{"id":17050,"date":"2021-01-13T10:24:27","date_gmt":"2021-01-13T04:54:27","guid":{"rendered":"https:\/\/ncertsolutions.guru\/?p=17050"},"modified":"2021-01-13T12:35:34","modified_gmt":"2021-01-13T07:05:34","slug":"ncert-solutions-for-class-12-economics-chapter-6","status":"publish","type":"post","link":"https:\/\/ncertsolutions.guru\/ncert-solutions-for-class-12-economics-chapter-6\/","title":{"rendered":"NCERT Solutions for Class 12 Economics Chapter 6 Open Economy Macroeconomics"},"content":{"rendered":"

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics<\/a> Chapter 6\u00a0Open Economy Macroeconomics Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.<\/p>\n

Open Economy Macroeconomics NCERT Solutions for Class 12 Economics Chapter 6<\/h2>\n

Open Economy MacroeconomicsQuestions and Answers <\/span>Class 12 Economics Chapter 6<\/h3>\n

Question 1.
\nDifferentiate between balance of trade and current account balance. (C.B.S.E 2013,2017)
\nAnswer:
\nFollowing are the points of difference between balance of trade and current account balance:<\/p>\n\n\n\n\n\n\n
S.No.<\/strong><\/td>\nBalance ofTrade<\/strong><\/td>\nCurrent Account Balance<\/strong><\/td>\n<\/tr>\n
1.<\/td>\nBalance of trade refers to the relationship between the value of imports and exports of the goods of a country.<\/td>\nThe current account balance is obtained by adding trade in seivices and net transfers to the trade balance.<\/td>\n<\/tr>\n
2.<\/td>\nIt includes only visible items.<\/td>\nIt includes visible items, invisible items and transfers.<\/td>\n<\/tr>\n
3.<\/td>\nThe balance of trade is a narrow concept.<\/td>\nThe current account balance is a broad concept.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\"NCERT<\/p>\n

Question 2.
\nWhat are official reserve transactions? Explain their importance in the Balance of Payments.
\nAnswer:
\nThe official reserve transactions are the transactions relating to the sale and purchase of the foreign currency in the foreign exchange market. A country, running down its reserves of the foreign exchange, could engage in the official reserve transactions by selling the foreign currency in the foreign exchange market. Importance of Official Reserve Transactions in the Balance of Payments<\/p>\n

A country can run a Balance of Payments surplus or deficit by increasing or decreasing its official reserves. Under the fixed exchange rate system, countries maintain official reserves that allow them to have Balance of Payments disequilibrium, without adjusting the exchange rate. For instance, if a country runs a deficit on the overall balance, the central bank of the country can supply foreign exchanges out of its reserve holdings.<\/p>\n

However, if the deficit persists, the central bank will eventually run out of its reserves, and the country may be forced to devalue its currency. Under the flexible exchange rate system, on the other hand, central banks do not intervene in the foreign exchange markets. Central banks, therefore, do not need to maintain official reserves. Thus, the official reserve transactions are more relevant under a regime of the pegged exchange rates than when exchange rates are floating.<\/p>\n

Question 3.
\nDistinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.
\nAnswer:
\nThe nominal exchange rate is the price of one unit of the foreign currency in terms of the domestic currency. The real exchange rate is the relative price of the foreign goods in terms of the domestic goods. It is equal to the nominal exchange rate times the foreign price level divided by the domestic price level.
\nThus, the real exchange rate\u00a0 \\(\\frac{e P_{f}}{P}\\)
\nwhere,\u00a0 P = Price level in the domestic country
\nPf = Price level in the other (foreign) country
\ne = nominal exchange rate<\/p>\n

It measures the international competitiveness of a country in the international trade. When the real exchange rate is equal to one, two countries are said to be in the purchasing power parity. While the nominal exchange rate is based on the current prices, the real exchange rate is based on the constant prices.<\/p>\n

If we were to decide whether to buy domestic goods or foreign goods, the real exchange rate would be more relevant. It is because real exchange rate measures the prices abroad relative to those at home. If the real exchange rate is more than one, it implies that the goods abroad are more expensive than the domestic goods and vice-versa.<\/p>\n

