B.Com Ist Year International Monetary Fund Short Question Answer Notes

Q.49. What is meant by Cost Push Inflation ?

Ans. The cost-push inflation is caused by an increase in production costs. It is generally caused by two factors : (a) an increase in wages, and (b) an increase in the profit-margins of the entrepreneurs. When cost inflation arises in one particular industry, it soon spreads to the other factors of economy as well, the reason being that the various sectors of the economy are closely linked with each other.

Q.50. What is meant by Demand Pull Inflation?

Ans. Demand-pull inflation is caused by an increase in aggregate effective demand for goods and services in the economy.

The effective demand increases due to increased money incomes of the factors of production. The demand inflation can be tac overnment by curtailing unnecessary demand throug doption of monetary and fiscal measures.

Q. 51. What is meant by Deflation ?

Ans. Deflation refers to that state in which the supply of money tends to cause the price level to decline. Thus, deflation is a situation of falling prices on account of insufficient effective demand. It results in over production,

talling prices on account of insufficient unemployment and a fall in economic activity.

Q.52. What is meant by Semi-inflation and Full-inflation :

Ans. The increase in price level in pre-full employment stage is referred as partial inflation because in this condition the volume of output also increases. The increase in supply of money after the point of full employment is referred to as full inflation because nese the volume of output is constant.

Q.53. Define Stagflation. (Meerut, 2005)

Ans. Stagflation describes a situation in which both unemployment and the rate of inflation are too high according to accepted standards. It is characterised by excessive money supply and high prices, and declining productivity and unemployment. In other words, the rate of unemployment and rate of inflation could both rise simultaneously.

Q.54. Discuss the effects of inflation on producers.

Ans. Inflation has favourable effect on producers and businessmen. It is a boon for enterpreneurs as they experience wind-fall gains as the prices of their stock suddenly go up. This would lead to optimism among the businessmen to invest more and get more profit. This increase the output and employment in the economy. During inflation, the monetary income of public rises and consequently the demand rises but the amount of production still remains low and goods are sold at higher prices. Thus, producers get more profits. But a state of hyper-inflation creates a lot of uncertainty in the economy which is harmful to production.

Q.55. Discuss the effects of inflation on employment. (Meerut, 2013)

Ans. More and more employment opportunities are generated during inflation because the producers expand the size of business and trade in expectation of huge profits. Thus, slight inflation is best for employment avenues.

Q.56. Discuss the main causes of inflation.

Ans. Main causes of inflation are as under:

• Increase in money supply and deficit financing.
• Increase in minimum support price of foodgrains.
• Hike in oil prices and global inflation.

(iv) Increase in unproductive public expenditure.

(v) Rising income and growth of middle class.

(vi) Removal of price and distribution control.

Q.57. Discuss the efforts made by the government to check inflation.

Ans. The following measures are taken to control inflation:

(i) Appropriate Monetary Policy: In order to check the rise in prices, following monetary policy mix should be used:(a) supply of money should be reduced, (b) rate of interest should be increased on savings, (c) credit be contracted.

(ii) Restriction on the Export of Essential Consumption Goods:Export of mass consumption goods like, onions, vegetables, cement, sugar, etc. should be banned.

(iii) Import of Essential Goods: Foreign Exchange reserve is in a comfortable state, at present it should be used to import essential goods. It will result in increase in supply of these goods. Such imports will go a long way in checking the rise in prices.

(iv) Control over Increase in Administered Prices : Government should reduce administered prices. Low administered prices will help to stabilise prices of other commodities.

Q.58. Write main difficulties faced by the government in controlling prices.

Ans. The government has adopted various monetary, fiscal and other measures to check price rise but the government could not get the desired result in so far as the control of price rise is concerned. The following difficulties are being faced by the government in controlling the increasing prices:

(1) Uncoordinated Price Policy: There is no coordination in the price policy adopted by the government. On the one hand, the Reserve Bank tries to contract supply of money and credit through its monetary policy but on the other, government under its fiscal policy indulges in a large-scale deficit financing which pushes up the supply of money and hence the prices.

(2) Black Money : The existence of hlock money has created a parallel economy in the country. It is becoming a hindran trolling the price level.

(3) Administrative Difficulties. The framing of price policy is very good but difficulties arise when the same is implemented. There has been a paucity of efficient, honest and competent staff in its. execution. The result is that no price policy has been enforced effectively.

Q. 59. What is meant by Parallel Economy? (Meerut, 2013)

Ans. The unaccounted transactions of production, consumption  and investment which take place parallel to the transactions duly accounted for, constitute the Parallel Economy. Thus, the parallel economy refers to functioning of and illegal or unsanctionedsector in the economy alongwith the legal sector. The Indian economy exhibits dualistic structure involving the co-existence of legitimate and illegitimate transactions pertaining to production, consumption and investment.

