CBSE Class 12 Economics National Income Accounting VBQs

MCQ Questions for NCERT Class 12 Economics Macroeconomics and Circular Flow of Income

Question. The study of macroeconomics deals with which of the following questions of an economy?
(i) Will prices as a whole rise or come down?
(ii) Is the employment condition of the country getting better or is it worsening?
(iii) What all factors act as a stimulant towards achieving higher growth rate?
Alternatives
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i) and (iii)
(d) (i), (ii) and (iii) 

Answer: D

Question. Which of the following is not an example of depreciation?
(a) A plant producing rubber shoes becomes obsolete when demand shift from rubber shoes to leather shoes
(b) A plant producing black and white televisions becomes obsolete when technology is discovered to produce coloured televisions               
(c) Fall in the market value of assets during the period of economic downturn
(d) Fall in the value of your residential apartment  

Answer: c 

Question. Which of the following is the cause of unexpected obsolescence?
(a) Natural calamities
(b) Change in demand
(c) Change in technology
(d) Both (a) and (c) 

Answer: A

Question. Which of the following is the main problem addressed in macroeconomics?
(a) Determination of output of a firm
(b) Determination of price of a product
(c) Determination of income and employment level in an economy
(d) All of the above  

Answer: C

Question. Which of the given pair is incorrectly matched?  

Codes
(a) A-(i)
(b) B-(ii)
(c) C-(iii)
(d) D-(iv)  

Answer: D

Question. Which of the following is not a leak from the circular flow of income/expenditure?
(a) Taxes
(b) Transfers
(c) Net imports
(d) Savings  

Answer: B

Question. Money flow refers to the
(a) flow of goods across different sectors of the economy
(b) flow of services across different sectors of the economy
(c) flow of money across different sectors of the economy
(d) flow of income across different sectors of the economy 

Answer: C 

Question. Intermediate goods are those goods 
(a) which have not yet crossed the boundary line of production
(b) which are purchased by one firm from the other firm for resale
(c) which are not included in the estimation of national product
(d) All of the above 

Answer: D 

Question. Depreciation is the
(a) loss in the value of fixed assets in use due to normal wear and tear
(b) loss of value of fixed assets in use due to normal rate of accidental damages
(c) loss of value of fixed assets in use due to foreseen obsolescence
(d) All of the above 

Answer: D

Question.`200 note lying in the pocket of Rohini, a student,is an example of ……… .
(a) stock variable
(b) flow variable
(c) Both stock and flow
(d) None of the above 

Answer: A

Question. “Expected obsolescence is included in depreciation”. The given statement is 
(a) True
(b) False
(c) Partially true 
(d) Partially false 

Answer: A

Question. Economic activities cover
(a) only activities that result in products that are exchanged in markets
(b) only activities that people engage in for profit
(c) only activities that are or can potentially be delegated to someone else
(d) only activities that are entered into the national accounts 

Answer: A

Question. The rate of interest is
(a) a flow variable
(b) a stock variable
(c) the ratio of a flow variable to a stock variable
(d) the ratio of a stock variable to a flow variable 

Answer: A

Question. The fiscal deficit is a
(a) flow variable
(b) stock variable
(c) the ratio of a flow variable to a stock variable.
(d) the ratio of a stock variable to a flow variable. 

Answer: A 

Question. If an economy produces GDP of ` 30 billion per year with a capital stock of ` 135 billion, then capital output ratio is a
(a) stock variable with a value of ` 4.5 billion.
(b) stock variable with a value of 4.5 years.
(c) flow variable with a value of ` 4.5 billion.
(d) flow variable with a value of 4.5 as pure number. 

Answer: D

Question. A car purchased by a household is a ……… .
(a) single use capital good
(b) single use consumer good
(c) durable consumer good
(d) semi-durable consumer good 

Answer: C

Question. Which of the following is a stock variable?
(a) Interest on capital
(b) Distance between Delhi and Goa
(c) Expenditure on money
(d) All of the above 

Answer: B

Question. The phases of circular flow of income includes 
(i) phase of production
(ii) phase of income generation
(iii) phase of disposal
Alternatives
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (i) and (iii)
(d) (i), (ii) and (iii) 

Answer: D

Question. Which of the following statements is/are correct?
(i) Flow of factor services rendered by the households to the producers is real flow.
(ii) Depreciation reserve fund refers to the fund which the producers keep to cope with depreciation losses in the process of production.
Alternatives
(a) Both are true
(b) Both are false
(c) (i) is true, but (ii) is false
(d) (i) is false, but (ii) is true  

Answer: A

Assertion–Reasoning MCQs

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A) 
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is false, but Reason (R) is true
(d) Both of the statements are false

Question. Assertion (A) LED TV is an example of durable consumer goods.
Reason (R) LED TV can be repeatedly used for several years and is of relatively high value. 

