1. In national income calculation, the sum total of gross value added of all the firms in the economy is known as

(a) National Disposable Income

(b) Gross National Product

(c) Gross Domestic Product

(d) National Income

Answer: (c) Explanation:

Value added of a firm = Value of Production of the firm – Value of intermediate goods used by the firm. The value added of a firm is distributed among its four factors of production, namely, labour, capital, entrepreneurship and land. If we include depreciation in value added then the measure of value added that we obtain is called Gross Value Added. If we sum the gross value added of all the firms of the economy in a year, we get a measure of the value of aggregate amount of goods and services produced by the economy in a year. Such an estimate is called Gross Domestic Product (GDP).

Source: XII NCERT: INTRODUCTORY MACROECONOMICS: Chapter 2 National Income Accounting Page 25.

2. Which of the following statement is correct regarding the ‘Paradox of Thrift’?

(a) It states that as people become thriftier, they end up saving less or same as before.

(b) It states that as people become thriftier, they end up having high standard of living.

(c) It states that as people become thriftier, they end spending on luxurious items.

(d) It states that as people become thriftier, economy booms.

Answer: (a) Explanation: The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving.

Source: XII NCERT: INTRODUCTORY MACROECONOMICS: Chapter 2 National Income Accounting Page13. https://www.investopedia.com/terms/p/paradox-of-thrift.asp

3. What do you understand by ‘Fiat Money’?

(a) Money which is based on an actual, fixed item which is considered valuable.

(b) Money that a government has declared to be legal tender, but it is not backed by a physical commodity.

(c) Money whose value comes from the value of resource used for the purpose.

(d) None of the above

Answer: (b) Explanation: Option (a) is related to ‘hard money’. Example: Gold. Option (c) is talking about barter system. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy. E.g. Modern day Indian Rupees.

Source: XII NCERT: INTRODUCTORY MACROECONOMICS: Chapter 3: Money and Banking Page 48.

4. Consider the following pairs:

List-I List-II

1. Gross National Product : GDP + Net Factor Income from abroad

2. National Income : NNP at market cost

3. Net National Product : GNP – Depreciation

Which of the pairs given above is/are correctly matched?

(a) 1 and 2 only

(b) 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

Answer: (c) Explanation: Gross National Product (GNP) is Gross Domestic Product (GDP) plus net factor income from abroad. GNP measures the monetary value of all the finished goods and services produced by the country’s factors of production irrespective of their location. When depreciation is deducted from the GNP, we get Net National Product (NNP). (Hence, pairs 1 and 3 are correctly matched). National Income is NNP at factor cost, not market price. (Hence, second pair is not correctly matched).

Source: XII NCERT: INTRODUCTORY MACROECONOMICS: Chapter 2 National Income Accounting Page 24.

5. Consider the following statements:

(1) GDP deflator is the ratio of real GDP to nominal GDP.

(2) Consumer Price Index (CPI) is the index of prices of a given basket of commodities which are bought by the representative consumer.

(3) The index for wholesale prices is called Wholesale Price Index (WPI), the price at which goods are traded in bulk.

Which of the statements given above is/are correct?

(a) 1 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2 and 3

Answer: (c) Explanation: Statement 1 is incorrect: GDP deflator:

The GDP deflator (implicit price deflator) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. Statement 2 is correct: The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Statement 3 is correct: The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries use WPI changes as a central measure of inflation. But now India has adopted new CPI to measure inflation. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions.

Source: XII NCERT: INTRODUCTORY MACROECONOMICS: Chapter 2 National Income Accounting Page26.