Workbook
Workbook
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Macroeconomics
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ISBN : 81-314-0227-4
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Preface
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The ICFAI University has been upgrading the study material so that it is amenable for self study
by the Distance Learning Students.
We are delighted to publish a Workbook for the benefit of the students preparing for the
examinations. The workbook is divided into three different parts.
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A brief summary of all the chapters in the textbook are given here for easy recollection of the
topics studied.
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Students are advised to go through the relevant textbook carefully and understand the subject
thoroughly before attempting Part I. Under no circumstances the students should attempt Part I without
fully grasping the subject material provided in the textbook.
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The students should attempt Part II only after carefully going through all the solved examples in
the textbook. A few repetitive problems are provided for the students to have sufficient practice.
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The Model Question Papers are included in Part III of this workbook. The students should attempt
all model question papers under simulated examination environment. They should self score their
answers by comparing them with the model answers.
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Effective from April, 2003, the examinations for all the subjects of DBF/CFA (Level-I) consist
of only multiple-choice questions. Each paper consists of Part I and Part II. Part I is intended to
test the conceptual understanding of the students. It contains 40 questions carrying one point
each. Part II contains problems with an aggregate weightage of 60 points.
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Please remember that the ICFAI University examinations follow high standards that demand
rigorous preparation. Students have to prepare well to meet these standards. There are no shortcuts to success. We hope that the students will find this workbook useful in preparing for the
ICFAI University examinations.
Work Hard. Work Smart. Work Regularly. You have every chance to succeed. All the best.
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Contents
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Part I
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Part III :
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Part II :
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Detailed Curriculum
Overview of Macroeconomics: Microeconomics vs. Macroeconomics, Fundamental Concerns of Macroeconomic
Policy, Objectives and Instruments of Macroeconomics, Aggregate Supply and Aggregate Demand.
The National Income and Product Accounts: Gross Domestic Product, Two Measures of National Product:
Goods-Flow and Earnings-Flow, Business Accounts and GDP, The Problem of "Double Counting", Details of
the National Accounts.
Consumption and Investment: Consumption and Saving, The Consumption Function, The Savings Function,
Investment: Determinants of Investment, The Investment Demand Curve, Shifts in the Investment Demand Curve.
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Aggregate Demand and the Multiplier: The Downward-Sloping Aggregate Demand Curve, Shifts in
Aggregate Demand, Relative Importance of Factors Influencing Demand. Output Determination with Saving and
Investment, The Meaning of Equilibrium, Output Determination by Consumption and Investment, The
Multiplier, The Multiplier in the AS-AD Framework, The Paradox of Thrift.
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Government, International Trade, and Output: Impact of Fiscal Policy on Output, Fiscal Policy Multipliers,
Impact of International Trade on GDP.
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Money and Banking: Money Supply and Interest Rates: Components of Money Supply, Interest Rates: Real vs.
Nominal Interest Rates, The Demand for Money, Money's Functions, The Process of Deposit Creation, Balance
Sheet of the Central Bank. Credit Control by the Central Bank. The Effects of Money on Output and Prices: The
Monetary Transmission Mechanism, The Money Market, Supply of and Demand for Money, The Monetary
Mechanism, Monetary Policy in an Open Economy, Monetary Policy in the AD-AS Framework, Monetary
Effects in the Long Run.
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Economic Growth and Aggregate Supply: The Four Elements in Development: Human Resources, Natural
Resources, Capital Formation, Technological Change and Innovation. Theories of Economic Growth,
Determinants of Aggregate Supply, Aggregate Supply in the Short run and Long run.
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Business Cycles and Unemployment: Features of the Business Cycle, Business Cycle Theories,
Unemployment: Okun's Law, Impact of Unemployment, Economic Interpretation of Unemployment.
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Price Stability: Inflation: Definition of Inflation, Price Indexes, The Economic Impacts of Inflation, Modern
Inflation Theory: Prices in the AS-AD Framework, The Phillips Curve, Anti-inflation Policy.
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Classical, Keynesian and Post-Keynesian Macroeconomics: The Classical Tradition: Say's Law of Markets,
Policy Consequences, The Keynesian Revolution, Retreat from Keynes. The Monetarist Approach: The Quantity
Theory of Prices. Modern Monetarism, New Classical Macroeconomics: Rational Expectations, Implications for
Macroeconomics, Ultra-Classicism: Supply-Side Economics: Macroeconomic Policies.
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Economic Consequences of Debt: Budgets and Fiscal Policy, Definitions, Government Budget Policy,
Discretionary Fiscal Policy, Automatic Stabilizers, Fiscal Deficits: Concepts and Trends, Applications of
Cyclical and Structural Budgets. The Burden of Deficits and Debts, The Crowding-Out Controversy, CrowdingOut and the Money Market, Impact of Structural Deficits, Government Debt and Economic Growth, External vs.
Internal Debt.
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Policies for Growth and Stability: The Interaction of Monetary and Fiscal Policies.
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The Open Economy: International vs. Domestic Trade. Economic Basis for International Trade, The Principle
of Comparative Advantage, The Economic Gains from Trade, Protectionism : Supply-and-Demand Analysis of
Trade and Tariffs, The Determination of Foreign Exchange Rates, Floating Exchange Rate and Fixed Exchange
Rates. The Balance of Payments.
Strategies of Economic Development: The Backwardness Hypothesis, Industrialization vs. Agriculture, State
vs. Market, Growth and Openness.
International Financial Institutions: The International Monetary Fund (IMF), The World Bank, Asian
Development Bank, International Financial Corporation, Bank for International Settlements.
Macroeconomic Policies in India: An Overview of Monetary Policy, Fiscal Policy, Industrial Policy, Trade
Policy in India.
Current Developments.
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The concepts like national income and national product are most significant in
macroeconomic accounting. As the accounting statement of a firm provides information on
the flow of revenues and expenses fully to show the firms performance, the national income
accounts supply similar information for the economy as a whole. They provide
comprehensive overview of how the economy is doing. Among the various aspects that shape
the economy is the nations capacity to produce goods and services and keep various factors
of production employed. The GNP growth rate, the most important indicator of the nations
economy, shows whether the nations income is expanding or contracting, and thus, it is the
broadest statistical aggregate of our economic output and growth. The estimates of GNP and
national income provide the policy makers and business community with the most useful tool
for analyzing an economys economic performance. In simple terms, GNP is the sum of all
final goods and services produced during a specified time period, usually a year, with each
class of goods and services measured at its market value, i.e. at price usually paid. In addition
to GNP, there are some other aggregates of national product such as GDP, NDP, and NNP
that measure a nations production of goods and services. GDP is the value at current
market prices or factor prices of the total final goods and services produced inside an
economy or country during a given time. By contrast, GNP is the value at current market
prices or factor prices of the total final goods and services produced during a year by the
factors owned by an economy or country. The difference between gross and net products is
depreciation. In words, depreciation is deducted from gross products to get net products.
When measuring GNP, or any other aggregate of national product, only the final value of
goods and services is to be considered. In other words, only the value added at each stage of
production process is considered while measuring GNP.
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There are three methods of calculating national income, and they are all conceptually
equivalent to each other. They are (a) output method, (b) the expenditure method, and (c) the
income method. The output method is followed either by valuing all the final goods and
services produced during a year or by aggregating the values imparted to the intermediate
products at each stage of production by the industries and productive enterprises in the
economy. The sum of these values added gives the gross domestic product at factor cost,
which after a similar adjustment to include net factor income from abroad gives gross
national product at factor cost. The expenditure method aggregates all money spent by
private citizens, firms and the government within the year, to obtain total domestic
expenditure at market prices. It aggregates only the value of final purchases and excludes all
expenditures on intermediate goods. However, since final expenditure at market prices
include both the effects of taxes and subsidies and our expenditures on imports while
excluding the value of our exports, all these transactions have to be taken into account before
we obtain gross national product by this method. The income approach to measuring national
income does not simply aggregates all incomes. It aggregates only incomes of residents of
the nation, corporate and individual, that obtain income directly from the current production
of goods and services. It aggregates the money payments made to the different factors of
production, i.e. factors income and excludes all incomes which cannot be considered as
payment for current services to production.
The principal tool of analysis in the Simple Keynesian Model of Income Determination
model is the aggregate demand. The focus of this model is only the goods market and the
influence of the money market on the goods market. The model is build assuming that prices
do not change at all and that firms are willing to sell any amount of output at the given level
of prices (the aggregate supply curve is perfectly elastic). Aggregate demand is the total
amount of goods demanded in the economy and is equal to the sum of consumption spending
(C), investment spending (I), government purchases (G), and net exports (NX).
AD = C + I + G + NX
Equilibrium level of output is that level of output at which the total desired spending on
goods and services (desired aggregate demand) is equal to the actual level of output (Y).
The concept of multiplier is a very useful one. The multiplier tells what the increase in the
level of equilibrium income would be for a unit increase in autonomous spending. Multiplier
is given by the ratio of increase in equilibrium income to increase in autonomous spending.
The value of the multiplier is the reciprocal of the marginal propensity to save, assuming all
other components of aggregate demand I, G and NX are constant and independent of the
level of income. The larger the marginal propensity to consume, the lower is the marginal
propensity to save, and thus larger is the value of the multiplier.
Multiplier, = 1/MPS
Taxes play an important role in determination of disposable income. When tax is considered,
the value of the multiplier is equal to 1/[1 b (1 t)], where, b is the marginal propensity to
consume and t is the rate of tax. Thus, a cut in the tax rate would, therefore, increase the
value of multiplier.
The value of multiplier in the above case is determined assuming that the other components
of aggregate demand, I, G and NX are constant and independent of the level of income. But,
in real scenario, the imports are dependent of the level of the income. Mathematically,
imports (M) = M(Y) = mY, where m is the marginal propensity to import = M/Y. Thus, the
value of multiplier is equal to
1/[1 b (1 t) + m]
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In the simple Keynesian model of income determination, we have determined the level of
income assuming that the investment being autonomous. And therefore we completely
avoided the role of interest rates (and money supply) in determining the level of income. But,
we know that interest rates and money supply have a major role to play in the economy.
The IS curve shows the combinations of interest rates and level of output such that planned
spending equals income. As interest rates and planned investment spending are inversely
related, the IS curve slopes downward. At equilibrium, (in goods market) Y = AD. But,
investment is a component of aggregate demand. Thus, the equilibrium output decreases
(increases) as interest rate rises (decreases), due to inverse relationship between interest rates
and planned investment expenditure. If the interest rate increases, ceteris paribus, interest
sensitive private investors reduce their investment spending, known as crowding out.
Asset market is a market in which money, bonds, stocks, houses and other forms of wealth
are traded. The demand for money is influenced by the level of real income and the interest
rate. It depends on the level of real income because individuals hold money to pay for their
consumptions, which in turn, depend on income. The demand for money depends also on the
cost of holding money. The cost of holding money is the interest that is forgone by holding
money rather than other assets. LM curve shows the combinations of income and interest rate
that produce equilibrium in the money market. The LM curve slopes upward. Because, if
there is an increase in income, the demand for money rises and this excess demand push the
market interest rates up. The real money supply is held constant along the LM curve, and
therefore, a change in the real money supply should shift the LM curve that an increase in
real money supply shift the LM curve down and to the right whereas a decrease in the real
money supply shift the LM curve up and to the right.
Points on the IS curve indicate equilibrium in the goods market and points on the LM curve
indicate equilibrium in the money market. For simultaneous equilibrium in both the goods
market and the money market, point indicating such equilibrium will have to lie on both the
IS and the LM curves. Such a point exists only at the intersection of the IS and LM curves.
Crowding out happens due to increase in interest rates, and therefore, can be reduced by
increasing the money supply.
Money is one of the most crucial elements of economic science. It acts as a medium of
exchange, unit of account, a standard of deferred payment and a store of value. Classical
economists viewed that money is demanded only for spending purposes. However, latter
Keynes recognized that money was held for other reasons too. In this view money would be
held as an asset, a non-interest-paying asset, whereby velocity is affected and tends to
change. According to him, the three motives for holding money are transactions, precaution
and liquidity or speculation.
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The aggregate demand schedule (or curve) shows the combinations of the price level and the
level of output at which the goods and money markets are simultaneously in equilibrium. The
aggregate demand schedule (or curve) slopes downward owing to inverse relationship
between price level and the level of output demanded. In addition to price level, there are
other factors such as income levels, rate of interest, government policy, exchange rate,
expected rate of inflation and business expectations influence the aggregate demand in an
economy. When these factors or variables change, the aggregate demand curve will shift.
In short run, the aggregate supply curve slopes upward from left to right for part of its range
because at any point in time there is a limit on the output of goods and services. This limit
increases as with increased production, the availability of idle resources decreases and limit
is reached when the production reaches full employment level of output. When the resources
available are fully employed the short run aggregate supply curve becomes vertical. At this
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point, further increases in price level will have no effect on output. In short, the aggregate
supply curve, in short run, slopes upward from left to right for a part of its range and
straightens at the end.
In the short run, the discrepancy between actual and expected price level causes changes in
output and employment. But in the long run, if all other things remain constant, the higher
price level will come to be accurately expected by firms, narrowing down the difference
between expected and actual price levels. This is important because in the long run, the costs
incurred by business firms rise as economic agents reach to higher prices.
The higher level of output in the short run was possible only because the unanticipated rise in
the price level led to higher profits to business firms. As soon as the costs increase in line
with final prices, the incentive to produce higher levels of output disappears and the
production reverts to its original level. In this situation, the level of output will be at its
natural rate and deviations from this state are possible only when actual price level differs
from the expected price level in the short run. Thus, in the long run, the natural rate of output
is the equilibrium rate of output for the economy.
In the long run, the natural rate of output is the level of output to which the economy will
tend to adjust in the long run. This indicates that in the long run the average price level has no
effect on the level of output (Y). Any unanticipated price rise in the short run will be offset in
the long run by an increase in costs as contracts with the suppliers of inputs are renegotiated.
Therefore, in the long run the output of an economy does not depend on the price level, but
on factors such as, labor import costs, capital stock, technological progress, etc. These factors
are not influenced by changes in the average price level and so is the case with aggregate
supply in the long run. Therefore, in the long run, the aggregate supply of an economy is
vertical at the natural rate of output.
Most of the factors that affect the position of the aggregate supply curve in short run also
affect the position of the aggregate supply curve in the long run, with few exceptions. Some
of the important factors affect aggregate supply curve are change in costs of production,
supply shocks, investment spending and technological changes, availability of raw materials,
supply of labor, human capital and incentives.
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Money is anything that serves as a commonly accepted medium of exchange. Money also
acts as a unit of value and a store of value. In past, commodities such as salt and oxen were
used as money but they failed to serve the purpose well. Latter, they were replaced by
precious metals such as gold, silver, etc. However, they too did not serve the purpose well.
All these were replaced by paper money as it has the basic features of good money, i.e.
portability, divisibility, durability, uniformity and storability.
Determining what should be included in the money supply is not as easy as it appears. Money
is sometimes defined as anything generally acceptable as a medium of exchange. Four
definitions of money are commonly used M1 to M4. M1 (known as narrow money) is made
up of currency with the public plus demand deposits with the banking system plus other
deposits with the RBI. M2 holds M1 plus post office savings bank deposits. M3 (known as
broad money) includes M1 plus time deposits with the banking system. And finally M4
includes M3 + total post office deposits (excluding national savings certificates).
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The Reserve Bank of India (RBI) issues money in the form of two rupee notes and above.
The central government also issues money in the form of one-rupee notes, coins and small
coins. The RBI currency plus the Government money constitutes the monetary base, which is
known as High Powered Money. The RBI currency together with the Government money
with the commercial banks is treated as Vault Cash. The deposits of the commercial banks
comprise of the balances maintained by the banks with the RBI. This is to ensure that the
commercial banks can meet all demands for withdrawals on the part of their depositors. The
banks may also choose to hold reserves over and above the statutory minimum, known as the
excess reserves. The commercial banks are required to maintain with the RBI a minimum of
Cash Reserve Ratio (CRR) as specified by the RBI on a fortnightly basis.
Commercial banks have the ability to multiple the money supply. The money supply
multiplier depends on the Cash Reserve Ratio (CRR) specified by the RBI and deposit ratio.
CRR specifies the percentage of deposits that every commercial bank must keep on deposit
with the Reserve Bank of India. In its simplest form, the money multiplier approach is based
on Ms = m. H equation, where m is the money multiplier and Ms is the broad money (M3)
and H is the high-powered money. However, m is equal to c + 1/c + r where c is the currency
deposit ratio and r is the reserve ratio. Currency deposit ratio depends on the attitude of the
people. But, reserve requirement is at the control of the RBI. Thus, RBI changes the reserve
ratio in order to manipulate the money supply in the economy.
The money supply in an economy is determined by the behavior of public in depositing their
income with the bank, the lending behavior of commercial banks, reserve ratio specified by
the RBI and some other factors.
The supply of and demand for money combinely determine the equilibrium of money
markets. The money markets will be in equilibrium when the quantity of real balances
demanded equals the quantity supplied.
A well-developed financial system is very essential for the smooth functioning of any
economy. One set of important statistical indicators that is used to look at the financial
development of a country is financial development ratios. These ratios are (i) Finance ratio,
(ii) Financial interrelations ratio, (iii) New issue ratio, and (iv) Intermediation ratio. Finance
ratio is the ratio of total financial claims issued during the year to national income of that
year. Financial interrelation ratio is the ratio of financial claims issued to net physical capital
formation. New issue ratio is the ratio of primary (new) issues by the non-financial sector to
the net physical capital formation. And intermediation ratio is the ratio of secondary issues to
primary issues.
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According to classicals, the economy will always be at its full employment level of output.
At the full employment level of output, any employment, which might exist, is voluntary and
is referred to as the natural rate of unemployment, because output cannot be raised above its
current level even if the price level rises. There is no more labor available to produce any
extra output. Thus, the aggregate supply curve will be vertical (i.e. perfectly price inelastic
aggregate supply curve) at a level of output corresponding to full employment of the labor
force.
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This classical approach to analyzing economic behavior came under severe criticism due to
its unrealistic assumptions of wage price flexibility and the existence of voluntary
unemployment. In real world, all unemployment is certainly not voluntary. There are many
who wish to work but cannot find work implying the existence of involuntary unemployment.
J M Keynes and Keynesian economists disputed the classical assumptions and pointed out
that a perfectly efficient wage price flexibility is far from real world. Keynesian aggregate
supply curve is based on the assumption that the wage does not change much or change at all
when there is unemployment, and thus the unemployment can continue for sometime.
The Great Depression and its adverse impact on world economy undermined the classical
view and provided the foundation for the Keynesian analysis of the Great Depression, which
was completely a demand side approach. Keynes rejected the classical view and offered a
completely new concept of output determination. He believed that spending induced business
firms to supply goods and services. From this he argued that if total spending fell due to
pessimistic or unfavorable expectations about future, then business firms would respond by
cutting production which in turn led to less spending and less output and employment. The
classical economists were also aware of this possibility, but they believed the labor surplus
would drive down wages, reducing costs and lowering prices until the surplus was eliminated
and the economy was directed to full employment within reasonable time. Keynes and his
followers rejected this view, arguing that wage-price flexibility is an impossible proposition,
particularly in a downward direction in modern economies characterized by large corporate
sectors and powerful trade unions. Keynes also introduced a completely different concept of
equilibrium. In the Keynesian framework equilibrium takes place at a less than full
employment level of output. The Keynesian view of less than full employment or less than
full capacity output could be explained as aggregate expenditure or aggregate demand leads
to current level of output and employment. The business sector will produce only the quantity
of goods and services it believes households (i.e. domestic consumers and investing
community), government and foreigners will plan to buy. If this aggregate expenditure
consumption, investment, government spending and net exports is less than the economys
full capacity output, output will fall short of its potential capacity, which is the full
employment level of output. When aggregate expenditure is deficient, there are no automatic
forces, as believed by classical economists, capable of assuring full employment. The result
is that the actual output will be less than capacity output which in turn results in prolonged
unemployment and decline in output. This was how Keynes explained the Great Depression
highlighting the drawbacks of self-regulating private enterprise economies.
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Keynesians suffered a major blow as their postulates failed to explain the happenings during
the post-1968 period when the rate of growth of output declined, the rate of inflation
increased coupled with rising unemployment. This paradox of stagflation is inconsistent with
the tenets of Keynesian economics that cyclical movements in prices and outputs relative to
trend are positively correlated. This led to reconsideration of theories underlying
policymaking and rival schools of thought such as Monetarist School, Rational Expectations
and Supply-side Economics (popularly known as Reaganomics). Supply-side economics
represent a return to orthodox classical economics and its recent more formal statement the
New Classical Macroeconomics.
The school of Monetarism argues that disturbances within the monetary sector are the
principal causes of instability in the economy. According to them, the money supply is the
principal determinant of the levels of output and employment in the short run and the price
level in the long run.
Rational Expectations School argues that expectations on the future values of economic
variables play an important role in macroeconomic analysis and economic analysis in
general. The hypothesis of rational expectations has three important implications for
macroeconomic analysis and policy.
The advocates of rational expectations school contend that their usefulness is limited,
because the parameters of the model will change when new policies are given
prominence over the others. Since estimates of the effects of the new policies are based
on the original set of parameters, the actual implications may be quite different. As a
result, economic models are considered not so helpful in selecting an appropriate policy
option.
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Discretionary monetary and fiscal policy cannot be used to stabilize the economy.
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Supply side economics is a view emphasizing policy measures to affect aggregate supply or
potential output. This approach holds that high marginal tax rates on labor and capital
incomes reduce work effort and saving.
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A business cycle is a swing in total national output, income and employment marked by
widespread expansion or contraction in many sectors of the economy. Typically, a business
cycle is divided into four phases: (i) the recovery or revival of economic activity (ii) the
prosperity or expansion of the activity (iii) the recession or downturn in economic activity,
and (iv) the depression or contraction in the economic activity.
A number of theories are proposed to explain the cyclical behavior of business cycles, which
includes supply shock theory, multiplier-acceleration and Keynes. But, no theory answered
all problems.
The rate of unemployment is one of the key indicators of the conditions prevailing in an
economy. Fluctuations in the rate of employment lead to partial changes in the economy and
therefore considered as a barometer which points out the condition of an economy. The rate
of unemployment gradually decreases during recovery and rapidly decreases during boom or
prosperity. By contrast, unemployment rate rises sharply during depression and gradually
moves upward during recession. Unemployment rate and phases of business cycles are
closely knitted.
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Price Stability
An increase in the general level of prices in an economy that is sustained over a period of
time is called inflation. Inflation plays a major role in an economy. Inflation is a major
concern of the governments world over. The effect of inflation on the economy is widespread
in its reach, ranging from redistribution of income and wealth among different sections of the
society to the worsening of balance of payments position.
The Phillips curve shows the relationship between inflation and unemployment. When
tracing the link between rate of change in wages and unemployment over nearly a century for
the United Kingdom, Phillips discovered an inverse relationship.
7
The BoP is a regular double entry accounting record with transactions that increase the
availability of foreign exchange recorded as credits and those that use up foreign exchange
recorded as debits. Thus, exports are a credit item. The BoP is divided into a current account
consisting of transactions involving imports, exports, remittances and gifts and a capital
account, which consists of all transactions that affect the countrys foreign exchange assets or
liabilities.
The BoP data helps in analyzing whether a particular course of action is likely to be helpful or
not in eliminating or reducing a current account deficit. At the same time, BoP data cannot be
considered in isolation for predicting a movement in the exchange rates.
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The levels in composition of taxes, the volume and composition of government expenditures
and the level of public debt all have significant microeconomic and macroeconomic effects.
Fiscal policy, narrowly interpreted, refers to actions governing and volumes of government
expenditure (and hence the resulting deficits or surpluses) and government borrowing. In a
broader sense it refers also to the structure of taxation, composition of expenditure, methods
of financing deficits and composition of public debt. Fiscal policy is normally the
responsibility of the finance ministry or the treasury.
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A glance at the development or evolution of monetary policy will reveal that its objectives
and emphasis have been undergoing significant changes. The monetary policy of any country
refers to the regulatory policy, whereby the monetary authority maintains its control over the
supply of money for the realization of general economic objectives such as stable prices, full
employment, etc. However, in the context of developing economies like India, monetary
policy acquires a still wider role and it has to be designed to meet the particular requirements
of the economy. Monetary policy as an instrument of economic policy has certain advantages
when compared to fiscal policy. The lag between the time when action is needed and when
action is actually taken is shorter in the case of monetary policy than fiscal policy. The
important tools of monetary policy are
As per minimum reserve requirements, the commercial banks are required to maintain a
minimum amount of balance with the Central Bank. This may be maintained either in the
form of chest cash or in the form of deposits. A certain proportion of the total deposit
liabilities, fixed by the Central Bank, is maintained by the commercial banks as statutory
reserves. The Central Banks power to set the reserve requirements provides it with great
powers over the lending behavior of the commercial banks. By changing the reserve
requirement from time to time, it can directly influence the lending capacity of the banking
system.
Bank rate or discount rate refers to rate at which commercial banks can rediscount their bills
with the Central Bank. By changing the bank rate, the Central Bank changes the cost of
money supply with the commercial banks and therewith influences the incentive of the banks
to borrow reserves.
Open market operations involve purchase and sale of securities (generally government
securities) by the Central Bank, to regulate the credit creating capacity of the commercial
banks. When the Central Bank purchases securities it makes cheque payment to the sellers.
The sellers deposit the cheques with the commercial banks, which automatically raise their
reserve base. An increase in the reserve base of the banks provides a basis to multiple
expansions of credit and deposits. Similarly, when the Central Bank performs open market
sale of securities, it results in decrease in the bank reserves. So it can be said that, an open
market purchase is expansionary in its effect and an open market sale is contractionary in its
effect from the point of view of credit creation.
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c.
Money supply.
d.
Exports.
e.
04
b.
Saving
c.
Expenditure
d.
Income
e.
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b.
c.
d.
e.
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b.
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3.
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a.
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1.
Consumption.
Money supply.
e.
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Pr
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Al
c.
d.
The act of replacing worn out assets and creating new assets is capital formation. Then Gross
Domestic Capital Formation (GDCF) consists of
ni
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5.
c.
Adding to inventories
d.
e.
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b.
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a.
6.
10
b.
Net domestic saving = Net national saving + Retained earnings of foreign companies.
c.
d.
e.
Part I
If GDP is growing at g% per annum and population at p% per annum, the per capita GDP
must be growing at __________ %.
1+ g
1
1+ p
b.
(g + p)/2
c.
(g p)/2
d.
(p g)
e.
c.
d.
e.
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b.
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a.
Which of the following statements is not true with respect to stock and flow variables?
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9.
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a.
04
7.
b.
c.
d.
e.
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10. Which of the following is a leakage from the circular flow of income?
Mr. Ramesh bought an Indian made color television for Rs.15,000.
b.
Mr. Babu bought a second hand refrigerator from his friend Rajesh.
c.
Mr. Harsha imported a brand new Ferrari car from Germany for Rs.10 lakh.
d.
e.
Pr
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11. Which is the best indicator of economic development of a developing country like India?
National income deflator.
b.
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c.
ni
a.
d.
e.
GDP deflator.
b.
c.
d.
Nominal GNP will increase by 40% but real GNP will decrease by 40%.
e.
Real GNP will increase by 40% but nominal GNP will decrease by 40%.
11
Macroeconomics
13. Which of the following will certainly increase real and nominal GNP?
a.
b.
c.
d.
e.
ii.
iii.
Small coins.
iv.
a.
b.
c.
d.
e.
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i.
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15. In an economy aggregate monetary resources are equal to the sum of ________.
RBI currency notes in circulation.
ii.
iii.
iv.
a.
b.
c.
d.
e.
Pr
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16. In country X, if NNP at market price remained constant and depreciation increased
compared to the previous year then GNP at market prices will _____.
Increase
b.
Decrease
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c.
ni
a.
d.
e.
Not change.
17. Which of the following method values the final goods and services produced during a year,
by aggregating the values imparted to the intermediate products at each stage of production
by the industries and productive enterprises in an economy?
12
a.
Expenditure method.
b.
Income method.
c.
Input method.
d.
Output method.
e.
Saving method.
Part I
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18. The ________ measurement method of national income aggregates all the money spent by
private citizens, firms and the government within the year.
a. Expenditure
b. Income
c. Input
d. Output
e. Saving.
19. Which of the following ratios best describes the GNP deflator?
a. Nominal GNP to real GNP.
b. Real GNP to nominal GNP.
c. Nominal GNP to real GDP.
d. Real GNP to nominal GDP.
e. Nominal GDP to real GDP.
20. GDP at market price exceeds GDP at factor cost by the amount of revenue raised through
_______.
a. Direct taxes
b. Indirect taxes
c. Income tax
d. Tax on rents
e. Both (b) and (c) above.
21. Which of the following is not true in representing the GDP at market price and GDP at factor
price?
a. In GDP at factor price, indirect taxes are not considered.
b. In GDP at factor price, subsidies are not considered.
c. In GDP at market price, exports are considered.
d. In GDP at market price, exports are not considered.
e. In GDP at factor price, exports are considered.
22. Macroeconomics is the study of
a. Inflation
b. Unemployment
c. Growth
d. Both (a) and (b) above
e. All of (a), (b) and (c) above.
Th
e
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fa
23. If the average rate of inflation in the USA and Japan between the years 1960-1973 is 3.2%
and 6.1% respectively, then the growth rate of ______.
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04
a.
b.
c.
d.
e.
24. In a closed economy savings are equal to __________ at the equilibrium level of income.
a.
Investments
b.
Wages
c.
Income-Investments
d.
Wages-Consumption
e.
Macroeconomics
25. Which of the following methods is/are used for measuring national income?
a.
Output method.
b.
Expenditure method.
c.
Income method.
d.
e.
b.
c.
d.
e.
o.
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b.
c.
d.
e.
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b.
c.
Wages and salaries + Dividends paid at home + Factor income received from
abroad Personal income tax
d.
Wages and salaries + Dividends paid at home + Factor income received from
abroad + Transfers from government Personal income tax
e.
Wages and salaries + Dividends paid at home + Factor income received from
abroad Transfers from government Personal income tax.
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a.
c.
d.
Dividend payments
e.
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b.
14
a.
b.
c.
d.
e.
Part I
e.
Services of a teacher.
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31. GDP at market prices is the sum of Consumption, Investment, Government spending and Net
Exports.
Net exports is
a. Gross exports minus depreciation
b. Exports minus imports
c. Gross exports earnings minus capital inflow
d. Export minus imports of merchandize
e. Imports and depreciation.
32. GDP at factor cost and GDP at market prices are both measures of output in the economy.
The item(s) that give(s) rise to the difference(s) in the two measures is/are
a. Direct taxes and subsidies
b. Direct taxes net of subsidies
c. Indirect taxes and subsidies
d. Direct taxes and depreciation
e. Indirect taxes and depreciation.
33. Which of the following is/are not included in the computation of GNP?
a. Spending for National Defense.
b. Rs.10,000 spent by a local government to fight crime.
c. The price paid for a stolen car.
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b.
c.
d.
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Macroeconomics
b.
c.
d.
Expenditures on machinery.
e.
04
39. In a model in which there is a household, business, government and foreign sector, GNP is
the sum of
Consumption, gross investment, government spending for goods and services, and net
exports
b.
Consumption, net investment, government spending for goods and services, and net
exports
c.
Consumption, gross investment, government spending for goods and services, and gross
exports
d.
e.
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b.
c.
Household saving plus depreciation always equals gross investment plus government
spending
d.
Household saving plus taxes equals net investment plus government spending
e.
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c.
d.
e.
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a.
fa
b.
c.
d.
Dividend payments
e.
Personal savings.
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Transfer payments
Ic
a.
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16
a.
b.
The total value of goods and services at prices corrected for inflation
c.
The total value of goods and services produced during periods of low unemployment
d.
e.
Part I
b.
c.
d.
e.
45. The difference between Gross National Product (GNP) and Gross Domestic Product (GDP) is
Excess of subsidies over indirect taxes
b.
Depreciation
c.
d.
e.
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b.
Depreciation allowances
c.
Undistributed profits
d.
Net exports
e.
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b.
c.
d.
e.
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b.
c.
d.
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a.
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e.
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a.
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Every increase in real GDP will necessarily improve the welfare of the people.
ii.
Foodgrains retained by the farmers are excluded from the computation of GDP.
iii.
iv.
Transfer payments are not taken into account while computing national income.
a.
b.
c.
d.
e.
Macroeconomics
b.
c.
d.
e.
b.
c.
d.
e.
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a.
o.
b.
GDP deflator reflects the change in overall price level of the economy.
c.
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e.
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d.
Residential investment
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53. The difference between personal disposable income and personal income is
ed
Subsidies
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c.
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b. Indirect taxes
Personal taxes.
ht
e.
re
d. Transfer payments
s.
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54. When the addition to capital goods in an economy is more than the capital consumption
allowance, the economy experiences
Negative net investment
b.
c.
d.
e.
fa
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ty
Pr
es
a.
a.
b.
c.
d.
e.
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Th
e
Ic
55. Which of the following ratios best describes the GNP deflator?
18
a.
b.
c.
d.
e.
Part I
57. Which of the following price indices is/are most widely used for determining of inflation in
India?
a.
b.
GDP deflator.
c.
d.
e.
b.
c.
d.
Delta Corp. buys ten used vehicles to strengthen its transportation fleet.
e.
o.
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ef
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59. The net factor income earned within the domestic territory of a country must be equal to
Net Domestic Product at factor cost
b.
c.
d.
e.
Personal income.
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a.
Corporate profits.
ii.
National income.
i.
Personal income.
iv.
a.
b.
c.
d.
e.
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a.
Ic
fa
iU
61. Which of the following indices necessarily gives higher weights to services like doctor fees,
railway and bus fares?
Consumer Price Index (CPI).
b.
c.
d.
GNP deflator.
e.
GDP deflator.
b.
c.
d.
e.
Macroeconomics
b.
c.
d.
Multiplier
e.
20
04
04
64. In an economy consumption function is equal to 12 + 0.6Y [then which of the following
statements are true?
Marginal propensity to consume is 0.6.
ii.
iii.
iv.
v.
a.
b.
c.
d.
e.
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04
i.
BN
b.
c.
d.
e.
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a.
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Pr
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s.
Al
20
a.
b.
c.
d.
e.
Part I
b.
c.
d.
e.
b.
c.
A behavioral coefficient
d.
A dependent variable
e.
04
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a.
04
ef
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o.
A variable is endogenous when its value is determined by forces outside the model.
b.
c.
A variable is exogenous when its value is determined by forces within the model.
d.
A variable is autonomous when its value is determined by forces within the model.
e.
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a.
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b.
c.
d.
e.
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a.
s.
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Pr
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a.
d.
e.
fa
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ty
b.
c.
a.
b.
c.
d.
e.
20
04
Th
e
Ic
b.
c.
There is no unsold output, and the level of income does not change
d.
e.
Macroeconomics
Equals C/Yd
b.
c.
d.
e.
b.
c.
20
04
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AC
d.
e.
04
a.
04
b.
c.
d.
e.
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a.
o.
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b.
c.
d.
e.
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b.
c.
d.
e.
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Pr
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s.
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a.
Th
e
b.
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Foreign exchange outflows on account of imports of goods and services and gifts made
exceed inflows on account of exports of goods and services received
d. Decrease in Foreign Exchange Reserves
e. Increase in Foreign Exchange Reserves.
82. Which of the following will not result in an increase in the level of income?
a. An increase in autonomous spending.
b. A decrease in autonomous taxes.
c. An increase in autonomous transfers.
d. An increase in net tax revenues.
e. Both (a) and (d) above.
83. Ceteris paribus, an income tax
22
c.
Ic
a.
fa
iU
Part I
a.
Increases the value of the expenditure and net tax revenue multiplier
b.
Increases the value of the expenditure multipier and decreases the value of the net tax
revenue multiplier
c.
Decreases the value of the expenditure and net tax revenue multiplier
d.
Decreases the value of the expenditure multiplier and increases the value of the net tax
revenue multiplier
e.
84. If the net export balance is zero, an increase in autonomous investment spending will
Increase the net export balance and the income level
b.
Increase the income level but make the net export balance negative
c.
Increase the income level and have no effect upon the net export balance
d.
Have no effect upon the income level but cause the net export balance to become
negative
e.
o.
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a.
ef
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Has the same effect upon the multipliers as an increase in the MPC
b.
c.
d.
e.
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86. When an investment spending is negatively related to the rate of interest, equilibrium income
in the goods market
Is unrelated to the rate of interest
b.
c.
d.
e.
Pr
es
s.
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a.
87. Given the consumption function C = 256 + 0.85Y, we may infer that, as Y increases
Average propensity to consume remains constant
b.
c.
The average propensity to consume is constant but marginal propensity to consume will
be decreasing
20
04
Th
e
Ic
fa
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ty
a.
d.
e.
88. Which of the following will not increase the value of multiplier?
a.
b.
c.
d.
e.
89. When the balanced budget multiplier is equal to one, increase in government expenditure and
23
Macroeconomics
b.
c.
d.
e.
b.
c.
d.
e.
M
AC
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04
04
a.
o.
Relative Income Hypothesis asserts that people can quickly and easily adjust their living
standards downwards but upward adjustment is very difficult.
b.
c.
Relative income hypothesis assumes that marginal propensity to consume and hence
multiplier are constant.
d.
Life Cycle Hypothesis states that the saving behavior of the individuals during their
working life is motivated by their desire to maintain consumption levels after
retirement.
e.
Relative Income Hypothesis states that marginal propensity to consume is lower for
increase in income than for decrease in income.
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ht
92. On the basis of the Keynesian model of output determination, a multiplier of 3 implies that
An increase in consumption by Rs.3 will result in an increase in investment by Re.1
b.
c.
d.
e.
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ty
Pr
es
s.
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a.
iU
93. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?
Monetary liabilities of the RBI increases.
Ic
fa
a.
c.
d.
e.
20
04
Th
e
b.
Income
b.
Propensity to consume
c.
Propensity to save
d.
Consumer spending.
e.
Part I
a.
b.
c.
d.
e.
ii.
iii.
iv.
a.
b.
c.
d.
e.
04
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o.
M
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i.
04
96. Given that the marginal propensity to consume is larger, which of the following statements
are true.
27
31
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02
97. The curve explains the combination of interest rates and levels of output at which planned
spending equals income.
IS
b.
LM
c.
MPC
d.
MPS
e.
AD.
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a.
ht
b.
The IS curve shifts to the right if tax rate and government expenditure increases.
c.
d.
e.
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Pr
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s.
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a.
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Ic
fa
a.
c.
d.
e.
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04
Th
e
b.
b.
c.
d.
e.
Macroeconomics
a.
b.
c.
d.
e.
102. At interest rate r there is a simultaneous equilibrium in goods and money markets. If
interest rate increases from r to r1 then
Equilibrium in goods market will be at a point higher than the existing income
b.
Equilibrium in money market will be at a point higher than the existing income
c.
Equilibrium in goods market does not change but equilibrium in money market will be
at a point higher than the existing income
d.
Equilibrium in money market does not change but equilibrium in goods markets will be
at a point higher than the existing income
e.
o.
M
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04
04
a.
ef
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b.
c.
The changes in money supply will have no effect on the LM curve, if the LM curve is
positively sloped.
d.
The changes in money supply will have no effects on the LM curve, if the LM curve is
negatively sloped.
e.
.IS
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a.
ed
b.
c.
d.
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ty
Schedule of goods market equilibrium where the supply of goods equals the demand for
goods
b.
Schedule of monetary equilibrium where the supply of money equals the demand for
money
Schedule of goods market equilibrium where the supply of goods equals the goods
produced
d.
Schedule of goods market equilibrium where the supply of goods equals the external
demand for goods
e.
20
04
Th
e
c.
Ic
fa
iU
ni
ve
rs
i
a.
b.
c.
d.
e.
Part I
a.
b.
c.
d.
e.
b.
c.
d.
e.
Money supply, price level and transactions demand function for money of the economy.
04
20
04
04
a.
b.
c.
d.
e.
ef
.N
02
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a.
o.
M
AC
c.
d.
e.
31
b.
1-
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a.
4-
ht
b.
c.
Negatively related to the income level and positively related to the rate of interest
d.
Positively related to the income level and negatively related to the rate of interest
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
a.
20
04
An increase in the quantity of money demanded and an increase in the rate of interest
Ic
Th
e
a.
fa
iU
ni
112. Suppose the money supply and price level are constant, and the demand for money is a
function of income and the rate of interest. When the income level increases, there is
b.
An increase in the quantity of money demanded and a decrease in the rate of interest
c.
A decrease in the quantity of money demanded and a decrease in the rate of interest
d.
A decrease in the quantity of money demanded and an increase in the rate of interest
e.
113. Simultaneous equilibrium in the money (LM) and goods (IS) markets exists
a.
b.
c.
d.
e.
Macroeconomics
a.
b.
c.
d.
e.
b.
c.
d.
e.
M
AC
116. A change in the money supply has a greater effect upon equilibrium income if
04
20
04
04
a.
b.
c.
d.
e.
02
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ef
.N
o.
a.
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31
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117. In which of the following situations will an increase in the money supply have no effect upon
equilibrium income?
LM is steeply sloped and IS is relatively flat.
b.
c.
d.
e.
ht
re
se
rv
ed
.IS
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a.
lr
ig
b.
c.
d.
20
04
Th
e
Ic
fa
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ni
ve
rs
i
ty
Pr
es
s.
Al
a.
e.
A decrease in the money supply raises interest rates which crowd out interest-sensitive
private sector spending
b.
An increase in taxes of the private sector reduces private sector disposable income and
spending
c.
A reduction in income taxes causes higher interest rates, which crowd out
interest-sensitive private sector spending
d.
e.
Part I
a.
When the relative increase in the price level is greater than the relative increase in the
nominal money supply, the real money supply decreases.
b.
When the relative increase in the nominal money supply is greater than the relative
increase in the price level, the real money supply increases.
c.
When the price level decreases, ceteris paribus, the real money supply decreases.
d.
When the price level increases, ceteris paribus, the real money supply decreases.
e.
Reduces the real money supply and shifts the LM schedule to the right
b.
Reduces the real money supply and shifts the LM schedule to the left
c.
Increases the real money supply and shifts the LM schedule to the right
d.
Increases the real money supply and shifts the LM schedule to the left
e.
o.
M
AC
04
20
04
a.
04
ef
.N
b.
c.
d.
The marginal propensity to save should rise, shifting the entire consumption schedule
e.
Investment spending should rise primarily to take up the slack left by lower
consumption expenditure.
BN
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a.
b.
Gm = a.Gy Gp
c.
Gm = a.Gp Gy
d.
Gm = Gy + a. Gp
e.
Gm = a.Gy + Gp.
re
Gm = Gp a. Gy
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
se
rv
ed
.IS
123. Given, growth rate of real output = Gy, income elasticity of demand is (alpha), acceptable
rate of inflation is Gp, the money stock growth target (Gm) is given by (all in percentage
terms)
124. When economists are concerned about the liquidity preference function, they are interested in
The relationship of the demand for money and the rate of interest
b.
20
04
iU
fa
Ic
Th
e
c.
ni
a.
d.
e.
The interrelationship between the money market and the goods market
b.
c.
d.
e.
Macroeconomics
The elasticity of demand is the same at all points on a linear demand curve.
ii.
iii.
a.
(i) only.
b.
(ii) only.
c.
(iii) only.
d.
e.
04
i.
20
04
127. A supply shock such as failure of monsoon or increase in the price of oil
Causes a rightward shift of the aggregate supply curve and thus results in higher
equilibrium output and lower prices
b.
Causes a rightward shift of the aggregate supply curve and thus results in higher
equilibrium output and higher prices
c.
Causes a leftward shift of the aggregate supply curve and thus results in lower
equilibrium output and higher prices
d.
Causes a leftward shift of the aggregate supply curve and thus results in lower
equilibrium output and lower prices
e.
Causes a rightward shift of the aggregate supply curve and thus results in lower output
and higher prices.
31
4-
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ef
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o.
M
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04
a.
b.
c.
d.
e.
.IS
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ht
re
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ed
a.
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1-
128. If transfer payments are increased, which of the following is true of I-S curve?
s.
Al
lr
129. If the demand for money is infinitely interest elastic, which of the following is true?
Changes in money stock are totally ineffective in influencing equilibrium output and
interest rate.
b.
c.
Changes in money stock lead to changes in equilibrium rate of interest only while
equilibrium output remains unaffected.
Changes in autonomous expenditure affects only the equilibrium output while
equilibrium rate of interest remains unchanged.
20
04
Th
e
Ic
d.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
e.
Changes in money stock lead to changes in both equilibrium output and rate of interest
while changes in autonomous expenditure affect only the interest rate.
b.
It is positively sloped.
c.
d.
e.
It is vertical if the consumption and investment expenditures are not responsive to the
rate of interest.
Part I
a.
b.
c.
d.
e.
b.
c.
d.
e.
04
04
20
a.
04
20
04
Th
e
Ic
fa
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ni
ve
rs
i
ty
Pr
es
s.
Al
lr
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ht
re
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ed
.IS
BN
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o.
M
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Equilibrium income is determined by the positions of both the I-S and L-M curves
d.
Equilibrium income is unaffected by the positions of both the I-S and L-M curves
e.
137. Japanese economy is facing the problem of liquidity trap. Which of the following statements
is not true about liquidity trap?
a.
Public is willing to hold whatever money is supplied at the current interest rate.
b.
LM curve is horizontal.
c.
d.
e.
LM curve is vertical.
138. Which of the following better explains the inverse relationship between the interest rate and
31
Macroeconomics
b.
c.
d.
e.
None of the above. The relationship between the interest rate and the demand for money
is direct, not inverse.
04
139. Which of the following statements is not true about IS-LM Model?
IS function represents the goods market equilibrium.
b.
c.
d.
Goods and money markets interact to determine the equilibrium national income.
e.
o.
M
AC
04
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a.
b.
c.
d.
e.
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BN
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140. In the standard IS-LM model, which of the following is true if the government raises tax rate
and the Reserve Bank of India decides to hold the money supply constant?
ed
.IS
b.
c.
d.
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ty
b.
c.
Not affect the position of LM curve but shift IS curve to the left
Not affect the position of IS curve but shift LM curve to the right
Th
e
Ic
d.
fa
iU
ni
ve
rs
i
a.
Not affect the position of LM curve but shift IS curve to the right.
20
04
e.
143. The demand for money is a demand for real money balances for a given interest rate. If there
is an increase in the level of income because of increase in real money supply, which of the
following statements holds true?
32
a.
b.
c.
d.
e.
Part I
20
04
Th
e
Ic
fa
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ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
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rv
ed
.IS
BN
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ef
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o.
M
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04
Macroeconomics
151. An increase in the real wage will increase the quantity of labor supplied, but will reduce the
quantity of
a.
Goods supplied
b.
Labor demanded
c.
Goods demanded
d.
Goods manufactured
e.
b.
c.
d.
e.
M
AC
04
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a.
04
ef
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o.
b.
c.
They assess the basic questions of how the society allocates scarce resources
d.
e.
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a.
.IS
BN
154. A rightward shift of aggregate demand, with no change in the aggregate supply schedule,
results in an increase in
Real output and no change in the price level when aggregate supply is upward sloping
b.
Real output and no change in the price level when aggregate supply is horizontal
c.
The price level and no change in real output when aggregate supply is upward sloping
d.
The price level and no change in real output when aggregate supply is horizontal
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
a.
Negatively related to the price level because a decline in the price level has a negative
effect on the demand for output
b.
Negatively related to the price level because a decline in the price level has a positive
effect on the demand for output
20
04
Positively related to the price level because a decline in the price level has a negative
effect on the demand for output
Ic
Th
e
c.
fa
iU
ni
ve
rs
i
ty
a.
d.
Positively related to the price level because a decline in the price level has a positive
effect on the demand for output
e.
34
a.
b.
The more sensitive the demand for money is to the rate of interest
c.
d.
e.
Part I
b.
c.
When the demand for labor and supply of labor schedules adjust immediately to a
change in the price level
d.
When equilibrium in the labor markets is unaffected by shifts in the supply of labor
schedule
e.
b.
c.
d.
e.
ef
.N
o.
M
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04
a.
04
158. Suppose there is full employment and aggregate supply is vertical. A decrease in taxes
-4
159. Suppose there is full employment and a vertical aggregate supply schedule. An increase in
the nominal money supply
Causes the real money supply to increase, which changes the composition of output
b.
c.
d.
e.
.IS
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se
rv
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160. When aggregate supply is positively sloped and there is an increase in the real per unit cost of
materials, aggregate supply shifts to the
Right, the price level falls, and real output increases
b.
c.
d.
e.
Pr
es
s.
Al
lr
ig
ht
re
a.
ve
rs
i
ty
161. When aggregate supply is positively sloped and there is a decrease in the mark-up on variable
cost, aggregate supply shifts to the
Left, the price level falls, and real output increases
b.
20
04
iU
fa
Ic
Th
e
c.
ni
a.
d.
e.
b.
Nominal money supply growth lowers the inflation rate with no effect on output in the
short run
c.
Nominal money supply growth lowers the inflation rate and the level of output in the
short run
d.
Government spending lowers the rate of inflation with no effect on output in the short
run
e.
Macroeconomics
163. With an upward sloping aggregate supply curve in the short run, an increase in aggregate
demand can be expected to cause
a.
b.
c.
Output to increase
d.
e.
b.
c.
d.
e.
Government expenditures on goods and services are greater than tax collections.
M
AC
04
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04
a.
ef
.N
o.
165. Suppose the price elasticity of demand coefficients are given as 1.50, 0.50, 2.00 and 0.75 for
demand schedules D1, D2, D3 and D4 respectively. A one percent increase in the price leads
to an increase in total revenue for
D1 and D4 only
b.
02
27
-4
a.
D4 only
d.
D2 only
e.
D2 and D4 only.
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c.
BN
b.
c.
d.
e.
lr
ig
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re
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ed
.IS
a.
s.
Al
167. With respect to Aggregate Supply (AS), which of the following is true?
AS in the short run is positively sloped and in the long run it is vertical.
b.
AS is positively sloped both in the short run and in the long run.
ve
rs
i
ty
Pr
es
a.
20
04
Th
e
Ic
fa
iU
ni
c. AS is positively sloped in the short run and negatively sloped in the long run.
d. AS is vertical both in the short run and in the long run.
e. Costs have greater impact on AS in short run than in the long run.
168. Aggregate demand in an economy increases with the
a. Decrease in income of foreigners
b. Increase in the private transfers from abroad
c. Decrease in government spending
d. Increase in interest rates
e. Increase in tax rates.
169. Which of the following is likely to happen, when realized output exceeds spending?
a. Lower demand increases the unemployment.
b. Higher inflation further reduces the aggregate demand.
c. Economy attains full employment level.
d. Inventory level in the economy increases.
e.
36
Part I
170. Which of the following statements is not true in the long run?
a.
b.
c.
d.
e.
b.
c.
d.
e.
M
AC
04
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04
04
a.
ef
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o.
02
27
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172. In an economy M1 is equal to currency with public + Demand deposits with banks + Demand
portion of savings deposits with Banks + Other Deposits with RBI, where currency with
public is equal to
Currency in circulation less currency with commercial banks
b.
c.
d.
Demand deposits with banks, other deposits and small coins in circulation
e.
se
rv
ed
.IS
BN
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a.
re
173. In an economy currency deposit ratio (Cu) and high-powered money (h) are constant. The
increase in the reserve ratio will ___________.
Increase the money supply
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
iU
ni
174. The basic difference between money stock measure M3 and M4 is that
M3 is more than M4
Ic
fa
a.
c.
d.
M4 includes all post office deposits, where as in M3 these are not included
e.
20
04
Th
e
b.
175. Time deposits with banks are included in __________ measure of money stock.
a.
M1
b.
M2
c.
M3
d.
M4
e.
Macroeconomics
b.
The rate at which Central Bank discounts the eligible bills of commercial banks
c.
The rate at which commercial banks give loans to the other commercial banks
d.
e.
iii.
iv.
a.
04
ii.
20
M
AC
04
i.
04
177. The RBI can increase the demand deposit component of the money supply by
d.
e.
-4
ef
.N
o.
b.
c.
4-
02
27
178. The quantity of notes and coins in private circulation plus the quantity of cash held by the
banking system is called
Monetary base
b.
c.
M1
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a.
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04
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s.
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d. M3
e. Both (a) and (b) above.
179. If you withdraw Rs.100 from your checking account, this transaction
a. Increases the supply of money
b. Decreases the supply of money
c. Does not change the supply of money
d. Increases the supply of money by more than 100
e. Decreases the supply of money by less than 100.
180. Read the following statements and choose the best alternatives.
i.
When you deposit currency in a commercial bank cash goes out of circulation and the
money supply declines.
ii. If the RBI creates more money, Indians would achieve a higher standard of living.
a. (i) and (ii) are true
b. (i) and (ii) are false
c. (i) is true and (ii) is false
d. (i) is false and (ii) is true
e. (i) is always true and (ii) is sometimes true.
181. In an economy Cu is equal to currency deposit ratio and r is equal to reserve ratio, then the
money multiplier in the economy is equal to
a. (1 + Cu)/(r Cu)
38
b.
(1 + Cu)/r
c.
d.
e.
(1 + Cu)/(1 r + Cu)
(1 + Cu)/(r + Cu)
(1 Cu)/(r + Cu).
Part I
b.
c.
d.
e.
183. If reserve ratio is constant and currency deposit ratio increases then money multiplier
Increases
b.
Decreases
c.
d.
e.
M
AC
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a.
o.
b.
c.
d.
e.
1-
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a.
:8
b.
M2 is high-powered money.
c.
M3 is high-powered money when time deposits with bank are not taken.
d.
e.
ig
ht
re
se
rv
ed
.IS
BN
a.
s.
Al
lr
ii.
iii.
iv.
a.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
i.
c.
d.
e.
20
04
Th
e
b.
187. If currency deposit ratio is constant and reserve ratio increases then money multiplier
a.
Increases
b.
Decreases
c.
d.
e.
Macroeconomics
188. Saving deposits are not a part of money stock measure (M1) because
a.
b.
c.
d.
e.
b.
c.
d.
e.
ef
.N
o.
M
AC
04
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04
04
a.
27
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The ratio of total financial claims issued during a year to the national income for the
year
b.
The ratio of primary issues by the non-financial sector to total physical asset formation
c.
d.
The ratio of the total stock of financial assets at a point of time to the stock of physical
assets
e.
ht
re
se
rv
ed
.IS
BN
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02
a.
s.
Al
lr
ig
191. The link between changes in the money supply and changes in real macroeconomic variables
is best described by
A change in interest rates that induces a change in spending, a change in aggregate
demand, and thus a potential change in real GDP
b.
c.
A change in spending caused directly by the Central Banks adjusting its own
investment portfolio and which translates into a change in aggregate demand and finally
a change in nominal GDP
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
d.
A change in bankers interest rates by direct intervention that may or may not alter real
GDP by altering spending
e.
40
a.
b.
c.
d.
Total financial claims issued during a year/National income for the year
e.
Part I
193. Commercial banks create money through credit creation. Which of the following statements
is true with regard to credit creation?
a.
b.
c.
d.
e.
04
194. Which of the following does not affect the balance sheet of Reserve Bank of India?
Central governments borrowings from RBI.
b.
c.
d.
e.
ef
.N
o.
M
AC
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04
a.
-4
195. Which of the following ratios is not an indicator of financial development of a country?
Finance Ratio.
b.
c.
d.
Intermediation Ratio.
e.
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.IS
BN
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a.
se
rv
196. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?
Monetary liabilities of the RBI increases .
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
a.
b.
20
04
Th
e
Ic
fa
iU
ni
a.
c.
Savings deposits
d.
Time deposits
e.
M2.
b.
c.
d.
e.
Macroeconomics
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
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ef
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o.
M
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04
04
199. In the classical model, if production function is represented by Y = f(N), where the capital
stock is assumed to be constant, then output in the short run depends only on
a. Raw material available
b. Labor input
c. Demand for goods
d. Production capacity
e. Wages.
200. The demand for labor is derived from the
a. Quantity of goods produced by labor
b. Price of goods produced by labor
c. Incremental cost and incremental revenue generated by the employment of labor
d. Incremental cost generated by the employment of labor
e. Incremental revenue generated by the employment of labor.
201. Under pure competition a profit maximizing firm hires workers until the real wage is equal to
the
a. General price level
b. General price level multiplied by marginal product of labor
c. General price level divided by marginal product of labor
d. Marginal product of labor divided by general price level
e. Marginal product of labor.
202. An increase in real wages will
a. Shift the demand for labor schedule to the right
b. Shift the demand for labor schedule to the left
c. Increase the quantity of labor demanded
d. Decrease the quantity of labor demanded
e. Both (b) and (c) above.
203. Marginal product of labor is the
a. Change in supply per unit change in the labor employed
b. Change in demand per unit change in the labor employed
c. Change in labor cost per unit change in the labor employed
d. Change in income per unit change in the labor employed
e. Change in output per unit change in the labor employed.
20
04
Th
e
Ic
b.
c.
d.
e.
205. In the classical model, the long run effect of an increase in government spending is
42
a.
b.
c.
d.
e.
Part I
b.
c.
d.
04
20
04
ef
.N
BN
s.
Al
Ic
Th
e
211.
fa
iU
ni
ve
rs
i
ty
Pr
es
210.
lr
ig
ht
re
se
rv
ed
.IS
209.
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208.
o.
M
AC
04
20
04
207.
a.
d.
e.
b.
c.
d.
Increases
e.
Macroeconomics
b.
c.
d.
e.
b.
c.
d.
e.
20
ef
.N
o.
M
AC
04
a.
04
04
b.
c.
d.
e.
.IS
BN
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a.
ed
b.
c.
d.
e.
Pr
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s.
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a.
ve
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ty
b.
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c.
ni
a.
d.
e.
218. The term speculative demand for money refers to money balances held in expectation of
44
a.
b.
c.
d.
e.
Part I
b.
The classical model assumes a fixed real wage and Keynesian model assumes a fixed
real wage.
c.
d.
The classical model assumes fixed nominal wage but Keynesian model assumes
instantaneous adjustment of real wages in response to demand supply balance in labor
market.
e.
Both the classical and Keynesian models assume a fixed real wage.
04
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a.
b.
c.
d.
e.
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b.
c.
d.
e.
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s.
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222. According to Keynes, the actual expenditure in an economy can differ from the planned
expenditure. Which of the following is true if the actual expenditure is less than the planned
expenditure in the economy?
There will be positive fixed investment in the economy.
b.
c.
d.
e.
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Pr
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a.
Ic
223. Which of the following is not one of the basic Postulates of the Keynesian Model?
Full employment occurs only by coincidence is an economy.
b.
c.
d.
e.
20
04
Th
e
a.
Demand deficiency
b.
Supply deficiency
c.
Demand sufficiency
d.
Supply sufficiency
Macroeconomics
b.
Inflation rate
c.
d.
Money supply
e.
Cost of living.
04
04
226. According to monetarism, in the short run, increase in money supply results in
Decrease in output
b.
Increase in output
c.
d.
e.
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a.
227. Which of the following is/are the implications of rational expectation hypothesis?
Econometric models are not very useful in evaluating alternative economic policies.
ii.
iii.
Discretionary monetary and fiscal policies cannot be used to stabilize the economy.
a.
b.
c.
d.
e.
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b.
c.
d.
e.
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229. To improve market efficiency, which of the following is not recommended by Supply side
economics?
Reduce government controls.
Ic
fa
a.
Promote competition.
c.
d.
e.
20
04
Th
e
b.
230. According to the Laffer curve, as the tax rate increases, tax revenues
46
a.
Rise continuously
b.
Decrease continuously
c.
d.
e.
Remain constant.
Part I
231. The Chief Economist to the Government told the Cabinet that the government can no longer
fool the people by increasing its spending during election years, as people will anticipate this
kind of behavior as previous governments used to do so. The economist is an advocate of
a.
Classical economics
b.
Rational expectations
c.
Keynesian economics
d.
Supply-side economics
e.
Monetarism.
04
232. Monetarists prefer monetary policy over the fiscal policy because they feel that
b.
c.
d.
e.
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a.
27
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233. According to the school of rational expectations there is no trade off between inflation and
unemployment because
People make biased forecasts about the future of the economy based on all the available
information
b.
People anticipate changes in money supply and accordingly adjust prices and wages
c.
d.
e.
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ht
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234. The curve that depicts the relationship between the rate of change in prices and the rate of
unemployment is
Laffer curve
b.
Phillips curve
c.
d.
LM curve
e.
IS curve.
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Pr
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s.
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a.
Ic
fa
235. The bank reserves fall rapidly in _________ stage of business cycle.
Recovery
b.
Boom
c.
Recession
d.
Depression
e.
236. If the available workers are unaware of the jobs being offered and the employers are not
aware of the available workers, such type of unemployment is called
a.
Frictional unemployment
b.
Structural unemployment
c.
Cyclical unemployment
d.
Disguised unemployment
e.
Macroeconomics
237. Unemployment that arises when there is a general downturn in business activity is known as
a.
Frictional unemployment
b.
Structural unemployment
c.
Cyclical unemployment
d.
Disguised unemployment
e.
b.
c.
d.
e.
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a.
b.
c.
Increase in inflation
d.
e.
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240. If the actual rate of unemployment exceeds the natural rate of unemployment then
Actual output of the economy will fall below its potential
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a.
c.
d.
e.
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241. Unemployment that arises due to regional occupational pattern of job vacancies, which does
not match the pattern of workers availability and suitability, is known as
Frictional unemployment
b.
Structural unemployment
c.
Cyclical unemployment
d.
Disguised unemployment
e.
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Pr
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s.
Al
a.
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a.
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242. The inventory stock will be high in _________ stage of a business cycle.
Recovery
b.
Boom
c.
Recession
d.
Depression
e.
Part I
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244. In which sector of Indian economy will we find a high rate of disguised unemployment?
a. Service sector.
b. Transport sector.
c. Agriculture sector.
d. Manufacture sector.
e. Mining sector.
245. Stagflation is a period of
a. High inflation
b. Low inflation
c. High unemployment
d. Low unemployment
e. Both (a) and (c) above.
246. The real rate of interest
a. Equals the nominal rate plus the rate of inflation
b. Equals the rate of inflation minus the nominal rate
c. Equals the nominal rate minus the rate of inflation
d. Tends to increase when inflation rises
e. Is more relevant to investors than consumers.
247. Unemployment that is caused by a mismatch between the composition of the labor force (in
terms of skills, occupation, industries, or geographic location) and the make-up of the
demand for labor is called
a. Real wage unemployment
b. Deficient-demand unemployment
c. Frictional unemployment
d. Structural unemployment
e. Search unemployment.
248. During the recessionary phase of a business cycle
a. The purchasing power of money is likely to decline rapidly
b. The natural rate of unemployment will increase dramatically
c. Potential national income will exceed actual national income
d. Actual national income will exceed potential national income
e. The real rate of interest will exceed the nominal rate of interest.
249. Monetary theorists believe in the use of
a. A stable growth rate for the money supply
b. Stable interest rates to stabilize the money supply
c. Fiscal policy as the main stabilization tool
d. A stop-and-go monetary policy for fine tuning the economy
e. Input-output planning as the main stabilization tool.
250. The Philips curve shows that
a. High unemployment rates are associated with low increases in money wage rates
b. Low unemployment rates are associated with low rates of inflation
c. High unemployment rates are associated with low rates of inflation
d. High inflation rates are associated with higher level of money wage rates
e. High inflation rates are associated with small increases in money wage rates.
49
Macroeconomics
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Part I
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258. When a person is employed in a sector where his/her employment does not make any
difference to the output, it signifies the presence of
a. Frictional unemployment
b. Cyclical unemployment
c. Disguised unemployment
d. Structural unemployment
e. Sectoral unemployment.
259. Cost push inflation occurs when
a. Wages are decreased
b. Productivity of labor increases
c. Cost of raw material increases
d. Aggregate supply curve shifts to the right
e. New raw material reserves are found.
260. Recessionary GDP gap signifies
a. Higher potential real GDP compared to realized real GDP
b. Hyper inflationary situation
c. Deflationary situation with high unemployment
d. Existence of natural rate of unemployment
e. Both (b) and (d) above.
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Macroeconomics
b.
c.
Domestic industries are financed more by the international financial institutes than local
financial institutions
d.
e.
04
The sale of goods by foreign supplier in anothery country at price above than the price
at which the supplier sells in domestic market
b.
The sale of goods by foreign supplier in another country at price below than the price at
which the supplier sells in domestic market
c.
The sale of goods by domestic supplier in another country at price above than the price
at which the supplier sells in domestic market
d.
e.
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a.
02
267. The investment income from abroad appears under _________ head of BoP statement.
Current account
b.
Capital account
c.
d.
e.
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b.
c.
d.
e.
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269. If the balance on current and capital accounts of Balance of Payments (BoP) taken together is
negative, then
It is a case of BoP surplus
It is a case of BoP where the official reserve account is in surplus
20
04
Th
e
Ic
b.
fa
a.
c.
d.
e.
270. A current account deficit unmatched or exceeded by a capital account surplus will
52
a.
b.
c.
d.
e.
Part I
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Fiscal policy
b.
Monetary policy
c.
Trade policy
d.
Revenue policy
e.
277. Increase in net RBI credit to the Central Government is reflected in ________ deficit.
a.
Budget
b.
Revenue
c.
Monetized
d.
Gross primary
e.
Gross fiscal.
53
Macroeconomics
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e
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278. Which of the following items is/are the major components of non-plan expenditure?
a. Interest payments.
b. Defense expenditure.
c. Subsidies.
d. Both (a) and (b) above.
e. All of (a), (b) and (c) above.
279. Gross fiscal deficit interest payments of government is equal to
a. Revenue deficit
b. Capital deficit
c. Budget deficit
d. Primary deficit
e. Monetized deficit.
280. Profits from public sector undertakings come under
a. Revenue receipts
b. Capital receipts
c. Monetized receipts
d. Both (a) and (c) above
e. Both (b) and (c) above.
281. Large fiscal deficit will have implications on
a. Money supply
b. Inflation
c. Private investments
d. Both (a) and (b) above
e. All of (a), (b) and (c) above.
282. An increase in Statutory Liquidity Ratio (SLR) will result in
a. An increase in fiscal deficit
b. A decrease in fiscal deficit
c. No change in fiscal deficit
d. An increase in fiscal deficit proportion with an increase in SLR
e. A decrease in fiscal deficit proportion with an increase in SLR.
283. Monetized deficit is a deficit caused due to
a. Increase in net RBI credit to states
b. Increase in net government credit to states
c. Increase in net RBI credit to commercial banks
d. Increase in net government borrowings from market
e. Increase in net RBI credit to the Central Government.
284. Which of the following are the examples of external debt?
i.