Q.60. What is meant by “Black Money”? (Meerut, 2012)

Ans. Black money refers to that income which is not disclosed. to government authorities. Neither any account is maintained on such income nor any tax is paid on it. It is earned either through illegal activities or through evading tax on income. People in India disclose their income too less so that taxes could be evaded and they remain outside the bracket of income tax. These activities helpin the generation of black money. Black money is also known by unaccounted money, illegal money, unofficial money etc.

Q.61. Write the causes of Black Money in India.

Ans. Main causes of black money in India are as follows:

• Inefficient enforcement of tax laws.
• High rates of taxation promotes tax evasion.
• Large sized and corrupt bureaucracy.

(iv) Undervaluation of price at the time of buying and selling the real estate.

(v) Manipulation in public expenditure,

Q.62. Write the effects of Black Money.                                                  

Ans. The main effects of black money are as follows:

• Notax is paid on black money which cause loss of revenue to the government.
• Black money leads to wasteful expenditure non-essential articles.
• Black money leads to unequal distribution of income wealth.
• It leads to increase corruption, prices of real estate speculation.
• Black money results in transfer of funds from India to foreign countries through secret channels.

B.Com Ist Year International Monetary Fund Short Question Answer Notes

Q.63. What measures have been taken by the government to check Black Money?

Ans.

• To avoid misinterpretation of tax provisions, government has simplified tax laws and tax procedures.
• Government has made it mandatory for all the assessees to mention PAN at the time of buying and selling the real estates, opening a new bank account etc. to check tax evasion.
• Election commission of India has put a ceiling on election expenses to be incurred by a candidate for convassing to reduce the use of black money.

(iv) Tax authorities ave been given wide powers to conduct raids on person suspected to have black money.

Q.64. Explain Sick Unit. (Meerut, 2012)

Ans. According to V.N. Nadkarni, “To a layman a sick unit is one which is not healthy. To an investor, it is one which skips dividends. To an industrialist, it is a unit which is making losses and tottering on the brink of closure. To a banker, it is a unit which has incurred cash losses in the previous year and is likely to repeat the performance in the current and following years.”

Q.65. What are the main causes of industrial sickness?

Ans. Main causes of industrial sickness are as follows:

• Investment in unproductive capital assets distort the liquidity and profitability of the unit, which leads to industrial sickness.
• Lack of proper infrastructure facilities is also responsible for industrial sickness.
• cute labour problems have resulted in strikes, lock-out and even closure of industrial unit.
• Over capitalisation puts burden in the form of interest and dividend. It increases cost of production, affects profitability and leads to sickness.

Q.66. Write the effects of industrial sickness.

Ans. See Page No.85.

Q.67. What is meant by monetary policy?

Ans. The monetary policy is concerned with regulation a.. control of the quantity of money and credit for attaining certain objectives such as price stability, exchange rate stability. employment or economic development etc. In other words, instrument used by the Central Bank to regulate the suppy money and credit for maintaining stability in the value of money.

Q.68. What are the main objectives of monetary policy?

Ans. The main objectives of monetary policy are:

• To regulate money supply in the economy.
• To achieve stability in the external value of rupee.

(iii) To attain price stability.

(iv) To promote savings and investment.

Q.69. Write the main instruments of credit control under monetary policy.

Ans. The main instruments of credit control under monetary policy are as follows:

• Bank rate at which RBI discounts or rediscounts the bills of commercial banks.
• Statutory Liquidity Ratio (SLR), a certain percentage of deposits which is to be kept by banks in the form of liquid assets.
• Cash Reserve Ratio (CRR), the minimum cash reserve that every bank has to maintain with the RBI.

(iv) Open market operations to control the flow of credit through the sale and purchase of securities in the open market.

(v) Selective credit control to regulate the credit for specific purposes.

Q.70. What is meant by Bank Rate ? How it is used for credit control?

Ans. Bank Rate is also known as discount rate. It is the rate at which RBI discounts or rediscounts the bills of commercial banks. If bank rate is increased, then commercial banks also charge higher rate of interest on loans given by banks to public because now RBI charges higher discount rate, while discounting bills of commercial banks. Higher bank rate will contract credit in the economy i.e., public will take lesser loans because of higher rates of interest on loans.

Q.71. How SLR is used to control credit by the RBI?

Ans. Commercial banks are required to keep part of their assets in the form of government securities and other approved securities to provide safety to depositors. Central Bank can vary the ratio throught its administrative powers. Central Bank can check inflation through the mechanism of increasing the SLR and thereby reducing lendable resources with the banks.

Q.72. How CRR is used as a weapon of credit control by the

RBI?

Ans. Reserve Bank controls Cash Reserve Ratio of commercial banks. It is obligatory for commercial banks to maintain this CRR is the minimum cash reserve that every bank has to maintain with the Central Bank (RBI). IfRBI increases CRR, then banks have to maintain more cash holdings with RBI and it will reduce their loan giving capacity. So higher CRR will contract credit. TERRI decreases CRR, then banks will have to maintain less cash holding with RBI and banks will have more of surplus cash for granting loans.