\"NCERT<\/p>\n

Question 4.
\nSuppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1. 2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in term of Indian goods). (Hint First find out the nominal exchange rate as a price of yen in rupees).
\nAnswer.
\nForeign price of domestic rupee = 1.25
\nPrice level of foreign country (Pf<\/sub>) = 3
\nPrice level of domestic country (P) =1.2
\n\"NCERT<\/p>\n

Thus, the real exchange rate between India and Japan is 2. Since real exchange rate is greater than I, it indicates that Japanese goods are expensive than Indian goods.<\/p>\n

Question 5.
\nExplain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.
\nAnswer:
\nUnder the gold standard, all the currencies were convertible into gold. Thus, the fixed exchange rate system was in operation. All the countries on the gold standard had stable exchange rate. Each participant country committed itself to convert freely its currency into gold at a fixed price. This, therefore, made each currency convertible into all others at a fixed price.<\/p>\n

Under the gold standard, BoP disequilibrium was corrected through a counter-flow of gold. For instance, suppose that Indian imports from Japan are greater than its export to Japan. Since gold is the only means of international payments, it will flow from India to Japan. Consequently, while India experiences a decrease in money supply, Japan experiences an increase.<\/p>\n

This implies that the price level will tend to fall in India and rise in Japan. Further, the Indian products become more competitive compared to Japanese products in the export market. This change will improve Indian BoP and deteriorate Japanese BoP, eventually, eliminating the initial BoP disequilibrium.<\/p>\n

\"NCERT<\/p>\n

Question 6.
\nHow is the exchange rate determined under a flexible exchange rate regime?
\nAnswer:
\nIn a system of flexible exchange rates, the exchange rate is determined by the free play of the market forces of demand and supply. Flexible exchange rate system is also known as the floating exchange rate. In a completely flexible system, the central banks do nothing to directly affect the level of the exchange rate. In other words, they do not intervene in the foreign exchange market and hence, there are no official reserve transactions. The equilibrium in the foreign exchange market may be shown with the help of a diagram.
\n\"NCERT<\/p>\n

In the given figure, DD and SS are foreign exchange demand and supply curves respectively. DD and SS intersect at point E. Corresponding to this point, the equilibrium exchange rate is R* and the equilibrium quantity of foreign exchange is Q*.<\/p>\n

Question 7.
\nDifferentiate between devaluation and depreciation.
\nAnswer:
\nFollowing are the points of difference between devaluation and depreciation:<\/p>\n\n\n\n\n
S.No.<\/strong><\/td>\nDevaluation<\/strong><\/td>\nDepreciation<\/strong><\/td>\n<\/tr>\n
1.<\/p>\n

2.<\/td>\n

Devaluation is said to occur when the ex\u00adchange rate is increased by a social action under a pegged exchange rate system.<\/p>\n

Devaluation takes place when a country has adopted a fixed rate system.<\/td>\n

Depreciation of a currency means a decrease in the value of the domestic currency in terms of the foreign currency.<\/p>\n

Depreciation occurs when a country has adopted a floating exchange system.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\"NCERT<\/p>\n

Question 8.
\nWould the Central Bank need to intervene in a managed floating system? Explain why.
\nAnswer:
\nManaged floating exchange rate system is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). It is also known as dirty floating. Under this system, the central banks intervene to buy and sell the foreign currencies in an attempt to control the exchange rate movements whenever they feel that such actions are appropriate. Therefore, official reserve transactions are not equal to zero.<\/p>\n

Question 9.
\nAre the concept of demand for domestic goods and domestic demand for goods the same?
\nAnswer:
\nNo, the concepts of demand for domestic goods and domestic demand for goods are not the same. The domestic demand for goods consists of the following:
\nY = C + I + G
\nWhere; C = Consumption
\nI = Domestic Investment
\nG = Government Expenditure
\nThe demand for the domestic goods, on the other hand, refers to the Aggregate Demand in an open economy, In an open economy, exports (X) constitute an additional source of demand for the domestic goods and services that come from abroad and therefore, must be added to the Aggregate Demand. The imports (M) supplement supplies in domestic markets and constitute that part of domestic demand that falls on the foreign goods and services. Therefore, the national income identity for an open economy is:
\nY + M = C + l + G + X
\nRearranging, we get;
\nY = C + l + G + X- M
\n= C + I + G – NX
\nwhere; NX is net exports (Exports – Imports).<\/p>\n