Short-term loan from IMF.
ii. Bonds issued by Indian company in overseas market.
iii. Bonds issued by Central Government in international market.
iv. Investment by Non-Resident Indians in Indian companies debentures on repatriation
basis.
a. Both (i) and (ii) above.
b. Both (i) and (iii) above.
c. Both (ii) and (iii) above.
d. Only (i), (ii), and (iii) above.
e. All of (i), (ii), (iii) and (iv) above.
54
Part I
Revenue deficit
b.
Capital deficit
c.
Budget deficit
d.
Primary deficit
e.
Fiscal deficit.
c.
d.
e.
04
b.
20
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04
286. If modern economies wish to maintain both full employment and price stability as their
policy objectives, then they should
o.
b.
c.
d.
e.
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b.
Fiscal policy, if properly administered, would eliminate the need for monetary policy.
c.
The existence of the progressive personal income tax system increases the size of the
government spending multiplier.
d.
A downward shift in the investment schedule has a greater multiplier effect on GDP
than an equivalent downward shift in the government-expenditures schedule.
e.
Autonomous investment is the part of investment that increases with national income.
s.
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Pr
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c.
d.
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e.
ty
a.
20
04
Installing a progressive income tax would have no effect on the Keynesian multiplier.
b.
The open economy investment multiplier is lower than the closed economy multiplier
even when net exports are not sensitive to changes in GDP.
c.
When full employment is reached, increases in money GDP are extremely difficult to
achieve.
d.
e.
Taxes collected by the government can lower the economys national output, while
government expenditures will tend to raise national output.
55
Macroeconomics
291. If the government increases its expenditure and simultaneously adjusts the tax rate such that
the budget deficit remains at the original level, then which of the following is true?
The equilibrium income remains unchanged.
b.
c.
d.
e.
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292. Given the supply of money, if the government reduces the tax rate which of the following is
true?
Equilibrium income and interest rate will increase.
b.
c.
d.
Equilibrium income will increase but interest rate will remain unchanged.
e.
Equilibrium income will remain unchanged but interest rate will increase.
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a.
.IS
293. Government borrowing to finance large deficits increases the demand for loanable funds and
Increases the supply of loanable funds
b.
c.
d.
e.
s.
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ty
Pr
es
294. If Mr. X buys a National Small Savings Certificate, which of the following is likely to
happen?
Increase in Government market borrowings.
b.
c.
Th
e
Ic
d.
fa
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a.
20
04
e.
56
a.
Inherent mechanisms in the stock market that automatically cause stock market gains to
be cancelled out by losses, which make expected long-run returns equal to zero
b.
The invisible hand mechanisms which automatically bring the economy out of a
recession
c.
d.
e.
Part I
296. Which of the following policy measures is/are fiscal policy measure(s)?
a.
The government cuts taxes or raises spending to get the economy out of a recession.
b.
The central bank changes the money supply to affect the price level, interest rates and
exchange rates.
c.
d.
e.
b.
c.
d.
e.
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a.
04
297. Which of the following is true if the Government monetizes part of its deficit?
o.
298. If a Government is running surplus in its budget, we can expect that public debt will be
Rising
b.
Falling
c.
Constant
d.
e.
Falling if the government uses the surplus to repay its past debts.
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a.
c.
d.
e.
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a.
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b.
c.
d.
e.
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a.
Ic
fa
301. In the Union Budget, profits from public sector undertakings are taken under
Revenue receipts
b.
Capital receipts
c.
Monetized receipts
d.
Planned expenditure
e.
Fiscal deficit.
302. Under which of the following tax system, more tax is imposed on the lower income groups?
a.
Progressive.
b.
Regressive.
c.
Proportional.
d.
Customs.
e.
Macroeconomics
303. The variables that changes the government spending and revenue as the economy fluctuates,
without any deliberate effort of the government are called
a.
Automatic Stabilizers
b.
Lagging indicators
c.
d.
Real factors
e.
Growth variables.
04
04
20
304. Which of the following is true if the Central Bank reduces the Reserve Ratio?
Money supply and loans given by commercial banks will decrease.
b.
Money supply will decrease while loans given by commercial banks will increase.
c.
d.
Money supply will increase while loans given by commercial banks will decrease.
e.
Money supply will remain unaffected while the loans given by the commercial banks
will decrease.
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02
305. A reduction in commercial bank reserves due to weekly increases in currency in circulation is
Reserve requirements
b.
Open-market operations
c.
d.
e.
Moral suasion.
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re
306. Loose monetary policy coupled with a contraction of aggregate supply should
Cause government spending to fall automatically
b.
c.
d.
e.
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Pr
es
s.
Al
lr
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ht
a.
Ic
b.
Increase interest rates and the money supply, but decrease national income
c.
Increase interest rates, but decrease the money supply and national income
d.
Decrease interest rates, but increase the money supply and national income
e.
20
04
Th
e
a.
fa
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ni
307. Open-market purchases of government bonds by Reserve Bank of India will have the
tendency to
308. In an inflationary period, the appropriate policy for the RBI would be to
58
a.
b.
c.
d.
e.
Part I
b.
c.
d.
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a.
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c.
d.
e.
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313. Which of the following categories is not permitted to trade in the forex market?
Commercial banks.
Recognized exporter.
20
04
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e
Ic
b.
fa
a.
c.
d.
e.
All the three categories mentioned in (a), (b) and (c) are permitted in the forex markets.
314. In the last few months the forex reserves in India have been increasing. Which of the
following sterilization policies would the Reserve Bank of India should adopt?
a.
Increase CRR.
b.
Decrease CRR.
c.
d.
e.
59
Macroeconomics
315. An expansionary fiscal policy combined with a liberal monetary policy results in
i.
ii.
iii.
v.
A lower or higher interest rate depending on the relative magnitude of fiscal and
monetary policies.
a.
b.
c.
d.
e.
04
20
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04
iv.
M
AC
316. Which of the following is true if the central bank does not impose any reserve ratio?
The banking system can no longer affect the supply of money in the economy.
b.
c.
d.
A rupee deposited in a bank reduces the money supply in the economy by one rupee.
e.
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o.
a.
1-
31
317. Which of the following policy instruments has the least outside lag?
Cash reserve ratio (CRR).
b.
Bank rate.
c.
Repo rate.
d.
Taxes.
e.
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318. Which of the following happens when the central bank increases open market purchases?
Aggregate supply decreases.
b.
c.
Pr
es
s.
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a.
e.
ve
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d.
20
04
Recognition lag
Ic
Th
e
a.
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319. The time between the interest rate changes and the corresponding changes in the spending
decisions of the public forms a part of
b.
Administrative lag
c.
Outside lag
d.
Inside lag
e.
Intermediate lag.
60
a.
b.
c.
d.
The rate of interest charged by banks for loans given to the central bank of the country
e.
The rate of interest charged by the central bank of a country on its loans to other
commercial banks.
Part I
321. What would be the sequence of events when RBI increases money supply by reducing CRR?
i.
ii.
a.
b.
c.
d.
e.
20
04
04
iii.
iv.
b.
c.
d.
e.
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a.
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322. If an economy is already under inflation, and there is increasing inflow of foreign exchange,
the central bank can sterilize the impact by
4-
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1-
31
323. Which of the following can lead to decrease in Incremental Capital Output Ratio (ICOR)?
Low managerial efficiency.
b.
c.
d.
e.
20
04
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e
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s.
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a.
61
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04
3. (d) In a two sector model, it is assumed that the whole income is spent on consumption and
savings. Symbolically, this can be represented by Y = C + S. Hence, savings can be known by
consumption expenditure from income (i.e. S = Y C).
M
AC
04
4. (c) The variable which is computed over as period of time is a flow variable and the variable
which is measured at a point of time is a stock variable. Unemployment, foreign exchange
reserves and money supply are measured at a particular point of time, and hence are stock
variables. Consumption is measured over a period of time, so is a flow variable.
ef
.N
o.
5. (e) Gross domestic capital formation consists of addition to the inventories, addition to fixed
assets, and depreciation.
20
04
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Part I
b.
GNP at current prices measures the money value of final value of goods and services
produced by the residents of a country. The value of goods are measured by taking the
price goods existing in the current year. A increase in GDP at current prices need not
necessarily lead to economic development.
c.
Real National Income measures the final value of goods and services produced by the
residents of a country. The value of goods are measured by taking the prices existing in
the base year. An increase in real national income need not lead to economic
development if the population is increasing at a faster rate than that of real national
income. Hence, cannot be used as an indicator of economic development.
d.
Per Capita real national income is the best indicator, because an increase in per capita
real national income would mean that more goods are available per head, which would
mean the standard of living has increased.
e.
GDP deflator is an indicator of price index, on the basis of reason (a), it is not an
indicator of economic development.
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12. (a) GNP deflator is the ratio of nominal GDP to real GNP. Hence, if GNP deflator increases by
40%, the numerator should at least increase by 40%. If GNP deflator rises, it does not affect
Real GNP as Real GNP is adjusted with inflation.
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13. (b) Since real GNP is measured in terms of goods and services, production of more goods
and services increases real GNP. Nominal GNP is the value of goods and services in terms of
current market prices, thus nominal GDP increases with the increase in price level.
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14. (e) Currency with the public including small coins + Demand deposits with the bank and
other deposits with RBI is called narrow money (is denoted by M1).
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15. (e) Broad money (M3) is also known as aggregate monetary resources and is equivalent to
M1 + time deposits with the banking system, where M1 is currency with the public + demand
deposits with the banking system.
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16. (c) NNP at market prices + Depreciation = GNP at market prices. Thus, if NNP at market
prices remains constant, GNP at market prices increases by an amount equal to rise in
depreciation.
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17. (d) The output method is followed either by valuing all the final goods and services produced
during a year or by aggregating the values imparted to the intermediate products at each stage
of production by the industries and productive enterprises in the economy. The sum of these
values added gives the gross domestic product at factor cost, which after a similar adjustment to
include net factor income from abroad gives gross national product at factor cost.
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18. (a) Under expenditure method we aggregate all money spent by private citizens, firms and
the government within the year to estimate the economys national income.
19. (a) GNP deflator is a price index constructed to reveal the cost of purchasing the items
included in the GNP during the period relative to the cost of purchasing. It is the ratio of
nominal GNP to real GNP.
20. (b) GDPMP = GDPFC + [Indirect Taxes Subsidies].
Where, Net Indirect Taxes = Indirect Taxes Subsidies.
This shows that GDP at market price exceeds GDP at factor cost by the amount of revenue
raised through indirect taxes, assuming that subsidies are not given.
63
Macroeconomics
21. (d) GDP at market price = GDP at factor price + Indirect Taxes Subsidies (or) GDP at
factor price = GDP at market price Indirect Taxes + Subsidies. We consider exports while
computing GDP at market price and factor price.
22. (e) Macroeconomics is concerned with the overall performance of the economy. It deals with
overall employment, inflation and growth of the economy as a whole.
23. (e) No conclusion can be drawn regarding the growth rate of a country based on the rate of
inflation in the country.
24. (a) In a closed economy, savings are equal to investments at the equilibrium level of income.
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25. (e) There are three most popular methods to calculate national income, all the three methods
are conceptually equivalent to each other. They are: (a) the output method, (b) the
expenditure method and (c) the income method.
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= NNPMP NDPMP.
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27. (b) Balance of trade = Total merchandize exports Total merchandize imports.
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28. (d) National income + Transfer payments + Net interest and dividend = Personal income
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29. (c) Personal income = Personal disposable income (Yd) + Personal income taxes
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30. (b) Net national savings + Retained earnings of foreign companies = Net domestic savings.
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32. (c) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.
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33. (c) The price paid for a stolen car is not a market transaction, as it is illegal. Thus, while
computing GNP price paid for a stolen car is not included.
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34. (d) Macroeconomics is concerned with the overall performance of the economy. It deals with
overall employment, price stability and growth of the economy.
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35. (b) Real GNP is expressed in terms of goods and services. So real GNP increases only when
there is an increase in the output of goods and services.
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36. (a) The operation of forces in an economy can be expressed in the form of a circular flow of
incomes and spending between the households and firms.
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37. (d) In a model where there is no government, investment, net investment, capital replacement
or international trade, the market value of final output is equal to the aggregate consumption
by the household sector or the sum of returns to all factors of production.
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38. (b) Expenditures on consumer goods are not included in gross investment.
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39. (a) In a model where there is household, business, government and foreign sector, the GNP is
given by the sum of the consumption (C), gross investment (I), government expenditure (G),
and net exports (E M).
GNP = C + I + G + E M.
Part I
44. (e) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies
Thus, when subsidies are more than indirect taxes, GDP at factor cost exceeds GDP at market
price.
45. (c) GNP = GDP + Net factor income from abroad
Hence, net factor income from abroad = GNP GDP.
46. (b) NDP does not include depreciation [Hint: GDP Depreciation = NDP]
47. (a) NNP at factor cost = NDP at market price + Subsidies Indirect Taxes
48. (d) NNP at factor cost is also known as National Income.
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49. (e) Transfer payments are not taken into account while computing national income. National
income is computed by summing up payments to all factors of production.
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50. (d) Salaries paid by Microsoft USA to Indian programmers employed at New York is a part
of Indian GNP but not GDP, as the income is earned outside the boundaries of the country.
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51. (e) National product fails to account the household production because it neither a market
transaction nor involve money. It also makes no adjustment for harmful side effects that
some times arise from several productive activities and the events of nature (e.g. pollution,
noise, etc).
52. (e) GDP Deflator is a price index, which is used to measure the average level of the prices
of all goods and services that make up GDP.
(a) Is not the answer because it is a true statement that GDP deflator is otherwise known as
implicit price deflator.
(b) Is not the answer because GDP deflator reflects the change in overall price level in the
economy.
(c) Is not the answer because GDP deflator is the most comprehensive index of price.
(d) Is not the answer because GDP deflator is used to measure real GNP i.e. GNP in rupees
of constant purchasing power. If prices are rising, the nominal GNP during the latter
period to account for the effects of inflation.
(e) Is the answer because GDP deflator does not measure economic growth.
53. (e) Personal disposable income = Personal income Personal taxes.
(a) Is not the answer because the difference between personal disposable income and
personal income is not residential investment.
(b) Is not the answer because the difference between personal disposable income and
personal income is not indirect taxes.
(c) Is not the answer because the difference between personal disposable income and
personal income is not subsidies.
(d) Is not the answer because the difference between personal disposable income and
personal income is not transfer payments.
(e) Is the answer because the difference between personal disposable income and personal
income is personal taxes.
54. (c) Investment is the flow of expenditures devoted to increasing or maintaining the real
capital stock. When the addition to capital goods is more than the capital consumption
allowance, it will result in a positive net investment.
(a) Is not the answer because when the addition to capital goods is less than the capital
consumption allowance, it will result in negative net investment.
(b) Is not the answer because when the addition to capital goods is more than the capital
consumption allowance, it will not result in zero net investment.
(c) Is the answer because when the addition to capital goods is more than the capital
consumption allowance, it will result in positive net investment.
(d) Is not the answer because when the addition to capital goods is more than the capital
consumption allowance, it will not result in negative gross investment. Because gross
investment is the total investment that occurs in the economy within any specific time
period.
(e) Is not the answer because when the addition to capital goods is more than the capital
consumption allowance, it will not result in zero gross investment.
65
Macroeconomics
55. (a) GNP deflator is a price index, which is used to reveal the cost of purchasing the items
included in GNP during the period relative to the cost of purchasing those items during a base
year. GNP deflator is used to measure real GNP i.e. in rupees of constant purchasing power.
If there is a rise in prices, the nominal GNP is deflated during the latter period to account for
the effects of inflation.
(a)
Is the answer because GNP deflator is the ratio of Nominal GNP to Real GNP.
(b) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GNP.
(c)
Is not the answer because GNP deflator is not the ratio of Nominal GNP to Real GDP.
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(d) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GDP.
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56. (d) Transfer payments are not considered as payment for current services or production.
These items are not entered in national income.
Is not the answer because salary paid to a soldier is the payment for current services and
hence it is not an examples of government transfer payments.
(b)
Is not the answer because purchasing of a new car for the Ministry of Finance is not an
examples of government transfer payments.
(c)
Is not the answer because funding of a clinic to provide free vaccinations is not an
examples of government transfer payments.
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(d) Is the answer because free food coupons issued to a persons in an antipoverty program
is not the payment for current services or production and hence it is an examples of
government transfer payments.
Is not the answer because funding of a new bridge in an urban area is the payment for
current services and hence it is not an examples of government transfer payments.
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57. (a) In India, Whole Sale Price Index (WPI) is widely used for determine of inflation.
Because the office of the economic advisor to the government of India publishes wholesale
price indices for individual commodities, commodity groups and the overall WPI monthly.
They are reported in a number of other publications also.
Is the answer because Whole Sale Price Index (WPI) is widely used for determine of
inflation in India.
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(a)
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(b) Is not the answer because GDP deflator is not used for determining inflation in India.
GDP deflator is used to reveal the cost of purchasing the items included in GNP during
the period relative to the cost of purchasing those items during a base year. And it is
difficult to bet the data for the two years for comparisons.
Is not the answer because in practice it is difficult to include each and every item for
construction of Consumer Price Index. (CPI)
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(c)
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(d) Is not the answer because both Whole Sale Price Index (WPI) and GDP deflator are not
used in measuring inflation.
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(e)
Is not the answer because both GDP deflator and Consumer Price Index. (CPI) are not
used in measuring inflation.
58. (c) Investment includes expenditure on the plant and machinery produced during the year,
expenditure incurred on construction activities (both residential and non-residential) during
the year and change in inventories.
(a) and (b) are not the answer as both are financial transactions, which do not form part of
investment.
(c) is the answer as change inventories is considered to be an investment.
(d) is not the answer as purchase of used vehicles amounts only to transfer of ownership and
not an investment.
66
Part I
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59. (a) Since the value added within the domestic territory will belong to the domestic factor
inputs, NDP at factor cost must be equal to domestic factor income.
Hence answer is (a).
(b) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net Domestic Product at market price.
(c) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net National Product at factor cost.
(d) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Net National Product at market price.
(b) Is not the answer because the net factor income earned within the domestic territory of a
country is not equal to Personal Income.
60. (a) By definition dividends and corporate taxes are part of corporate profits.
National Income refers to the factor income earned by the residents of a country and it
includes profits earned by entrepreneurs. Profit includes dividends and corporate tax. Hence
dividends and corporate tax are part of national income.
Hence dividends and corporate taxes are part of corporate profits and national income.
On the basis of the above reason, dividends and corporate taxes are part of corporate profits
(i) and National Income (ii). Hence this is true option.
Dividends and corporate taxes are not part of personal income, hence not the correct option.
On the basis of above reason, the option is not correct.
d.e. As given in the reason, dividends and corporate taxes are not part of personal income and
personal disposable income. Hence not correct option.
61. (a) All the options that are given measure price indices. Each of which is constructed with a
particular objective.
a. CPI represents the changes in the price of a basket of goods with respect to the prices
existing in the base year. The basket of goods that are considered are those that are used
commonly by consumers and they are grouped together as food items, housing, fuel and
light etc. Doctor fees, railway and bus fares are the items of expenditure of the
consumer, hence in the calculation of consumer price index they are given greater
weightage. Hence the option is correct.
b. Whole sale price index can be interpreted as an index of prices paid by producers for
their inputs. It gives more importance to items used in production process. Hence the
option is not correct.
c. Index of industrial production is a quantity index which covers mining, manufacturing
and electricity generation. Hence the items referred to in the question are not included.
Hence the option is not correct.
d. GNP deflator is a measure of real GNP i.e. GNP in rupees of constant purchasing
power. While calculating it no weights are assigned, hence the option is not correct.
e. Same reason as given in option (d).
62. (d) GDP refers to money value of final goods and services produced within the domestic
territory of a country including depreciation. There are certain goods which are produced but
will not be included in GDP. For example services of house wives.
Bobby purchase of a new suit is nothing but the consumption expenditure of bobby, which is
part of GDP.
Purchase of new Ford car also refers to consumption expenditure and hence part of GDP
New computer purchased by Community Bank for its loan office refers to purchase of capital
goods. Hence it is part of capital expenditure and hence part of GDP.
Tomatoes grown in home garden by Market are not taken as part of GDP Even though goods
are produced, they are not taken as part of GDP as it refers to production for self
consumption. If she sells them in the market then it becomes part of GDP.
Ford India could not sell 100 cars, hence they are part of inventories and hence part of capital
expenditure. Hence included in GDP as part of capital goods expenditure.
67
Macroeconomics
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65. (b) The rachet effect is the situation where households find it easier to adjust to rising
incomes than falling incomes.
Taxation policy
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66. (a) Amounts of consumption and saving not only depend upon the level of disposable
income, but on many factors. Changes in these factors cause shift in the consumption
function. This can lead to more or less consumption at the same level of income. Some of
these factors are:
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67. (c) The slope of the consumption function represents the Marginal Propensity to Consume
(MPC).
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68. (c) The Average propensity to consume can never exceed unity.
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69. (d) An automatic stabilizer is any mechanism in the economy that reduces the amount by
which output changes in response to a change in autonomous demand. The proportional
income tax levied by the government is an automatic stabilizer. Hence it does not affect the
balanced budget.
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70. (a) In the equation C = C + cY, C and c represent autonomous consumption and marginal
propensity to consume respectively. Autonomous consumption expenditure is the
consumption expenditure, which is independent to income level, Y. In other words, it is the
consumption expenditure when the income level is 0.
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73. (c) In a two-sector economy, planned savings are equal to planned investments at the
equilibrium level of income.
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74. (b) When planned savings are not invested fully, part of the money saved would become
ideal and therefore, the output decreases.
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75. (a) When the value of output exceeds planned spending, there is unsold output, which leads
to drop in the level of income.
76. (d) Marginal propensity to consume refers to change in consumption as a result of change in
income, that is C/Y. C/Y is nothing but slope of the consumption function.
77. (a) The multiplier is used more generally in Economics to mean the effect on some
endogenous variable due to change in exogenous variable. The expenditure multiplier relates
the change in income to the change in autonomous spending.
78. (b) As autonomous spending for a particular consumption line is taken as constant while
constructing spending curve, any change in autonomous spending cause shift in the spending
line.
79. (c) When consumption spending lags the receipt of disposable income by one period it is
given by Ct = f(Yd,t-1).
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Part I
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80. (d) A single shock in autonomous demand produces a slow or distributed lag effect on
output. Dynamic multiplier shows how a given change in autonomous investment affects the
level of output overtime.
81. (c) Current account describes the trade in goods and services of a country with the outside
world. If current account balance shows a deficit, it represents that foreign exchange outflows
on goods and services, gifts and unilateral transfers are more than inflows.
82. (d) An increase in autonomous investment spending, transfers or a decrease in taxes cause an
increase in the level of income, but increase in net tax revenues does not cause an increase in
income.
83. (c) Ceteris paribus, introduction of taxes reduces the disposable income. This in turn
decreases the value of the expenditure and net tax revenue multiplier.
84. (b) Y = C+ I + G + E M
An increase in autonomous investment spending increases the income level in the country
that in turn increases imports. Consequently, the net exports become negative.
85. (d) Multiplier = 1/[1 b + MPI), where MPI is marginal propensity to import. This shows
inverse relationship between multiplier and marginal propensity to import. Thus, an increase
in the marginal propensity to import decreases the value of the multiplier.
86. (b) If an investment spending is negatively related to the rate of interest, equilibrium income
also relates inversely with interest rate, as investment spending is a component of equilibrium
income.
87. (d) In the consumption function, C = 256 + 0.85 Y, MPC = 0.85l and it remains constant,
whereas average propensity to consume will be changing with the income.
88. (b) Multiplier = 1/MPS where MPS is the marginal propensity to save; thus an increase in
marginal propensity to save decreases the value of multiplier.
89. (b) When the multiplier is one (or unity), it implies that output expands precisely by the
amount of the increased government purchases without any induced consumption spending.
So when the government expenditure increases by 100, the equilibrium income also increases
by 100.
90. (c) The term multiplier is used more generally in economics to mean the effect on some
endogenous variable of a unit due to change in an exogenous variable. The multiplier is
necessarily be greater than one in a simple model of income determination.
91. (d) Life Cycle Hypothesis states that the saving behavior of the individuals during their
working life is motivated by their desire to maintain consumption levels after retirement. The
permanent income theory argues that people gear their consumption behavior to their
permanent or long-term opportunities but not to their current level of income. The relative
income hypothesis argues that current consumption depends not only on current income but
also on the past behavior of the income.
92. (c) The term multiplier in macroeconomics refers to the change in an induced variable per
unit change in an external variable. Keynes multiplier denotes the number by which the
change in investment results in change in total output (or income). Thus, a multiplier of 3
implies that when investment increases by Re.1, income or output increases by Rs.3. But,
income Y = C + I + G + NE. Thus, if autonomous investment increases by Re.1, the income
increases by Rs.3. Out of that Rs.3; autonomous investment increases by Re.1 (given) and
consumption by Rs.2 (i.e. 3 1), assuming that government expenditure and net exports are
autonomous and do not influenced by the autonomous investment. (Note: Assume that there
are no imports).
93. (e)
The demand for precautionary balances represents money that is held as a precaution against
some unforeseen events such as medical emergency, accident etc.
This precautionary demand for money is inversely related to rate of interest and frequency
with which income is received. Lower the rate of interest and frequency with which income
is received, higher is the precautionary demand for money and vice versa.
(a) Is not the answer because precautionary demand for money varies directly with the level
of income.
(b) Precautionary demand for money is inversely related to rate of interest.
69
Macroeconomics
(c)
Is not the answer because precautionary demand for money varies directly with the
wealth a person held.
(d) Precautionary demand for money is inversely related to frequency with which income is
received.
(e)
Is the answer because precautionary demand for money is inversely related to rate of
interest and frequency with which income is received.
94. (e)
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(a) Consumption depends on the income and as income increase consumption also increase.
Propensity to consume refers to the changes in consumption as a result of change in income.
Hence propensity to consume effects consumption.
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Propensity to save refers to changes in savings as a results of changes in income. The level of
savings affects the level of consumption. Hence changes in savings does affect consumption
d. Consumption demand does not depend upon the level of consumer spending.
e. Consumption demand does not depend upon the level of marginal efficiency of
investment.
95. (c) Consumption curve depicts the relationship between consumption and income.
APS is given by the ratio between saving and Income. Whereas the slope of the curve is
given by the ratio between change in consumption and income. Hence not correct
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APC refers to the ratio between consumption and Income, hence not the slope of the
consumption curve which as said above is given by changes in consumption as a result of
change in income.
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By definition, MPC refers to increase in consumption per unit increase in income. Which is
nothing but the slope of the consumption curve. Hence the option is true.
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MPS refers to change in savings as results of change in income and slope of consumption
curve gives the changes in consumption as a result of change in income. Hence not true.
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Level of consumption cannot be used to calculate slope of the consumption curve as slope
refers to ratio between changes in consumption and changes in income.
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96. (b) Marginal propensity to consume refers to the change in consumption as a result of
increase in income. Part of the changed income is saved. Hence MPC is equal to 1-MPS.
Multiplier is the reciprocal of 1-MPC or MPS. Hence larger MPC means smaller MPS and
hence larger will be the value of the multiplier.
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Statement (i) is false because as MPC is larger, MPS will be smaller as it is nothing but
1-MPC.
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Statement (ii) is true because multiplier is reciprocal of MPS and MPS is smaller as said
above.
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Statement (iii) is true. Average propensity to consume will depend on level of consumption
and income. Since the MPC is larger, consumption will also be larger and hence average
propensity to consume will also be larger.
Statement (iv) is false, as autonomous consumption is independent of MPC and hence it is
not possible to say anything about autonomous consumption on the basis of MPC.
Since both (ii) and (iii) are true, the option (c) is the answer.
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From this it can be known that larger the multiplier the flatter would be the IS curve. Since
the slope of the curve is dependent on the multiplier and the multiplier in turn dependent on
the tax rate. An increase in the tax rate increases the steepness of the IS curve. Hence options
(b) and (c) are correct.
100. (d) Factors other than interest rate shift the IS curve either upwards or downwards. In other
words, IS curve is constructed keeping other factors autonomous investment, government
expenditure, tax rate, etc. constant. As autonomous increase in investment increases the
income, the IS curve shifts toward right.
101. (a) The real money supply is held constant along the LM curve, thus a change in the real
money supply shifts the LM curve. Increase in real money supply shifts the LM curve down
and to the right.
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102. (a)
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From the graph it is clear that equilibrium in the goods market will be at a higher point than
the existing income.
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103. (a) A vertical (horizontal) LM curve represents zero (high) sensitively to interest rates.
Speculative demand for money is highly responsive to changes in interest rates. Hence, the
LM curve will be vertical, if there is no speculative demand for money.
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104. (b) The basic difference between IS and LM curve is that IS curve explains goods market and
LM curve explains money market.
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105. (b) LM schedule is a schedule of monetary equilibrium where the supply of money equals the
demand for money. The equilibrium where the demand for real balances of money equals to its
real supply of money is described by the LM schedule.
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106. (d)
107.
108.
109.
110.
From the graph we can notice that if income and interest rates increase IS curve shifts to the
right.
(e) A shift in the IS curve occurs when factors other than interest rate affect the IS curve.
Changes in all the factors mentioned shift the IS curve upward or downward.
(c) The slope of the LM curve is dependent upon the demand function for money in the
economy.
(d) The steepness of the IS curve depends on the multiplier and investment sensitiveness to
changes in interest rates. A steeper (flatter) IS curve indicates lesser (higher) sensitivity to
interest rate changes. Since investment demand is infinitely interest elastic in the given
problem, the correct answer is (d).
(a) An expansionary monetary and fiscal policy increases the aggregate demand in the
economy, which leads to shift in AD curve towards right.
71
Macroeconomics
111. (d) One of the main determinants of the demand for money is the level of income. If prices
remain constant larger money balances are required to conduct the larger volume of business
with an increase in the quantity of goods bought and sold. Thus if nominal GNP increases the
demand for money balances also goes up. This shows direct/positive relationship between the
demand for money and income levels. If interest rates go up demand for money balances
decreases and people tend to invest or deposit the money, which implies an inverse
relationship between the demand for money and interest rates.
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112. (a) When the income level increases, the demand for money function shifts toward right. As
a result of upward shift, both quantity of money demanded and rate of interest increase (see
figure below).
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113. (b) All the points on IS curve indicate equilibrium in the goods market and all the points on
LM curve represent equilibrium in the money market. Therefore, simultaneous equilibrium in
both the markets is possible only at the intersection of both the curves that is only at one
income level and interest rate.
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114. (b) The liquidity effect refers to the immediate effect on market interest rates due to changes
in the money supply that are predicted from the liquidity preference framework. Within that
framework an increase in the money supply would reduce interest rates. This reduction would
be the liquidity effect.
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115. (c) The liquidity effect refers to the decrease in the real interest rate following an increase in
the money supply. Liquidity effect will result in an income effect, as lower interest rates will
increase interest-sensitive spending.
116. (a) If the private sector spending is more interest sensitive the change in interest rate caused
by the changes in money supply will have a greater effect on the equilibrium income.
117. (c) If the sensitiveness of demand for money to interest rates is high the LM curve is steeply
sloped. In that case changes in money stock are totally ineffective in influencing the equilibrium
output.
118. (d) Crowding out refers to a situation where due to increase in government spending the
interest rate in the market goes up and private investment will come down. Thus, crowding
out is more likely to occur when the demand for money is interest-insensitive and private
sector spending is interest-sensitive.
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119. (c) Crowding out will occur when a reduction in income taxes causes higher interest rates,
which crowd out interest-sensitive private spending. Note that crowding out refers to a
situation where due to increase in government spending the interest rate in the market goes
up and private investment will come down.
120. (c) Real money supply = Nominal money supply/Price level. Hence, decrease in price level
(or inflation) increases the real money supply in the market.
121. (b) Increase in the price level reduces the real money supply and from the LM curve equation
it is known that if real money supply decreases LM schedule shifts to the left.
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122. (b) As investment spending is inversely related to the interest rates, any fall in real and
nominal interest rates increases the investment spending in the economy.
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123. (e) The growth rate in nominal stock of money, Gm = aGy + Gp where Gy is the real GDP
growth rate and Gp is the rate of inflation.
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124. (a) The amount of wealth that households and business desire to hold in the form of money
balances is called the demand for money. The liquidity preference function shows the
demand for money balances and its relationship with the interest rates.
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125. (a) The mechanism by which the changes in monetary policy affect the aggregate demand is
called transmission mechanism. This shows the relationship between the goods market and
money market.
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126. (e) Price elasticity of demand for different points on the linear demand curve. A reduction in
the rate of interest rate increases the profitability of additions to the capital stock and
therefore leads to a larger rate of planned investment spending. This implies a negative
relationship between interest rates and investment spending.
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127. (c) A supply shock such as failure of monsoon or increase in the price of oil causes a
leftward shift in the aggregate supply curve that results in lower equilibrium output and
higher prices.
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129. (a) Changes in money stock are totally ineffective in influencing equilibrium output and
interest rate if the demand for money is infinitely interest elastic.
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130. (b) IS curve shows the equilibrium in the goods market. It reflects the relationship between
interest rate and output. As interest rate is negatively related to output (i.e. if interest rate
increases, output decreases and vice versa), the IS curve slopes downward. Hence (b) is
wrong.
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131. (c) Crowding out is the process where expansionary fiscal policy like tax cut or increase in
government spending causes interest rates to rise thereby reducing private spending
particularly investment.
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132. (b) Transaction demand for money varies positively with income and inversely with rate of
interest. In words, higher (lower) the income, higher (lower) is the demand for money. On the
other hand, higher (lower) the interest rate, lower (higher) is the demand for money.
133. (a) IS curve is negatively sloped indicating that interest rate is negatively associated with the
aggregate demand. A rise in the interest rates reduces both consumption and investment,
which results in decline in aggregate demand.
[Hint: AD = C + I + G].
134. (c) A rise in government expenditure increases the interest rates in the economy, which lead
to reduction in interest-sensitive private investment.
135. (c) When government spending increases at unchanged interest rates, the level of AD
increases to meet the increased demand for goods. Because of this increase in income the
quantity of money demanded goes up which in turn pushes up the interest rate. So both
interest rate and income increase.
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Macroeconomics
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136. (b) If investment is insensitive to the interest rates, IS curve stands vertical indicating a
constant level of income. When the level of income remains constant, shifts in LM curve
does not change the equilibrium income, but only affect the interest rates in the money.
Hence, a shift in IS curve (i.e. changes in the goods market) determines the equilibrium
income.
137. (e)
Liquidity trap occurs when there is no decrease in the interest rate despite an increase in the
money supply. This results in an addition to idle balances.
(a) Is not the answer because when the economy is facing a situation of liquidity trap, there
is no future expectation of rise in the interest rate. So public hold money rather than
using for investment. The statement is true.
(b) Is not the answer because LM curve gives the combination of income and interest rates
which produce equilibrium in the money market. As the interest rate remains at the
critical rate, the speculative demand for money is nil. As the interest elasticity of
demand is infinity, the LM curve will be horizontal. The statement is true.
(c) Is not the answer because as the interest rate does not increase, a sound fiscal policy
such as tax and expenditure policy will help in increasing the income. The fiscal policy
has a direct bearing on the level of aggregate demand and the level of economic activity.
The is a true statement.
(d) Is not the answer because monetary policy is ineffective in affecting the interest rate due
to the infinite interest elasticity of demand for money. The is a true statement.
(e) Is the answer because LM is not vertical rather than horizontal when there is liquidity in
the economy.
138. (b)
The amount of wealth that household or business hold in the form of money balances is
referred to as demand for money. Individuals and firms may hold part of their wealth in the
form of money to take the advantage of decrease in prices. Speculation can be done on price
of stock and bonds. Securities prices are linked to interest rates and inversely proportional to
a change in interest rates. With a rise in interest rates, prices of securities fall and the
speculative demand for money also comes down. Contrary to this, if the interest rates fall,
securities prices rise and demand for speculation purposes also rises. Thus speculative
demand is inversely proportional to the rate of interest.
(a) Is not the answer because transaction demand for money is largely influenced by level
of income and the frequency with which income is received.
(b) Is the answer because there is an inverse relationship rate of interest and the speculative
demand for money.
(c) Is not the answer because the demand for precautionary balances represents money that
is held as a precaution for some unforeseen events such as medical emergency, an
accident etc. The precautionary demand for money is highly influenced by level of
income.
(d) Is not the answer because an inflationary expectation does not represent an inverse
relationship between the interest rate and the demand for money.
Is not the answer because the relationship between the interest rate and the demand for
money is inverse, not direct.
139. (e)
(a) Is not the answer because IS curve shows the combinations of income and interest rates
which reflects the goods market equilibrium.
(b) Is not the answer because LM curve shows the combinations of income and interest
rates, which reflect the money market equilibrium.
(c) Is not the answer because interest rate is a variable in both the IS and LM model.
(d) Is not the answer because the equilibrium level of national income is determined when
there is a simultaneous equilibrium in the goods market and money market.
(e) Is the answer because IS curve is not positively sloped rather it is negatively sloped.
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140. (d) If the government raises tax rate, it has an effect on the IS curve because it is a fiscal
policy and the IS curve shifts to left. And at the same time the Reserve Bank of India keep
the money supply constant. It implies that there is no change in the LM curve. This will result
in a fall in the interest rate.
(a) Is not the answer because when the Government raises tax rate, disposable income
falls.
(b) Is not the answer because if the government raises tax rate and the Reserve Bank of
India hold the money supply constant, the IS curve shifts to the left.
(c) Is not the answer because if the government raises tax rate and the Reserve Bank of
India hold the money supply constant, there is no shift in the LM curve.
(d) Is the answer because if the government raises tax rate and the Reserve Bank of India
hold the money supply constant, the IS curve shifts to the left while LM curve
unchanged means that the interest rate falls.
(e) Is not the answer because interest rate does not increase.
141. (a) The LM curve gives the combinations of income and interest rates, which produce
equilibrium in the money market. For all points in the LM curve, the demand for real
balances is equal to supply of real balances. The LM curve shows a positive relationship
between rate of interest and level of income.
(a) Is the answer because the LM curve shows a positive relationship between rate of
interest and level of income.
(b) Is not the answer because the LM curve does not show a negative relationship between
rate of interest and level of income.
(c) Is not the answer because the LM curve does not show a negative relationship between
rate of interest and level of investment.
(d) Is not the answer because the LM curve does not show a positive relationship between
rate of interest and level of investment.
(e) Is not the answer because the LM curve does not show a positive relationship between
level of investment and level of income.
142. (e) An increase in government expenditure results in an increase in the level of income and
an increase in the interest rate. It will shift the IS curve to the right. But LM curve remain
unchanged because an increase in government expenditure, a fiscal policy measure, has no
impact initially in the asset markets.
(a) Is not the answer because an increase in government will not shift both IS and LM
curve to the right.
(b) Is not the answer because an increase in government will not shift both IS and LM
curve to the left.
(c) Is not the answer because an increase in government will not shift IS curve to the left.
(d) Is not the answer because an increase in government will affect IS curve.
(e) Is the answer because an increase in government will not shift the position of LM curve
but shift IS curve to the right.
143. (d) The relationship between demand for money and interest rate is given by the LM curve.
The relationship between interest rate and demand for money is negative. The LM curve
gives the demand schedule for a particular income level.
a. If there is an increase in the level of income because of increase in real money supply,
there is no shift in the IS curve.
b. As at the same interest rate, the demand for money increases with the increase in
income level. The LM curve will shift to the right and hence the option is not correct.
c. There will be increase in the real balances as income increases, but no shift in the IS
curve.
d. As per the reason given in the option (b), the LM curve shifts to the right and hence
option d is the correct answer.
e. The entire increased income need not be used for consumption as part of it goes into
savings and hence the increased income need not be equal to changed income. Hence
this option is not correct.
75
Macroeconomics
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144. (a) An increase in the real stock of money tend to bring down interest rates in the market,
which in turn increases the aggregate demand (indicated by an upward shift in the AD curve).
An increase in real stock of money shifts the LM schedule down and to the right.
145. (a) Expansionary fiscal policies shift the IS and AD curves towards right.
146. (b) Real stock of money = Nominal stock of money/Price level. Hence, any decline in the
price level increases the amount of real stock of money.
147. (e) The increase in the price level reduces the real balances and the LM schedule shifts up
and to the left until a new equilibrium for supply and demand is reached.
148. (b) If all the resources available are fully employed then aggregate supply curve in the long
run will become vertical indicating that the quantity of goods supplied cannot be increased
further.
149. (e) All the factors given are determinants of aggregate demand in an economy.
150. (e) All the factors given are determinants of aggregate supply in an economy.
151. (b) Increase in real wages attract more labor, as a result labor supply will increase. But at
high wages firms tend to employ lesser labor, leading to lesser demand for labor.
152. (b) The demand for money is the demand for real money balances real balances for
short because people hold money for what it will buy. Demand for money depends upon
the real income and real interest rate. It depends on the level of real income because
individuals hold money to pay for their purchases, which in turn, depend on the income. The
demand for money also depends upon the cost of holding money, which is indicated by real
interest rate.
153. (a) Business firms will produce at maximum efficiency because of the market forces of both
supply & demand.
154. (b) From the figure, it is clear that a rightward shift of aggregate demand, with no change in
aggregate supply schedule, results in an increase in real output and no change in the price
level when aggregate supply is horizontal.
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155. (b) Aggregate demand is negatively related to the price level because a decline in the price
level has a positive effect on the demand for output.
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156. (a) The slope of aggregate demand becomes flatter, it indicates more sensitivity to the
investment spending to the changes in the rate of interest.
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157. (c) A neoclassical aggregate supply schedule exists when the demand for labor and supply of
labor schedules adjust immediately to a change in the price level.
158. (b) Decrease in taxes shift the aggregate demand curve upwards. When the supply curve is
vertical, an upward shift in aggregate demand curve increases the price level. However, it
will not have any effect on real output (see figure below).
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Part I
159. (b) As the aggregate supply curve is vertical, increase in nominal money supply only lead to
increase in price level. But it will not have any effect on the real money supply or the
composition of output, because the economy already running at full employment.
160. (d) For given wages, profit margins and labor productivity a change in the real price of the
commodities will increase prices simply because it raises costs. The impact is the AS curve
shifts upward and to the left at each level of output.
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161. (b) The mark-up pricing singles out 3 determinants of prices the money wages, the unit labor
requirement or its reciprocal, labor productivity and the mark-up rate. A rise in any of these
3 determinants will increase the price that firms set for their output. Conversely a decline in
wages, a rise in productivity, or a fall in the mark-up rate will lower costs and therefore lower
prices and AS schedule shifts to down and right.
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162. (c) Decline in the nominal money supply growth reduces the inflation rate and the level of
output in the short run.
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163. (d)
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From the figure, it is clear that with an upward sloping aggregate supply curve in the short
run, an increase in aggregate demand causes rise in general level of prices.
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164. (c) When the depreciation is greater than the net investment, it will lead to the decline of an
economys capital stock.
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165. (e) Since the price elasticity of demand coefficients for demand schedules D2 and D4 are less
than one, total revenue for good 2 and good 4 increases with decrease of price.
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166. (d) When government spending is used as a policy instrument in order to achieve full
employment, it is called internal balance.
167. (a)
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The aggregate supply explains the production behavior of an economy. If the actual price
achieved is more than the expected price, firms will experience a higher than anticipated
level of profits. This will lead to increase in production. Thats why the short run aggregate
supply curve slopes upward. But in the long run, the difference between expected and actual
price levels is negligible. In the long run, the output of an economy does not depend on the
price level, but on factors such as labor import costs, capital stock, technological progress,
etc. So aggregate supply curve of an economy in long run is vertical.
(a)
Is the answer because aggregate supply curve is positively sloped in the short run and
vertical in the long run.
(b) Is not the answer because aggregate supply curve is not positively sloped in the short
run as well as in the long run.
(c)
Is not the answer because aggregate supply curve is not positively sloped in the short
run as well as in the long run.
(d) Is not the answer because aggregate supply curve is not positively sloped in the short
run and negatively sloped in the long run.
(e)
Is not the answer because in the long run, output of an economy does not depend on the
price level, but on factors such as labor import costs, capital stock, technological
progress, etc.
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Macroeconomics
168. (b) AD curve gives the relation between quantity of goods and services demanded and price
level. Apart from price, AD is also affected by
i.
A change in income
ii.
Rate of interest
Government policy
A change in exchange rate and
v.
Transfer payments
a.
A decrease in income of foreigners will have its impact only on the aggregate demand
of the country to which they belong to and not on the domestic economy. Hence, there
is no impact on the aggregate demand.
b.
Transfer payments refer to incomes such as pensions, gifts etc. which are unilateral
payments. They add to the income of the receiver. Hence private transfers from abroad
will add to the income and leads to increase in aggregate demand.
c.
d.
Increase in interest rates makes loans demanded for investment and consumption
purposes costlier. The people would prefer to wait until the interest rates come down
and hence the aggregate demand will less.
e.
An increase in tax rates will lead to decrease in disposable income in case of direct
taxes and investment demand in case of corporate taxes. The net impact is that
aggregate demand will decrease.
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iii.
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169. (e) Realized output refers to aggregate supply and spending refers to aggregate demand. If
aggregate supply is greater than aggregate demand, it results in fall in price, output and
employment.
Since aggregate demand is falling short of aggregate supply, demand is lower and hence
there is not new investments which would mean there will be increase in
unemployment.
b.
c.
d.
There is excess supply in the economy i.e. there is unsold stock which leads to increase
in inventories. Hence true.
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170. (e) In long run the economy will tend towards output which is referred to as natural rate of
output.
True, because long equilibrium is characterized by tendency towards natural rate of
output
In long run output of an economy does not depend on the price level, but on labor,
import cost, capital stock, technological progress etc., hence true.
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a.
c.
True, input costs play a greater role in the determination of equilibrium output.
d.
At natural rate the aggregate supply is vertical as it is insensitive to price hence true.
e.
Since price does not have any impact of output in long run, unanticipated price also has
no role. Hence this option is not true.
171. (c) Aggregate supply curve gives the relationship between net national product that would be
supplied at each general price level.
Deficit demand refers to a situation where aggregate demand is falling short of aggregate
supply, hence price decrease. This results us decrease in supply. Hence the supply curve will
be positive sloped.
In case there are idle resources, as the prices increase firms can increase supply by utilization
of idle resources. Hence the relationship between supply and prices is positive.
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Part I
In a situation where all the resources are fully employed, the firms will not be in a position to
increase the supply even if prices are increased. Hence the supply curve will be vertical.
Hence the correct option.
Aggregate supply curve is vertical in short run as the resources are fully employed. Labor is a
variable factor in short run, hence the available labour force is fully employed.
Vertical supply curve only means that all the available resources are fully employed, it is not
necessary that all firms must earn normal profits.
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172. (c) The currency with the public is equal to the notes and coins in circulation and demand
deposits with banks.
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As both Cu and H are constant, an increase in reserve ratio decreases money supply, but at a
lesser proportion.
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175. (e) M3 = M1 + Time deposits with the banking system and M4 = M3 + Total post office
deposits. Thus, both M3 and M4 include time deposits with the banking system.
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176. (b) Bank rate is the rate at which the central bank is prepared to discount or rediscount the
commercial bills brought to it by commercial banks.
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177. (c) Lowering the reserve requirements and increasing the volume of reserves rises the money
supply in the market. [Hint: Money supply = {(1 + c)/(c + r)} H]
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Ceteris paribus, a reduction in reserve ratio therefore increases the DD component in the
money supply.
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178. (e) The RBI money together with government money constitutes the monetary base which is
known as high powered money. High powered money = Currency with the public + Reserves
+ Other deposits with RBI.
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179. (c) This transaction does not make any change in money supply because it is already in
circulation.
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182. (a) The RBI money together with government money constitutes the monetary base which is
known as high powered money.
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183. (e) Money multiplier = (1 + Cu)/(Cu + r). Thus, if currency deposit increases the multiplier
decreases less than proportionately to the increase.
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184. (c) Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net physical
capital formation. FIR shows the relation between financial development and the growth of
physical investment.
185. (e) The RBI money together with government money constitutes the monetary base which is
known as high powered money. High powered money, H = M3/m, where m is the money
multiplier.
186. (d) M3 = M1 + Time deposits with banks
M2 = M1 + Post office savings deposits.
187. (e) Money Multiplier = [(1 + Cu)/(Cu + r)]
Therefore, if reserve ratio, r is constant and currency deposit ratio, Cu increases then money
multiplier decreases less than proportionately to the increase of currency deposit ratio.
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Macroeconomics
188. (c) Savings deposits are not a part of money stock measure (M1) because they are not
recognized as legal tender by the RBI and are not readily convertible to cash.
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189. (c) Increase in corporate income tax at constant interest rates will discourage the investment.
Hence, the volume of investment will not increase.
190 (d) Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net
physical capital formation. FIR shows the relation between financial development and the
growth of physical investment.
191. (a) Change in money supply induces change in interest rates, which affects the investment
spending that in turn affects the aggregate demand and output.
192. (b) New issue ratio = Primary issues by non-financial sector/total physical asset formation.
193. (a) Creation of credit is a major function of a commercial bank. When a bank creates credit
or advances loans, there tends to be a multiple expansion of credit in the banking systems.
(a) Is the answer because credit creation by the commercial bank is limited by the Cash
Reserve Ratio(CRR), i.e. every commercial bank must keep on deposit with the Reserve
Bank certain amounts of funds equal to a specified percentage of it is own deposit
liabilities.
(b) Is not the answer because commercial banks cannot create as much credit as they want.
Is not the answer because RBI has control over the credit created by commercial banks.
(d) Is not the answer because CRR has an impact on credit creation
194. (b) The balance sheet of Reserve Bank of India contains particulars of banks current assets
and liabilities.
(a) Is not the answer because central governments borrowings from RBI constitutes assets
of RBI. It will affect the balance sheet.
(b) Is the answer because loan taken by one commercial bank from the other is a inter bank
loan. It will not affect the balance sheet of the Reserve Bank of India. It is neither a
liability nor an asset to the RBI.
(c) Is not the answer because refinancing of NABARD loans constitutes assets of RBI.
(d) Is not the answer because increase in reserves of commercial banks increases the
liabilities of RBI.
(e) Is not the answer because increase in net foreign exchange assets increases the assets of
RBI.
195. (e) A well-developed financial system is vital for the smooth functioning of an economy. The
financial development ratios such as Finance Ratio, Financial Interrelation Ratio, New Issues
Ratio and Intermediation Ratio are indicators of financial development of a country.
(a) Is not the answer because Finance Ratio is an indicator of financial development of a
country.
(b) Is not the answer because Financial Interrelation Ratio is an indicator of financial
development of a country.
(c) Is not the answer because New Issues Ratio is an indicator of financial development of a
country.
(d) Is not the answer because Intermediation Ratio is an indicator of financial development
of a country.
(e) Is the answer because Cost Benefit Ratio is not an indicator of financial development of
a country.
196. (c)
Money supply = H (1+ Cu / Cu + r)
Where, H = Monetary Liabilities of Central Bank + Government Money.
Cu = Currency-deposit ratio
r = Cash reserve ratio.
(a) Is not the answer because when the RBI increases cash reserve ratio (CRR), monetary
liabilities of the RBI decreases.
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(b) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), high
powered money in the economy increases.
(c) Is the answer because when the RBI increases Cash Reserve Ratio (CRR), the value of
money multiplier decreases.
(d) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), aggregate
demand in the economy decreases.
(e) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), price
level in the economy decreases.
197. (d) M1 = Currency with the public + Demand deposits with the banking system + other
deposit with the bank.
M3 = M1+ Time deposits with the banking systems.
(a) Is not the answer because the difference between M3 and M1 is not the demand deposits.
(b) Is not the answer because the difference between M3 and M1 is not the post office
savings deposits.
(c) Is not the answer because the difference between M3 and M1 is not the savings deposits.
(d) Is the answer because the difference between M3 and M1 is the time deposits.
(e) Is not the answer because the difference between M3 and M1 is not M2.
198. (d) Given the demand for money, an increase in money supply lowers the nominal rate of
interest. Decrease in rate of interest increase interest sensitive expenditure like consumption
and investment, thereby increasing AD.
a. Is not the answer because other things being equal, an increase in the supply of money
does not lowers both nominal interest rate and aggregate demand.
b. Is not the answer because other things being equal, an increase in the supply of money
does not raises both nominal interest rate and aggregate demand.
c. Is not the answer because other things being equal, an increase in the supply of money
does not raise nominal interest rate and lowers aggregate demand.
d. Is the answer because other things being equal, an increase in the supply of money
lowers nominal interest rate and raises aggregate demand.
e. Is not the answer because other things being equal, an increase in the supply of money
do change nominal interest rate or aggregate demand.
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199. (b) Since the theory of income distribution is a short run theory both the capital stock and
technology are assumed to be constant. Thus, output in the short run depends only on
quantity of labor input, i.e. Y = f (N), where N represents quantity of labor input.
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200. (c) The firms demand the labor so long as the cost of hiring additional worker is less than the
revenue gained (i.e. w = P. MPL).
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201. (e) Under pure competition a profit maximizing firm hires workers until the money wage w
is equal to the general price level P multiplied by Marginal Product of Labor (MPL).
Symbolically, w = P.MPL or w/P = MPL, where w/P represents real wage rate.
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202. (d) The amount of labor demanded is negatively related to real wage rate. That is, an increase
(decrease) in real wages will increase (decrease) the quantity of labor demanded.
203. (e) Marginal Product of Labor (MPL) represents the change in output per unit change in labor
employed. If the change in input is Y and change in labor N, then MPL = Y/N.
204. (d) According to Says Law of Markets supply creates its own demand. Over production
and unemployment are not possible in long run as price and wages adjust to remove both of
them. Only in short run disequilibrium can exist.
a.
b.
Disequilibrium occurs because of mismatch between demand and supply, hence true.
c.
True, in the short run there can be excess production and unemployment.
d.
False, in long run price, wages adjust freely and bring about equilibrium.
e.
Macroeconomics
205. (b) The long run effect of an increase in government spending in the classical model is to
increase the price level as the long-run aggregate supply curve is considered to be vertical.
Therefore any increase in demand is simply inflationary.
(a)
Is not the answer because in the classical model, the long run effect of an increase in
government spending is not an increase in the price level.
(b) Is the answer because in the classical model, the long run effect of an increase in
government spending is an upward shift of the aggregate demand curve.
(c)
Is not the answer because in the classical model, the long run effect of an increase in
government spending is not an increase in the level of output.
04
Is not the answer because (a), (b) and (c) above cannot be the answer.
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(d) Is not the answer because both (a) and (b) above cannot be the answer.
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206. (d) Contrast to classical model, where wage rate is flexible, in the Keynesian model, workers
oppose to any decrease in their money wages.
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207. (a) The real difference between the classical model and the Keynesian model lies in the
assumption of rigid money wages. Contrast to classical mode, where wage rate is flexible, in
the Keynesian model, nominal wages are flexible upward but rigid downward.
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208. (e) As in the classical system Keynesian system also consists of 3 basic markets the labor
market, the money market and the goods market.
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209. (c) Says law states that supply of goods creates its own demand.
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210. (e) In Keynesian system, equilibrium takes place at a less than full employment level of
output.
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211. (c) Real wage = w/P where w is money wage and P is the price level. Thus, if the price level
falls, real wages increase, given the money wage.
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212. (b) At a higher real wage business firms will not wish to hire many workers. But the higher
real wage brings forth more labor, which results in unemployment.
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213. (e) Increase in prices at a constant nominal money wages decreases real wages and increases
employment. At a higher real wage business firms will not wish to hire more workers,
resulting in increase in unemployment.
214. (e) As against classical theory, Keynesian analysis was completely a demand side approach.
It says that demand induces firms to produce or supply goods and services. Keynes also
advocated that demand for money determines the supply of money in the market.
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215. (e) Investors prefer holding money in bonds when they expect an increase in interest rate and
capital loss from a bond.
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216. (b) Since nominal wages are assumed flexible upwards the aggregate supply curve will be
perfectly price inelastic at the full employment level.
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217. (e) All the three statements given are true in case of an economy in equilibrium.
218. (e) Individuals and firms may want to maintain part of their wealth in the form of money to
take advantage of price reduction. This is because, if price reduces, the value of money
increases.
219. (c) Classical model assumes that real wages adjusts automatically to bring about equality of
demand for and supply of labor; on the other hand, the Keynesian model assumes that
nominal wages (w) is rigid downward.
220. (e) The statements a, b, c and d are true with regard to Keynesian model of income
determination. Statement c is not true.
221. (b) Increase in autonomous government expenditure has direct impact on aggregate demand,
which causes production of more goods and services thereby increasing the level of income.
This increase in quantity of money demanded will in turn lead to an increase in interest rates.
82
Part I
222. (c)
In the Keynesian model, actual expenditure and planned expenditure is same at the
equilibrium level of output. When the actual expenditure is less than the planned expenditure
in the economy, there will be a positive inventory investment in the economy.
(a)
Is not the answer because there will not be a positive fixed investment in the economy.
(b) Is not the answer because there will not be a negative fixed investment in the economy.
(c)
Is the answer because there will be positive inventory investment in the economy.
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(d) Is not the answer because there will not be negative inventory investment in the
economy.
Is not the answer because there will be change in the inventory investment in the
economy.
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(e)
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223. (e)
Is not the answer because Keynes considered the existence of full employment as a
special case. The Keynesian underemployment equilibrium is reflecting real life
situations.
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(a)
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(b) Is not the answer because aggregate demand or effective demand indicates the total
quantity of goods and services that people want to buy. According to Keynes, effective
aggregate demand determines the level of employment and output.
Is not the answer because Keynes argues that State intervention is essential as full
employment is not possible in an economy.
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(c)
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(d) Is not the answer because Keynes argues that an economy facing recession, budget
deficit is an important tool to overcome recession.
Is the answer because in the Keynesian model, monetary policy is not effective as
compared to fiscal policy. Rather it is the fiscal policy, which is very effective and
powerful. Keynes argues that government should maintain an active stance with a
combination of tax and expenditure policies to maintain the desired levels of output and
employment through manipulation of effective demand.
s.
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224. (a)
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In the Keynesian model, unemployment could be reduced if the aggregate demand increases.
Therefore, unemployment is caused by demand deficiency. The Keynesian theory of
unemployment suggests that governments can play an active role in the economy by
adjusting the aggregate demand through its fiscal and monetary instruments.
(b) Is not the answer because unemployment in the Keynesian model is not caused by
supply deficiency.
(c)
Is not the answer because unemployment in the Keynesian model is not caused by
demand sufficiency.
(d) Is not the answer because unemployment in the Keynesian model is not caused by
supply sufficiency.
(e)
Is not the answer because unemployment in the Keynesian model is not caused by both
demand deficiency and supply deficiency.
83
Macroeconomics
04
226. (e) The monetarism theory conclusion is that an increase in money supply leads to a
significant increase in AD, which in turn leads to increase in price level.
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227. (e) The hypothesis of rational expectations has three important implications for
macroeconomic analysis and policy.
Econometric models are not very useful in evaluating alternative economic policies.
ii.
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228. (a) Discretionary monetary and fiscal policy cannot be used to stabilize the economy.
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The rational expectations theory suggests that individuals do not make systematic forecasting
errors and that their guesses about future are on an average correct.
229. (e)
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(a)
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(b) Is not the answer because supply side economics recommend promoting competition to
improve market efficiency.
Is not the answer because supply side economics recommend restricting the power of
trade unions to improve market efficiency.
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(d) Is not the answer because supply side economics recommend removing institutional
barriers to improve market efficiency.
Is the answer because supply side economics does not recommend increasing corporate
tax rate to improve market efficiency.
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(e)
230. (d)
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The Laffer curve depicts the relationship between tax revenues and tax rates. The shape of
the Laffer curve is backward bending indicating that tax revenues initially increase and then
decrease as the tax rate increases.
Is not the answer because according to Laffer curve, tax revenues do not rise
continuously as the tax rate increases.
(b) Is not the answer because tax revenues do not decrease continuously as the tax rate
increases.
(c) Is not the answer because tax revenues do not decrease initially and then increase as the
tax rate increases.
(d) Is the answer because tax revenues increase initially and then decrease as the tax rate
increases.
(e) Is not the answer because tax revenues do not remain constant as the tax rate increases.
231. (b)
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(a)
According to rational expectations school, discretionary monetary and fiscal policy cannot be
used to stabilize the economy. Proponents of rational expectation argue that consumers and
business firms anticipate the implications of rise in government spending. Moneywage rate
and prices will rise, but output and employment will remain the same. So government can no
longer fool the people by increasing its spending during elections years. So the answer is (b).
84
Part I
232. (e) Monetarist opines that demand function for money is better determined than consumption
or investment function and hence they prefer monetary policy over fiscal policy. Fiscal policy
is ineffective because increase in public expenditure leads to decrease private expenditure.
(Crowding out)
a.
b.
c.
d.
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e.
233. (b)
School of rational expectation is based on the premise that people do not make
systematic forecasting errors. On an average their views about the future are correct and
not biased as they behave rationality. Hence the option is wrong.
b. Whenever central bank increases the money supply, according to rational expectations
theory, people realize that it is the cause of inflation. According workers and business
firms adjust wages and prices in response to the changes in money supply. Hence any
change in money supply only affects wages and prices. Hence this option is true as only
wages and prices are affected and not employment.
c. Since the people are assumed to behave rationally, any attempt by the monetary
authorities to increase employment will be anticipated by the firms. They accordingly
changes prices and wages. Hence wages are flexible and not rigid. Hence the option is
not true.
Business men anticipate the changes in money supply (which is the primary cause for
inflation) and as they are rational, change prices accordingly. The price are flexible and not
rigid. Hence the option is not true.
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Since (c) and (d) are not correct options, (e) cannot be the answer.
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234. (b)
a. The Laffer curve gives the relationship between tax revenues and tax rates. Hence not
correct option.
b. Philips curve depicts the relationship between the rate of change in price and the rate of
unemployment.
c. Aggregate supply curve gives the relationship between net national product that would
be supplied at general price level given constant expectations.
d. The LM curve signifies the money supply. So this option is not right
e. The IS curve shows that combination of interest rates and levels of output such that
planned spending equals income. Hence not true option.
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235. (d) Bank reserves increase rapidly in boom period; suffer a set back in recession and fall
rapidly during depression.
236. (a) Frictional unemployment is the unemployment caused by constant changes in the labor
market.
237. (c) Unemployment that arises when there is general downturn in business activity is known
as cyclical unemployment.
238. (d) Full employment is defined as the level of employment that results when the rate of
unemployment is normal.
239. (e) Natural rate of unemployment is influenced by the structure of workforce and by the
changes in public policy. The natural rate of unemployment increases when youthful workers
comprise a large proportion of the workforce because they change jobs and move in and out
of the employment often.
85
Macroeconomics
240. (e) When the actual rate of unemployment exceeds the natural rate of unemployment the
actual output of the economy will fall below its potential and consumption of goods
decreases.
241. (b) Unemployment that arises due to structural changes in the economy is called structural
unemployment. This arises when the regional or occupational pattern of job vacancies does
not match the pattern of workers availability and suitability.
242. (d) Inventory stocks will be very little in boom period whereas the stock levels will be very high
during depression. The reason is that during boom (recession) the consumption will be high
(low).
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243. (d) Disguised unemployment refers to a situation where more than the required number of
people are visibly occupied in some work contributing nothing to the output.
244. (c) In developing countries like India there is wide spread disguised unemployment in
agricultural sector.
245. (e) Stagflation is a period characterized by high inflation and high unemployment levels.
246. (c) Real interest rate is the nominal rate of interest minus the expected rate of inflation.
247. (d) Unemployment that arises due to structural changes in the economy is called structural
unemployment. This arises when the regional or occupational pattern of job vacancies does
not match the pattern of workers availability and suitability.
248. (b) During recessionary phase of business cycle the rate of unemployment increases rapidly
due to increasing reduction in consumption.
249. (a) Monetarists believe in the use of a stable growth rate for the money supply for the
economic development.
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250. (c) Philips curve shows the relationship between inflation rate and unemployment rate. Philips
curve indicates an inverse relationship between the rate of inflation and unemployment.
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251. (e) Bottlenecks refer to the obstacles in reaching full employment in the economy. Both (b)
and (c) act against achieving full employment.
252. (c)
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In the business cycles theory, after a business peak or boom, the economy enters contraction
stage. The sales of most businesses fall and real GNP of an economy grows at a slow pace.
There is a large number of unemployment in the labor market. This phase is otherwise known
as recession.
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(a) Is not the answer because the inventory stock increases gradually in recession.
(b) Is not the answer because business expectation will be pessimistic with cautious
decision-making.
(c) Is the answer because there is an underutilization of existing capacity in the economy.
(d) Is not the answer because bank credit starts falling in the recession phase of business
cycle.
(e) Is not the answer because there is a decline in the income levels of the people.
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253. (e)
Inflation is a serious problem on the part of the government worldwide. The effect of
inflation is ranging from redistribution of income and wealth of the society to the worsening
the balance of payments position of the country.
(a)
It is true statement that unanticipated inflation hurts the fixed income earners most.
Though their monetary income is constant, real income is reduced because of inflation.
(b) It is true statement that higher than expected inflation hurts creditors but benefits
debtors. Debtors repay the amount, which is fixed in nominal terms. The real values of
repayments in the future will decrease with an increase in inflation, leads to an increase
in the wealth of the debtors. On the other hand, the wealth of the creditors will decrease
with an increase in the rate of inflation.
(c)
86
It is a true statement that inflation creates inefficiency in the economy because people
spent lot of time to find a reasonable price.
Part I
(d) It is a true statement that inflation can lead to a misallocation of resources because
inflation misleads people to invest logically.
(e)
254. (e) In case of stagflation, there is stagnation as well as inflation exists in the economy.
There is a slowing down of economic activities occurs.
(a)
Is not the answer because deflation refers to a situation in which there is a decrease in
general level of prices in an economy that is sustained over a period of time
04
(b) Is not the answer because in the case of hyperinflation, price rise is very large and
accelerating.
Is not the answer because recession is characterized by the downturn in economic
activities in an economy.
04
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(c)
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(d) Is not the answer because there is a contraction of economic activities in the
depression period.
Is the answer because there is a stagnation combined with inflation prevails in the
economy in the period of stagflation.
255. (c)
The periodic upswings and down swings in the level of economic activity which forms
a regular pattern with an expansion of activity followed by a contraction ,succeded by
further expansion are referred to as business cycles. Each of the phases is characterized
by certain features.
02
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(e)
b.
Price levels are only an indicator of purchasing power, which in turn is dependent on
income levels of the people also. Hence cannot be taken as primarily indicator of the
different phases of business cycles.
c.
d.
Changes in inventory level do give an indication about the different phases, but the
changes inventory level are as a result of changes in real GDP.
e.
Gross investment is dependent on future growth rate, which again based on estimation
of real GDP in future. Hence gross investment cannot be primarily indicator.
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256. (a) Stagflation refers to a situation where there is high unemployment and high inflation
occurs simultaneously.
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Statement (i) is true as stagflation refers to coexistence of stagnant output and high inflation.
