Anda di halaman 1dari 447

Macroeconomics

20 04

Th e

Ic

fa

iU

ni

ve rs i

The Icfai University Press


# 52, Nagarjuna Hills, Hyderabad 500 082

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

WORKBOOK

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

2004 The Icfai University Press. All rights reserved.


No part of may this be

publication

reproduced, stored in a retrieval system, used in

or by any means electronic, mechanical, photocopying or

permission

in

writing

may please write to us giving the above reference number of this book specifying chapter and page number. While every possible care has been taken in typesetting and printing this book, we welcome

suggestions from students for improvement in future editions.

For any clarification regarding this book, the students

20 04

Ref. No. MACWB 04200404

Th e

ISBN : 81-314-0227-4

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

Press.

27

-4

from The Icfai University

ef .N

otherwise without prior

o.

M AC

04

20

transmitted in any form

04

spreadsheet,

or

04

Preface
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.

20 04

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.

Th e

Ic

fa

iU

ni

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.

ve rs i

ty

Pr es

s. Al

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.

lr

ig

ht

re

se rv

Part III: Model Question Papers (with Suggested Answers)

ed

.IS

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.

BN

:8

1-

31

Part II: Problems and Solutions

4-

02

27

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.

-4

ef .N

o.

Part I: Questions on Basic Concepts and Answers (with Explanatory Notes)

M AC

A brief summary of all the chapters in the textbook are given here for easy recollection of the topics studied.

04

20

04

Brief Summaries of Chapters

04

Contents

Brief Summaries of Chapters

04 B 04 20 o. M AC W -4 R ef .N s. Al lr ig ht s re se rv ed .IS BN :8 131 402 27

Part I

Questions on Basic Concepts and Answers (with Explanatory Notes)

Part II :

Problems and Solutions

Part III :

Model Question Papers (with Suggested Answers)

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

04
1 10 98 317

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. 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.

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.

20 04

Th e

Policies for Growth and Stability: The Interaction of Monetary and Fiscal Policies.

Ic

fa

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.

iU

ni

ve rs i

ty

Pr es

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.

s. Al

lr

ig

ht

re

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.

se rv

ed

Business Cycles and Unemployment: Features of the Business Cycle, Business Cycle Theories, Unemployment: Okun's Law, Impact of Unemployment, Economic Interpretation of Unemployment.

.IS

BN

:8

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.

1-

31

4-

02

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.

27

-4

ef .N

o.

M AC

Government, International Trade, and Output: Impact of Fiscal Policy on Output, Fiscal Policy Multipliers, Impact of International Trade on GDP.

04

20

04

04

Brief Summaries of Chapters


Macroeconomic Analysis: An Overview
Macroeconomics is the study of economy as a whole. As a field of study it analyzes the causes of major problems such as high unemployment, rampant inflation, low wages, low economic growth, and mounting trade deficits. It deals with both the short-term fluctuations in output, employment and prices that called the business cycle and the long-term trends in output and standards of living called economic growth. It is, therefore, important to know about the forces that act behind growth and cycles for understanding the science of macroeconomics. Macroeconomic analysis attempts to explain why problems arise in an economy and how these problems can be dealt with. It is, therefore, indispensable for formulating and conducting macroeconomic policy. Macroeconomic policy operates within a framework of goals and constraints. The core objectives of a macroeconomic policy include high output level, full employment, stable prices, trade balance, rapid economic growth, etc. Generally, economists measure the macroeconomic performance by examining some of the key variables Gross Domestic Product (GDP), the unemployment rate, and inflation. Thus, macroeconomic analysis involves study and analysis of these key variables.

20 04

Th e

It is important to distinguish between real and nominal values of macroeconomic aggregates. When comparing data at different points in time, economists often use terms such as real wages, real income or real GNP. The real refers to the fact that the data have been adjusted for changes in the level of prices. Thus real GNP in current rupees is estimated by deflating the nominal GNP. This is done using GNP deflator. GNP deflator is a price index constructed to a price index to reveal the cost of purchasing the items included in GNP during the period relative to the cost of purchasing the same items in base year. Price indices are measures of inflation. Apart from GNP or GDP deflator, there are two important price indices the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Consumer Price Index (CPI) is a price index that is used to measure the cost of a fixed basket of consumer goods in which the weight assigned to each good is the proportionate of expenditures on that good by consumers in the base year. The principles of construction of WPI are quite analogous to those behind CPI. WPI considers producer goods and wholesale prices in contrast to CPI. Weights are based on the value of transaction in various items in the base year. 1

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

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.

ef .N

Measurement of Macroeconomic Aggregates

o.

M AC

04

20

04

04

Measurement of National Income


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.

20 04

Income Determination Model including Money and Interest


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.

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 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]

27

-4

The Simple Keynesian Model of Income Determination

ef .N

o.

M AC

04

20

04

04

IS-LM model is constructed by introducing interest rate as an additional determinant of aggregate demand. This model illustrates how goods market (IS curve) and assets market (LM curve) interact and determine income jointly. 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.

20 04

Th e

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 3

Ic

fa

iU

ni

ve rs i

The aggregate demand-supply model is the basic macroeconomic model for studying output and price level determination. In short run, the interaction between aggregate demand and aggregate supply determines the level of the output, employment, and capacity utilization as well as the price level (the source of inflation). In the long run, a decade or more say, aggregate supply is considered as the major factor behind economic development and wellbeing of a nation.

ty

Fundamentals of Aggregate Demand and Aggregate Supply

Pr es

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.

s. Al

lr

ig

ht

re

se rv

ed

.IS

Crowding out happens due to increase in interest rates, and therefore, can be reduced by increasing the money supply.

BN

:8

1-

31

4-

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.

02

27

-4

ef .N

o.

M AC

04

20

04

04

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.

20 04

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). 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.

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

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.

re

Money Supply and Banking System

se rv

ed

.IS

BN

:8

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.

1-

31

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.

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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.

20 04

Th e

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.

Ic

fa

iU

ni

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.

ve rs i

The aggregate supply curve describes the combinations of output and the price level, to supply the given quantity of output. The amount of output that business firms are willing to supply depends on the prices they receive for their goods and the amount they have to pay for labor and other factors of production. Accordingly, the aggregate supply curve shows conditions in the factor markets, especially, the labor market, as well as the good market. From a historical standpoint it is very important to compare and contrast the views expressed by the classical economists and J M Keynes. The main reasons are that the analysis has different implications regarding a market economys tendency to adjust to full employment and the relative effectiveness of monetary and fiscal measures.

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04
5

04

Aggregate Supply, Price Level and Employment Macroeconomic Equilibrium in the Keynesian Model
Mainstream economic thought before Keynes emphasized the importance of supply-side aspects of macroeconomic system. The classical economists did not concern themselves with demand issues. They had faith in Says Law of Markets. According to this law, a general overproduction of goods relative to total demand is impossible since supply or production creates its own demand. Says law is based on the view that people do not work just for the sake of working, but they work to obtain the income required to purchase the desired goods and services. The capacity to purchase the desired products is generated by the production process in the form of wages and salaries, rent, interest and profits. Classical economists believed that is possible to produce too much of same type of goods (implying full employment) and not enough of other type (implying no overproduction). In case of any discrepancies between demand and supply, the mechanism of wage-price flexibility would come into play automatically.

20 04

Th e

Post-Keynesian Macroeconomics Monetarism, Rational Expectations and Supply-side Economics


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.

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

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.

04

20

04

04

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. a. 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. A W Phillips showed an inverse relationship between the ratio of change of money wage rates and unemployment rate, it was argued that lower unemployment could be obtained at the expense of higher inflation rates through more rapid increases in affective demand. However, some economists argued that a trade-off existed in the short run, but not in the long run. According to rational expectations, no trade-offs exist even in the short run. It is because, if workers and business firms realize that any disturbance leads to higher inflation, wages and prices (which are assumed to be flexible in rational expectations model) will adjust automatically. Assuming full employment in the economy, money wages and prices increase proportionately, leaving the real wage and unemployment unaffected. Thus, according to rational expectations, even though inflation has increased, the unemployment rate remains the same, implies no trade-off between money wage rate and unemployment rate.

20 04

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 inflation may be demand-pull or cost-push. A demand-pull inflation refers to increase in price level due to increased or excess demand. Cost-push inflation refers to rise in general level of prices due to increased cost of production. 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

Th e

Ic

fa

iU

ni

ve rs i

ty

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.

Pr es

s. Al

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.

lr

ig

ht

re

se rv

ed

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.

.IS

Economic Fluctuations and Unemployment

BN

:8

1-

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.

31

4-

c.

Discretionary monetary and fiscal policy cannot be used to stabilize the economy.

02

27

-4

ef .N

o.

M AC

04

20

04

04

b.

The Open Economy and Balance of Payments: Indias Balance of Payments


All countries have economic transactions with other countries. These consist of import and export of goods and services, official and private gifts and donations, lending and borrowing abroad and investment abroad in financial and physical assets. The Balance of Payments (BoP) is a record of all transactions that a country has with the rest of the world during a period. 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.

Th e

20 04

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.

Ic

fa

Minimum reserve requirements Discount or bank rate Open Market Operations (OMO).

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

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

ht

Modern Macroeconomics: Monetary Policy and Interest Rate Structure

re

se rv

ed

.IS

BN

:8

1-

31

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.

4-

02

27

-4

Governments in modern economies play a very important role in the economic process. They collect taxes, provide a variety of services and often undertake production and distribution of goods using inputs purchased from the rest of the economy. They borrow on the capital market and from financial institutions and are engaged in capital formation.

ef .N

Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt

o.