Answer: A

Question. Assertion (A) Microeconomics and Macroeconomics are interdependent upon each other. One cannot study the two in isolation.
Reason (R) Microeconomics has a smaller degree of aggregation while Macroeconomics has greater degree of aggregation. 

Answer: A

Question. Assertion (A) High fixed investment is a sign of growth and development.
Reason (R) Fixed investment indicates production capacity of a nation. Greater the addition to production capacity (fixed investment), higher the growth and development. 

Answer: A

Question. Assertion (A) All producer goods are capital goods.
Reason (R) Producer goods are those which are used in the production of other goods whereas capital goods are the fixed assets of the producers. 

Answer: A

Question. Assertion (A) Unexpected obsolescence is an element of depreciation.
Reason (R) Loss of value of fixed assets owing to un expected obsolescence is called capital loss.

Answer: C

Question. Assertion (A) Expenditure on maintenance of machinery is an intermediate expenditure.
Reason (R) All expenditures on repair and maintenance incurred by the firm are treated as part of intermediate consumption. 

Answer: A

Question. Assertion (A) Real flow and money flow are one or the same thing, presented in a different form.
Reason (R) In money flow, there is no involvement of goods in its physical form. 

Answer: D

Short Answer  Type Questions

Question. Giving reasons, classify the following into intermediate goods and final goods.
(i) Ceiling fan purchased by a tailor for his shop.
(ii) Chalks, dusters, etc. purchased by a school.
Answer: (i) Ceiling fan purchased by a tailor for his shop is a final good because tailor is the final user of the ceiling fan and no value is to be added to the ceiling fan. This will be deemed as investment expenditure because ceiling fan is used by the tailor for several years and is of high value.
(ii) Chalks, dusters, etc. purchased by a school are intermediate goods as these are used up in the process of value addition during the year.

Question. ‘All producer goods are not capital goods’. Do you agree?
Answer: Yes, I agree that all producer goods are not capital goods,because producer goods includes
(i) Goods which are used as raw material like wood,used to make furniture.
(ii) Goods which are used as fixed assets like plant and machinery.
Capital goods include only fixed assets of the producers.
These are durable goods. On the other hand, goods used as raw material are not capital goods as these are not repeatedly used in the process of production. Thus, all producers goods are not capital goods.

Question. Giving reasons, classify the following into intermediate goods and final goods.
(i) Curtain cloth purchased by a household.
(ii) Machinery installed in an office.
Answer: (i) Curtain purchased by a household is a final consumer good because the household is the final user of the curtain cloth and there is no value addition.
(ii) Machinery installed in an office is a final producer good because machinery is finally and repeatedly used by the office for several years and these are of high value.

Question. ‘‘Final goods include only those goods which are consumed by the households.’’ Defend or refute the given statement with valid reason. 
Answer: Final goods include only those goods which are consumed by the households. The given statement is refused as final goods are the goods which have crossed the boundary line of production and are ready to use by consumers and producers (includes capital goods). These goods can be further classified as final consumer goods and final producer goods.

Question. Explain with the help of an example, the basis ofclassifying goods into final goods and intermediate goods.
Answer: The basis of classification is the end-use of the product.
Goods which are used by the producers in the process of production such as raw material or goods purchased for resale, are known as intermediate goods, e.g. shirt purchased by a firm for resale. These goods are still within the production boundary.
Goods which are outside the boundary line of production and are ready for use by their final users are called final goods, e.g. shirt purchased by a consumer.

Question. Which among the following are final goods and which are intermediate goods? Give reasons.
(i) Milk purchased by a tea stall
(ii) Bus purchased by a school
(iii) Juice purchased by a student from the school canteen
Answer: (i) ‘Milk purchased by a tea stall’ is an intermediate goods.
Reason It will be used as a raw material for making tea and involves value addition.
(ii) ‘Bus purchased by a school’ is final good.
Reason School purchases bus as long-term durable product and it is an investment for school. It is not for re-sale.
(iii) ‘Juice purchased by a student from school canteen’ is final good.
Reason Here juice is purchased for direct satisfaction of student’s need, i.e., juice is being consumed by its end user.