Statement (ii) is false because during stagflation, there is no increase in output and hence the
output is stagnant. Therefore real GDP is not growing.
Statement (iii) is true because during stagflation, the output is stagnant, new employment
opportunities are not created and hence unemployment level is high.
Statement (iv) is false as the price are high and there is unemployment, the aggregate demand
tends to be low.
So the answer is (a).
257. (b)
a.
87
Macroeconomics
b.
Natural rate of unemployment is the long run average of unemployment caused due to
frictional and structural changes in labour market. Full employment means that there is
certain amount of unemployment which is refered to as natural rate of unemployment.
Hence the correct option.
c.
During full employment, there still exists certain amount of unemployment and hence
cannot say that demand for labor is at the lowest . Hence not correct option.
d.
Supply of labor depends on population and has no relation with full employment. Hence
the option is not correct.
e.
Since (c) and (d) are not correct options, this is not true option.
04
04
258. (c)
Frictional unemployment occurs when constant changes in the labour market lead to
unemployment. It occurs on account of imperfect information. Hence not correct option.
b.
Unemployment that arises due to general down turn in business activity is refered to as
cyclical unemployment. Hence not related to the output, not the correct option.
c.
d.
Structural unemployment occurs due to structural changes in the economy, and such
people are not employed and hence there is no question of contribution to production.
Not correct option.
e.
Sectoral unemployment refers to unemployment that exists in any particular sector, for
example agricultural sector. Hence not correct option.
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259. (c) Cost-push inflation refers to increase in price as a result of the causes originating from the
supply side. The left ward shift of the supply curve occurs as a result of increase in the wage
level unmatched by the increase in the labour productivity, increase in the profit margins by
those who can exercise the market power and supply shocks.
Decrease in wages leads to decrease in cost of production and hence prices will reduce
if the producer passes on to the consumer.
b.
When the productivity of labour increase it leads to lowering the cost of production per
unit and hence the prices will decrease.
c.
As the cost of raw material increases it leads to increase in cost of production which
results in increases in prices. Hence this option is correct.
d.
Right ward shift in the supply curve occurs when there is a decrease in prices and hence
not the correct option.
e.
Finding of new raw material would lead to lower cost of raw material as the supply of
raw material has increased and hence lowers the prices.
88
Recessionary GDP gap signifies higher potential real GDP compared to realized real
GDP.
b.
Hyper inflationary situation refers to price rise is very large and accelerating. This
occurs when aggregate demand is more than aggregate supply. In case of recessionary
GDP gap, prices are falling. Hence not correct option.
c.
When these is necessionary GDP gap, it leads to realized GDP falling short of potential
GDP. Hence during prices will be falling and unemployment rate would increase. But
there will be high unemployment, which occurs only during depression.
d.
Natural rate of unemployment occurs when potential GDP is equal to realized GDP.
Which is not the case when there is recessionary GDP gap. Hence not the correct
option.
e.
Since (b) and (d) are not correct, this is not correct option.
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260. (a)
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a.
Part I
04
264. (d) Inventories of foreign countries and gold that could be sold for dollars are held under the
official reserves account by central bank that they would sell in the market when there is an
excess demand for dollars. Conversely when there is excess supply of dollars they would buy
up the dollars.
04
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265. (a) The current account records all transactions in merchandize and invisible with the rest of
the world. If the BoP on current account is deficit, it implies that imports of goods and
services are more than that of exports.
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266. (b) If a foreign supplier sells the goods in the domestic market at a price less than that of the
goods supplied by the domestic supplier, it is called dumping.
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267. (a) The items included under the invisibles of the current account are investment income,
travel, transportation, insurance, and other miscellaneous items.
27
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268. (d) Transfer of assets or goods to a country without any consideration or return are called
international transfers.
02
269. (c) BoP is in deficit when both current account and capital account balances are in deficit.
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270. (a) When current account balance is not balanced by the capital account surplus the foreign
exchange reserves will decline and it causes a contraction in the money supply.
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271. (c) Receipts in cash or kind without a quid pro quo are called transfer of payments, i.e. they
are made for no return service, i.e. unilateral.
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272. (b) The foreign exchange reserves of a country apart from serving to balance the BoP
statement of an economy have a strong impact on the monetary policy pursued by the central
bank in the domestic sector. When foreign exchange reserves contracts, the money supply in
the economy decreases.
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273. (d) Dividends earned on portfolio investments come under the head of invisibles in current
account, whereas the other options given come under the capital account of the BoP.
274. (d) Preparation of BoP statement is based on double-entry system of book keeping. Hence, all
debt items should equal credit items, and the balance is zero.
Is not the answer because all entries in the balance of payments statement is not
collectively sum to GDP of the country.
b.
Is not the answer because all entries in the balance of payments statement is not
collectively sum to GNP of the country
c.
Is not the answer because all entries in the balance of payments statement is not
collectively sum to Foreign exchange reserves of the country
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a.
d.
Is the answer because all entries in the balance of payments statement is collectively
sum to zero.
Is not the answer because all entries in the balance of payments statement is not
collectively sum to Exports of the country.
275. (d) All the transactions which effect the asset or liability position of a country are put under
Capital account of the Balance of Payments statement. Other transactions are put under the
Current account.
a.
Is not the answer. Foreign Direct Investment increase the liability of a country, hence
falls under Capital Account.
b.
Is not the answer. Portfolio Investments increase the liability of a country, hence falls
under Capital Account.
89
Macroeconomics
c.
Is not the answer. External Commercial Borrowings increase the liability of a country,
hence falls under Capital Account.
d.
Is not the answer. External Assistance increases the liability of a country, hence falls
under Capital Account.
04
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276. (a) The tax and expenditure policies together constitute the fiscal policy of the government.
Customs duty is an instrument of fiscal policy.
04
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277. (c) The increase in net RBI credit to the central government, comprising the net increase in
the holdings of treasury bills of the RBI and its contribution to the market borrowings of the
government is called monetized deficit.
defense expenditure
c.
subsidies.
o.
b.
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interest payments
a.
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279. (d) Primary deficit is calculated by deducting interest payments of the government from the
gross fiscal deficit.
280. (a) Apart from the tax revenue the other important areas of resource mobilization for the
government are non-tax revenues which include profits from PSUs.
281. (e) Large fiscal deficits will have implications upon money supply, growth, inflation and for
the access to resources for private investment.
282. (c) SLR refers to the minimum percentage of the total liquid assets that banks have to
maintain with themselves. Fiscal deficit is obtained when total receipts excluding government
borrowings are subtracted from total expenditure. So change in SLR has no effect on fiscal
deficit.
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283. (e) Monetized deficit is the increase in net RBI credit to the Central Government, comprising
the net increase in the holdings of Treasury Bills of the RBI and the contribution to the
market borrowings of the Government.
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285. (e) Gross fiscal deficit is computed by deducting total receipts excluding government
borrowings from the total expenditure.
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286. (b) Mandatory wage price guidelines maintain the full employment and keep the inflation
under control.
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288. (a) Y = C + I + G + X
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04
Y = a + b(Yd) + I + G + X
Where Yd = Y T and T = tY
Thus, an increase in taxes decreases the income. But an equal increase in government
expenditure increases the income greatly because of multiplier effect. So GDP increases.
289. (b) An increase in savings will not make any changes in current output.
290. (a) Installing a progressive income tax would have no effect on the Keynesian multiplier.
291. (e) Equilibrium income will increase by the amount of increase in government expenditure if
the multiplier is one. So MPC is equal to the investment income ratio.
292. (a) When the government spending increases and/or the tax rate decreases, an increase in the
aggregate demand (AD) takes place, which in turn leads to increase in the equilibrium real
GDP.
90
Part I
293. (d) Government borrowing to finance large deficits increases the demand for loanable funds,
which puts an upward pressure on interest rates in the market.
294. (b)
If somebody buys National Small Saving Certificate, it increases in the other liabilities of the
government.
(a)
Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not
increase government borrowings.
(b) Is the answer because if Mr.X buys a National Small Saving Certificate, it will increase
in the other liabilities of the government.
Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not
increase in forex reserves.
20
04
04
(c)
04
(d) Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not
increase government revenue.
Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not
decrease government liability.
o.
M
AC
(e)
ef
.N
295. (c)
:8
1-
31
4-
02
27
-4
Every economy goes through cyclical fluctuations in output, employment and prices. This
will have an automatic impact on certain government expenditures and revenues. The
changes in the government spending and revenues that results automatically as the economy
fluctuates are called non-discretionary fiscal policy. Automatic stabilizers are features of the
government budget that automatically adjust net taxes to stabilize aggregate demand as the
economy expands or contracts.
Is not the answer because an automatic stabilizer is not a mechanism in the stock market
that automatically cause stock market gains to be cancelled out by losses.
.IS
BN
(a)
se
rv
ed
(b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms,
which automatically bring the economy out of a recession.
Is the answer because automatic stabilizer refers to government revenues and
expenditures that change automatically in response to changes in economic activity.
When the economy is in a contraction phase, these stabilizers increase transfer
payments and reduce tax collections in order to stimulate aggregate demand. On the
other hand, when the economy begins to expand, the automatic stabilizers increase tax
collections and reduce transfer payments in order to restrain growth in the aggregate
demand.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
(c)
ni
(d) Is not the answer because automatic stabilizer is a discretionary fiscal policy.
iU
296. (a)
Th
e
Ic
fa
Fiscal policy refers to policies dealing with taxes and government expenditure including
transfer payments.
20
04
(a)
Is the answer because when the government reduces taxes or raises spending to get the
economy out of a recession, is a case of fiscal policy measure.
(b) Is not the answer because when the central bank changes the money supply to affect the
price level, interest rates and exchange rate , it is a monetary policy.
(c)
Is not the answer because when the government restricts imports and stimulates exports;
it is a case of EXIM (Export-Import) policy.
(d) Is not the answer because both (a) and (b) cannot be the answer.
(e)
Is not the answer because both (a) and (c) cannot be the answer.
91
Macroeconomics
297. (a)
When the government monetizes part of its deficit, it is an increase in net RBI credit to the
government, comprising the net increase in the holdings of treasury bills of the RBI and its
contribution to the market borrowings of the government. To meet the needs of the
government, the RBI prints more money. This will lead to excess money supply in the
economy.
(a)
Is the answer because money supply in the economy increases when the government
monetizes part of its deficit.
04
(b) Is not the answer because when there is an excess money supply, interest rate will
decline.
Is not the answer because when the government monetizes part of its deficit, primary
deficit will decrease. Primary deficit is calculated by deducting the interest payments of
the government from the gross fiscal deficit.
04
20
04
(c)
M
AC
(d) Is not the answer because when the government monetizes part of its deficit, public debt
will decrease.
Is not the answer because when the government monetizes part of its deficit, revenue
deficit will increase. Revenue deficit is the difference between governments revenue
expenditure and revenue receipts.
ef
.N
o.
(e)
-4
298. (e)
02
27
If a government has a surplus budget, and the government repays its past debts using its
surplus budget, public debt will be falling.
Is not the answer because if a government is running surplus in its budget, public debt
may not be rising.
1-
31
4-
(a)
.IS
BN
:8
(b) Is not the answer because if a government is running surplus in its budget, public debt
may not be falling.
Is not the answer because if a government is running surplus in its budget, public debt
may not be constant.
se
rv
ed
(c)
ht
re
(d) Is not the answer because if a government is running surplus in its budget, public debt
may not be falling if there are tax cuts.
Is the answer because if a government is running surplus in its budget, public debt will
be falling if the government uses the surplus to repay its past debts.
s.
Al
lr
ig
(e)
Pr
es
299. (b)
ve
rs
i
ty
In India, personal taxes is an example of progressive tax system. Progressive tax system
implies that higher the level of income, higher will be the volume of tax burden, represented
as a percentage of the total income.
Is not the answer because personal tax is not a proportional tax system. In proportional
tax systems, the tax imposed is of a particular percent of income irrespective of his
income level.
Ic
fa
iU
ni
(a)
20
04
Th
e
(b) Is the answer because personal taxes is an example of progressive tax system.
(c)
Is not the answer because personal tax is not a direct tax system.
(d) Is not the answer because personal tax is not a value added tax system. In value added
tax system, the tax is on the value added at each stage.
(e)
Is not the answer because personal tax is not a regressive tax system. In regressive tax
system, people with lower levels of income are imposed with higher taxes as a
proportion of their income.
300. (c) Monetized deficit refers to increase in net RBI credit to the Central Government,
comprising the net increase in the holdings of T-bills of the RBI and its contribution to the
market borrowings of the government. Fiscal deficit = Borrowings and liabilities of the
Central Government and primary deficit = Fiscal deficit interest payments.
a.
92
Is not the answer because monetized deficit does not refer fiscal deficit minus interest
payments.
Part I
Is not the answer because monetized deficit does not refer borrowings and other
liabilities of the Central Government.
c. Is the answer because monetized deficit refers Increase in the net RBI credit to the
Central Government.
d. Is not the answer because monetized deficit does not refer fiscal deficit minus Primary
deficit.
e. Is not the answer because monetized deficit does not refer RBIs credit to the
commercial banks.
301. (a) Government gets its revenue from two sources, i.e. tax revenue and non-tax revenue.
Non-tax revenue includes profits from public sector units, interest earned on loans etc.
04
b.
Current year receipts of the government are classified under revenue receipts. Profits
from public sector units re the returns on investments by the government. Hence it
represents current income and hence part of revenue receipts of the government.
b.
Capital receipts refer to recovery of loans, borrowing and other liabilities. It does not
include current earnings of the government from public sector units. Hence profits are
not included.
c.
Monetized receipts.
d.
Planned expenditure refers to the outflow from the government, as the government is
spending money. Whereas in case of profits from public sector units they are inflows,
hence cannot be part of planned expenditure.
e.
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
a.
:8
1-
302. (b)
Progressive tax system refers to imposing more tax on people with greater income. As
income increases, tax rate also increases. Hence more tax is imposed on higher income
people. This option is not true
b. When more tax is imposed on lower income groups it is called regressive tax.
d. When tax imposed is of a particular percent of income irrespective of his income slab, is
known as proportional tax. Hence a poor person pays less tax as his income is less.
Hence not correct option.
d, e Customs and value added tax are indirect taxes, where as what is referred to under the is
with respect to the direct tax i.e. income tax. Hence cannot be correct answer.
303. (a) Automatic stabilizers are features of the government budget that automatically adjust net
taxes to stabilize aggregate demand as the economy expands or contracts.
a. By definition this option is true.
b. Lagging indicators refer to the time gap between the monetary policy changes and their
impact on the economy. They are not related to the fiscal policy of the government.
c. National Income aggregates are only indicators of the performance of the economy.
d , e. Real factors and growth variables are not related to fiscal policy.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
a.
20
04
305. (b) To regulate the credit creating capacity of the commercial banks, the central bank
undertakes open market operations. An open market purchase (sale) is expansionary
(contractionary) in its effect from the point of view of credit creation.
306. (d) Loose monetary policy increases the money supply. Due to increased money supply in the
market, the interest rates will come down in the short run.
307. (d) Open market purchase causes more money to come into the circulation and thereby
increases the money supply. This in turn bring downs interest rates in the market.
93
Macroeconomics
04
308. (a) Sale of government securities in the open market reduces the money supply, which in turn
brings down inflation in the economy.
309. (c) Contractionary policies are aimed at reducing money supply in the economy. Increasing
the refinance limits is an expansionary policy, as it increases money supply in the market.
310. (c) The acts of Central Bank aimed at correcting the imbalances created by changes in
foreign exchange reserves is referred to as sterilization. If RBI wants to sterilize the inflow
of foreign exchange, it would conduct an open market sale of securities, which helps in
reducing the increased money supply in the economy.
311. (e) The excess of Gross Domestic Capital formation over Gross Domestic Savings is
financed by borrowing from the rest of the world. This shows a current account deficit in the
balance of payments. Thus
M
AC
04
20
04
ef
.N
o.
312. (a) Trade policy of any country which has trade relations with other countries constitutes
both import policy and export policy. While the former tries to reduce the expenditure on
imports, the latter aims at increasing the export earnings.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
313. (d) Only commercial banks will be authorized to trade in foreign currencies. Permitted
commercial banks act as foreign currency dealers and are regulated by FEDAI.
314. (a) In an economy, the high-powered money is the aggregate of monetary liabilities of the
central bank and government money. The foreign exchange reserves are the asset of the
central bank. When the foreign exchange reserves increases, the monetary liabilities also
increase. This in turn increases the high-powered money in the economy and thereby the
money supply. If the economy is already affected by inflation, the central bank must step in
to curb this expansion of money supply by either contracting its lending its lending to the
banking systems (by increasing the discount rate) or by open market operations (sale of
government securities) or by increasing the cash reserve ratios of the commercial bank.
(a) Is the answer because the Reserve Bank of India increase CRR to correct the
imbalances created by changes in foreign exchange reserve.
(b) Is not the answer because RBI would not decrease CRR. It will not help in correcting
the imbalances created by changes in foreign exchange reserve.
(c) Is not the answer because due to increase in foreign exchange reserves, RBI increases
the discount rate.
(d) Is not the answer because RBI checks the expansion of money supply by open market
operations, i.e. sale of government securities.
20
04
Th
e
Ic
fa
iU
315. (d)
An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary plicy
shifts the LM curve to the right. It will result in a higher level of output, but the level of
interest rate is dependent on the relative magnitude of fiscal and monetary policies
a. Is not the answer, because an expansionary fiscal policy combined with a liberal
monetary policy does not result in a lower level of output and a lower interest rate.
b. Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy does not result in a lower level of output and a higher interest rate.
c. Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy results in a higher level of output but not a lower interest rate.
d. Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy results in a higher level of output but we cannot say that it results in a
higher interest rate.
e. Is the answer because an expansionary fiscal policy combined with a liberal monetary
policy result in higher level of output, but the level of output, but the level of interest
rate is dependent on the relative magnitude of fiscal and monetary policies.
94
Part I
316. (b) If the central bank does not impose any reserve ratio, the commercial bank need not keep
on deposit with the Reserve Bank certain amount of funds equal to a specified percentage of
its own deposit liabilities. Then the banking sector can create unlimited money supply.
(a)
Is not the answer because without the imposition of reserve ratio, the banking system
can affect the supply of money through credit creation.
(b) Is the answer because if the central bank does not impose any reserve ratio, the banking
sector can create unlimited money supply.
(c)
Is not the answer because without reserve ratio, the lending capacity of banks would not
narrow down to zero.
20
04
04
(d) Is not the answer because if the central bank does not impose any reserve ratio, a rupee
deposited in a bank does not reduce the money supply in the economy by one rupee.
Is not the answer because if the central bank does not impose any reserve ratio, money
supply in the economy will not be equivalent to high-powered money.
ef
.N
o.
M
AC
04
(e)
Cu = Currency-deposit ratio
27
-4
31
4-
02
317. (d) Outside lag is the duration involved for output and employment to respond to changes of
the implemented of policies. Taxes has the least outside lag.
Is not the answer because cash reserve ratio has not the least outside lag.
:8
1-
(a)
BN
(b) Is not the answer because bank rate has not the least outside lag.
Is not the answer because repo rate has not the least outside lag.
ed
.IS
(c)
se
rv
(d) Is the answer because tax has the least outside lag.
Is not the answer because open market operation has not the least outside lag.
re
(e)
s.
Al
lr
ig
ht
318. (b) Open market operations refer to purchase and sale of securities by the central bank. When
the central bank purchases securities it increases the reserve base of the commercial banks
and hence leads to multiple expansions of credit and deposits.
The increase in the monetary base leads to more credit creation and hence leads to
increase in output that is aggregate supply.
b.
As the money supply increases due to open market purchases, in short run production
cannot adjust to the increased demand which is a result of higher money supply. The
prices tend to increase which results in inflation. Hence b is the correct option.
c.
The increase in money supply leads to a downward pressure on interest rate and the
interest rates will in fact decrease.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
d.
Aggregate demand will increase as the increased money supply will lead to decrease in
interest rates which will increase the investment demand and consumption demand.
e.
319. (c) The lags that are given below basically refers to lags in the monetary policy
a.
Recognition lag refers to the time gap between the requirement of an action and its
actual initiation. Hence not the correct option.
b.
Administrative lag refers to the time gap between recognition lag and the
implementation of monetary policy. Hence not the correct option.
c.
As the monetary makes some changes, it takes some time for the firms and to respond
with changes in output and employment. Such time gap is refered to as outside lag.
Hence (c) is the correct option.
95
Macroeconomics
d.
Inside lag refers to the time gap between necessity of an action to be taken by central
bank and the action actually undertake. Hence not correct option.
e.
The difference between inside and outside lag is referred to as intermediate lag.
Whereas the response of the public due to changes in interest rate is part of outside lag.
Hence this option is not correct.
04
04
320. (e) Bank rate is the minimum rate at which the central bank is prepared to discount or
rediscount the bills of exchange brought to it by the members of the money market. It is also
the interest rate at which the central bank provides loans to the commercial bank when they
borrow money from central bank.
04
20
Is not the answer because bank rate does not mean the rate of interest on inter-bank
loans
b.
Is not the answer because bank rate does not mean the rate of interest charged by banks
on borrowers
c.
Is not the answer because bank rate does not mean the rate of interest paid by banks to
depositors
d.
Is not the answer because bank rate does not mean the rate of interest charged by banks
for loans given to the central bank of the country
e.
Is the answer because bank rate means the rate of interest charged by the central bank of
a country on its loans to other commercial banks.
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
a.
se
rv
ed
.IS
BN
321. (b) There are two stages in the transmission mechanism. In the first stage when there is an
increase in real money supply, portfolio disequilibrium occurs i.e people are holding more
money than they want. They try to get rid of excess money they are holding by buying financial
assets. This results in increase in prices of financial assets and hence the interest rates fall.
s.
Al
lr
ig
ht
re
In the second stage the changes in the interest rate affects aggregate demand. The fall in the
interest rate leads to increase in investment demand as the cost of borrowing has decreased.
Hence the sequence of events is portfolio disequilibrium, increases in prices of assets, fall in
interest rate and then increase in investment.
Pr
es
iU
ni
ve
rs
i
ty
322. (c) Since the economy is already under inflation, any increase in money supply has to be
curtailed by the monetary authorities so as to control any further increase in prices. The
increase in foreign exchange reserves leads to increase in monetary base and hence the
money supply in the economy increases.
A decrease in discount rate would result in increased borrowings by the commercial
banks from the central bank. This will increase the money supply, hence not the correct
option.
b.
When the government buys securities from the people, the money with the people will
increase, the money supply will increase and prices also will rise. Hence not the correct
option.
c.
The central bank by increasing the cash reserve ratio reduces the credit creation capacity
of the banking system. This results in decrease in money supply which will compensate
the increase in the money supply due to foreign exchange inflow. Hence this option is
correct.
d.
e.
20
04
Th
e
Ic
fa
a.
96
Part I
323. (e)
Low managerial efficiency leads decrease in productivity, this .would mean that
more input (capital) is required to produce an unit of output. Hence ICOR
increases.
As the production process becomes complicated, i.e. complex leads to time
consuming procedures which leads time over runs. This reduces productivity and
hence ICOR increases.
Since the existing capital is less productive, it means the returns on the capital are
also low and hence ICOR will be high.
Inadequate delegation of powers lead to delay in decision making which result in
cost and time over runs. This increased costs leads to more capital inputs required
to produce an unit of output i.e. higher ICOR.
b.
20
04
04
c.
M
AC
04
d.
As the productivity of labor increase, less units of input will be required to produce
one unit of output. Hence ICOR will decrease Hence this option is correct.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
e.
97
e.
132.9.
04
132.25
d.
133.5
M
AC
c.
o.
134.5
ef
.N
130.7
b.
a.
20
04
Item
Pulses
Rice
Cotton
Electricity
04
1.
27
02
4-
.IS
BN
Price 1991-92
Rs.10/kg
Rs.8/kg
Rs.6/ltr
Rs.20/mtr
Rs.400
31
1-
Quantity 1991-92
20 kg
10 kg
40 ltrs
15 mtr
Single bedroom flat
:8
Item
Rice
Wheat
Milk
Cotton cloth
Housing
-4
2.
se
rv
ed
If the price of rice and milk in 1996-97 increased by 20% and 30% respectively, what would
be the Retail Price Index for the year 1996-97?
ty
Pr
es
s.
Al
lr
ig
ht
re
a. 107.40.
b. 108.50.
c. 108.70.
d. 108.95.
e. 109.30.
Based on the following information answer the questions 3 to 6.
fa
iU
ni
ve
rs
i
If the GNP deflator in 2000-01 is 100, then the real GNP of 2001-02 would be:
a. 2031.83
b. 2057.48
c. 2183.83
d. 2083.33
e. 2103.33.
The real GNP of 2002-03 is:
a. 2,207.00
b. 2,214.70
c. 2,215.50
d. 2,214.60
e. 2,213.20.
20
04
Th
e
Ic
3.
4.
GNP Deflator
120
145
Part-II
04
20
04
B
6.
04
5.
GNP Deflator
2,500
100
2002-03
3,200
159.50
R
-4
27
02
431
1:8
BN
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
8.
o.
2001-02
7.
M
AC
ef
.N
Year
fa
iU
ni
ve
rs
i
ty
Pr
es
9.
Th
e
Ic
10. The following particulars are provided, the GDP of factor cost would be:
20
04
Factor Incomes
135
120
125
105
110.
99
Macroeconomics
800
Subsidies
400
800
900
Undistributed profits
200
Indirect taxes
450
Depreciation
350
M
AC
Corporate tax
04
1,000
20
04
5,000
04
Rs.
Particulars
e.
4,850.
ef
.N
4,900
d.
-4
4,550
27
4,950
c.
02
b.
4-
4,750
31
a.
o.
4,600
e.
4,950.
:8
d.
BN
4,850
.IS
c.
ed
4,450
se
rv
b.
re
4,500
a.
1-
c.
2,600
d.
4,100
e.
4,000.
s.
Al
3,900
Pr
es
b.
ty
3,800
iU
ni
ve
rs
i
a.
lr
ig
ht
20
04
Th
e
Ic
fa
14. In an economy:
GDP at FC
Depreciation
(Rs.)
80,000
4,000
95,000
5,000
100
a.
15,000
b.
10,000
e.
15,000
d.
12,500
e.
12,000.
Part-II
15.
Dr.
Cr.
(Rs.) in Crore
250
20
20
50
20
320
04
Production Account
Rs. (in crore)
200
Sales to households
40
Fixed investment
50
Net changes in inventories
10
Exports
20
Imports
320
250
e.
280.
20
d.
04
260
c.
290
M
AC
b.
o.
300
ef
.N
a.
04
Cr.
31
4-
02
27
-4
Dr.
400
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
Wages
Dividends paid to residents
Dividends paid abroad
Retained profits
Profit tax
Excise tax
Rs.
(in crore)
280
30
50
50
10
ty
Pr
es
s.
Al
Dr.
Ic
fa
iU
ni
ve
rs
i
Export of goods
Factor income received from abroad
Foreign Account
Rs.
(in crore)
50
Imports
60
Factor income paid abroad
Surplus
110
Cr.
Rs.
(in crore)
10
30
70
110
20
04
Th
e
Macroeconomics
420
b.
410
c.
430
d.
390
e.
370.
Depreciation
40
205.
ef
.N
e.
225
-4
d.
27
230
02
c.
4-
210
31
b.
1-
195
:8
a.
o.
04
20
20
Retained Profits
04
25
185
04
Rs. in crore
M
AC
Factor Incomes
BN
.IS
Production Account
Rs.
(in crore)
se
rv
ed
Rs.
(in crore)
Ic
Th
e
20
04
102
ht
lr
300
Sales to households
250
48
Fixed investment
90
32
60
50
Exports
60
30
Imports
20
20
480
480
Foreign Account
Cr.
Rs.
Rs.
(in crore)
(in crore)
Export of goods
60
Imports
20
Factor income received from abroad
60
Factor income paid abroad
32
Surplus
68
120
120
fa
Dr.
iU
ni
ve
rs
i
Excise Tax
ty
Profit Tax
Pr
es
Retained Profits
s.
Al
ig
re
Wages
Cr.
a.
380
b.
430
c.
410
d.
480
e.
460.
Part-II
508
b.
480
c.
390
d.
430
e.
460.
04
Price Level
67.50
121.01
04
Nominal GNP
55,000
1,35,000
20
Year
2001
2003
e.
81,435.
81,491
d.
M
AC
81,543
o.
c.
ef
.N
81,698
81,481
b.
-4
a.
04
1,12,682
d.
1,11,674
e.
1,11,492.
02
431
ed
c.
1-
1,11,561
:8
b.
BN
1,12,561
.IS
a.
27
se
rv
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
Particulars
National Income
Government purchase
Consumption
Net investment
Gross investment
GNP
Personal tax and non-tax payment
Transfer payments
Net interest
Government budget surplus
Dividends
Proprietors income and rental
income of persons
Wages and Salaries
Rs. in crores
3,850
930
3,000
300
800
4,800
600
510
120
30
100
320
2,920
465
b.
445
c.
450
d.
476
e.
480.
103
Macroeconomics
27
-4
ef
.N
o.
M
AC
04
20
04
04
4-
02
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
BN
.IS
ed
se
rv
re
Net investment
Gross investment
GNP
Consumption
Personal tax and non-tax payment
Transfer payments
Net interest
Government purchases
National Income
Government Budget Surplus
Dividends
Proprietors Income
Wages
:8
1-
31
Particulars
Ic
b.
735
c.
760
d.
745
e.
720.
20
04
Th
e
a.
104
a.
6,450
b.
6,750
c.
6,300
d.
6,335
e.
6,400.
Part-II
5,735
b.
5,285
c.
5,070
d.
5,175
e.
5,090.
570
d.
565
e.
550.
04
c.
20
590
04
b.
580
a.
04
3,000
Depreciation
4,000
-4
27
4,000
02
4-
3,800
:8
1-
Indirect Taxes
800
31
Direct Taxes
o.
Rs. in crore
ef
.N
Particulars
M
AC
350
BN
Surplus
2,000
.IS
Subsidies
22,550.
ht
e.
ig
22,650
lr
d.
s.
Al
22,800
Pr
es
c.
ty
22,950
ve
rs
i
22,600
b.
re
16,000
se
rv
ed
National Income
ni
fa
iU
Particulars
Ic
16,939
46
Depreciation
900
Subsidies
354
Th
e
20
04
Rs. in crore
Indirect Taxes
2,136
15,517
b.
15,751
c.
15,157
d.
15,215
e.
15,257.
105
Macroeconomics
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
BN
:8
ed
.IS
Particulars
se
rv
re
ig
ht
1,200
Pr
es
ty
ve
rs
i
ni
Indirect Taxes
fa
iU
Depreciation
Ic
6,300
b.
6,000
c.
6,450
d.
6,200
e.
6,600.
Th
e
20
04
475
900
1,500
106
6,000
1,200
s.
Al
lr
Subsidies
Million of Currency
Units
a.
5,725
b.
5,475
c.
5,600
d.
5,275
e.
5,550.
225
900
600
Part-II
3,200
b.
2,980
c.
2,950
d.
2,840
e.
2,700.
04
20
04
B
W
M
AC
o.
GNP
Gross investment
Net investment
Consumption
Government Spending
04
Amount
Rs. crore
4,850
854
310
3,095
968
ef
.N
Particulars
e.
4,600.
-4
27
02
4,446
4-
4,544
d.
31
c.
1-
4,306
:8
b.
b.
46
c.
67
d.
67
e.
76.
s.
Al
lr
ig
ht
re
se
rv
ed
a.
BN
4,850
.IS
a.
ve
rs
i
ty
Pr
es
42. The following is the data relating to the national accounts of an economy for the year 1995 in
million units of currency.
Particulars
Million units of currency
iU
ni
fa
12,500.00
500.00
250.00
Ic
Th
e
20
04
1,000.00
Net Exports
25.00
Dividends
750.00
Rent
1000.0
Interest
500.00
1,250.00
550.00
8,487.50
912.50
1,250.00
107
Macroeconomics
o.
M
AC
04
20
04
04
ef
.N
1-
31
4-
02
27
-4
An economy consists of production sector and household sector. The production sector is
made up of three Corporations Rose Corporation, Perfume Corporation, and the Bottle
Corporation. In the year 1995, Rose Corporation paid wages of Rs.2,250 to workers who
gathered roses. It sold Rs.1,650 (labor cost value) of these roses to the Perfume Corporation,
for which the latter paid Rs.1,950. The Rose Corporation added the remainder of its output to
its inventories.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
The Perfume Corporation paid Rs.4,500 to its workers to convert the roses into perfume. It
sold Rs.6,750 (Cost for Perfume Corporation) to the Bottle Corporation for Rs.7,200. To
achieve this level of sales, Perfume Corporation drew from its opening inventory. The Bottle
Corporation paid Rs.750 as wages. It increased its inventories by Rs.2,259 (at cost to it) and
sold the rest of perfume to households for Rs.7,875. All the corporations fully distributed
their profits.
44. In the production account, the net investment in the stock would be:
a. 475
b. 525
c. 575
d. 600
e. 610.
45. The value added GDP of the economy is:
a. 7,650
b. 7,950
c. 8,400
d. 8,200
e. 8,550.
Based on the following information answer the questions 46 to 48.
From the national accounts for the year 2000-01 at current prices, we have the following
information. (All figures in Rs. crore).
NDP at market prices
84,686
Net factor income from abroad
Depreciation
4,957
Subsidies
1,772
Indirect Taxes
108
233
10,689
Part-II
-4
ef
.N
o.
M
AC
04
20
04
04
27
31
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
50.
Pr
es
s.
Al
lr
ig
ht
re
49.
se
rv
ed
.IS
BN
:8
1-
4-
02
The figures given below pertain to the year 2000-01. (All figures in Rs. crore)
20
04
51.
52.
109
Macroeconomics
1,14,601
Depreciation
8,062
Subsidies
2,822
+330
Indirect Taxes
16,745
1,20,600
e.
1,29,240.
04
d.
20
1,20,524
04
c.
1,28,524
b.
M
AC
1,28,620
o.
a.
04
e.
1,20,580.
1,21,460
-4
d.
27
1,21,480
02
c.
4-
1,24,524
31
b.
1-
1,20,462
:8
a.
ef
.N
e.
1,20,132.
.IS
1,20,160
ed
d.
se
rv
1,20,145
re
c.
1,20,180
ht
b.
ig
1,20,250
lr
a.
BN
1,07,125
c.
1,06,209
d.
1,07,250
e.
1,05,850.
Pr
es
b.
ty
1,06,400
Ic
fa
iU
ni
ve
rs
i
a.
s.
Al
Th
e
20
04
For the year 2000-01, the national accounts statistics at current prices were as follows:
GNP at Factor Cost
Depreciation
8,062
Subsidies
2,822
+330
Indirect Taxes
16,745
10,000
6,539
Retained Profit
110
1,14,601
30,000
Part-II
65,000
b.
75,000
c.
70,500
d.
70,000
e.
72,000.
1,06,445
d.
1,06,579
e.
1,06,750.
04
c.
20
1,06,550
04
b.
1,06,539
a.
04
66,000
e.
62,000.
o.
d.
ef
.N
60,000
c.
-4
58,000
27
b.
02
65,000
4-
a.
M
AC
1-
31
:8
For the year 2000-01, the national accounts statistics at current prices were as follows.
Rs.
(in crore)
ed
.IS
BN
Particulars
se
rv
re
Depreciation
ig
ht
Subsidies
8,062
2,822
+330
16,745
55,000
ty
Indirect Taxes
Pr
es
s.
Al
lr
1,14,601
80,000
Personal Income
60,000
iU
ni
ve
rs
i
National Income
20
04
Th
e
a.
Ic
fa
b.
5,200
c.
5,050
d.
4,950
e.
5,000.
18,000
b.
20,000
c.
22,000
d.
19,500
e.
21,000.
111
Macroeconomics
20
04
04
20
04
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
04
Rs.
(in crore)
4,000
800
600
350
1,000
800
150
600
400
Particulars
66. The following information is available about the consumption patterns of a family and prices
in the year 1986-87 and 2001-02.
Quantity consumed
Prices
Item
1986-87 2001-02
1986-87
2001-02
Rs.3
per
kg
Rs.5
per kg
Rice (kg.)
30
25
Rs.4 per ltr
Rs.6 per ltr
Milk (ltr)
20
30
Rs.5 per doz
Rs.6.50 per doz
Eggs (doz)
1
2
Rs.15 per mtr
Rs.25 per mtr
Cloth (mtr.)
5
3
Re.30/ unit
Re. 0.40/ unit
Electricity (units)
100
150
112
Part-II
04
20
04
B
W
M
AC
o.
-4
27
02
431
1:8
BN
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
ef
.N
Particulars
GDP at Factor Cost
Corporate Income Tax
Personal Income Tax
Subsidies
Factor Income received from abroad
Factor Income paid abroad
Undistributed Profits
Indirect Taxes
Depreciation
04
The index of Industrial Production for 2001-02 with reference to 1986-87 is:
a. 157.68
b. 151.75
c. 154.32
d. 155.58
e. 156.68.
Based on the following information answer the questions 67 to 69.
20
04
Th
e
70. You are provided with the following information for an economy:
()500
Net Factor Income from abroad
2,000
Depreciation
1,900
Indirect Taxes
1,000
Subsidies
The difference between GDP at Market Prices and NNP at Factor Cost is:
a.
3,400
b.
3,250
c.
3,325
d.
3,425
e.
3,375.
113
Macroeconomics
27
-4
ef
.N
o.
M
AC
04
20
04
04
71. The GNP of an economy at nominal values and price indices for two years is given below.
Year
Money GNP
Price Level
(Rs. in crore)
Index
1990
23,200
49.70
2003
1,30,000
105.90
The real GNP for the years 1980 and 2003 are:
a. 46,730 and 1,22,757
b. 45,825 and 1,25,734
c. 45,938 and 1,23,757
d. 46,680 and 1,22,757
e. 46,680 and 1,23,725.
72. In an economy the GDP at factor cost is Rs.70,000, NNP at market price is Rs.71,000,
depreciation is Rs.2,000 and indirect taxes are Rs.1,000. There are no subsidies. The value of
the Net Factor Income from abroad is:
a. 2,500
b. 2,300
c. 2,450
d. 2,600
e. 2,000.
4-
02
:8
1-
31
The following is the information from the national income accounts for a hypothetical country:
BN
GNP
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
Gross Investment
Net Investment
Consumption
Government Purchases of Goods and Services
National Income
Wages and Salaries
Proprietors Income + Rental income of persons
Dividends
Government Budget Surplus
Interest
Transfer payments
Personal tax and non-tax payments
20
04
Th
e
Ic
2,350
b.
2,150
c.
2,200
d.
2,250
e.
2,400.
114
a.
25
b.
32
c.
30
d.
20
e.
22.
Rs.
2,400
400
150
1,500
480
1,925
1,460
160
50
15
60
260
300
Part-II
235
b.
250
c.
225
d.
210
e.
230.
230
d.
228
e.
254.
04
c.
20
265
04
b.
245
a.
04
480
e.
495.
o.
d.
ef
.N
515
c.
-4
520
27
b.
02
485
4-
a.
M
AC
e.
2,040.
1-
2,100
:8
d.
BN
1,990
.IS
1,690
c.
ed
b.
se
rv
1,820
re
a.
31
1,720
d.
1,780
e.
1,650.
lr
c.
s.
Al
1,690
Pr
es
b.
ty
1,550
ni
ve
rs
i
a.
ig
ht
b.
185
c.
205
d.
198
e.
203.
Th
e
20
04
190
Ic
a.
fa
iU
Macroeconomics
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
The following are inter-industry transactions in an economy. (The figures represent money
value of output).
Industries
X
Y
Z
Total
output
X
50
80
30
200
Y
20
60
50
240
Z
30
40
60
160
200
240
160
20
04
Th
e
Ic
175
b.
180
c.
183
d.
178
e.
172.
Part-II
80
120
22
292
04
04
20
04
B
W
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
104
24
64
20
04
Ic
Th
e
90.
fa
iU
ni
ve
rs
i
ty
Pr
es
89.
s.
Al
lr
ig
ht
re
se
rv
ed
88.
.IS
87.
130
24
168
30
1,064
M
AC
91.
117
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
04
20
04
04
The following information is extracted from the National Income Accounts of an economy
for the year 2002-03.
Particulars
Rs. in crore
GNP at factor price
95,000
Indirect taxes
14,000
NDP at market prices
1,00,422
NNP at market prices
1,00,000
GNP at market prices
1,07,000
Personal income taxes
10,000
Corporate profit tax
6,500
Retained profit
30,000
118
Part-II
04
R
-4
27
02
431
1:8
BN
.IS
ed
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ef
.N
o.
M
AC
04
20
For the year 2001-02 the National Accounts Statistics at current prices were as follows:
Particulars
Rs. in crore
NNP at factor price
4,73,246
Depreciation
61,809
Subsidies
19,431
Net Factor Income from abroad
6,833
Indirect Taxes
87,043
Personal Income Tax
9,759
Corporate Taxes
7,300
Retained Profit
6,758
04
119
Macroeconomics
04
1,70,992
ef
.N
R
-4
27
1-
31
4-
The indirect tax and Net Factor Income from abroad are:
a. 3,638 and 3,760
b. 3,438 and 3,725
c. 3,538 and 3,860
d. 3,425 and 3,658
e. 3,745 and 3,438.
o.
1,64,182
02
11,888
M
AC
Depreciation
20
588
04
Subsidies
04
(MUC)
1,79,930
BN
:8
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
20
04
Th
e
Ic
40
60
11
146
65
12
84
15
532
52
12
32
Part-II
688
b.
678
c.
685
d.
669
e.
681.
e.
631.
04
681
20
d.
04
696
674
c.
b.
04
452.
o.
e.
ef
.N
467
d.
-4
438
27
c.
02
456
4-
b.
M
AC
re
1:8
se
rv
ed
.IS
BN
7,09,900
92,700
29,100
10,200
1,30,500
14,600
11,000
8,700
s.
Al
lr
ig
ht
31
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
Macroeconomics
7,20,500
b.
7,15,700
c.
7,18,100
d.
7,20,100
e.
7,19,980.
8,12,750
d.
8,22,650
e.
8,21,500.
04
c.
20
8,24,600
04
b.
8,02,600
a.
04
6,23,600
e.
6,74,500.
o.
d.
ef
.N
6,25,250
c.
-4
6,75,600
27
b.
02
6,25,600
4-
a.
M
AC
1-
31
se
rv
ht
ig
s.
Al
Pr
es
1,000
91
50
101
34
87
114
ty
Depreciation
lr
Personal Savings
re
Undistributed Profits
Corporate Income Tax
ed
.IS
BN
:8
Particulars
102
ve
rs
i
iU
ni
Ic
fa
a.
1,230
c.
1,350
d.
1,420
e.
1,260.
20
04
Th
e
b.
122
a.
1,268
b.
1,264
c.
1,328
d.
1,245
e.
1,458.
Part-II
27
-4
ef
.N
o.
M
AC
04
20
04
04
119. The value of the Net National Product at Factor Cost is:
a. 1,175
b. 1,185
c. 1,136
d. 1,035
e. 1,173.
120. The value of Personal Income is:
a. 1,142
b. 1,128
c. 1,185
d. 1,136
e. 1,145.
121. The value of Personal Disposable Income is:
a. 1,134
b. 1,034
c. 1,136
d. 1,173
e. 1,264.
4-
02
:8
1-
31
Particulars
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
20
04
Th
e
Macroeconomics
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
125. The following information pertains to national income aggregates of a hypothetical economy:
Particulars
Rs. in crore
Compensation to employees paid by the Government
50
Profit distributed as dividends by the firms
70
Old age pension, scholarships etc., distributed by Government
21
Purchases made by the Government sector
246
Indirect taxes paid by the firms
75
Value of exports
22
Factor income paid as dividends abroad
25
Corporate Tax
62
Personal Savings
22
Undistributed profits of the firms
42
Income Tax
94
Factor incomes received by the household sector
632
The Personal Disposable Income in the economy is
a. Rs.509 crore
b. Rs.539 crore
c. Rs.529 crore
d. Rs.559 crore
e. Rs.549 crore.
126. The personal income of an individual is Rs.5,000, if the income taxes paid is Rs.200,
consumption is Rs.4,300, interest payment on loans is Rs.100 and savings is Rs.400, the
disposable income of the individual is
a. Rs.5,000
b. Rs.4,800
c. Rs.4,300
d. Rs.4,900
d. Rs.4,600.
Th
e
Ic
fa
iU
ni
127. The following table gives information about price and units of aggregate output for the years
2002 and 2003.
Goods
20
04
P
Q
R
S
T
2002
2003
Quantity
Price (Rs.)
Quantity
Price (Rs.)
30
55
45
35
40
2.00
6.00
5.00
4.00
3.00
35
65
60
40
50
2.50
8.00
6.00
5.00
4.50
124
a.
122.
b.
104.
c.
15.
d.
142.
e.
130.
Part-II
128. Given the following information, what would be the national income of the economy?
Particulars
MUC
Compensation to employees
2,325
Interest payments made by the firms
323
Rental Income received
43
Corporate Profits (before tax)
170
Proprietors Income
135
Dividends paid by the firms
72
Personal Taxes paid by the individuals
260
04
20
04
04
2,786 MUC.
2,996 MUC.
2,886 MUC.
3,115 MUC.
2,662 MUC.
M
AC
a.
b.
c.
d.
e.
:8
1-
31
4-
02
27
-4
ef
.N
o.
129. The following information is given from the national accounts of a country for the year
2002-03.
Particulars
MUC
Factor income earned within domestic territory
65,000
Gross domestic fixed capital formation
6,000
Net domestic fixed capital formation
4,000
GNP at market prices
85,000
Indirect Taxes
3,000
Subsidies
1,000
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
The net factor income from abroad for the year 2002-03 is
a. 15,000 MUC
b. 13,000 MUC
c. 16,000 MUC
d. 17,000 MUC
e. 11,000 MUC.
130. In a hypothetical economy, the nominal income increased by 6%. If the prices increased by
4%, the real income increases by
a. 10.00%
b. 2.00%
c. 1.50%
d. 0.67%
e. 2.50%.
131. The equilibrium income for the economy is
a. 900 MUC
b. 825 MUC
c. 950 MUC
d. 930 MUC
e. 910 MUC.
132. Budget deficit/surplus for the economy is
a. 10 MUC (deficit)
b. 15 MUC (deficit)
c. 15 MUC (surplus)
d. 20 MUC (deficit)
e. 20 MUC (surplus).
125
Macroeconomics
04
04
133. The economy is opened to trade in goods and services with the rest of the world, and imports
and exports are as given below:
Imports (M) = 0.10Y
Exports (X)
= 420 MUC
The multiplier for the economy is
a. 2.0
b. 3.0
c. 3.5
d. 4.0
e. 4.5.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
134. The following data is taken from National Income Accounts of a country:
Rs. Cr.
GNP at market prices
1,700
Transfer payments
242
Indirect Taxes
173
Personal Taxes
203
Consumption of Capital
190
Undistributed Corporate Profits
28
Corporate Tax
75
Subsidies
20
Personal income in the country is
a. Rs.1,363 cr
b. Rs.1,121 cr
c. Rs.1,230 cr
d. Rs.1,296 cr
e. Rs.1,496 cr.
135. In an economy the factor income earned within domestic territory for the year 2002-03 is
50,000 MUC. For the year, consumption of capital is 3,000 MUC and the GNP at market
prices is 60,000 MUC. If indirect taxes are 2,000MUC and subsidies are 500 MUC, net factor
income from abroad is
a. 5,000 MUC
b. 5,500 MUC
c. 6,000 MUC
d. 6,500 MUC
e. 6,800 MUC.
20
04
Th
e
Ic
fa
iU
126
Cr.
Rs. Cr.
550
85
55
40
730
Part-II
Rs.650 cr
b.
Rs.670 cr
c.
Rs.695 cr
d.
Rs.640 cr
e.
Rs.630 cr.
d.
Rs.45 cr (deficit)
e.
Rs.55 cr (deficit).
04
Rs.35 cr (deficit)
20
c.
04
Rs.35 cr (surplus)
b.
Rs.45 cr (surplus)
M
AC
a.
04
137. If the Factor Income received from abroad is Rs.200 cr., current account balance for the
economy is
ef
.N
o.
138. For an economy, GDP at market prices for the current year is 1500 MUC. If GDP deflator for
the current year is 120, real GDP for the current year would be
7,500 MUC
b.
1,250 MUC
c.
300 MUC
d.
1,800 MUC
e.
1,100 MUC.
:8
1-
31
4-
02
27
-4
a.
ve
rs
i
ty
Pr
es
re
se
rv
Primary Sector
100
15
15
10
12
10
7
ht
s.
Al
lr
ig
Items
Sales
Closing Stock
Intermediate Consumption
Opening Stock
Indirect taxes
Depreciation
Subsidies
ed
.IS
BN
139. An economy consists of three sectors: primary, secondary and tertiary sectors. Transactions
related to the three sectors are given below:
Secondary Sector
150
20
25
10
13
12
8
(MUC)
Tertiary Sector
130
25
15
15
17
15
7
ni
Ic
b.
fa
iU
a.
271 MUC
d.
258 MUC
e.
342 MUC.
20
04
Th
e
c.
MUC
10
160
20
100
20
60
20
127
Macroeconomics
The amount paid by the government to the households towards wages and salaries is
a.
10 MUC
b.
20 MUC
c.
30 MUC
d.
40 MUC
e.
50 MUC.
Based on the following information answer the questions 141 and 142.
Capital consumption allowance
356.4
253.0
Personal Taxes
402.1
64.4
105.1
374.5
1,991.9
M
AC
o.
:8
BN
.IS
se
rv
2,455.3.
re
e.
2,456.4
ht
d.
ig
2,453.2
lr
c.
s.
Al
2,455.8
Pr
es
2,450.4
b.
ed
1-
ef
.N
66.4
Corporate dividends
-4
120.3
27
Proprietors income
02
164.8
4-
Corporate profits
34.1
31
04
266.3
20
264.9
04
04
1,866.3
Compensation of employees
3073.9
b.
3072.5
c.
3074.7
3072.7
Ic
d.
fa
iU
ni
ve
rs
i
a.
ty
Th
e
e.
3073.1.
20
04
Based on the following information answer the questions 143 and 144.
Million of
Currency Units
1,475.0
210.8
75.0
212.4
72.0
175.8
235.0
212.6
Part-II
1,512
b.
1,622
c.
1,812
d.
1,775
1,580
d.
1,625
e.
1,645.
04
c.
20
1,645
04
b.
1,547
a.
04
e. 1,720.
144. The value of Personal disposable income is:
1,920.
o.
ef
.N
R
27
02
431
1:8
BN
ed
e.
se
rv
1,790
re
d.
1,860
ht
c.
ig
1,882
lr
b.
s.
Al
1,765
Pr
es
a.
.IS
1,525
215
95
220
72
180
235
205
-4
M
AC
145. The figures given below are pertaining to year 2001.(Rs. in crore)
6,000
1,200
800
400
1,500
1,800
250
800
400
Ic
fa
iU
Th
e
20
04
Rs.
ni
ve
rs
i
ty
a.
5,250
b.
5,400
c.
5,600
d.
5,700
e.
5,500.
129
Macroeconomics
20
04
04
88,065
88,195
88,105
88,275
88,365.
04
a.
b.
c.
d.
e.
88,750
260
5,220
1,820
10,825
M
AC
o.
ef
.N
R
-4
27
02
re
se
rv
ed
.IS
BN
:8
1-
31
4,82,220
62,725
20,150
6,800
85,450
9,600
7,500
6,850
4-
ig
lr
1,72,250
520
1,63,740
12,180
1,57,170
fa
iU
ni
2,750
2,600
2,450
2,900
2,850.
20
04
Th
e
Ic
a.
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
ht
149. From the following National income data, calculate net factor income from abroad.
150.
Particulars
Personal consumption expenditure
Indirect business taxes
Undistributed corporate profits
Corporate income tax
Personal savings
Depreciation
Transfer payments by government
Personal tax payments
130
Million units of
currency (MUC)
1,300
105
72
116
45
98
124
112
Part-II
1,432
b.
1,521
c.
1,560
d.
1,476
e.
1,620.
Based on the following information answer the questions 151 and 152.
The following are the data pertaining to National income of an economy.
-4
ef
.N
o.
M
AC
04
20
04
04
Rs. in crores
1,90,000
28,000
2,00,844
2,00,000
2,14,000
20,000
13,000
60,000
27
Particulars
GNP at factor prices
Indirect taxes
NDP at market prices
NNP at market prices
GNP at Market prices
Personal income taxes
Corporate Profit taxes
Retained Profits
1,60,000.
4-
1,58,000
e.
31
d.
1-
1,76,000
:8
c.
BN
1,54,000
.IS
b.
ed
1,74,000
se
rv
a.
02
84,450
e.
83,600.
d.
ht
84,700
ig
c.
lr
83,000
s.
Al
b.
Pr
es
82,300
ty
a.
re
ve
rs
i
20
04
Th
e
Ic
fa
iU
ni
=
=
=
=
=
=
=
=
1,14,605
8,165
2,865
350
16,745
12,500
7,250
32,000
1,06,440
b.
1,05,525
c.
1,06,530
d.
1,06,205
e.
1,07,125.
131
Macroeconomics
1,845
e.
1,875.
04
04
d.
1,989
c.
M
AC
1,895
o.
1,998
b.
ef
.N
a.
20
04
Million units of
currency
1,675
230
112
240
72
182
320
210
Subsidies
4-
BN
.IS
ed
3,775.
se
rv
e.
re
3,640
d.
ht
3,625
ig
c.
lr
3,745
s.
Al
b.
1,200
Pr
es
3,650
31
2,100
1-
Indirect taxes
:8
2,250
02
() 625
Depreciation
a.
27
-4
155. Calculate the difference between GDP at Market price and NNP at factor cost from the
following information.
ve
rs
i
ty
Particulars
20
04
Th
e
Ic
fa
iU
ni
Million of
Currency
1,332
180.8
80.0
202.4
68.0
173.6
228.0
203.6
132
a.
2,012.4
b.
2,156.8
c.
2,896.3
d.
2,225.5
e.
2,139.6.
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
se
rv
ed
.IS
04
Part-II
re
s.
Al
lr
ig
ht
ve
rs
i
ty
Pr
es
Consumption
Investment
Government expenditure
=
=
=
1,200
200
50
20
04
Th
e
Ic
fa
iU
ni
a. 2,015
b. 2,018
c. 2,010
d. 2,016
e. 2,009.
Based on the following information answer the questions 162 to 164.
162. Marginal propensity to import (MPI) = 0.10
Marginal propensity to save (MPS) = 0.25
If the autonomous investment increased by Rs.100.
The value of Multiplier will be:
a. 2.558
b. 2.852
c. 2.857
d. 2.358
e. 2.493.
133
Macroeconomics
04
20
04
04
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
20
04
Th
e
Ic
167.
Consumption (C)
Investment (I)
Government expenditure (G)
Exports (E)
Imports (M)
Marginal propensity to save (MPS)
Potential GNP of the economy
134
ef
.N
R
-4
27
02
431
1:8
BN
.IS
ed
se
rv
o.
0.35Y
0.15Y
20 + 0.22Yd
45
18
20
8
re
Tax function
Import function
Saving function
Investment (I)
Government expenditure (G)
Exports (X)
Transfer payments (R)
M
AC
165.
1,000
400
500
200
180
0.35
2,500
Part-II
M
AC
04
20
04
04
02
27
-4
ef
.N
o.
re
Yd (Disposable Income)
C (Consumption)
Rs.400
Rs.360
Rs.500
Rs.400
Rs.600
Rs.580
Rs.700
Rs.670
The Marginal Propensity to consume (MPC) when C = Rs.40 + bYd, where d is the MPC is:
a. (C 42)/Yd
b. (C 40)/bYd
c. (C 45)/Yd
d. (C 40)/Yd
e. (C 41)/Yd.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
170.
se
rv
ed
.IS
BN
:8
1-
31
4-
When the exports increase by 25, The change in the equilibrium level of income will be:
a. 2,220
b. 2,100
c. 2,250
d. 2,218
e. 2,020.
20
04
171.
Equilibrium income
Income tax rate
Marginal Propensity to consume
2,000
20%
0.85
Macroeconomics
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
re
se
rv
ed
.IS
BN
Consumption function
Investment function
Exogenous government expenditure
Exogenous exports
Import function
Interest
= 200 + 0.6Y
= 0.3Y 15i
= 100
= 50
= 0.1Y
=4
ht
C
I
G
E
M
I
:8
1-
Based on the following information answer the questions 174 and 175
1,465
d.
1,398
e.
1,440.
s.
Al
1,450
c.
Pr
es
b.
ty
1,375
iU
ni
ve
rs
i
a.
lr
ig
20
04
b.
Ic
Th
e
a.
fa
c.
d.
e. 3.
176. In an economy marginal propensity to consume is 0.90 and the marginal propensity to import is
0.10. If there is an autonomous increase in investment of 200, The level of imports would be:
136
a.
1,000
b.
1,500
c.
1,250
d.
1,100
e.
1,050.
Part-II
37.75
c.
38.90
d.
38.28
e.
37.50.
04
b.
20
39.50
04
a.
04
The disposable income increased from 200 to 250. The increase in disposable income on the
steady state level of consumption is:
M
AC
Ct
83.65.
e.
-4
84.45
27
d.
02
85.28
4-
c.
31
84.39
1-
b.
:8
83.58
BN
a.
ef
.N
o.
Where Ct and Ct 1 denote consumption in periods t and t 1 respectively and Ydt is the
disposable income in the period t. If Ydt increases from 500 to 600 and remains there
indefinitely, The change in the steady state level of consumption would be:
.IS
re
se
rv
ed
ig
ht
Investment ( I )
5
10
ve
rs
i
ty
Exports ( X)
Pr
es
10
lr
s.
Al
Govt. expenditure ( G )
b.
9.50
20
04
iU
fa
Ic
Th
e
c.
ni
a.
9.48
d.
9.67
e.
9.88.
180. Economy has the break even level income of 900 (i.e. income = consumption) and the
equilibrium level of income of 4,500. If the saving in equilibrium is 1,080, The value of the
multiplier in the economy. (Approximately) would be:
a.
3.33
b.
3.45
c.
3.38
d.
3.15
e.
3.41.
137
Macroeconomics
Rs. in crore
Autonomous consumption
400.00
0.30
Autonomous investment
15.00
0.10
Exports (exogenous)
20.00
Propensity to import
0.05
d.
2,472
e.
2,435.
2,457
c.
M
AC
2,466
o.
b.
ef
.N
2,442
a.
04
45.00
04
04
150.00
20
-4
02
27
31
4-
where,
1-
Ct = Consumption in period t
.IS
BN
:8
185.
se
rv
e.
re
181
d.
ht
176
ig
174
lr
b.
c.
s.
Al
172
Pr
es
a.
ed
If Ydt increases from 700 to 900, The change in steady state level of consumption is:
ty
Based on the following information answer the questions 183 and 184
C
= C0 +Y d
Disposable income
Yd
=YT
= I
iU
ni
ve
rs
i
Consumption function
Ic
fa
Investment
= G
Exports
= E
Import function
= M0+Y
Where,
C0
= 80
20
04
Th
e
Government Expenditure G
G and T
138
= 30
I
= 100
= 0.8
= 120
M0
= 110
= 0.1
Part-II
657
b.
662
c.
665
d.
654
e.
653.
b.
3.42
c.
3.39
d.
3.56
e.
3.25.
M
AC
04
20
04
04
a.
Exports
= E
Import
where,
C0
= M
= 140
= 0.8
=YT
= I
-4
Disposable income
Yd
Investment
I
Government Expenditure G
ef
.N
= C0 + Y d
27
Y=C+I+G+EX
Consumption function
o.
185.
431
1:8
BN
.IS
se
rv
ed
= 75
= 35
02
= G
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
= 30
E
M = 25
The value of the equilibrium level of income is:
a. 1,279
b. 1,237
c. 1,275
d. 1,248
e. 1,267.
Ic
fa
20
04
Th
e
a.
b.
c.
d.
e.
= 40 + 0.25Yd
=YT
= 0.20Y
= 120 12i
= 80
= 60
= 0.1Y
2.5
1.5
2
1
2.3.
139
Macroeconomics
Based on the following information answer the questions 187 and 188.
= C + I + G + (X M)
= C0+ Yd
T
Yd
M
= T0 + tY
=YT
= M0 + Y
= 90
= 65
X
C0
M0
= 80
04
04
Y
C
04
20
= 70
= 40
= 0.9
R
-4
27
02
431
1:8
BN
.IS
ed
se
rv
re
lr
ig
ht
ef
.N
o.
M
AC
= 0.15
= 0.2
= 20
t
T0
s.
Al
fa
iU
ni
ve
rs
i
ty
Pr
es
Th
e
Ic
a. 5.0
b. 3.8
c. 4.2
d. 4.8
e. 4.0.
190. Saving function= 80 + 0.20Y
Import function = 0.10Y
If the Government expenditure is increased by 200, The impact on GNP would be:
a. Increase in GNP by 668.6
b. Decrease in GNP by 568.6
c. Decrease in GNP by 666.9
d. Increase in GNP by 666.6
e. No change in GNP.
20
04
Consumption (C)
380
480
660
720
140
Part-II
b.
c.
d.
e.
No change in GNP.
04
a.
Where,
= 0.8
= 0.2
= 0.1
= 120
= 120
M
AC
=I
o.
Investment
ef
.N
=YT
= T0 + Ty
=G
=E
.IS
BN
:8
1-
31
4-
02
27
-4
Disposable income Yd
Tax
T
Government expenditure
Export function
04
20
04
192. If the Government expenditure increases by 40 and investment by 50, value of the increased
income would be:
Consumption function C
= C0 + Yd
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
a. 195.9
b. 194.6
c. 195.3
d. 197.8
e. 196.6.
193. The consumption function C= 40 + PYd, find out MPC = .8 and disposable income Rs.800.
The value of the consumption would be:
a. 640
b. 860
c. 645
d. 865
e. 680.
194. C = 50 + 0.9Yd
Yd = Y T
T
= 10 + 0.2Y
Y =C+I+G
I
= I exogenous
G = G exogenous
The equilibrium income for I = 50, G = 40 is:
a. 467.86
b. 478.90
c. 463.80
d. 478.59
e. 460.43.
141
04
20
04
B
M
AC
04
Macroeconomics
1-
31
4-
02
27
-4
ef
.N
o.
BN
:8
197. The following data pertains to national income aggregates of a hypothetical economy:
ed
.IS
se
rv
Investment (I)
= 200 MUC
Taxes (T)
= 100 MUC
ig
ht
re
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
142
= 70 + 0.75Yd
= 80 MUC
= 70 MUC
= 0.2Y
Part-II
20
04
.IS
ve
rs
i
Th
e
Ic
fa
iU
ni
203.
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
202.
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
201.
M
AC
04
20
04
04
200.
204.
143
Macroeconomics
205. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC,
private savings for the year is
a.
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
d.
500 MUC
e.
600 MUC.
04
400 MUC
c.
300 MUC
M
AC
b.
o.
200 MUC
ef
.N
a.
20
04
04
e.
6.
02
4-
d.
31
1-
c.
:8
BN
b.
.IS
ed
a.
27
-4
re
se
rv
b.
Rs.1,500 cr
c.
Rs.1,600 cr
d.
Rs.1,700 cr
e.
Rs.1,300 cr.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
fa
b.
Rs.525.
c.
Rs.625.
d.
Rs.425.
e.
Rs.325.
Th
e
20
04
Rs.125.
Ic
a.
iU
ni
209. The break-even income of Mr. Ravi is Rs.5,000 and his Marginal Propensity to Consume is
3/4. If his current income is Rs.2,500, how much would Mr. Ravi borrow?
210. In a two sector economy the savings function is S = 60 + 0.25 Yd. If the investment in the
economy is 100 Million Units of Currency (MUC), equilibrium income will be
144
a.
620 MUC
b.
640 MUC
c.
660 MUC
d.
650 MUC
e.
630 MUC.
Part-II
750
250
Increase in stock
150
Government expenditure
100
230
04
Money supply
20
150
Imports
04
50
04
Merchandise exports
e.
1.
o.
ef
.N
d.
-4
c.
27
02
b.
1-
4-
31
a.
M
AC
BN
:8
C = 1000
G = 200
se
rv
ed
.IS
I = 200
re
MPC= 2/3
c.
375
d.
325
e.
310.
Pr
es
360
ty
b.
ve
rs
i
340
fa
iU
ni
a.
s.
Al
lr
ig
ht
If the expenditure increased by 100 and government expenditure increased by 80, the
increase in GNP would be:
Th
e
Ic
20
04
S = 380 + 0.2Y
M= 0.15Y
Where I is aggregate saving, M is import and Y is national product. If the private gross
domestic investment (I) increases by 280 units and the government spending decreases by 72
units what will be the increase in national product?
a.
590.50.
b.
588.24.
c.
594.28.
d.
578.75.
e.
560.43.
145
Macroeconomics
C + I + G + (X)
C0 + Yd
T0 + tY
YT
M0 + Y
90
65
80
C0
70
M0
40
0.9
0.15
0.2
T0
20
-4
ef
.N
o.
M
AC
04
20
04
04
M (Imports)
2.33
b.
2.35
c.
2.45
d.
2.28
e.
2.50.
:8
1-
31
4-
02
27
a.
BN
ed
.IS
se
rv
d.
831.2.
e.
833.7.
ig
833.9.
lr
c.
s.
Al
832.5.
Pr
es
b.
ty
831.5.
ve
rs
i
a.
ht
re
iU
ni
216.
fa
Consumption function C
Th
e
Ic
Disposable income Yd
20
04
Tax
= T0 + tY
Government expenditure
= G
Import function
= M + Y
Export function
Investment
= E
= I
= 0.8
Where,
146
= C0 + Yd
= YT
= 0.2
= 0.1
= 120
= 120
Part-II
If the government expenditure and investment increased by 40 and 50 respectively, what would be
the increase in income?
a. 195.6.
b. 197.8.
c. 194.4.
d. 195.8.
e. 194.7.
217. The following relationships are given in an economy
04
20
04
04
C = 50 + 0.9Yd
Yd = Y T
T = 10 + 0.2Y
Y=C+I+G
I = I exogenous
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
G= G exogenous
Calculate the equilibrium income for I = 50, G = 40.
a. 469.85
b. 467.28
c. 466.52
d. 467.86
e. 468.59.
218. In an economy the marginal propensity to consume is 0.75, and the proportional tax rate is
0.20. When there is an increase in government expenditure by Rs.500, calculate the rise in
budget deficit.
a. 278
b. 265
c. 245
d. 225
e. 250.
219. The following data refer to a hypothetical economy for 19x2.
ve
rs
i
ty
Pr
es
s.
Al
lr
C =
500
I
=
100
G =
100
Potential GNP of the economy is 800.