M AC

04

20

04

04

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.

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

B
9

04

20

04

04

Part I: Questions on Basic Concepts


Macroeconomic Analysis: An Overview
1. Which of the following variable(s) will come under stock variable(s)? a. b. c. d. e. 2. Consumer price index. Gross domestic product. Money supply. Exports. Both (a) and (c) above.

b. c. d. e. 3. a. b. c. d. e. 4. a. b. c. d. e. 5.

Saving Expenditure Income None of the above. Gross Domestic Product and Gross National Product

Gross domestic savings is the difference between

National Disposable Income and Gross Domestic Product National Disposable Income and Gross National Product. Unemployment. Consumption. Money supply.

Which of the following variable(s) will come under flow variable(s)? Foreign exchange reserves.

Both (a) and (b) above.

Th e

c.

20 04

d. e. a. b. c. d. e.

6.

Which of the following relationships is not correct? Net national savings = National Disposable Income (NDI) Private consumption expenditure Government expenditure on current goods and services. Net domestic saving = Net national saving + Retained earnings of foreign companies. Gross domestic saving = Net domestic saving + Depreciation provision. Gross domestic investment = Gross fixed investment + Change in inventories. Gross domestic product = Consumption + Gross investment + Government expenditure + Exports.

10

Ic

b.

fa

Adding to the stock of fixed assets Adding to inventories

Both (a) and (b) above All of (a), (b) and (c) above.

iU

a.

Making good the depreciation on existing fixed assets

ni

ve rs i

The act of replacing worn out assets and creating new assets is capital formation. Then Gross Domestic Capital Formation (GDCF) consists of

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

GDP and Aggregate Consumption

BN

:8

1-

Gross Domestic Product and GDCF (Gross Domestic Capital Formation)

31

4-

02

27

-4

ef .N

o.

M AC

a.

Consumption

04

The relationship between aggregate consumption expenditure and aggregate income of household sector is known as ________ function.

20

04

04

Part I

7.

If GDP is growing at g% per annum and population at p% per annum, the per capita GDP must be growing at __________ %. a. b. c. d. e.
1+ g 1 1+ p

(g + p)/2 (g p)/2 (p g) None of the above. How competition achieves economic efficiency under laissez faire How the prices of resources, goods and assets are determined How resources are distributed How production and household sectors interact through markets Both (b) and (d) above. Both variables have time dimension. Stock variables are usually affected by flow variables. All flow variables need not have stock variable counterparts. Flow variables are partly determined by stock variables. Mr. Ramesh bought an Indian made color television for Rs.15,000. Mr. Harsha imported a brand new Ferrari car from Germany for Rs.10 lakh. Mr. Sujit paid Rs.10,000 to his personal secretary towards salary. Both (a) and (c) above. National income deflator.

e. 9. a. b. c. d. e. a. b. c. d. e. a. b. c.

Which of the following statements is not true with respect to stock and flow variables? Flow variables are always determined by stock variables.

Th e

d. e.

20 04

Measurement of Macroeconomic Aggregates


12. If GNP deflator is raised by 40% then which of the following statements is correct? a. b. c. d. e. Nominal GNP will increase at least by 40%. Real GNP will increase at least by 40%. Both nominal GNP and real GNP will increase by 40%. Nominal GNP will increase by 40% but real GNP will decrease by 40%. Real GNP will increase by 40% but nominal GNP will decrease by 40%.

Ic

fa

Real national income.

Per capita real national income. GDP deflator.

iU

GNP at current prices.

ni

ve rs i

11. Which is the best indicator of economic development of a developing country like India?

ty

Pr es

s. Al

lr

ig

ht

Mr. Babu bought a second hand refrigerator from his friend Rajesh.

re

se rv

ed

10. Which of the following is a leakage from the circular flow of income?

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

d.

M AC

c.

W
11

b.

04

a.

20

04

8.

The circular flow model of a free enterprise economy shows

04

Macroeconomics

13. Which of the following will certainly increase real and nominal GNP? a. b. c. d. e. i. ii. iii. iv. a. b. c. d. e. i. ii. iii. iv. a. b. c. d. e. Production of more goods and services and decrease in prices. Production of more goods and services and rise in prices. Production of less goods and services and rise in prices. Production of less goods and services and decrease in prices. Production of less goods and services and rise in inflation. RBI currency notes in circulation. Small coins. Demand deposits with banks and other deposits with RBI. Both (i) and (ii) above Both (ii) and (iii) above Both (i) and (iii) above Only (i), (ii) and (iv) above All of (i), (ii), (iii) and (iv) above. RBI currency notes in circulation. Time deposits with banks. Both (i) and (ii) above Only (i), (ii) and (iii) above Only (i), (ii) and (iv) above All of (i), (ii), (iii) and (iv) above.

14. In an economy narrow money is equal to the sum of ________. Rupee coins and notes in circulation.

Rupee coins and notes and small coins in circulation. Demand deposits with banks and other deposits with RBI. Only (ii), (iii) and (iv) above

Th e

c. e.

20 04

d.

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? a. b. c. d. e. 12 Expenditure method. Income method. Input method. Output method. Saving method.

Ic

fa

b.

Decrease Increase by an amount equal to rise in depreciation

Decrease by an amount equal to rise in depreciation Not change.

iU

a.

Increase

ni

ve rs i

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 _____.

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

15. In an economy aggregate monetary resources are equal to the sum of ________.

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part I

Th e

a.

20 04

b. c. d. e. a. b. c. d. e.

24. In a closed economy savings are equal to __________ at the equilibrium level of income. Investments Wages Income-Investments Wages-Consumption None of the above. 13

Ic

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 ______.

fa

USA will be more Japan will be more USA will be twice that of Japan Japan will be twice that of USA No definite conclusion can be made.

iU

ni

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.

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

Macroeconomics

25. Which of the following methods is/are used for measuring national income? a. b. c. d. e. Output method. Expenditure method. Income method. Both (a) and (b) above. All of (a), (b) and (c) above.

26. Net factor income from abroad is equal to

c. d. e.

NDP at factor cost + Depreciation

NNP at market prices + Depreciation.

e.

Same as the overall balance of payments.

a. b. c. d. e.

Wages and salaries Personal income tax Wages and salaries + Dividends paid at home Personal income tax

Th e

b.

c.

20 04

d. e.

30. The Net Domestic Savings of an economy is defined as a. b. c. d. e. 14 Net national savings less retained earnings of foreign companies Net national savings plus retained earnings of foreign companies National disposable income less consumption of household and government sectors Gross national savings less depreciation provisions National disposable income plus consumption of household and government sectors.

Ic

fa

a.

Personal savings

Transfers from government Personal income taxes Dividend payments Both (b) and (c) above.

iU

ni

29. Personal income equals personal disposable income (Yd) plus

ve rs i

Wages and salaries + Dividends paid at home + Factor income received from abroad Transfers from government Personal income tax.

ty

Pr es

Wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government Personal income tax

s. Al

lr

ig

Wages and salaries + Dividends paid at home + Factor income received from abroad Personal income tax

ht

re

se rv

ed

.IS

28. Personal disposable income is equal to _______

BN

:8

1-

d.

Same as the balance of capital account

31

4-

c.

Same as the balance of current account

02

27

b.

The difference between merchandize export and imports

-4

a.

The difference between current and capital account

ef .N

27. Balance of trade is

o.

M AC

NDP at factor cost Depreciation

04

20

b.

NDP at market prices Indirect taxes + Subsidies

04

04

a.

NNP at market prices NDP at market prices

Part I

b. c. d.

The general level of prices The growth of real output All of the above

e. None of the above. 35. Real GNP increases a. When there is an increase in the price level b. When there is an increase in the output of goods and services c. When there is an increase in the price level and/or the output of goods and services d. All of the above e. None of the above. 36. The circular flow of income for a private sector model shows a. The flow of income between the household and business sectors b. The flow of income between the government and business sectors c. The flow of income between the household, business and government sectors d. The flow of income to the household and government sectors e. All of the above. 37. In a model in which there is no government, net investment, capital replacement or international trade, the market value of final output equals a. Aggregate consumption b. The sum of the receipts of economic resources c. The sum of wages, rent, interest and profit d. All of the above e. None of the above.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

a.

The level of output of goods and services

BN

34. Macroeconomics is concerned with

:8

e.

Services of a teacher.

1-

31

d.

Purchase of groceries by a family.

4-

02

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.

27

-4

ef .N

o.

M AC

04

20

04
15

04

Macroeconomics

38. Which of the following is not included in gross investment? a. b. c. d. e. Business and residential construction. Expenditures on consumer goods. Additions to business inventory. Expenditures on machinery. None of the above.

39. In a model in which there is a household, business, government and foreign sector, GNP is the sum of

c. d. e.

Consumption, gross investment, government spending for goods and services, and gross exports All of the above.

b. c. d. e.

Household saving always equals gross investment

41. Which of the following is not correct?

e. a. c.

None of the above. Transfer payments Undistributed corporate profits Personal income taxes Dividend payments Personal savings.

20 04

43. Nominal GDP is a. b. c. d. e. 16 The total value of goods and services net of exports The total value of goods and services at prices corrected for inflation The total value of goods and services produced during periods of low unemployment The total value of goods and services measured at current prices The total value of goods and services produced at full employment.

Th e

b.

d. e.

Ic

fa

iU

42. Personal income includes all of the following except

ni

ve rs i

ty

d.

Personal income equals disposable personal income plus direct taxes.

Pr es

c.

Gross investment equals net investment plus depreciation.

s. Al

b.

NNP + Capital consumption allowances equals GNP.

lr

ig

a.