Question 10.
\nWhat is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?
\nAnswer:
\nM = 60 + 0.06Y
\nThe import function is given as:
\nM = \\(\\bar{M}\\)-mY
\nThus, m = 0.06
\n\\(\\bar{M}\\) > 0 is the autonomous component, and 0 < m < I.
\nHere, m is the marginal propensity to import. It is the fraction of an extra rupee of income spent on imports, a concept analogous to the Marginal Propensity to Consume. There is a positive relationship between marginal propensity to import and Aggregate Demand function. Higher the marginal propensity to import, greater is the Aggregate Demand.<\/p>\n

Question 11.
\nWhy is the open economy autonomous expenditure multiplier smaller than the closed economy one?
\nAnswer:
\nThe open economy multiplier is smaller than in the closed economy because a part of the domestic demand falls on the foreign goods. An increase in the autonomous demand, therefore, leads to a smaller increase in the output in an open economy. It also results in a deterioration of the trade balance. Since, the marginal propensity to import is always greater than zero; we get a smaller multiplier in an open economy. We know that:
\n\"NCERT<\/p>\n

Let us take an example. If c = 0.8 and m = 0.3, we would have the open and closed economy multipliers as
\n\"NCERT<\/p>\n

Question 12.
\nCalculate the open economy multiplier with proportional taxes,T = tY, instead of lump-sum taxes as assumed in the text.
\nAnswer:
\nOpen Economy Multiplier (in case of lump-sum taxes) = \\(\\frac{1}{1-c+m}\\)
\nIn the case of proportional tax, the equilibrium income would be;
\nY = C+c( I -t)Y+ I +G+X-M-mY
\nY – C(I – t)Y + mY = C+1 + G + X – M
\n\\(Y=\\frac{A}{1-c(1-t)+m}\\)
\nwhere; Autonomous Expenditure (A) = C + I + G + X
\nTherefore, the open economy multiplier (in case of proportional taxes) =\\frac{1}{1-c(1-t)+m}<\/p>\n

\"NCERT<\/p>\n

Question 13.
\nSuppose C = 40 + 0.8YD<\/sub>,T = 50,1 = 60, G = 40, X = 90, M = 50 + 0.05Y
\n(i) Find equilibrium income.
\n(ii) Find the net export balance at equilibrium income.
\n(iii) What happens to equilibrium income and the net export balance when the government purchase increases from 40 to 50?
\nAnswer:
\n(i) Equilibrium income is determined as:
\n= \\(\\bar{C}\\)+ cYD<\/sub> +1 + G + (X – M)
\n= \\(\\bar{C}\\) + c(Y – T) +1 + G + (X – M)
\nGiven: C = 40 + 0.8YD<\/sub>, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y.
\nSubstituting appropriate values in (I), we get:
\nY = 40 + 0.8 (Y – 50) + 60 + 40 + 90 – (50 + 0.05Y)
\nY = 40 + 0.8Y – 40 + 60 + 40 + 90 – 50 – 0.05Y
\nY = o.8Y – 0.5Y + 40-40 + 60 + 40 + 90 – 50
\nY = 0.75Y + 140 Y
\nY – 0.75Y = 140
\n\\(Y=\\frac{140}{0.25}=560\\)
\nThus, the equilibrium income is 560.<\/p>\n

(ii) Net exports are calculated as the difference between the exports and imports. That Exports = X – M
\n= 90 – [50 + (0.05 x 560]
\n= 90 – (50 + 28)
\n= 90-78 = 12
\nThus, the net export balance at equilibrium income is 12.<\/p>\n

(ii) Change in equilibrium income due to change in government expenditure can
\n\"NCERT<\/p>\n

New income = 560 + 40 = 600
\nThus, the new equilibrium income is 600.
\nNet Exports = X – M1
\n<\/sub>= 90 – [50 + (0.05 x 600)]
\n= 90 – (50 + 30)
\n= 90 – 80 = 10
\nThus, the net export balance at new equilibrium income is 10.<\/p>\n