MPC = 2/3
20
04
Th
e
Ic
fa
iU
ni
8 + 0.15Yd
=
=
=
=
=
=
0.2Y
0.10Y
20
10
5
10
147
Macroeconomics
C+I+G+EX
C0 + Yd
C0
140
0.8
75
30
25
35
ve
rs
i
ty
Pr
es
s.
Al
lr
fa
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
iU
ni
20
04
Th
e
Ic
where,
148
b.
1,320
c.
1,245
d.
1,275
e.
1,350.
Part-II
50 + 0.8Yd
YT
10 + 0.3Y
C+I+G
I exogenous
G exogenous
=
=
=
=
=
=
fa
iU
ni
1,200.
1,600.
1,100.
1,000.
1,300.
20
04
Th
e
Ic
a.
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Calculate the equilibrium level of income, aggregate consumption and government budget
deficit for I = 60, G = 45.
a. 335.7
b. 342.8
c. 328.3
d. 348.2
e. 331.8.
225. For the saving function S = 500 + 0.2Y, at what level of income savings will be equal to
investment, if the autonomous investment is Rs.100 crores?
a. 3,200.
b. 3,500.
c. 3,000.
d. 3,325.
e. 3,450.
226. If the aggregate income rises from 50 lakh to Rs.250 lakh as a result of increase in investment
of Rs.20 lakh, find the value of Marginal Propensity to Consume.
a. 0.90
b. 0.82
c. 0.75
d. 0.88
e. 0.95.
227. What would be the change in aggregate income and aggregate consumption, when
investment increases by Rs.100 crore in 1999?
Year Aggregate income Aggregate consumption
(Rs. in Crores)
(Rs. in Crores)
1997
10,000
9,000
1998
11,000
9,900
228.
Tax function
Import function
Saving function
Investment ( I )
=
=
=
=
0.3Y
0.18Y
20 + 0.25 Yd
50
Government expenditure ( G ) = 20
= 22
Exports ( X )
Transfer payments
= 10
Macroeconomics
a. 25.68
b. 26.75
c. 24.73
d. 25.52
e. 23.25.
229. Calculate the multiplier for the economy for the following Yd and C where consumption
function C = 90 + Yd.
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
2.3
c.
3.4
d.
ty
b.
ve
rs
i
2.5
iU
ni
a.
fa
The exports economy increase by 30. Compute the foreign trade multiplier.
Th
e
Ic
4.2
20
04
e.
4.0.
232.
150
Autonomous Consumption
460
0.3
Autonomous investment
18
0.1
162
48
Exports (Exogenous)
25
Propensity to Import
0.05
Part-II
2,655.5
b.
2,725.5
c.
2,742.4
d.
2,628.4
e.
2,528.5.
04
04
I = 78 230i
d.
472
e.
485.
467
M
AC
c.
o.
448
ef
.N
b.
435
-4
a.
04
20
Where Y is output for the economy and i is rate of interest which is 10 percent at present.
Find the equilibrium level of output for the economy.
02
27
31
4-
e.
42.15.
:8
43.75
BN
d.
.IS
42.84
ed
c.
se
rv
41.43
re
b.
43.55
ht
a.
1-
c.
2.5
d.
3.2
e.
2.2.
Pr
es
2.8
ty
b.
ve
rs
i
3.1
Ic
fa
iU
ni
a.
s.
Al
lr
ig
235. In an economy the break even level income is 1,200 and the equilibrium level of income is
4,800. If the savings in equilibrium is 1,400, calculate the multiplier in the economy.
20
04
Th
e
62
b.
60
c.
53
d.
65
e.
61.
151
Macroeconomics
(I) = 80
Yd = Y, since there is no government sector.
625
b.
618
c.
650
d.
647
e.
635.
04
a.
04
04
20
238. The following are the economic information for the year 2002.
0.35
2,700
W
o.
ef
.N
195
Imports (M)
-4
210
27
Exports (E)
02
600
4-
31
450
1-
Investment (I)
M
AC
1,200
:8
Consumption (C)
(Rs. in crore)
18.7%
e.
18.2%.
se
rv
d.
re
16.2%
c.
ht
17.5%
ig
b.
lr
16.8%
s.
Al
a.
ed
.IS
BN
270 + 0.75Y
72 + 0.15Y
ty
ve
rs
i
Pr
es
120
Exports (X)
140
0.13Y
20
04
Th
e
Ic
fa
iU
ni
152
Due to an exogenous boost to the economy, exports increase by 20. The value of the foreign
trade multiplier would be:
a.
4.75
b.
4.35
c.
5.21
d.
3.89
e.
3.57.
Part-II
04
04
20
04
B
W
M
AC
o.
ef
.N
R
27
02
431
1-
:8
s.
Al
lr
ig
ht
re
BN
= 150 80i
= 300
= 0.3Y
= 120 160i
.IS
I
Ms
Mt
Ma
ed
= 120 + 0.6Y
se
rv
= 40 + 0.25Yd
=YT
= 0.20Y
= 120 12i
= 80
= 60
= 0.1Y
= 6Y 2,200i
= 2,800
-4
Savings function
(S)
Disposable income (Yd)
Tax function
(T)
Investment function (I)
Government expenditure (G)
Exports
(E)
Imports
(M)
Demand for Money (Md)
Money supply
(Ms)
a. 596.48
b. 587.35
c. 578.45
d. 591.84
e. 588.67.
241. Given the following information:
Pr
es
242.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Consumptions function C
Tax function
T
Disposable income
Yd
Investment
I
Government expenditure G
Precautionary demand for money (Mp)
Transaction demand for money (Mt)
Speculative demand for money (Ma)
Supply of Money
(Ms)
= 100 + 0.75Yd
= 0.20Y
=YT
= 50 12i
= 200
= 20 + 0.1Y
= 0.20Y
= 130 30i
= 300
153
Macroeconomics
= 0.22Y
= 10 11i
= 320
= 0.1Y
= 118
Exports ( E )
Nominal GNP in 1991-92
The GNP deflator for the year 2002-03 is:
04
20
= 600
04
Government expenditure ( G )
04
243. The following are the economic indicators for the year 2002-03.
Savings function
(S)
= 70 + 0.20Yd
Disposable income (Yd)
=YT
Tax function
(T)
= 0.25Y
Investment demand function (I)
= 300 10i
M
AC
= 3,472
164.3
e.
164.7.
ef
.N
R
166.5
d.
-4
c.
27
167.5
02
b.
4-
163.3
31
a.
o.
.IS
BN
= 40+0.80Yd
=YT
= 0.2Y
= 5 + 0.1Y
= 100
= 100 120i
= 300
= 0.24Y
= 220
= 150 10i
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
:8
1-
244.
20
04
245.
154
Part-II
246.
= 40 + 0.2Yd
=YT
= 0.21Y
= 200 10i
= 5 + 0.1Y
Exports (E)
= 0.12Y
Government expenditure ( G )
= 300
= 0.24Y
= 100 20i
= 300
04
20
04
04
(S)
c.
d.
e.
b.
-4
:8
1-
31
4-
02
27
a.
ef
.N
o.
M
AC
Savings function
BN
.IS
800 = 0.4Y + 8i
se
rv
ed
e.
215.
208
ht
d.
ig
206
lr
c.
s.
Al
216
Pr
es
b.
ty
210
ve
rs
i
a.
re
If the exogenous investment increased by 150. The change in equilibrium will be:
ni
Based on the following information answer the questions 248 and 249.
fa
iU
Th
e
Ic
20
04
1.09.
b.
1.56.
c.
1.05.
d.
1.87.
e.
1.12.
155
Macroeconomics
249. At what real income level is there equilibrium in the commodity and money markets if the
nominal, money supply is 200, the price level is 1, and the household sectors nominal
disposable income is 500?
a.
672.
b.
640.
c.
645.
d.
678.
e.
664.
04
04
250.
Consumption function
I = 250 200i
Investment function
T = G = 24
Government expenditure.
Mt = 0.25Y
Ma = 134 500i
Ms = 250
Money supply.
27
-4
ef
.N
o.
M
AC
04
20
C = 60 + 0.75 Yd
28.
e.
24.
31
d.
1-
26.
:8
c.
BN
22.
.IS
b.
ed
20.
re
se
rv
a.
4-
02
If there is a decline of 75 in money supply, what will be the changed equilibrium level of
investment?
ig
ht
S = 250 + 0.2Y
s.
Al
lr
M = 0.15Y
500.
b.
525.
c.
515.
Ic
fa
iU
ni
a.
ve
rs
i
ty
Pr
es
Where S is aggregate saving, M is imports, and Y is national product. If the private gross
domestic investment increases by 250 units and government spending decreases by 75 units,
by what tune the national income will increase?
475.
e.
490.
20
04
Th
e
d.
156
M
p
=
=
=
=
=
120 + 0.25Yd
420 10i
150
150
0.20Y 5i
300
Part-II
04
04
20
300
1-
.IS
BN
:8
120 + 0.25Yd
300 5i
150
240
0.20Y 5i
300
lr
ig
ht
re
M
p
Money supply
=
=
=
=
=
=
se
rv
31
4-
02
27
-4
ef
.N
o.
7.53%
7.90%
8.23%
8.35%
7.33%.
ed
a.
b.
c.
d.
e.
04
M
=
p
Money supply
120 + 0.25Yd
300 5i
150
150
0.20Y 5i
=
=
=
=
=
(S)
(I)
(T)
(G)
(L)
M
AC
Saving function
Investment function
Taxes
Government expenditure
Demand for money
1,875
c.
1,884
d.
1,848
e.
1,857.
Pr
es
b.
ty
1,868
Ic
fa
iU
ni
ve
rs
i
a.
s.
Al
20
04
Th
e
Based on the following information answer the questions 255 and 256.
Consumption function
Disposable income
Tax function
Investment function
Exogenous Govt. expenditure
Transaction demand for money
Speculative demand for money
Supply of money
Exports
Import function
(C) =
(Yd) =
(T) =
(I) =
(G) =
(Mt) =
(Ma) =
(Ms) =
(E) =
(M) =
15 + 0.80Yd
YT
0.25Y
450 12i
300
0.20Y
145 60i
300
225
5 + 0.2Y
157
:8
1-
31
4-
02
27
-4
ef
.N
o.
04
20
04
B
W
M
AC
04
Macroeconomics
ed
re
se
rv
=
=
=
=
ig
ht
.IS
BN
Based on the following information answer the questions 258 and 259.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
158
04
20
04
27
-4
ef
.N
o.
M
AC
04
Part-II
re
31
1-
:8
BN
.IS
lr
ig
50 + 0.2Yd
YT
.25Y
00 10i
400
0.25Y
125 50i
250
ed
se
rv
(S) =
(Yd) =
(T) =
(I) =
(G) =
(Mt) =
(Ma) =
(Ms) =
ht
Savings function
Disposable income
Tax function
Investment demand function
Government purchase
Transaction demand for money
Speculative demand for money
Supply of money
4-
02
Based on the following information answer the questions 262 and 263.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
Macroeconomics
04
20
04
04
Consumption function
Disposable income
Tax function
Investment function
Exogenous Govt. expenditure
Import function
Export function
Transactions demand for money
Speculative demand for money
Supply of money
9%
c.
6%
d.
8%
e.
10%.
b.
M
AC
7.5%
-4
ef
.N
o.
a.
e.
2,100.
02
2,265
4-
d.
31
2,230
1-
c.
:8
2,225
BN
b.
.IS
2,250
ed
a.
27
se
rv
b.
40
c.
48
c.
43
d.
49.
Pr
es
s.
Al
lr
ig
ht
re
a.
368
b.
362
c.
389
20
04
Th
e
Ic
iU
a.
fa
ni
ve
rs
i
ty
268. If the exogenous government expenditure is increases by 115, the equilibrium investment
will be:
d.
365
e.
367.
269.
C = 20 + 0.75Yd
Yd = Y T
T = 0.2Y
I = 500 15i
G = 515
M = 10 + 0.1Y
E = 260
160
Consumption function
Disposable income
Tax function
Investment function
Exogenous Govt. expenditure
Import function
Export function
Part-II
Mt = 0.25Y
Ma = 125 50i
Ms = 250
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
C = 80 + 0.75Yd
Consumption function
Yd = Y Tx
Disposable income
I = 300 200i
Investment function
T x = G = 30
Govt. expenditure
Mt = 0.30Y
Transactions demand for money
Ma = 150 300i
Speculative demand for money
Ms = 270
Supply of money
the value of equilibrium investment is:
a. 175
b. 179
c. 172
d. 173
178.
ed
e.
.IS
BN
:8
1-
270.
20
04
04
If to keep the equilibrium investment as it is (at an interest rate of 8%), to what extend money
supply should be increased?
a. 307.5.
b. 305.8.
c. 305.2.
d. 306.8.
e. 307.9.
s.
Al
lr
ig
ht
re
Consumption function
Disposable income
Investment function
Govt. expenditure
Transactions demand for money
Speculative demand for money
Supply of money
ve
rs
i
ty
Pr
es
C = 60 + 0.75Yd
Yd = Y Tx
I = 250 200i
T x = G = 24
Mt = 0.25y
Ma = 150 300i
Ms = 250
se
rv
271.
20
04
Th
e
Ic
fa
iU
ni
Consumption function
Disposable income
Investment function
Govt. expenditure
Transactions demand for money
Speculative demand for money
Supply of money
161
Macroeconomics
a.
b.
c.
d.
e.
1567
1543
1598
1552
1563.
273.
o.
M
AC
04
20
04
What will be the quantity of money available for speculative balance at income level 700?
a. 115.
b. 110.
c. 113.
d. 109.
e. 100.
04
ef
.N
274.
27
-4
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
The quantity of money available for speculative balance at income level 900 will be:
a. 25
b. 30
c. 32
d. 24
e. 29.
275. Equilibrium in the commodity market
Y = 850 2500i (IS Curve)
Equilibrium in the money market
Y = 500 + 5m + 1000i (LM curve)
m represents money supply and i represents interest rate. Full employment exists at 650
real income level. If the nominal supply is 200 and the price level is 1, the price level at
which simultaneous equilibrium on all markets is:
a. 0.934
b. 0.921
c. 0.923
d. 0.918
e. 0.912.
Based on the following information answer the questions 276 and 278.
162
Savings function
(S)
Disposable income (Yd)
Tax function
(T)
Private investment function (I)
720 + 0.3Yd
YT+R
0.2Y
20 + 0.10Y
200
=
=
=
=
=
Transfer payments
(R)
= 50
Exports
(E)
= 25
Import function
(X)
= 0.05Y
Part-II
Mt
Transaction demand for money
= 0.25Y
Ma
Speculative demand for money
= 250 10r
Ms
e.
262.82.
04
20
04
B
W
M
AC
o.
ef
.N
02
4-
236.92
31
d.
1-
263.44
:8
c.
BN
262.35
.IS
b.
ed
262.85
se
rv
a.
27
e. 104.591.
278. The budget surplus at equilibrium level of income is:
04
= 600
-4
Supply of money
re
ht
ig
lr
s.
Al
(R)
Pr
es
Transfer payments
(S)
(Yd)
Savings function
Disposable income
ve
rs
i
ty
Tax function
(T)
Private investment function (I)
ni
420 + 0.2Yd + 6i
YT+R
100
=
=
=
0.2Y
0.2Y 20i
2000
(M)
0.1Y
Exports
(E)
1400
Mt
Transaction demand for money
0.15Y
Ma
Speculative demand for Money
225i
450
Ic
fa
iU
Import function
Th
e
20
04
=
=
=
Supply of Money
Ms
:8
1-
31
4-
20 + 0.25Yd
YT
40 + 0.2Y
240 10i
300
10 + 0.10Y
BN
=
=
=
=
=
=
se
rv
ed
.IS
Savings function
(S)
Disposable income
(Yd)
Tax function
(T)
Investment function
(I)
Exogenous Govt. expenditure (G)
Import function
(M)
02
27
-4
ef
.N
o.
04
20
04
B
W
M
AC
04
Macroeconomics
200
Mt
Transaction demand for money
0.2Y
Ma
Speculative demand for money
50 16i
250
Exports
ni
ve
rs
i
Money supply
ty
Pr
es
s.
Al
lr
ig
ht
re
(E)
Th
e
Ic
fa
iU
20
04
Ms
164
Part-II
285. The value of equilibrium level of income when the exogenous govt. expenditure increases by
50 is:
a. 1,528
b. 1,576
c. 1,448
d. 1,450
e. 1,520.
=
=
60 + 0.25Yd
YT+R
Transfer payments
(R)
80
(I)
=
=
0.2Y
1000 15i
800
Import function
20 + 0.1Y
400
Mt
Transaction demand for money
0.2Y
Ma
Speculative demand for Money
130 44i
Ms
Money Supply
04
B
W
M
AC
o.
ef
.N
02
27
-4
(E)
4-
Exports
(M)
:8
1-
31
04
(S)
(Yd)
20
Savings function
Disposable income
04
ed
.IS
BN
450
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
165
Macroeconomics
289. If the government expenditure increases by 125, The equilibrium income would be:
a. 4462
b. 4469
c. 4460
d. 4486
e. 4468.
(S)
(Yd)
= 25 + 0.25Yd
=YT+R
Transfer payments
(R)
= 40
Tax function
Private investment function
(T)
(I)
= 0.2Y
= 500 15i
(G)
(M)
= 400
= 10 + 0.1Y
Exports
(E)
= 225
04
B
W
M
AC
o.
ef
.N
= 0.25Y
Ma
Speculative demand for money
= 125 504i
Ms
.IS
BN
= 250
:8
1-
31
4-
02
27
-4
Mt
Transaction demand for money
Money supply
20
04
Savings function
Disposable income
04
Based on the following information answer the questions 290 and 292.
2200
e.
2275.
re
d.
2125
ht
c.
ig
2250
lr
b.
s.
Al
2100
Pr
es
a.
se
rv
ed
6.3
b.
2.8
c.
5.2
Ic
fa
iU
ni
a.
d.
5.0
e.
4.8.
Th
e
20
04
ve
rs
i
ty
291. The value of the Trade Balance at equilibrium in the economy is:
292. The value of the budget deficit at the equilibrium in the economy is:
166
a.
22
b.
26
c.
28
d.
21
e.
20.
Part-II
293.
25 + 0.25Yd
YT+R
(R)
40
0.2Y
500 15i
745
Import function
(M)
10 + 0.1Y
Exports
(E)
225
Mt
Transaction demand for money
0.25Y
Ma
Speculative demand for money
125 504i
Ms
Money supply
250
04
20
W
M
AC
o.
ef
.N
R
-4
31
2800
1-
d.
:8
2700
BN
c.
.IS
2735
ed
b.
se
rv
2750
4-
04
(T)
02
Tax function
27
Transfer payments
(S)
04
Savings function
ht
re
e. 2725.
Based on the following information answer the questions 294 to 297.
lr
s.
Al
Pr
es
Disposable income
ve
rs
i
ty
Transfer payments
Tax function
(S)
60 + 0.2Yd
(Y )
YT+R
(R)
50
0.1Y
400
ig
Savings function
(T)
ni
fa
iU
20 + 0.1Y
Exports
(E)
250
Mt
Transaction demand for money
0.2Y
Ma
Speculative demand for Money
120 40i
300
20
04
Th
e
Ic
Import function
Money Supply
Ms
167
Macroeconomics
2500
b.
2450
c.
2630
d.
2655
e.
2525.
d.
16
e.
20.
04
22
20
c.
04
18
b.
25
M
AC
a.
04
e.
220.
ef
.N
200
d.
-4
230
27
c.
02
226
4-
b.
31
289
1-
a.
o.
2875
.IS
d.
ed
2850
se
rv
c.
re
2900
b.
ht
2950
ig
a.
BN
:8
297. If the exogenous government expenditure is increases by 182, the value of the equilibrium
income in the economy will be:
Pr
es
s.
Al
lr
e. 2975.
Based on the following information answer the questions 298 to 301.
=
=
=
=
(R)
200
Import function
(M)
15 + 0.12Y
Exogenous Exports
(E)
800
500
400
Mt
Transaction demand for money
0.25Y
Ma
Speculative demand for Money
110 145i
fa
iU
ni
ve
rs
i
ty
Consumption function
(S)
Private investment function (I)
Disposable income
(Yd)
Tax function
(T)
20
04
Th
e
Ic
Transfer payments
168
Ms
Part-II
5220
b.
5375
c.
5420
d.
5470
e.
5275.
b.
158.60
c.
159.43
d.
159.60
e.
157.98.
M
AC
04
20
04
04
a.
e.
160.
ef
.N
178
d.
-4
145
27
c.
02
163
4-
b.
31
158
1-
a.
o.
300. The value budget deficit at the equilibrium in the economy is:
d.
21
ed
27
se
rv
c.
re
29
b.
ht
24
ig
a.
.IS
BN
:8
301. If the exogenous government expenditure increases by 225, The change in private investment
will be:
Pr
es
s.
Al
lr
e. 23.
Based on the following information answer the questions 302 and 303.
(S)
(T)
=
=
502 + 0.20Yd
0.25Y
Transfer payments
(R)
60
=
=
=
=
(E)
150
Ms
Money Supply
480
Mt
Transaction demand for money
0.15Y
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Savings function
Tax function
Exports
Ma
Speculative demand for Money
=
P
30i
169
Macroeconomics
04
20
04
04
M
AC
ef
.N
R
-4
27
BN
:8
1-
31
4-
02
15 + 0.8 Yd
450 12i
300 MUC
0.20Y
145 60i
300 MUC
225 MUC
0.25Y
5 + 0.2Y
.IS
C
I
G
Mt
Ma
Ms
E
T
M
ed
Consumption function
Investment function
Exogenous Government expenditure
Transaction demand for money
Speculative demand for money
Supply of Money
Exports
Tax function
Import function
o.
304. The following equations are given with respect to a hypothetical economy.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
fa
Ic
Y = M+
c.
Y=
M
+ hi
k
d.
Y=
M hi
k
e.
Y=
hi M
.
k
Th
e
20
04
hi
k
b.
170
M + hi
k
ni
Y=
iU
a.
Part-II
b.
Increase by 25 MUC
c.
Decrease by 50 MUC
d.
Increase by 50 MUC
e.
Insufficient data.
20
04
04
a.
500 MUC.
e.
225 MUC.
o.
d.
ef
.N
190 MUC.
c.
-4
375 MUC.
27
b.
02
250 MUC.
4-
a.
M
AC
04
i = 4% and Y = 580.
BN
e.
.IS
ed
d.
se
rv
i = 7% and Y = 640.
re
c.
i = 5% and Y = 600.
ht
b.
ig
i = 3% and Y = 560.
lr
a.
:8
1-
31
308. The LM function is Y = 500 + 20i. Which of the following combinations of interest and
income does not represent equilibrium in the money market?
s.
Al
309.
Pr
es
ve
rs
i
ty
ni
: 500 MUC
fa
iU
: 200 10i
Th
e
Ic
20
04
Tax rate
: 20%
If the expansionary fiscal policies increase the equilibrium rate of interest to 12% and IS
function to Y = 2,900 100i, what should be the money supply in the economy to avoid the
crowding out?
a.
500 MUC.
b.
550 MUC.
c.
600 MUC.
d.
675 MUC.
e.
750 MUC.
171
Macroeconomics
310. The IS function and LM function in an economy are estimated to be Y = 5,700 + 0.5Y - 100i
and Y = 5,200 + 800i respectively. The investment function in the economy is 1600 100i. If
the government spending increases by 100 MUC, which of the following is true about the
interest rate in the economy?
a.
b.
c.
d.
e.
YT
0.25Y
100 11i
500 MUC
Exports (E)
40 MUC
20
ef
.N
o.
M
AC
04
04
04
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Imports (M)
= 0.3Y
If the equilibrium output for the economy is to be increased by 100 MUC, investment should
be increased by
a. 60.0 MUC
b. 77.5 MUC
c. 70.0 MUC
d. 95.0 MUC
e. 90.5 MUC.
312. For an economy, the savings function is S = 300 + 0.2Y and the investment function is
I = 200 5i. If the equilibrium level of output is 2,250 MUC, interest rate in the economy is
a. 6%
b. 8%
c. 10%
d. 12%
e. 14%.
313. In an economy, demand for money is L = 0.4Y 10i and supply of money is 300 MUC. If
the government intends to decrease the equilibrium interest rate from the current level of 8%
to 6%, what will be the change in the equilibrium level of output?
a. 25 MUC Increase.
b. 50 MUC Decrease.
c. 75 MUC Decrease.
d. 50 MUC Increase.
e. No change in the equilibrium level of output.
Based on the following information answer questions 314 and 315.
LM function
172
Y = 500 + 200i
Investment function
(I)
200 10i
(Mt)
0.50Y
(Ma)
350 100i
Supply of money
(Ms)
500 MUC
(i)
10%
Part-II
314. If expansionary fiscal policies increase the equilibrium rate of interest to 12%, the crowding
out in the economy is:
a.
10 MUC
b.
15 MUC
c.
20 MUC
d.
25 MUC
e.
30 MUC.
d.
700 MUC.
e.
750 MUC.
04
650 MUC.
20
c.
04
600 MUC.
b.
100 MUC.
M
AC
a.
04
315. If the government would like to avoid the crowding out as in the above question, what should
be the new money supply in the economy?
ef
.N
o.
31
4-
02
27
-4
50 + .50Yd
YT+R
80 MUC
0. 40Y
1000 30i
800 MUC
20 + 0.20 Y
450 MUC
0.50Y
250 100i
500 MUC
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
Savings Function
(S)
Disposable income
( Yd)
Transfer Payments
(R)
Tax function
(T)
Investment function
(I)
Exogenous government expenditure
(G)
Import function
(M)
Export
(E)
Transaction demand for money
(Mt / P)
Speculative demand for money
(Ma / P)
Money supply
(Ms / P)
The equilibrium level of income in the economy is:
a. 1,875 MUC
b. 1,985 MUC
c. 2,062 MUC
d. 2,162 MUC
e. 2,281 MUC.
(All macro aggregates are in million units of currency and interest in terms of percent per annum)
20
04
Th
e
Ic
fa
173
Macroeconomics
= 120 + 0.6Y
= 150 80i
= 300
= 0.3Y
= 120 160i
a.
655
02
431
1:8
BN
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
C
I
Ms
Mt
Ma
b.
648
c.
662
d.
671
e.
640.
Th
e
20
04
s.
Al
lr
ig
ht
re
se
rv
27
60 + 0.80Y,
116 2i,
0.20Y 5i and
120.
.IS
=
=
=
=
ed
Suppose C
I
L
M
-4
ef
.N
o.
M
AC
04
20
04
04
318. If the government expenditure increases by 475 MUC, the new equilibrium rate of interest
will be
a. 7.83%
b. 8.01%
c. 8.83%
d. 9.13%
e. 9.65%.
319. In the hypothetical economy,
IS curve is
= 2,500 40i = Y
Transaction demand for money
= 0.25Y
Speculative demand for money
= 450 50i
Money supply
= 750
The value of equilibrium income is:
a. 2,462
b. 2,557
c. 2,325
d. 2,284
e. 2,175.
320. In a two sector economy,
174
a.
1,253.
b.
1,132.
Part-II
c.
1,245.
d.
1,268.
e.
1,250.
323.
C
= 120 + 0.6Y
= 150 80i
Ms = 300
20
04
B
W
27
-4
ef
.N
o.
M
AC
04
04
Mt = 0.3Y
Ma = 120 160i
75 + 0.80 Yd consumption
Yd
Y T disposable income
Md =
se
rv
ed
.IS
BN
:8
1-
31
4-
02
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
5450
b.
5400
c.
5475
d.
5650
e.
5625.
175
Macroeconomics
Intermediation ratio
Financial interrelations ratio
Net capital formation
= 0.72
= 1.21
= 98,667.3
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
.IS
se
rv
330.
ed
04
19x2
93,102.10
10,201.00
5,203.01
1,301.32
11,021.01
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
Particulars
19x1
NNP at market price
89,405.30
Indirect taxes
9,782.00
Subsidies
4,313.02
Direct taxes
1,202.11
Secondary issues:
9,031.12
Issue of financial institutions
Primary issues:
Issues of non-financial sector
Domestic sector
4,051.11
GDR
6,021.01
ADR
452.04
Net capital formation
16,420.01
(Net physical asset)
The percentage in the Finance Ratio is:
a. 5.2%
b. 5.4%
c. 6.1%
d. 6%
e. 4.8%.
176
5,035.92
5,016.00
562.04
17,421.03
Part-II
331.
20
04
04
Rs. in Crores
620
60
950
875
222
421
40
72
42
60
120
04
Particulars
Share capital
Reserve funds
Credit to state government
Credit to government
Deposits of banks
Credit to banks
Foreign exchange asset
Other non-monetary liabilities
Other assets
Government deposits
Government money
31
1-
4-
02
27
-4
ef
.N
o.
M
AC
In the economy currency-deposits ratio is 0.3 and reserve ratio 0.10 is imposed by Central
Bank. The money supply is:
a. 5,321
b. 5,356
c. 5,317
d. 5,385
e. 5,346.
332. The following information in furnished:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
Particulars
Rs. in Crores
Net worth
740
Credit to government
1,420
Credit to bank
432
Credit to commercial sector
594
Foreign exchange assets
202
Other assets
114
Government deposits
42
Deposit of commercial banks
220
Money supply in economy
= 8,542
Reserve ratio imposed by Central Bank
= 7%
Government money
= 201
a. 3.9062
b. 3.4075
c. 3.6575
d. 3.9842
e. 3.9148.
333. From the below indicators find out New Issue Ratio for the year 2001 when secondary issue
are 14,000 and 16,000 respectively for the years.
Particulars
2001 2002
Finance ratio
0.32 0.30
Intermediation ratio
0.82 0.79
Financial interrelation ratio 1.24 1.22
a. 0.621
b. 0.653
c. 0.681
d. 0.635
e. 0.679.
177
Macroeconomics
334.
Particulars
2001
2002
Finance ratio
0.31
0.29
0.78
0.80
Intermediation ratio
1.24
1.18
d.
382
e.
431.
04
445
20
c.
04
341
b.
275
M
AC
a.
04
Find out the change in indirect tax when NNP at Market price are Rs.75,000 and Rs.85,000
respectively and there are no subsidies. The primary issue in 1981 and 1982 are Rs.10,000
and Rs.11,000, respectively.
1.22
1.32
Intermediation ratio
0.82
0.94
:8
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
1-
31
= 12,000
BN
ef
.N
28.5%
25.69%
-4
Finance ratio
27
2002
02
2001
4-
Particulars
o.
ve
rs
i
ty
0.82
= 12,000
= 14,000
20
04
Th
e
Ic
fa
iU
ni
Particulars
Finance ratio
Financial interrelation ratio
New issue ratio
Intermediation ratio
2002
28.5%
1.32
0.68
178
a.
20,567
b.
20,547
c.
20,588
d.
20,675
e.
20,450.
Part-II
27,184
b.
27,176
c.
27,458
d.
27,750
e.
27,635.
b.
0.98
c.
0.87
d.
0.85
e.
0.89.
M
AC
04
20
04
04
a.
339.
31
4-
02
27
-4
ef
.N
o.
Rs. in Crores
500
150
140
80
60
162
1-
Particulars
Consumption (C)
Investment (I)
Government expenditure (G)
Exports (E)
Imports (M)
Money Supply (Ms)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
20
04
341.
0.35
b.
0.4
c.
0.2
d.
0.6
e.
0.1.
179
Macroeconomics
Rs. in Crores
1,000
400
300
300
200
d.
1,700
e.
1,400.
04
1,800
20
c.
04
1,750
b.
1,650
M
AC
a.
04
R
-4
27
02
431
1:8
.IS
BN
Rs. in Crores
800
40
20
140
400
20
1,400
600
ed
Particulars
Net worth
Other assets
Other non-monetary liabilities
Government deposits
Credit to commercial sector
Foreign exchange assets
Credit to government
Credit to banks
ef
.N
o.
343.
96.75.
95.25
e.
ht
d.
ig
90.10
lr
c.
s.
Al
94.50
Pr
es
b.
ty
99.76
ve
rs
i
a.
re
se
rv
The currency deposit ratio in the economy is 0.3 and reserve ratio is 5%, that should be the
amount of government money the economy to have a money supply of 5,942 is:
ni
Based on the following information answer the questions 344 and 345.
20
04
Th
e
Ic
fa
iU
Particulars
2001
NNP at market prices
89,405.30
Indirect taxes
9,782.00
Subsidies
4,313.02
Direct taxes
1,202.11
Secondary issues
9,031.12
Issues of financial institutions
Primary issues of non-financial sector
Domestic sector
4,051.11
GDR
6,021.01
ADR
452.04
Net capital formation
16,420.01
(Net physical assets)
180
2002
93,102.01
10,201.00
5,203.01
1,301.32
11,021.01
5,035.92
5,016.00
562.04
17,421.03
Part-II
4.8
b.
3.6
c.
4.2
d.
5.6
e.
4.6.
b.
21%
c.
22%
d.
19%
e.
18%.
M
AC
04
20
04
04
a.
Based on the following information answer the questions 346 and 347.
14,000.
1-
e.
:8
22,000
BN
d.
.IS
18,000
ed
c.
se
rv
16,000
re
12,000
b.
31
27
-4
02
=
=
=
=
4-
ef
.N
o.
In an economy,
c.
0.3540.
d.
0.3340.
e.
0.3258.
Pr
es
0.2365.
ty
0.2285.
b.
fa
iU
ni
ve
rs
i
a.
s.
Al
lr
ig
ht
347. The currency deposit ratio changes to 0.2. If the Central Bank wants to maintain the money
supply at the present level (14,000) by changing the reserve ratio, what will be the new
reserve ratio?
20
04
Th
e
Ic
:
:
:
:
0.25
1.60
0.85
0.88
25,000
b.
24,000
c.
22,300
d.
25,750
e.
23,250.
181
Macroeconomics
16,000
b.
12,500
c.
19,000
d.
11,000
e.
15,000.
12,750
d.
14,200
e.
15,500.
04
c.
20
13,450
04
b.
11,500
a.
04
11,220
e.
12,250.
o.
d.
ef
.N
11,280
c.
-4
12,750
27
b.
02
12,460
4-
a.
M
AC
1-
31
Based on the following information answer the questions 352 and 353.
:8
Item
8,985
.IS
BN
ed
se
rv
Domestic sector
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
ht
20
04
ig
s.
Al
National income
lr
re
182
9,760
835
13,680
98,865
Part-II
If the Central Bank purchases government securities worth Rs.8,970, The increase in money
supply will be:
a. 21,485
b. 22,470
c. 22,425
d. 21,875
e. 23,105.
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
Item
Million Units of Currency
Foreign exchange assets
15
Credit to government
1,780
Credit to banks
410
Government deposits
21
Other non-monetary liabilities
11
Net worth
510
Other assets
78
Credit to commercial sector
112
The currency deposit ratio is 0.3
Reserve ratio is 4%
The government money is considered to be negligible.
355. The money supply in the economy is:
a. 7,125
b. 7,085
c. 7,250
d. 7,158
e. 7,060.
356. If the Central Bank wants to reduce the money supply 18%, The value new reserve ratio is:
a. 12.80%
b. 12.20%
c. 11.25%
d. 11.46%
e. 13.25%.
04
Based on the following information answer the questions 355 and 356.
ve
rs
i
Based on the following information answer the questions 357 and 358.
iU
ni
The following balances have been taken from the Balance Sheet of the Central Bank of an economy:
20
04
Th
e
Ic
fa
183
Macroeconomics
10.6%
b.
11.2%
c.
10.9%
d.
11.5%
e.
9.8%.
04
358. There is an increase in Central Bank credit to government by 550 million units of currency.
But the Central Bank desires to contain the money supply at the original level and for this
purpose it alters the reserve ratio. The new reserve ratio is:
24
b.
26
c.
21
d.
23
e.
25.
M
AC
04
20
04
a.
-4
: 1.60
27
02
: 0.65
4-
Intermediation ratio
31
: 0.30
1-
Finance ratio
ef
.N
o.
359. The following indicators of financial development for an economy are available for the year
2000.
15,400.75.
.IS
e.
ed
15,350.75
se
rv
d.
re
15,468.75
c.
ht
15,725.75
ig
b.
lr
15,565.75
s.
Al
a.
BN
:8
The value of net capital formation for the year 2000 if the new issues for the year is 15,000
(Million units of currency) is:
b.
1,600
c.
1,450
d.
1,750
ni
iU
fa
Ic
Th
e
e.
ty
1,500
ve
rs
i
a.
Pr
es
360. On a given day the stock of high-powered money is 1,000. The currency-deposit ratio is 0.8
while the reserve ratio is 0.2. The money supply is:
1,800.
20
04
361. If the currency deposit ratio is 1.2 and the reserve ratio 0.10, the value of the money
multiplier is:
184
a.
1.63
b.
1.69
c.
1.72
d.
1.75
e.
1.65.
Part-II
362. The following balances have been taken from the Balance Sheet of the Central Bank of an
economy.
04
04
20
Credit to government
Credit to bank
Government deposits
Other non-monetary liabilities
Net worth
Credit to commercial sector
Foreign exchange assets
Other assets
04
Million units
of currency
500
200
10
5
250
50
7
4-
02
27
-4
ef
.N
o.
M
AC
You may assume government money to be negligible and hence can be ignored.
The Central Bank imposes a reserve ratio of 5%. If the money supply in the economy is 1957
million units of currency, the currency-deposit ratio in the economy is:
a. 30%
b. 32%
c. 36%
d. 28%
e. 29%.
re
se
rv
ed
.IS
BN
ty
Pr
es
s.
Al
lr
ig
ht
Particulars
Credit to Government
Credit to banks
Government deposits
Deposits of banks
Credit to commercial sector
Foreign exchange assets
Net worth
Other assets
Other non-monetary liabilities
:8
1-
31
363. The following balances have been taken from the balance sheet of the Central Bank of an
economy:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
.15
e.
.16.
185
Macroeconomics
Based on the following information answer the questions 365 and 366.
Particulars
Credit to government
950
Credit to Bank
350
Government deposits
20
500
125
25
Other assets
65
04
04
Net worth
04
20
M
AC
The Currency/Deposit ratio has been ascertained as 0.20. The amount of government money
is 10 million units of currency. Total money supply in the economy is 4,000 million units of
currency.
ef
.N
o.
b.
16%
c.
12%
d.
14%
e.
10%.
1-
31
4-
02
27
-4
a.
e.
390.
se
rv
320
re
d.
378
ht
c.
ig
360
lr
b.
s.
Al
345
Pr
es
a.
ed
.IS
BN
:8
366. If there is an increase of 100 million Central Bank credit to Government accompanied by
Government purchase of foreign exchange worth 10 million from the Central Bank, the
increase in money supply in the economy is:
iU
ni
ve
rs
i
ty
367. At a point of time, in an economy, high-powered money stock is 800 and narrow money
stock (M1) is 4,000. Currency deposit ratio is 0.2. If the Central Bank purchases government
securities worth 200 but does not want the money supply to change, the reserve ratio should
be increased by:
0.2
0.08
20
04
Th
e
Ic
b.
fa
a.
c.
0.3
d.
0.1
e.
0.5.
368. Assume that the ability of the commercial banking system to create demand deposits depends
only upon reserve requirement stipulated by the Central Bank. The following details are
available as on a date:
Million units of currency
186
2,400
9,600
Reserve requirement
25%
Part-II
If the volume of reserves is decreased by 500 and the reserve requirement is lowered to 20%,
the demand deposits is:
a.
100
b.
120
c.
160
d.
125
e.
130.
369.
04
7,862.50
12,500.00
a. Domestic sectors
8,525.00
13,850.00
725.00
1,775.00
04
Secondary Issues:
Issues of financial institutions
2002
04
2001
20
Particulars
ef
.N
o.
M
AC
12,333.33
19,230.76
National income
95,404.16 1,21,456.75
27
-4
4-
02
b.
0.88
c.
0.85
d.
0.95
e.
0.98.
se
rv
ed
.IS
BN
:8
1-
31
a.
re
370. The following are the indicators of financial development for an economy:
2002
0.28
0.25
1.75
1.20
Intermediation ratio
0.75
0.70
ig
ht
2001
ve
rs
i
ty
Pr
es
s.
Al
lr
Finance ratio
iU
ni
(The above ratios are based on total figures pertaining to a year and not on the incremental
values.)
New issues
10,000
2002
12,000
20
04
Th
e
Ic
fa
15,000
b.
18,000
c.
14,000
d.
11,000
e.
10,000.
187
Macroeconomics
Based on the following information answer the questions 371 and 372
Particulars
400
300
800
Net worth
400
250
Other assets
500
04
350
20
04
300
Government deposits
M
AC
420
04
1,080
Credit to banks
Credit to government
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
Government money is negligible and hence can be ignored. The currency-deposit ratio is
ascertained to be 0.2. The Central Bank has imposed a reserve ratio of 5%.
371. The value of money supply in the economy is:
a. 7,250
b. 7,200
c. 7,800
d. 7,750
e. 7,450.
372. The Government approached the Central Bank for an additional credit of 500 million units of
currency. If the additional credit is provided, The increase in the money supply in the
economy would be:
a. 2,500
b. 2,650
c. 2,750
d. 2,300
e. 2,400.
373. The following information is available for an economy.
Income elasticity of demand for real balances
3.0
Acceptable rate of inflation
6%
Money multiplier
3
20
04
Th
e
Ic
fa
If the real GDP is desired to grow at 4%, the rate at which reserve money should grow would be:
a. 7.5
b. 4
c. 9
d. 6
e. 5.8.
Based on the following information answer the questions 374 and 375
The following are the indicators of financial development for an economy for the year 2000.
2000
Finance ratio
0.27
1.50
Intermediation ratio
New Issues (Million units of currency)
188
0.75
90,000
Part-II
65,400
b.
67,300
c.
67,500
d.
66,500
e.
68,750.
1,01,280
e.
1,06,570.
04
d.
20
1,05,750
04
c.
1,03,180
b.
M
AC
1,05,000
o.
a.
04
375. The value of net capital formation for the year is:
ef
.N
Based on the following information answer the questions 376 and 375.
-4
The following are the indicators of financial development for an economy for the year 2001.
Intermediation ratio
0.76
02
1.60
4-
31
0.33
BN
:8
1-
Finance ratio
27
2001
1,98,240
e.
10,57,280.
re
10,58,980
d.
ht
10,57,290
ig
c.
lr
10,56,280
s.
Al
b.
Pr
es
10,56,286
ty
a.
se
rv
ed
.IS
0.98
b.
0.96
20
04
iU
fa
Ic
Th
e
c.
ni
a.
ve
rs
i
377. The new issue ratio for the year 2001 is:
0.91
d.
0.89
e.
0.85.
378. In an economy the income elasticity of demand for real balances is 2.0 and the acceptable
rate of inflation is 5%. The real GDP is expected to grow at 5%, and money multiplier is 3.
The rate at which the reserve money should grow is:
a.
4.8%
b.
5.0%
c.
5.2%
d.
4.6%
e.
6.0%.
189
Macroeconomics
379.
Particulars
Credit to government
3,500
Government deposits
100
1,500
250
1,000
Net worth
2,000
100
50
04
Other assets
04
40
20
04
Credit to banks
M
AC
ef
.N
o.
-4
The Central Bank wants to keep the total money supply in the economy at 12,000 million
units of currency by fixing the reserve ratio.
10.67%.
02
e.
4-
11.56%
31
d.
1-
12.80%
:8
c.
BN
11.26%
.IS
b.
ed
10.50%
se
rv
a.
27
Based on the following information answer the questions 380 and 381.
lr
s.
Al
Particulars
ig
ht
re
The following balances have been taken from the balance sheet of the Central Bank of an
economy.
Million units of currency
400
ty
Credit banks
1,000
Pr
es
Credit to government
20
10
500
100
iU
Net worth
fa
ni
ve
rs
i
Government deposits
20
04
Th
e
Ic
70
14
= 5%
190
a.
5058.5
b.
5059.2
c.
5120.2
d.
5109.2
e.
5029.5.
Part-II
381. If the Central Bank wants to reduce the money supply by 20%, the new reserve ratio would be:
a.
12.50%
b.
11.75%
c.
12.80%
d.
11.25%
e.
12.20%.
382.
04
20
04
04
Year I
0.27
0.75
1.60
M
AC
Particulars
Finance ratio
Intermediation ratio
Financial interrelations ratio
Other information:
New issues
20,000
d.
14,450
ef
.N
16,750
c.
-4
14,550
27
b.
02
15,000
4-
a.
o.
:8
1-
31
e. 15,600.
Based on the following information answer the questions 383 and 384.
BN
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
Particulars
19x1
Finance ratio
0.26
Intermediation ratio
0.78
Financial interrelations ratio
1.50
Other information:
New issues
24,000
The value of national income is:
a. 1,64,408.69
b. 1,65,480.75
c. 1,64,307.69
d. 1,63,235.76
e. 1,65,703.90.
384. Calculate the net capital formation from the above given financial indicators.
a. 21,435
b. 22,325
c. 20,750
d. 21,875
e. 20,925.
Based on the following information answer the questions 385 and 386.
The following information pertaining to an economy is available:
Commodity market equation
5000 30i
0.3Y 300i
1.2
191
Macroeconomics
5%
3.5%
In the economy the commercial banks charge nominal rate of interest which is 2% higher than
the equilibrium rate of interest.
327.6
c.
377.6
d.
358.5
e.
325.8.
04
b.
20
337.8
04
a.
04
10.88%.
e.
M
AC
12.75%
o.
d.
ef
.N
10.25%
c.
-4
11.50%
11.25%
27
a.
b.
4-
02
Based on the following information answer the questions 387 and 388.
re
se
rv
ed
.IS
BN
:8
1-
30,000
1,000
4,000
405
700
7,500
35,000
4,000
s.
Al
lr
ig
ht
Credit to banks
Government deposits
Credit to Government
Other non-monetary liabilities
Foreign exchange assets
Credit to commercial sector
Net worth
Other assets
31
The following are the balances taken from the balance sheet of the Central Bank.
Pr
es
ve
rs
i
ty
b.
26,570
iU
fa
d.
27,720
e.
26,980.
Th
e
20
04
28,480
Ic
c.
ni
a.
388. The Central Bank provides an additional credit of 250 million units of currency to the
government through adhoc purchase of treasury bills, out of which the government
immediately used 50 millions for purchase of foreign exchange from the Central Bank.
The increase in money supply in the economy would be:
192
a.
580
b.
620
c.
560
d.
610
e.
635.
Part-II
389. The following monetary data on financial development of an economy has been obtained for
the year 1998.
New issues ratio
0.74
2,00,445
Secondary issues
1,15,605
b.
0.82
c.
0.85
d.
0.78
e.
0.91.
04
20
04
04
a.
M
AC
390. The following are the data pertaining to the various components of money supply.
o.
Rs. in Crores
Small coins
991
4-
4,986
31
Cash in hand
-4
1,942
27
Rupee coins
1,44,818
02
Notes in circulation
ef
.N
5,041
25,969
lr
ig
ht
re
se
rv
5,627
4,83,560
ed
BN
99,106
.IS
:8
1-
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
20
04
Th
e
Ic
391. The following balances have been taken from the balance sheet of Central Bank of an
economy.
Credit to government
Credit to bank
Government deposits
Other non-monetary liabilities
Net worth
Credit to commercial sector
Foreign exchange assets
Others assets
The currency/deposit ratio has been ascertained as 0.30 and the Central Bank imposes a
reserve ratio of 5%. The amount of government money is negligible.
193
Macroeconomics
M
AC
04
20
04
04
Finance ratio
0.70
Financial interrelation ratio
1.40
New issues ratio
0.80
Intermediation ratio
0.75
The net capital formation is 5,00,000 million units of currency.
8,15,000
e.
8,35,000.
ef
.N
d.
7,00,000
-4
c.
27
7,75,000
02
b.
4-
7,25,000
31
a.
o.
e.
11,50,000.
:8
15,00,000
BN
d.
.IS
12,50,000
ed
c.
se
rv
12,00,000
re
10,00,000
b.
a.
1-
ig
ht
Based on the following information answer the questions 394 and 395.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
Particulars
Government Deposits
Foreign Exchange Assets
Net worth
Other assets
Other non-monetary liabilities
Credit to government
Credit to banks
Credit to commercial Sector
Deposits of Banks
The currency deposit ratio has been ascertained as 34%. The amount of Government money
is 5 million units of currency. Total money supply in the economy is 6,000 million units of
currency.
394. The Reserve Ratio imposed by the Central Bank would be:
194
a.
11.76
b.
12.28
c.
10.87
d.
10.67
e.
11.25.
Part-II
395. There is an increase in Central Bank credit to Government by 550 million units of currency.
But the Central Bank desires to contain the money supply at the original level and for this
purpose it alters the reserve ratio. The new reserve ratio is:
a.
21.5
b.
22.9
c.
20.5
d.
23.8
e.
21.7.
M
AC
04
0.25
1.60
0.85
0.88
ef
.N
-4
15,000.
27
e.
02
16,000
4-
d.
31
14,000
1-
c.
:8
12,000
e.
12,500.
se
rv
11,500
re
d.
12,750
ht
c.
ig
13,250
lr
b.
s.
Al
11,250
Pr
es
a.
ed
BN
b.
.IS
13,500
o.
Finance ratio
Financial interrelation ratio
New issues ratio
Intermediation ratio
20
04
Following are the indicators of financial development of an economy for the year 2002-03.
04
Based on the following information answer the questions 396 and 397.
ve
rs
i
ty
Based on the following information answer the questions 398 and 399.
9,600
iU
ni
Secondary Issues:
Issues of Financial Institutions
2001
20
04
Th
e
Ic
fa
Primary Issues:
Issues of Non-Financial Sectors
a. Domestic Sectors
11,600
1,200
1,600
National income
89,600
0.70
b.
0.65
c.
0.25
d.
0.42
e.
0.28.
195
Macroeconomics
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Secondary Issues:
12,000
Issues of Financial Institutions
Primary Issues:
Issues of Non-Financial Sectors
a. Domestic Sectors
13,400
b. Rest of the World
1,600
Net Capital Formation
20,000
(Net Physical Assets)
National income
1,00,000
The value of Finance Interrelations Ratio is:
a. 1.38
b. 1.35
c. 1.42
d. 1.48
e. 1.29.
401. The following balances have been taken from the balance sheet of the Central Bank of an
economy.
re
s
1,000
400
20
10
500
100
70
14
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
Credit to government
Credit to banks
Government deposits
Other non-monetary liabilities
Net worth
Credit to commercial sector
Other assets
Foreign exchange assets
se
rv
ed
Particulars
Ic
fa
iU
The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a
reserve ratio of 5%.
20
04
Th
e
Based on the following information answer the questions 402 and 403.
Particulars
Secondary issues
Primary issues
Net capital formation
National income
196
2001-2002
68,500
47,445
1,16,450
6,50,750
Part-II
0.178
b.
0.125
c.
0.195
d.
0.182
e.
0.165.
d.
0.407
e.
0.412.
04
0.432
20
c.
04
0.425
b.
404. From the following financial data, calculate financial interrelations Ratio.
e.
0.915.
o.
ef
.N
R
-4
27
02
31
0.909
1-
d.
:8
0.992
BN
0.986
c.
.IS
b.
ed
0.998
se
rv
a.
2002-03
69,000
50,000
1,20,000
8,00,000
4-
Particulars
Secondary Issues
Primary Issues
Net Capital formation
National Income
0.417
M
AC
a.
04
re
Based on the following information answer the questions 405 and 406.
ht
Following are the extracts from the balance sheet of Central Bank.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
Particulars
Credit to Government
Credit to Banks
Government Deposits
Deposits of Banks
Credit to commercial sector
Foreign exchange assets
Other assets
Other non-monetary liabilities
Net worth
405. The value of the total money supply in the economy is:
a.
4,065
b.
4,078
c.
4,125
d.
4,150
e.
4,275.
197
Macroeconomics
406. An additional inflow of 50 million unit currency of foreign exchange assets is expected
during the coming year. However, the Central Bank wants to maintain the money supply at
the original level by altering the reserve ratio. The new reserve ratio is:
a. 10.98%
b. 11.66%
c. 11.75%
d. 12.85%
e. 12.76%.
Based on the following information answer the questions 407 and 408.
04
20
04
B
W
M
AC
o.
ef
.N
R
-4
27
02
Particulars
Credit to banks
Credit to government
Credit to commercial sector
Net foreign exchange assets
Net worth
Government Deposits
Deposits of Banks
Other assets
04
Following are the extracts from the balance sheet of the Central Bank.
1-
31
4-
Government money in the economy is 100 MUC. Reserve ratio imposed by the Central Bank
is 10% and currency deposit ratio is 0.30.
d.
39,000
e.
41,000.
BN
.IS
ed
36,000
se
rv
c.
re
38,250
b.
ht
37,500
ig
a.
:8
Pr
es
s.
Al
lr
408. If there is a foreign exchange inflow of 450 million, then the required reserve ratio to sterilize
the effect of foreign exchange inflow is:
12.2
b.
11.5
c.
13.5
d.
10.7
e.
12.8.
Ic
fa
iU
ni
ve
rs
i
ty
a.
20
04
Th
e
409. The following are the excepts from the balance sheet of a Central Bank.
198
Particulars
Notes in circulation
Other deposits
Other non-monetary liabilities
Statutory and contingency reserves
Credit to Central Government
Shares & loans to financial institutions
Central bank claims on Commercial banks
Net foreign exchange assets
Other assets
MUC
100
50
100
420
1,120
550
350
150
50
Part-II
If the government money is 25 MUC, the high powered money in the economy is:
a.
1,650 MUC
b.
1,750 MUC
c.
1,725 MUC
d.
1,825 MUC
e.
1,650 MUC.
410. In an economy the demand for money is estimated to be L = 0.25Y 10i. If the interest rate
is 6% and money supply is 200 MUC, the equilibrium level of output is:
1,060 MUC
b.
1,040 MUC
c.
1,080 MUC
d.
1,100 MUC
e.
1,120 MUC.
M
AC
04
20
04
04
a.
225
Increase in inventories
50
ef
.N
-4
750
31
4-
02
MUC
27
Particulars
o.
160
1-
BN
:8
Exports
.IS
Imports
30
239
se
rv
ed
Money supply
40
e.
7.
d.
ht
ig
c.
lr
s.
Al
b.
Pr
es
ty
a.
re
iU
ni
ve
rs
i
412. On the basis of following data calculate finance ratio for the year 2003.
Particulars
Ic
fa
76,500
Depreciation
2,500
Indirect taxes
1,225
Th
e
20
04
MUC
Subsidies
725
200
28.6%
b.
31.6%
c.
34.6%
d.
26.6%
e.
36.6%.
15,500
1.5
199
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
413. The central banks monetary liabilities as on 31 December 2003 stood at 10,500 MUC and
Government money at 1,500 MUC. The currency deposit ratio is estimated to be 0.25. If the
Central bank intends to maintain the money supply at 48,000 MUC, what should be the
reserve ratio specified by the Central bank?
a. 6.25%.
b. 8.10%.
c. 9.10%.
d. 5.00%.
e. 4.25%.
414. In an economy demand for money is
Md = 500 + 0.2Y 20i
If money supply in the economy is 2,340 MUC and equilibrium rate of interest is 8 percent,
national income is
a. 340 MUC
b. 500 MUC
c. 1,000 MUC
d. 2,000 MUC
e. 10,000 MUC.
415. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and
total demand for money is Rs.5,000, then the amount required by banks to meet the reserve
requirement is equal to
a. Rs.250
b. Rs.2,250
c. Rs.2,500
d. Rs.5,000
e. None of the above.
416. As on December 20, 2003 monetary liabilities of the central bank are 1,200 MUC and
government money is 50 MUC. The currency deposit ratio is 0.2, while reserve ratio
specified by the central bank is 5%. During the coming year, an additional flow of 50 MUC
of foreign exchange assets is expected. If the central bank wants to maintain the money
supply at the original level by resorting to open market operations, what would be the worth
of government securities to be sold in the market?
a. Rs.50 MUC.
b. Rs.250 MUC.
c. Rs.175 MUC.
d. Rs.225 MUC.
e. Rs.210 MUC.
417. The following balances are taken from the balance sheet of the Central Bank:
Loans given to the Government
Reserves maintained by the banks
Net worth
Loans to the commercial banks
Government deposits
Other assets
Other deposits with the central bank
Net foreign exchange assets
200
MUC
1,200
300
80
800
200
60
10
1,500
Part-II
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
re
Finance ratio
Financial inter-relation ratio
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
If the national income for the year 2002-03 is 19,200MUC, the total issues will be
a. 7,800 MUC
b. 8,200 MUC
c. 8,700 MUC
d. 9,000 MUC
e. 9,600 MUC.
421. In an economy, the high-powered money and money supply are 4,300 MUC and 17,200
MUC respectively. If the reserve ratio is 10%, currency deposit ratio for the economy is
a. 0.17
b. 0.20
c. 0.24
d. 0.27
e. 0.29.
422. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and
total demand for money is Rs.5,000, then the amount required by banks to meet the reserve
requirement is equal to
a. Rs.250
b. Rs.2,250
c. Rs.2,500
d. Rs.5,000
201
Macroeconomics
e.
423.
Reserves with the Central Bank
Volume of demand deposits
Reserve requirements
Rs.8,000
Rs.32, 000
25%
d.
0.8.
e.
0.1.
04
0.2.
20
c.
04
0.4.
b.
0.5.
M
AC
a.
04
If the volume of reserves is decreased by Rs.1200 and volume of demand deposits increased
by Rs.2,000, what will be the new reserve ratio?
Finance Ratio:
Intermediation Ratio:
Financial Interrelations Ratio:
ef
.N
o.
424. The following indicators of financial development for an economy are available for the year
19x0.
02
27
-4
0.35
0.68
1.75
e.
17,320.
:8
15,750
BN
d.
.IS
16,750
ed
c.
se
rv
17,280
re
b.
15,450
ht
a.
1-
31
4-
Calculate Net Capital Formation for the year 19x0, if the New Issues for the year is 18,000
(Million units of currency).
s.
Al
lr
ig
425. The following are the figures from the balance sheet of Central Bank
Pr
es
Particulars
ve
rs
i
ty
Credit to government
ni
Credit to banks
fa
iU
Government deposits
20
04
Th
e
Ic
Million units
of currency
2,500
500
25
18
Net worth
522
160
Other assets
75
15
The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a
reserve ratio of 5%. Calculate the money supply in the economy.
202
a.
12,660
b.
12,458
c.
12,980
d.
12,725
Part-II
e.
12,888.
426.
Particulars
Rs. in Crore
Share capital
740
Reserve funds
75
1,010
Credit to government
890
Deposits of Banks
235
Credit to banks
460
130
20
Government money
04
70
Government deposits
44
M
AC
76
Other assets
ef
.N
04
55
o.
04
5,425
e.
5,550.
27
d.
02
5,320
4-
c.
31
5,645
1-
b.
:8
5,291
BN
a.
-4
In the economy currency deposit ratio is 0.3 and reserve ratio 0.10 is imposed by Central
Bank.
ht
re
se
rv
= 5000
= 18,000
= 25%
ig
ed
.IS
427.
0.16.
c.
0.12.
d.
0.22.
e.
0.23.
Pr
es
b.
ty
0.18.
Ic
fa
iU
ni
ve
rs
i
a.
s.
Al
lr
If the volume of reserves is decreased by 750 and volume of demand deposits increased by
1,200 what will be the new reserve ratio?
20
04
Th
e
2,250
630
478
535
312
a.
3,415
b.
3,225
c.
3,260
d.
3,650
e.
3,420.
203
Macroeconomics
429.
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Rs. in crore
Net worth
820
Other assets
48
Other non-monetary liabilities
22
Government deposits
165
Credit to commercial sector
435
Foreign exchange assets
25
Credit to Government
1,525
Credit to banks
675
The currency deposit ratio in the economy is 0.4 and reserve ratio is 6%, then how much
should be the Government money in the economy to have a money supply of 6,325?
a. 357.8.
b. 368.5.
c. 354.2.
d. 384.6.
e. 377.2.
430. In an economy, the currency with the public is Rs.6,500 crore and banks reserve are
Rs.2,200 crore. The currency deposit ratio is 0.5 and the Central Bank imposes a reserve ratio
of 0.12. Calculate the money supply in the economy.
a. 20,350
b. 20,570
c. 20,455
d. 20,635
e. 20,215.
431.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
20
04
Th
e
432. Assume that the ability of the commercial banking system to create demand deposits depends
only upon reserve requirement stipulated by the Central Bank.
Reserve with the Central Bank
Volume of demand deposits
Reserve requirements
= 3,200
= 11,500
= 30%
If the volumes of reserves are decreased by 700 and reserve requirement is lowered to 25%,
find out the estimated demand deposit.
a. 10,000
b. 11,200
c. 12,150
d. 12,300
e. 12,600.
204
Part-II
433.
Particulars
1985
Finance ratio
0.26
Intermediation ratio
0.78
1.50
d.
0.935
e.
0.843.
04
0.922
20
c.
04
0.826
b.
0.985
M
AC
a.
24,000
04
434. The following are the data pertaining to the various components of money supply.
ef
.N
o.
Rs. in crores
Cash in hand
4,986
27
BN
:8
02
991
4-
1,942
Small coins
31
Rupee coins
-4
1,44,818
1-
Notes in circulation
99,106
.IS
4,83,560
se
rv
5,627
ed
re
s.
Al
lr
ig
ht
5,041
25,969
b.
7,41,030
7,41,228
d.
7,41,145
fa
iU
ni
c.
Ic
7,41,160.
Th
e
e.
ty
7,41,540
ve
rs
i
a.
Pr
es
20
04
Based on the following information answer the questions 435 and 436.
Following is the information relating to balance of payments of an economy for the year
2000-2001.
External assistance to the country
External assistance by the country
Transfers (debit)
Transfers (credit)
Merchandize exports
Merchandize imports
(US$ million)
36
82
170
248
34,954
36,984
205
Macroeconomics
Export of services
31,944
Import of services
24,928
858
2,108
576
84
70
04
04
200
20
2,018
e.
2,125.
d.
2,257
M
AC
c.
o.
2,125
ef
.N
b.
2,030
-4
a.
04
5,645.
02
e.
4-
5,906
31
d.
1-
5,725
:8
c.
BN
5,546
.IS
b.
ed
5,865
se
rv
a.
27
ht
Particulars
re
437.
Agricultural Exports
b.
Aircraft Exports
c.
Automobile Imports
d.
100
e.
275
f.
450
1,050
900
h.
100
i.
850
Ic
fa
122
Th
e
20
04
1,000
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
a.
g.
206
Rs. in Crores
a.
+350
b.
345
c.
+347
d.
341
e.
+352.
Part-II
04
20
04
B
W
M
AC
o.
ef
.N
-4
27
02
Merchandize Imports
Merchandize Exports
Travel (net)
Transportation (net)
Earnings on Loans and Investments Abroad
Transfers (debit)
Transfers (credit)
External Assistance to India (net)
External Assistance by India
Direct Investments abroad (net)
Foreign Direct Investments in the country
Portfolio Investment in India (net)
Short-term Loans and Investments to India
Commercial Borrowings (long-term) by India
Commercial Borrowings (long-term) to India (net)
Deposits made by NRIs (net)
Net assets of Commercial banks
Net liabilities of Commercial banks
Miscellaneous Banking Capital (net)
Rupee Debt service
Other Capital (net)
ed
Pr
es
s.
Al
lr
ig
ht
re
se
rv
.IS
BN
:8
1-
31
4-
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
(US $ million)
55,383
38,285
11,865
15,721
1,931
34
12,290
901
10
74
2,167
3,024
377
20
+313
2,140
790
26
177
711
1,508
04
438. The following information is extracted from Indias balance of payments statement, 2002-2003.
You are required to prepare the capital account.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
439. The capital inflows and outflows in an economy during the year 2002-03 are 6,300 MUC and
4,500 MUC respectively. Suppose there is no change in the official foreign reserve assets
held by the central bank, what could be the current account balance for the economy?
a. 1,500 MUC (Deficit).
b. 1,800 MUC (Surplus).
c. 1,800 MUC (Deficit).
d. 1,500 MUC (Surplus).
e. Zero.
Based on the following information answer the questions 440 and 443.
Indias overall Balance of Payments for the year 2002 03
Items
Merchandise
Services
Transfers
Income
Foreign Direct Investment
(US $ million)
Credit
Debit
53000
65474
24986
18780
15225
367
2826
7708
4790
1179
207
Macroeconomics
04
04
20
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
Portfolio Investment
External Assistance
Commercial Borrowings (MT & LT)
Commercial Borrowings (Short Term)
Commercial Banks
Others
Rupee Debt Service
Other Capital
Errors & Omissions
Debit
6591
5233
4435
7210
8973
246
474
2909
Credit
7535
2773
2737
8189
16926
536
6402
634
Items
iU
ni
20
04
Th
e
Ic
fa
444. The following information is extracted from the Union Budget for the year 2003-04:
208
Particulars
Part-II
04
20
o.
M
AC
04
1,84,169
69,766
18,023
13,200
1,53,637
2,89,384
28,437
-4
ef
.N
04
Rs. crore
d.
Rs.1,19,292 cr
31
Rs.1,12,292 cr
:8
c.
BN
Rs.1,12,392 cr
.IS
b.
ed
Rs.1,13,292 cr
se
rv
a.
1-
4-
02
27
76,843
44,131
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
e. Rs.1,19,922 cr.
446. The estimated primary deficit for the year 2003-04 is
a. Rs.31,814 cr
b. Rs.30,814 cr
c. Rs.31,414 cr
d. Rs.30,414 cr
e. Rs.32,414 cr.
ni
20
04
Th
e
Ic
fa
iU
The following estimates are extracted from the Union Budget for the year 2002-03.
Tax Revenue
Non-tax revenue
Recoveries of Loans
Other Capital Receipts
Borrowings/other Liabilities
Non-plan Expenditure:
On Revenue Account (of which interest payment is Rs.75,000 Crore)
On Capital Account
Plan Expenditure:
On Revenue Account
On Capital Account
Rs. in Crore
1,16,857
45,137
9,908
5,000
91,025
1,66,301
29,624
43,761
28,241
209
Macroeconomics
1,61,984
b.
1,65,948
c.
1,62,895
d.
1,62,750
1,05,947
d.
1,05,942
e.
1,05,928.
04
c.
20
1,05,933
04
b.
1,05,995
a.
04
e. 1,61,994.
448. The value of Capital Receipts is:
02
27
-4
ef
.N
o.
M
AC
4-
Based on the following information answer the questions 450 and 451.
.IS
ed
se
rv
Rs. in Crore
1,46,209
57,464
13,539
10,000
1,11,275
2,28,768
1,01,266
21,619
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
BN
:8
1-
31
The following items are taken from the Union Budget for the year 2000-01.
20
04
Th
e
a.
Ic
fa
b.
10,265
c.
10,009
d.
10,555
e.
10,256.
210
a.
77,425
b.
77,275
c.
76,780
d.
76,220
e.
78,650.
