1.What are the limitations of fiscal policy?

Ans. Fiscal policy can conflict with monetary policy in certain circumstances. Government spending
and taxation cuts have consequences for the government deficit; there are also limits to the utility of
stimulus in a globalised economic system. Fiscal policy refers to the use of government spending and
taxation to influence the overall level of economic activity, employment, and inflation. It is a tool
used by government to stabilize the economy, promote economic growth, and achieve social
objectives.

Limits of fiscal policies:

* Time: Fiscal policy changes can take time.

* Interest rates: Fiscal policy changes can affect interest rates.

* Uncertainty: Fiscal policy changes can create economic uncertainty.

* Inflexibility: Fiscal policies can take time to adjust.

Hyperinflation describes an excessive increase in the prices of goods in an economy. If

banks use monetary policy to set interest prices at a low rate, individuals and businesses may
borrow excessively, increase demand, and inflate prices unreasonably. Critics of supply-side
economics argue that it disproportionately benefits the wealthy and exacerbates income inequality.
Those opposed contend that it can lead to budget deficits and reduced government revenue. The
practical weaknesses of discretionary fiscal policy involve time lags, political considerations, and
crowding-out effects. Political constraints, data limitations, and the potential for policy to be
procyclical rather than countercyclical.

The maximum amount of debt that the government is able to repay and calculated as
the (state contingent) present discounted value of all the maximum present and future primary
surpluses. Long-term market interest rates may not move in the same direction as short-term
interest rates. The money demand curve may not always be downward sloping, leading to a liquidity
trap. Monetary policy may struggle to counter deflation, requiring the use of quantitative easing as
an alternative approach.

2. Discuss the concept of national income and their relationships?

Ans. National income is the money value of all goods and services produced by a country during a
period of one year. National income consists of a collection of different types of goods and services
of different types. The main concepts of national income are: GDP, GNP, NNP, NI, PI, DI, and PCI.
National income is referred to as the total monetary value of all services and goods that are
produced by a nation during a period of time. In other words, it is the sum of all the factor income
that is generated during a production year. The various measures of determining national income
are GDP (Gross Domestic Product) GNP (Gross National Product), and NNP (Net National Product)
along with other measures such as personal income and disposable income.

The positive changes in the national income increase its volume. As a result, people
consume more of goods and services which lead to increase in the economic welfare. Where the
negative in national income results in reduction of its volume. National income in India is calculated
by summing up all the incomes individuals and businesses earn. This includes total rent, wages,
interest, and profit. Symbolically, it is represented as National Income = Total Rent + Total Wages +
Total Interest + Total Profit.

*GDP (Gross Domestic Product) is the total value of goods and services produced within a country’s
borders over a specific time period, typically a year. It measures a nation’s economic activity, growth
and standard of living. Formula: GDP = C + I + G + (X - M)

Types of GDP: C: Consumer

1.Nominal GDP: Uses current prices. I: Investments

2.Real GDP: Adjust for inflation. G: Government

3.GDP Growth Rate: percentage change in GDP. X: Exports

M: Imports

*GNP (Gross National Product) is a measure of the total value of all goods and services produced by
country’s citizens, regardless of where they are located. It includes:

1. Domestic Production: Value of goods and services produced within the country.

2. Foreign Production: Value of goods and services produced by the country’s citizens
abroad.

GNP is calculated using the following formula:

GNP = C + I + G + (X - M)

*NNP (Net National Product) is a measure of the total value of all final goods and services produced
by a country’s citizens, minus depreciation (the decrease in value of assets due to wear and tear). It
is a more comprehensive measure of a country’s economic performance than Gross National
Product.

NNP is calculated using the following formula:

NNP = GNP - Depreciation

GNP: Gross National Product

Depreciation: Decrease in value of assets due to wear and tear

3. Explain internal economics of scale, and discuss the source of oligopoly?

Ans. Internal economies of scale refer to the cost saving and efficiency gains that a firm can achieve
by increasing its production scale, while remaining within its exiting organizational structure. These
economies arise from the firm’s internal operations and management decisions.

Types of internal Economies of scale:

1.Technical Economies: Achieved through specialization and division of labour, leading to increased
efficiency and productivity.
2.Marketing Economies: Realized through bulk purchasing, and branding, resulting in lower costs
and increased market share.

3.Financial Economies: Obtained through access to cheaper capital, reduced borrowing costs, and
improved cash flow management.

4.Managerial Economies: Resulting from the appointment of specialized managers, who can
optimize resource allocation and improve decision-making.

5.Risk-Bearing Economies: Arising from the ability to spread risks across a larger portfolio of
products or services.

An oligopoly is a market structure where a few large firms control most of the market.
The word oligopoly comes from the Greek words oligos meaning “few” and polein meaning “ to sell”.

Oligopoly arises from various sources:

*Structural Factors:

1. Barriers to Entry: High startup costs, regulatory hurdles, patent protection, or economies of scale
deter new entrants.

2. Industry Concentration: Few firms dominate the market, reducing competition.

3. Interdependence: Firms’ decisions affect rivals, creating interdependence.

*Market Characteristics:

1. Homogeneous Products: Similar goods or services make substitution easy.

2. Differentiated Products: Unique features reduce substitutability.

3. High Demand Elasticity: Small changes in price or output significantly impact demand.

*Economic Factors:

1. Economies of scale: Large firms achieve lower costs, increasing market power.

2. Research and Development: Investment in R&D cerates barriers to entry.

3. Government Policies: Regulatory support, subsidies, or protectionism favor existing firms.