\"NCERT<\/p>\n

Question 14.
\nIn the above question, if exports change to X = 100, find the change in equilibrium income and the net export balance.
\nAnswer:
\n(i) Equilibrium income is determined as:
\nY = \\(\\bar{C}\\) + cYD<\/sub> +I + G + (X – M)
\n= \\(\\bar{C}\\) + c(Y – T) +I + G + (X – M)
\nGiven: C = 40 + 0.8YD<\/sub>, T = 50, I = 60, G = 40, X = 100, M = 50 + 0.05Y.
\nSubstituting appropriate values in (I), we get:
\nY = 40 + 0.8 (Y – 50) + 60 + 40 + 100 – (50 + 0.05Y)
\nY = 40 + 0.8Y – 40 + 60 + 40 + 100 – 50 – 0.05Y
\nY = 0.8Y – 0.5Y + 40 – 40 + 60 + 40 + 100 – 50
\nY = 0.75Y + 150 Y
\n– 0.75Y = 150
\n0.25Y = 150
\n\\(Y=\\frac{150}{0.25}=600\\)
\nThus, the equilibrium income is 600.<\/p>\n

(ii) Equilbrium Income when exports were 90 Y1<\/sub> = 560
\nEquilibrium Income when exports are 100\u00a0 \u00a0 \u00a0 \u00a0Y2<\/sub> = 600
\nThus, change in equilibrium income;
\ny = y2 <\/sub>– y1
\n<\/sub>= 600 – 560 = 40
\nEquilibrium income increased by 40 when exports increased from 90 to 100.<\/p>\n

(ii) Net exports are calculated as the difference between the exports and imports.That is,
\nNet Exports = X – M
\n= 100-[50 + (0.05 x 600)]
\n= 100 -(50 + 30)
\n= 100-80 = 20
\nThus, the net export balance at equilibrium income is 20.<\/p>\n

Question 15.
\nSuppose the exchange rate between the Rupee and the dollar was \u20b930 = I $ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.
\nAnswer:
\nThe rupee-dollar exchange rate as \u20b9 30 = I $ implies that if a good, say a hat, costs $ I in the USA, it will cost \u20b9 30 in India. Now, it is assumed that the prices in India double in the next 20 years but remain fixed in the USA.<\/p>\n

In, Indian the hat would now cost \u20b9 60 while in America, the hat would still cost I $. According to the purchasing power parity theory, I $ is worth \u20b9 60 for these two prices to be equivalent. Thus, the exchange rate between dollar and rupee in the year 2030 would be \u20b9 60 = I $.<\/p>\n

\"NCERT<\/p>\n

Question 16.
\nIf inflation is higher in country A than in country B, and the exchange rate between the two\u00a0 countries is fixed, what is likely to happen to the trade balance between the two countries?
\nAnswer:
\nIf inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed, the trade balance of country A will show the deficit while that of country B will show surplus. In such a situation, imports of country A will rise or exports of country A will decline. As a result, the trade balance of country A will be unfavourable and the trade balance of country B will be favourable.<\/p>\n

Question 17.
\nShould a current account deficit be a cause for alarm? Explain.
\nAnswer:
\nWhen a country runs a current account deficit, there may be a decrease in saving, increase in investment or an increase in the budget deficit, A current account deficit must be a cause for alarm if it reflects smaller saving or a larger budget deficit. The deficit indicates higher private or government consumption. In such cases, the country\u2019s capital stock will not rise rapidly enough to yield growth. It needs to repay its debt.<\/p>\n

However, a current account deficit need not be a cause for alarm if it reflects an increase in the investment, which will build the capital stock more quickly and increase future output. In short, the current account deficits need not be an issue of concern if the country invests the borrowed funds yielding a rate of the growth higher than the interest rate.<\/p>\n