NNP Direct taxes equals national income.

ht

re

se rv

None of the above.

ed

Household saving plus taxes equals net investment plus government spending

.IS

BN

Household saving plus depreciation always equals gross investment plus government spending

:8

1-

31

4-

a.

Household saving always equals net investment

02

27

40. In a three-sector model,

-4

ef .N

Wages, rent, interest, profit and depreciation

o.

M AC

04

b.

Consumption, net investment, government spending for goods and services, and net exports

20

04

a.

Consumption, gross investment, government spending for goods and services, and net exports

04

Part I

44. GDP at factor cost exceeds GDP at market price a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. When the factor income from abroad is negative When the factor income from abroad is positive When depreciation on fixed capital exceeds income in investment When direct tax exceeds indirect tax When subsidies exceed indirect taxes. Excess of subsidies over indirect taxes Net foreign income from abroad Personal disposable income. Payments made for income taxes Depreciation allowances Undistributed profits Net exports The value added from intermediate goods. NNP + Indirect taxes = National Income.

45. The difference between Gross National Product (GNP) and Gross Domestic Product (GDP) is Depreciation Excess of indirect taxes over subsidies

47. Which of the following is not correct? GNP = NNP + Depreciation.

Saving + Taxes = Investment + Government Spending. Gross Investment = Net Investment + Depreciation. NDP at market prices NDP at factor cost

48. National income is

49. Which of the following statements is/are true?

20 04

Th e

i. ii. iii. iv. a. b. c. d. e.

Ic

fa

GNP at market prices.

Every increase in real GDP will necessarily improve the welfare of the people. Foodgrains retained by the farmers are excluded from the computation of GDP. GNP at market prices is also known as National Income. Transfer payments are not taken into account while computing national income. Both (i) and (ii) above. Both (ii) and (iii) above. Both (iii) and (iv) above. Only (ii) above. Only (iv) above. 17

iU

NNP at factor cost

ni

ve rs i

ty

NNP at market prices

Pr es

s. Al

lr

ig

ht

Personal Income = Disposable Income + Direct Taxes.

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

46. NDP does not include

M AC

04

20

04

04

Macroeconomics

50. Which of the following is not included in GDP of India? a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. c. e. Depreciation written off by Reliance Industries Ltd. Profits before tax earned by Ford Motors Ltd. in India. Salaries paid by Satyam Infoway to an American consultant at its Chennai office. Salaries paid by Microsoft USA to Indian programmers employed at New York. Dividends earned by a Foreign Institutional Investor in India. The expenditure and production methods to GDP yield different results because of conceptual problems It does not include non-monetized transactions/activities It is purely a monetary measure It does not include environmental degradation Both (b) and (d) above. GDP deflator is also known as implicit price deflator. GDP deflator is the most comprehensive index of prices. GDP deflator measures economic growth. Residential investment Subsidies Personal taxes.

51. GDP is not a very good measure of economic prosperity because

52. Which of the following statements is not true?

d. Transfer payments

b. c. d. e.

Zero net investment Negative gross investment

Th e

a. c.

20 04

b. d. e. a. b. c. d. e.

56. Which of the following is an example of a government transfer payment? Salary paid to a soldier. Purchase of a new car for the Ministry of Finance. Funding of a clinic to provide free vaccinations. Free food coupons issued to persons in an anti-poverty program . Funding of a new bridge in an urban area.

18

Ic

55. Which of the following ratios best describes the GNP deflator? Nominal GNP to real GNP. Real GNP to nominal GNP. Nominal GNP to real GDP. Real GNP to nominal GDP. None of the above.

fa

iU

Zero gross investment.

ni

ve rs i

Positive net investment

ty

Pr es

a.

Negative net investment

s. Al

54. When the addition to capital goods in an economy is more than the capital consumption allowance, the economy experiences

lr

ig

ht

re

se rv

ed

.IS

b. Indirect taxes

BN

:8

1-

53. The difference between personal disposable income and personal income is

31

4-

02

GDP deflator reflects on the purchasing power of the people.

27

-4

GDP deflator reflects the change in overall price level of the economy.

ef .N

o.

M AC

04

20

04

04

Part I

57. Which of the following price indices is/are most widely used for determining of inflation in India? a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. i ii. i. iv. a. b. c. d. e. Wholesale Price Index (WPI). GDP deflator. Consumer Price Index (CPI). Both (a) and (b) above. Both (b) and (c) above. Arun deposits Rs.10,000 with a nationalized bank in a term deposit for a period of 5 years. Charlie and Co. accumulates unsold inventory worth Rs.1,000 . Delta Corp. buys ten used vehicles to strengthen its transportation fleet. None of the above. Net Domestic Product at factor cost Net Domestic Product at market price Net National product at factor cost Net National Product at market price Personal income.

58. Which of the following is considered as an investment?

Both (ii) and (iii) above Both (i) and (iii) above (i), (ii) and (iv) above. (i), (ii) and (iii) above

Th e

a.

b.

20 04

c. d. e. a. b. c. d. e.

62. Which of the following would not be included in GDP? Bobby purchases a new suit to wear at work. Amok purchases a new Ford car. Community Bank purchases new computers for its loan office. Margaret grows tomatoes in her home garden Ford India produces but could not sell 100 cars. 19

Ic

fa

61. Which of the following indices necessarily gives higher weights to services like doctor fees, railway and bus fares? Consumer Price Index (CPI). Wholesale Price Index (WPI). Index of Industrial Production. GNP deflator. GDP deflator.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

Both (i) and (ii) above

ig

ht

Personal disposable income.

re

Personal income.

se rv

National income.

ed

.IS

Corporate profits.

BN

60. Both dividends and corporate taxes are part of

:8

1-

31

4-

02

27

-4

ef .N

59. The net factor income earned within the domestic territory of a country must be equal to

o.

M AC

04

Barucha invests Rs.5,000 in equity shares of a company.

20

04

04

Macroeconomics

The Simple Keynesian Model of Income Determination


63. The ratio of the change in equilibrium output to the change in autonomous spending that causes change in output is called a. b. c. d. e. Marginal propensity to consume Marginal propensity to save Average propensity to save Multiplier Average propensity to consume.

iv. v. a. b. c. d. e. a. b. c. d. e.

Marginal propensity to save is 0.6. Autonomous consumption demand is 12. Both (iii) and (v) above. Both (iv) and (v) above. Only (iii), (iv) and (v) above. Only (i), (ii) and (v) above. Only (ii), (iii) and (v) above.

Supply of goods not sufficient, due to low production That inflation is the only reason for high cost consumption It is difficult to save, due to low income.

66. Changes in subjective and objective factors of households a. May cause upward or downward shifts of the consumption function b. May cause upward shifts of the consumption function c. May cause downward shifts of the consumption function d. Never effect consumption function e. May cause upward shift of saving function. 67. The slope of the consumption function represents _______. a. Average Propensity to Save (APS) b. Marginal Propensity to Save (MPS) c. Marginal Propensity to Consume (MPC) d. Average Propensity to Consume

20 04

Th e

e. a. b. c. d. e. 20

68. The balanced budget multiplier is not affected by Marginal propensity to save Marginal propensity to import Investment function of the economy Proportional income tax rate levied by the government Both (a) and (b) above.

Ic

fa

Level of Consumption in the Economy.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

It easier to adjust to rising incomes than falling income

.IS

It difficult to adjust to rising incomes than falling income

BN

65. The rachet effect is the situation where households find

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

iii.

Marginal propensity to consume is 0.4.

ii.

Marginal propensity to save is 0.4.

04

i.

Marginal propensity to consume is 0.6.

20

04

64. In an economy consumption function is equal to 12 + 0.6Y [then which of the following statements are true?

04

Part I

69. Which of the following is false? a. b. c. d. e. The naive consumption function assumes a constant marginal propensity to consume. The naive consumption function assumes that the autonomous component of consumption is constant. The average propensity to consume can never exceed unity. As income increases, the average propensity to consume decreases. Both (c) and (d) above.

70. In the equation C = C + cY, C is b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. A parameter whose value depends upon the level of disposable income A behavioral coefficient None of the above.

A variable is endogenous when its value is determined by forces outside the model. A variable is exogenous when its value is determined by forces within the model. All of the above.

It is hypothesized that Yd is a more important determinant of C than W

Consumption plus investment equals the value of output Aggregate spending equals the revenues of the business sector

Th e

a.

20 04

b. c. d. e. a. b. c. d. e.

75. When the value of output exceeds planned spending There is unsold output, and the level of income will fall There is unsold output, and the level of income will rise There is no unsold output, and the level of income does not change Any of the above can happen None of the above. 21

Ic

74. When planned saving is greater than planned investment, Output should increase Output should decrease Output should not change Any of the above can happen None of the above.

fa

iU

All of the above.

ni

ve rs i

Planned saving equals planned investment

ty

Pr es

Saving equals investment

s. Al

lr

73. Equilibrium occurs in a two-sector model when

ig

ht

Both (c) and (d) above.

re

Yd and W are independent variables explaining C

se rv

W and Yd are dependent variables explaining C

ed

It is hypothesized that W is a more important determinant of C than Yd

.IS

BN

:8

72. In stating that C = f(Yd, W)

1-

31

4-

A variable is autonomous when its value is determined by forces within the model.

02

27

-4

A change in an exogeneous variable is classified as an autonomous change.

ef .N

o.

71. Which of the following statements is correct?

M AC

A dependent variable

04

20

04

a.