Question. Distinguish between consumption of fixed capital and capital loss.
Answer: Consumption of fixed capital refers to depreciation of fixed assets. It refers to loss of value of fixed assets while these are being used in the process of production. It occurs on account of normal wear and tear, accidental damages and expected obsolescence.
On the other hand, capital loss is the loss of value of fixed assets when these are not being used. It occurs on account of natural calamities (like earthquake, floods, or fire) and fall in the market value11. Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank. 
Answer: Stock is that quantity of an economic variable which is measured at a particular point of time. Stock has no time dimension. Flow is the quantity of an economic variable which is measured during the period of time. Flow has a time dimension as per hour, per day or per month.
Net investment is a flow variable and capital is a stock variable. Flow of water in a tank is flow because it is measured as per unit of time period. Whereas, stock of water in a tank is stock because it is measured at a point of time. Capital is like a stock of water in the tank at a point of time.

Question. Give reasons and categorise the following into stock and flow. 
(i) Capital
(ii) Saving
(iii) Gross domestic product
(iv) Wealth
Answer: (i) Capital It is a man-made means of production. It is a stock because it is measured at a given point of time.
(ii) Saving It is the surplus of production over consumption. It is a flow as it is measured during a period of time.
(iii) Gross Domestic Product It is a flow as it is the market value of final goods and services produced within the domestic territory measured during a period of time.
(iv) Wealth It is a stock as it is measured at a particular point of time.

Question. Distinguish between money flows and real flows.
Answer: Flow of income refers to flow of goods and services (or their money value) across different sectors of the economy. It is called real flow in case it occurs in the form of goods and services, e.g., households rendering their factor services to the producers and in return producers offering final goods and services to the households. It is called money flows because there is a flow of money value from one sector to the other, e.g.,producers make factor payments to the households and households make payments to the producers for the purchase of goods and services.

Question. Why is the flow of income and product called a circular flow?
Answer: It is because of the following reasons that the flow of income and product is called a circular flow (i) Corresponding to each real flow to one direction, there is money/income flow from the opposite direction. For example Corresponding to the flow of factor services (which is a real flow) from household to the producer sector, there is a flow of factor payments (which is a money flow) from producer to the household sector.
(ii) In a two sector economy, receipts of one sector are equal to payments to other sector. In case receipts are less than the payments (or payments are less than the receipts), circularity is bound to stop at one point or the other.
(iii) Activities of production, income generation and expenditure never stop in the economy. They keep chasing one another in a circular manner.

Question. Describe the four major sectors in an economy according to the macroeconomics point of view.
Answer: An economy is generally classified into the following four sectors
(i) Household Sector It is engaged in the consumption of goods and services.
(ii) Producing Sector It is engaged in the production of goods and services.
(iii) Government Sector It is engaged in such activities which are related to taxation and subsidies as well as consumption and production.
(iv) Rest of the World It is engaged in exports and imports.

Question. How money flows are opposite to real flows?
Explain with the help of an example.
Answer: Money flows are opposite to real flows because money flows in response to the real flows. For example, There is a real flow of goods and services from the producers to the households. It is in response to it, that the households make payments to the producers. So, money flows from the households to the producers in terms of consumption expenditure. 
Likewise, there is a real flow of factor services from the households to the producers. It is in response to it, that the producers make payments to the households. So,money flows from producers to the households in terms of factor payments.

Long Answer  Type Question

Question. Explain the circular flow of income in a two sector economy with the help of a diagram.
Answer: In a two sector economy, there are only two sectors of economic activity namely households and firms. Households supply factor services to firms and firms hire factor services from households. Households spend their entire income on consumption. Firms sell what is produced to the households.
There are two types of markets in this economy 
(i) Product Market Market for goods and services.
(ii) Factor Market Market for factors of production.
The above figure shows that "
(i) Total Production of Goods and Services by firms = Total Consumption of Goods and Services by Households
(ii) Factor Payments by Firms = Factor Incomes of Households
(iii) Consumption Expenditure of Households = Income of Firms Thus, Real Flow of Production and Consumption of Firms and Households = Money Flows of Income and Expenditure of Firms and Households 