52,330
35,770
Part-II
Based on the following information answer the questions 452 and 453.
(Rs. in Crore)
Direct Taxes
40,000
10,000
Interest Receipts
12,000
22,000
17,000
13,000
30,000
ef
.N
R
-4
27
02
431
1:8
BN
ig
ht
re
se
rv
ed
.IS
Defense Expenditure
47,000
o.
Interest Payments
04
1,32,000
M
AC
Subsidies
04
Recovery of Loans
04
1,20,000
20
Indirect Taxes
Tax Revenue
Pr
es
s.
Al
lr
454. The value of Deficit Fiscal from the following data extracted from Union Budget, 1999-2000.
1,32,365
50,475
2,36,987
46,895
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Non-tax Revenue
Total Revenue Expenditure
Total Capital Expenditure
Non-plan Revenue Expenditure
(excl. interest Payments)
Interest Payments
Loans Recovered
Other Capital Receipts
(Rs. in crore)
a.
78,985
b.
77,998
c.
79,595
d.
79,955
e.
79,050.
1,02,331
88,000
11,087
10,000
211
Macroeconomics
Based on the following information answer the questions 455 and 456.
The following information is extracted from the union budget for the year 2002-03.
(Rs. in crore)
1,22,475.
04
04
20
04
ed
se
rv
re
79,280.
e.
ht
78,750
ig
d.
lr
77,275
s.
Al
77,425
c.
.IS
78,435
b.
BN
M
AC
e.
-4
1,11,275
27
d.
02
1,21,275
4-
c.
31
1,25,750
1-
b.
:8
1,12,575
2,28,768
21,619
52,330
35,770
ef
.N
1,46,209
57,464
13,539
1,12,275
10,000
o.
Tax Revenues
Non-tax Revenues
Recoveries of Loans
Borrowings and other Liabilities
Other Receipts
(Of which disinvestment proceeds committed for redemption of Public
debt 1,000 cr.)
Non-plan Revenue Expenditure (incl. Interest payments of Rs.101266 cr.)
Non-plan Capital Expenditure
Planned Revenue Expenditure
Planned Capital Expenditure
Pr
es
2.0%.
b.
3.0%.
fa
iU
ni
a.
Ic
4.0% .
d.
3.5% .
e.
4.5%.
20
04
Th
e
c.
ve
rs
i
ty
457. For an economy, the growth rate of population is likely to be 2% per annum. Given that capital
output ratio is 5 and possible level of investment is 25 percent of GDP, what is the possible per
capita real GDP growth rate?
458. The Planning Commission is targeting a growth rate of 6% p.a. in per capita income for the
next 10 years. To achieve the target, the required domestic savings to income ratio is 32%. If
the population is expected to grow at the rate of 2% p.a., capital output ratio for the economy
is
212
a.
3.0
b.
4.5
c.
5.0
d.
4.0
e.
5.5.
Part-II
Based on the following information answer the questions 459 and 460.
Targeted growth rate in real GDP =
7.0%
Gross domestic savings as a proportion of the GDP for the year is expected to be 24%.
4%
b.
6%
c.
3.5%
d.
4.25%
e.
5%.
20
04
a.
04
459. The required external financing to achieve the targeted growth rate in GDP is:
4.9%
d.
4.8%
e.
5%.
c.
M
AC
4.3%
o.
b.
ef
.N
4.5%
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
a.
04
460. The per capita GDP, if population is expected to increase by 2% during the same period is:
213
24.0
37.8
53.2
19.5
134.5
04
0.20
0.27
0.40
0.13
04
120
140
133
150
20
9.00
7.00
20.00
0.75
(i) x (ii)
ef
.N
o.
M
AC
Weight
(ii)
-4
120
130
130
100
100
27
10
8
6
20
400
02
20
10
40
15
Single
Bedroom
Price relative
1996-97
(i)
4-
Rice
Wheat
Milk
Cotton Cloth
Housing
Price
1996-97
Rs.
12.00
8.00
7.80
20.00
400
31
Price
1991-92
Rs.
1-
Qty
1991-92
0.164
0.066
0.197
0.246
0.328
19.68
6.60
25.61
24.60
32.80
109.30
.IS
BN
:8
Item
Pulse
10 Kg
7.50
Rice
20 Kg
5.00
Cotton cloth
10/Mtr
15.0
Electricity
100 Unit
0.50
Laspeyers consumer price Index
2. (e)
Weights
(iii)
(ii)
= (i) x (iii)
Price relative
1995 96 (i)
04
Item
ed
se
rv
= Nominal GNPCurrent Period GNP Deflator base period /GNP Deflator Current Period
re
ig
ht
s.
Al
lr
Pr
es
ve
rs
i
ty
Ic
Th
e
6.
fa
iU
ni
20
04
7.
8.
9.
10.
11.
214
Part II
= GNP at FC Depreciation
GNP at FC
04
M
AC
o.
(i)
ef
.N
= GNP at MP GDP at MP
20
04
Personal Income =
04
27
-4
where, GDP at MP
02
:8
1-
31
4-
BN
.IS
se
rv
ed
re
= 200 + 40 + 50 + 10 = 300.
ht
lr
ig
s.
Al
Pr
es
ve
rs
i
ty
iU
ni
= 60 30 = 30.
Ic
fa
20
04
Th
e
= 30.
185 + 25 + 20 + 5 40 = 195.
215
Macroeconomics
4-
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
20
04
ty
ve
rs
i
ni
Th
e
28.
Ic
fa
27.
iU
26.
29.
30.
216
04
20
04
B
W
M
AC
Pr
es
25.
o.
02
27
-4
ef
.N
R
04
Part II
= 5,070
Personal Savings
= 5,070 4,500
32. (c) NNP at Factor Cost = National Income.
= 570.
04
04
= GDP at MP + Net Factor Income from Abroad Depreciation + Subsidies Indirect Taxes.
ef
.N
o.
M
AC
33. (c) NDP at Factor Cost = NDP at Market Price Indirect taxes+ Subsidies
= 16,939 2,136 + 354 = 15,157.
04
16,000
20
-4
02
27
31
4-
= 15,157 46 = 15,111.
1-
BN
:8
.IS
= 2.1% p.a.
ed
se
rv
Growth required in GDP to achieve target per capita GDP growth = 5 + 2.1 = 7.1% p.a.
re
lr
ig
ht
We know that:
s.
Al
Pr
es
ty
ve
rs
i
iU
ni
= GDP at Market Price + Factor Income Received from Abroad Factor Income Paid Abroad
fa
20
04
Th
e
Ic
40. (b) NNP = GNP Depreciation (i.e. Gross Investment Net Investment)
= 4,850 544 = 4,306.
217
Macroeconomics
1,250.00
Compensation to Employees
8,487.50
Rents
1,000.00
Interest
500.00
250.00
Total (GNP)
04
Undistributed Profits
20
750.00
04
Dividends
500.00
Corporate Taxes
04
1,250.00
M
AC
Proprietors Income
13,987.50
= 6.0%
o.
= 1.9%
ef
.N
= 4 7.9 = 31.6%.
4-
02
27
-4
Hence growth required in GDP to achieve target per capita GDP Growth = 1.9 + 6 = 7.9%
31
44. (b)
:8
1-
Production Account
Particulars Amount
(Rs.)
BN
.IS
525
se
rv
ed
Wages
Amount
(Rs.)
Particulars
525
re
Profits
8,400
s.
Al
lr
ig
ht
8,400
45. (c) Input Output Account
Rose Corp.
Rs.
Rose Corp.
---Perfume Corp
---Bottle Corp.
---House Hold*
2,550
* Including Profits.
Perfume
Corp. Rs.
1,950
------4,950
Bottle Inventory
Corp. Rs.
Rs.
---7,200
---900
600
(300)
225
----
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
From/To
House
holds
------7,875
----
04
20
04
B
W
27
-4
ef
.N
o.
M
AC
04
Part II
4-
02
1-
31
ed
.IS
BN
:8
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ty
iU
ni
ve
rs
i
Th
e
Ic
fa
20
04
57. (d) Personal Income = National Income Retained Earnings Corporate Taxes.
National Income
Macroeconomics
20
04
fa
Th
e
Ic
62.
iU
ni
61.
ve
rs
i
ty
60.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
59.
ef
.N
o.
M
AC
04
04
20
04
63.
220
Part II
= 3,550.
GDP at Factor Cost + Net Factor Income from Abroad
04
Also GDP at Factor Cost = GDP at Market price Indirect Taxes + Subsidies
04
20
04
65. (d) GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies
M
AC
27
Quantities
30
20
1
5
100
Price(Rs.)
3/kg
4/ltr
5/doz
15/mtr
0.3/unit
pi0 qi0
pit qi0
90
80
5
75
30
280
150
120
6.5
125
40
441.5
5
p t q0
i=1 i i
4-
02
( )
31
Price (Rs.)
5/kg
6/ltr
6.5/doz
25/mtr
0.4/unit
5
p0q0
i =1 i i
1-
:8
BN
.IS
Kg.
Ltr.
Doz
Meters
units
( )
s.
Al
lr
ig
ht
re
Rice
Milk
Eggs
Cloth
Electricity
( )
ed
Unit
se
rv
Item
-4
ef
.N
o.
Pr
es
ty
ni
ve
rs
i
P0t =
pit qi0
i =1
n
100
pi0 qi0
fa
iU
i =1
Th
e
Ic
20
04
Macroeconomics
National Income
= 5,300.
National Income
04
04
= 5,700
= 5,300
ef
.N
R
-4
27
Personal Income
M
AC
o.
= 6,100.
431
02
:8
1-
BN
04
20
.IS
se
rv
ed
re
ht
The difference between GDP at Market Price and NNP at Factor Cost = 3,400.
lr
ig
s.
Al
Pr
es
ve
rs
i
ty
ni
The real GNP for the years 1990 and 2003 are 46,680 and 1,22,757 Crore.
fa
iU
20
04
Th
e
Ic
= 71,000 + 2,000
Net Factor Income from Abroad = GNP at Market Prices GDP at Market Prices
= 73,000 71,000 = 2,000.
73. (b) NNP = GNP Depreciation = 2,400 250 = 2,150
where : Depreciation = Gross Investment Net Investment
= 400 150 = 250.
74. (d) Net Exports = GNP (C + I + G)
= 2,400 (1,500 + 400 + 480) = 2,400 1,380 = 20.
222
Part II
04
04
20
= 480 + 15 = 495.
04
78. (c) Personal Income = National Income Corporate Profits + Transfer Payments + Dividends
M
AC
o.
Corporate Profits
ef
.N
02
31
4-
27
-4
Personal Income
:8
1-
se
rv
ed
.IS
BN
Personal Disposable Income = Personal Income Personal taxes and Non-tax Payments.
Personal Income
= National Income Corporate Profits + Transfer
Payments + Dividends.
ni
ve
rs
i
ty
Pr
es
s.
Al
iU
lr
ig
ht
Personal Savings
re
=
=
=
=
20
55
15
90
20
04
Th
e
Ic
fa
Macroeconomics
04
04
20
04
M
AC
ef
.N
o.
-4
4-
02
27
= Factor Income received by personal sector from business sector and Government Sector
+ Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad.
1-
:8
31
BN
se
rv
ed
.IS
= Factor Income Received by Personal Sector from Business Sector and Government Sector
+ Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad.
re
ht
lr
ig
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
91. (c) Personal Disposable Income = Personal Income Personal Taxes + Transfer Payments
Personal Taxes
= 1,064 168 + 16 = 912.
92. (e) Depreciation = GNP at Market Price NNP at Market Prices = 1,07,000 1,00,000 = 7,000.
93. (d) Net Factor Income from Abroad = NNP at Market Price NDP at MP
= 1,00,000 1,00,422 = 422.
224
Part II
04
04
Subsidies
20
B
W
= 88,000.
M
AC
National Income
04
o.
ef
.N
National Income
31
4-
02
27
-4
Subsidies
= 88,000
Personal Income
BN
:8
1-
National Income
.IS
98. (c) Personal Disposable Income = Personal Income Personal Income Tax.
= National Income Corporate Profit Tax Retained Profit
National income
re
se
rv
ed
Personal Income
ht
lr
ig
Subsidies
ty
Personal Income
= 88,000
Pr
es
National Income
s.
Al
ve
rs
i
iU
ni
99. (d) GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect Taxes.
Ic
fa
20
04
Th
e
Macroeconomics
= NNP at FC + Depreciation.
= 4,73,246 + 61,809 = 5,35,055.
104. (a) Personal Disposable Income = Personal Income Personal Income Tax.
NNP at MP + Depreciation
1,70,992 + 11,888 = 1,82,880
04
=
=
20
GNP at MP
04
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
iU
ni
ve
rs
i
ty
Ic
fa
GNP at FC
20
04
Th
e
GDP at FC
= 447 + 60 + 40 + 52 + 32
631
GNP at FC
= 631 + ( 15) =
616
GNP at MP
= 616 + 65 0 =
681.
GDP at MP
226
447 + 60 + 40 + 52 + 32 = 631
631 + 65 0 =
696
Part II
04
20
NNP at MP
04
B
W
=
NNP at MP = GNP at MP Depreciation
=
NNP at FC + Depreciation + Indirect taxes Subsidies.
=
7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000
NNP at MP
=
9,04,000 92,700 = 8,11,300
NDP at Market Price = 8,11,300 (10,200) = 8,21,500.
114. (d) NDP at FC
= NNP at FC Net Factor Income from Abroad.
NDP at Factor Cost = 7,09,900 (10,200) = 7,20,100.
115. (a) GNP at FC
= GNP at MP Indirect Taxes + Subsidies
GNP at MP
= NNP at FC + Depreciation + Indirect Taxes Subsidies
= 7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
NNP at MP
GNP at MP
04
113. (c) NDP at Market Price = NNP at MP Net Factor Income from Abroad.
.IS
GNP at FC
se
rv
ed
116. (b) Personal Disposable Income = NNP at FC Corporate Taxes Retained Profit Personal
Income Tax
ig
ht
ty
GNP at FC
Pr
es
s.
Al
lr
re
ve
rs
i
Th
e
Ic
fa
iU
ni
GNP at FC
20
04
GNP at FC
GNP at FC
Macroeconomics
GNP at FC
NNP at FC
1,264 91 = 1,173
Personal Income
04
20
04
04
121. (b) Personal Disposable Income = Personal Income Personal Tax Payment.
-4
ef
.N
NNP at FC
o.
M
AC
GNP at FC
:8
1-
31
4-
02
27
GNP at FC
1,260 87 + 91 = 1,264
NNP at FC
1,264 91 = 1,173
Personal Income
se
rv
ed
.IS
BN
ig
ht
ty
Pr
es
s.
Al
lr
re
ve
rs
i
= NNP at FC + Depreciation Net Factor Income from Abroad + Indirect Taxes Subsidies
=
Ic
fa
iU
ni
NNP at FC
20
04
Th
e
Personal Consumption
Part II
360
40 5
200
50 4.50
225
04
04
20
04
B
W
ef
.N
60 6
520
-4
27
65 8
02
87.5
4-
31
35 2.5
70
390
300
160
150.
M
AC
o.
Nominal GNP
BN
GDP deflator
:8
1-
se
rv
ed
.IS
re
ht
s.
Al
lr
ig
Pr
es
ty
ve
rs
i
130. (b) Growth rate of Real Income = Nominal Income Price Level = 6% 4% = 2%.
iU
ni
131. (b) Y = C + I + G
Th
e
Ic
fa
20
04
= 0.10Y
= 420MUC
When the economy is opened to trade in goods and services with rest of the world, the
1
multiplier in the economy will be
1 + t +
where, marginal propensity to consumer
229
Macroeconomics
t tax
marginal propensity to import
1
1
1
=
=
= 2.
1 0.75 + ( 0.75 0.20 ) + 0.10 1 0.75 + 0.15 + 0.10 0.5
Personal Income =
04
National Income
04
Multiplier =
04
20
M
AC
o.
NDP at Factor Cost = NDP market price Depreciation Indirect taxes + Subsidies
NFIA = 55,500 50,000
ef
.N
-4
= 5,500 MUC.
4-
:8
1-
31
02
27
136. (c) NDP at market price = NDP at Factor Cost + Indirect Taxes
.IS
BN
ht
re
se
rv
ed
1, 500
100 = 1,250 MUC.
120
ig
=
ve
rs
i
ty
Pr
es
s.
Al
lr
ni
fa
iU
Th
e
Ic
20
04
= 130 15 17 + 7 = 105
NDP at factor cost = Sum of value added by Primary sector, Secondary sector and tertiary
sector
= 80 + 120 + 105 = 305
Depreciation
= 10 + 12 + 15
= 37
= 305 + 37
= 342 MUC.
140. (c) Wages and salaries paid by the government = Factor income received by households
(wages and salaries paid by the business sector + Dividends paid to house holds + Factors
income receive abroad)
= 160 100 10 20 = 30 MUC.
230
Part II
04
20
04
04
ef
.N
143. (c) We can find out the factor income received by the house hold sector
o.
M
AC
1,475.0
Transfer payments
235.0
212.6
Factor incomes
(Balancing figure)
1,524.6
02
4-
Amount
72.0
BN
Personal savings
:8
1-
27
-4
Cr
Amount
31
Dr
se
rv
ed
.IS
1,759.6
1,759.6
National Income = NNP at Factor Cost = NNP at market prices Indirect Taxes
re
ht
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
Dr
Dr
Amount
235.0
1524.6
72.0
1759.6
= 1524.6 + 235 = 1759.6
Personal Disposable Income
Amount
1759.6
Macroeconomics
Cr
Amount
235
1,567
Amount
1,525 Transfer payments
205 Factor incomes
72
1,802
National Income = NNP at factor cost = NNP at MP Indirect taxes
Personal consumption expenditure
Personal tax payments
Personal savings
1,802
= GNP at MP Depreciation
GNP at MP
GNP at FC
04
20
04
04
NNP at MP
NNP at MP
o.
ef
.N
GNP at MP
M
AC
27
-4
02
31
:8
ed
.IS
National Income
BN
1-
4-
se
rv
NNP at Factor Cost = GNP at Factor Cost Depreciation = 6,000 400 = 5,600
re
ig
ht
147. (c) GNP at FC = GDP at Factor Cost + Net income from Abroad
= NDP at FC + Depreciation
NDP at FC
Pr
es
s.
Al
lr
GDP at FC
ve
rs
i
ty
GNP at FC
iU
ni
GDP at FC
Ic
fa
148. (b) NDP at Market Price = NNP at Market Price Net Factor Income from abroad
= GNP at Market Prices Depreciation
20
04
Th
e
1,72,250
= 1,69,350 + X
1,72,250 1,69,350 = X
X
232
= 2,900.
Part II
04
04
04
20
o.
M
AC
ef
.N
-4
152. (b) Personal Disposable Income = Personal Income Personal Income Tax
27
4-
02
National Income = NNP at Factor Cost = NNP at Market Prices Indirect Taxes + Subsidies
1-
31
:8
BN
ed
.IS
se
rv
re
ht
lr
ig
Pr
es
s.
Al
ve
rs
i
ty
iU
ni
National Income
= 1,06,440.
20
04
Th
e
Ic
fa
Rs.
1,675 Transfer Payments
Factor incomes
210 (Balancing figure)
72
1,957
National Income
Cr
Rs.
320
1,637
1,957
Macroeconomics
National Income
= 1,989.
04
= GDP at Market Price + Net Factor Income from Abroad Depreciation + Subsidies
Indirect Taxes
04
04
20
= GDP at MP 3,775
GNP at FC
1831.6
GNP at MP
4-
31
02
27
-4
ef
.N
o.
GNP at FC
M
AC
GNP at FC
.IS
BN
:8
1-
GNP at MP
ed
GNP at MP
re
se
rv
GNP at FC
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
234
Part II
04
20
04
04
M
AC
ef
.N
o.
= 0.10 Multiplier
= 100 Multiplier = 100 2.857 =285.7
-4
02
41:8
BN
= 0.15Y
.IS
Import Function
ed
= 0.35Y
31
27
= 20 + 0.78Yd + 45 + 18 + 20 0.15Y
se
rv
re
ig
ht
Pr
es
s.
Al
lr
ve
rs
i
ty
ni
fa
iU
Surplus = 33.46.
Th
e
Ic
1
1 (1 t ) +
= MPC = 0.75; t = 0.20,
20
04
Y
I
multiplier =
= 0.1;
Multiplier =
1
= 2.
0.5
Macroeconomics
04
20
04
= 530 + 0.75Y
Y 0.75Y
= 530
0.25Y = 530
= 530/0.25 = 2,120
ef
.N
o.
M
AC
04
When the export increases by 25, the Change in Equilibrium Income will be as follows:
27
-4
4-
02
Y = 555/0.25 = 2,220.
400
360
0.80
500
400
0.72
600
580
0.90
700
670
90.00
.IS
ed
se
rv
re
s
ht
1-
MPC
:8
BN
Yd
31
170. (d)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
236
Part II
= Ct 1
The given Ct
= 10 + 0.6Ydt + 0.3 Ct 1
Since Ct
Then Ct
Ct 0.3 Ct
= 10 + 0.6Ydt
Ct
When Ydt increases from 100 to 120, the change in the steady State Level of Consumption is:
04
1/0.7 [10 + 0.6 120] 1/0.7 [10 + 0.6 100] = 0.6/0.7 (120 100) =17.14.
20
04
173. (d) Y = C + S
04
YC=S
GDP of an economy is
M
AC
Y = C + I + G + X M ... (1)
o.
C = Consumption Function
ef
.N
I = Investment Function
27
-4
X = Exogenous Exports
4-
02
M = Imports
31
S = 50 + 0.25Y
:8
1-
M= 0.10Y
BN
So, C = 50 + 0.75Y
ed
=C+I+G+XM
= I + G + X M ..(2)
ht
or S
re
or Y C = I + G + X M
se
rv
.IS
lr
ig
0.35 Y
= 50 + I + G + X
= 1/0.35 (50 + I + G + X)
ty
Pr
es
s.
Al
50 + 0.25Y
ni
ve
rs
i
There is an increase in private investment by 200 and Government Expenditure decreases by 60.
= 1/0.35 (200 60) = 400
fa
iU
20
04
Th
e
Ic
= 350 60 + 0.8Y
0.2Y = 290
Y
= 290/0.2 = 1,450
= Investment Function
= 0.3 Y 15 I; w Y pi
237
Macroeconomics
= 100; G
= 50; E
=C+I+G+EM
= a + bY + wY pi + G + E mY
04
20
04
Y bY wY + mY = a pi + G + E
B
M
AC
o.
ef
.N
1
1
=
= 5.
1 0.6 0.3 + 0.1 0.2
-4
1
1 b w + m
1
(a pi + G + E )
(1 b w + m)
27
02
04
Y (1 b w + m) = a pi + G + E
31
4-
:8
1-
BN
.IS
With an autonomous increase in investment of 200, the level of income will increase by,
se
rv
ed
= 5 200 = 1,000.
re
ig
ht
s.
Al
lr
Pr
es
ty
ve
rs
i
ni
Change in the Steady Level of Consumption when Disposable Income increase from 500 to 600 is
fa
iU
20
04
Th
e
Ic
179. (e) Y = C + I + G + X M
Y 0.58Y = 52.25
0.42Y
= 58.25
Y=
52.25
= 124.40
0.42
Part II
20
1
1
=
= 3.33.
1 MPC
1 0.7
04
04
04
C
2,520
=
0.7
3, 600
Y
M
AC
181. (b) Y = C + I + G + E M
= Government Expenditure.
= Exports
= Import Function
ef
.N
= Investment Function
-4
= Consumption Function
= 15
= 0.1
= 150
= 20
= 0.05
s
ht
ig
lr
s.
Al
Pr
es
ty
=
fa
iU
ni
20
04
Th
e
Ic
1-
.IS
= (1 0.3) = 0.7
ed
se
rv
= 400
re
ve
rs
i
where,
BN
Y= + Y + R + + Y + G + E Y
:8
31
4-
02
27
o.
+ R + G + E
(1 +)
1
[400 + (0.7 45) + 150 + 2015]
(1 0.7 0.1 + 0.05)
1
616.5 = 2,466.
0.25
Consumption Function is
Ct
0.85 Ct = 20 + 0.75Ydt
Ct
= 23.53 + 0.88Ydt
C t
= 0.88 x Ydt
239
Macroeconomics
04
20
W
04
1
1
=
= 3.33.
1 0.8 + 0.1
1 +
M
AC
04
196
= 80 0.8 30 + 100 + 30 + 120 110 =
= 653.
0.30
[1 0.8 + 0.1]
185. (c) Y = C + I + G + E M
ef
.N
o.
or Y = C0 + Y + I + G + E M
-4
27
C0 + I + G + E M
1
31
1BN
.IS
ed
1
1 (1 t + )
se
rv
:8
255
= 1,275.
0.2
4-
02
re
or
Y Y = C0 + I + G + E M
MPC = 0.75,
ht
t = 0.20, = 0.1
s.
Al
lr
ig
1
1
=
= 2.
1 ( 0.75 0.8 ) + 0.1 0.5
Pr
es
Multiplier =
1
1
=
= 2.33.
1 0.9 + ( 0.9 0.2 ) + 0.15
1 + t +
ve
rs
i
ty
ni
Ic
fa
iU
= C0 + 0.9Y d + I+ G + X [M0 + Y]
Th
e
20
04
= 70 + 0.72Y 18 + 90 + 65 + 80 40 0.14Y
Y = 247 + 0.57Y
Y=
247
= 574.42.
0.43
C 80
Y
Multiplier =
240
380 80 300
=
= 0.75
400
400
1
1
1
1
=
=
or
= 4.
1 MPC 1 1 .75 .25
Part II
1
1 +
where,
1
= 3.33
1 08. + 0.10
04
04
04
20
1
1 +
M
AC
ef
.N
1
= 3.33
1 08. + 0.10
Multiplier =
o.
27
-4
41:8
.IS
BN
1
= 2.17
1 0.8 + 0.8 0.2 + 0.1
ed
31
1
1 + t +
Multiplier
02
se
rv
re
= 90 2.17 = 195.3.
ht
ig
Yd
= 40 + Yd
193. (e) C
s.
Al
lr
= 800
Pr
es
MPC = 0.08
ty
=YT
(2)
= 10 + 0.2Y
.... (3)
fa
Yd
ni
. (1)
iU
ve
rs
i
Th
e
Ic
20
04
Yd
= Y (10 + 0.2Y)
= Y 10 0.2Y
..
(4)
= 50 + 0.9(Y 10 0.2Y)
= 50 + 0.9Y 9 0.18Y
= 41 + 0.72Y
...
Further Y = C + I + G ..
(5)
(6)
241
Macroeconomics
41+ I + G
0.28
= 0.20
= 500
04
0.25 0.8
0.2
= (1 0.75) (1 0.20) 500 =
500 =
500 = 250.
1 0.6
.4
1 [0.75(1 0.20)]
04
(1 b) (1 t)
G
1 b (1 t)
M
AC
ef
.N
-4
2
3
27
= C + I + G = + Y + I + G
02
o.
MPC = =
31
4-
Y (1 ) = + I + G
BN
:8
1-
1
1
=
=3
2
1
1
3
.IS
Multiplier =
04
re
se
rv
ed
ig
ht
s.
Al
lr
Pr
es
197. (a) C
=C+I+G
ty
ve
rs
i
Or, Y
ni
= 4,100.
fa
iU
20
04
Th
e
Ic
C = 20 + 0.70Yd
At Y = 600, S = 20 + 0.30(600)
= 20 + 180 = 160 MUC.
199. (c) Y = C + I+ G
Y = 70 + 0.75Yd + 80 + 70
Y = 70 + 0.75 (Y 0.2 Y) + 80 + 70
Y = 70 + 0.75 Y 0.15 Y+ 80 + 70
242
20
Part II
Y = 220 0.6Y
Y = 550
Budget deficit = T G = 0.2 (550) 70
= 110 70 = 40 MUC.
200. (c) At equilibrium, S = I 50 + 0.3Y = 150 5i
04
04
Or, i = 10%.
20
04
In steady state Ct = C t1
M
AC
= 10 + 0.5Yd t + 0.4C t
Ct
Ct 0.4C t = 10 + 0.5Yd t
= 10 + 0.5Yd t
Ct
ef
.N
o.
0.6 Ct
27
-4
02
31
4-
:8
1-
BN
ed
= 0.15Y
se
rv
.IS
re
MPS = 0.25
lr
ig
ht
MPI = 0.15
s.
Al
Pr
es
ve
rs
i
ty
iU
ni
203. (c) The change in government spending if the government is committed to a balanced budget
to bring output to the full-employment level is
Ic
fa
20
04
Th
e
Macroeconomics
04
04
M
AC
Y=C+S
ef
.N
o.
When S = 0, Y = C
Y = 400 + 0.75 Y
27
-4
02
Yd = 1,600
31
4-
:8
1-
BN
= Rs.5,000
ed
se
rv
=a+bY
re
= 2,500
s.
Al
= 1,875.
lr
= 0.75 (2,500)
ht
ig
.IS
3
= 0.75
4
MPC
Pr
es
ty
ve
rs
i
iU
ni
60 + 0.25 Yd = 100
fa
Th
e
Ic
20
04
Velocity of money =
1,150
= 5.
230
=C+I+G
= + Y + I + G
Y(1 ) = + I + G
244
04
20
Part II
Hence, Multiplier =
1
1
=
=3
1 1 2
3
04
04
20
04
Since the potential GNP is only Rs.1,600, with the GNP going up to Rs.1940, the price level
will increase.
1
( G + I )
0.35
27
02
4-
ef
.N
1
1
=
0.15 + 0.20 0.35
-4
Multiplier =
o.
= 0.15
MPM
M
AC
:8
1
( 280 72 ) = 594.28.
0.35
BN
Y =
1-
31
There is an increase in private investment by 280 and decline in government spending by 72.
re
1
1
= 1/ (1 0.9 + 0.9 0.2 + 0.15) =
= 2.33.
0.43
1 +t +
ig
ht
se
rv
ed
.IS
The net result of change in both private investment and government spending is that it
increases the national product of GDP by 594.28.
s.
Al
lr
1
1
=
= 3.33
1 + 1 0.8 + 0.10
ve
rs
i
ty
Increase in GNP
Pr
es
iU
ni
20
04
Th
e
Ic
fa
Macroeconomics
Y (1 0.72)
= 41 + I + G
41+ I + G
0.28
The equilibrium level of income can be determined if I and G are made known.
Given I = 50, and G = 40
Y
41+ 50 + 40
131
=
= Rs.467.86.
0.28
0.28
= 0.20
04
= 0.75
20
04
04
M
AC
=C+I+G
ef
.N
se
rv
ed
= +1+ G
re
1
1
=
=3
1 1 2
3
ig
ht
Hence, Multiplier =
-4
.IS
BN
= +Y +1+ G
Y (1 )
27
4-
02
2
3
1-
= =
31
0.25 0.80
0.20
500 =
500 = 250.
1 ( 0.75 0.80 )
0.40
:8
o.
(1 b )(1 t )
(1 0.75)(1 0.20 )
G =
500
1 b (1 t )
(1 0.75) (1 0.20 )
s.
Al
lr
Pr
es
ve
rs
i
ty
ni
iU
8 + 0.15 Yd
8 + 0.85 Yd
0.2Y
0.10Y
20
10
Exports (X)
10
fa
20
04
Th
e
Ic
Y=C+I+G+XM
= 8 + 0.85 Yd + 20 + 10 + 10 0.10Y
246
Part II
= 52.25
0.42Y
= 52.25
= 124.40
Taxes
04
52.25
0.42
04
Y=
20
= 0.10
W
-4
1
=5
1 0.90 + 0.10
27
02
Multiplier
M
AC
MPI
ef
.N
= 0.90
MPC
1
1 MPC + MPI
o.
04
= 10 + 5 24.88 = 9.88.
5 200
31
4-
With an autonomous increase in investment of 200, the level of income will increase by,
BN
:8
1-
= 1,000
.IS
se
rv
ed
Consumption function is
= 20 + 0.75Ydt + 0.15Ct
0.85Ct
= 20 + 0.75Ydt
Ct
= 23.53 + 0.88Ydt
Ct
= 0.88 Ydt
s.
Al
lr
ig
ht
re
Ct
Pr
es
ty
= 200
ve
rs
i
Ct
iU
ni
20
04
Th
e
Ic
fa
223. (d) Y
=C+I+G+EM
= C0 + Y+ I + G + E M
Y Y
Co + I + G + E M
= C0 + I + G + E M =
1
= 140 + 0.8Y + 75 + 35 + 30 25
225
= 1,275.
0.2
..
(1)
where Y = Y T
..
(2)
..
(3)
(4)
= 10 + 0.3Y
247
Macroeconomics
= 41 + 0.56Y
Further Y = C + I + G
..
(5)
..
(6)
I+G
Y(1 0.56)= 41 + I + G
04
41+ I + G
0.44
04
20
04
M
AC
27
31
4-
02
0.2 Y = 600
= 3,000.
1-
.IS
ed
s
ht
= 0.10
s.
Al
MPS = 1/10
re
1
=10
MPS
se
rv
Y 200
= 10
=
I
20
ig
= 20 lakh
lr
Multiplier (K) =
BN
Change in Investment ( I )
:8
ef
.N
= 331.8.
-4
o.
41+ 60 + 45
146
=
0.44
0.44
ty
C
Y
ve
rs
i
Pr
es
Ic
fa
iU
ni
20
04
Th
e
Multiplier (K) =
1
1
= 10
=
1 MPC 1 0.9
When investment increases by Rs.100 crore, change or increase in aggregate income (Y)
and aggregate consumption is
Y = K I
K= I
Consumption function
= 20 + 0.75 Yd
Tax function
= 0.3 Y
Import function
= 0.18 Y
900
= 0.90
1,000
Part II
54.73 20 + 10
20
04
04
Budget deficit/surplus
04
Surplus = 24.73.
M
AC
= C 90/Yd
ef
.N
-4
1
1
=
1 .76
1 MPC
27
Multiplier =
o.
31
1-
ed
se
rv
1
= 2.70
1 0.78 + 0.15
re
.IS
BN
4-
1
1 +
:8
02
Multiplier = 4.17.
ig
ht
s.
Al
lr
Increase in GNP
Pr
es
= 575 + 0.75Y
ve
rs
i
ty
=2,300
iU
= 575
ni
0.25Y
20
04
Th
e
Ic
fa
When there is an exogenous increase in exports to the extent of 30, the change in equilibrium
income will be as follows:
where,
= Consumption function
= Investment function
249
Macroeconomics
= Government expenditure
= Exports
= Import function
where,
= (1 0.3) = 0.7
04
= 18
20
04
= 0.1
04
G = 162
M
AC
R = 48
E = 25
ef
.N
+ R + G + E
-4
(1 + )
27
Y=
o.
= 0.05
4-
02
1
[ 460 + (480.7) + 162 + 48 18]
(1 0.7 0.1 + 0.05 )
BN
........
= 62 + 0.25Y ....
se
rv
= 2,742.4.
.IS
:8
1
685.6
0.25
ed
1-
31
Y=
(1)
(2)
iU
Th
e
Ic
fa
20
04
s.
Al
= 560 88 = 472.
ni
= 560 880i
ve
rs
i
At I = 10%;
Pr
es
140
220
i
0.25 0.25
ty
lr
ht
ig
78 230i = 62 + 0.25 Y
re
Multiplier =
1
MPS + MPI
1
= 2.38
0.30 + 0.12
= 357
Part II
= 3,600/2,200 = 0.6
Multiplier in the economy =
Multiplier
1
1
=
1 MPC 1 0.6
= 2.5.
=C+I
= 40 + 0.75Y + 60
= 400
04
04
Y 0.75Y = 100
04
20
When Y = 400,
W
M
AC
= Income consumption
= 400,
Savings
= 40 + 0.25(400) = 40 + 100
= 60.
-4
Savings
o.
When income
ef
.N
Savings
02
27
31
4-
= 50 + 0.80Yd,
Since C
:8
1-
BN
0.20Y
= 130
= 130/.20
re
se
rv
ed
.IS
50 + 0.20Y
ig
ht
lr
1
1
=
= 2.85
MPS
0.35
Pr
es
s.
Al
Multiplier =
238. (e)
The total increase in investment and government expenditure = 150 + 175 = 325
= 325 2.85 = 926.25
=C+I+G+EM
= 1,200 + 450 + 600 + 210 195 = 2,265
fa
iU
ni
ve
rs
i
ty
Th
e
Ic
20
04
= 602 + 0.77Y
0.23Y = 602
Y
= 2,617.4
When there is an exogenous increase in exports to the extent of 28, the change in equilibrium
income will be as follows:
251
Macroeconomics
04
04
At equilibrium: Md
= Ms
6Y 2,200i
= 2,800
W
ef
.N
o.
M
AC
300 12i
= 600 24i
.5
27
-4
4-
02
1-
31
2,344i = 800
:8
800
= 0.34
2,344
BN
I=
ed
.IS
se
rv
re
ht
s.
Al
lr
ig
Pr
es
ve
rs
i
ty
Y = 675 200i
The equation of the LM Curve is Ms = Md
Th
e
Ic
fa
iU
ni
.. (2)
20
04
733.33 i = 75
i =
75
= 0.10%.
733.33
252
20
04
350 12i
= 875 30i = IS Curve
0.40
Part II
LM Curve:
Demand for Money = [Precaution + Transaction + Speculative Demand]
At equilibrium, Ms = 300.
300 = 20 + 0.10Y + 0.20Y + 130 30i = 150 + 0.30Y 30i
150 + 30i
0.30
= 500 + 100i
04
04
Equilibrium Level of Income is determined at the point where both goods and Money
Markets are in equilibrium simultaneously, which occurs at the point of interaction of the Is
and Lm Curves. So, we have,
04
20
M
AC
o.
=C+I+G+EM
ef
.N
27
-4
4-
02
31
:8
= 2,576 20i
BN
1-
ed
.IS
se
rv
= Transactions and precautionary demand for money + Speculation demand for money.
re
ht
s.
Al
lr
ig
Pr
es
ve
rs
i
ty
iU
ni
Economy will be in equilibrium when Goods Market and Money Market are in simultaneous
equilibrium.
fa
Is Curve = LM Curve
20
04
Th
e
Ic
2,576 20i
= 1,000 + 50i
1,576
= 50 + 20i
1,576
= 70i
= 22.51%
253
Macroeconomics
3, 472
100 = 163.3.
2,125.80
244. (d) Y = C + I + G + E M
04
04
455 120i
0.46
Y =
04
20
M
AC
o.
ef
.N
-4
27
02
= 1.20%
= 675.40
:8
ed
Y
675.40
=
= 2.25.
MS
300
se
rv
Velocity of Money =
.IS
BN
1-
4-
= 302.87i
31
364.13
ht
ig
re
Pr
es
s.
Al
lr
= Money Demanded
ve
rs
i
Money supply
ty
In equilibrium position:
iU
ni
Ic
fa
20
04
Th
e
1,000 + 250i = Y
Equating LM and IS functions:
2,400 40i
= 1,000 + 250i
1,400
= 290i
= 4.83
= 800 + 200i
New equilibrium
254
Part II
= 240i
= 6.67
40 + 0.8Yd
1537 28.7i
04
B
W
M
AC
04
20
246. (a) Y
04
ef
.N
o.
LM Curve:
300
= 100 20i + 0.24Y
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Y
= 833 + 83i
Equating LM and IS functions:
1,537 28.7i = 833 + 83i
704
= 111.7i
i
= 6.30
In the problem;
Investment = 200 10i
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
1, 037
= 9.28
111.7
fa
iU
ni
20
04
Th
e
Ic
= 200 + 18i =
200
= 11.1
18
[800 8 11.1]
= 1778
0.40
255
Macroeconomics
Y=
1
(800 8i + 150)
0.4
Since 150 is an autonomous component, it has to be added to (800 8i) to get the multiplier effect.
Again equating LM and IS functions:
800 + 150 8i = 600 + 10i
i
350
= 19.4
18
20
04
04
0.4Y
= 800 + 150 8 19.4 = 794.4
Y
= 1,986
Change in equilibrium = 1,986 1,778 = 208.
M
AC
200
+ 4000i .IS Curve
p
1000
+1000i ..LM Curve
p
-4
600 = 140 +
ef
.N
o.
600 = 640 +
04
248. (c) There is simultaneous equilibrium in all markets at a 600 real income level. Therefore,
substituting Y = 600, Yd = 500/p and Ms = 200/p into the IS and LM equations respectively.
02
27
31
4-
i = 0.057
1-
p = 1.05
BN
:8
The price level must increase from 1 to 1.05 to eliminate the excessive spending.
re
se
rv
ed
.IS
249. (b) If the price level is 1, the real money supply is 200 and real balances equal 200.
Substituting Yd = 500 and Ms = 200 into IS and LM equations respectively.
ig
ht
And, i
= 0.05.
s.
Al
Pr
es
ty
lr
ve
rs
i
iU
ni
20
04
Th
e
Ic
fa
LM Curve
250
0.25Y
= 116 + 500i
= 464 + 2,000i
At equilibrium level, IS = LM
1,264 800i
= 464 + 2,000i
2,800i
= 800
= 0.29
Investment
Part II
175
0.25Y
= 41 + 500i
= 164 + 2,000i
= 1,264 800i
2,800i
= 1,100
= 0.39
04
At equilibrium:
04
04
20
1
[G + I]
0.35
-4
27
o.
1
1
=
0.15 + 0.20 0.35
Multiplier =
M
AC
= 0.15
ef
.N
MPM
31
4-
1
[ 250 75] = 500.
0.35
:8
1-
02
The increase in private investment is by 250 and decline in government expenditure by 75.
ht
re
se
rv
M
=
p
ed
.IS
BN
The net result of changes in private investment and government expenditure is that, it
increases the GDP by 500.
lr
ig
0.20Y 5i = 300
= 300 + 5i
Pr
es
s.
Al
0.20 Y
ty
ve
rs
i
iU
ni
fa
Ic
Th
e
20
04
At equilibrium Y,
IS
= LM
= 65i
= 12.46
Y =Y=C+I+G
257
Macroeconomics
M
p
04
= 300 + 5i
04
0.20Y 5i = 300
0.20 Y
04
20
= 7.33
= 45i
M
AC
330
ef
.N
o.
254. (c) Y = C + I + G
-4
02
27
31
4-
= 547.5 + 0.75Y 5i
se
rv
ed
.IS
M
=
p
:8
BN
1-
0.25Y = 547.5 5i
re
0.20Y 5i = 300
= 300 + 5i
s.
Al
lr
ig
ht
0.20 Y
Pr
es
690
= 45i
ve
rs
i
ty
2,190 20i
= 15.333
fa
iU
Interest
ni
Th
e
Ic
Income Y
= 15.3%
= 2,190 20i
= 2,190 (20 15.3) = 2,190 306 = 1,884.
20
04
Y =C+I+G+EM
= 15 + 0.80Yd + 450 12i + 300 + 225 5 + 0.2Y
= 15 + 0.80 [Y 0.25Y] + 450 12i + 300 + 225 [5 + 0.2Y]
= 985 + 0.4Y 12i
Y = 1,642 20iIS Curve
LM Curve:
Demand for money = Mt + Ma
= 0.20Y + 145 60i
258
Part II
Supply of money
= 300
d
At equilibrium (M ) = Ms
300
.20Y
= 155 + 60i
Equilibrium income:
LM
775 + 300i
867
320i
2.71
04
20
04
1,642 20i =
04
IS
= 1,587.8 = 1,588.
M
AC
ef
.N
o.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Y
Y
Macroeconomics
20
04
M
AC
s.
Al
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
260.
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
259.
04
20
04
04
258.
Y
= 460 88 = 372.
t
(e) M + Ma
= Money supply
0.15Y + 75 225i = 500
0.15Y
= 425 + 225i
Y
= 2833.3 + 1500iLM Curve
IS Curve:
0.25 Y
= 115 220i
Y
= 460 880i..IS Curve
In an equilibrium situation: IS = LM
460 880i
= 2833.3 + 1500i
2373.3
= 2380i
i
= 0.997.
(a) IS Curve equation:
0.25Y
= 115 220i
Y
= 460 880i....IS Curve
The equation for the LM Curve is:
Mt + Ma
= Money supply
0.15Y + 75 225i = 500
0.15Y
= 425 + 225i
Y
= 2833.3 + 1500i.LM Curve
In an equilibrium situation: IS = LM
460 880i = 2833.3 + 1500i
2373.3
= 2380i
i
= 0.997
Equilibrium income:
Y = 2,833.3 + 1,500(0.997)
Y = 4,328.8 = 4,328.
(c) The equations can be re-written as:
0.5Y = 500 6i
0.5Y = 400 + 14i
Since IS Curve has a negative slope and LM Curve has a positive slope,
0.5Y = 500 6i..IS Curve
0.5Y = 400 + 14iLM Curve
At equilibrium, IS = LM
0.5Y 500 + 6i = 0.5Y 400 14i
20i = 100
i = 5.
(d) Since the full employment exists at the real income level of 550, we can substitute the real
income in the IS equation. The IS equation will become:
Y = 500 = 850 2500i
2500i
= 850 550 = 300
261.
300
= 0.12
2500
Part II
5m
= 930
i.e. m
930
= 186
5
Since the real money supply is 186, and the nominal money supply is 200, the price level to
200
achieve simultaneous equilibrium in the commodity and money market will be:
= 1.075.
186
262. (c) Saving function = 50 + 0.2Yd
= 650 10i
0.40Y
04
20
04
=C+I+G
04
M
AC
LM Curve:
= 250
ef
.N
Supply of money
o.
In equilibrium; Md = Ms
27
-4
31
4-
02
0.25Y
= 225i
ed
re
se
rv
1125
=5
225
= 1625 (25 5)
= 1,500.
ht
BN
= 500 + 200i
1125
.IS
1625 25i
:8
1-
= 50 + 0.2Yd
lr
ig
= C+I+G
Pr
es
s.
Al
ve
rs
i
ty
iU
ni
Ic
fa
LM Curve:
20
04
Th
e
= 250
d
= 225i
1125
=5
225
Macroeconomics
When the government expenditure increases by 135, the IS Curve will change to:
Y
= 1,962.5 25i.
= 500 + 200i
1462.5
= 225i
20
04
04
1462.5
= 6.5
225
04
= 50 + 0.2Yd
M
AC
ef
.N
o.
-4
02
27
31
1-
4-
:8
LM Curve:
= 250
Md = Ms
re
In equilibrium;
se
rv
Supply of money
ed
.IS
BN
ig
ht
Pr
es
s.
Al
lr
0.25Y
ty
= 500 + 200i
ve
rs
i
1625 25i
= 225i
fa
Ic
iU
ni
1125
1125
=5
225
20
04
Th
e
Investment will not be crowded out if interest rate is maintained at 5%. This can happen only
when LM also shifts to the right.
0.4Y
= 785 10i
= 1,962.5 25i
Part II
= 334.38.
Since money supply should cover demand for money, money supply should be increased
to 334.38.
So increase in Money supply = 334.38 250 = 84.38.
265. (d) IS Curve:
Y = C+I+G+EM
04
04
04
20
M
AC
Y = 2,340 30i
o.
LM Curve:
ef
.N
-4
27
0.25Y
4-
=250
31
02
:8
BN
1-
.IS
Equilibrium Income
= 500 + 200i
1,840
= 230i
ht
re
2,340 30i
se
rv
ed
At equilibrium, IS = LM
s.
Al
lr
ig
1,840
= 8%.
230
Pr
es
ty
Y =C+I+G+EM
ve
rs
i
iU
ni
fa
Th
e
Ic
20
04
Y = 2,340 30i
LM Curve
Demand for money (Md) = Ms
0.25Y + 125 50i = 250
0.25Y
Equilibrium Income:
263
Macroeconomics
At equilibrium: IS = LM
2,340 30i = 500 + 200i
1,840
= 230i
1,840
= 8%
230
04
04
20
IS Curve:
04
Y =C+I+G+EM
M
AC
ef
.N
o.
27
-4
Y = 2,340 30i
02
LM Curve:
31
4-
:8
BN
0.25Y
1-
ed
= 250
se
rv
.IS
re
ht
s.
Al
At equilibrium, IS = LM
lr
ig
Equilibrium Income:
Pr
es
ve
rs
i
ty
1,840
iU
ni
1,840
= 8%
230
Ic
fa
EM
20
04
Th
e
=C+I+G+EM
When the exogenous government expenditure increases by 115 the IS Curve will change to:
Y
Part II
230i
= 2,070
04
20
04
2,570 30i
04
At equilibrium:
M
AC
2070
= 9%
230
o.
Thus, an increase in Govt. expenditure will increase the equilibrium rate of interest to 9%.
ef
.N
02
27
-4
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
IS Curve
Y =
C+I+G+EM
When the exogenous government expenditure increases by 115 the IS Curve will change to:
Y =
20 + 0.75Yd +500 15i + (400 + 115) + 260 10 + 0.1Y
=
20 + 0.75(Y 0.2Y) + 500 15i + 515 + 260 10 0.1Y
=
1,285 + 0.5Y 15i
=
2570 30iIS Curve
The new IS Curve will be:
Y =
2,570 30i
ty
Pr
es
s.
Al
=
2,570 (30 8) = 2,330
In the money market, the demand for money will be
= 0.25Y + 125 50i
Ic
fa
iU
ni
ve
rs
i
Th
e
20
04
=C+I+G
= 80 + 0.75Yd + 300 200i + 30
LM Curve:
Ms
= Mt + Ma
270
Macroeconomics
= 400 + 1000i
= 400 + 1000i
1800i
= 1150
1150
1800
04
1150
= 300 128 = 172.
1800
04
= 300 200
04
M
AC
20
o.
= 1264 + 800i
ef
.N
LM Curve:
-4
02
= 446 + 2000i
4-
27
1-
31
At equilibrium:
BN
800
= 0.285 = 0.29
2800
se
rv
Investment
.IS
ed
:8
re
Pr
es
= 1264 + 800i
ve
rs
i
LM Curve:
ty
= 66 + 500i
Ic
fa
iU
0.25Y
ni
200
Y
s.
Al
lr
ig
ht
= 264 + 2000i
1264 800i
2800i
20
04
Th
e
At equilibrium:
= 264 + 2000i
= 1000
= 1000/2800 = 0.36
= 1264 + 800i
= 1264 + [800 x (0.36)] = 1552.
Part II
So at the income level of 700 the money available for speculative balance is 110.
274. (a) Quantity of money available for speculative balance:
650
= 850 2500i
04
= 850 2500i
20
04
275. (a) Since full employment exists at 650 real income level, we can substitute the real income
in the IS equation.
= 200/2500 = 0.08.
04
2500i = 200
= 500 + 5m + 1000i
ef
.N
o.
M
AC
We can now substitute Y = 650 and i = 0.08 in the LM equation which will determine
whether simultaneous equilibrium is there in the market.
27
-4
650 = 500 + 5m + 80
4-
= 1070/5 = 214
31
02
5m = 1070
.IS
BN
:8
1-
Since the nominal money supply is 200 while the real money supply is 214, all markets will
be in equilibrium when the price level is 200/214 = 0.934.
se
rv
ed
ht
re
lr
ig
Pr
es
= 1000 + 0.61Y
s.
Al
ty
ve
rs
i
Th
e
Ic
fa
iU
ni
Note that consumption function is given as interest inelastic. So IS Curve will be a horizontal
line in the r-Y plane. This means equilibrium output will be determined solely in the goods
market and the position of LM Curve does not matter for the determination of equilibrium
output.
20
04
Y = equilibrium income
Savings function
C + I +G + E X
0.39Y =
1000 IS Curve
267
Macroeconomics
2564.10
= T (G
+ R
= C + I +G + E X
= 720 + 0.7Yd + 20 + 0.10Y + 200 + 25 0.05Y
= 720 + 0.7(Y 0.2Y + 50) + 20 + 0.10Y + 200 + 25 0.05Y
04
20
= 2564.10
04
04
M
AC
ef
.N
o.
= 420 + 0.2Yd + 6i
Consumption function (C) = 420 + 0.8Yd 6i
-4
27
= C + I + G + (E M)
31
4-
02
1-
BN
:8
.IS
ed
re
se
rv
ig
Pr
es
lr
= 0.15Y 225i
s.
Al
450
ht
LM Curve equation:
= (450/0.15) + (225i/0.15)
ve
rs
i
ty
iU
ni
Economy will be in equilibrium position when goods market and Money market are in
simultaneous equilibrium.
Ic
fa
Thus at equilibrium: IS = LM
20
04
Th
e
= 12000
= 12000/1600 = 7.5
268
Part II
= C + I + G + (E M)
= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)
= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y
= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y
= 3900 + 0.74Y 26i
= 3900 26i
= (3900/0.26) (26i/0.26)
04
04
20
0.26Y
04
LM Curve equation:
= (450/0.15) + (225i/0.15)
o.
M
AC
= 450 + 225i
ef
.N
0.15Y
-4
Thus at equilibrium: IS = LM
= 3000 + 1500i
1600i
= 12000
= 12000/1600 = 7.5
1-
31
4-
02
27
15000 100i
:8
.IS
BN
ed
se
rv
ht
= C + I + G + (E M)
ig
re
s.
Al
lr
Pr
es
ty
ve
rs
i
20
04
fa
Th
e
= (3900/0.26) (26i/0.26)
Ic
iU
ni
LM Curve equation:
452 = 0.15Y 225i
0.15Y= 450 + 225i
Y
= (450/0.15) + (225i/0.15)
Thus at equilibrium: IS = LM
15000 100i
= 3000 + 1500i
1600i
= 12000
= 12000/1600 = 7.5
269
Macroeconomics
= C + I + G + (E M)
= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)
04
04
20
04
o.
= (3900/0.26) (26i/0.26)
ef
.N
M
AC
LM Curve equation:
-4
31
= (450/0.15) + (225i/0.15)
1-
4-
02
27
:8
Thus at equilibrium: IS = LM
= 12000
= 12000/1600 = 7.5
se
rv
1600i
ed
.IS
BN
re
ig
ht
s.
Al
lr
Pr
es
= 20 + 0.75Yd
ty
ve
rs
i
fa
iU
ni
20
04
Th
e
Ic
= 1000 + 80i
= 1000 + 80i
Part II
1560 1000
560
i
= 80i + 20i
= 100i
= 5.6
C + I + G + ( E M)
04
B
W
o.
0.5Y =
M
AC
04
20
04
ef
.N
The money market will be in equilibrium when, supply of money (Ms) is equal to
Transaction demand for money + speculation demand for money.
-4
02
431
1:8
BN
.IS
ed
se
rv
Y = 1000 + 80i
When equilibrium is there: IS = LM
1560 20i
= 1000 + 80i
1560 1000 = 80i + 20i
560
= 100i
i
= 5.6
27
ig
ht
re
Pr
es
s.
Al
lr
ty
285. (a) Y
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
271
Macroeconomics
= C + I + G + ( E M)
20
04
04
04
o.
M
AC
= 1600 + 220i
-4
= 4600 30i
27
ef
.N
4-
02
250i = 3000
ed
.IS
BN
:8
1-
31
i
= 12
Equilibrium interest is 12%.
To find out equilibrium income substitute the value of i in IS Curve equation.
Y = 4600 30i
s
ht
= C + I + G + ( E M)
re
se
rv
Y = 4600 30 12 = 4240.
287. (e) Trade balance = Exports Imports = 400 20 + 0.1Y
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
= 4600 30 12 = 4240
Part II
04
20
04
31
4-
02
27
-4
ef
.N
o.
M
AC
=
Govt. expenditure + Transfer payments Taxes = (800 + 80) (0.2 Y)
Y =
60 + .75 (Y 0.2Y + 80) +1000 15i + 800 + 400 20 0.10Y
Y =
2300 + 0.50Y 15i
0.5Y =
2300 15i
Y =
4600 30i
Equilibrium in the money market will be:
Supply of money = demand for money
450 = 0.2Y + 130 44i 0.2Y = 130 44i 450
0.2Y = 320 + 44i
Y = 1600 + 220i..LM Curve
Equilibrium rate of interest in economy:
Y = 4600 30i
Y = 1600 220i
250i = 3000 = i = 12
Equilibrium interest is 12%.
To find out equilibrium income substitute the value of i in IS Curve equation.
Y = 4600 30i
Y = 4600 30 12 = 4240
04
:8
1-
BN
289. (c) Y = C + I + G + E M
se
rv
ed
.IS
= 4850 30i
ht
re
lr
ig
s.
Al
Pr
es
ve
rs
i
ty
iU
ni
20
04
Th
e
Ic
fa
= 4850 30i
= 1600 220i
250i = 3250
i
= 13
= 4850 30i
= 4850 30 13 = 4460.
= C+I+G+EM
273
Macroeconomics
Ms
P
250
Mt
Ma
+
P
P
04
20
04
B
M
AC
= 1840
o.
= 8%
ef
.N
= 2340 30i
-4
4-
02
27
1-
31
= 225 10 + 0.1Y
=C+I+G+EM
:8
04
By equalizing the LM and IS Curves, we will get the equilibrium interest rate.
BN
ed
.IS
re
se
rv
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
Money supply = Transaction Demand for Money + Speculative demand for money
250 = 0.25Y + 125 50i
0.25Y = 125 + 50i
Y
= 500 + 200i .LM Curve
By equalizing the LM and IS Curves, we will get the equilibrium interest rate.
2340 30i = 500 + 200i
230i
= 1840
i
= 8%
Equilibrium income is:
Y = 2340 30i
= 2340 (30 x 8) = 2100
Money supply = Transaction demand for Money + Speculative demand for money
274
Part II
250
By equalizing the LM and IS Curves, we will get the equilibrium interest rate.
2340 30i
= 500 + 200i
230i
= 1840
= 8%
04
04
20
04
293. (c) Y = 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 745 + 225 (10 + 0.1Y)
M
AC
ef
.N
o.
-4
Money supply = Transaction Demand for Money + Speculative demand for money
02
27
31
1-
:8
4-
BN
By equalizing the LM and IS Curves, we will get the equilibrium interest rate.
= 11%
re
ed
= 2530
se
rv
230i
.IS
ht
lr
ig
s.
Al
=C+I+G+EM
Pr
es
ty
= 60 + 0.8 [Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]
ve
rs
i
iU
ni
20
04
Th
e
Ic
fa
= 900 + 200i
= 8%
Macroeconomics
= 250 20 + 0.1Y
Y = 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]
= 60 + 0.72Y + 40 + 250 + 0.1Y 35i + 400 + 250 20 0.1Y = 980 + 0.72Y 35i
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
:8
1-
BN
= 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]
ed
.IS
ig
= 3500 125i
Pr
es
Ms = Md
s.
Al
lr
ht
re
se
rv
ve
rs
i
ty
iU
ni
Ic
fa
20
04
Th
e
= 8%
Budget Surplus = 0.1Y (400 + 50) = (0.1 2500) 450 = 250 450 = 200.
297. (b) Y
= 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 582 + 250 [20 + 0.1Y]
= 60 + 0.72Y + 40 + 250 + 0.1Y 35i + 582 + 250 20 0.1Y
= 1162 + 0.72Y 35i
0.28Y
Y = 4150 125i
276
Part II
= 900 + 200i
= 325i
20
04
04
i
= 10%
The equilibrium income is:
04
ef
.N
o.
M
AC
C
Yd
27
-4
Equilibrium Income:
Y =C+I+G+EM
4-
02
1:8
BN
31
.IS
LM Curve:
se
rv
ed
Md = Mt + Ma
re
ht
lr
ig
We can find out the equilibrium interest by equating the IS and LM:
= 1160 + 580i
6300
= 900i
= 7%
ty
Pr
es
s.
Al
7460 320i
ve
rs
i
= 800 15 + 0.12Y
Ic
fa
iU
ni
Yd
=Y+R+T
= Y + 200 0.1Y = 0.9Y + 200
20
04
Th
e
IS Curve:
Equilibrium Income:
Y
=C+I+G+EM
= 560 + 0.72Y 20i + 20 +0.15Y 60i + 500 + 800 15 0.12y
Macroeconomics
LM Curve:
Md = Mt + Ma
400 = 0.25Y + 110 145i
Y
6300
= 900i
= 7%
= 7460 320i
04
7460 320i
04
We can find out the equilibrium interest by equating the IS and LM:
04
20
M
AC
o.
= T (G + R)
ef
.N
-4
=C+I+G+EM
27
4-
31
02
:8
BN
1-
.IS
LM Curve:
se
rv
ed
Md = Mt + Ma
re
ht
lr
ig
We can find out the equilibrium interest by equating the IS and LM:
s.
Al
= 7%
= 7460 320i
ve
rs
i
ty
Pr
es
6300
iU
ni
fa
Th
e
Ic
20
04
= 0.9Y + 200
C
Equilibrium Income:
Y
=C+I+G+EM
= 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y
Part II
LM Curve:
Md = Mt + Ma
400 = 0.25Y + 110 145i
Y
We can find out the equilibrium interest by equating the IS and LM:
7460 320i = 1160 + 580i
= 900i
= 7%
= 7460 320i
20
04
04
6300
04
= 8360 320i
W
M
AC
ef
.N
o.
0.27Y
7200
= 900i
= 8%
= 8360 320i
27
= 1160 + 580i
:8
1-
31
4-
02
8360 320i
-4
We can find out the equilibrium interest by equating the IS and LM:
.IS
ed
BN
se
rv
re
ig
ht
s.
Al
lr
Pr
es
=YT+R
ve
rs
i
ty
= Y 0.25Y + 60 = 0.75 + 60
iU
ni
Ic
fa
IS Curve:
20
04
Th
e
=C+I+G+EM
= 550 + 0.60Y + 400 + 0.25Y 10i + 300 + 150 0.10y = 1400 + 0.75 10i
=
(1400 10i )
0.25
= 5,600 40i
LM Curve:
Md = Mt + Ma
= 0.1Y 30i
Money Market to be in equilibrium, Md = Ms
0.15Y 30i = 480
Y
( 480 + 30i )
0.15
279
Macroeconomics
= 3200 + 200i
= 2400
= 10%
= 5200.
04
04
= 150 0.10Y
20
= 502 + 0.80Yd
Savings (S)
Yd
04
M
AC
=YT+R
= Y 0.25Y + 60 = 0.75 + 60
o.
ef
.N
-4
27
=C+I+G+EM
02
IS Curve:
4-
0.25
1:8
(1400 10i )
= 5,600 40i
BN
.IS
31
ed
LM Curve:
se
rv
Md = Mt + Ma
re
= 0.1Y 30i
ig
ht
s.
Al
lr
( 480 + 30i )
= 3200 + 200i
Pr
es
ve
rs
i
ty
0.15
ni
fa
iU
5600 40i
i
= 10%
= 5200
Ic
= 2400
Th
e
20
04
= 3200 + 200i
240i
Y=C+I+G +EM
Y = 15 + 0.8 Yd + 450 12i + 300 + 225 5 0.20Y
Y = 15 + 0.8 (Y 0.25Y) + 450 12i + 300 + 225 5 0.20Y
Y = 985 + 0.40Y 12i
280
Part II
04
04
20
320i = 866.67
M
AC
305. (a) Money market equilibrium is where demand for money = supply of money
04
i = 2.7%.
kY hi = M .
ef
.N
o.
kY = M + hi
Y = ( M + hi) / k.
27
-4
02
Y = 6,250 50i
.IS
BN
:8
1-
31
4-
ed
i = 5%,
i = 4%,
ht
re
se
rv
i = 7%,
ig
If,
ty
Pr
es
s.
Al
lr
ve
rs
i
fa
iU
ni
Ic
Total demand for money function = (Mt /p) + (Ms /p) = 0.50Y + 350 100i
20
04
Th
e
.IS function
Y = 5200 + 800i
.LM function
Thus at simultaneous equilibrium,
11400 200i = 5200 + 800i
Or, 6200 = 1000i
Or, i = 6.2
281
Macroeconomics
04
20
04
C = 250 + 0.70Yd
04
T = 0.25Yd
M = 0.3Y
o.
1
1
1
1
=
=
=
= 1.29
1 (1 t ) + 1 0.70 (1 0.25 ) + 0.3 1 0.70 ( 0.75 ) + 0.3
0.775
ef
.N
M
AC
-4
27
02
31
4-
100
= 77.5 MUC.
1.29
1-
Or, I =
Y = mI
Or, 100 = 1.29I
:8
BN
ed
.IS
At equilibrium, S = I
se
rv
200 5i = 150
re
or, 5i = 50
ig
ht
or, i = 10%.
s.
Al
lr
Pr
es
ve
rs
i
ty
ni
iU
Ic
fa
Or, Y = 950
20
04
Th
e
Part II
+ Ma
p
Substituting Y = 2,500 and i = 10 in the total demand for money function, we get,
0.50 (2,500) + 250 100(10) = 1,250 + 350 1,000 = 600 MUC
Since money supply is equal to demand for money, the new money supply will be 600 MUC.
316. (e) Saving function = 50 + 0.50 Yd
04
04
20
Y=C+I+G+EM
M
AC
o.
-4
M
M
= t + a
p
p
27
ef
.N
04
Or, Y = 50 + 0.50 (Y 0.40Y + 80) + 1,000 30i + 800 + 450 (20 + 0.20Y)
4-
02
:8
1-
31
BN
By equating the IS and LM function, we can get the equilibrium rate of interest.
ed
.IS
se
rv
ig
ht
re
or, i = 8.9%
s.
Al
lr
Pr
es
ve
rs
i
ty
ni
iU
Ic
fa
20
04
Th
e
283
Macroeconomics
IS function becomes
0.5Y = 2,925 + 475 37.5i
or, 0.5Y = 3,400 37.5i
or, Y = 6,800 75i
At simultaneous equilibrium,
IS = LM
Or, 6,800 75i = 1,250 + 500i
Or, 575i = 5,500
04
04
Or, i = 9.65%.
04
20
300 + 50i
= 0.25Y
1,200 + 200
=Y
-4
31
4-
02
27
750
:8
1-
1,300
= 240i
= 5.42
ig
lr
= 0.10Y + 88
Pr
es
s.
Al
= 176 2i
= 0.20Y 5i
ty
= 0.04Y 24
iU
ni
ve
rs
i
=M=L
= 0.20Y 120
fa
Ic
= 60 + 0.80Y + 116 2i
0.2Y
The LM equation
5i
ht
re
se
rv
ed
.IS
BN
2,500 40i
20
04
Th
e
= 0.04Y 24
321. (a)
ef
.N
o.
In equilibrium position:
M
AC
Part II
= 75
= 0.10%
75
733.33
04
04
0.6Y = 650 8i
04
20
M
AC
Since IS Curve has a negative slope and LM Curve has a positive slope,
o.
ef
.N
27
-4
4-
02
At equilibrium:
31
:8
1-
26i = 230
.IS
BN
i = 8.85
Equilibrium income will be
se
rv
re
Y = 1,132.
ed
ig
lr
ht
Pr
es
s.