The autonomous part of consumption, independent of the level of income, Y

04

Macroeconomics

76. By definition, the marginal propensity to consume a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. Equals C/Yd Is the behavioral coefficient c in the equation C = a + cYd Is the slope of the consumption function All of the above None of the above. The change in income to the change in autonomous spending The change in autonomous spending to the change in income The change in consumption to the change in income The change in income to the change in consumption

77. The value of the expenditure multiplier relates

78. A change in autonomous spending is represented by A movement along a spending line A shift of a spending line A change in a behavioral coefficient Both (a) and (c) above None of the above.

There is no relationship between consumption and disposable income

The economy is not in equilibrium Consumption is unrelated to disposable income None of the above. There is a lagged response between consumption and disposable income

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

20 04

Th e

b.

c.

Ic

fa

There is net debit balance in the merchandize account There is net credit balance in the merchandize account

iU

81. A current account deficit implies that

ni

ve rs i

ty

Pr es

s. Al

lr

The assumption of ceteris paribus is dropped

ig

ht

80. Dynamic multipliers occur when

re

Both (a) and (c) above.

se rv

The receipt of disposable income lags consumption spending by one period

ed

Consumption spending lags the receipt of disposable income by one period

.IS

BN

:8

There is an imperfect relationship between consumption and disposable income

1-

79. When Ct = f(Yd, t 1)

31

4-

02

27

-4

ef .N

o.

M AC

All of the above.

04

20

04

04

Part I

a. b. c. d. e. a. b. c. d. e. a. b. c. d. e.

Increases the value of the expenditure and net tax revenue multiplier Increases the value of the expenditure multipier and decreases the value of the net tax revenue multiplier Decreases the value of the expenditure and net tax revenue multiplier Decreases the value of the expenditure multiplier and increases the value of the net tax revenue multiplier None of the above. Increase the net export balance and the income level Increase the income level but make the net export balance negative Increase the income level and have no effect upon the net export balance

84. If the net export balance is zero, an increase in autonomous investment spending will

None of the above. Has the same effect upon the multipliers as an increase in the MPC Increases the value of the multipliers Decreases the value of the multipliers None of the above.

a. b. c. d. e. a. b. c. d.

Is unrelated to the rate of interest

Is inversely related to the rate of interest Falls as the rate of interest decreases None of the above.

87. Given the consumption function C = 256 + 0.85Y, we may infer that, as Y increases The marginal propensity to consume and average propensity to consume will be decreasing The average propensity to consume is constant but marginal propensity to consume will be decreasing The average propensity to consume will be decreasing but marginal propensity to consume will be constant Both the average and marginal propensity to consume will be constant. Increase in marginal propensity to consume. Increase in marginal propensity to save. Decrease in tax rate. Decrease in marginal propensity to import. None of the above.

20 04

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

Th e

e.

Ic

fa

iU

ni

ve rs i

ty

Average propensity to consume remains constant

Pr es

s. Al

lr

ig

ht

Is positively related to the rate of interest

re

se rv

ed

.IS

86. When an investment spending is negatively related to the rate of interest, equilibrium income in the goods market

BN

:8

1-

31

4-

02

27

Has no effect upon the multipliers

-4

ef .N

85. An increase in the marginal propensity to import

o.

M AC

Have no effect upon the income level but cause the net export balance to become negative

04

20

04

04

Macroeconomics

the tax revenue by 100 will a. b. c. d. e. a. b. c. d. e. a. b. c. d. Not change the equilibrium income Increase the equilibrium income by 100 Increase the equilibrium income by less than 100 Decrease the equilibrium income by 100 Decrease the equilibrium income by more than 100. The value of Marginal Propensity to Consume (MPC) lies between zero and infinity. The value of multiplier lies between 1 and infinity. The value of multiplier is the inverse of MPC. In the linear consumption function average propensity to consume is constant.

90. Which of the following statements is true? The value of multiplier lies between 0 and 1.

91. Which of the following statements is true?

e. a. b. c. d. e. a. b. c. d. e.

An increase in income by Re.1 will result in an increase in investment by Rs.2. Monetary liabilities of the RBI increases. High-powered money in the economy decreases. Aggregate demand in the economy increases. Price level in the economy increases. Income Propensity to consume Propensity to save Consumer spending. Marginal efficiency of investment. The value of money multiplier decreases.

20 04

94. Consumption demand does not depend upon the level of

95. The slope of the consumption curve connotes 24

Th e

Ic

fa

iU

93. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?

ni

ve rs i

ty

d.

An increase in investment by Re.1 will result in an increase in consumption by Rs.1

Pr es

c.

An increase in investment by Re.1 will result in an increase in consumption by Rs.2

s. Al

b.

An increase in investment by Re.1 will result in an increase in consumption by Rs.3

lr

ig

a.

An increase in consumption by Rs.3 will result in an increase in investment by Re.1

ht

92. On the basis of the Keynesian model of output determination, a multiplier of 3 implies that

re

se rv

e.

Relative Income Hypothesis states that marginal propensity to consume is lower for increase in income than for decrease in income.

ed

.IS

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.

BN

:8

1-

Relative income hypothesis assumes that marginal propensity to consume and hence multiplier are constant.

31

4-

02

Permanent Income Hypothesis states that the transitory component of income significantly influences the consumption behavior.

27

-4

Relative Income Hypothesis asserts that people can quickly and easily adjust their living standards downwards but upward adjustment is very difficult.

ef .N

o.

M AC

04

20

04

04

Part I

a. b. c. d. e.

Average propensity to save Average propensity to consume Marginal propensity to consume Marginal propensity to save Level of consumption in the economy.

96. Given that the marginal propensity to consume is larger, which of the following statements are true. i. ii. iii. iv. a. b. c. d. e. Marginal propensity to save will be larger. Multiplier value will be larger. Average propensity to consume will be larger. Autonomous consumption will be higher. Both (i) and (ii) above Both (ii) and (iii) above (ii), (iii) and (iv) above (i), (ii) and (iii) above Both (iii) and (iv) above.

e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e.

AD.

Both (c) and (d) above. Larger the multiplier, steeper the IS curve. Larger the multiplier, flatter the IS curve. As the taxes decrease, the IS curve becomes steeper. Both (b) and (c) above. Does not affect the IS curve Shifts the LM curve to the left Shifts the IS curve to the left Shifts the IS curve to the right Makes the IS curve flat. As the taxes increase, the IS curve becomes steeper.

20 04

100. An autonomous increase in investment

101. The LM schedule shifts 25

Th e

Ic

fa

iU

99. Which of the following statements is/are true regarding IS curve?

ni

ve rs i

ty

The IS schedule shifts to the right if the interest rate rises.

Pr es

The IS schedule shifts to the right if the interest rate falls.

s. Al

The IS curve shifts to the right if tax rate and government expenditure increases.

lr

The IS curve shifts to the left if the tax rate increases.

ig

ht

98. Which of the following statements is/are incorrect?

re

se rv

d.

MPS

ed

.IS

c.

MPC

BN

b.

LM

:8

1-

a.

IS

31

97. The curve explains the combination of interest rates and levels of output at which planned spending equals income.

4-

02

27

Income Determination Model Including Money and Interest

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

a. b. c. d. e.

To the right, if the supply of money increases To the right, if the demand for money increases To the left, if the supply of money increases To the left, if the demand for money decreases Both (c) and (d) above.

102. At interest rate r there is a simultaneous equilibrium in goods and money markets. If interest rate increases from r to r1 then a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. Equilibrium in goods market will be at a point higher than the existing income Equilibrium in goods market does not change but equilibrium in money market will be at a point higher than the existing income Equilibrium in money market will be at a point higher than the existing income

Both (a) and (b) above.

The LM curve is vertical if there is no speculative demand for money. The changes in money supply will have no effect on the LM curve, if the LM curve is positively sloped.

105. The LM schedule is a

20 04

Th e

c.

d. e. a. b. c. d. e.

106. When IS curve shifts rightwards Income will fall but interest rates will rise Income will rise but interest rates will fall Both income and interest rates will fall Both income and interest rates will rise Income will decrease but interest rate will remain unchanged.

107. A shift in the IS curve would occur if there is a change in 26

Ic

fa

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 Schedule of goods market equilibrium where the supply of goods equals the external demand for goods Both (a) and (d) above.

iU

ni

ve rs i

Schedule of goods market equilibrium where the supply of goods equals the demand for goods

ty

Pr es

IS curve slopes from right to left and LM from left to right.

s. Al

lr

IS curve explains monetary policy and LM curve explains fiscal policy

ig

ht

IS curve explains money in circulation and LM curve explains goods in demand

re

IS curve explains goods market and LM curve explains money market

se rv

IS curve explains money market and LM curve explains goods market

ed

104. The basic difference between IS and LM curve is that

.IS

BN

Both (b) and (d) above.

:8

The changes in money supply will have no effects on the LM curve, if the LM curve is negatively sloped.

1-

31

4-

02

27

-4

The LM curve is horizontal if there is no speculative demand for money.

ef .N

103. Which of the following is true?

o.

M AC

Equilibrium in money market does not change but equilibrium in goods markets will be at a point higher than the existing income

04

20

04

04

Part I

a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e.

Autonomous government expenditure on goods and services Transfer payments made by the government Marginal propensity to import Both (a) and (b) above All of (a), (b) and (c) above. Money supply in the economy Price level in the economy Money supply and price level in the economy

108. The slope of the LM curve is dependent upon the

Money supply, price level and transactions demand function for money of the economy. LM curve becomes vertical LM curve becomes horizontal IS curve becomes vertical IS curve becomes horizontal Both (b) and (c) above. Aggregate demand to the right Aggregate demand to the left Aggregate supply to the right Aggregate supply to the left None of the above.

None of the above.

a.

