Wednesday, 1 May 2013


Write down the important objectives of the IMF.
        -The IMF  was established with the following objeectives:-
1. To promote international monetary cooperation.
2. To facilitate expansion and balanced growth of International trade and maintain high employment.
3. To promote exchange stability and to avoid exchange depreciation.
4. To establish multilateral exchange system and to eliminate foreign exchange restrictions.
5. To help countries sort their maladjustments in their balance of payments.
6. To expand capital movement in underdeveloped countries.
7. To develop confidence among the member countries by rescuing them at the hour of crisis with monetary help.

Define money.State the functions of money.
        -Money is anything that acts as the medium of exchange.Anything which is universally accceptable in case of making transactions may be regarded as money.
The four major functions of money:-
1. Medium of exchange
        -The main function is to work as a medium of exchange and avoid the ambiguity of barter system.Money has the quality of general acceptablility.

2.Unit of account
        -It works as a measure of value or a unit of account. Since all prices are expressed in terms of money,it is also called the numerase or unit of account.

3. Standard of deferred account
        -Borrowing and lending are done in terms of money. Money is suitable for deferred payment because:-
            a. It is more stable than other values
            b. It is more durable than other commodities.
            c. It has general acceptability.

4. Store of value.
        - People can save through money. Money is thus known as the temporary abode of purchasing power
Distinguish between tariff and quota.
        -1.Tariffs are the taxes imposed by the government of a country on import and export products while a quota is the limitation imposed by the government on the number of goods that can be either exported or imported.
         2.Tariffs earn revenue for the government and increase the GDP of the country while quotas are for the number of the products traded and not the amount paid; thus, it neutralizes the GDP.
         3.The revenue obtained by tariffs brings gains to the government while the gains obtained by quotas are beneficial for the traders.

Mention the characteristics of an underdeveloped economy.
        - The characteristics of an underdeveloped economy can be discussed under the following parameters:-
1. Low levels of GNP per capita and slower GNP per capita growth.
2. Larger income inequalities and widespread poverty.
3. Low levels of productivity.
4. Great independence on agriculture with a backward industrial structure.
5. Higher levels of unemployment and underemployment,
6. Technological backwardness.
7. High proportion of consumption expenditure and low saving rate.
8. High rates of population growth and dependency burdens.
9. Lack of infrastructure.
10. Economic backwardness and poor economic organisation.

What is the need of a Central bank of a country?
        -There are different reasons why a central bank is needed in a country.They are;-
a. It is required to issue paper currency.If different commercial banks are granted the power to issue notes,then there will be different types of notes and all the notes may not be equally preferred by the public.
b. It is also needed to help the commercial banks tide over economic crises.
c. It is also needed to control the credit granted by the commercial banks.
d. It is also needed to implement the monetary policies of the government.
e. It is the undisputed leader in the money market.

State the sources of government revenue. How do you explain burden of public debt?
        -The state governments in our country obtain revenue with current account from the following main sources :-
1. Taxes.
2. Non-tax revenue
3. Grants-in aid from the central government.
4. Public borrowings.
They are also empowered to issue tax on the following departments:-
1. agricultural income-tax
2. land tax and building tax
3. Sales tax
4. excise duty
5. taxes on goods and passengers carried by road transport and inland waterways
6. Entertainment tax
7. Profeesional ta.x
8. advertisement tax
9. capitalisation fees
10 .stamp duties and taxes on consumption of electricity.

            Public debt has two types of burdens- money burden and real burden .
When the government borrows money,this money will have to be repaid in future and interest on this amount has to be paid regularly.This is known as the direct money burden of public debt.
On the other hand, the real burden of public debt refers to the loss of economic welfare as a result of the repayment of public debt. For eg, if there is an inflation or price level increases during the repayment of public debt,then even if the same amount of money is repaid,its real value is now lower than before.In this case the direct real burden of public debt decreases. Oppositely,if there is a deflation,i.e, price level decereases at the time of repayment of public debt, then even if the same amount of money is repaid but its real value increases and the real burden of public debt also increases. These are the direct real burden of the public debt.
The most important is indirect real burden of public debt. In order to repay interest on debt, the government has to impose taxes . As a result of the imposition of taxes, there will be some adversse effects on the prodduction and distribution of income. These adverse effects are called indirect burden of public debt.

        -Taxation influences production in three ways:-
1. As a result of direct taxation, an individual's willingness to work falls, hence his income , sabings and investment falls . Production falls in the economy.
2. If a tax is imposed on profit, then producer's ability to invest decreases because producers profit after tax falls, and the amount of profit which is reinvested in the production also falls, which adversely affects production.
3.If higher taxes are imposed on important raw materials, then production cost increases, which results in cost push inflation

        -If the government imposes direct taxes for the repayment of a loan or for paying interest,then the burden of indirect taxes fall mostly on the poor. On the other hand the government bonds are purchased mostly by the rich. As a result,the income of the poor will fall because they pay the taxes but do not receive any interest payment from the government where as the income of the rich will receive interest payments on public debt from the government.

Explain the causes of inflation 
        - It has been observed that inflation is an outcome of an imbalance in demand for and supply of goods and services. These causes can be divided into two parts:-


1. Deficit financing
2. Increase in the velocity of money.
3. Expansion of credit.
4. Increasse in public expenditure
5. Expansion of exports.
6. Icrease in population.
7. Trade union activities.
8. Reduction in taxation
9. Shortage of supplies of factors of production.
10. Hoarding by traders and concumers.
11. Cheap money policy.
12. Black money.
13. increase in investment.
14. Repayment of old debts.


1. Less production
2. Wage and cost spiral.
3. Taxation policy.
4. Technical changes.
5. War
6. Exports.
7. Devaluation.
8. Natural calamities.
9. Industrial policy.
10. International factors

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