Static Quiz 08 July 2022 (Indian Economy)

Solution: d) justification: Under the effective demand principle, the equilibrium output of the final goods is equal to ex-ante
aggregate demand. Thus, a basic equation used for determining aggregate demand is AD = Y = C I G, where C is usually an increasing function of national income. Y is the total output. Based on the above, if any of the factors are increased, it increases the AD.

Solution: c) Justification: Every economy meets with certain challenges. One, to ascertain the availability of the goods and services required by the population and second, the presence of the supply network. Every economy has to, at first, guarantee the required level of goods and services out of its production process. For this, a proper level of production capacity should be built which requires a particular level of capital formation or investment. From where the investible funds will be managed is altogether a separate question.
Whether the investment will come from the government, the domestic private sector or the foreigners? Once these details are cleared and selected as per the socio-economic condition of the economy, a proper distribution network for goods and services produced is assured.
Statement 3: But, in a State Economy the private sector does not play any role and is nationalized by the government.

Solution: a) Justification: Statement 1: Currency is not considered as fixed capital, it is liquid capital. Fixed capital is the assets
used in the productive process. Other examples include Building or expanding existing factories, Purchase of transport equipment and all other machinery used in the productive process. Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income. Increasing an economy’s capital stock also increases its capacity for production, which means an economy can produce more. Producing more goods and services can lead to an increase in national income levels.

Solution: c) Justification: Statement 1: A good can be priced only when you know who is using and how much is being used, for e.g. a soap is used by one person and it is quite easy to make them pay for it. But, there are some goods where doing this is not possible. For e.g., if providing clean air is a public good, then it is not possible to separate users who consume a fixed quantity of clean air, and it is also not possible to exclude someone from using them. In such a case, a central authority or body must provide the good at either a constant price to all or make it free of cost for users. However, it should be noted that, in either of these cases, the body cannot use the market principles of pricing.

Solution: a) Justification: In this system, allocation of resources, the mix of output and the distribution of output among the people (i.e., ‘What, How and For Whom’ problems) are determined centrally in accordance with the predetermined plans and targets. Administrative control and regulation from the central planning authority flow in all directions. Because of control over the available resources of the country by the state, resources are allocated in such a way that production becomes maximum, people get goods and services in fixed quantities at fixed prices, and the welfare of the nation gets maximized. Thus, communist China was the purest example of such planning.