Th e

b. c.

20 04

d. e. a. b. c. d. e.

113. Simultaneous equilibrium in the money (LM) and goods (IS) markets exists At an unlimited number of income levels and rates of interest At only one income level and rate of interest At an unlimited number of income levels and only one rate of interest At only one income level and an unlimited number of rates of interest None of the above. 27

114. A liquidity effect occurs when

Ic

fa

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 An increase in the quantity of money demanded and an increase in the rate of interest An increase in the quantity of money demanded and a decrease in the rate of interest A decrease in the quantity of money demanded and a decrease in the rate of interest A decrease in the quantity of money demanded and an increase in the rate of interest None of the above.

iU

ni

ve rs i

ty

Positively related to the income level and negatively related to the rate of interest

Pr es

Negatively related to the income level and positively related to the rate of interest

s. Al

Negatively related to the income level and the rate of interest

lr

ig

Positively related to the income level and the rate of interest

ht

111. The demand for money is

re

se rv

ed

.IS

BN

:8

1-

31

4-

110. An expansionary monetary and fiscal policy shifts

02

27

-4

ef .N

o.

M AC

109. If investment demand is infinitely interest elastic

04

20

04

04

Transactions demand function for money of the economy

Macroeconomics

a. b. c. d. e. a. b. c. d. e. a. b. c. d. e.

A reduction in government spending lowers the rate of interest A money supply increase lowers the rate of interest An increase in government spending increases the rate of interest A money supply increase raises the rate of interest None of the above. Lower interest rates will increase the portfolio demand for money Lower interest rates will cause less crowding out Lower interest rates will cause more crowding out None of the above. The private sector spending is more interest-sensitive The private sector spending is less interest-sensitive The expenditure multiplier is smaller than anticipated None of the above. Lower interest rates will increase interest sensitive spending

115. A liquidity effect will normally result in an income effect because

a. b. c. d. e. a. b. c. d. e.

LM is steeply sloped and IS is relatively flat. LM is vertical and IS is steeply sloped. LM is steeply sloped and IS is vertical. LM is relatively flat as is IS. None of the above.

Th e

The demand for money is interest-insensitive, and private sector spending is interest-sensitive None of the above.

20 04

119. Crowding out will occur when a. b. c. d. e. A decrease in the money supply raises interest rates which crowd out interest-sensitive private sector spending An increase in taxes of the private sector reduces private sector disposable income and spending A reduction in income taxes causes higher interest rates, which crowd out interest-sensitive private sector spending A reduction in government spending causes induced consumption spending to fall None of the above.

120. Which of the following statements is not true? 28

Ic

fa

iU

The demand for money is interest-insensitive, and private sector spending is interest-insensitive

ni

ve rs i

The demand for money is interest-sensitive, and private sector spending is interest-sensitive

ty

Pr es

The demand for money is interest-sensitive, and private sector spending is largely interest-insensitive

s. Al

lr

ig

118. Crowding out is more likely to occur when

ht

re

se rv

ed

.IS

BN

:8

1-

117. In which of the following situations will an increase in the money supply have no effect upon equilibrium income?

31

4-

02

27

-4

The interest-sensitive money holding to the rate of interest is more

ef .N

o.

M AC

116. A change in the money supply has a greater effect upon equilibrium income if

04

20

04

04

Part I

a. b. c. d. e.

When the relative increase in the price level is greater than the relative increase in the nominal money supply, the real money supply decreases. When the relative increase in the nominal money supply is greater than the relative increase in the price level, the real money supply increases. When the price level decreases, ceteris paribus, the real money supply decreases. When the price level increases, ceteris paribus, the real money supply decreases. None of the above.

121. An increase in the price level

c. d. e. a. b. c. d. e.

Increases the real money supply and shifts the LM schedule to the right

None of the above. Investment spending should fall, as well Investment spending should rise Consumption expenditure should fall as people save more

124. When economists are concerned about the liquidity preference function, they are interested in b. c. d. e. a. b. c. d. e. The proportion of liquid (cash) reserves maintained by commercial banks The preference for a currency backed by gold A banks desire for accounts receivables as collateral The amount of money in circulation. The interrelationship between the money market and the goods market Low increase in government expenditure increases income The relationship between income and consumption The relationship between income and saving None of the above.

20 04

125. Transmission mechanism shows

126. Which of the following statements is/are true? 29

Th e

Ic

fa

iU

a.

The relationship of the demand for money and the rate of interest

ni

ve rs i

ty

e.

Gm = a.Gy + Gp.

Pr es

d.

Gm = Gy + a. Gp

s. Al

c.

Gm = a.Gp Gy

lr

ig

b.

Gm = a.Gy Gp

ht

re

a.

Gm = Gp a. Gy

se rv

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)

ed

.IS

BN

Investment spending should rise primarily to take up the slack left by lower consumption expenditure.

:8

1-

31

The marginal propensity to save should rise, shifting the entire consumption schedule

4-

02

27

-4

ef .N

122. If real and nominal interest rates fall, then

o.

M AC

Increases the real money supply and shifts the LM schedule to the left

04

20

b.

Reduces the real money supply and shifts the LM schedule to the left

04

04

a.

Reduces the real money supply and shifts the LM schedule to the right

Macroeconomics

i. ii. iii. a. b. c. d. e. a. b. c. d. e.

The elasticity of demand is the same at all points on a linear demand curve. Interest rates are inversely related to investment expenditure. An increase in money supply tends to increase interest rates. (i) only. (ii) only. (iii) only. (i) and (ii) only. (ii) and (iii) only. Causes a rightward shift of the aggregate supply curve and thus results in higher equilibrium output and lower prices

d. e. a. b. c. d.

Slope of the I-S curve will decrease.

Th e

20 04

e.

130. Which of the following is not true with respect to IS curve? a. b. c. d. e. It shows the equilibrium in the goods market. It is positively sloped. If autonomous exports increase, it will shift to the right. If government expenditure decreases, it shifts to the left. It is vertical if the consumption and investment expenditures are not responsive to the rate of interest.

131. The term crowding out refers to the process by which 30

Ic

fa

Changes in autonomous expenditure affects only the equilibrium output while equilibrium rate of interest remains unchanged.

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.

iU

Changes in money stock lead to changes in equilibrium rate of interest only while equilibrium output remains unaffected.

ni

ve rs i

Changes in autonomous expenditure are totally ineffective in influencing equilibrium output and interest rate.

ty

Pr es

Changes in money stock are totally ineffective in influencing equilibrium output and interest rate.

s. Al

lr

129. If the demand for money is infinitely interest elastic, which of the following is true?

ig

ht

I-S curve will not be affected.

re

se rv

c.

I-S curve will shift to the right.

ed

.IS

b.

Slope of the I-S curve will increase.

BN

a.

I-S curve will shift to the left.

:8

1-

128. If transfer payments are increased, which of the following is true of I-S curve?

31

4-

Causes a rightward shift of the aggregate supply curve and thus results in lower output and higher prices.

02

27

-4

Causes a leftward shift of the aggregate supply curve and thus results in lower equilibrium output and lower prices

ef .N

Causes a leftward shift of the aggregate supply curve and thus results in lower equilibrium output and higher prices

o.

M AC

Causes a rightward shift of the aggregate supply curve and thus results in higher equilibrium output and higher prices

04

20

04

127. A supply shock such as failure of monsoon or increase in the price of oil

04

Part I

a. b. c. d. e. a. b. c. d. e.

Excessive investment is undertaken in the economy A rise in base money leads to a very tight monetary policy Increase in government deficit, due to a tax cut or an increase in government spending reduces the funds available to investment spending Funds available for investment spending will be protected by all means Both (a) and (c) above. Varies positively with income and rate of interest

132. Transaction demand for money Varies positively with income and inversely with rate of interest Varies inversely with income and positively with rate of interest Varies inversely with income and rate of interest Does not depend on income and rate of interest.

133. In an IS curve, as interest rate i increases a. Both consumption and investment decline b. Both consumption and investment increase c. Consumption increases, investment declines d. Consumption declines, investment increases e. Consumption and investment are unaffected. 134. Which of the following statements is correct? a. GDP deflator = Real GDP/Nominal GDP. b. Real rate of interest = Nominal rate of interest + Rate of inflation. c. An increase in government expenditure is likely to cause a reduction in private investment. d. If the interest elasticity of demand for money is zero, the IS curve becomes vertical. e. When the rate of interest increases, the IS curve shifts to the left. 135. In the IS-LM framework, an increase in autonomous government expenditure a. Will result in an increase in income and decrease in interest rate b. Will result in a decrease in income and increase in interest rate c. Will result in an increase in both income and interest rates d. Will result in a decrease in both income and interest rates e. Will affect neither the income nor the interest rate. 136. If interest elasticity of demand for investment and consumption is zero a. Equilibrium income depends solely on the position of L-M curve b. Equilibrium income is determined solely in the goods market

Th e

c.

20 04

d. e.

137. Japanese economy is facing the problem of liquidity trap. Which of the following statements is not true about liquidity trap? a. b. c. d. e. Public is willing to hold whatever money is supplied at the current interest rate. LM curve is horizontal. Fiscal policy is more effective in increasing income. Monetary policy is ineffective in affecting interest rate. LM curve is vertical.

138. Which of the following better explains the inverse relationship between the interest rate and 31

Ic

fa

Equilibrium income is determined by the positions of both the I-S and L-M curves Equilibrium income is unaffected by the positions of both the I-S and L-M curves Fiscal policy is totally ineffective in changing any of the real variables.

