Q17 of 10 Page 1

Describe the adjustment mechanism, if in an economy, the planned savings are lesser than the planned investments.

● The economy is in equilibrium at the income level where the saving is equal to investment.


● If the planned savings are less than the planned investment it will lead to an increase in the production to meet the excess demand.


● The national income will increase which will increase the savings.


● This movement continues until saving is equal to investment.


● The equilibrium is established here because what the investors intended to invest will be equal to what the savers intended to save.


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9

The- coefficient of price elasticity of demand is given as unity (1). At a price of < 10, a consumer buys 120 units of the commodity. How

many units of the commodity will she buy if the price increases by 20 %?


 11

(a) Explain the feature of ‘‘product differentiation’’ in the monopolistic competition form of the market, with a suitable example.

(b) Under the oligopoly form of market, why does the feature of ‘‘price rigidity’’ exist?


 20

Explain the following functions of the Central Bank :

(i) Lender of last resort


(ii) Banker to the Government


 22

The saving function of an economy is given as :

S = (–) 10 + 0 �20 Y.


If the ex-ante investments are Rs. 240 crores, calculate the following :


(i) The equilibrium level of income in the economy.


(ii) Additional investments will be needed to double the


present level of equilibrium income.