(a) Bank rate is the rate at which the central bank provides credit to commercial banks. An increase or decrease in the bank rate leads to an increase or decrease in the market rate of interest, thereby the cost of credit changes in the market. During inflation, an increase in the bank rate increases the cost of capital which reduces the flow of credit.
(b) Two causes for increase in public expenditure in recent times:
1. Developmental Work: Modern state has also taken up developmental work in addition to their primary functions of administration and defense and others benefits such as old age pension, free medical aid, free education etc. to improve the social-economic welfare of the country.
2. Increase in Population: The government has to incur great expenditure to meet the requirements of increasing population. In fact, the public expenditure increases in the same ratio in which the population increases.
(c) Demand Schedule :
| Price (Rs.) |
Qty. of Mangoes demande (kgs) |
| 350.00 |
2 |
| 300.00 |
3 |
| 250.00 |
4 |
| 200.00 |
5 |
| 150.00 |
6 |
| 100.00 |
7 |
(d) Perfectly inelastic supply curve:
(e) Low saving ability is the main cause for low capital formation in India. The people in India have the desire to save and possess all those factors, which motivate the ‘will to save’ but they have lower per capita income. Hence the low rate of savings leads to a low rate of capital formation.