Al
ve
rs
i
ty
ni
iU
or Y = 675 200i
....(i)
Ic
fa
20
04
Th
e
... (ii)
= 600 + 533.33i
733.33i = 75
i = 75/733.33
i = 0.10%
Y = 675 200 0.10
Y = 655
Transaction demand for money = 0.3Y = 0.3 655 = 196.50.
324. (e) We know that
285
Macroeconomics
= C + I + G .......(1)
Where,
C
= Consumption function
= Investment function
= 75 + 0.80 Yd
= 150 16i
= 31
04
= 0.15Y
04
20
04
Yd = Y T
Md = 80Y 2,400i
M
AC
Ms = 3,200
Substituting C, I and T values in equation (1) we get
o.
ef
.N
27
-4
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
0.32Y
= 256 16i
Y
= 800 50i ...... (2)
At equilibrium:
Md = Ms
80Y 2,400i = 3,200
Substituting the value of Y in equation (2)
80 (800 50i) 2,400i = 320
64,000 4,000i 2,400i = 3,200
6,400i = 60,800
i = 9.5
By substituting the value of i in equation (2) we get the equilibrium level of income
Y = 800 50(9.5) = 800 475 = 325
Once the equilibrium level of income is found out the other variables can be estimated:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
T
= 0.15 Y = 15/100 325 = 48.75
Budget surplus of the government = T G = 48.75 31 = 17.75
Budget surplus of the government is 17.75.
325. (c) Y = C + I + G
When the government expenditure increases to 63,
Y = 75 + 0.80(Y 0.15Y) + 150 16i + 63
Y = 75 + 0.80Y 0.12Y + 150 + 16i + 63
0.32Y = 288 16i
Y
= 900 50i ...... (1)
At equilibrium:
Md = Ms
80 Y 2,400i = 3,200
Substituting the value of Y i.e., equation (1), we get
80 (900 50i) 2,400i = 3,200
72,000 4,000i 2,400i = 3,200
286
Part II
= 10.75
04
04
20
= 502 + 0.80Yd
Yd
04
M
AC
=YT+R
o.
= Y 0.25Y + 60 = 0.75 + 60
ef
.N
-4
27
=C+I+G+EM
02
IS Curve:
0.25
31
= 5,840 40i
1-
(1460 10i )
:8
BN
4-
= 550 + 0.60Y + 400 + 0.25Y 10i + 360 + 150 0.10y = 1460 + 0.75 10i
.IS
LM Curve:
se
rv
ed
Md = Mt + Ma
re
= 0.1Y 30i
ig
ht
s.
Al
lr
( 480+30i )
= 3200 + 200i
Pr
es
ve
rs
i
ty
0.15
iU
ni
Ic
fa
= 11%
= 5400.
20
04
Th
e
240i
Macroeconomics
330. (b)
04
04
04
20
23.29
M
AC
R
-4
1.26
100 = 5.4%.
23.29
27
02
( 24.55 23.29 )
ef
.N
21,634.97
100 = 24.55
88,104.62
4-
19,555.28
100 = 23.29
83,936.32
o.
BN
:8
1-
31
1+ Cu
331. (c) Money supply = H
Cu + r
ht
re
222
1,294
lr
s.
Al
Pr
es
ty
ve
rs
i
60
72
620
60
ed
Assets
Financial assets
Credit to government
1,516 Credit to State Govt.
Credit to banks
Foreign exchange assets
Other assets
812
2,328
Rs.
Rs.
875
950
421
40 2,286
42
2,328
iU
ni
Rs.
se
rv
Rs.
ig
Liabilities
A. Monetary liabilities
Other deposits
Other monetary liabilities
B. Non-monetary liabilities
Government deposits
Others
Share capital
Reserves
.IS
where H is High Powered Money = Money Liabilities of Central Bank + Government Money.
Th
e
Ic
fa
1 + 0.3
= 5,317.
0.3 + 0.10
20
04
332. (a)
Liabilities
Government deposits
Net worth
Monetary Liabilities
Bank deposits
Other liabilities
Rs.
42
740
Rs.
Assets
Credit to government
782 Credit to Bank
Credit to commercial sector
220
Foreign Exchange assets
1,760 1,980 Other assets
2,762
Rs.
1,420
432
594
202
42
2,726
Part II
1 + Cu
Money supply substituting figures in the above formula = H
Cu + r
1 + Cu
= 2181
Cu + 0.07
8,542
= 1,583.06
Cu
= 1,583/631
04
04
1 + 0.25
= 3.9062.
0.25 + 0.07
20
Money Multiplier =
= 0.25 (approx.)
04
= 20,253
M
AC
= 17,073
o.
-4
27
17, 073
= 0.681.
25, 058
4-
= 25,058
02
For 2001
ef
.N
1-
31
BN
.IS
:8
For 1982 =
s.
Al
lr
ig
ht
re
se
rv
For 1981 =
ed
Pr
es
ve
rs
i
ty
ni
fa
iU
Ic
20
04
Th
e
14, 000
= 20,588.
0.68
289
Macroeconomics
337. (b) Total Issue = Financial Interrelation Ratio Net Capital Formation
14, 000
= 20,588
.68
04
14, 000
= 20,588
0.68
04
20
04
M
AC
o.
Y
Ms
ef
.N
-4
= 810/162 = 5.
02
27
Velocity of Money
4-
1-
31
:8
1.33
45,000 = 12,000
0.33 +
ht
re
se
rv
ed
Money Supply
.IS
BN
s.
Al
1,110
= 0.025
45, 000
Pr
es
r =
lr
ig
ty
ve
rs
i
iU
ni
fa
20
04
Th
e
Ic
342. (d) M3 = Currency with public + Deposits money of the public + Time deposits with banks.
343. (a)
Liabilities
Government deposits
Other non-monetary liabilities
Net worth
Monetary liabilities
(Balancing figure)
Rs.
Assets
290
Rs.
1,400
600
400
20
40
2,460
Part II
Money Supply =
1+ C u
xH
r + Cu
where, Cu
r
and, H
where, x
= 0.3
= 5%
= 1,500 + x
= Government Money
5,942
2079.7
= 1950 + 1.3x
04
04
1+ 0.3
[1500 + x ]
0.05 + 0.3
04
20
129.7
= 99.76.
1.3
W
M
AC
o.
ef
.N
10, 613.96
= 0.61
17, 421.03
-4
10,524.16
= 0.64
16,420.01
27
344. (e) New Issue Ratio = Primary Issues/ Net Capital Formation
Primary Issues
= 4,051.11 + 6,021.01 + 452.04 = 10,524.16
1-
31
0.03
100 = 4.6%.
.64
:8
4-
02
BN
ed
.IS
9,031.12
= 0.86
1024.16
se
rv
11,021.01
= 1.04
10,613.96
ig
ht
re
s.
Al
lr
1.04 0.86
100 = 21%.
0.86
iU
ni
ve
rs
i
ty
Pr
es
Th
e
Ic
fa
1 + Cu
1 + 0.4
Money Supply in the Economy (M) = H
= 5,000
0.4 + 0.10
Cu + r
20
04
1 + Cu
1 + 0.4
347. (a) The money multiplier at the original level =
=
= 2.8
0.4 + 0.10
Cu + r
To maintain the money supply at the original level, money multiplier should be maintained at
the original level of 2.8.
1 + 0.2
0.2 + r
= 2.8
Macroeconomics
Total Issues
349. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60
04
04
Total Issues
Net Capital Formation
04
= 96,000
20
M
AC
Finance Ratio
o.
ef
.N
Total Issues
-4
Total Issues
4-
31
02
27
:8
1-
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
20
04
Th
e
Ic
= 8,985/10,595 = 0.84.
= 10,595/13,680 = 0.77.
(Cu) = 0.5
Reserve Ratio
(r)
= 0.1
Money Multiplier
1 + Cu
1 + 0.5
=
= 2.5
=
C
+
r
0.1
+ 0.5
u
Money Supply
= H 2.5
= 18950 2.5
= 47,375. (1)
292
Part II
Central Bank purchasing Rs.8,970 worth government securities will increase the high
powered money by the same amount, i.e., Rs.9,970.
= H 2.5 = (18,850 + 8,970) 2.5
= 69,800(2)
Increase in money supply = (2) (1)
04
20
04
M
AC
Financial Assets =
04
ef
.N
o.
Money supply
= H
-4
Other assets
H
02
27
= 1,853
BN
:8
1-
31
4-
1 + Cu
1 + 0.30
= 1,853
= 7,085.
r + Cu
0.40 + 0.3
.IS
ed
re
s
1 + 0.3
r + 0.3
ht
= 1,853
lr
ig
5,809.7
se
rv
1
r + 0.3
ty
Pr
es
ni
ve
rs
i
2.412
1
r + 0.3
s.
Al
5,809.7
1
1,853
1.3
20
04
Th
e
Ic
fa
iU
r + 0.3
1
2.412
= 11.46%.
357. (a)
Liabilities
Non-monetary liabilities
Net worth
Government deposits
Other non-monetary liabilities
Monetary liabilities
Bank deposits
Other monetary liabilities
Amount Assets
Financial assets
1,000 Credit to government
50 Credit to banks
25 Credit to commercial sector
Foreign exchange assets
125 Other assets
1,970
3,070
Amount
1,750
750
500
20
50
3,070
Macroeconomics
Money Supply = H
=
0.34 + 1
2,000
0.34 + r
0.34 + 1
0.34 + r
1.02 + 3
= 1.34
3r
= 0.32
o.
M
AC
04
20
04
04
6,000
-4
27
ef
.N
358. (d) When the Central Bank credit to Government is increased by 550 million, this affects the
financial assets of the Central Bank. Hence high-powered money will increase by 550 million.
02
If the Central Bank wants to contain the money supply at the original level of 6,000 million:
=(M) (2,000 + 550)
6,000
= 2.3529
2,550
1+ Cu
= 2.3529 =
Cu + r
1.34
= 0.799 + 2.3529r
= 0.541/2.3529
= 0.23 or 23%.
1+ 0.34
= 2.3529
0.34 + r
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
6,000
Pr
es
ve
rs
i
ty
Ic
fa
iU
ni
Total Issues
Financial Ratio
= 24,750/1.60 = 15,468.75.
Th
e
20
04
31
4-
= 0.8
= 0.2
Money Supply and High-Powered Money are related to each other by the following formula:
294
1 + Cu
=
H
Cu + r
1 + 0.8
=
1,000 = 1.8 x 1,000 = 1,800.
0.8 + 0.2
Part II
1 + Cu
r + Cu
Cu
= 1.2r = 0.1
Multiplier
= 2.2/1.3 = 1.69.
04
04
04
20
M
AC
Other Assets = 35
o.
ef
.N
= 10 + 5 + 250 = 265
-4
02
27
Money = 527
= Reserve Ratio
.IS
= 0.05
ht
1 + Cu
= 527
Cu + 0.05
re
se
rv
ed
:8
BN
where Cu
1-
31
4-
1 + Cu
Money supply = H
Cu + r
s.
Al
lr
ig
1,957
ve
rs
i
ty
Pr
es
1957
1 + Cu
=
= 3.7135
527
Cu + 0.05
1 + Cu
= 3.7135Cu + 0.1857
Th
e
Ic
Cu
fa
iU
ni
2.7135 Cu = (1 0.1857)
=
0.8143
0.30 = 30%.
2.7135
20
04
363. (e)
Liabilities
Monetary liabilities
Other deposits
Other monetary liabilities
(Balancing figure)
Non monetary liabilities
Government deposits
Other
Net worth
Rs. Assets
Financial assets
50 Credit to government
750 Credit to banks
Credit to commercial sector
20 Foreign exchange assets
10 Other assets
400
1,230
Rs
700
300
200
10
20
1,230
295
Macroeconomics
Cu + r
04
= 10%.
20
04
= 1.35
3 x (0.35 + r)
04
1 + 0.35 1.35
2400 = 800
=3
0.35 + r 0.35 + r
= Currency + Reserves
ef
.N
o.
M
AC
1.35 1.05
= 0.10
3
= 16,500
= Let us assume X
27
= 0.3
:8
1-
31
4-
02
-4
1 + Cu
xH
Cu + r
ed
.IS
BN
Money Supply and High-Powered Money (that is with the public) are related to each other by
the following formula.
= 2200
= 0.13
ni
ve
rs
i
16,500 X
= 4950 + 16,500X
ty
7150
= 16,500 (0.3 + X)
Pr
es
(1 + 0.3) 5,500
s.
Al
lr
ig
ht
1 + 0.3
5,500 = 16,500
0.3+ X
re
se
rv
= M
fa
iU
The reserve ratio that the Central Bank must impose (approximately) is 0.13.
Ic
365. (e) High-Powered Money (H) = Monetary Liabilities of RBI + Government Money
20
04
Th
e
Other Assets = 65
Non-Monetary Liabilities = Government Deposits + Other Non-Monetary Liabilities + Net Worth
= 20 + 5 + 500 = 525
Monetary Liabilities
Government Money
= 10
296
Part II
1 + Cu
=
H
Cu + r
= 0.20
1.2
= 0.8 + 4r
04
1 + 0.20
=
=4
0.20 + r
20
04
1.20 0.8
= 0.10.
4
04
Money Multiplier
ef
.N
o.
M
AC
02
27
-4
1 + 0.20
=
=4
0.20 + r
Money Multiplier
31
4-
ed
se
rv
.IS
BN
:8
1 + Cu
367. (d) Money multiplier in the economy =
Cu + r
1-
Pr
es
s.
Al
lr
ig
ht
re
Money Supply in the Economy = Money Multiplier High-Powered Money Central Bank
purchase of Government Securities worth 200 will increase
the High-Powered Money from the initial 800 to 1,000.
If the money supply is to remain at 4,000;
ve
rs
i
ty
=4
1 + 0.2
= 4
r + 0.2
fa
iU
ni
1 + Cu
Cu + r
4000
1000
20
04
Th
e
Ic
1.2
= 4r + 0.8 = 0.4 4r
r
= 0.1.
368. (a) When reserves are decreased by 500, the new reserve will be:
2400 500
= 1900
Reserve requirement = 20%
Demand deposits that can be supported with the lower reserves and lower reserve
requirement are:
1900/0.20
= 9500
Decrease in demand deposits = 9600 9500 = 100.
369. (c) Intermediation Ratio = Secondary Issues/Primary Issues
For year 2001 =
7,862.50
7862.50
= 0.85.
=
9250
8525 + 725
297
Macroeconomics
Other Assets
M
AC
04
20
04
04
ef
.N
o.
Non-Monetary Liabilities
27
-4
02
1-
31
4-
(Currency issued by Central Bank and deposits of banks with Central Bank are apart of
monetary liability).
:8
.IS
BN
ed
ht
re
se
rv
1 + Cu
Money Supply in the Economy = H
Cu + r
s.
Al
lr
ig
1 + 0.2
Money Supply = 1500
= 7,200 million units of currency.
0.2 + 0.05
Pr
es
ve
rs
i
ty
Financial Assets
ni
fa
iU
Th
e
Ic
20
04
298
= 1,500
Part II
If an additional credit of 500 million units of currency is granted to government, the highpowered money will be 1,500 + 500 = 2,000
Money Supply = 2,000 4.8 = 9,600
Money Supply will increase by 9,600 7,200 = 2400 million units of currency.
373. (d) Given,
o.
ef
.N
27
-4
31
1:8
1,57,500
= 1,05,000.
1.5
4-
02
04
M
AC
20
W
= (3 4) + 6 = 18%
Given money multiplier is 3
Rate of growth of reserve money
= 18/3 = 6%.
374. (c) Secondary Issues = Primary Issues Intermediation Ratio
04
3.0
4% and
6%
a.gY + gP
04
=
=
=
=
BN
ed
.IS
se
rv
re
= 1,50,662.4 + 1,98,240
ht
Total Issue
s.
Al
lr
ig
Pr
es
ve
rs
i
ty
iU
ni
Ic
fa
Th
e
20
04
= 2.0
= 5%
= 5%
= a.gY + gP
= (3 4) + 6 = 18%
= 15/3
= 5%.
299
Macroeconomics
= 100 + 2,000 + 50
04
04
04
20
M
AC
High-Powered Money (H) = Monetary Liabilities of the Central Bank + Government Money
= 3,990 + 10 = 4,000 million units of currency
ef
.N
o.
1 + Cu
Money Supply = H
Cu + r
27
-4
02
r = Reserve Ratio
31
4-
1-
:8
.IS
1 + 0.34
= 3 = 1.02 + 3r = 1.34
0.34 + r
se
rv
=3=
ed
1 + Cu
Cu + r
re
1.34 1.02
= 10.67%.
3
ig
ht
12,000
=3
4,000
BN
s.
Al
lr
Pr
es
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets
= 1,000 + 400 + 100 + 14 = 1,514
ty
= 70
ve
rs
i
Other Assets
iU
ni
= 20 + 500 + 10 = 530
Ic
fa
20
04
Th
e
= 4.8
0.2 + 0.05
Cu + r
Reduce 20% of 4.8
300
Part II
Secondary Issues
Total Issues
National Income
= 42,720/0.26 = 1, 64,307.69.
20
o.
ef
.N
M
AC
04
Secondary Issues
04
04
-4
02
27
4-
1:8
= 35,000/1.6 = 21,875.
31
.IS
BN
ed
se
rv
re
ht
Pr
es
s.
Al
lr
ig
ve
rs
i
ty
Y = 5,000 30i
ni
iU
20
04
Th
e
Ic
fa
1030i = 4,000
= 3.88%
Thus,
Y = 5,000 30 3.88 = 4883.6 MUC
The growth rate in nominal stock of money will be:
gm = gY + gp
where,
gm = Growth in nominal money stock
gp = Rate of inflation = 5%
gY = Rate of growth of real GDP = 3.5%
301
Macroeconomics
Hence,
gm = (1.2 3.5 ) + 5 = 9.2%
Hence,
Expected nominal stock of money = 300 1.092 = 327.6 MUC.
386. (e) The cost of borrowing from the commercial banks will be:
5,000 30i
0.3Y 300i
300 (MUC)
04
20
04
04
M
AC
ef
.N
o.
27
-4
Y = 5,000 30i
02
31
= 3.88%
1-
:8
= 4,000
BN
1030i
4-
.IS
ig
ht
re
1+ Cu
H
Cu + r
lr
se
rv
ed
3.88 + 5 + 2 = 10.88%.
= High-Powered Money
= Reserve Ratio
Pr
es
s.
Al
ty
ve
rs
i
iU
ni
fa
Th
e
Ic
FA (RBI)
20
04
OA (RBI)
Cu + r
H = High-Powered Money
302
04
20
02
27
-4
ef
.N
o.
M
AC
04
r = Reserve Ratio
Cu = Currency to Deposit Ratio
H = Monetary Liabilities of RBI + Government Money
Monetary Liabilities of RBI
= Financial Assets of RBI + Other Assets of RBI Non-Monetary Liabilities of RBI
FA (RBI) = 30,000 + 4,000 + 700 + 7,500 = 42,200 (MUC)
OA (RBI) = 4,000 MUC
NML (RBI) = 1,000 + 405 + 35,000 = 6,405 MUC
Thus,
ML (RBI) = 42,200 + 4,000 36,405 = 9,795 MUC
Hence,
H = 9,795 + 5 = 9,800 MUC
M = 9800 x 1.4/0.5 = 27,440
The net increase in
H = 250 50 = 200 MUC
H = 9,800 + 200 = 10,000
1 + 0.4
M = 10,000
= 28,000
0.4 + 0.1
04
Part II
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
MUC
1,500
600
150
21
105
2,376
20
04
Th
e
Ic
fa
iU
ni
Liabilities
Government Deposits
Other Non-Monetary
Liabilities
Net Worth
Monetary Liabilities
Macroeconomics
04
=
1,581 million Units of Currency
Stock of High-Powered Money (H)
= Monetary Liabilities of Central Bank + Government Money
As the government money constitutes a negligible proportion of total money supply, 1,581
million units represents total stock of High-Powered Money (H).
We have,
High-Powered Money (H) = 1,581 million units of currency
Currency-Deposits Ratio (Cu) = 0.30
Reserve Ratio (r) = 5%
04
20
04
1 + Cu
Money Supply (M) = H
r + Cu
ef
.N
o.
M
AC
1 + 0.30
= 1,581
= 5,872.29 million units of Currency.
0.05 + 0.30
27
BN
:8
Total Issues
1-
31
4-
Secondary Issues
02
-4
Primary Issues
.IS
ed
se
rv
re
ig
ht
s.
Al
lr
Pr
es
ve
rs
i
ty
ni
iU
Ic
fa
= C+R
20
04
Th
e
Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI
Or ML (RBI) = FA (RBI) + OA (RBI) NML (RBI)
Hence,
ML (RBI) = (1,750 + 500 + 750 + 20) + 50 (1,000 + 25 + 50)
= 3,020 + 50 1,075 = 1,995
High-Powered Money (H) = 1995 + 5 = 2,000
1 + Cu
Ms = H
r + Cu
1 + 0.34
6,000= 2,000
r + 0.34
304
Part II
1.34
=3
0.34 + r
1.02 + 3r = 1.34
3r
= 0.32
395. (b) As per the given information, the high power money is:
04
Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI
04
20
04
M
AC
27
-4
ef
.N
o.
1.34
0.34 + r
:8
1-
31
4-
02
1 + 0.34
2,550
= 6,000
r + 0.34
.IS
BN
= 2.35
se
rv
= 0.229 or 22.9%.
re
ed
ig
ht
s.
Al
lr
Pr
es
Total Issue
= 24,000/1.6 = 15,000.
ty
ve
rs
i
ni
fa
iU
Total Issue
Th
e
Ic
20
04
Total Issue
24,000
305
Macroeconomics
400. (b) Financial Interrelations Ratio = Total Stock of Financial Assets Incremental Physical Assets
04
BN
:8
1-
ed
Finance Ratio
.IS
Total Issues
31
4-
02
27
-4
1 + 0.2
1.2
=
1,054 =
1,054 = 5,059.2.
0.2
+
0.05
0.25
ef
.N
o.
1 + Cu
=
1,054
Cu + r
Ms
20
400
100
14
70
1,584
04
20 Credit to Banks
10 Credit to Commercial Sector
500 Foreign Exchange Assets
Other Assets
1,584
Rs
1,000
Rs.
Assets
1,054 Credit to government
M
AC
Liabilities
Monetary Liabilities
(Balancing figure)
Government Deposits
Other non-Monetary Liabilities
Net Worth
04
se
rv
re
= 47,445/1,16,450 = 0.407.
ht
lr
ig
s.
Al
Pr
es
ve
rs
i
ty
= 0.99166 = 0.992.
ni
Ic
fa
iU
20
04
Th
e
= 1345 + 10
Money Supply
= 1355 MUC
= 1355 3 = 4,065.
1+0.35
=3
0.35+0.10
306
Part II
= 1,345 + 10
= 1,345
= 1,355 MUC
= 1,355 + 50
= 1,405
1 + 0.35
1405
0.35 + r
0.35 + r
1,405 1.35
4,065
04
B
W
M
AC
04
20
4,065
04
o.
1 + Cu
=
Cu + r
02
27
-4
ef
.N
31
4-
Cu = 0.30
= 0.10
1.30
1.30
= 3.25
=
=
0.30 + 0.10 0.40
se
rv
ed
.IS
BN
:8
1-
ht
re
lr
ig
s.
Al
ty
ve
rs
i
Money Supply
Pr
es
ni
408. (b)
fa
iU
Money Supply = m. H
1 + Cu
=
Cu + r
Cu
= 0.30
= 0.10
1.30
1.30
= 3.25
=
=
0.30
+
0.10
0.40
20
04
Th
e
Ic
Macroeconomics
= 0.115 = 11.5%.
04
1.30 12,450
= 0.415
39,000
04
(0.30 + r) =
1.30
12,450
0.30 + r
04
20
39,000
409. (c) High Powered Money = Monetary Liabilities of Central Bank + Government Money
M
AC
Monetary Liabilities of Central Bank = Financial Assets + Other Assets Non-Monetary Liabilities
ef
.N
o.
27
02
-4
31
4-
1-
BN
:8
L = 0.25Y 10i.
.IS
At i= 6 %, L = 0.25Y 60.
ed
se
rv
0.25Y 60 = 200
re
0.25Y= 260
ig
ht
Y = 1,040 MUC.
s.
Al
lr
Pr
es
Y = C+ I + G + E M
ve
rs
i
ty
ni
Ic
fa
iU
20
04
Th
e
GNP at Market Prices = GDP at Market Price + Net Factor Income from Abroad
= 76,500 + 200 = 76,700
308
{(1 + C ) / ( C
u
+ r )}
Part II
48,000 =
12,000
(1 + 0.25)/(0.25 + r) = 4 = 1 + 4r = 1 0.25
4r
0.25
0.0625 = 6.25%.
At equilibrium Ms = Md.
2,000
04
10,000 MUC.
04
20
0.2Y
04
2,340 =
M
AC
o.
02
27
-4
ef
.N
Given the reserve ratio of 10%, required reserves are 2,500 0.10 = Rs.250.
416. (a) Since foreign exchange inflows of 50 MUC increases the monetary liabilities by 50
MUC, the central bank can sold 50 MUC worth of government securities to bring back the
monetary liabilities to its original level to keep money supply at the same level.
4-
417. (e) High-Powered Money (H) = Monetary Liabilities or Central Bank + Government Money.
1-
31
BN
:8
ed
.IS
re
se
rv
lr
ig
ht
s.
Al
ve
rs
i
ty
Pr
es
Money Supply Ms
iU
ni
20
04
Th
e
Ic
fa
1 + Cu
H
Cu + r
1 + 0.20
1, 250 = 4.8 1,250 = 6,000 MUC.
0.20 + 0.05
1 + Cu
H
Cu + r
1 + 0.40
500 = 2.8 500 = 1,400 MUC
0.40 + 0.10
1.40
( 0.40 + r )
1.40
1, 400
Macroeconomics
Total issue
National Income
17,200 = 4,300. m
04
04
W
1 + Cu
=4
Cu + 0.10
M
AC
1 + Cu
Cu + r
20
m=
17, 200
=4
4, 300
04
or, m =
ef
.N
o.
-4
02
27
31
4-
2, 500 10
= Rs.250.
100
BN
:8
1-
.IS
ed
ht
re
6,800
= 0.2.
34,000
ig
Reserve requirements =
se
rv
s.
Al
lr
Pr
es
ni
ve
rs
i
ty
fa
iU
20
04
Th
e
Ic
Rs. Assets
2,685 Credit to Government
Credit to Banks
25 Credit to Commercial
Sector
18 Foreign Exchange Assets
522 Other Assets
3,250 Total
Rs
2,500
500
160
15
75
3,250
Part II
426. (a)
Amount
Assets
Financial Assets
235 Credit to Government
1,263 Credit to State Govt.
Amount
890
1,010
Credit to Banks
Foreign Exchange Assets
Other Assets
2,459
M
AC
o.
ef
.N
1+ 0.3
= 5,291.
0.3+ 0.10
427. (d) Reserves are decreased by 750 = 5,000 750 = 4,250
-4
= 1,628
27
Money Supply
04
20
04
04
70
76
740
75
2,459
Non-Monetary Liabilities
Government Deposits
Others
Share Capital
Reserves
460
55
44
Liabilities
Monetary Liabilities
Other Deposits
Other Monetary
Liabilities
1-
31
4,250
= 0.22.
19,200
:8
Reserve requirements =
4-
02
BN
428. (a) M3 = Currency with Public +Deposit Money of the Public + Time Deposits with Banks
ed
.IS
re
Assets
Credit to Government
Credit to Banks
Credit to Commercial
Sector
1,701 Foreign Exchange Assets
Other Assets
2,708
Pr
es
s.
Al
lr
ig
ht
Liabilities
Government Deposits
Other Non-Monetary Liabilities
Net Worth
se
rv
429. (e)
ni
ve
rs
i
ty
Monetary Liabilities
(Balancing figure)
Rs.
1,525
675
435
25
48
2,708
1 + Cu
H
r + Cu
Ic
fa
iU
Money Supply =
Rs.
165
22
820
20
04
Th
e
where Cu = 0.4
r
= 6%
and H
= 1,701 + X
1 + 0.4
(1,701 + X)
0.06 + 0.4
= 1.4 (1,701 + X)
2,909.5
= 2,381.4 + 1.4X
1.4 X
= 2,909.5 2,381.4
1.4 X
X
= 528.1
= 528.1/1.4 = 377.2.
311
Macroeconomics
= 0.12
0.5 + 0.12
04
20
= 0.6
04
04
M
AC
ef
.N
Money Supply
1+ 0.6
= 2.22
0.6 + 0.12
o.
27
-4
Central Bank purchases Rs.12,500 worth Government securities will increase the high
powered money by the same amount,
4-
02
1-
(ii)
:8
31
= 27,750.
.IS
BN
ed
432. (a) When reserves are decreased by 700, the new reserve will be: 3,200 700 = 2,500
se
rv
lr
s.
Al
ig
ht
re
Demand deposits that can be supported with the lower reserves and lower reserve
requirement are 2,500/0.25 = 10,000.
Pr
es
ty
ve
rs
i
iU
ni
20
04
Th
e
Ic
fa
M1 = Currency with Public + Demand Deposits with Banks + Demand Portion of Savings
Deposits with Banks + Other Deposits with RBI
= 1,52,737 + 99,106 + 5,627 = Rs.2,57,470 crore
M3 = 2,57,470 + 4,83,560 = 7,41,030.
312
Part II
436. (d)
04
04
20
04
B
W
o.
M
AC
130
200
200
0
70
538
46
492
408
ef
.N
70
0
0
0
70
658
82
576
728
1-
31
4-
02
27
I. MERCHANDIZE
II. INVISIBLES (a + b + c)
a. Services
b. Transfers
c. Income
Total Current Account (I + II)
CAPITAL ACCOUNT
I. Foreign Investment (a+b)
200
a. In the country,
200
i. Direct
200
ii. Portfolio
0
b. Abroad
0
II. Loans
120
a. External Assistance
36
b. Short-Term
84
Total Capital Account (I + II)
320
Over all Balance of Payments
= Current Account Balance Capital Account Balance
= 6,314 408 = 5,906.
(US $ million)
Debit
Net
36,984 2,030
25,956 8,344
24,928 7,016
170
78
858 1,250
62,940 6,314
-4
Credit
34,954
34,300
31,944
248
2,108
69,254
1,325
+347
re
se
rv
ed
.IS
Net
400
53
100
122
Net
5,117
a. In India
5,191
Direct
2,167
Portfolio
3,024
74
1,601
891
By India
10
10
To India
901
333
By India
20
To India
313
c. Short Term
377
ve
rs
i
Foreign Investment (a + b)
iU
fa
Ic
Th
e
20
04
Debit
1,050
275
0
0
Capital Account
Credit
Debit
ni
ty
Particulars
Pr
es
438. (a)
Credit
1,450
222
100
122
0
1,672
s.
Al
lr
ig
ht
Particulars
Merchandize
Invisibles (a + b + c)
a. Services
b. Transfers
c. Investment income
Total current account
I
II
BN
:8
437. (c)
b. Abroad
II Loans ( a + b + c)
a. External Assistance
b. Commercial Borrowings
313
Macroeconomics
2,727
a. Commercial Banks
2,904
Assets
790
Liabilities
26
Non-Resident Deposits
2,140
177
711
711
V Other Capital
1508
10,242
04
b. Others
Net
04
Debit
20
Credit
04
Particulars
M
AC
439. (c) Capital Inflows Capital Outflows = 6,300 4,500 = 1,800 MUC (Deficit).
ef
.N
o.
27
-4
02
31
4-
:8
1-
BN
.IS
se
rv
ed
442. (d) Net Foreign Investment in India = Foreign Direct Investment (credit) + Portfolio
Investment (credit) Foreign Direct Investment (debit) Portfolio Investment (debit)
re
ig
ht
443. (e) Overall Balance of Payment = Total Credit of the Bop Total Debit of the Bop
s.
Al
lr
Pr
es
ty
ve
rs
i
ni
fa
iU
Th
e
Ic
20
04
Revenue Deficit
Part II
04
04
20
Fiscal Deficit
449. (c)
04
M
AC
ef
.N
-4
4-
02
27
o.
1-
31
:8
.IS
BN
se
rv
ed
re
lr
ig
ht
452. (e) Revenue Receipts = Direct Taxes + Indirect Taxes + Interest Receipts + Total Profits
s.
Al
Pr
es
ve
rs
i
ty
iU
ni
Ic
fa
20
04
Th
e
Working notes:
Total Receipts
Total Borrowings
315
Macroeconomics
456. (b) Revenue Deficit = Total Revenue Expenditure Total Revenue Receipts
04
457. (b) Possible GDP growth = Possible level of investment/Capital Output Ratio = 25/5 = 5 %
04
04
20
M
AC
ef
.N
32
= 4.
8
o.
Growth rate = 6 + 2 = 8%
27
-4
459. (a) Required savings to achieve the targeted growth rate in GDP is
02
31
4-
= 4 7 = 28%
:8
1-
BN
.IS
se
rv
ed
re
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
316
M
AC
04
20
04
04
The model question paper consists of two parts A and B. Part A is intended to test the
conceptual understanding of the students. It contains around 40 multiple-choice questions
carrying one point each. Part B contains problems with an aggregate weightage of 60 points.
Students are requested to note that this is an indicative format of the question paper in general
and that the ICFAI University reserves the right to change, at any time, the format and the
pattern without any notice. Hence, the students are advised to use the model question papers for
practice purposes only and not to develop any exam-related patterns out of these model
question papers.
The suggested answers given herein do not constitute the basis of evaluation of the students
answers in the examination. These answers have been prepared by the faculty members of the
ICFAI University with a view to assist the students in their studies. And, they may not be taken as
the only answers for the questions given.
27
-4
ef
.N
o.
Time: 3 Hours
02
31
4-
1.
b.
c.
Macroeconomics studies the behavior of large firms, while microeconomics studies the
behavior of small firms.
d.
There is no difference, basically macroeconomics and microeconomics are one and the
same.
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
a.
ve
rs
i
ty
2.
Population has grown less rapidly than the growth of the capital stock.
b.
iU
fa
Ic
The percentage of GDP used to finance investment in physical capital has been roughly
constant.
d.
e.
20
04
Th
e
c.
ni
a.
3.
b.
c.
d.
e.
Macroeconomics
4.
b.
c.
Though some prices may be falling, prices are, on the average, climbing
d.
e.
d.
e.
04
c.
20
04
b.
Aggregate consumption
M
AC
a.
ef
.N
b.
c.
d.
e.
:8
1-
31
4-
02
27
-4
a.
BN
6.
04
o.
5.
a.
lr
ig
ht
re
se
rv
ed
.IS
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
Ic
fa
b.
c.
d.
e.
20
04
Th
e
a.
318
a.
b.
c.
d.
e.
Part III
b.
c.
d.
e.
04
12. On the basis of the Keynesian model of output determination, which of the following will
most likely result if maintainable savings exceed intended investment?
Output will fall.
b.
c.
d.
e.
ef
.N
o.
M
AC
04
20
04
a.
b.
c.
d.
e.
BN
ed
.IS
:8
1-
31
4-
02
27
-4
a.
b.
c.
d.
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ve
rs
i
ty
b.
Residual wages
c.
Transfer payments
Ic
fa
iU
ni
a.
Dividend payments
e.
Personal savings.
20
04
Th
e
d.
b.
Varies inversely with the rate of interest and is proportional to the square root of income
c.
d.
e.
319
Macroeconomics
17. Which of the following are the sources of change in high-powered money in Indian economy?
Change in RBI credit to government.
ii.
iii.
iv.
v.
a.
b.
c.
d.
e.
M
AC
04
20
04
04
i.
o.
b.
c.
Consumption to savings
d.
e.
:8
1-
31
4-
02
27
-4
ef
.N
a.
BN
MPC is the ratio of total consumption to total income and APC is the ratio of
incremental consumption to incremental income.
b.
APC is the ratio of total consumption to total income and MPC is the ratio of
incremental consumption to incremental income.
c.
APC is the ratio of total consumption to total income and MPC is the ratio of
incremental consumption to incremental disposable income.
d.
MPC is the ratio of total consumption to total income and APC is the ratio of
incremental consumption to incremental disposable income.
e.
APC is the ratio of total consumption to total savings and MPC is the ratio of
incremental consumption to incremental income.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
a.
20
04
Th
e
i.
Ic
fa
20. Which of the following factors will affect the aggregate demand curve?
320
Change in income.
ii.
iii.
iv.
a.
b.
c.
d.
e.
Part III
b.
c.
d.
e.
c.
d.
e.
04
b.
20
o.
M
AC
04
a.
04
ef
.N
GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax.
ii.
GNP at factor cost = GDP at factor cost + Net factor income from abroad.
iii.
iv.
a.
b.
c.
d.
e.
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
i.
s.
Al
lr
24. Which of the following statements is true regarding the personal disposable income?
It is equal to Wages and salaries + Dividends paid at home + Factor income received
from abroad + Transfers from government Personal income tax.
b.
It is equal to Wages and salaries + Dividends paid abroad + Factor income received
from abroad + Transfers from government Personal income tax.
c.
It is equal to Wages and salaries + Dividends paid at home + Factor income received
from abroad + Transfers from government.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
It is equal to Wages and salaries + Dividends paid at home + Factor income received
from abroad + Corporate tax.
e.
It is equal to Wages and salaries + Dividends paid abroad + Transfers from government
Personal income tax.
20
04
Th
e
d.
b.
c.
d.
e.
321
Macroeconomics
b.
c.
d.
e.
27. When there is an equal decrease in taxes and the government spending,
The income level will fall by the change in the government expenditure but the level of
consumption and investment remains the same
b.
The income level will fall but the level of consumption will increase
c.
The income level will fall but level of investment will increase
d.
The income level will fall but the level of investment will decrease
e.
The income level will fall but the level of consumption and investment will increase.
ef
.N
o.
M
AC
04
20
04
04
a.
b.
c.
d.
e.
BN
:8
1-
31
4-
02
27
-4
a.
ed
.IS
b.
c.
d.
e.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ve
rs
i
ty
b.
c.
Ic
fa
iU
ni
a.
e.
20
04
Th
e
d.
322
a.
Adds up the difference between the value of output and costs of intermediate goods
b.
c.
d.
Adds up all the expenditures incurred on the goods and services produced by the
domestic sector
e.
Adds the total money value of goods and services purchased by their ultimate
buyers.
Part III
b.
c.
d.
The higher the interest rate, the higher will be the opportunity cost of holding money.
e.
When the value of goods imported exceeds the value of goods exported, the country
faces a trade deficit.
04
a.
20
04
b.
c.
d.
e.
ef
.N
o.
M
AC
04
a.
27
-4
b.
c.
d.
e.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
re
b.
Flood relief.
c.
Government pensions.
d.
e.
Scholarships.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
ni
Horizontal
20
04
Th
e
Ic
b.
fa
iU
a.
c.
d.
e.
Positively sloped.
Consumption.
b.
Investment.
c.
Government purchases.
d.
Net exports.
e.
Taxes.
323
Macroeconomics
38. In which sector of Indian economy do we find a high rate of disguised unemployment?
a.
Service sector.
b.
Transport sector.
c.
Agriculture sector.
d.
Manufacture sector.
e.
Mining sector.
b.
c.
d.
e.
o.
M
AC
04
20
04
04
a.
b.
Cyclical unemployment
c.
Frictional unemployment
d.
Disguised unemployment
e.
Perfect unemployment.
Structural unemployment
BN
:8
1-
31
4-
02
27
-4
a.
ef
.N
ed
.IS
se
rv
Solve all the problems. Points are indicated against each problem.
ht
re
41. The following information is available from National Income Accounts of a country:
lr
ig
Particulars
900
500
400
ty
Indirect Taxes
ni
20
04
Th
e
Ic
fa
iU
Subsidies
10,000
ve
rs
i
Pr
es
s.
Al
MUC
300
1,700
350
1,100
8,700 MUC
b.
8,800 MUC
c.
8,900 MUC
d.
9,000 MUC
e.
9,100 MUC.
(2 points)
324
Part III
42. The following information is extracted from the balance sheet of a Central Bank.
04
20
04
Net Worth
Credit to Government
Credit to Commercial Sector
Government Deposits
Credit to Banks
Net Foreign Exchange Assets
Other Non-monetary Liabilities
Other Deposits with the Central Bank
Other Assets
04
Million Units
of Currency
6,000
10,000
5,000
150
4,000
9,000
3,000
50
100
Particulars
M
AC
The Central Bank imposes a reserve ratio of 10 percent and the currency deposit ratio is estimated
to be 20 percent. Government money is 1,050. What is the money supply in the economy?
80,000 MUC.
b.
75,000 MUC.
c.
78,000 MUC.
d.
72,000 MUC.
e.
4-
02
27
-4
ef
.N
o.
a.
(3 points)
12.00%.
re
11.89%.
d.
e.
ht
11.45%.
ig
c.
lr
10.23%.
s.
Al
b.
Pr
es
10.77%.
ve
rs
i
ty
a.
se
rv
ed
.IS
BN
:8
1-
31
43. The current money supply and high powered money in the economy are 80,000 MUC and
20,000 MUC respectively. The currency deposit ratio is estimated to be 20 percent. At
present, the reserve ratio imposed by the central bank is 0.10. What would the required
reserve ratio if the Central Bank would like to sterilize the effect of an inflow of foreign
exchange to the extent of US $10 million. Current exchange rate is 50 units of local currency
to one US $?
(3 points)
iU
ni
44. The following items are taken from the Union Budget for the year 2001- 2002.
20
04
Th
e
Ic
fa
Rs. crore
1,63,031
1,16,314
2,50,341
24,782
95,100
34,875
(2 points)
325
Macroeconomics
45. For an economy the Incremental Capital Output Ratio (ICOR) is estimated to be 4.0 and
expected savings-income ratio for the next year is 0.24. If the growth rate of population for
the next year is 3 percent, what is the expected growth rate in per capita income?
a.
2.91%.
b.
3.23%.
c.
2.41%.
d.
2.03%.
e.
04
04
(2 points)
: YT+R
Transfer Payments R
: 40
: 0.2Y
: 500 15i
ef
.N
-4
( )
o.
Disposable Income (Y )
: 25 + 0.25 Yd
d
M
AC
04
20
46. The following relations are derived for an economy. (All macro aggregates are in million
units of currency and interest in terms of percent per annum).
27
( )
4-
: 400
31
02
1-
()
BN
:8
Export Function E
: 225
: 0.25Y
se
rv
ed
.IS
M
Transaction Demand for Money t
P
: 10 + 0.10 Y
: 125 50i
ig
ht
re
M
Speculative Demand for Money a
P
Pr
es
s.
Al
lr
M
Money Supply s
P
: 250
fa
iU
ni
ve
rs
i
20 MUC
25 MUC
30 MUC
35 MUC
40 MUC.
(3 points)
20
04
Th
e
Ic
a.
b.
c.
d.
e.
ty
47. The IS and LM functions of a hypothetical economy are 0.5Y = 1170 15i and Y = 500 + 200i.
If the exogenous government expenditure is increased by 345 MUC, the crowding out of
private investment in the economy will be
a.
b.
c.
d.
e.
40 MUC
45 MUC
50 MUC
55 MUC
60 MUC.
(3 points)
326
Part III
48. The following relations are derived for an economy. (All macro aggregates are in million
units of currency and interest in terms of percent per annum).
(S)
Transfer payments
(R)
200
Tax function
(T)
0.25Y
(I)
Government expenditure
(G )
680
Import function
Exports
(E )
04
Savings function
20
04
450
ef
.N
o.
M
AC
04
b.
27.30%.
c.
30.55%.
d.
28.95%.
e.
:8
1-
31
4-
02
27
-4
a.
BN
(3 points)
re
se
rv
ed
.IS
49. The following information is extracted from the budget of union government. Find out the
revenue deficit of the government.
ig
ht
Rs. crore
1,63,031
68,714
Recoveries of Loans
15,164
Pr
es
s.
Al
lr
1,16,314
ve
rs
i
ty
2,50,341
On Capital Account
24,782
Plan Expenditure:
95,100
On Revenue Account
60,225
On Capital Account
34,875
20
04
Th
e
Ic
fa
iU
ni
Non-Plan Expenditure:
a.
b.
c.
d.
e.
Rs.75,023 crore
Rs.78,821 crore
Rs.82,034 crore
Rs.83,032 crore
Rs.85,234 crore.
(2 points)
327
Macroeconomics
50. The following information is available from National Income Accounts of a country:
04
04
Million Units of
Currency (MUC)
1,700
350
1,100
250
450
50
9,400
Particulars
7,800 MUC
b.
7,850 MUC
c.
7,900 MUC
d.
7,950 MUC
e.
8,000 MUC.
ef
.N
o.
M
AC
04
a.
20
-4
(1 point)
02
27
51. The following information is available from National Income Accounts of a country:
31
1:8
BN
.IS
ed
s.
Al
lr
ig
ht
re
se
rv
Million Units of
Currency (MUC)
1,600
100
1,700
350
1,100
250
450
8,000
4-
Particulars
b.
6,450 MUC
c.
6,550 MUC
d.
6,750 MUC
e.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
6,350 MUC
(3 points)
52. The money supply in a hypothetical economy is 350,000 MUC. The demand for money in
the economy is estimated to be Md = 410,000 15,000i. Because of the poor credit off-take
by the industrial sector, the Central Bank is considering lowering the interest rate by one
percentage point by buying government securities in the market. The volume of government
securities to be bought by the Central Bank to achieve the objective is (Assume multiplier to
be 5)
a. 2,000 MUC
b. 2,500 MUC
c. 3,000 MUC
d. 3,500 MUC
e. 4,000 MUC.
(2 points)
20
04
Pr
es
328
04
04
20
04
Part III
M
AC
o.
ef
.N
R
-4
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
(2 points)
re
(1 point)
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
55. In an economy monetary liabilities of the Central Bank is Rs.10,000 and government money
is Rs.2,000. If the currency-deposit ratio is known to be 0.33 and the Central Banks money
supply target is Rs.45,000, what will be the reserve ratio imposed by the Central Bank?
a. 0.025.
b. 0.010.
c. 0.037.
d. 0.005.
e. 0.018.
(1 point)
20
04
Th
e
56. The followings relations are derived for an economy. (All macro aggregates are in million
units of currency and interest in terms of percent per annum).
Savings function
(S)
Transfer payments
(R )
Tax function
Private investment function
(T)
(I)
0.25Y
250 + 0.30 Y 80i
Government expenditure
(G)
600
Import function
(M)
100 + 0.10 Y
Exports
(E)
Md
Ms
100
450
0.2Y + 50 20i
410
329
Macroeconomics
To stimulate the economy the government increased its expenditure by 100. If the
government wants to maintain the budgetary surplus/deficit at the previous level, what should
be the new tax rate?
a.
25.00%.
b.
24.30%.
c.
28.45%.
d.
27.65%.
e.
28.25%.
04
04
(4 points)
04
0.80
Intermediation Ratio
0.30
ef
.N
o.
If the secondary issues are 15,000, the New Issue Ratio for the economy is
M
AC
Finance Ratio
20
0.55
b.
0.60
c.
0.65
d.
0.70
e.
0.75.
BN
:8
1-
31
4-
02
27
-4
a.
(2 points)
lr
ig
Rs.2,000cr.
Rs.200 cr.
Rs.542cr.
Rs.2,292 cr.
se
rv
re
=
=
=
=
ht
ed
.IS
Rs.50 cr
b.
Rs.342 cr
c.
Rs.450 cr
d.
Rs.292 cr
e.
Rs.742 cr.
(1 point)
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
59. In an economy, the exogenous investment is 50, government spending is 100 MUC and
autonomous consumption is 50 MUC. The net export function is 100 0.1Y and disposable
income (Yd) is Y T. If an increase in autonomous investment by 40 leads to an increase in
equilibrium income and consumption by 100 MUC and 80 MUC respectively, what would be
the new equilibrium income for the economy?
a.
320 MUC.
b.
500 MUC.
c.
800 MUC.
d.
850 MUC.
e.
330
Part III
60. The following consumption function has been estimated for an economy:
Ct = 10 + 0.7Ydt + 0.3Ct-1
b.
70 MUC.
c.
30 MUC.
d.
100 MUC.
e.
143 MUC.
04
10 MUC.
20
a.
04
Where Ct and Ct-1 denote consumption in periods t and t-1 respectively and Ydt is the
disposable income in period t. If Ydt increases from 200 MUC to 300 MUC and remains
there indefinitely, what could be the change in the steady state level of consumption?
04
(2 points)
M
AC
61. In a two sector economy the consumption function (C) is equal to 8 + 0.7Y and autonomous
investment is equal to 22 MUC. The equilibrium level of income in the economy is
21 MUC
b.
30 MUC
c.
43 MUC
d.
100 MUC
e.
(1 point)
31
4-
02
27
-4
ef
.N
o.
a.
e.
51% of GDP.
.IS
45% of GDP.
ed
d.
se
rv
21% of GDP.
re
c.
14% of GDP.
ht
b.
ig
10% of GDP.
s.
Al
lr
a.
BN
:8
1-
62. In an economy, the incremental capital output ratio is 5 and the expected population growth
rate is 3% per annum. What is the required investment, if the targeted per capita real GDP
growth rate is 6%?
(2 points)
Pr
es
ve
rs
i
ty
20
04
Th
e
Ic
fa
iU
ni
Particulars
Merchandise imports
Merchandise exports
Software exports
Software imports
Earnings on loans and investments abroad
Earnings on loans and investments in the country by foreigners
Private remittances to abroad
Private remittances from abroad
Government loans to abroad
Government loans from abroad
Direct investments abroad
Foreign direct investment in the country
Short-term loans and investments abroad
Foreign short-term loans and investments in the country
MUC
20,000
18,000
16,000
12,000
400
1,000
200
150
30
20
10
150
200
40
331
Macroeconomics
04
20
04
B
W
M
AC
4-
02
27
-4
ef
.N
o.
(2 points)
(2 points)
:8
1-
31
65. What is the capital account balance for the year 2002?
a. 30 MUC (Dr.).
b. 30 MUC (Cr.).
c. 570 MUC (Dr.).
d. 630 MUC (Cr.).
e. 1,350 MUC (Cr.).
04
64. What is the current account balance for the year 2002?
a. 1,350 MUC (Cr.).
b. 1,950 MUC (Cr.).
c. 1,650 MUC (Dr.).
d. 1,350 MUC (Dr.).
e. 2,000 MUC (Dr.).
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
66. Marginal Propensity to Consume (MPC) for an economy is estimated to be 0.75. Beginning
from a position of equilibrium, investment rises by Rs.100 crore. The change in Y that will
bring the economy back to equilibrium is
a. Rs.75 crore
b. Rs.133 crore
c. Rs.300 crore
d. Rs.400 crore
e. Rs.100 crore.
(1 point)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
67. The LM function is Y = 500 + 20i. Which of the following combinations of interest and
income does not represent an equilibrium in the money market?
a. i = 2% and Y = 460.
b. i = 5% and Y = 600.
c. i = 7% and Y = 640.
d. i = 10% and Y = 700.
e. i = 4% and Y = 580.
(1 point)
68. The Marginal Propensity to Consume (MPC) is 0.70 and the proportional tax rate is 28.5%.
Following the economic recovery, the government of the country decided to cut down its
expenditure by 250 MUC. What could be the change in budgetary surplus, if the government
proceeds with its plans?
a. 107.5 MUC.
b. 175.0 MUC.
c. 250.0 MUC.
d. 142.5 MUC.
e. 500.0 MUC.
(2 points)
332
Part III
69. The following data is taken from balance sheet of a Central Bank.
Particulars
MUC
Net worth
6,000
Credit to government
10,000
5,000
150
Credit to banks
4,000
3,000
50
04
04
Government deposits
o.
ef
.N
9,000 MUC
9,750 MUC
d.
10,050 MUC
e.
10,000 MUC.
c.
-4
b.
27
8,500 MUC
31
4-
02
a.
M
AC
04
20
Other assets
100
The Government money in the economy is 1050 MUC and Money supply in the economy is
80,000 MUC. If Central Bank imposes a reserve ratio of 10 percent and the currency deposit
ratio is estimated to be 20 percent, net foreign exchange assets with the Central Bank are
(3 points)
800 MUC.
ed
e.
se
rv
750 MUC
re
d.
700 MUC
ht
550 MUC
c.
ig
b.
lr
200 MUC
(1 point)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
.IS
BN
:8
1-
70. In an economy, transaction demand for money is 500 MUC. The speculative demand for
money is estimated to be 250-5i. If Central Bank of the country aims at an interest rate (i) of
10 percent, money supply should be
333
04
04
20
04
3. (a) Policies that are related to collection of taxes and government spending constitute the
fiscal policy of a government. Personal income tax is an instrument of fiscal policy.
M
AC
4. (c) Inflation refers to rise in general level of price. Positive price inflation refer to a situation
where although some prices may be falling, prices are, on the average climbing.
ef
.N
o.
31
4-
02
27
-4
6. (e) Potential GDP is the maximum feasible GDP of an economy when all the resources are
fully employed. If potential GDP is more than actual GDP, then production is less than it
could be if all resources were fully employed.
.IS
BN
:8
1-
7. (b) A reduction in money supply eventually lower interest rates if it makes price inflation
subside. However, if it is not able to subside inflation, soon the interest rates will go up in the
market.
se
rv
ed
8. (b) Net (Gross) Domestic Product = Net (Gross) National Product NFIA. This implies that
net domestic product does not include net factor income from abroad.
ig
ht
re
9. (e) Because the purchase of existing house is not an addition to the capital stock, the value of
existing house is not added to GDP or GNP of an economy.
s.
Al
lr
10. (a) Savings is done by individuals, separately and collectively, for various reasons.
ty
Pr
es
11. (c) Investment demand curve (or investment spending curve or IS curve) depicts the relation
between investment spending and interest rates in the goods market.
ni
ve
rs
i
12. (a) On the basis of the Keynesian model of output determination, if maintainable savings
exceed intended investment, output will fall.
Th
e
Ic
fa
iU
13. (c) A reduction in the reserve ratio increases the credit creating and lending capacity of the
commercial banks, which in turn lead to increase in money supply in the economy.
20
04
14. (c) Real interest rate = Nominal interest rate Rate of inflation.
15. (a) Personal disposable income = Personal income Personal income taxes. Hence, Personal
income = Personal disposable income + Personal income taxes.
16. (b) According to the inventory theory, the transaction demand for money varies inversely
with the rate of interest and is proportional to the square root of income.
17. (e) The high powered money in Indian economy will change due to all the five sources.
18. (a) Average propensity to consume is the ratio of change in consumption to total income.
19. (b) Whereas average propensity to consume (APC) is the ratio of total consumption to total
income, marginal propensity to consume is the ratio of incremental consumption to
incremental income.
Part III
20. (b) Following are some of the important factors that are responsible for changes in aggregate
demand.
Change in income
Rate of interest
Government policy
04
04
21. (a) Any increase in real stock of money will shift the LM curve to words right.
M
AC
04
20
22. (d) Fiscal policy affects AD demand directly. For example, increase in government spending
increases the aggregate demand in the economy, which tend to increase the output at each level of
interest rate. Thus the IS curve shifts out and to the right for an increase in government
expenditure.
ef
.N
o.
GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax
ii.
GNP at factor cost = GDP at factor cost + Net factor income from abroad
iii.
iv.
31
4-
02
27
-4
i.
:8
1-
24. (a) Personal income = Wages and salaries + Dividends + Transfer payments; and
ed
.IS
BN
Personal Disposable Income = Personal income Personal income taxes. Thus, personal
disposable income is equal to wages and salaries + Dividends paid at home + Factor income
received from abroad + Transfers from government Personal income taxes.
re
se
rv
25. (b) NNP at market (factor) prices = GNP at market (factor) prices Depreciation.
ht
26. (b) Laffer curve shows the relationship between tax rates and tax revenue.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
27. (b) Decrease in taxes increases the disposable income and hence increases the consumption
by MPC times the increase in disposable income. Decrease in government expenditure
decreases the income by the same amount. Since level of increase in income due to decrease
in taxes is less than that of level of decrease in income due to reduction in government
spending, the income level will fall. However, due to increase in disposable income level of
consumption will increase.
Th
e
Ic
fa
iU
28. (e) Bottlenecks refer to the blockages in the achievement of full employment in the
economy. Shortage of materials and inadequate supply of labor act as bottlenecks in the
process of achieving full employment.
20
04
335
Macroeconomics
(c)
Is not the answer as we get real GDP by removing the effect of inflation from nominal
GDP.
(d & e) Is not the answer as we get GDP through expenditure approach by summing up all
the expenditures incurred by the ultimate buyers on the goods and services produced
by the domestic sector.
True. Nominal GDP can increase both on account of increase in real production or
an increase in the price level.
(b) False. Disposable income is equal to personal income less personal tax payments.
Disposable income is either used for consumption expenditure or saving.
(c) True. Net investment is equal to gross investment less depreciation.
(d) True. The opportunity cost of holding money is the rate of interest foregone by
holding the money. Therefore, as the rate of interest increase, opportunity cost of
holding money also increases.
(e) True. Trade balance is in deficit if import are greater than export of goods.
M
AC
04
20
04
04
o.
ef
.N
31
4-
02
27
-4
se
rv
ed
.IS
BN
:8
1-
34. (b) Consumption function captures the relation between the consumption and the disposable
income. Slope of consumption function indicates how responsive consumption is as income
changes. That is, slope of the consumption function is equal to C/Y, which is nothing but
Marginal Propensity to Consume.
(a) Is not the answer. Average Propensity to Save is equal to S/Yd.
re
s.
Al
lr
ig
ht
ni
ve
rs
i
ty
Pr
es
35. (d) Transfer payments are payments which cannot be regarded as payment for current
services or production and therefore do not enter national income. Of the above, invalidity
benefit, flood relief, government pensions and Scholarships do not involve any production
activity and are transfer payments. Where as, salaries paid to Members of Parliament are
compensation to the services rendered by the members, hence it is not a transfer payment.
20
04
Th
e
Ic
fa
iU
36. (a) (a) Classical economists assume flexible wages in the economy. Flexibility of wages
results in full employment of labor in the economy. Hence the aggregate supply curve
becomes vertical at the full employment level. Therefore, the answer is (a).
(b) Is not the answer. If Aggregate Supply curve is horizontal, increase in the Aggregate
Demand does not exert pressure on the price level and more goods and services are
supplied at the same price level. This can happen only if there is very high level of
unemployed resources in the economy. But, classical economists assume full
employment of resources.
(c)
If Aggregate Supply curve is first horizontal and then vertical, it implies Aggregate Supply is
perfectly elastic until the full employment level is reached and perfectly inelastic at the full
employment level of output. Hence, (c) is not the answer.
(d) Is not the answer. Aggregate Supply curve with such a shape does not exist.
(e)
336
Is not the answer. A positively sloped Aggregate Supply curve is not possible under the
classical assumption of perfectly flexible wages.
Part III
Not included since the car is not produced during the current year
04
Not included since sale of stocks and bonds are financial transactions only.
20
(c)
04
(b) Not included since the house is not constructed during the current year
04
(d) Is included in GDP as the fee is earned for rendering brokerage services and is an
income.
ef
.N
o.
M
AC
40. (c) Unemployment caused by imperfect information about the available jobs and skills in the
market is called frictional unemployment.
-4
Part B: Problems
02
27
41. (b)
a. GDPFC
31
4-
:8
1-
NFIA
.IS
BN
ed
se
rv
re
ig
ht
= 9,500 MUC
b. NNPFC
Pr
es
Depreciation
s.
Al
lr
ve
rs
i
ty
= 1,700 1,100
= 9,500 600 + (100)
= 8,800 MUC.
Ic
fa
iU
ni
NNPFC
= 600 MUC
20
04
Th
e
42. (a) Money Supply in the Economy (Ms) = Money Multiplier (m) x High Powered Money (H)
m =
1 + Cu
1 + 0.20
1.2
=
=
=4
Cu + r 0.20 + 0.10 0.3
28,000 MUC
337
Macroeconomics
9,150 MUC.
18,950 MUC
18,950 + 1,050
20,000 MUC.
04
ML =
20
04
B
W
M
AC
o.
ef
.N
R
-4
New m
4-
Now, H
US $ 10 m
10 x 50 MUC
500 MUC
20,000 + 500
20,500
80,000
80,000
= 3.90
20,500
27
Ms Target
=
=
=
=
=
=
02
04
= 80,000 MUC.
3.90
lr
=
=
=
=
=
ni
ve
rs
i
ty
Primary deficit
Pr
es
s.
Al
=
=
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
1.20
0.2 + r
3.90 r
24
= 6%
4
(1 + g y )
1 x 100
(1 + g p )
1.06
1 x 100
1.03
2.91%.
20
04
Th
e
Ic
fa
iU
338
04
20
04
B
M
AC
04
Part III
Equating the IS and LM functions, we can get the equilibrium interest rate.
ef
.N
o.
Hence,
27
4-
02
1,840
= 8%
230
i =
1-
= 2,340 30i
:8
-4
= 1,840
31
230i
BN
= 2,340 30(8)
ed
= 10 + 0.1Y
se
rv
.IS
s
ht
= 225
ig
re
= 10 + 210 = 220
s.
Al
lr
Pr
es
G + R = 400 + 40
ve
rs
i
Budget deficit
ty
tY
Ic
fa
iU
ni
47. (b) Equating the IS and LM functions, we can get the equilibrium interest rate. If IS function
is 0.5Y = 1,170 15i, then Y = 2,340 30i.
20
04
Th
e
Hence, at equilibrium,
2,340 30i
230i
i
= 500 + 200i
= 1,840
=
1,840
= 8%
230
If the exogenous government expenditure increases by 345, the new IS function will be
0.5Y = 1,170 + 345 15i
0.5Y = 1,515 15i
Y = 3,030 30i
Hence, new interest rate (i) will be:
3,030 30i = 500 + 200i
339
Macroeconomics
230i = 2,530
2,530
= 11%
230
Investment function (I) = 500 15i
When i = 8%
I
= 500 (15 x 8) = 380
When i = 11%
I
= 500 (15 x 11) = 335
Crowding-out of private investment
= 380 335 = 45 MUC.
ed
1,405.4 95i
0.35
se
rv
re
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
20
04
B
M
AC
48. (e) If government intends to maintain the budget surplus at 170 MUC.
T (G + R) = 170
T
= (G + R) 170
= 758.5 + 200 170
= 788.5
Yd
= (Y T + R) = Y 588.5
C
= 400 + 0.60 (Y 588.5) 20i
= 46.9 + 0.60Y 20i.
IS function is
Y
= C + I + G + (E M)
= 46.90 + 0.60Y20i + 250 +0.15Y75i + 758.5 + 450 (100 + 0.10Y)
Y
= 1,405.4 + 0.65Y 95i
0.35Y = 1,405.4 95i
04
04
788.5
T
= 24.45%.
=
Y 3, 225.57
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
At Equilibrium, IS = LM
4015.43 271.43i = 2,500 + 250i
1515.43 = 521.43i
i = 2.91
Y = 3,225.57
20
04
Th
e
Ic
fa
340
Part III
04
ef
.N
o.
M
AC
04
20
04
50. (e) The income received by the households represented by the personal income of the
economy. Personal income = GNPFC Depreciation Net corporate profits + Dividends +
Transfer payments = 9,400 (1,700 1,100) 1,100 + 250 + 50 = 8,000 MUC.
BN
:8
1-
31
4-
02
27
-4
ed
se
rv
= 3,65,000.
.IS
= 4,10,000 (15,000 x 3)
ht
re
= 3,65,000.
lr
ig
Pr
es
ve
rs
i
ty
Ms
s.
Al
= 3,65,000 3,50,000
= 15,000 MUC
=
M s
15,000
=
= 3,000 MUC
m
5
fa
iU
ni
If the Central Bank buy government securities worth 3,000 MUC, the equilibrium rate of
interest can be decreased by one percentage point.
20
04
Th
e
Ic
Macroeconomics
= [1.33/(0.33 + r)]
or, r
= 0.025.
04
04
04
20
Y = 8400 500i
M
AC
ef
.N
o.
Y = 1800 + 100i
27
-4
02
31
4-
1320 = 120i
:8
1-
Or, i = 11
BN
.IS
se
rv
ed
re
If government wants to maintain the same budget surplus even after the increase of
government expenditure, then
lr
ig
ht
Tax revenue (T) {New Government spending (G) + Transfer payments (R)} = 25
s.
Al
Pr
es
ty
ve
rs
i
Y = 400 + 0.8(Y 725) 20i + 250 + 0.3Y 80i + 700 + 450 100 0.1Y
iU
ni
fa
20
04
Th
e
Ic
Or, i = 11.2
Coming to LM curve, there will not be any change in the equilibrium position of assets
market. Hence, LM function = 0.2Y = 360 + 20i = 360 + 20(11.2) = 584
or, Y = 2920
New Tax rate = T/Y = 825/2920 = 0.2825 or 28.25%.
Part III
04
20
04
B
W
M
AC
o.
ef
.N
04
02
27
-4
1-
31
4-
se
rv
re
s
Pr
es
s.
Al
lr
ig
ht
ed
.IS
BN
:8
ve
rs
i
ty
62. (d) Required nominal growth rate = Real GDP growth rate + Population growth rate
=
3% + 6% = 9%
20
04
Th
e
Ic
fa
iU
ni
Thus, investment requirement = Required nominal growth rate Incremental capital output ratio
= 9 x 5 = 45% of GDP.
Alternatively,
Per capita growth rate
= {(1 + gn)/(1 + gp) 1} x 100
Where,
gn = GDP growth rate and gp
= Population growth rate
0.06 = [{(1 + gn)/(1.03)} 1] 1.06 x 1.03
= 1 + gn
Or, gn = 0.0918 or 9.18%
Thus, the investment requirement = Required nominal growth rate Incremental capital output ratio
=
45% of GDP.
343
Macroeconomics
20
1
100
1 0.75
04
04
04
65. (a) [Government loan to abroad +direct investments abroad + short-term loan abroad]
[Government loan from abroad + FDI in the country + short-term loan in the country]
= (30 + 10 + 200) (20 + 150 + 40) = 30 MUC Dr.
M
AC
= Rs.400 crore.
67. (a) LM function Y = 500 + 20i
i = 4%,
Y = 500 + (20 4)
= 580
i = 2%,
Y = 500 + (20 2)
= 540
ef
.N
= 600
Y = 500 + (20 5)
-4
i = 5%,
27
= 640
02
Y = 500 + (20 7)
4-
i = 7%,
o.
= 700
31
If,
se
rv
ed
.IS
BN
:8
1-
(a) does not fall on the LM curve hence does not represent an equilibrium in the money
market.
Change in tax income = Tax rate (t) x Change in income (Y) = 2 x (-250) x 0.285 = 142.5
ht
re
lr
ig
s.
Al
Pr
es
ty
ve
rs
i
iU
ni
Ic
fa
20
04
Th
e
Total liabilities = Net worth (6000)+ Government deposits (150) + Other non-monetary
liabilities (3000) + Monetary liabilities (18950) = 28100.
