Associated Concepts | Long Question | Banking | 1st Year / Class 11 – Commerce | AHSEC (Assam)

Associated Concepts | Long Question | Banking | 1st Year / Class 11 – Commerce | AHSEC (Assam)

1. What are the main causes of inflation? (2015) (5marks)

-> The causes of inflation are:

A) Increase in disposable income- When the disposable income of the people increases, it raises their demand for goods and services. Rise in national income or reduction in taxes or reduction in the saving of the people may increase the disposable income.

B) Population expansion- The rapid growths of population raise the aggregate demand in the economy due to increase in consumption, investment etc. and thus lead to inflation.

C) Black Money- The existence of black money in an economy due to tax evasion, corruption etc. increases the aggregate demand. People with such money spend extravagantly thereby creating unnecessary demand for commodities and hence the price level goes up.

D) Reduction in taxation- When the government reduces taxes, it increases the income of the people, which, in turn, creates more demand for goods and services within the economy.

E) International factors- International factors may be the reason for inflation. Sometimes the prices of a basic raw material like diesel rise in the international market which leads to rise in the price of that commodity in all the countries of the world. 

2. What do you mean by trade cycle? Describe the different phases of the trade cycle. (2015/2016/2017/2018/2019) (2+6=8)

-> Trade cycle or business cycle is an important feature of a capitalist economy. It is a complex monetary phenomenon. The term trade cycle is used to denote the fluctuations in economic activity which occurs in a more or less regular interval of time. Each fluctuation, the rise and fall taken together, is called trade cycle.

The phases of trade cycle are:- 

1) Depression phases- During depression economic activity in a country is far below the normal. The depression phases of the trade cycle may be short or it may continue for a considerable period of time. In these phases, economic activity lowers down, unemployment level rises.

The significant features of depression are listed below:

a) Economic activity is at a low level.

b) Rise in the level of unemployment.

c) Fall in prices, profits, wages, interest rate, consumption, expenditure, investment, bank deposits and loan.

d) Shrinkage in the volume of output, trade and transactions.

2) Recovery phases- The phase of trade cycle when the economic activities of the country undergoes sudden changes for depression to prosperity which leads to improvement in economic activities is known as Recovery. It is the second phase of the trade cycle. In these phases, the level of employment, wages prices, profits etc. rises.

3) Prosperity- The phase of trade cycle in which the economy of the country prospers and economic activities increases and causes economic development of a country is called Prosperity. This is the third phase of the trade cycle. In these phases, employment, income, investment, etc are at a high level.

4) Boom- The peak point of prosperity marked by greatly accelerated economic activity is called Boom. It is basically the outcome of various development processes of the prosperity phases. It is a period of short duration. In these phases, the economic activities are at the highest level.

5) Recession- The phase where there is a downward trend of economic expansion of the country from the peak and the whole of the economy retards to zero is known as Recession. In these phases, the factors of production become scarce leading to rise in prices, the rate of interest rises due to scarcity of capital, the investment, employment income and demand decline, etc.

3. What is inflation? Discuss its effects on production and distribution. (2015/2018) (2+6=8)

-> Inflation is popular in the mind and is generally associated with rapidly rising prices which cause a decline in the purchasing power of money. 

                   According to G. Crowther, “Inflation is a state in which the value of money is falling, i.e., the prices are rising.”

The effects of inflation are as follows:-

a) Effects on production- Inflation also affects the level of production. When inflation occurs in an economy, the prices of goods and services rise leading to higher profits. This makes the business enterprises concentrate more on earning profits which leads to misallocation of resources, adulteration of commodities, hoarding and black marketing, etc.

b) Effects on distribution- When inflation occurs in an economy, it leads to economic inequalities in the economy. The business man, industrialists, speculators, farmers, etc. gain during the inflation as they can sell their produce at higher price to earn profit but the salary earners, wages earners, etc. lose during inflation as they get fixed and less money as compared to their expenditure.

3. Discuss the causes and effects of inflation. (2017/2018/2019)

-> The causes of inflation are:

A) Increase in disposable income- When the disposable income of the people increases, it raises their demand for goods and services. Rise in national income or reduction in taxes or reduction in the saving of the people may increase the disposable income.

B) Population expansion- The rapid growths of population raise the aggregate demand in the economy due to increase in consumption, investment etc. and thus lead to inflation.

C) Black Money- The existence of black money in an economy due to tax evasion, corruption etc. increases the aggregate demand. People with such money spend extravagantly thereby creating unnecessary demand for commodities and hence the price level goes up.

D) Reduction in taxation- When the government reduces taxes, it increases the income of the people, which, in turn, create more demand for goods and services within the economy.

E) International factors- International factors may be the reason for inflation. Sometimes the prices of a basic raw material like diesel rise in the international market which leads to rise in the price of that commodity in all the countries of the world. 

The effects of inflation are as follows:-

a) Effects on the fixed income group- When the prices of goods and services rises in an economy, their purchasing power reduces as their income is fixed and is unable to meet their expenditure.

b) Effects on production- Inflation also affects the level of production. When inflation occurs in an economy, the prices of goods and services rise leading to higher profits. This makes the business enterprises concentrate more on earning profits which leads to misallocation of resources, adulteration of commodities, hoarding and black marketing, etc.

c) Effects on distribution- When inflation occurs in an economy, its leads to economic inequalities in the economy. The business man, industrialists, speculators, farmers, etc. gain during the inflation as they can sell their produce at higher price to earn profit but the salary earners, wages earners, etc. lose during inflation as they get fixed and less money as compared to their expenditure.

4. Describe five characteristics of Trade Cycle. (2019) (5marks)

-> Trade cycle or business cycle is an important feature of a capitalist economy. It is a complex monetary phenomenon. The term trade cycle is used to denote the fluctuations in economic activity which occurs in a more or less regular interval of time. Each fluctuation, the rise and fall taken together, is called trade cycle.

The features of Trade Cycle are:

1. A trade cycle is a wave like movement. It is characterised by downward and upward movements.

2. They are irregular in nature. The peaks and troughs do not occur at regular intervals.

3. The phases of a trade cycle appear in all types of business in different variations.

4. Though they are international in character, yet they did not affect all the countries equally.

5. In the trade cycle, profits fluctuate more than other incomes.

5. Explain the difficulties of the Barter System. (2019) (5marks)

-> The basic difficulties of Barter System are:-

  1. Lack of Double coincidence of wants- Barter system requires a double coincidence of wants on the part of those who want to exchange goods or services. In the barter system, goods are exchanged between two people to satisfy their demands and if the wants of two people do not coincide, then barter exchange cannot take place. This is known as lack of Double coincidence of wants.
  2. Absence of common measure of value- Another difficulty under the barter system is the absence of a common unit in which the value of goods and services should be measured. 
  3. Difficulty of Divisibility- It is difficult to fix a rate of exchange for certain goods which are indivisible.
  4. Absence of a meaningful accounting system- Under barter system since the value of each commodity can be expressed only in terms of every other commodity; one has to remember a large number of cross relations of values in exchange for different goods which is physically impossible to do when there are an infinite number of commodities. Under such conditions, no meaningful accounting system can be evolved.
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