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

Macroeconomics

the demand for money? a. b. c. d. e. The transaction demand for money. The speculative demand for money. The precautionary demand for money. The inflationary expectations. None of the above. The relationship between the interest rate and the demand for money is direct, not inverse. IS function represents the goods market equilibrium. LM function represents the money market equilibrium. Goods and money markets interact to determine the equilibrium national income. IS curve is positively sloped. Interest rate is a variable in both IS and LM functions.

139. Which of the following statements is not true about IS-LM Model? b. c. d. e.

e. a. b. c. d. e.

A positive relationship between level of investment and level of income. Shift both IS and LM curves to the right Not affect the position of LM curve but shift IS curve to the left

142. An increase in government expenditure will Shift both IS and LM curves to the left

Th e

20 04

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? a. b. c. d. e. IS curve shifts to the left. LM curve shifts to the left. IS curve shifts to the right. LM curve shifts to the right. Both IS and LM curves shifts to the right.

32

Ic

fa

Not affect the position of IS curve but shift LM curve to the right

Not affect the position of LM curve but shift IS curve to the right.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

d.

A positive relationship between rate of interest and level of investment

ig

ht

c.

A negative relationship between rate of interest and level of investment

re

b.

A negative relationship between rate of interest and level of income

se rv

a.

A positive relationship between rate of interest and level of income

ed

.IS

141. The LM curve shows

BN

e.

Interest rate increases.

:8

d.

Interest rate falls.

1-

31

c.

LM curve shifts to the left.

4-

02

b.

IS curve shifts to the right.

27

-4

a.

Disposable income remains constant.

ef .N

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?

o.

M AC

04

20

04

a.

04

Part I

Fundamentals of Aggregate Demand and Aggregate Supply


144. Due to an increase in the real stock of money ___. a. The LM curve and AD curve shift towards right b. The LM curve shifts towards left and AD curve towards right c. The AD curve and LM curve shift towards left d. The AD curve shifts towards left and LM curve shifts towards right e. Increase in the real stock of money will not have any effect on LM curve but shifts AD curve towards right. 145. Due to fiscal expansion __________. a. IS and AD curves shift towards right b. IS and AD curves shift towards left c. LM and AD curves shift towards right d. LM and AD curves shift towards left e. Fiscal expansion will not have any effect on LM, IS and AD curves. 146. The real stock of money in the economy increases due to a. Increase in prices b. Decrease in prices c. Increase in interest rates d. Decrease in interest rates e. Both (b) and (d) above. 147. When price level increases a. LM curve shifts towards right b. IS curve shifts towards left c. Aggregate supply curve shifts towards right d. IS curve shifts towards right e. LM curve shifts towards left. 148. If all the resources available are fully employed then aggregate supply curve in the long run will become a. Horizontal b. Vertical c. Parabola d. Straight line with a positive slope of 45 degrees e. Straight line with a negative slope of 45 degrees. 149. Which of the following factor/s is/are responsible for a change in aggregate demand? a. Rate of interest. b. Exchange rate. c. Government policy. d. Both (b) and (c) above. e. All of (a), (b) and (c) above. 150. Which of the following factors is/are responsible for a change in aggregate supply? a. Change in cost of production. b. Supply shock. c. Human capital. d. Both (a) and (b) above. e. All of (a), (b) and (c) above.

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
33

04

Macroeconomics

151. An increase in the real wage will increase the quantity of labor supplied, but will reduce the quantity of a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. Goods supplied Labor demanded Goods demanded Goods manufactured Both (a) and (c) above. Nominal income and nominal interest rate Real income and real interest rate Real income and nominal interest rate High-powered money and interest rate. Of the market forces of both supply and demand Of government regulatory role Of possible change in prices of goods and services Both (b) and (d) above. Nominal income and real interest rate

152. In the demand function for money, we include

b. c. d. e. a. b. c.

Real output and no change in the price level when aggregate supply is horizontal The price level and no change in real output when aggregate supply is horizontal

155. Aggregate demand is

Th e

20 04

d. e. a. b. c. d. e.

156. The slope of aggregate demand becomes flatter The more sensitive the investment spending is to the rate of interest The more sensitive the demand for money is to the rate of interest The smaller the value of the expenditure multiplier The large the nominal money supply None of the above.

34

Ic

fa

Positively related to the price level because a decline in the price level has a negative effect on the demand for output Positively related to the price level because a decline in the price level has a positive effect on the demand for output None of the above.

iU

Negatively related to the price level because a decline in the price level has a positive effect on the demand for output

ni

ve rs i

Negatively related to the price level because a decline in the price level has a negative effect on the demand for output

ty

Pr es

s. Al

None of the above.

lr

ig

ht

The price level and no change in real output when aggregate supply is upward sloping

re

se rv

ed

a.

Real output and no change in the price level when aggregate supply is upward sloping

.IS

154. A rightward shift of aggregate demand, with no change in the aggregate supply schedule, results in an increase in

BN

:8

1-

31

4-

02

They assess the basic questions of how the society allocates scarce resources

27

-4

ef .N

153. Business firms will produce at maximum efficiency because

o.

M AC

04

20

04

04

Part I

157. A neoclassical aggregate supply schedule exists a. b. c. d. e. a. b. c. d. e. At an output rate greater than the natural rate of unemployment At an output level determined by the supply of and demand for labor When the demand for labor and supply of labor schedules adjust immediately to a change in the price level When equilibrium in the labor markets is unaffected by shifts in the supply of labor schedule None of the above.

a. b. c. d. e.

Right, the price level falls, and real output increases Right, the price level increases, and real output decreases Left, the price level increases, and real output decreases None of the above.

c.

Th e

d. e. a.

20 04

162. The economy is in inflationary equilibrium. A reduction in Government spending permanently lowers the economys rate of inflation Nominal money supply growth lowers the inflation rate with no effect on output in the short run Nominal money supply growth lowers the inflation rate and the level of output in the short run Government spending lowers the rate of inflation with no effect on output in the short run None of the above. 35 b. c. d. e.

Ic

fa

b.

Right, the price level falls, and real output increases

Left, the price level increases, the real output decreases Right, the price level increases, and real output decreases None of the above.

iU

ni

a.

Left, the price level falls, and real output increases

ve rs i

161. When aggregate supply is positively sloped and there is a decrease in the mark-up on variable cost, aggregate supply shifts to the

ty

Pr es

s. Al

lr

ig

ht

Left, the price level falls, and real output increases

re

se rv

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

ed

.IS

BN

e.

None of the above.

:8

d.

Reduces the rate of interest and changes the composition of output

1-

31

c.

Causes a proportional increase in real output

4-

02

b.

Has no effect on the real money supply or the composition of output

27

a.

Causes the real money supply to increase, which changes the composition of output

-4

159. Suppose there is full employment and a vertical aggregate supply schedule. An increase in the nominal money supply

ef .N

o.

None of the above.

M AC

Has no effect on the price level or real output

Increases real output but has no effect on the price level

04

Increases the price level but has no effect on real output

20

04

Increases the price level and real output

04

158. Suppose there is full employment and aggregate supply is vertical. A decrease in taxes

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. d. e. a. b. c. d. e. Price level to increase Price level to fall Output to increase Price level and output to increase Price level to fall even as output increases. Consumption exceeds investment Net investment is zero Depreciation is greater than net investment Depreciation is greater than gross investment

164. An economys capital stock must decline if

a. b. c. d. e. a. b. c. d. e. a. b.

D1 and D4 only D1, D2 and D4 only D4 only D2 only D2 and D4 only.

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.

20 04

Th e

e. 36

Ic

fa

Both (a) and (d) above.

iU

ni

ve rs i

ty

AS is positively sloped both in the short run and in the long run.

Pr es

AS in the short run is positively sloped and in the long run it is vertical.

s. Al

167. With respect to Aggregate Supply (AS), which of the following is true?

lr

Aggregate demand being equal to aggregate supply.

ig

ht

Full employment level of output

re

Domestic savings being equal to domestic investment

se rv

Balanced budget of government

ed

.IS

Equilibrium in balance of payments

BN

166. Internal balance refers to

:8

1-

31

4-

02

27

-4

ef .N

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

o.

M AC

Government expenditures on goods and services are greater than tax collections.

04

20

04

04

Part I

170. Which of the following statements is not true in the long run? a. b. c. d. e. a. b. c. d. e. Output converges towards natural rate of output. Output becomes insensitive to changes in aggregate demand. Input costs play a greater role in the determination of equilibrium output. Aggregate supply curve is vertical. Unanticipated price changes would have adverse impact on output. The economy is facing deficit demand There are idle resources All available resources are fully employed All firms are earnings normal profits. The economy is yet to reach full employment

171. Aggregate supply curve becomes vertical even in short run, if

b. c. d. e.

Notes and coins in circulation and cash with banks

Demand deposits with banks, other deposits and small coins in circulation

d. e. a. b. c.

Decrease money supply in proportion to the increase in reserve ratio Decrease money supply lesser in proportion to the increase in reserve ratio. M3 is more than M4 M2 is part of M3 whereas M2 is not part of M4

Th e

20 04

d. e. a. b. c. d. e.

175. Time deposits with banks are included in __________ measure of money stock. M1 M2 M3 M4 Both (c) and (d) above. 37

Ic

fa

M3 is part of M1 and M4 is not part of M1 M4 includes all post office deposits, where as in M3 these are not included M1 is part of M4 where as M1 is not part of M3.

iU

174. The basic difference between money stock measure M3 and M4 is that

ni

ve rs i

ty

Pr es

c.

Not change the money supply

s. Al

b.

Decrease the money supply

lr

ig

a.

