4 Marks Question

Question 14 Marks

Explain, using a numerical example, how an increase in reserve deposit ratio affects the credit creation power of the banking system.

Answer

Reserve deposit ratio is the minimum reserves that a commercial bank must maintain as per the instructions of the central bank. Credit creation is inversely related to the reserve deposit ratio.
For Ex. suppose the legal Reserve Ratio is 0.4 and initial deposit is ₹ 1000 Total Credit Created = $\frac{1}{R R} x$ initial deposits = $\frac{1}{0.4} \times 1000=$-₹ 2,500
Whereas, suppose Legal Reserve ratio is 0,8 and initial deposit is ₹ 1,000
Total Credit Created $=\frac{1}{ RR }$ initial deposits =$\frac{1}{0.8} \times 1000$=₹ 1,250
Thus, increase in reserve deposit will decrease the credit ereation power of the banking system.

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Question 24 Marks

In an economy, an increase in investment leads to doubling of the national income. Calculate the Marginal Propensity to Consume $\ce{(MPC)}$ for the given economy.

Answer

We know that, Investment Multiplier $(K)$ is;
$K=\frac{\Delta Y}{\Delta I}$
$\text { Also, } K =\frac{1}{1-\ce{MPC}}$
$\text { Given; } K=\frac{\Delta Y}{\Delta I}=2$
$2=\frac{1}{1-\ce{MPC}}$
$2 \ \ce{MPC} =1$
$\ce{MPC} =\frac{1}{2}=0.5$

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Question 34 Marks

Does an excess of AD over AS always imply a situation of inflationary gap? Explain.

Answer

Yes, Inflationary gap is a consequence of excess demand. Excess demand is a situation in which actual AD is more than the AD required at full employment level of equilibrium. (AD is more than AS corresponding to full employment level of equilibrium.)

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Question 44 Marks

State briefly the effect of excess demand on output, employment and price?

Answer

1. EFFECT OF EXCESS DEMAND OVER:
2. OUTPUT
1. It does not affect the level of output because economy is already operating at full employment level. 3. 3.EMPLOYMENT
1. There will be no change in the level of employment as the economy is already operating at full employment level.
4. PRICES
1. Excess demand causes rise in prices because extra demand exerts (puts) extra pressure on the same output.

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Economics 4 Marks Question

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