Case Study Questions Macroeconomics and Circular Flow of Income Class 12 Economics   

Question. The above diagram shows which type of circular flow of income?
(a) Real flow
(b) Physical flow
(c) Money flow 
(d)None of these 

Answer: C

Question. Government expenditure in the above case is an example of ………… .
(a) injections
(b) leakages
(c) withdrawals
(d) Both (b) and (c) 

Answer: A

Question. Which of the following is a leakage from the circular flow of income as per the above diagram?
(i) Taxes
(ii) Savings
(iii) Imports
(iv) Exports
(v) Government expenditure
(vi) Investment Alternatives
(a) (i), (iii) and (iv)
(b) (i), (ii) and (iii)
(c) (iii), (v) and (vi)
(d) (iv), (v) and (vi) 

Answer: B

Question. Imports in the above model is an example of
 (a) injections
(b) leakages
(c) withdrawals
(d) Both (b) and (c) 

Answer: D

Question. Assertion (A) Intersectoral flows refer to the flow of goods and services as well as flow of moneyReason (R) Intersectoral interdependences are satisfied through a system of mutual exchanges, and mutual exchanges lead to intersectoral flows of money as well as goods and services.
 Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is false, but Reason (R) is true
(d) Both the statements are false 

Answer: A 

Question. When money moves out of circular flow of income,it is known as ……… .

(a) Leakages
(b) Injections
(c) Both (a) and
(b) (d) None of these 

Answer: A

Question. The figure shows ……… flow.
(a) real
(b) money
(c) Both (a) and (b)
(d) None of these 

Answer: B

Question. Who are considered as the owner of factors of production in the circular flow of income?
(a) Firms
(b) Household
(c) Government
(d) Rest of the world  

Answer: B

Question. In an two economic model described above, how many sectors are there?
(a) Three
(b) Two
(c) Five
(d) None of these 

Answer: B

Question. Assertion (A) Real and money flows are the essence of modern economic activity.
Reason (R) Factor services flow from household to the producers without which production activity is not possible. Likewise, factor incomes flow from producers to the households without which consumption activity is not possible.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is false, but Reason (R) is true 
(d) Both the statements are false 

Answer: A

Question. The value of Marginal Propensity to Save (MPS) is zero. In this case, the value of Marginal Propensity to Consume (MPC) will be ……… .
(a) 1
(b) 0
(c) − 1
(d) None of these 

Answer: A 

Manish is an entrepreneur who manufactures decorative items. He is at the helm of affairs. He hires wage labour from the mar et and employs the services of capital and land as well. After hiring the inputs, he undertakes the task of production which involves conversion of raw material into finished products.
His motive is to ensure the optimal utilisation of the available inputs and to produce output for sale in the market and maximise profit.
His products are also available on e-commerce websites and are not limited only to domestic consumers but to consumers of other countries as well thus, ensuring inter-regionalism.
However in this process, he undertakes risks and uncertainties, for example he may not get a right price for his product which in turn would minimise his profit level. There is also a possibility that the goods might damage during shipping process.

Question. Choose the correct statement from given below options.
(a) Manish is involved in production activity
(b) Manish is involved in distribution of goods
(c) Manish is involved in disposal of income
(d) All of the above

Answer: A 

Question. Manish sells his goods in countries like America,Belgium and Germany. Trade with these countries includes which of the following sector of an economy?
(a) Household
(b) Firms
(c) Government
(d) Rest of the world 

Answer: D

Question. As per the case given above, profit earned by Manish will be referred as ……… .
(a) factor income
(b) transfer income
(c) unproductive service
(d) non-market service 

Answer: A

Question. Export of good to the rest of the world will lead to ………… in circular flow of income.
(a) increase
(b) decrease
(c) no change
(d) ambiguous 

Answer: A

Question. Manish is selling in foreign countries as well. If it is to be a model of circular flow of income, which of the following it should be?
(a) Closed economic model
(b) Open economic model
(c) Traditional economic model
(d) Modern economic model 

Answer: B 

Question. Assertion (A) One of the way to mitigate the risk of damage or loss is to get the goods insured.
Reason (R) Insurance act is an assurance to safeguard and provide some sense of security to the concerned parties involved.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason
(R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is false, but Reason (R) is true
(d) Both the statements are false 

Answer: A