Thus, total assets = 28100 (10000 + 4000 + 5000 + 100 + Net foreign exchange assets)
Or, Net foreign exchange assets = 28100 19100 = 9,000 MUC.
344
o.
ef
.N
R
-4
27
Potential GDP is
02
3.
4-
:8
1-
31
2.
M
AC
04
20
04
04
b.
The total value of goods and services that could be produced at full employment
c.
The total value of goods and services measured at prices corrected for inflation
d.
e.
The total value of goods and services that could be produced at full efficiency.
ht
re
se
rv
ed
.IS
BN
a.
The study of macroeconomics includes, among other topics, which of the following?
lr
ig
4.
b.
c.
d.
e.
fa
In the Simple Keynesian multiplier model, national output moves up and down in response to
a. Movements in aggregate demand
b. Movements in aggregate supply
c. Changes in the general price level
d. Changes in the level of input prices
e. Changes in the time of day.
20
04
Th
e
Ic
5.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
6.
Macroeconomics
Suppose that people were suddenly to decide to save less of their disposable incomes. You
should expect to observe
a.
b.
c.
d.
An increase in the sum of the marginal propensity to consume and the marginal
propensity to save
e.
20
04
b.
c.
d.
e.
ef
.N
o.
M
AC
8.
04
04
7.
27
-4
Whatever else tax reductions do, the personal consumption resulting from tax
reductions must stimulate the real GDP.
b.
c.
d.
e.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
lr
ig
ht
re
10. The resorting of the Central Bank to contractionary or expansionary monetary policies to
neutralize the change in money supply caused by changes in foreign exchange reserves is
referred to as
Transmission mechanism
b.
Sterilization
c.
Stabilization
d.
Monetary mechanism
e.
Exchange mechanism.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Ic
Th
e
a.
fa
c.
d.
e.
346
a.
b.
c.
d.
e.
Part III
13. Which of the following g is most important in increasing the rate of economic growth?
A highly progressive tax structure.
b.
c.
d.
e.
b.
c.
d.
e.
04
20
04
04
a.
M
AC
14.
a.
o.
15. Unemployment, inflation and the rate of growth of actual GDP are all examples of
Policy variables
b.
Exogenous variables
c.
Endogenous variables
d.
e.
1-
31
4-
02
27
-4
ef
.N
a.
:8
b.
c.
d.
e.
ig
ht
re
se
rv
ed
.IS
BN
a.
s.
Al
lr
b.
c.
Interest rates do not decrease, no matter how much the money supply is expanded
d.
e.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
20
04
Th
e
Ic
18. The difference between the actual fiscal deficit and Cyclical Neutral Fiscal Deficit (CNFD) is
known as
a. Fiscal stance
b. Fiscal impulse
c. Gross fiscal deficit
d. Neutral fiscal deficit
e. Cyclical fiscal deficit.
19. An increase in government expenditure will
a. Shift both IS and LM curves to the right
b. Shift both IS and LM curves to the left
c. Not affect the position of LM curve but shift the IS curve to left
d. Not affect the position of IS curve but shift the LM curve to right
e. Not affect the position of LM curve but shift the IS curve to right.
347
Macroeconomics
20. Curve that illustrates the relationship between the rate of change in prices and the rate of
unemployment is known as
a.
b.
Laffer curve
c.
Philips curve
d.
e.
b.
Forward market
c.
Future market
d.
Spot market
e.
Swap market.
04
ef
.N
o.
M
AC
04
20
a.
04
21. In which market foreign exchange is bought and sold for delivery at a future date at the rate
of exchange agreed upon today
b.
c.
d.
e.
BN
:8
1-
31
4-
02
27
-4
a.
.IS
b.
Increase in tax rate always leads to a decrease in tax revenue since people search for
alternatives to evade tax.
c.
Increase in tax rate, up to a certain level, leads to an increase in tax revenue and later
results in decrease of tax revenue.
d.
Decrease in tax rate leads to an increase in tax revenue since more people will come
forward to pay taxes.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
a.
24. Supply of money remaining constant, an increase in demand for money, will result in
A fall in the level of prices
b.
20
04
iU
fa
Ic
Th
e
c.
ni
a.
d.
e.
348
a.
b.
c.
When the demand for labor and supply of labor schedules adjust immediately to a
change in the price level
d.
When equilibrium in the labor markets is unaffected by shifts in the supply of labor
schedule
e.
Part III
b.
c.
Foreign exchange outflows on account of imports of goods and services and gifts made
exceed inflows on account of exports of goods and services received
d.
e.
Causes the real money supply to increase, which changes the composition of output
b.
c.
d.
e.
ef
.N
o.
M
AC
04
20
a.
04
04
27. Suppose there is full employment and a vertical aggregate supply schedule. An increase in
the nominal money supply
27
-4
28. When the aggregate supply schedule is positively sloped, continuous increases in the nominal
money supply, ceteris paribus, result in
No change in the price level and proportional increases in real output
b.
c.
d.
e.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
re
29. Other things remaining constant, an increase in the marginal propensity to import will
Increase the multiplier
b.
c.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
b.
20
04
iU
fa
Ic
Th
e
c.
ni
a.
d.
e.
31. Total market value of all the final goods and services produced in a given period by factors of
production located within a country is
a.
b.
c.
d.
e.
349
Macroeconomics
04
20
04
B
W
M
AC
33. All entries in the balance of payments statement should collectively sum to
a. GDP of that country
b. GNP of the country
c. Foreign exchange reserves of that country
d. Zero
e. Exports of that country.
04
32. The quantity theory of money implies that a given percentage change in the money supply
will cause
a. An equal percentage change in nominal GDP
b. A smaller percentage change in nominal GDP
c. A larger percentage change in nominal GDP
d. An equal percentage change in real GDP
e. A smaller percentage change in real GDP.
ef
.N
o.
34. If the anticipated rate of inflation rises, other things remaining constant, we would expect the
nominal interest rate to
Remain unchanged
b.
Rise by the same percentage as the increase in the anticipated rate of inflation
c.
Fall by the same percentage as the increase in the anticipated rate of inflation
02
27
-4
a.
Rise, but by less than the anticipated increase in the rate of inflation
e.
Fall, but by less than the anticipated increase in the rate of inflation.
1-
31
4-
d.
:8
b.
c.
d.
e.
ig
ht
re
se
rv
ed
.IS
BN
a.
s.
Al
lr
Pr
es
a.
c.
Not affect the position of LM curve but shift the IS curve to left
d.
Not affect the position of IS curve but shift the LM curve to right
e.
Not affect the position of LM curve but shift the IS curve to right.
iU
ni
ve
rs
i
ty
b.
Ic
fa
37. Increase in net RBI credit to the Central Government is reflected in which of the following?
Budget deficit.
Revenue deficit.
Monetized deficit.
d.
e.
20
04
Th
e
a.
b.
c.
38. The basic difference between money stock measure M3 and M4 is that
a. M3 is more than M4
b. M2 is part of M3 whereas M2 is not part of M4
c. M3 is part of M1 and M4 is not part of M1
d. M4 includes all post office deposits, whereas in M3 these are not included
e. M1 is part of M4 where as M1 is not part of M3.
350
Part III
M
AC
04
20
04
04
39. Which of the following variables will be at low levels during boom phase of a business cycle?
a. Bank reserves.
b. Wage rates.
c. Bank credit.
d. Inventory.
e. Cost of production.
40. Financial Inter-relations ratio is
a. The ratio of total financial claims issued during a year to the national income for the year
b. The ratio of primary issues by the non-financial sector to total physical asset formation
c. The ratio of volume of financial instruments issued by financial intermediaries during a
period to the volume of primary issues by the non-financial sector
d. The ratio of the total stock of financial assets at a point of time to the stock of physical assets
e. Ratio of total financial claims to total physical asset formation.
ef
.N
o.
Solve all the problems. Points are indicated against each problem.
(Million units of currency)
5,000
1,500
700
1,300
500
600
200
50
Nil
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Particulars
Sales to households
Sales to government
Indirect taxes
Gross fixed investment
Change in inventories
Depreciation
Current account balance
Subsidies
Net factor income from abroad
41. The following information is available from National Income Accounts of a country:
(2 points)
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
iU
42. The following information is available from National Income Accounts of a country:
20
04
Th
e
Ic
fa
Particulars
MUC
Indirect taxes
700
Depreciation
600
Current account balance
200
Subsidies
50
Net factor income from abroad
Nil
If the NDPMP of the country is 7,500 MUC, what would be the total value of all final goods
and services produced by all factors of production of the country at factor cost?
a. 7,450 MUC.
b. 7,350 MUC.
c. 7,250 MUC.
d. 7,150 MUC.
e. 7,050 MUC.
(1 point)
351
Macroeconomics
43. The following relations are derived for an economy. (All macro aggregates are in million units of
currency and interest in terms of percent per annum)
(S)
(Yd)
(R)
(T)
(I)
(G )
80 + 0.1875 Yd + 5i
YT+R
80
0.2Y
600 + 0.05Y 15i
965
Import function
(M)
20 + 0.10Y
Exports
(E)
450
04
04
Savings Function
Disposable income
Transfer payment
Tax Function
Private investment function
Exogenous government expenditure
Mt
0.25Y
Ma
200 50i
Money supply
Ms
600
04
B
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M
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R
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27
02
431
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s.
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(3 points)
44. The IS and LM functions of a hypothetical economy are found to be Y = 5,350 50i and
Y = 1,600 + 200i respectively. Part of the economys imports is autonomous, while the other
part is dependent on the total income of the economy. The import function of the economy is
estimated to be 20 + 0.10Y. The exports of the economy are 450 MUC. At equilibrium, the
trade balance of the economy is
a. (30) MUC
b. 40 MUC
c. (50) MUC
d. 60 MUC
e. (70) MUC.
(2 points)
45. The following relations are derived for a fictitious economy.
20
04
Th
e
Ic
Disposable income
Transfer payment
Tax function
Exogenous government expenditure
(Yd)
(R)
(T)
(G)
YT+R
80
0.2Y
965
Decrease by 60 MUC.
b.
Increase by 60 MUC.
c.
Decrease by 50 MUC.
d.
Decrease by 70 MUC.
e.
352
Part III
46. The following are the indicators of financial development of the economy:
04
20
04
04
Particulars
2001
Finance Ratio (FR)
0.25
Financial Interrelations Ratio (FIR)
1.20
Intermediation Ratio (IR)
0.70
New issues
12,000 MUC
The Net Physical Capital Formation for the year 2001 is
a. 16,500 MUC
b. 17,000 MUC
c. 17,500 MUC
d. 18,000 MUC
e. 18,500 MUC.
(2 points)
M
AC
47. The following are the indicators of financial development of the economy:
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Particulars
2000
2001
Finance Ratio (FR)
0.28
0.25
Financial Interrelations Ratio (FIR)
1.75
1.20
Intermediation Ratio (IR)
0.75
0.70
For the year 2001 new issues are 12,000 (MUC).
Which of the following statements is/are true with respect to the above data?
a. Decrease in FR indicates increased financial deepening of the economy.
b. Financial development of the country is less than the overall economic development of
the country during the period.
c. Decline in IR shows financial intermediation in the economy.
d. Ultimate users of funds indirectly access funds from ultimate savers, thereby avoiding
financial intermediaries like banks and financial institutions.
e. Both (b) and (d) above.
re
(1 point)
s.
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lr
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48. The following monetary data on financial development of an economy has been obtained for
the year 2000-2001.
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e
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ty
Pr
es
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04
(1 point)
49. The following balances are extracted from balance sheet of a Central Bank.
Particulars
Net worth
Other deposits
Government deposits
Credit to government
Credit to commercial sector
Credit to banking sector
Other non-monetary liabilities
Other assets
Macroeconomics
04
Current money supply in the economy is 12,000 MUC. Currency deposit ratio for the
economy is 0.20 and reserve ratio imposed by the Central Bank is 10%. Government money
in the economy is negligible and can be ignored.
What are the net foreign exchange assets (reserves) of the country, assuming there are no
excess reserves with the banking sector?
a. 510 MUC.
b. 450 MUC.
c. 500 MUC.
d. 520 MUC.
e. 530 MUC.
20
04
(3 points)
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04
50. The High-powered money in an economy is 3,000 MUC. Current money supply in the
economy is 12,000 MUC. The currency deposit ratio is estimated to be 0.20 and reserve ratio
imposed by the Central Bank is 0.10. If the banking sector maintains excess reserves
equivalent to 10% of their deposits, what would be the money supply?
a. 8,800 MUC.
b. 9,000 MUC.
c. 9,100 MUC.
d. 9,150 MUC.
e. 9,200 MUC.
(2 point)
BN
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51. The following information is related to external transactions of India for the year 2000-01.
ed
se
rv
re
44,894
59,264
19,185
ig
ht
Merchandize exports
Merchandize imports
Services rendered by Indians to
rest of the world
US $ million
.IS
Particulars
20
04
Th
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lr
b.
c.
d.
e.
354
Part III
04
20
04
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Particulars
(Rs. in crore)
Tax revenue
1,16,857
Non-tax revenue
45,137
Recoveries of loans
9,908
Other capital receipts
5,000
Borrowings/other liabilities
91,025
Non plan expenditure
On revenue account (of which interest payment is
1,66,301
Rs.75,000 crore)
On capital account
29,624
Plan expenditure
On revenue account
43,761
On capital account
28,241
The revenue and primary deficit of the government for the year 2001-02 are
a. Rs.49,502 crore and 16,025 crore
b. Rs.47,239 crore and 14,075 crore
c. Rs.48,068 crore and 16,025 crore
d. Rs.45,002 crore and 15,225 crore
e. Rs.48,068 crore and 15,225 crore.
04
52. The following estimates are extracted from the Union Budget for the year 2001-02.
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53. The following information is available from National Income Accounts of a country:
20
04
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BN
Particulars
(Million units of currency)
Sales to households
5,000
Corporate profits
2,000
Corporate profit tax
800
Depreciation
600
Transfer payments
300
Dividends
200
Personal tax payments
200
GNP at factor cost
7,450
The savings made by the households during the year is
a. 100 MUC
b. 125 MUC
c. 150 MUC
d. 175 MUC
e. 200 MUC.
54.
Particulars
Sales to government
Indirect taxes
Corporate profits
Corporate profit tax
Depreciation
Transfer payments
Dividends
Subsidies
Personal tax payments
Personal savings
(2 points)
(Million units of currency)
1,500
700
2,000
800
600
300
200
50
200
150
355
Macroeconomics
1,450
b.
1,550
c.
1,600
d.
1,700
e.
1,650.
(2 points)
04
04
802.25 MUC.
e.
808.10 MUC.
o.
d.
ef
.N
794.15 MUC.
c.
-4
782.35 MUC.
27
b.
02
759.50 MUC.
(2 points)
1-
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4-
a.
M
AC
04
20
Where Ct and Ct1 denote consumption in period t and t1 respectively and Ytd is the
disposable income in period t. The Ytd has been 500 for a long time. If Ytd increases by 100
in period t, what will be the consumption in the second period, t + 2 (Assume the steady
state level of consumption in the economy)?
d.
15.00%.
e.
16.00%.
ig
11.25%.
lr
c.
s.
Al
10.50%.
Pr
es
b.
ty
10.04%.
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BN
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56. The currency deposit ratio in an economy is estimated to be 0.4. The central bank of the country
imposed a reserve ratio of 10%. Monetary liabilities of the central bank stood at 50,000 million
units of currency (MUC). Due to an exogenous boost to the economy, the foreign exchange
reserves of the country are expected to increase by 500 million dollars during the next period. If
the central bank would like to neutralize the impact of change in foreign exchange reserves on
the money supply by adjusting the reserve ratio, what should be the new reserve ratio? (Assume
that the exchange rate is 12 units of local currency to a dollar)
iU
ni
(2 points)
20
04
Th
e
Ic
fa
MUC
300
180
45
30
15 MUC
25 MUC
35 MUC
45 MUC
55 MUC.
(1 point)
356
Part III
M
AC
04
20
04
04
MUC
5,000
4,200
1,075
800
750
75
100
650
350
350
950
300
150
o.
Particulars
NDP at market prices
NNP at factor cost
Personal saving
Gross domestic investment
Corporate profits (profit before tax)
Transfer payments by the government
Subsidies
Net domestic investment
Corporate profit tax
Personal tax payments
Indirect taxes
Government budget deficit
Dividends
BN
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(2 points)
s.
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(1 point)
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58. What is the Net Factor Income Earned from Abroad (NFIA) in the economy?
a. 1,650 MUC.
b. 1,650 MUC.
c. 50 MUC.
d. 50 MUC.
e. 100 MUC.
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Pr
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04
Th
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Macroeconomics
04
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27
10 MUC
20 MUC
30 MUC
40 MUC
50 MUC.
(2 points)
.IS
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a.
b.
c.
d.
e.
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04
20
Particulars
MUC
Factor income paid abroad by the business sector
10
Factor incomes received by household sector
160
Transfers to household sector
20
Wages and salaries paid by the business sector
100
Dividends paid by the business sector (of which Rs.10 is paid abroad)
20
Household savings
60
Factor income received from abroad by the household sector
20
The amount paid by the government to the households towards wages and salaries is
04
(1 point)
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Pr
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s.
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64. Savings function of an economy is S = 300 + 0.25 Yd. Break-even disposable income for
the economy is
a. 75 MUC
b. 300 MUC
c. 900 MUC
d. 1,200 MUC
e. 1,500 MUC.
ve
rs
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65. The following information is extracted from the National Income Accounts of an economy:
20
04
Th
e
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Particulars
Factor income received by domestic residents from business sector
Factor income received by domestic residents from foreigners
Gross investment
Retained earnings
Net indirect taxes
Corporate profit taxes
Personal income taxes
Net factor income from abroad
Dividends
National Income (NI) of the economy is
a. 560 MUC
b. 620 MUC
c. 640 MUC
d. 720 MUC
e. 810 MUC.
MUC
500
20
200
25
60
15
100
5
100
(2 points)
358
Part III
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04
20
04
04
66. The IS function and LM function of an economy are estimated to be Y = 2860 + 0.5Y 60i
and Y = 2600 + 400i respectively. The investment function in the economy is 800 50i. If
the government wants to increase the output by 10% by raising the government expenditure,
what is the crowding out in the economy?
a. 52.5 MUC.
b. 55.5 MUC.
c. 62.5 MUC.
d. 500.0 MUC.
e. None of the above.
(2 points)
67. The money supply in an economy is estimated to be 250 MUC and the transaction plus
precautionary demand for money is 0.20Y. The speculative demand for money is 150 50i.
If the income level in the economy is 700 the rate of interest in the economy is
a. 0.7%
b. 0.8%
c. 0.9%
d. 1.0%
e. 1.2%.
(1 point)
Answer Questions 68 and 69 based following information:
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Year
Nominal GNP GNP deflator
2001-02
5000
250
2002-03
6600
300
68. What is the growth rate of real GNP from year 2001-02 to 2002-03?
a. 10.0%.
b. 32.0%.
c. 20.0%.
d. 58.4%.
e. 53.6%.
(1 point)
ty
Pr
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s.
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lr
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69. What is the rate of inflation in the economy for the year 2002-03?
a. 10.0%.
b. 32.0%.
c. 20.0%.
d. 58.4%.
e. 53.6%.
20
04
Th
e
Ic
fa
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ve
rs
i
(1 point)
70. GDP of a country is 8000 MUC. Value of output produced in the domestic country by
foreign factors of production is 200 MUC and value of the output produced by domestic
factors of production in foreign countries is 100. GNP of the country is
a. 7,700 MUC
b. 7,800 MUC
c. 7,900 MUC
d. 8,100 MUC
e. 8,200 MUC.
(1 point)
71. The LM function of an economy is estimated to be Y = 750 50i. The transaction demand for
money and speculative demand for money are 0.25Y and 150 20i respectively. If output in
the economy is 600 MUC, the velocity of money in the economy is
a. 0.40
b. 4.00
c. 5.00
d. 2.50
e. 250.00.
(3 points)
359
Macroeconomics
72. In a hypothetical economy, the high-powered money is 2000 MUC and the money supply is
6000. Currency deposit ratio is estimated to be 0.2. The central bank sells government
securities worth 500 MUC in the open market. Even after the open market sale, if the central
bank wants to maintain the money supply at the same level, the reserve ratio should be
0.1%
b.
1.0%
c.
3.0%
d.
10.0%
e.
30.0%.
04
a.
04
(1 point)
04
20
73. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and
total demand for money is Rs.5,000, then the amount required by banks to meet the reserve
requirement is equal to
Rs.250
b.
Rs.2,250
c.
Rs.2,500
d.
Rs.5,000
e.
(1 point)
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74. There are different stages in the production of good Zebra. The values at each stage are
given as under:
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BN
Particulars
Value
Raw material
30
Manufacturing
50
Packaging
80
Retailing
120
The value added in manufacturing stage and the total value added in the process of producing
Zebra are
20 and 120, respectively
50 and 120, respectively
20 and 100, respectively
50 and 100, respectively
20 and 50, respectively.
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Pr
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s.
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a.
b.
c.
d.
e.
(1 point)
20
04
Th
e
Ic
fa
75. In a hypothetical economy, if the marginal propensity to consume is 0.8; marginal propensity to
import is 0.14; and the tax rate is 20%, then the value of multiplier will be
a.
b.
c.
d.
e.
6.
(1 point)
360
Macroeconomics
04
04
3. (b) Potential GDP is the maximum feasible GDP of an economy when all the resources are
fully employed.
04
20
4. (e) Macroeconomics deals with the study of economy as a whole; it seeks to analyze the
sources of inflation, unemployment, economic growth. It also explains about the policies to
be implemented for the achievement of macroeconomic objectives.
ef
.N
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M
AC
5. (a) In the Simple Keynesian model, movements of the economy from one equilibrium point
to another can be gauged with the help of a single assumption that business firms raise
production as soon as demand increases and that this results in an equivalent raise in income
payments. Thus, the Simple Keynesian multiplier model is based on the principle that
national output moves up and down in response to movements in aggregate demand.
02
27
-4
6. (b) Real GNP is the GNP in current rupees deflated for the changes in the prices of items
included in nominal GNP. [Hint: Real GNP = Nominal GNP/Price index].
1-
31
4-
7. (a) If the people decide to save less, MPS decreases. So MPC increases. [Hint: MPC = Y
MPS].
BN
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8. (d) According to the Keynesian model of output determination, GDP is in equilibrium when
planned savings equals planned investment.
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se
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ed
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9. (a) Tax reductions induce more consumption, but decrease the government expenditure. If
increase in the consumption is same as decrease in government expenditure then output won't
change. So it is not always true that increase in personal consumption resulting from tax
decreases would increase the real GDP.
lr
ig
ht
10. (b) Sterilization is neutralization of changes in the money supply caused by changes in the
foreign exchange reserves of a country.
Pr
es
s.
Al
11. (e) There are several factors which affect Aggregate supply such as change in the cost of
production, supply shocks, technology, raw materials labor supply, etc. All the factors given
affect the aggregate supply in an economy. Hence answer is (e).
ve
rs
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ty
12. (b) Philips curve shows the relationship between the inflation rate and unemployment rate.
20
04
Th
e
Ic
fa
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ni
13. (c) Increase in investment leads to efficiency in the use of resources and increase the rate of
economic growth.
14. (e) Keynes held that demand for money consists of
i.
Transaction demand for money
ii. Precautionary demand for money and
iii. Speculative demand for money
Hence, the answer is (e).
15. (d) Since unemployment, inflation and the growth rate of GDP are all variables showing the
economy as a whole (in the macro sense) these are all macroeconomic variables.
16. (b) Personal income is the total income received by individuals that is available for
consumptions saving and payment of personal taxes. Personal income = National income
Retained earnings Corporate taxes.
17. (c) A liquidity trap refers to a situation where lower interest rates fail to stimulate demand. It
may arise when a slowing economy reduces demand for loans. Lenders see asset quality
deteriorate and become more reluctant to lend. The combination of reluctant bankers and
borrowers turns loan growth negative, which further depresses economic activity. During this
period, interest rates do not decrease, no matter how much the money supply is expanded.
361
Macroeconomics
18. (a) Fiscal stance is the difference between actual fiscal deficit and cyclical neutral fiscal
deficit.
19. (e) Expansionary fiscal policies will shift the IS curve towards right but will not affect LM curve.
20. (c) Philips curve shows the relationship between unemployment and inflation (i.e. rate of
change in prices).
21. (b) The market in which foreign exchange is bought and sold for delivery at a future date at
the rate of exchange agreed upon today is called forward market.
04
22. (a) Velocity of circulation is the rate at which money moves as it carries out its functions or
it is the average number of times per year that each rupee of stock of money is spent for
output.
04
20
04
23. (c) Laffer curve shows the relation between total tax revenue and tax rates. It shows that
increase in tax rates up to a certain level leads to an increase in tax revenue and latter results
in decrease of tax revenue.
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24. (b) Ceteris paribus, an increase in demand for money, increases the rate of interest in the
economy. The figure given below explains this phenomenon.
ed
.IS
25. (c) A neoclassical aggregate supply schedule exists when the demand for labor and supply of
labor schedules adjust immediately to a change in the price level.
ht
re
se
rv
26. (c) A current account deficit implies that foreign exchange outflows on account of import of
goods and services and gifts made exceed inflows on account of exports of goods and
services received.
Pr
es
s.
Al
lr
ig
27. (b) As the aggregate supply curve is vertical, increase in nominal money supply only lead to
increase in price level. But it will not have any effect on the real money supply or the
composition of output, because the economy already running at full employment.
ni
ve
rs
i
ty
28. (c) When the aggregate supply schedule is positively stopped, continuous increase in the
nominal money supply center is paribus, results in an increase in the price level and real
output.
Th
e
Ic
fa
iU
29. (d) Multiplier = 1/[1 b + MPI), where MPI is marginal propensity to import. This shows
inverse relationship between multiplier and marginal propensity to import. Thus, an increase
in the marginal propensity to import decreases the value of the multiplier.
20
04
30. (a) An expansionary monetary and fiscal policy increases the aggregate demand in the
economy, which leads to shift in AD curve towards right.
31. (b) a.
GNPMP is the total market value of the final goods and services produced in a
given period by factors of production owned by the citizens of a country.
b.
GDPMP is defined as the total market value of all the final goods and services
produced in a given period by factors of production located within a country.
c.
d.
GNPFC is the total value of the final goods and services produced in a given period
by factors of production owned by the citizens of a country and valued at factor cost.
e.
GDPFC is the total market value of the final goods and services produced in a given
period by factors of production located within a country and valued at factor cost.
362
Part III
ht
37.
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04
20
04
04
33. (d) Preparation of BoP statement is based on double-entry system of bookkeeping. Hence, all
debt items should equal credit items, and the balance is zero.
34. (b) Expected nominal interest rate = Real interest rate + Expected rate of inflation.
Therefore, if the expected inflation goes up, expected nominal rate of interest also goes up by
the same amount. Hence the answer is (b).
35. (a) Y = C + I + G + Net Exports
Where Y = Domestic income
C + I + G = Domestic spending.
Y (C + I + G) = Net Exports (Current Account Balance)
If Current Account Balance is negative, then domestic spending is greater than domestic income.
The answer is (a).
(b) If domestic income exceeds domestic spending, there is current account surplus.
(c) Current account balance is equal to exports imports. If exports exceed imports, there
is current account surplus.
(d) If domestic savings exceed domestic investment, domestic income exceeds domestic
spending and there is current account surplus.
36. (e) Expansionary monetary policy will shift the LM curve to the right and contractionary
monetary policy will shift the LM curve to the left. Expansionary fiscal policies will shift the
IS curve towards right but will not affect LM curve.
ni
b.
c.
d.
During a boom bank reserves will be high as the bank credit is high to support the
increased economic activity.
Wage rate will be high as demand for labor increase during the boom phase.
As the economic activity increase during the boom phase bank credit also increases.
During a boom demand increased at a faster rate and inventories tend to be low.
All other variables tend to increase during a boom.
Cost of production will be high as demand for factors of production will be relatively
high during the boom phase.
ve
rs
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a.
20
04
Th
e
Ic
fa
iU
39. (d)
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Pr
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s.
Al
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e.
Or
=
363
Macroeconomics
Part B: Problems
41. (c) NDP at market prices = Sales to households + Sales to government + Net investment +
Net exports (Current Account Balance)
= 5,000 + 1,500 + 1,200 200 = 7,500
Net Investment = Gross fixed investment + Change in inventories Depreciation
= 1,300 + 500 600 = 1,200.
04
04
42. (a) GNP at factor cost = NDPMP + Depreciation Indirect taxes + Subsides + Net factor
income from abroad
80 + 0.8125 Yd 5i
Yd
(Y T + R) = (Y 0.2Y + 80)
0.8Y + 80
B
W
M
AC
o.
C + I + G + (E M)
BN
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4-
600
Pr
es
s.
Al
0.25Y
= 400 + 50i
= 1,600 + 200i . (2)
ve
rs
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ty
ig
lr
ht
re
ni
iU
1,600 + 200i
250i
3,750
15%
4,600.
Th
e
Ic
fa
5,350 50i
20
04
ef
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02
27
IS Function
Y
80 + 0.1875 Yd + 5i
04
-4
43. (e)
20
04
20
04
04
Part III
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31
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Secondary issues
New issues
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rv
IR =
46. (b)
.IS
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ht
ig
= 8,400 (MUC)
re
s.
Al
lr
Pr
es
= 12,000 + 8,400
ty
= 20,400 (MUC)
Total Issues
Net Physical Capital Formation (NPCF)
ve
rs
i
=
iU
ni
FIR
20,400
= 17,000 (MUC).
1.20
Th
e
Ic
fa
NPCF =
20
04
47. (b) Decrease in FR indicates decreased financial deepening of the economy. That is,
financial development of the country is less than the overall economic development of the
country during the period.
Decline in IR indicates financial disintermediation in the economy. That is, ultimate users of
funds directly access funds from ultimate savers, thereby avoiding financial intermediaries
like banks and financial institutions.
48. (c) Intermediation ratio = Secondary issues/ Primary issues
New issues ratio = Primary issues/Net capital formation = 0.74
Thus, 0.74
= x/2,00,445
Or, x
= 1,48,329.3
Hence, intermediation ratio = 1,15,605/1,48,329.3 = 0.78 approximately.
365
Macroeconomics
1 + Cu
49. (c) Money Supply (Ms) = H x
Cu + r
Where, High Powered Money (H) = Monetary Liabilities of RBI (MLRBI) + Government
money.
H=
Ms
1 + Cu
Cu + r
12,000
= 3,000 MUC
1 + 0.2
0.2 + 0.10
04
FARBI
M
AC
NMLRBI
04
20
04
MLRBI
3,000
NFEA
27
-4
ef
.N
o.
=
=
4-
02
Therefore, net foreign exchange assets of the country are 500 MUC.
1-
31
:8
Ms = 12,000
BN
Cu = 0.2
ed
.IS
re
se
rv
Thus, the new money supply in the market = H x Money multiplier = 3,000 x (1 + 0.2)/(0.2 + 0.2)
= 9,000 MUC.
ht
51. (e)
s.
Al
lr
ig
US $ Millions
Pr
es
Current Account
Credit
Debit
Net
4489
59264
(1437)
Merchandise
ii.
Invisibles (a + b)
34762
22656
12106
a.
Services
19185
16392
2793
15577
6264
9313
79656
81920
(2264)
ve
rs
i
ty
i.
b.
fa
iU
ni
A.
Th
e
Ic
20
04
B.
Capital Account
i.
Foreign investment
12617
9706
2911
ii.
Loans
23076
18545
4531
iii.
Other capital
16133
16088
45
51826
44339
7487
633
633
126259
5856
5856
(5856)
366
C.
D.
132115
E.
Part III
52. (c) Revenue Surplus (Deficit) = Revenue Receipts Revenue Expenditure = [Tax Revenue +
Non-tax Revenue] [Plan and Non-plan Revenue Expenditure] = [(1,16,857 + 45,137)
(1,66,301 + 43,761)] = Rs. (48,068) million.
Primary Deficit = Borrowings and liabilities Interest payments = 91,025 75,000
= Rs. 16,025 million.
53. (c) Personal Savings
PI
NNPFC
PI
PDI
Personal Savings
04
20
04
04
PDI
o.
M
AC
54. (c) Gross Domestic Savings = Retained earnings (RE) + Budget surplus + Personal savings +
Depreciation.
ef
.N
RE = Corporate ProfitsCorporate Profit tax Dividends = 2,000 800 200 = 1,000 MUC
-4
31
4-
02
27
:8
1-
55. (a)
ed
.IS
Ct = Ct-1
BN
ig
ht
lr
0.80 Ct
re
se
rv
250 + 0.60Ytd
0.80
s.
Al
Pr
es
Ct
ve
rs
i
ty
Ytd = 500
iU
ni
When
fa
Ct
Ic
increase by 100,
20
04
Th
e
If
Ytd
Macroeconomics
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
57. (d) National income (NNP at FC) = wages & salaries + interest income + rental income + profit
Or, Profit = 300 180 45 30 = 45 MUC.
58. (d) NFIA = NNPMP NDPMP
NNPMP = NNPFC + Indirect Taxes Subsidies = 4,200 + 950 100 = 5,050 MUC
Thus, NFIA = 5,050 5,000 = 50 MUC.
59. (d) GDPFC = NDPMP + Depreciation Indirect Taxes + Subsidies
5000 + (800 650) 950 + 100 = 4,300 MUC.
60. (c) Personal Income (PI) (i.e. income received by the households) = NI Corporate profit +
Dividends + Transfer payments = 4,200 750 + 150 + 75 = 3,675 MUC.
61. (c) Current account balance (CAB) = Net Domestic Savings (NDS) Net Domestic Investment
(NDI)
NDS
= Retained Earnings (RE) + Budget surplus + PS
RE
= Corporate Profits Corporate Profit Tax Dividends
= 750 350 150 = 250
Thus, NDS
= 250 300 + 1,075 = 1,025 MUC.
Thus, CAB
= 1,025 650 = 375 (surplus).
62. (c) Corporate profits = Corporate profit tax + Dividends + Retained earnings
= 50 + 15 + 20 = 85.
:8
1-
31
4-
63. (c) Wages and salaries paid by the government = Factor income received by households
(Wages and salaries paid by the business sector + Dividends paid to households + Factor
income received from abroad) = 160 100 10 20 = 30.
0.25 Yd
.IS
= 300 + 0.25Yd = 0
300
= 1,200 MUC.
0.25
ht
se
rv
Yd
ed
= 300
re
BN
Pr
es
s.
Al
lr
ig
65. (a) National income (NI) = Factor income received by domestic residents + Factor income
received by domestic residents from foreigners + Corporate profit taxes + Retained earnings
= 500 + 20 + 15 + 25 = 560 MUC.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Part III
68. (a) Growth rate of real GNP = {(Real GNP 2002-03/Real GNP 2001-02) 1} x 100
Real GNP 2002-03 = 6600 x 100/300 = 2200
Real GNP 2001-02 = 5000 x 100/250 = 2000
Growth rate = {(2200/2000) 1} x 100 = 10%.
69. (c) Inflation rate = (GNP deflator of current period GNP deflator of previous year) divided
by GNP deflator of previous year x 100 = (300/250 1) x 100 = 20%.
70. (c) GNP =
=
100 200
100
8000 100
7900 MUC.
04
20
04
04
GNP
NFIA
GDP + NFIA
M
AC
o.
ef
.N
-4
Ms = 240
27
4-
02
.IS
= 10%.
ed
Or, r
BN
6000
:8
1-
31
se
rv
re
ht
s.
Al
lr
ig
Given the reserve ratio of 10%, required reserves are 2,500 0.10 = Rs.250.
Pr
es
74. (a) Total value added in the process = Market value of the final product = 120
ty
Value added in the manufacturing stage = Total value of the good after manufacturing stage
Total cost for procuring raw-material = 50 30 = 20.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
75. (a) Multiplier = 1/(1 MPC + MPC x tax rate + MPI) = 1/(1 0.8 + 0.8 x 0.2 + 0.14) = 2.
369
c.
d.
e.
04
20
b.
04
ef
.N
o.
b.
c.
d.
e.
1-
31
4-
02
27
-4
a.
BN
:8
2.
a.
04
M
AC
1.
b.
c.
d.
e.
re
se
rv
ed
a.
.IS
Pr
es
s.
Al
lr
ig
ht
3.
For an economy operating below its potential, the effect on GDP of an increase in intended
investment will normally be
ve
rs
i
ty
4.
b.
Nothing at all, unless savings also increase at once, since investment and savings must
always be equal
Nothing at all, since consumption must go down by as much as investment goes up
d.
e.
20
04
Th
e
c.
Ic
fa
iU
ni
a.
5.
Suppose that government spending rises. Assume that the economy is operating at a level
slightly below the level of potential GDP. The effect of this policy change should be
a.
b.
c.
d.
e.
Part III
6.
b.
c.
d.
A measure of income.
e.
c.
d.
e.
04
20
04
04
c.
d.
e.
02
27
-4
ef
.N
o.
1-
:8
a.
31
c.
d.
e.
se
rv
ed
.IS
BN
b.
re
9.
a.
4-
8.
a.
M
AC
7.
a.
ig
ht
b.
c.
d.
e.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
a.
20
04
Ic
Th
e
a.
fa
c.
Negatively related to the income level and positively related to the rate of interest
d.
Positively related to the income level and negatively related to the rate of interest
e.
12. Which of the following situations would you expect to see during a period of recession?
a.
b.
c.
d.
e.
Macroeconomics
04
20
04
04
M
AC
b.
c.
d.
e.
4-
02
27
-4
ef
.N
o.
a.
1-
31
b.
c.
d.
e.
re
se
rv
ed
.IS
BN
:8
a.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
17. In which market simultaneous spot and forward contract are entered into by two parties?
a. Euro currency market.
b. Forward market.
c. Future market.
d. Spot market.
e. Swap market.
20
04
Th
e
Ic
fa
iU
372
Part III
20. An
a.
b.
c.
d.
e.
04
20
04
04
c.
d.
e.
o.
ef
.N
b.
b.
c.
d.
e.
re
se
rv
ed
.IS
BN
:8
a.
1-
31
4-
02
27
-4
a.
M
AC
22. In the IS-LM model of income determination, an increase in the propensity to save leads to a
lr
ig
ht
24. When investment spending is negatively related to the rate of interest, equilibrium income in
the goods market
Is unrelated to the rate of interest
b.
c.
d.
e.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
a.
Ic
fa
25. Which of the following theories is called as the Neoclassical theory of interest?
The Keynesian Theory.
b.
c.
d.
Expectations Theory.
e.
b.
c.
d.
Expenditures on machinery.
e.
Macroeconomics
27. When the actual rate of inflation turns out to be higher than expected
a.
b.
c.
The gain depends on the extent of difference between the actual rate of inflation and the
expected rate of inflation
d.
e.
c.
d.
e.
04
b.
20
M
AC
04
a.
04
ef
.N
o.
29. A situation in which the marginal physical productivity of labor is zero is known as
Seasonal unemployment
b.
Cyclical unemployment
c.
Disguised unemployment
d.
Structural unemployment
e.
Voluntary unemployment.
:8
1-
31
4-
02
27
-4
a.
Revenue budget.
c.
Capital budget.
d.
Cyclical budget.
e.
.IS
b.
ed
Structural budget.
lr
ig
ht
re
se
rv
a.
BN
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
374
e.
04
20
04
B
W
27
-4
d.
ef
.N
o.
M
AC
04
Part III
c.
d.
e.
31
b.
1-
se
rv
ed
.IS
BN
:8
a.
4-
02
b.
Public debt.
c.
Wealth of a country.
d.
Inflation.
e.
Money supply.
ty
Pr
es
s.
Al
lr
ig
ht
a.
re
ve
rs
i
b.
20
04
iU
fa
Ic
Th
e
c.
ni
a.
d.
e.
b.
c.
Interest rates does not decrease, no matter how much the money supply is expanded
d.
e.
375
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
Particulars
MUC
Credit to Government
950
Credit to Bank
350
Government Deposits
20
Other non-monetary liabilities
5
Net worth
500
Credit to commercial sector
125
Net foreign exchange assets
25
Other assets
65
The currency/deposit ratio has been ascertained as 0.20. The amount of Government money
is 10 million units of currency. Total money supply in the economy is 4000 million units of
currency. The reserve ratio imposed by the Central Bank is
a. 9%
b. 10%
c. 11%
d. 11.5%
e. 12%.
(3 points)
42. The monetary liabilities of the RBI and the government money in circulation are Rs.990
MUC and 10 MUC respectively. The currency deposit ratio is estimated to be 20%. If there is
an increase of 100 MUC in Central Bank Credit to Government, accompanied by
Government purchase of foreign exchange worth 10 MUC from the RBI, what would be the
money supply in the economy? (Assume reserve ratio is 10%)
a. 4,340 MUC.
b. 4,350 MUC.
c. 4,360 MUC.
d. 4,370 MUC.
e. 4,380 MUC.
(2 points)
43. The following relations are derived for an economy.
Saving function (S)
100 + 0.25Yd
Investment function (I)
400 15i
Tax function (T)
0.20 Y
Government expenditure (G)
900
Transaction demand for money (Mt)
0.25Y
Speculative demand for money (Ma)
250 50i
Money supply
600
Exports (E)
500
Import function (M)
50 + 0.10Y
All macroeconomic aggregates are in million units of currency (MUC) and the rate of interest
is in percentage. What is the budget deficit of the economy at equilibrium?
a. 200 MUC.
b. 210 MUC.
c. 215 MUC.
d. 220 MUC.
e. 225 MUC.
(3 points)
376
Part III
44. The IS function and LM function of an economy are 0.5Y = 1850 15i and 0.25Y = 350 +
50i. If exports increase by 200 and autonomous imports decrease by 30 MUC, the new
equilibrium income and budget deficit are
a.
b.
c.
d.
e.
b.
c.
d.
e.
27
-4
ef
.N
o.
M
AC
a.
04
20
04
04
(3 points)
45. In an economy, the equilibrium functions in goods market and money market are Y = 3,700 30i
and Y = 1,400 + 200i. The investment function in the economy is 400 15i and the net
exports is 450 0.1Y. Suppose autonomous investment increased by 230 MUC, then what
would be the impact on trade balance and private investment in the economy?
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
(3 points)
46. In an economy which has a capital-output ratio of 5:1, population is expected to grow at the
rate of 2 percent p.a. If the targeted per capita real GDP growth rate is 4 percent, then the rate
of investment (i.e. investment as % of GDP) required to achieve the target is
a. 25%
b. 30%
c. 35%
d. 40%
e. None of the above.
(3 points)
47. The following information is extracted from the union budget for the year 2001-02.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
Particulars
Tax revenues
Non-tax revenues
Recoveries of loans
Borrowings and other liabilities
Other receipts (of which disinvestment proceeds committed for
redemption of public debt 2,000 cr.)
Non-plan revenue expenditure (including interest payments of
Rs.2,02,532
Non-plan capital expenditure
Planned revenue expenditure
Planned capital expenditure
The revenue and capital surplus (deficit) of the economy are
a. (Rs.1,54,850) crore and Rs.1,56,850 crore
b. (Rs.1,54,850) crore and Rs.1,54,850 crore
c. (Rs.1,56,850) crore and Rs.1,56,850 crore
d. (Rs.1,56,850) crore and Rs.1,56,850 crore
e. None of the above.
In crore of rupee
2,92,418
1,14,928
27,078
2,24,550
20,000
4,57,536
43,238
1,04,660
71,540
(3 points)
377
Macroeconomics
04
48. The borrowings and other liabilities of a hypothetical economy is Rs.2,24,550. The capital
receipts (incl. disinvestment proceeds committed for redemption of public debt Rs.2,000) is
Rs.20,000. Suppose the non-plan revenue expenditure of Rs.4,57,536 includes interest
payments of Rs.2,02,532, then the primary and fiscal deficit for the year 2001-02 are
a. Rs.22,018 and Rs.2,24,550 respectively
b. Rs.10,231 and Rs.2,24,550 respectively
c. Rs.10,011 and Rs.1,11,399 respectively
d. Rs.10,231 and Rs.1,11,399 respectively
e. Rs.10,011 and Rs.1,11,409 respectively.
(2 points)
20
04
o.
M
AC
MUC
20,000
18,000
16,000
12,000
400
1,000
100
150
50
20
1,450 Cr.
e.
1,600 Cr.
1-
d.
:8
1,400 Dr.
BN
c.
.IS
1,450 Dr.
ed
b.
se
rv
1,400 Cr.
re
a.
31
4-
02
27
-4
ef
.N
Particulars
Merchandize imports
Merchandize exports
Export of services, including travel and transportation
Import of services, including travel and transportation
Earnings of loans and investments abroad
Earnings of loans and investments in country X by foreigners
Private remittances to abroad
Private remittances from abroad
Government loans to abroad
Government loans from abroad
What is the current account balance of country X for the year 2001?
04
49. The following information pertains to the balance of payments of country X for the year 2001.
ig
ht
(2 points)
s.
Al
lr
50. The following information pertains to the balance of payments of country Y for the year 2001.
Pr
es
Particulars
ve
rs
i
ty
50
30
Ic
Th
e
20
04
1,000
20
fa
400
iU
ni
MUC
150
300
(150) MUC.
b.
(160) MUC.
c.
(170) MUC.
d.
(180) MUC.
e.
(190) MUC.
40
(2 points)
378
Part III
51. For Country X Gross Domestic Investment for the year 2001 is 5,000 MUC. If gross retained
earnings of the business sector are 2,000 MUC and household savings are 5,500 MUC, then
what is the budget surplus or deficit? (Assume current account balance to be 1,450 MUC)
950 MUC.
b.
(1,000) MUC.
c.
(1,050) MUC.
d.
1,100 MUC.
e.
1,150 MUC.
04
a.
04
(2 points)
ef
.N
o.
M
AC
3,870 MUC.
3,750 MUC.
3,720 MUC.
3,840 MUC.
3,920 MUC.
-4
a.
b.
c.
d.
e.
04
20
52. The current account and capital account balances of a country are 1,450 MUC (credit) and
170 MUC (debit) respectively. If money multiplier is estimated to be 3, what is the impact of
balance of payments position on the money supply in the economy?
31
4-
02
27
(1 point)
53. The following information is taken from the national income accounts of a hypothetical economy:
MUC
3,000
600
200
1,400
600
2,000
1,500
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
Particulars
GNP at market prices
Gross investment
Net investment
Consumption
Government purchases of goods and services
National income
Wages and salaries
The amount of net indirect taxes collected by the government is
a. 500 MUC
b. 550 MUC
c. 600 MUC
d. 650 MUC
e. 700 MUC.
20
04
Th
e
Ic
fa
iU
ni
(2 points)
54. The following information is taken from the national income accounts of a hypothetical economy:
Particulars
MUC
GNP at market prices
3,000
Gross investment
600
Net investment
200
Consumption
1,400
Government purchases of goods and services
600
National income
2,000
The net exports made by the country is
a. 300 MUC
b. 350 MUC
c. 400 MUC
d. 450 MUC
e.
500 MUC.
(1 point)
379
Macroeconomics
55. The following information is taken from the national income accounts of a hypothetical
economy:
2,000
1,500
200
Net interest
100
Dividends
50
300
200
04
Transfer payments
04
National income
04
MUC
20
Particulars
c.
d.
e.
o.
ef
.N
b.
02
27
-4
a.
M
AC
The amount of profits earned by the corporates and the total disposable income of the
households are
31
4-
(2 points)
:8
1-
56. The following information is extracted from National Income Accounts of a country:
Million Units of Currency
BN
Particulars
se
rv
ed
.IS
ht
1,600
200
1,300
1,900
lr
ig
Indirect taxes
re
10,000
7,350 MUC.
b.
8,240 MUC.
c.
8,600 MUC.
d.
8,720 MUC.
e.
8,800 MUC.
(2 points)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
s.
Al
20
04
57. The Government of India is expecting tax collections (net) to the tune of Rs.1,84,169 crore during
the year 2003-04. The borrowings and other liabilities are expected to be Rs.1,53,637 crore. If
the non-plan revenue expenditure of the government is Rs.2,89,384 crore (inclusive of
interest payments of Rs.1,23,223 crore), the primary deficit for the year 2003-04 is
a.
Rs.1,53,637 crore
b.
Rs.1,35,747 crore
c.
Rs.1,05,215 crore
d.
e.
380
Part III
58. In a closed two sector economy, there are 50 individuals. All the individuals have identical
consumption functions but have different disposable incomes. One of the individuals
consumption function is C = 100 + 0.7Yd. Aggregate disposable income in the economy is
50,000 MUC. The level of investment in the economy is
10,000 MUC
b.
11,000 MUC
c.
12,000 MUC
d.
13,000 MUC
e.
14,000 MUC.
04
a.
-4
ef
.N
o.
M
AC
04
20
04
(2 points)
59. If the Average Propensity to Consume (APC) in an economy is 1.05, Average Propensity to
Save (APS) in the economy would be
a. 0.05
b. 0.95
c. 1.00
d. 1.05
e. Insufficient data.
(1 point)
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
60. The annual growth rate of GDP in a country is estimated to be 5.06%. If the per capita GDP
growth rate is 2%, what is the growth rate of population?
a. 2.530%.
b. 0.395%.
c. 3.000%.
d. 4.530%.
e. 2.000%.
(1 point)
b.
80 MUC
c.
0 MUC
d.
250 MUC
e.
330 MUC.
Pr
es
580 MUC
(1 point)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
a.
s.
Al
lr
ig
ht
re
61. The money supply in an economy is 330 MUC. At equilibrium, the transaction demand
for money and the interest rate (i) in the economy are 250 and 8 percent respectively. If
the precautionary demand for money is zero, the speculative demand for money in the
economy is
20
04
Macroeconomics
63. In a hypothetical economy, the nominal income increased by 6%. If the prices increased by
4%, the real income increases by
a.
b.
c.
d.
e.
10.0%
2.0%
1.5%
0.667%
2.5%.
(1 point)
04
04
20
02
27
-4
ef
.N
o.
M
AC
04
64. If the current output is 800 MUC, what will be the involuntary inventory accumulation in the
economy?
a. 0 MUC.
b. 100 MUC.
c. 200 MUC.
d. 50 MUC.
e. 250 MUC.
(1 point)
se
rv
ed
.IS
BN
:8
800 MUC.
1,000 MUC.
850 MUC.
950 MUC.
1,050 MUC.
re
a.
b.
c.
d.
e.
1-
31
4-
65. Suppose the autonomous investment increases from 100 MUC to 150 MUC, what would be
the consumption at the equilibrium?
ht
(2 points)
lr
ig
66. The following information pertains to the balance of payments of a country for the year 2002-03:
s.
Al
Particulars
1,40,240
Merchandize exports
1,16,320
ve
rs
i
ty
Pr
es
Merchandize imports
2,30,010
1,25,234
2,000
4,000
1,000
fa
Ic
iU
ni
Th
e
20
04
382
MUC
Part III
67. At an income level of Rs.20,000 the saving is zero. If the Marginal Propensity to Save (MPS)
is 0.3, the autonomous consumption is
a.
Rs.4,900
b.
Rs.5,000
c.
Rs.6,000
d.
Rs.7,000
e.
Rs.8,000.
(1 point)
04
R
-4
ed
(1 point)
Pr
es
s.
Al
lr
ig
ht
re
.IS
BN
:8
1-
31
4-
02
27
Rs.67,500
Rs.87,500
Rs.33,750
Rs.43,750
Rs.23,450.
se
rv
a.
b.
c.
d.
e.
o.
Price of Butter
(Rs. per unit)
15
20
Year
ef
.N
Price of Bread
(Rs. per unit)
2002
20
2003
25
68. Nominal GDP for the year 2002 is
M
AC
04
20
04
An economy produces only two commodities bread and butter. During the year 2003, it doubled
its production to 1500 units of bread and 2500 units of butter, as compared to last year. The
commodity prices in the economy during the two years are given below: (Consider 2002 as the
base year)
(2 points)
ve
rs
i
ty
ni
= 1,000 MUC
Consumption (C)
= 500 + 0.75Yd
Ic
fa
iU
Taxes (T)
20
04
Th
e
= 1,000 MUC
= 100 50i
= 500 MUC
0 MUC
b.
(52.5) MUC
c.
(137.5) MUC
d.
(102.5) MUC
e.
102.5 MUC.
(3 points)
383
Macroeconomics
04
04
14.0%.
3.5%.
32.0%.
8.0%.
5.5%.
20
a.
b.
c.
d.
e.
2.0
4%
4
rate at which reserve money should
04
(2 points)
27
-4
ef
.N
o.
Rs.1,100
Rs.1,200
Rs.800
Rs.1,000
None of the above.
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
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ed
.IS
BN
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1-
31
4-
02
a.
b.
c.
d.
e.
M
AC
72. A government employee received a cheque for Rs.1,200 drawn on the RBI. When the cheque
is credited to the employees account, high-powered money in the economy increases by
384
(1 point)
04
2. (b) Economic goods are those goods that are scare or limited in supply.
04
20
04
3. (e) Monetary and fiscal policies are aimed at reaching macroeconomic objectives. Thus
objectives of monetary and fiscal policies are similar to macroeconomic objectives. All the
options given are objectives of monetary policy. Hence, the answer is (e).
o.
M
AC
4. (a) For an economy operating below its potential, the effect on GDP of an increase in
intended investment will normally be greater than the increase in investment due to multiplier
effect.
ef
.N
5. (b) Increase in government spending is an expansionary fiscal policy which increases the
price level and output in the economy.
02
27
-4
6. (c) The sum of all transactions involving money in an economy is least applicable to the
concept of NDP.
:8
1-
31
4-
7. (d) When government spending is used as a policy instrument in order to achieve full
employment, it is called internal balance.
ed
.IS
BN
8. (b) Savings reduces the consumption expenditure, which is a basic component of total output
(income). Hence, increase in savings reduces the consumption, which in turn pull the income
level down.
se
rv
9. (b) M1 = Currency with the public + Demand deposits with the banks.
lr
ig
ht
re
10. (c) Raise in discount rate discourages banks to rediscount their bills with the RBI, which
leads to contraction in money supply in the economy. Reduction of money supply pushes the
interest rates up in the market.
ty
Pr
es
s.
Al
11. (d) Demand for money increases (decreases) with the increase (decrease) in the level of
income. On the other hand, increased (decreased) interest rate tend to reduce (increase) the
demand for money.
iU
ni
ve
rs
i
12. (e) When these is recession in the economy, the tax receipts will come down, there will be
decrease in corporate profit, stock prices will start falling, and these will not be any new
business investment.
20
04
Th
e
Ic
fa
13. (d) GDP = NDP + Depreciation (or) GDP NDP = Depreciation. Similarly, on the other
hand, gross investment Net investment = Depreciation. Hence, difference between GDP and
NDP is equal to difference between gross investment and net investment.
14. (b) The Marginal Propensity to Save (MPS) can be described as the fraction of extra income
that goes into extra savings.
15. (b) A tax is regressive if potentials of income paid taxes decreases as income increases.
16. (e) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies (or) GDP at
factor cost = GDP at market price + Subsidies Indirect taxes. Hence, if GDP at factor cost
exceeds GDP at market prices subsidies must be greater than the indirect taxes.
17. (e) In swap market, simultaneous spot and forward contract are entered into by two
counterparties.
18. (a) When the output exceeds the spending there will naturally be some unsold output. As
unsold output is not included in income, the income level decreases in the economy.
Macroeconomics
19. (e) Laffer curve shows the relation between total tax revenue and tax rates. It shows that
increase in tax rates up to a certain level leads to an increase in tax revenue and latter results
in decrease of tax revenue. According to Laffer curve, tax revenue will be zero when tax rate
is at zero or at 100%.
20. (d) Multiplier = 1/[1 b + MPI), where MPI is marginal propensity to import. This shows
inverse relationship between multiplier and marginal propensity to import. Thus, an increase
in the marginal propensity to import decreases the value of the multiplier.
21. (a) GDP at factor cost (market prices) Depreciation = NDP at factor cost (market prices).
04
22. (d) In the IS-LM model of income determination, an increase in the propensity to save leads
to the leftward shift of the IS curve.
M
AC
04
20
04
23. (b) The demand for money is the demand for real money balances real balances for
short because people hold money for what it will buy. Demand for money depends upon
the real income and real interest rate. It depends on the level of real income because
individuals hold money to pay for their purchases, which in turn, depend on the income. The
demand for money also depends upon the cost of holding money, which is indicated by real
interest rate.
02
27
-4
ef
.N
o.
24. (b) When investment spending is inversely (negatively) related to the interest rate, a fall in
the interest rate induces an increase in investment expenditure and also possibly consumption
expenditure, which in turn lead to increase in the level of aggregate demand and ultimately
the income. This shows an inverse relationship between rate of interest and income in the
goods market.
31
4-
BN
:8
1-
26. (b) Expenditure on consumer goods comes under consumption expenditure and hence does
not included in gross investment.
ed
.IS
27. (a) The borrower will gain and lenders will loss, as the purchasing power of money will
decrease by a greater amount than expected.
re
se
rv
28. (a) The value of expenditure multiplier relates the change in income (Y) as a result of
change in the autonomous spending (J).
s.
Al
lr
ig
ht
29. (c) Disguised unemployment refers to a situation where more than the required number of
people are visibly occupied in some work contributing nothing to the output.
Pr
es
30. (d) Cyclical budget calculates the effect of business cycle on budget. It measures the changes
in the revenue expenditure and deficit that arise due to business fluctuations.
fa
iU
ni
ve
rs
i
ty
31. (b) IS curve shows various combinations of rate of interest and level of income where the
goods market is in equilibrium. There is a negative relation between rate of interest and level
of income because of negative relation between rate of interest and consumption and
investment expenditure.
Th
e
Ic
32. (b) Laffer curve shows the relationship between tax rates and tax revenue.
20
04
34. (b) Money earned abroad and remitted to home country is factor income received from
abroad, which is included in GNP of the home country and GDP of the host country.
35. (d)
M2 = M1 + Post office savings Bank Deposits
M3 = M1 + Time Deposits
M4 = M3 + All post office deposits.
The answer is (d).
386
Part III
04
04
1 b(1 t)
20
Y=
04
ef
.N
o.
M
AC
40. (c) Liquidity trap is a situation where the demand for money is infinitely elastic. At the
current interest rate the public is willing to absorb any amount of money. Hence, increase in
money supply will not decrease the rates of interest. Other options are not correct.
Part B: Problems
27
-4
41. (b)
4-
02
31
65 MUC.
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rv
Other Assets
.IS
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BN
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1-
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ig
ht
s.
Al
lr
Pr
es
ve
rs
i
ty
Money Supply = H x m
1 + Cu
Cu + r
fa
iU
ni
m = money multiplier =
20
04
Th
e
Ic
4,000 = 1,000 m
m=
4,000
= 4.
1,000
1 + Cu
Cu + r
=4
1+ 0.2
=4
0.2 + r
1.2 = 0.8 + 4r
r=
1.20 0.8
= 0.10 = 10%.
4
387
Macroeconomics
42. (c)
Money supply (Ms) = High-powered money (H) x Money Multiplier (m)
= [(990 + 10) + 100 10] [(1 + 0.2)/(0.2 + 0.1)] = 1,090 x 4 = 4360 MUC.
04
20
04
B
W
M
AC
o.
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27
02
31
1:8
BN
350 + 50i
= 1,400 + 200i. LM function
0.25
.IS
4-
04
43. (d)
Savings function (S)
= 100 + 0.25Yd
Consumption function (C) = 100 + 0.75Yd
Yd = Y T
= Y 0.20Y = 0.80Y
C = 100 + 0.75 0.80Y = 100 + 0.6Y
Goods market equilibrium:
Y = C+I+G+EM
= 100 + 0.6Y + 400 15i + 900 + 500 50 0.10Y
Y = 1,850 + 0.5Y 15i
Y = 3,700 30i IS function
Money market equilibrium:
Ms
= Md
Md
= Mt + Ma
= 0.25Y + 250 50i
ed
re
se
rv
s.
Al
lr
ig
ht
i = 10%
Y = 3,700 30i = 3,400 MUC.
Budget deficit = Government expenditure Tax revenue
Pr
es
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Y
Tax revenue
388
1-
31
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27
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04
20
04
04
Part III
.IS
ed
(1 + g)
(1 + p)
re
Where,
se
rv
BN
:8
46. (b)
ht
Pr
es
1 + g = 1.04 1.02
s.
Al
lr
ig
= 0.0608 = 6.08%
ty
ve
rs
i
iU
ni
fa
Alternative approach:
Th
e
Ic
20
04
= 2.0% p.a.
Growth required in GDP to achieve target per capita GDP growth = 4 + 2 = 6% p.a.
Capital output ratio = 5:1
The required rate of investment as a percentage of GDP = 5 6 = 30% approx.
47. (b)
Tax revenues
Non-tax revenues
Recoveries of loans
Borrowings and other liabilities
In crore of
rupee
2,92,418
1,14,928
27,078
2,24,550
389
Macroeconomics
In crore of
rupee
Other receipts (of which disinvestment proceeds committed
for redemption of public debt is 2,000 cr.)
Non-plan revenue expenditure (including interest
payments of Rs.2,02,532)
20,000
4,57,536
43,238
1,04,660
71,540
20
04
04
04
ef
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AC
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27
Fiscal Deficit
48. (a)
4-
02
Primary Deficit = Fiscal Deficit Interest payments = 2,24,550 2,02,532 = Rs.22,018 crore.
1-
31
49. (d)
Credit
Debit
18,000
20,000
(2,000)
16,000
12,000
4,000
400
1,000
(600)
150
100
50
34,550
33,100
1,450
:8
Item
BN
I. Merchandize
se
rv
ed
.IS
II. Invisibles
(a + b + c)
Net
re
a. Services
lr
ig
c. Transfers
ht
b. Income
Pr
es
s.
Al
ty
50. (c)
I. Foreign investment
II. Loan capital
Capital account balance (I + II)
Credit Debit
150
30
Net
120
60
350 (290)
210
380 (170)
Th
e
Ic
fa
iU
ni
ve
rs
i
Item
20
04
51. (c)
Gross Domestic Savings (GDS) = GDI + Current Account Balance (CAB)
GDS =
=
390
Part III
52. (d) Change in money supply (Ms) = Money multiplier x Change in high powered money (H)
Since the overall BoP position is a surplus of 1,280 MUC (1,450 170), forex reserves
increase by the same amount, which leads to increase in H by 1,280 MUC.
04
20
04
B
W
M
AC
54. (c)
04
ef
.N
o.
27
-4
National income (Wages and salaries + Rental income + Proprietors income + Net
interest)
4-
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31
Personal income =
02
1-
BN
ed
.IS
se
rv
56. (c)
re
s.
Al
lr
ig
ht
GDPMP Indirect taxes + Subsidies = GDPFC = 10,300 1,900 + 200 = 8,600 MUC.
Pr
es
ve
rs
i
ty
iU
ni
Th
e
Ic
fa
20
04
60. (c) Per capita GDP growth rate = (1 + g)/(1 + p) 1; where g = growth rate of GDP and
p = growth rate of population.
= (1 + 0.0506)/(1 + 0.02) 1 = 0.03 or 3%.
61. (b) At equilibrium, Supply of money = Demand for money
Demand for money = Transaction demand for money + Speculative demand for money
+ Precautionary demand for money
Or, speculative demand for money = 330 250 0 = 80 MUC.
391
Macroeconomics
04
04
64. (a) When output (income) = 800, aggregate demand = C + I = 100 + 0.75(800) + 100 = 800.
When AD = Y, there will be no involuntary inventory accumulation in the economy.
04
20
M
AC
If autonomous investment increases to 150 (i.e. 50), then the income increases by 50 x 4 = 200.
That means, new Y = 800 + 200 = 1000.
ef
.N
o.
66. (c) Change in foreign exchange reserves = Current account balance + Capital account balance
27
-4
Current account balance = (116,320 + 230,010 + 4000 + 1000) - (140,240 + 125,234 + 2000)
= 351330 267474 = 83856 i.e. current account surplus (Credit)
4-
02
1-
31
.IS
ed
se
rv
BN
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re
s.
Al
lr
ig
ht
68. (c) Nominal GDP for 2002 = (Quantity of bread in 2002 x Price of bread in 2002) +
(Quantity of butter in 2002 x Price of butter in 2002) = (750 x 20) + (1250 x 15) = 15,000 +
18,750 = Rs.33,750.
Pr
es
69. (d) Real GDP for 2003 = (Quantity of bread in 2003 x Price of bread in 2002) + (Quantity of
butter in 2003 x Price of butter in 2002) = (1500 x 20) + (2500 x 15) = Rs.67500.
fa
iU
ni
ve
rs
i
ty
Nominal GDP for 2003 = (Quantity of bread in 2003 x Price of bread in 2003) + (Quantity of
butter in 2003 x Price of butter in 2003) = (1500 x 25) + (2500 x 20) = 37500 + 50000
= 87,500.
Th
e
Ic
GDP deflator =
Nominal GDP
100
Real GDP
20
04
.. IS curve
Part III
.. LM curve
iii.
04
ii.
20
04
04
M
AC
ef
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-4
Thus, gM = (2 x 5) + 4 = 14%
02
27
4-
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
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ht
re
se
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ed
.IS
BN
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1-
31
72. (b) When a cheque is drawn on the central bank, the money in circulation with public
increases that in turn increases the monetary liabilities of the central bank. Since monetary
liabilities of the central bank and government money form part of high-powered money, it
also increases by the same amount for a given increase in monetary liabilities of the central
bank. Hence the answer is (b).
393
c.
A variable is exogenous when its value is determined by forces within the model.
d.
A variable is autonomous when its value is determined by forces within the model.
e.
b.
c.
d.
e.
GDP/GNP
d.
GNP/GDP
e.
ed
se
rv
re
s
ht
ig
lr
A depletion of inventories.
b.
c.
d.
e.
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ni
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i
ty
Pr
es
s.
Al
a.
20
04
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e
Ic
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27
02
31
c.
1-
:8
b.
BN
.IS
a.
If the level of aggregate demand were greater than the level of aggregate supply in the
economy, which of the following choices could also be seen?
5.
6.
o.
a.
4.
04
20
04
B
M
AC
3.
04
A variable is endogenous when its value is determined by forces outside the model.
4-
2.
a.
1.
Money supply/GDP
b.
Money supply/investment
c.
Investment/money supply
d.
GDP/money supply
e.
Part III
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se
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BN
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20
04
04
b.
s.
Al
lr
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ht
a.
e.
ni
ve
rs
i
ty
Pr
es
c.
d.
iU
Ic
fa
a.
Wealth
c.
Expectations
20
04
Th
e
b.
d.
e.
b.
c.
d.
e.
395
Macroeconomics
14. When a Central Bank wishes to increase the quantity of money held by the public, it
a.
Sells bonds
b.
Buys bonds
c.
d.
e.
b.
c.
d.
e.
M
AC
04
20
04
a.
04
Primary deficit.
ef
.N
e.
Revenue deficit.
-4
d.