Increase the money supply

ht

re

173. In an economy currency deposit ratio (Cu) and high-powered money (h) are constant. The increase in the reserve ratio will ___________.

se rv

ed

Notes and coins in circulation and saving deposits.

.IS

BN

:8

Notes and coins in circulation and demand deposits with banks

1-

31

4-

a.

Currency in circulation less currency with commercial banks

02

27

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

-4

ef .N

Money Supply and Banking System

o.

M AC

04

20

04

04

Macroeconomics

176. Bank rate is a. b. c. d. e. i. ii. iii. iv. a. b. c. d. e. The rate at which Central Bank discounts the government bills The rate at which Central Bank discounts the eligible bills of commercial banks The rate at which commercial banks give loans to the other commercial banks The rate at which commercial banks lend to the public The rate at which Central Bank discounts the foreign bills. Lowering reserve requirements. Decreasing the volume of reserves. Increasing reserve requirements. Only (iv) above Both (i) and (ii) above Both (i) and (iii) above Both (ii) and (iv) above. Only (iii) above

177. The RBI can increase the demand deposit component of the money supply by

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)

20 04

Th e

b. c. d. e. 38

Ic

fa

(1 + Cu)/r (1 + Cu)/(1 r + Cu) (1 + Cu)/(r + Cu) (1 Cu)/(r + Cu).

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

c.

M1

:8

b.

Stock of high-powered money

1-

31

a.

Monetary base

4-

02

178. The quantity of notes and coins in private circulation plus the quantity of cash held by the banking system is called

27

-4

ef .N

o.

M AC

04

20

04

04

Increasing the volume of reserves.

Part I

182. In an economy high-powered money is equal to a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. i. ii. iii. iv. a. b. c. Monetary liabilities of Central Bank + Government money Monetary liabilities of Central Bank Government money Financial assets + Non-monetary liabilities Monetary liabilities of Central Bank + Foreign exchange assets Both (a) and (d) above. Increases

183. If reserve ratio is constant and currency deposit ratio increases then money multiplier Decreases Does not change Decreases less than proportionately to the increase of currency deposit ratio. Total issues/National income Primary issues/Net capital formation Total issues/Net capital formation d. Total stock of financial assets/Stock of fiscal assets Secondary issues/Net capital formation. M1 is high-powered money. M2 is high-powered money. Decreases more than proportionately to the increase of currency deposit ratio

184. Financial interrelation ratio is equal to

M3 = M1 + Time deposits with banks.

Th e

20 04

d. e.

187. If currency deposit ratio is constant and reserve ratio increases then money multiplier a. b. c. d. e. Increases Decreases Does not change Decreases more than proportionately to the increase of reserve ratio Decreases less than proportionately to the increase of reserve ratio. 39

Ic

fa

Only (i) above.

Both (i) and (ii) above. Both (ii) and (iii) above. Both (i) and (iv) above. All of (i), (ii), (iii) and (iv) above.

iU

M4 = M3 + All post office deposits.

ni

ve rs i

ty

M2 = M1 + Post office savings deposits.

Pr es

M1 = Currency with public + Demand portion of savings deposits with banks + Demand deposits with banks + Other deposits with RBI.

s. Al

lr

186. Which of the following statement/s is/are true?

ig

ht

None of the above.

re

M4 is high-powered money when total postal deposits are not taken.

se rv

M3 is high-powered money when time deposits with bank are not taken.

ed

.IS

BN

:8

185. Which of the following statements is true?

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

188. Saving deposits are not a part of money stock measure (M1) because a. b. c. d. e. They are not recognized as legal tender by the RBI They are negligible compared to demand deposits They are not a medium of exchange They will not generate money supply Both (a) and (c) above.

189. An increase in volume of investment will not occur if interest rates

d. e.

None of the above.

c. d. e.

Th e

d. e. a. b.

20 04

192. New issues ratio is defined as Stock of financial assets/stock of physical assets Primary issues by non-financial sector/total physical asset formation Volume of financial instruments issued by financial intermediaries/volume of primary issues by non-financial sectors Total financial claims issued during a year/National income for the year None of the above.

c. d. e. 40

Ic

fa

A change in bankers interest rates by direct intervention that may or may not alter real GDP by altering spending None of the above.

iU

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

ni

ve rs i

b.

A change in interest rates that induces a change in spending, a change in aggregate demand, and thus an immediate and unavoidable change in real GDP

ty

Pr es

a.

A change in interest rates that induces a change in spending, a change in aggregate demand, and thus a potential change in real GDP

s. Al

lr

191. The link between changes in the money supply and changes in real macroeconomic variables is best described by

ig

ht

re

Ratio of total financial claims to total physical asset formation.

se rv

The ratio of the total stock of financial assets at a point of time to the stock of physical assets

ed

.IS

BN

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

:8

1-

b.

The ratio of primary issues by the non-financial sector to total physical asset formation

31

4-

02

a.

The ratio of total financial claims issued during a year to the national income for the year

27

-4

190. Financial Interrelations ratio is

ef .N

o.

Remain constant, while corporate sector exports increase as result of a decrease in personal income tax

M AC

c.

Remain constant while corporate income tax is increased

04

b.

Are lowered by increasing M3

20

04

04

a.

Remain constant while the government announces new tax concessions on capital additions

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. Credit creation by commercial banks is limited by CRR . Commercial banks can create as much credit as they want. RBI has no control over the credit created by Commercial banks. CRR has no impact on credit creation. None of the above

194. Which of the following does not affect the balance sheet of Reserve Bank of India?

d. e.

Increase in reserves of commercial banks. Increase in net foreign exchange assets.

b. c. d. e.

Financial Interrelations Ratio. New Issue Ratio. Intermediation Ratio.

196. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)? a. b. c. d. e. Monetary liabilities of the RBI increases .

Price level in the economy increases.

197. The difference between M3 and M1 is

Th e

c.

20 04

d. e.

198. Other things being equal, an increase in the supply of money a. b. c. d. e. Lowers both nominal interest rate and aggregate demand Raises both nominal interest rate and aggregate demand Raises nominal interest rate and lowers aggregate demand Lowers nominal interest rate and raises aggregate demand Does not change either nominal interest rate or aggregate demand. 41

Ic

b.

Post office savings deposits Savings deposits

fa

Time deposits M2.

iU

a.

Demand deposits

ni

ve rs i

ty

Pr es

Aggregate demand in the economy increases.

s. Al

lr

The value of money multiplier decreases .

ig

ht

High-powered money in the economy decreases.

re

se rv

ed

.IS

Cost Benefit Ratio.

BN

:8

1-

31

4-

02

27

a.

Finance Ratio.

-4

195. Which of the following ratios is not an indicator of financial development of a country?

ef .N

o.

M AC

c.

Refinancing of NABARD loans.

04

b.

Loan taken by one commercial bank from the other.

20

04

a.

Central governments borrowings from RBI.

04

Macroeconomics

Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model
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. 204. Which of the following is not a postulate of Says law?

Th e

a.

20 04

b. c. d. e. a. b. c. d. e.

205. In the classical model, the long run effect of an increase in government spending is An increase in the price level An upward shift of the aggregate demand curve An increase in the level of output Both (a) and (b) above (a), (b) and (c) above.

42

Ic

fa

Disequilibrium in the economy can exist for a while. There might be temporary mismatch between aggregate demand and supply. In the short run there can be excess production and unemployment. Prices and wages are sticky downwards. Interest rate fluctuations bring about saving and investment equilibrium.

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

Part I

Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Keynesian Model
206. In the Keynesian model, workers a. b. c. d. 207. Accept a decrease in money wages as long as these cuts bring about full employment Accept cuts in money wages as long as real wages do not fall Resist any decrease in their real wages Resist any decrease in their money wages

20 04

Th e

d. e. a. b. c. d. e.

212. If real wages increase, then unemployment Decreases in proportion of labor demand Decreases in proportion to supply of labor Decreases more than the proportion of labor demand Increases Remain at the same level. 43

Ic

211.

fa

Decrease more than proportionately to decrease in price None of the above.

iU

ni

ve rs i

ty

Pr es

s. Al

210.

lr

ig

ht

re

se rv

ed

.IS

BN

209.

:8

1-

31

4-

02

27

-4

ef .N

208.

e. Both (b) and (c) above. The basic difference between Classical model and the Keynesian model lies in the assumption of a. Rigid money wages b. Rigid money supply c. Demand for money d. Labor supply e. Real interest rate. In the Keynesian model, an economy consists of a. Labor market, money market b. Labor market, goods market c. Money market, goods market d. Labor market, international trade e. Labor market, money market, goods market. Says law of market emphasizes that a. Demand for goods creates its own supply b. Demand for goods depends on supply of money c. Supply of goods creates its own demand d. Supply of goods depends on supply of money e. Both (a) and (d) above. In the Keynesian model, macroeconomic equilibrium can take place at a. Full employment b. Less than full employment c. Less than full capacity output d. Both (a) and (c) above e. Both (b) and (c) above. If price level falls, then real wages a. Decrease in proportion to decrease in prices b. Decrease but not in proportion to decrease in prices c. Increase

o.

M AC

04

20

04

04

Macroeconomics

213. Which of the following statements is/are true? a. b. c. d. e. If prices increase then real wages increase. If real wages increase then unemployment increases. If prices increase then unemployment decreases, nominal wages remaining constant. Both (a) and (b) above. Both (b) and (c) above.

214. Keynesian model of macroeconomic equilibrium emphasizes that

215. Investors prefer holding money to bonds if they expect a. b. c. d. e. Interest rates to increase Interest rates to decrease Capital loss from a bond

216. According to the Keynesian Aggregate Supply Model

b. c. d. e.