\"NCERT<\/p>\n

Question 18.
\nSuppose C = 100 + 0.75YD, I = 500, G = 750, taxes are 20 percent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.
\nAnswer:
\n(i) Equilibrium income is determined as:
\nY = C + cYD+l + G + (X-M)
\n= C + c(Y – tY) +1 + G + (X – M)
\n= C + c(l – t)Y +1 + G + (X – M)
\nGiven: C = 100 + 0.75YD, t = 0.20Y, I = 500, G = 750, X = 150, M = 100 + 0.2Y.
\nSubstituting appropriate values in (I), we get:
\nY = 100 + 0.75 (1 -0.20) Y + 500 + 750 + (150 – I00-0.2Y)
\nY = 100 + (0.75) (0.8) Y + 500 + 750 + 150 – 100 – 0.2Y
\nY = 0.6Y – 0.2Y + 1400 Y = 0.4Y + 1400
\nY – 0.4Y = 1400
\n\\(Y=\\frac{1400}{0.6}=2333\\)
\nThus, the equilibrium income is 2,333.<\/p>\n

(ii) Budget deficit is estimated as the difference between government expenditure and government receipts. That is,
\nBudget Deficit
\n= G – T
\n= G – tY
\n\\(=750-\\left(\\frac{20}{100} \\times 2333\\right)\\)
\n= 750 – 467 = 283
\nThus, the budget deficit is 283.<\/p>\n

(iii) Trade deficit or surplus is estimated as the difference between the exports and imports, That is, Net Exports = X – M
\n= 150- [100 + (0.2 x 2333)]
\n= 150-(100 + 467)
\n= 150 – 567 = – 417
\nSince net exports are negative, there exists trade deficit of 417.<\/p>\n

Question 19.
\nDiscuss some of the exchange rate arrangements that countries have entered in to bring about stability in their external accounts.
\nAnswer:
\nFollowing are some of the exchange rate arrangements that country have entered in to bring about stability in their external accounts:
\n(i) The Gold Standard: From 1870 to 1914, the prevailing system was the gold standard, which was the epitome of the fixed exchange rate system. All currencies were defined in terms of gold; indeed some were actually made of gold.<\/p>\n

Each participant country committed to guarantee the free convertibility of its currency into gold at a fixed price. This meant that residents had, at their disposal, a domestic currency which was freely convertible at a fixed price into another asset (gold) acceptable in the international payments.<\/p>\n

(ii) The Bretton Woods System: The Bretton Woods Conference held in 1944 set up the IMF and the World Bank, and re-established a system of fixed exchange rate. This was different from the international gold standard in the choice of the asset in which national currencies would be convertible. The US monetary authorities guaranteed the convertibility of the dollar into gold at the fixed price of gold.<\/p>\n

\"NCERT<\/p>\n

(iii) The Fixed Exchange Rates: The countries have had flexible exchange rate system ever since the breakdown of the Bretton Woods System in the early 1970s. Prior to that, most countries had fixed or what is called the pegged exchange rate system, in which the exchange rate is pegged at a particular level.<\/p>\n

Under a fixed exchange rate system, such as the gold standard, adjustment to BoP surplus or deficit cannot be brought about through changes in the exchange rate. Adjustment must either come about automatically through the workings of the economic system or be brought about by the government.<\/p>\n

(iv) Managed Floating: Managed floating exchange rate system is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). It is also known as dirty floating. Under this system, the central banks intervene to buy and sell the foreign currencies in an attempt to control the exchange rate movements whenever they feel that such actions are appropriate.<\/p>\n","protected":false},"excerpt":{"rendered":"

Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 6\u00a0Open Economy Macroeconomics Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation. Open Economy Macroeconomics NCERT Solutions for Class 12 Economics Chapter 6 Open Economy MacroeconomicsQuestions and Answers Class 12 Economics Chapter …<\/p>\n

NCERT Solutions for Class 12 Economics Chapter 6 Open Economy Macroeconomics<\/span> Read More »<\/a><\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":""},"categories":[3],"tags":[],"yoast_head":"\nNCERT Solutions for Class 12 Economics Chapter 6 Open Economy Macroeconomics - NCERT Solutions<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ncertsolutions.guru\/ncert-solutions-for-class-12-economics-chapter-6\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"NCERT Solutions for Class 12 Economics Chapter 6 Open Economy Macroeconomics - NCERT Solutions\" \/>\n<meta property=\"og:description\" content=\"Detailed, Step-by-Step NCERT Solutions for Class 12 Economics Chapter 6\u00a0Open Economy Macroeconomics Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation. 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