security, strategic and environmental interests. This was the central measure and the one that ended the licence raj.

2. Reduction of the public sector's reserved area, from 17 industries to 8, and progressively to the present handful, chiefly atomic energy and railway operations.

3. Disinvestment. Government equity in public sector undertakings was opened to sale, both to raise revenue and to introduce market discipline. It is administered today by DIPAM, and the sale of Air India to the Tata Group in January 2022 is the clearest example of strategic disinvestment.

4. Referral of sick public undertakings to the BIFR, so that chronic loss-makers could be restructured or wound up rather than subsidised indefinitely.

5. Liberalisation of foreign investment. Automatic approval for foreign equity up to 51% in specified industries at the outset, raised progressively since, with FDI now permitted up to 100% in most sectors. FERA was replaced by the far more liberal FEMA, 1999.

Criticisms: jobless growth, employment rising far more slowly than output; manufacturing's share of GDP failing to rise; small units suffering from de-reservation and import competition; widening regional imbalance and inequality; and agriculture receiving little attention in the package.

D. Its participants: companies raising funds, retail and institutional investors, mutual funds, insurers, banks, foreign portfolio investors, merchant bankers, brokers and depositories.

Features

1. It is regulated by SEBI, under the SEBI Act, 1992, whose mandate is to protect investors and to develop and regulate the market.

2. It is technologically advanced. India moved to screen-based electronic trading, dematerialisation of shares through the depositories NSDL and CDSL, and one of the shortest settlement cycles in the world. Trading is nationwide rather than confined to a floor.

3. It is dominated by two exchanges. After reform the BSE and the NSE account for effectively all trading, and the small regional exchanges have closed.

4. Institutional investors are large and growing. Mutual funds, insurers, pension funds and foreign portfolio investors now move the market far more than individual investors do.

Meaning and origin

The World Trade Organization (WTO) is the international body that frames the rules of trade between nations and provides a forum for negotiating trade agreements and settling trade disputes.

It was established on 1 January 1995 by the Marrakesh Agreement, as the successor to the General Agreement on Tariffs and Trade (GATT), 1947, following the Uruguay Round of negotiations (1986 to 1994). Its headquarters is at Geneva, Switzerland, and it has 166 members, who together account for almost all world trade. India is a founder member, as it was of GATT.

Objectives

1. To raise standards of living, income and effective demand in member countries.
2. To expand production of and trade in goods and services.
3. To ensure the optimal use of the world's resources consistent with sustainable development.

Principles

Most Favoured Nation (MFN), a concession given to one member must be given to all; National Treatment, imported goods must be treated no less favourably than domestic goods once inside the market; transparency; binding tariff commitments; and special and differential treatment for developing countries.

Structure

Ministerial Conference, the highest body, meeting at least once every two years; General Council; specialised councils and committees; and a Secretariat at Geneva headed by a Director-General. Decisions are taken by consensus.

India and the WTO

India has used the WTO to challenge protectionist measures against its exports and to defend its public stockholding of food grain at minimum support prices, protected by the peace clause agreed at the Bali Ministerial Conference in 2013. TRIPS obliged India to recognise product patents, which it did through the Patents (Amendment) Act, 2005, and India used the flexibility TRIPS allows to enact the Protection of Plant Varieties and Farmers' Rights Act, 2001.