27
Capital deficit.
02
c.
4-
Fiscal deficit.
31
b.
1-
Budget deficit.
:8
a.
o.
16. Which of the following is the largest deficit for the government?
ed
.IS
BN
17. Which of the following model explains that people can quickly and easily adjust their living
standards upwards but downward adjustment is very difficult?
Relative Income Hypothesis.
b.
c.
d.
e.
Expectation Hypothesis.
Pr
es
s.
Al
lr
ig
ht
re
se
rv
a.
ve
rs
i
ty
18. When excise tax on cigarettes was hiked, it was found that total expenditure on cigarettes
increased. A possible explanation is that
The tax increase was not passed onto consumer
b.
20
04
iU
fa
Ic
Th
e
c.
ni
a.
d.
e.
19. Which of the following is true of I-S curve? When transfer payments are increased,
396
a.
b.
c.
d.
e.
Part III
The expenditure and production methods of estimating GDP yield different results
because of conceptual problems
b.
c.
d.
e.
04
21. The impact of a recession is likely to have a stronger impact on the economy when
MPC is larger
b.
MPC is smaller
c.
MPS is larger
d.
MPS is smaller
e.
ef
.N
o.
M
AC
04
20
04
a.
20
04
Th
e
Ic
fa
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ve
rs
i
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Pr
es
s.
Al
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ht
re
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ed
.IS
BN
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1-
31
4-
02
27
-4
22. In an inflationary period, an appropriate policy for the Reserve Bank of India would be to
a. Sell government securities in the open market
b. Encourage commercial banks to increase their loans
c. Lower the cash reserve ratio
d. Lower the bank rate
e. None of the above.
23. In an economy during a particular year, GDP exceeds GNP. This must imply that
a. Indirect taxes exceed subsidies
b. Net factor income from abroad is negative
c. Government tax revenue exceeds its expenditure
d. The merchandize trade balance is in surplus
e. Subsidies exceed indirect taxes.
24. A decline in foreign exchange reserves of a country, other things remaining the same will
a. Cause a capital inflow into the country
b. Cause a contraction of money supply in the country
c. Force the country to borrow from foreign countries
d. Increase the prices of imported goods
e. None of the above.
25. When I sell a share for Rs.250 which I had bought for Rs.130
a. National income goes up
b. Money supply goes up
c. National income goes down
d. High-powered money increases
e. None of the above.
26. A current account deficit implies that
a.
b.
c.
d.
e.
Macroeconomics
04
20
04
02
27
-4
ef
.N
o.
M
AC
04
31
GDP takes into account both transfer payments and leisure time.
GDP takes into account transfer payments, but not leisure time.
GDP takes into account leisure time, but not transfer payments.
GDP takes into account neither transfer payments nor leisure time.
GDP takes into account both the services of a housewife and services of a driver
engaged by a company.
31. If the marginal propensity to consume is zero, a decrease in investment would lead to
a. A decrease in the equilibrium level of income by the same amount
b. No change in the equilibrium level of income
c. An unending downward spiral in equilibrium level of income
d. An unending upward spiral in the equilibrium level of income
e. An increase in the equilibrium level of income.
32. The government decreases both its expenditure and tax receipts by Rs.10 billion. This would
a. Reduce the equilibrium level of income
b. Increase the equilibrium level of income
c. Reduce the equilibrium level of income only if the government had previously been
running a deficit
d. Leave the equilibrium level of income unaffected
e. Increase the equilibrium level of income only if the government had previously been
running a surplus.
33. The money payments which are not due to any current productive activity on the part of
income receiver is called
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
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1-
a.
b.
c.
d.
e.
4-
a.
b.
c.
d.
e.
398
Plan expenditure
Transfer payments
Consumption expenditure
Past expenditure
Either (b) or (d) above.
Part III
34. Which of the following is/are not considered in the calculation of national income?
Teaching in a class.
ii.
iii.
iv.
Services of a housewife.
a.
b.
c.
d.
e.
04
20
04
04
i.
b.
c.
d.
e.
27
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ef
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o.
M
AC
a.
4-
02
36. National product at market prices is higher than national product at factor cost by the amount of
Indirect taxes
b.
Subsidies
c.
d.
e.
Depreciation.
se
rv
ed
.IS
BN
:8
1-
31
a.
re
b.
Income method.
c.
Expenditure method.
d.
e.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
a.
ni
20
04
Th
e
Ic
b.
fa
iU
a.
c.
d.
e.
b.
c.
d.
e.
399
Macroeconomics
40. If the Average Propensity to Save (APS) is negative, then the Average Propensity to
Consume (APC) is
a.
Negative
b.
Zero
c.
d.
One
e.
04
20
04
Solve all the problems. Points are indicated against each problem.
7,000
Credit to Banks
4,000
B
W
ef
.N
Credit to Government
o.
Million units of
currency (MUC)
M
AC
Particulars
04
41. The following balances are taken from the Balance Sheet of the Central Bank of a country.
500
Government Deposits
25
27
-4
1,000
4-
02
Net worth
31
:8
1-
BN
Other assets
ed
.IS
Deposits of banks
se
rv
Other Deposits
2,000
11,000
100
6,000
600
85,500 MUC.
c.
90,400 MUC.
ty
95,300 MUC.
e.
96,200 MUC.
fa
iU
ni
ve
rs
i
d.
(3 points)
Th
e
Ic
42. The net worth of a Central Bank is 1000 and the money supply in the economy is 90,400. The
monetary liabilities of the Central Bank are 22,600. Because of intervention in the foreign
exchange market, net worth of the central bank is expected to erode by 50% in the next
period. If the Central Bank desires to maintain the current level of money supply by changing
the reserve ratio, what should be the new reserve ratio? (Assume currency/deposit ratio to be
24%)
a. 7.06%.
b. 6.59%.
c. 6.51%.
d. 7.69%.
e. 8.01%.
(3 points)
20
04
lr
b.
s.
Al
80,600 MUC.
Pr
es
a.
ig
ht
re
The currency/deposit ratio has been ascertained as 0.24. Reserve ratio imposed by the central
bank is 7%. The amount of Government money is 25 million units of currency. What is the
money supply in the economy?
400
Part III
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
43. The consumption function estimated for an economy is Ct = 80 + 0.6 Ytd + 0.2 Ct 1. If Ytd
increase by 100 and remains at that level, what is the change in steady state level of
consumption?
a. Consumption increases by 55.
b. Consumption decreases by 55.
c. Consumption increases by 75.
d. Consumption decreases by 75.
e. Consumption increases by 100.
(2 points)
44. The following relations are estimated for an economy:
Savings function
(S) = 380 + 0.35Yd + 10i
Tax function
(T) = 0.30Y
Investment function
(I) = 300 + 0.15Y 50i
Transfer payments
(R) = 200
Government Expenditure (G) = 1,200
Exports
(E) = 900
Import function
(M) = 50 + 0.105Y
Money Supply
(Ms) = 1,000
Transaction Demand
for Money
(Mt) = 0.25Y
Speculative Demand
for Money
(Ma) = 350 100i
(All macroeconomic aggregates are in million units of currency (MUC) and the rate of
interest is in percentage.)
What is the equilibrium level of income of the economy?
a. 3,000 MUC.
b. 4,000 MUC.
c. 5,000 MUC.
d. 6,000 MUC.
e. 7,000 MUC.
(3 points)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
45. The IS and LM functions in an economy are 0.5Y = 2,860 60i and 0.25Y = 650 + 100i. The
government expenditure (G) during the period is 1,200. If the government desires to increase
the equilibrium output by 10% in the next period, it must increase its expenditure (G) by
a. 425 MUC
b. 475 MUC
c. 350 MUC
d. 575 MUC
e. 325 MUC.
(3 points)
46. The IS function in an economy is estimated to be Y = A 120i. The transaction demand for
money (Mt) and speculative demand for money (Ma) are 0.25Y and 350 100i. The
equilibrium income (output) of the economy is 5000 MUC. The government directed the
Central Bank to undertake appropriate monetary policy to increase the equilibrium output by
10%. Suppose the central bank wants to achieve the goal by increasing the money supply
(Ms), then it should increase the supply of money to
a. 1,542 MUC
b. 1,323 MUC
c. 1,252 MUC
d. 1,444 MUC
e. None of the above.
(3 points)
401
04
20
04
B
ef
.N
o.
M
AC
47. The following information is taken from Union Budget for the year 2002 03:
(Rs.crore)
Tax Revenue (Net)
1,72,965
Non-tax Revenue
72,140
Recoveries of Loans
17,680
Other capital receipts
12,000
Borrowings & Other Liabilities
1,35,524
Non-plan revenue expenditure
2,70,169
(Of which, interest payments is Rs.1,17,390 crore)
Non-plan capital expenditure
26,640
Planned revenue expenditure
70,313
Planned capital expenditure
43,187
The revenue and capital deficits of the country for the year 2002-03 are
a. Rs.95,377 crore (deficit) and Rs.95,377 crore (surplus)
b. Rs.95,377 crore (deficit) and Rs.90,229 crore (surplus)
c. Rs.92,389 crore (deficit) and Rs.95,377 crore (surplus)
d. Rs.92,389 crore (deficit) and 90,229 crore (surplus)
e. None of the above.
04
Macroeconomics
2.6% of GDP.
e.
2.8% of GDP.
BN
d.
.IS
2.1% of GDP.
ed
c.
se
rv
1.3% of GDP.
re
b.
1.8% of GDP.
ht
a.
:8
1-
31
4-
02
27
-4
(3 points)
48. In an economy domestic savings income ratio is 25% and the population is expected to
grow at the rate of 1.5%. Incremental Capital Output Ratio (ICOR) for the economy is 4. If
the targeted growth in Per Capita Income is 5%, What will be the required external financing
to achieve the target?
lr
ig
(3 points)
Pr
es
s.
Al
49. The following information is taken from Union Budget for the year 2002-03:
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Rs. crore
1,72,965
72,140
17,680
12,000
1,35,524
2,70,169
402
Part III
50. The following monetary data on financial development of an economy has been obtained for
the year 2000-2001.
New issues ratio
Net physical capital formation
Secondary issues
The intermediation ratio for the economy is
0.63
b.
0.78
c.
0.84
d.
0.87
e.
0.90.
04
20
04
04
a.
0.74
2,00,445
1,15,605
(2 points)
M
AC
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
re
Particulars
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
625 MUC
b.
650 MUC
c.
675 MUC
d.
700 MUC
e.
725 MUC.
500
20
200
25
150
10
15
100
5
10
7
319
70
(2 points)
403
Macroeconomics
53. The following information is extracted from the National Income Accounts of an economy:
e.
04
20
04
B
M
AC
ef
.N
29 MUC (surplus)
d.
-4
35 MUC (deficit)
27
32 MUC (surplus)
c.
31
4-
b.
o.
27 MUC (deficit)
02
a.
Business savings
Subsidies
Corporate profit taxes
Personal income taxes
Budget deficit
Net transfer to household sector
Indirect taxes
National income
Consumption
Gross investment
Net investment
The current account balance of the economy is
04
Million units of
currency (MUC)
25
10
15
100
10
7
70
560
319
200
150
Particulars
(2 points)
.IS
Rs. in crore
14,000
1,00,422
1,07,000
10,000
30,000
7,000
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
Particulars
Indirect taxes
NDP at market prices
GNP at market prices
Personal income taxes
Retained profit
Depreciation
The national income of the economy is
a. Rs.82,000 crore
b. Rs.84,000 crore
c. Rs.86,000 crore
d. Rs.88,000 crore
e. Rs.90,000 crore.
BN
:8
1-
54. The following information is extracted from the National Income Accounts of an economy
for the year 2000-2001.
Ic
(1 point)
20
04
Th
e
(Rs. in crore)
500
170
140
162
(1 point)
404
Part III
56. The monetary liabilities of the central bank of an economy are 20,000 MUC. The government
money in the economy is 200 MUC. Currency deposit ratio for the economy is estimated to
be 0.2 and reserve ratio imposed by the central bank is 5 percent. If foreign exchange
reserves of the country decline by 200 MUC, what would happen to the money supply?
Decline by 960 MUC.
b.
c.
d.
e.
04
a.
04
(2 points)
500
400.0
400
287.5
250
04
475.0
ef
.N
o.
M
AC
Consumption (C)
20
57. The consumption schedule for a two sector economy is given below:
27
-4
250.0
200
If savings in the economy is 100, the equilibrium income in the economy is
750 MUC
b.
700 MUC
c.
800 MUC
d.
950 MUC
e.
1,050 MUC.
se
rv
ed
.IS
BN
:8
1-
31
4-
02
a.
(2 points)
b.
200 MUC
c.
500 MUC
d.
260 MUC
e.
140 MUC.
Pr
es
40 MUC
(2 points)
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
a.
s.
Al
lr
ig
ht
re
58. In an economy the marginal propensity to consume is 0.75, the tax rate is 20%, and
marginal propensity to import is 10%. The net exports function in the economy is
estimated to be 100 0.2Y. Assuming that the investment is autonomous and increases by
500 MUC during the year, the trade balance deteriorates by
20
04
59. Monetary liabilities of the Central Bank in an economy are 20,000 MUC and government
money is 2000 MUC. The currency-deposit ratio is estimated to be 0.25. If the Central Bank
wants to set the money supply at 50,000 MUC, what should be the reserve ratio that the
Central Bank should impose on banks to achieve the targeted money supply?
a.
0.25.
b.
0.30.
c.
0.50.
d.
0.425.
e.
0.20.
(2 points)
405
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
60. The following balances are taken from the balance sheet of the Central Bank of a country:
Particulars
(MUC)
Net worth
400
Credit to central government
1000
Credit to commercial banks
500
Other non-monetary liabilities
100
Other assets
200
Government deposits
100
Foreign exchange assets
200
If the government money in the economy is 100 MUC, the high-powered money in the
economy is
a. 1,400 MUC
b. 1,500 MUC
c. 1,650 MUC
d. 1,600 MUC
e. 1,250 MUC.
(2 points)
61. The IS function and LM function in an economy are estimated to be Y = 5700 + 0.5Y 100i
and Y = 5200 + 800i respectively. The investment function in the economy is 1600 100i. If
the government spending increases by 100, which of the following is true about the interest
rate in the economy?
a. Increases from 6.2 to 6.5.
b. Increases from 6.1 to 6.5.
c. Increases from 6.2 to 6.4.
d. Increases from 6.0 to 6.4.
e. None of the above.
(2 points)
62. In an economy, the investment function is given by I = 1000 40i. If an increase in
government spending by 250 MUC increases the interest rate in the economy by 5%, what
could be the amount of crowding out in the economy?
a. 100 MUC.
b. 150 MUC.
c. 75 MUC.
d. 200 MUC.
e. 90 MUC.
(1 point)
63. The following information is extracted from the National Income Accounts of an economy.
All figures are in millions units of currency (MUC).
Particulars
MUC
Compensation to employees
1,942
Exports of goods and services
134
Depreciation
118
Government expenditure
594
Gross domestic investment
639
Transfer payments
139
Imports of goods and services
165
Personal taxes
405
Net income earned from abroad
22
Personal consumption expenditure
2,191
The NDP at market prices is
a. 1,472 MUC
b. 3,275 MUC
c. 2,346 MUC
d. 1,782 MUC
e. 3,393 MUC.
(2 points)
406
Part III
64. The following information is extracted from the National Income Accounts of an economy.
All figures are in millions units of currency (MUC).
Particulars
MUC
Depreciation
236
Government expenditure
1,188
Corporate taxes
288
Transfer payments
278
Personal taxes
810
44
04
600
Retained earnings
20
04
1,278
04
M
AC
If the national income is 10,000 MUC, the personal disposable income in the economy would be
8,960 MUC
b.
8,580 MUC
c.
10,240 MUC
d.
9,230 MUC
e.
7,440 MUC.
4-
02
27
-4
ef
.N
o.
a.
1-
31
(2 points)
BN
:8
65. The following information is available from the consolidated balance sheet of the banking
sector:
ed
.IS
Particulars
se
rv
2000
3000
re
(Rs. Billion)
2200
lr
ig
ht
ve
rs
i
ty
Pr
es
s.
Al
b.
Rs.6,000 billion
c.
Rs.6,200 billion
Ic
fa
iU
ni
a.
Rs.7,400 billion
e.
20
04
Th
e
d.
(1 point)
66. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC,
private savings for the year is
a.
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
(1 point)
407
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
1. (b) An exogenous variable is one whose value is determined by forces outside the economic
model. Hence, change in the exogenous variable is classified as an autonomous change.
2. (c) In a two sector model, equilibrium occurs when planned saving equals planned
investment.
3. (b) Real GDP = Nominal GDP/GDP deflator.
Hence, GDP deflator = Nominal GDP/Real GDP.
4. (e) If the level of aggregate demand were greater than the level of aggregate supply in the
economy, soon the inventory stock will be depleted, firms will recruit more labor to meet the
increased demand, demand-pull inflation occurs, and labor will demand more wages.
5. (d) Velocity of money is the speed at which a given sum of money circulates in the
economy, i.e. the average number of times a unit of money changes hands in a specified time
period. GDP = MV, where M = money supply and V = velocity of money. Hence, velocity of
money, V = GDP/Money supply.
6. (c) Supply of reserve is not a function of money.
7. (d) Economic development is defined as a process of economic transition involving the
structural and a raising of GNP and per capita income. From the fact the rate of profit has
been gradually but steadily declining we cannot identify the trend of economic development.
8. (d) There will be more variation in durable goods production than in non-durable goods
production during ups and downs in the business cycles.
9. (a) Investment spending is addition to the firms capital such as machines or buildings
typically firms borrow to purchase investment goods. Higher the interest rate, lesser will be
willingness to borrow or invest. Firms want to borrow and invest more when interest rates are
lower. This shows an inverse relationship between investment and interest rate.
10. (e) Policies directed to stimulating exports can influence all the given factors in an economy.
11. (e) Net investment = Gross investment Capital depreciation.
12. (e) All the given factors affect the consumption behavior of individuals.
13. (a) Once deposits are made in a bank, the bank become liable to pay back our amount as per
specifications. Hence, deposits form a liability of a commercial bank.
14. (b) If the RBI purchases bonds from the public, the money flows from the RBI to the public,
which leads to an increase in money supply.
15. (c) When consumption spending lags the receipt of disposable income by one period, it is
given by Ct = f(Yd, t1).
16. (b) Fiscal deficit is the largest deficit for the government.
17. (a) Relative income hypothesis states that people can easily and quickly adjust to higher
living standards, but adjust slowly for lower standards of living.
18. (d) The total expenditure in cigarettes increased irrespective of the like in excise tax because
income elasticity of demand for cigarettes is very high.
19. (c) Increase in autonomous expenditure results in an outward (rightward) shift of the IS
curve. As transfer payments is a part of government autonomous expenditure, increase in
transfer payments results in increase of government autonomous expenditure, which make
the IS curve to shift rightwards.
20. (e) GDP is not a very good measure of economic prosperity because, it does not include
non-monetized transactions/activities. For example, the national product fails to account
household production because such production does not include a market transaction. As a
result the household services of millions of people are excluded from the national income
accounts. Further, GDP does not include environmental degradation such as pollution, etc.
Macroeconomics
21. (e) The impact of a recession is likely to have a stronger impact on the economy when MPC is
smaller or MPS is larger. Note that MPC = 1 MPS. Hence, if MPC is small, it indicates larger
MPS.
22. (a) In an inflationary period, the RBI would undertake measures to reduce money supply in the
economy to reduce inflation. Selling of government securities in the open market reduces the
money supply, thereby helps to contain inflation.
23. (b) GNP = GDP + Net factor income from abroad (NIFA); this implies that when GDP
exceeds GNP, net factor income from abroad will be negative.
20
04
04
24. (b) The foreign exchange reserves of a country apart from serving to balance the BoP
statement of an economy have a strong impact on the monetary policy pursued by the central
bank in the domestic sector. When foreign exchange reserves rises (declines), the money
supply increases (decreases).
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
25. (e) Buying and selling stocks are not included in GDP, as it involves only swapping paper
assets and the amount spent on these assets does not directly involve current production.
26. (c) Current account captures the transactions related to trade in goods and services, transfer
payments and factor incomes. If foreign exchange outflow on account of these is more than
inflows, the current account is in deficit.
27. (d) A single shock in autonomous demand produces a slow or distributed lag effect on
output. Dynamic multiplier shows how a given change in autonomous investment affects
the level of output overtime. Dynamic multipliers occur only when there is a lagged
response between consumption and disposable income.
28. (c) Money Multiplier = (1 + Cu)/(Cu + r)
Money Supply = [(1 + Cu)/(Cu + r)] x High powered money.
Hence, if RBI increases the reserve ratio, money supply decreases. However, there will not
be any change in high-powered money, H. Note that changes in reserve ratio (r) and currency
deposit (Cu) affect only money multiplier but not high-powered money (H).
29. (e) Stagflation is a period characterized by high inflation and high unemployment levels.
30. (d) In computing GDP transfer payments, leisure time and non-marketable services are not
taken into account. Therefore, the answer is (d).
ig
ht
lr
1
= 1. Therefore, the equilibrium income would also decrease by the same
1 0
amount as decrease in investment.
Pr
es
s.
Al
Multiplier =
fa
iU
ni
ve
rs
i
ty
32. (a) Reduce the equilibrium level of income because decrease in government expenditure
would reduce the AD by Rs.10 billion. Whereas decrease in tax receipts increase the AD by
MPC 10 billion. This results in net decrease in AD thereby reducing equilibrium level of
income.
Th
e
Ic
33. (b) Transfer payments are money payments which are not associated with any current
production activity on the part of income receives.
20
04
34. (c) Alternatives ii and iv does not involve marketable transaction hence ignored in
calculation of national income.
35. (a) The transmission mechanism in the Keynesian theory is
Change in Money supply Change in r Change in C & I Change in AD.
36. (c) The relation between market price (MP) and factor cost (FC) is
MP = FC + Indirect taxes Subsidies.
37. (d) All the three approaches are used to compute national income in India.
38. (d) Per capita real GNP is the best indicator of the standard of living.
410
Part III
39. (d) Keeping the supply of loanable funds at the same level increase in government
borrowings increase the demand for loanable funds and put upward pressure on the rate of
interest.
40. (e) APS + APC = 1
If APS < 0 , APC > 1.
Part B: Problems
41. (c) High powered money = Monetary Liabilities of RBI + Government Money
Monetary liabilities of RBI = Financial Assets + Other Assets Non-monetary liabilities
Credit to Government + Credit to Banks + Credit to commercial sector
+ Net Foreign exchange assets
24,000 MUC
100 MUC.
04
M
AC
Other Assets
20
04
04
Financial Assets =
o.
ef
.N
-4
= 22,575 + 25
31
= 25 MUC
:8
= 22,600 MUC
1-
Government money
4-
02
27
= 22,575 MUC.
= Hm
ed
.IS
BN
Money Supply
se
rv
re
42. (d) If net worth is eroded by 50%, Net worth = 500 MUC.
ig
ht
s.
Al
lr
H = 23,100.
0.0769
7.69%
ni
ve
rs
i
ty
90,400
Pr
es
fa
iU
Th
e
Ic
20
04
At steady state, Ct = Ct 1
Ct
0.8 Ct
80 + 0.6 Ytd
Ct
Ct
0.75 Ytd
0.75 100
75
If
Ytd
411
Macroeconomics
Yd
(Y tY + R)
(Y 0.3Y + 200)
44. (c) S
IS function
-4
27
02
650 + 100i
= 2,600 + 400i
0.25
LM function.
31
Y=
4-
1,000 =
ef
.N
o.
M
AC
04
20
04
=
C + I + G + (E M)
=
510 + 0.455Y 10i + 300 + 0.15Y 50i + 1200 + 900 50 0.105Y
Y =
2,860 + 0.5Y 60i
Y =
5,720 120i
IS function.
LM function
Ms =
Md
Md =
Mt + Ma
=
0.25Y + 350 100i
04
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
At equilibrium LM = IS
2,600 + 400i =
5,720 120i
520i
=
3,120
i
=
6%
Y
=
5,000 MUC.
45. (e) 0.5Y = 2,860 60 i
Or, Y = 5,720 120i
0.25Y = 650 + 100i
Or, Y = 2,600 + 400i
At equilibrium LM = IS
2,600 + 400i =
5,720 120i
520i
=
3,120
i
=
6%
Y
=
5,000.
If Y is to increase by 10% new equilibrium income is 5,000 (1 + 0.10) = 5,500
Y =
2,600 + 400i
LM function
If Y =
5,500
400i =
5,500 2,600
i
=
7.25%
IS function with G as a variable is
412
0.5Y =
(1,660 + G 60i)
0.5
2G =
3,050
1,525.
Part III
= 650 + 100i
Thus, i
= [0.25(5000) 650]/100 = 6
Thus, A
Thus, Y
= 5,720 120i
IS function
04
If Y = 5,500,
= Md
20
Ms
04
= 1.83%
M
AC
04
LM function
ef
.N
o.
Ms
27
-4
= 1,542 MUC.
4-
02
31
se
rv
Where,
= Growth rate is GDP
gp
gn
gy
= [(1.05) (1.015) 1]
s.
Al
lr
ig
ht
re
gy
Pr
es
.IS
ed
48. (b) gy
BN
:8
1-
ty
= 0.06575
ni
fa
iU
gy
ve
rs
i
= 6.575%.
20
04
Th
e
Ic
To achieve the target gy, Investment Income ratio for the economy is (gy x ICOR)
= 6.575 4 = 26.3%
26.3 25.00
1.3% of GDP.
413
Macroeconomics
Thus,
x
2,00,445
04
0.74 =
04
o.
M
AC
1,15,605
= 0.779 or 0.78.
1,48,329.3
B
W
IR =
20
04
R
-4
31
4-
02
27
= 3.0;
= 4%; and
= 6%
= a.gy + gp
= (3 x 4) + 6
= 18%
BN
:8
1-
ef
.N
.IS
s.
Al
lr
Pr
es
Depreciation
ig
ht
re
se
rv
ed
= 18/3
= 6%.
52. (c) GDPMP = Factor income paid to domestic residents by the production sector + Factor
income paid to foreign residents by the production sector + Business savings + Corporate profit
tax + Depreciation + Indirect taxes Subsidies.
ty
Factor income paid abroad = Factor income received from abroad NFIA
ve
rs
i
20 ( 5) = 25
ni
fa
iU
Th
e
Ic
20
04
PDI
PS
CAB
Part III
M
AC
04
20
04
04
56. (a) Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where High powered money =
monetary liabilities of the central bank + government money.
Ms = H. m
When foreign exchange reserves of the country decline by Rs.200 MUC, the monetary
liabilities also fall by 200 MUC. Thus, money supply decline by 4.8 x 200 = 960 MUC.
57. (c) C = + Yd
Where, = autonomous consumption and = marginal propensity to consume (MPC)
= C/Yd = (475 400)/100 = 0.75
If MPC = 0.75, autonomous consumption:
475 = a + 0.75(500) Or, a = 100.
Thus, C = 100 + 0.75Yd Or, S = 100 + 0.25Yd
When S = 100, 100 = 100 + 0.25Yd
Or, 200 = 0.25Yd Or, Yd = 800 MUC
Since the economy is a two sector economy, Y = Yd (disposable income).
ef
.N
o.
58. (b) Multiplier = 1/(1 MPC + MPC t + MPI) = 1/(1 0.75 + 0.75 0.2+0.1) = 1/(0.4+0.1)
= 2.0
-4
Thus if investment increases by 500, income increases by 1000. Thus, change in trade
balance
27
31
4-
02
59. (b) High-powered money (H) = Government money + Monetary liabilities of the Central
Bank = 20,000 + 2000 = 22,000 MUC.
:8
.IS
BN
1-
se
rv
ed
60. (a) High-powered money (H) = Monetary liabilities of Central Bank + Government money =
1300 + 100 = 1400.
re
s.
Al
lr
ig
ht
Pr
es
(1000 + 500 + 200 + 200) = (400 + 100 + 100 + ML) 1900 = 600 + ML
ve
rs
i
ty
20
04
Th
e
Ic
fa
iU
ni
415
Macroeconomics
62. (d) Crowding-out refers to decrease in private investment because of increase in interest rate
caused by the increase government spending. Crowding out = 40 x 5 = 200 MUC.
63. (b) GDP at market price = C + I + G + NX = 2191 + 639 + 594 + (134 165) = 3,393
Thus, NDP at market price = GDP at market price depreciation = 3,393 118 = 3,275
MUC.
64. (b) Personal income = National income (corporate taxes + retained earnings) + Transfer
payments = 10,000 (288 + 600) + 278 = 9,390.
Personal disposable income = personal income personal taxes = 9,390 810 = 8,580 MUC.
20
04
04
65. (a) Money Supply = Net bank credit to Government + Bank credit to commercial sector +
Net foreign exchange assets of the banking sector Net non-monetary liabilities of the
banking sector + Government money
04
M
AC
o.
ef
.N
27
-4
4-
02
= 2 200 = 400
1:8
ed
.IS
BN
0.2Y
re
ht
ig
se
rv
2,340 =
=
s.
Al
lr
Y = 100
iU
ni
Y 100
= 40 MUC.
=
m
2.5
fa
G =
ty
Pr
es
1
1
1
=
=
= 2.5
1 MPC(1 t)
1 0.75(1 0.20)
0.40
ve
rs
i
31
Th
e
Ic
20
04
Y = 2500 150i
If i decrease by one percentage point, equilibrium income would increase by 150 MUC.
71. (b) Value added by the industry Y = 2,000/2 900 = 1,000 900 = Rs.100
Value added by the industry Z = 2,000/2 700 = 1,000 700 = Rs.300.
416
b.
c.
d.
e.
04
c.
A behavioral coefficient
d.
A dependent variable
e.
B
W
ef
.N
R
-4
27
02
41-
b.
c.
The flow of income between the household, business and government sectors
d.
e.
re
se
rv
ed
.IS
BN
:8
a.
ig
ht
4.
s.
Al
lr
a.
c.
d.
e.
Irreplaceable inputs.
ni
ve
rs
i
ty
Pr
es
b.
20
04
Disposable income
Ic
Th
e
a.
fa
iU
5.
20
b.
3.
6.
04
o.
a.
31
2.
04
a.
M
AC
1.
b.
Personal income
c.
d.
e.
If people do not consume all their incomes and if they put the unspent amount into a bank,
they are, in national income and product terms
a.
b.
c.
d.
e.
Saving, but investing only to the extent that they buy securities.
Macroeconomics
7.
When we speak of expressing the prices of goods in an economy, we are speaking primarily
of moneys role as
A store of value or wealth
b.
A precautionary hedge
c.
A medium of exchange
d.
A unit of account
e.
Suppose that the supply of money were fixed. An increase in the demand for money should
be expected to cause
The equilibrium rate of interest to increase
b.
c.
d.
e.
Trade policy.
M
AC
o.
ef
.N
-4
e.
27
Budget deficit
02
d.
4-
Monetary policy
31
c.
1-
Fiscal policy
:8
b.
BN
Supply shocks
04
20
a.
.IS
9.
04
04
8.
a.
se
rv
ed
10. An expansion phase of the usual business cycle can be most appropriately represented as
An outward shift in the aggregate demand curve
b.
c.
d.
e.
Pr
es
s.
Al
lr
ig
ht
re
a.
ve
rs
i
ty
b.
Ic
fa
iU
ni
a.
d.
e.
20
04
Th
e
c.
12. If you want to compute disposable personal income from NDP, then one thing you must not
do is
418
a.
Deduct depreciation
b.
c.
d.
e.
Part III
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
13. In deciding whether to hold money on other interest-bearing assets, people will compare
a. The inflation rate and the nominal interest rate on the other investment
b. The nominal interest rate on money and the nominal interest rate on the other investment
c. The value of the other asset and the stream of future profits from it
d. The purchasing power of the money and the loss incurred due to foregone consumption
e. Only the inflation rate.
14. Most models of economic growth conclude that
a. Technological change will impoverish at least one factor of production
b. Technological change can benefit at most one factor of production
c. Technological advance increases labors share of output
d. Technological advance can increase the real returns to all factors of production
e. Technological change is usually the enemy of labor because pieces of capital can
replace labor in the workplace.
15. In stating that C = f(Yd, W)
a. It is hypothesized that Yd is a more important determinant of C than W
b. It is hypothesized that W is a more important determinant of C than Yd
c. W and Yd are dependent variables explaining C
d. Yd and W are independent variables explaining C
e. None of the above.
16. When the LM curve is very steep, an increase in autonomous government expenditure
a. Will have little impact on rate of interest and will result in an increase in income
b. Will have little impact on income and mainly interest rate will increase
c. Will significantly reduce interest rate and increase level of income
d. Will have little effect on interest rate and income
e. Will have high impact on rate of interest and will result in a decrease in income.
17. Narrow money includes currency with public, demand portion of savings deposits and
a. Demand and time deposits with banks and other deposits with RBI
b. Demand and time deposits with banks
c. Demand deposits with banks and other deposits with RBI
d. Demand deposits with banks and other deposits with RBI and post office savings deposits
e. Demand deposits with banks and other deposits with RBI, and post office savings
deposits and time deposits.
18. A decrease in currency-deposit ratio on the part of the public will cause
a. An increase in high-powered money and money supply
b. An increase in bank reserves and decrease in money supply
c. An increase in money supply but will not change the high-powered money
d. A decrease in money supply while the high-powered money will not change
e. A decrease in money supply while the high-powered money will increase.
19. Which of the following is a transfer payment?
a. The payment received by a Central Government employee from the Central Government
on his being transferred from Delhi to Chennai, to meet the traveling expenses.
b. A pension cheque received by former railway employee.
c. Payment received from the neighbors for caring for their garden while they were on
vacation.
d. The payment received by teacher.
e. The payment received by nurse for taking care of a child.
419
Macroeconomics
20. In a simple model of a closed economy the government expenditure is assumed to the
exogenous. While calculating the income multiplier, marginal propensity to consume is
considered and marginal propensity to invest is not considered. This is because
Only consumption of consumer goods is related to income level
b.
c.
d.
e.
04
a.
b.
c.
d.
e.
20
ef
.N
o.
M
AC
04
a.
04
27
-4
22. Suppose the net export function is NX = X mY and the net export balance is zero. An
increase in autonomous investment spending will
Increase the net export balance and the income level
b.
Increase the income level but make the net export balance negative
c.
Increase the income level and have no effect upon the net export balance
d.
Have no effect upon the income level but cause the net export balance to become negative
e.
ed
.IS
BN
:8
1-
31
4-
02
a.
se
rv
Speculative demand for money varies directly with the interest rate.
b.
c.
Transactionary demand for money varies positively with income and such variation is
usually more than proportionate.
d.
e.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
a.
20
04
Ic
Th
e
a.
fa
iU
24. If the marginal propensity to consume is zero, a decrease in investment would lead to
b.
c.
d.
e.
420
a.
b.
Residential construction.
c.
Inventory.
d.
Non-residential construction.
e.
Part III
26. Simultaneous equilibrium in the money (LM) and goods (IS) markets exist
a.
b.
c.
d.
e.
27. Which of the following reduces the likelihood that fiscal policy in the real world will help to
promote economic stability?
Policy planners cannot estimate the impact on income and output that may result from a
fiscal action.
b.
The time lag between the recognition that a policy change is needed and the actual
impact of the policy change makes it difficult to time fiscal policy properly.
c.
Policy planners are reluctant to implement expansionary fiscal policy even during a
serious recession.
d.
Empirical studies have observed that policy planners will be more concerned with
inflation than unemployment. Thus, fiscal policy will generally be restrictive except at
the time of deflation.
e.
27
-4
ef
.N
o.
M
AC
04
20
04
04
a.
31
4-
02
28. If an economy is currently experiencing both full employment and price stability, a major tax
reduction will probably cause
An increase in unemployment in near future
b.
An acceleration in the inflation rate, unless government expenditures are also, reduced
c.
An increase in the interest rate, since individuals will reduce their savings in response to
the tax cut
d.
e.
An acceleration in the inflation rate, unless government expenditures are also increased.
ht
re
se
rv
ed
.IS
BN
:8
1-
a.
lr
ig
b.
c.
d.
e.
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
Th
e
a.
Ic
fa
30. The dividends received by an Indian company from its Malaysian subsidiary would be included in
20
04
b.
c.
d.
e.
GDP of India.
Classical economics
b.
Keynesian economics
c.
Post-Keynesian economics
d.
Marshallian economics
e.
421
Macroeconomics
b.
c.
Investment coefficient
d.
e.
b.
c.
d.
e.
M
AC
04
20
04
04
a.
b.
c.
d.
e.
4-
02
27
-4
ef
.N
a.
o.
1-
31
35. A change in the money supply has greater effect upon equilibrium income if
The private sector spending is more interest-sensitive
:8
a.
d.
e.
re
se
rv
ed
.IS
BN
b.
c.
ig
ht
b.
< Zero
c.
>1
d.
<1
e.
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
a.
fa
b.
c.
d.
e.
Th
e
20
04
Ic
a.
iU
38. When the addition to capital goods in an economy exceed the capital consumption allowance,
the economy experiences
422
a.
b.
Equilibrium investment
c.
d.
e.
Part III
b.
c.
d.
e.
b.
c.
d.
e.
ef
.N
o.
Solve all the problems. Points are indicated against each problem.
M
AC
04
20
04
04
a.
41. The data relating to the various components of money supply in India are as follows:
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Particulars
Rs. in crore
Currency with the public
Notes in circulation
2,89,636
Rupee coins
3,884
Small coins
1,982
Cash in hand
9,972
Deposit money of the public
Demand deposits with banks
1,98,212
Other deposits with Reserve Bank
11,254
Time deposits with banks
9,67,120
Post office deposits
Post office savings bank deposits
10,082
Total post office deposits
51,938
According to M1 and M4 definition, the money stock in the country are
Rs.5,14,940 crore and 15,33,998 crore
b.
c.
d.
ve
rs
i
ni
iU
fa
Ic
Th
e
e.
ty
a.
20
04
42. The following savings and import functions have been estimated for an economy.
S
=
50 + 0.25Y
M =
0.1Y
Where S is aggregate savings, M is imports and Y is GDP. Private investment increases by
200 MUC and government expenditure decreases by 60 MUC. What is the impact on GDP?
a.
b.
c.
d.
e.
Macroeconomics
43. For an economy the following indicators of financial development are available:
Particulars
Year 2000
Finance Ratio
0.25
1.25
Intermediation Ratio
0.60
Primary Issues
The total issues for the year 2000 is
Rs.1,70,000
b.
Rs.1,55,000
c.
Rs.1,60,000
d.
Rs.2,30,000
e.
Rs.2,00,000.
ef
.N
0.30 Y
600
3,440
re
se
rv
27
02
431
1-
1,050 150i
1,636
ht
:8
.IS
BN
0.25Y
ed
-4
Exports (E)
(2 points)
o.
M
AC
04
20
04
04
a.
1,00,000
2,785 MUC.
b.
2,695 MUC.
c.
2,555 MUC.
d.
2,465 MUC.
e.
2,355 MUC.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
s.
Al
lr
ig
(3 points)
20
04
45. In a hypothetical economy, the IS function is 0.7Y = 7,266 112i. The money supply in the
economy is 2,695 MUC. The demand function for money in the economy is estimated to be
0.25Y + 1,050 150i. The equilibrium income is 9,580 MUC. The exports of the economy
are at
1,636 MUC. The import function in the economy is 150 + 0.15Y. If the money
supply is expected to increase by 190 MUC, what will be the impact on trade balance?
a.
Decrease by 24 MUC.
b.
Decrease by 36 MUC.
c.
Decrease by 40 MUC.
d.
Decrease by 42 MUC.
e.
Decrease by 44 MUC.
(3 points)
424
Part III
46. The following information is available from balance sheet of the Reserve Bank of India:
Rs. million
12,000
Credit to Government
18,000
Government Deposits
600
100
400
250
o.
Other assets
20
21,000
04
7,000
04
10,000
M
AC
Net worth
04
Particulars
Rs.1,84,600 million.
27
e.
02
Rs.1,80,640 million
4-
d.
31
Rs.1,76,780 million
1-
c.
:8
Rs.1,66,560 million
BN
b.
.IS
Rs.1,56,460 million
se
rv
ed
a.
-4
ef
.N
Government money in the economy is Rs.750m. Currency deposit ratio for the economy is
estimated to be 0.30. Cash Reserve Ratio (CRR) imposed by the RBI is 7.5 percent. The
money supply in the economy is
(3 points)
lr
ig
ht
re
47. The high-powered money (H) in the economy is Rs.48,000m. If foreign exchange reserves of
India decline by Rs.600m, what would happen to the money supply? (Assume multiplier to
be 3.47)
Money supply decreases by Rs.2,702 million.
b.
c.
d.
e.
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
a.
20
04
Th
e
48. The currency deposit ratio and CRR are 30% and 7.5% respectively. The high-powered
money in the economy is 48,000m. The foreign exchange reserves of India are expected to
decline by Rs.600m during the forthcoming period. If the RBI would like to sterilize the
impact of change in foreign exchange reserves on the money supply by adjusting the CRR,
what should be the new CRR?
a.
7%.
b.
7.5%.
c.
8%.
d.
8.5%.
e.
9%.
(3 points)
425
Macroeconomics
49. The following information pertains to the balance of payments of India for the period
April-December 2001.
US $
million
Particulars
42121
Merchandize exports
32639
15316
13677
ef
.N
e.
-4
27
d.
02
(3 points)
1-
31
b.
c.
o.
4-
a.
49
M
AC
20
3931
04
1912
04
04
Merchandize imports
.IS
BN
:8
50. The following information pertains to the balance of payments of India for the period
April-December 2001.
US $ million
ed
Particulars
3931
se
rv
49
re
9185
ig
ht
4055
555
Pr
es
s.
Al
lr
130
471
835
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
12646
10724
b.
c.
d.
e.
426
Part III
51. The current and capital account balances of India are $726 (Dr) and $6295 (Cr). If money
multiplier is estimated to be 4, what is the impact of balance of payments position on the
money supply in the economy? (Exchange rate is Rs.50/US$)
a.
Rs.15,13,600 million.
b.
Rs.12,12,700 million.
c.
Rs.13,12,600 million.
d.
Rs.14,11,800 million.
e.
Rs.11,13,800 million.
20
04
M
AC
o.
ef
.N
R
-4
27
02
431
1:8
BN
se
rv
re
40,000 MUC.
e.
ht
37,500 MUC
ig
d.
lr
35,000 MUC
(1 point)
Pr
es
32,500 MUC
c.
ed
30,000 MUC
b.
2,000
30,000
1,500
500
4,200
11,000
Nil
6,500
s.
Al
a.
.IS
Particulars
Government expenditure
Consumption expenditure
Factor incomes received by domestic
residents
Rent
Wages and salaries
Interest income
Dividends
Indirect taxes
Gross investment
Net factor income from abroad (NFIA)
Corporate profits (profit before tax)
The national income of the economy is
04
52. The following information is extracted from the National Income Accounts of an economy:
04
(2 points)
ni
ve
rs
i
ty
53. The following information is extracted from the National Income Accounts of an economy:
Particulars
20
04
Th
e
Ic
fa
iU
2,000
30,000
1,500
500
5,000
8,000
4,200
11,000
6,500
7,000
700
Nil
427
Macroeconomics
42,500 MUC.
b.
45,000 MUC.
c.
47,500 MUC.
d.
50,000 MUC.
e.
52,500 MUC.
(3 points)
Net investment
7,000
1,200
o.
ef
.N
-4
27
36,200 MUC.
02
e.
4-
35,200 MUC
31
d.
1-
34,200 MUC
:8
c.
BN
33,200 MUC
.IS
b.
(1 point)
se
rv
ed
32,200 MUC
40,000
National income
The personal income in the economy is
a.
6,500
M
AC
04
500
Dividends
04
20
Particulars
04
54. The following information is extracted from the National Income Accounts of an economy:
ht
Particulars
re
55. The following information is extracted from the National Income Accounts of an economy:
s.
Al
lr
ig
Government expenditure
Pr
es
Dividends
8,000
ve
rs
i
ty
ni
iU
4,200
6,500
700
Nil
fa
Subsidies
Ic
Th
e
500
5,000
20
04
16,000
Personal saving
The net domestic savings in the economy are
a.
5,900 MUC
b.
5,750 MUC
c.
6,100 MUC
d.
7,200 MUC
e.
1,200
5,600
(3 points)
428
Part III
687.50 MUC
c.
652.25 MUC
d.
702.15 MUC
e.
712.20 MUC.
04
b.
20
655.75 MUC
04
a.
04
disposable income in period t. If Ytd has been 500 MUC for a long time, compute the steady
state level of consumption in the economy
(3 points)
ef
.N
o.
M
AC
57. Investment during the next year is expected to be 2,000 MUC, which is likely to increase the
GDP to 3,000 MUC. If GDP for the current year is 2500 MUC, accelerator coefficient for the
economy is
1.25
b.
1.50
c.
4.00
d.
5.00
e.
1-
31
4-
02
27
-4
a.
BN
:8
(1 point)
ed
.IS
58. The following information is available from the consolidated balance sheet of the banking
sector:
Rs. Billion
2,000
3,000
Rs.200 billion
b.
Rs.6,000 billion
iU
fa
Ic
Th
e
Rs.6,200 billion
d.
Rs.7,400 billion
e.
20
04
1,200
6,200
ni
a.
c.
2,200
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
Item
Net Bank Credit to the Government
Bank Credit to the Commercial Sector
Net Foreign Exchange Assets of the
Banking Sector
Net Non-Monetary Liabilities of the
Banking Sector
Money supply in the economy
Government Currency Liabilities to the Public is
59. If the economy is expected to grow at 8 percent and expected growth rate in per capita
income is 6 percent, the population is expected to increase by
a.
2%
b.
4%
c.
6%
d.
10%
e.
16%.
(1 point)
429
Macroeconomics
Rs.98 crore
Rs.105 crore
d.
Rs.162 crore
e.
Rs.195 crore.
M
AC
c.
04
b.
20
Rs.65 crore
04
a.
04
Particulars
Rs. in crore
Consumption
500
Investment
170
Government expenditure
140
Velocity of money
5
The Money supply in the economy is
(1 point)
ef
.N
o.
61. National savings for a year is 1,500 MUC. If the government budget deficit was 500 MUC,
private savings for the year is
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
:8
1-
31
4-
02
27
-4
a.
(1 point)
0 MUC
d.
50 MUC
e.
100 MUC.
se
rv
50 MUC
c.
lr
ig
ht
re
b.
ed
100 MUC
Pr
es
s.
Al
a.
.IS
BN
62. In an economy Marginal Propensity to Consume is 0.75 and proportional tax rate is 0.20. If
government expenditure increases by 100, change in budget surplus will be
(1 point)
ni
ve
rs
i
ty
63. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and
total demand for money is Rs.5,000, then the amount required by banks to meet the reserve
requirement is
Rs.250
b.
Rs.2,250
20
04
fa
Ic
Th
e
c.
iU
a.
Rs.2,500
d.
Rs.5,000
e.
(1 point)
64. Savings function of an economy is S = 150 + 0.25 Yd. Break-even disposable income for
the economy is
a.
37.5 MUC
b.
150 MUC
c.
450 MUC
d.
600 MUC
e.
750 MUC.
(1 point)
430
Part III
65. An individual receives Rs.7,000 every two weeks. If the individual spends the income evenly
throughout the two weeks, his average holding of money is
a.
Rs.500
b.
Rs.1,000
c.
Rs.1,750
d.
Rs.3,500
e.
Rs.7,000.
(1 point)
Interest Income
15
04
04
-4
40 BUC.
27
e.
02
30 BUC
4-
d.
31
25 BUC
1-
c.
:8
15 BUC
BN
b.
.IS
5 BUC
(1 point)
se
rv
ed
a.
10
Rental Income
Profit in the economy is
M
AC
60
o.
100
ef
.N
National Income
20
Billion units of
currency (BUC)
Item
04
re
ht
s.
Al
lr
ig
If expansionary monetary polices decrease the rate of interest in the economy by one
percentage point, the equilibrium income will
Decrease by 75 MUC
b.
Increase by 75 MUC
c.
d.
e.
Insufficient data.
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
(1 point)
20
04
Increases by 4
b.
Increases by 6
c.
Increases by 10
d.
Increases by 25
e.
431
Macroeconomics
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
69. For an economy, Average Propensity to Save is -0.05. Average Propensity to Consume for
the economy is
a. 0.05
b. 0.95
c. 1.00
d. 1.05
e. Insufficient data.
(1 point)
70. In an economy Marginal Propensity to Save (MPS) is estimated to be 0.25 and the
proportional tax rate is 0.20. Multiplier for the economy is
a. 2.0
b. 2.5
c. 4.0
d. 5.0
e. None of the above.
(1 point)
71. The IS equation is Y = 500 20i. Which of the following combinations of interest and
income does not represent a point on the IS curve?
a. i = 0.02% and y = 450.
b. i = 0.05% and y = 400.
c. i = 0.07% and y = 360.
d. i = 0.10% and y = 300.
e. i = 0.04% and y = 420.
(1 point)
72. In an economy Marginal Propensity to Consume is estimated to be 0.75. If investment in the
economy increases by 50, equilibrium savings in the economy
a. Remain unchanged
b. Increase by 50 MUC
c. Increase by 100 MUC
d. Increase by 150 MUC
e. Increase by 200 MUC.
(1 point)
73. For an economy GDP deflator for the year 2001 is 175 and the base year is 1990. If real GDP
(in 1990 prices) for the year is 1000, nominal GDP for the year 2001 is
a. 71 MUC
b. 825 MUC
c. 1,000 MUC
d. 1,175 MUC
e. 1,750 MUC.
(1 point)
74. Net domestic capital formation in a country is 2000. Savings by private and public sectors in
the economy are 1800 and 100 respectively. Current account deficit for the economy is
a. 100 MUC
b. 200 MUC
c. 300 MUC
d. 400 MUC
e. 500 MUC.
(1 point)
432
Part III
75. In an economy there are three industries A, B and C. A sells goods worth Rs.600 to B and
goods worth Rs.500 to C. Consumers divide their expenditure equally between Bs goods and
Cs goods. If the national product is Rs.1,500 and if there are no other transactions than
mentioned above, the value added by industries B and C respectively are
Rs.100,
Rs.500
b.
Rs.150,
Rs.250
c.
Rs.600,
Rs.500
d.
Rs.750,
Rs.750
e.
Rs.1,100, Rs.1,500.
04
a.
04
(1 point)
7.0%
e.
7.0%.
d.
M
AC
3.0%
o.
c.
ef
.N
3.0%
2.5%
b.
(1 point)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
a.
04
20
76. Suppose the rate of inflation is 2% and the real interest rate is 5%. The nominal interest rate
will be
433
2.
(a) In the equation C = A + (MPC)Y, A and MPC represent autonomous investment and
marginal propensity to consume respectively. Autonomous investment does not change with
the income. It is independent to the income. Thus, autonomous investment acts as a
parameter to determine the level of consumption.
3.
(a) The operation of forces in an economy can be expressed in the form of a circular flow of
incomes and spending between households and firms. A household is a group of people
(consumers) earning incomes and spending them on goods and services produced by the
firms. Money passes from households to firms in return for goods and services produced by
firms and money passes from firms to households in return for factor services provided by
households.
4.
5.
6.
(a) If the people put their unspent income into a bank it is only a savings but not an
investment because their intention is not to make money on that amount.
7.
(d) Unit of account function of money refers to act of money as a means of expressing the
value of different goods and services. When we speak of expressing the prices of goods in an
economy, we are speaking primarily of moneys role as a means to express the value of
goods and services.
8.
(a) Ceteris Paribus, an increase in the demand for money causes an increase in the interest
rates.
9.
(a) Stagflation represents a situation where there is high inflation and unemployment. Supply
shock means a drastic reduction in the supply such as crop failure due to bad weather, ban on
imports of a critical raw material, reduction in the supply oil by OPEC, etc. Supply-shock
shifts the AS curve towards left causing inflation.
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
ef
.N
o.
M
AC
04
20
04
04
1.
iU
ni
10. (a) An expansion phase of the usual business cycle is characterized by increased AD, which
implies an upward shift in the aggregate demand curve.
Ic
fa
11. (b) Keynesian model assumed investment and government spending as exogenous variables.
Keynesian economists ignored the crowding out effect.
20
04
Th
e
12. (a) As we are considering NDP and not GDP, it is not required to deduct depreciation since
we have already deducted depreciation from GDP to arrive at NDP.
13. (b) In deciding whether to hold money on other interest-bearing assets, people will compare
the nominal interest rate on money and the nominal interest rate on the other investment.
14. (d) Technological advances increases the real returns to all factors of productions. For
example, if technological advances are made in rice production, farmers can produce more
quantity of rice with the same labor and land.
15. (d) C = f(Yd, W) represents that consumption C is a function of two independent
variables W and Yd.
16. (b) A steeper LM curve indicates less sensitivity in income level due to changes in interest
rates. Hence, when the LM curve is very steep, an increase in autonomous government
expenditure increases the interest rates, but will have little impact on income.
Part III
17. (c) Narrow money or M1 = Currency with the public + Demand deposits with the banking
system + Other deposits with RBI.
18. (c) Money Supply = [(1 + cu) /(r + cu)] x H.
Hence, when currency deposit ratio, Cu increases money supply increases, but high-powered
money, H remains the same.
19. (b) Transfer payments refers to payments of money (or goods and services) by a firm or
government to an individual or firm for which payer receives no consideration. E.g. gifts
given to foreign citizens, etc. As transfer payments are made without consideration, it does
not form part of GDP.
04
20
04
04
20. (b) In a simple model of a closed economy both the government expenditure and the
investment are assumed to the exogenous factors (note that exogenous factors are those
factors that are determined by the forces outside the economic model).
ef
.N
o.
M
AC
21. (b) The RBI money together with the Government money constitutes the monetary base
which is known as High Powered Money. H = Monetary liabilities of the RBI +
Government money, or H = Currency with the public + Reserves + Other Deposits with the
RBI. Government deposits with the RBI is a Non-Monetary Liabilities (NML) of the RBI and
hence it does not form part of high-powered money, H. Money supply = [(1 + Cu)/(Cu + r)] x
H, which implies that high-powered money is a part of money supply. If government deposits
with the RBI does not form part of H, then it does not become a component of money supply.
31
4-
02
27
-4
22. (b) Increase in autonomous investment spending will increase the income. As imports
depend on the income levels, imports also increase with the increase of income. With the
increased imports, the net export balance becomes negative from zero.
.IS
BN
:8
1-
23. (e) Speculative demand for money varies inversely with interest rates prevailing in the
market. If the frequency at which a person receives income is increased, transactionary
demand for money decreases. Transactionary demand for money varies positively with
income, but such variation is usually less than proportionate.
se
rv
ed
1
= 1. Therefore, the equilibrium income would also decrease by the same
1 0
amount as decrease in investment.
ig
ht
re
Multiplier =
s.
Al
lr
25. (c)
Investment in plant and machinery can at the most be zero and cannot be negative. If we
do not undertake any investment in plant and machinery, the investment is zero.
b.
Investment in residential construction can at the most be zero and cannot be negative. If
we do not undertake any investment in residential construction, the investment is zero.
c.
20
04
Th
e
Ic
d.
fa
iU
ni
ve
rs
i
ty
Pr
es
a.
26. (b) All the points on IS curve indicate equilibrium in the goods market and all the points on
LM curve indicate equilibrium in the money market. Hence, the simultaneous equilibrium in
both the markets is possible only at the intersection of both the curves that is only at one
income level and interest rate.
27. (b) The time lag between the recognition of the policy need and actual policy change impact
reduces the likelihood that fiscal policy helps for the economic development.
28. (b) If an economy is currently experiencing both full employment and price stability, a major
tax reduction increases the demand for goods and services. Since already the economy is
operating at full employment, rapid increase in supply of goods and services is not possible in
near future. This leads to demand-pull inflation in the economy unless government
expenditures are reduced.
435
Macroeconomics
29. (a) High powered money (H) = Monetary liabilities of RBI + Government money =
Currency with the public (C) + Reserves (R) + Other Deposits with the RBI.
30. (b) Dividends received by an Indian company from its Malaysian subsidiary would be
included in the GNP of India because it is the factor income from abroad for India. However,
it is considered in the GDP of Malaysia because profits are earned within the boundaries of
Malaysia.
31. (e) The new classical economic school of thought advocates measures to create conditions in
which the free play of market forces can stimulate the economy to work more efficiently.
Because of its emphasis on supply aspects, New Classical Economics is called supply-side
Economics. Other schools of thought does not emphasize supply aspects.
20
04
04
1
1 +
04
= Investment coefficient
M
AC
ef
.N
o.
Where,
02
27
-4
Balanced budget multiplier is not effected by MPS, since it is part of both numerator and
denominator and the multiplier is equal to one if sum of and is equal to zero.
1-
31
4-
33. (b) Money earned abroad and remitted to home country is factor income received from
abroad, which is included in home country GNP and not in home country GDP.
se
rv
ed
.IS
BN
:8
34. (b) Simple Keynesian model assumes that aggregate supply (AS) curve is perfectly elastic
until full employment output is reached. This implies AS is independent of the price level and
the output depends on the AD, if the economy is operating at less than full employment level
of output.
re
AS
ht
Yf
Pr
es
s.
Al
lr
ig
AD
ty
ve
rs
i
1
A
i
1 b(1 t) 1 b(1 r )
iU
ni
Y=
20
04
Th
e
Ic
fa
b
(1
r)
1
given change in the interest rate, the Y will be larger if
is high. Therefore, a
1 b (1 r)
change in the money supply, which cause a change in the rate of interest, will have greater
1
effect on equilibrium income of
is larger.
1 b (1 r)
36. (e) When income of a consumer increases, some of the income is saved and some of the
income is spent on consumption. Therefore, MPC > 0 but < 1.
37. (e) GDPFC
Part III
If Gross investment > Depreciation, Net investment > 0, hence other options are wrong.
39. (d) NPFC is also called a National Income.
40. (b) If interest elasticity of demand for investment and consumption is zero, IS curve is
Y=
A
1 b(1 t)
20
04
04
Part B: Problems
04
41. (a) M1 = Currency with public + Demand deposits with banks + Demand portion of savings
deposits with banks + Other deposits with RBI.
+ 11,254) = Rs.5,14,940 crore.
M
AC
-4
ef
.N
o.
02
27
1-
31
4-
Thus, if autonomous expenditure increases by (200 60) = 140, then GDP increases by 2.857
x 140 = 400.
:8
ed
se
rv
Total Issue
Finance Ratio
re
National Income =
.IS
BN
Secondary issues
ht
Particulars
Pr
es
1,60,000
ty
s.
Al
Total issues
44. (b)
lr
ig
Secondary issues
Year 2000
ni
iU
Yd
ve
rs
i
Ic
fa
Goods Market
20
04
Th
e
C+1+G+EM
1,140 + 0.5 (Y 0.3Y + 600) 12i + 900 + 0.1Y 100i + 3440 + 1636 150
0.15Y
Y =
7,266 + 0.3Y 112i
0.7Y =
7,266 112i
Y =
10,380 160i IS function
At equilibrium Y = 9,580
9,580
= 10,380 160i
160i
=
800
i
=
5%
437
Macroeconomics
Money Market
=
Ms
Md
Mt + Ma
Mt
0.25 Y
Ma
1,050 150i
Md
04
Md
04
04
20
45. (a) If the money supply increases by 190, new money supply is 2,695 + 190 = 2,885 MUC.
M
AC
LM function
=
Md
2,885
0.25Y
1,835 + 150i
02
27
-4
ef
.N
o.
Ms
31
4-
.IS
BN
:8
1-
3040
4%
9740 MUC.
ht
re
se
rv
ed
760i
=EM
lr
ig
s.
Al
Pr
es
ve
rs
i
ty
ni
20
04
Th
e
Ic
46. (b)
fa
iU
Financial Assets
= Rs.250 million
Non-monetary liabilities
= Government deposits + Other non-monetary liabilities
+ Net worth = 600 + 400 + 10,000 = Rs.11,000 million
438
Part III
Monetary liabilities
= 58,000 + 250 11,000 = 47,250
Government money
1+ Cu
Cu + r
1 + 0.30
0.30 + 0.075
1.30
= 3.47
0.375
M
AC
04
20
04
04
ef
.N
o.
4-
02
27
-4
47. (c) If foreign exchange reserves of India decline by Rs.600m, then high-powered money (H)
in the economy reduces to 48,000 600 = 47,400. Consequently, the money supply in the
economy decreases by 3.47 x 600 = Rs.2,082 million.
1-
31
BN
:8
If foreign exchange reserves decline by 600m, then high-powered money would also reduce
by 600m. Thus, H = 48,000 600 = 47,400.
ed
se
rv
1 + 0.30
0.30 + r
ht
1.30 x 47,400
1,66,560
ig
Pr
es
ve
rs
i
0.3699
ty
61,620 =
1,66,560
s.
Al
lr
0.30 + r
re
1,66,560 = 47,400
.IS
ni
6.99% = 7%
20
04
Th
e
Ic
49. (b)
fa
iU
Item
Credit
Debit
Net
Current Account
I.
Merchandise
II. Invisible (a + b + c)
32,639
42,121
(9,482)
26,413
17,657
8,756
a.
Services
15,316
13,677
1,639
b.
Income
1,912
3,931
(2019)
c.
Transfers
9,185
49
9,136
59,052
59,778
(726)
439
Macroeconomics
835
10,724
(835)
1,922
12,585
4,246
2,049
72,363
5,569
5,569
(5,569)
04
(471)
20
471
04
3,500
130
555
Net
(726)
o.
M
AC
Debit
726
ef
.N
Item
Credit
A. Current account balance
Capital Account
i. Foreign investment
4,055
ii. Net external assistance
130
iii. Net commercial borrowings
v. Other capital
12,646
B. Capital account balance
16,831
(i + ii + iii + iv + v)
C. Errors & omissions
2,049
D. Overall balance
77,932
(A + B + C)
E. Change in forex reserves
04
50. (d)
20
04
Th
e
Ic
fa
iU
ni
ve
rs
i
ty
Pr
es
s.
Al
lr
ig
ht
re
se
rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
51. (e) Change in money supply (Ms) = Money multiplier x Change in high powered money (H).
Since the overall BoP position is a surplus of US $5,569m, forex reserves increase by the
same amount, which leads to an increase in H by 5,569 x 50 = Rs.2,78,450m.
Ms
=
4 x 2,78,450 = Rs.11,13,800 m.
52. (e) National Income (NNPFC) = Sum of all factor incomes earned by domestic factors of
production
= Rent + Wages and salaries + Interest + Profits
= 2,000 + 30,000 + 1,500 + 6,500 = 40,000 MUC.
53. (c) NNPFC = Sum of all factor income earned by domestic factors of production
= Rent + Wages and salaries + Interest + Profits
= 2,000 + 30,000 + 1,500 + 6,500 = 40,000 MUC.
GDPMP = NNPFC + Depreciation + Indirect Taxes Subsidies NFIA
Depreciation
= Gross Investment Net investment
= 11,000 7,000 = 4,000 MUC
GDPMP = 40,000 + 4,000 + 4,200 700 0 = 47,500 MUC.
54. (d) Personal Income (PI) = National income Corporate profits + Dividends + Transfer
payments = 40,000 6,500 + 500 + 1,200 = 35,200 MUC.
55. (a) Net Domestic Savings (NDS) = Personal Savings + Business Savings + Government Savings.
Business Savings (Retained earnings) = Corporate Profits Corporate Profit Tax Dividends
= 6,500 5,000 500 = 1,000 MUC.
Government Savings = Net Tax Collections Government Expenditure Transfer payments
= (5,000+8,000+4,200700) 16,000 1,200 = 700 MUC.
NDS = 5,600 + 1,000 700 = 5,900 MUC.
56. (b) The consumption function for an economy is ascertained as
d
Ct = 250 + 0.60 Y t + 0.20 Ct1
d
Where Ct and Ct1 denote consumption in period t and t1 respectively and Y t is the
disposable income in period t.
If there is steady state level of consumption, then Ct = Ct-1. Thus, Ct = 250 + 0.6Yd + 0.2Ct
Or, 0.8Ct = 250 + 0.6Yd
Or, Ct = 312.5 + 0.75Yd
Part III
Investment
Change in Income
2000
= 4.
500
58. (a) Money Supply = Net bank credit to Government + Bank credit to commercial sector +
Net foreign exchange assets of the banking sector Net non-monetary liabilities of the
banking sector +
2000+3000+2200-1200+ Government money
04
Rs.6200billion =
M
AC
o.
Total expenditure(PY)
Money supply (M)
ef
.N
-4
02
27
4-
1:8
ed
.IS
BN
(1 b) (1 t )
. G
1 b (1 t )
ig
ht
G = 100
se
rv
re
Where
31
62. (b) BS =
04
59. (a) Growth in per capita income = Growth in economy Growth rate of population
20
04
lr
(1 0.75) (1 0.20)
100 =50 MUC.
1 0.75 (1 0.20)
s.
Al
Pr
es
BS
ty
ve
rs
i
ni
20
04
Th
e
Ic
fa
iU
Given the reserve ratio of 10%, required reserves are 2,500 0.10 = Rs.250.
64. (d) At break-even level of disposable income, savings are zero.
S
0.25 Yd
Yd
= 150 + 0.25Yd = 0
= 150
=
150
= 600 MUC.
0.25
7, 000
= Rs.3,500.
2
66. (b) Notional income = wages and salaries + Interest income + Rental income + Profit
Profit
= 100 60 15 10 = 15 BUC.
67. (d) 0.5Y = 1250 75i
Y = 2500 150i
If i decrease by one percentage point, equilibrium income would increase by 150 MUC.
441
Macroeconomics
68. (c) Income of the economy for period t is equal to Aggregate Supply during the period t.
Based on the assumption that AS lags AD by one period, income for period t+1 will be
equivalent to AD during period t. Therefore, income during period t+1 will increase by 10
as the AD in period d increases by 10. Hence the answer is (c).
69. (d) For any economy APS + APC = 1.
Therefore, if APS = -0.05, APC = 1.05
70. (b) Multiplier =
1
1 (1 t )
04
Where
20
1
1
=
= 2.5.
1 0.75 (1 0.20) 0.40
Multiplier =
04
04
t = tax rate
M
AC
i = 5%,
Y = 500 (20 5)
= 400
i = 4%,
Y = 500 (20 4)
= 420
ef
.N
= 360
Y = 500 (20 7)
-4
i = 7%,
o.
If, i = 10%,
02
431
1
. I
1
1
.50 = 200
0.25
ed
.IS
BN
:8
1-
se
rv
72. (b) Y
27
i = 2%,
Y = 500 (20 2) = 460
Hence, (a) does not fall on the IS curve.
MPS = 1 MPC
ht
ig
= 0.25 200 = 50
re
S = MPS Y
Pr
es
s.
Al
lr
ve
rs
i
ty
fa
iU
ni
175
100 = 1,000
100 = 1,750.
100
20
04
Th
e
Ic
442