Aggregate supply is independent of price level

Both (c) and (d) above.

a. b. c.

Aggregate demand is equal to aggregate supply.

Th e

d. e.

20 04

218. The term speculative demand for money refers to money balances held in expectation of a. b. c. d. e. Fall in the prices of goods Fall in the prices of bonds An increase in the interest rates Both (a) and (b) above Both (b) and (c) above.

44

Ic

fa

Unintended investments are zero.

Both (a) and (b) above. All of (a), (b) and (c) above.

iU

Employment is not necessarily at full employment level.

ni

ve rs i

ty

217. Which of the following is/are true in case of an economy in equilibrium?

Pr es

s. Al

Nominal and real wage are perfectly flexible

lr

ig

Involuntary unemployment cannot exist

ht

re

se rv

a.

Aggregate supply varies positively with price level

ed

.IS

BN

Both (a) and (c) above.

:8

Reinvestment rate of return exceeds capital loss from a bond

1-

31

4-

02

27

-4

ef .N

o.

e.

Both (a) and (d) above.

M AC

d.

Supply depends on demand for money

c.

Supply creates its own demand

04

20

b.

Demand depends on supply of money

04

a.

Demand creates its own supply

04

Part I

219. Which of the following is true? a. b. c. The classical model assumes a fixed nominal wage and Keynesian model assumes a fixed real wage. The classical model assumes a fixed real wage and Keynesian model assumes a fixed real wage. The classical model assumes instantaneous adjustment of real wage in response to demand-supply balance in the labor market while the Keynesian model assumes fixed nominal wage. 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.

d.

b. c. d. e.

Keynesian model of income determination assumes wage rigidity. Classical economists consider only transaction demand for money. Keynes considers speculative demand for money also.

e.

None of the above.

a. b. c. d. e.

There will be positive fixed investment in the economy. There will be negative fixed investment in the economy. There will be negative inventory investment in the economy. There will be positive inventory investment in the economy.

Th e

a.

20 04

b. c.

d. e. a. b. c. d. e

224. The unemployment in the Keynesian model is caused by Demand deficiency Supply deficiency Demand sufficiency Supply sufficiency Both (a) and (b) above. 45

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. Effective demand determines the level of employment and output. Since full employment is not always possible, Government intervention is essential. Budget deficit is a tool to fight recession. Monetary policy is more effective than fiscal policy.

fa

iU

There will be no change in inventory investment in the economy.

ni

ve rs i

ty

Pr es

s. Al

lr

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?

ig

ht

re

se rv

d.

Lower level of income and higher rate of interest

ed

.IS

c.

Lower level of income and lower rate of interest

BN

b.

Higher level of income and higher rate of interest

:8

1-

a.

Higher level of income and lower rate of interest

31

221. An increase in the autonomous government expenditure will result in

4-

02

Keynesian model of income determination results in a vertical aggregate supply curve at the full employment level of output.

27

-4

ef .N

o.

M AC

a.

Classical model of income determination assumes wage flexibility.

220. Which of the following is not true?

04

e.

Both the classical and Keynesian models assume a fixed real wage.

20

04

04

Macroeconomics

Post-Keynesian Macroeconomics Monetarism, Rational Expectations and Supply-side Economics


225. According to monetarism, demand for money depends on a. b. c. d. e. a. b. c. d. e. i. ii. iii. a. b. c. d. e. a. b. c. d. e. Interest rate on bonds Inflation rate Rate of return on all assets other than money Money supply Cost of living. Decrease in output Increase in output Increase in price level Both (b) and (d) above. Decrease in price level

227. Which of the following is/are the implications of rational expectation hypothesis? Econometric models are not very useful in evaluating alternative economic policies. Discretionary monetary and fiscal policies cannot be used to stabilize the economy. Only (iii) above. Both (i) and (iii) above. Both (i) and (ii) above. All of (i), (ii) and (iii) above.

Information received will be always correct Both (a) and (c) above

Th e

b.

20 04

c.

d. e. a. b. c. d. e.

230. According to the Laffer curve, as the tax rate increases, tax revenues Rise continuously Decrease continuously Initially decrease and then increase Initially increase and then decrease Remain constant.

46

Ic

fa

a.

Reduce government controls. Promote competition. Remove institutional barriers. Increase corporate tax rate. Restrict the power of trade unions.

iU

229. To improve market efficiency, which of the following is not recommended by Supply side economics?

ni

ve rs i

ty

Both (b) and (c) above.

Pr es

s. Al

lr

Guesses about the future are always correct

ig

ht

Guesses about the future are on average correct

re

228. Basic assumption/s of rational expectation theory is/are

se rv

ed

.IS

BN

:8

1-

31

Only (i) above.

4-

02

27

There is no trade-off between inflation and unemployment.

-4

ef .N

o.

M AC

04

20

04

04

226. According to monetarism, in the short run, increase in money supply results in

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. b. c. d. e. a. b. c. d. e. Classical economics Rational expectations Keynesian economics Supply-side economics Monetarism. Statistically money demand function can be better determined than consumption or investment demand Demand for money is determined by rate of interest Fiscal policy is ineffective because of crowding out effect Both (a) and (d) above.

c. d. e.

Wages are rigid downwards

234. The curve that depicts the relationship between the rate of change in prices and the rate of unemployment is b. c. d. e. Phillips curve LM curve IS curve.

Th e

a.

b. c.

20 04

d. 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. b. c. d. e. Frictional unemployment Structural unemployment Cyclical unemployment Disguised unemployment Demand pull unemployment. 47

Ic

fa

235. The bank reserves fall rapidly in _________ stage of business cycle. Recovery Boom Recession Depression Both (c) and (d) above.

iU

ni

Economic Fluctuations, Unemployment and Inflation

ve rs i

ty

Pr es

Aggregate supply curve

s. Al

lr

ig

a.

Laffer curve

ht

re

se rv

ed

Both (c) and (d) above.

.IS

Prices are rigid downwards

BN

:8

1-

b.

People anticipate changes in money supply and accordingly adjust prices and wages

31

4-

02

a.

People make biased forecasts about the future of the economy based on all the available information

27

-4

233. According to the school of rational expectations there is no trade off between inflation and unemployment because

ef .N

o.

M AC

Money is a substitute for financial assets

04

20

04

04

232. Monetarists prefer monetary policy over the fiscal policy because they feel that

Macroeconomics

237. Unemployment that arises when there is a general downturn in business activity is known as a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. Frictional unemployment Structural unemployment Cyclical unemployment Disguised unemployment Demand pull unemployment. Zero unemployment Least demand for labor Least supply of labor Demand for goods is less than supply. General downturn in business activity Changes in labor market Increase in inflation Structural changes in economy Frequent changes of jobs by labor.

238. Full employment is the level at which there is

239. Natural rate of unemployment increases due to

Disguised unemployment increases Consumption of goods decreases Both (a) and (d) above.

d. e. a. c. d. e.

Disguised unemployment

Th e

b.

20 04

243. Disguised unemployment means a. Unemployment in agriculture b. Unemployment due to recession c. Unemployment by choice d. Unemployment due to downturn in business activity e. Marginal Productivity of Labor (MPL) is zero. 48

Ic

fa

242. The inventory stock will be high in _________ stage of a business cycle. Recovery Boom Recession Depression Both (a) and (c) above.

iU

ni

Demand pull unemployment.

ve rs i

ty

c.

Cyclical unemployment

Pr es

b.

Structural unemployment

s. Al

a.

Frictional unemployment

lr

ig

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

ht

re

se rv

ed

.IS

BN

Production will increase more than potential

:8

Actual output of the economy will fall below its potential

1-

31

240. If the actual rate of unemployment exceeds the natural rate of unemployment then

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Normal rate of unemployment

Part I

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.

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
49

04

Macroeconomics

251. Bottlenecks in the context of macroeconomics refers to a. Inadequate spending in a sector of the economy b. A shortage of materials in a full employment economy c. Inadequate supply of labor in a full employment economy d. Inadequate supply of specific resources in an economy below full employment e. Both (b) and (c) of the above. 252. Which of the following is most likely to happen during a recession? a. Decrease in inventory . b. Producers will be cautiously optimistic. c. Capacity under utilization . d. Expansion in bank credit. e. Increasing income levels. 253. Which of the following statements is/are true about the impact of inflation in the economy? a. Unanticipated inflation hurts the fixed income earners most. b. Higher than expected inflation hurts creditors but benefits debtors. c. Inflation creates inefficiency in the economy because it forces people to search for prices when they could be doing something else. d. Inflation can lead to a misallocation of resources because people tend to make mistakes when there is inflation in the economy. e. All of the above. 254. Suppose an economy is experiencing inflation. And at the same time, there is a slowing down of economic activities. This is a case of a. Deflation b. Hyper inflation c. Recession d. Depression e. Stagflation. 255. Phases of business cycles in an economy are designated primarily based on the a. Unemployment rate b. Price levels c. Real GDP d. Inventory levels e. Gross investment. 256. Stagflation is a period of i. High inflation. ii. High growth of real GDP. iii. High unemployment. iv. High aggregate demand. a. Both (i) and (iii) above b. Both (iii) and (iv) above c. (i), (ii) and (iii) above d. (ii), (iii) and (iv) above e. All (i), (ii), (iii) and (iv) above. 257. Full employment exists when there is a. Zero unemployment b. Natural rate of unemployment c. Least demand for labor d. Least supply of labor e. Both (c) and (d) above. 50

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

Part I

261. Balance of trade is a. The difference between balance on current account and capital account b. Same as the balance of merchandize trade c. Same as the balance of current account d. Same as the balance of capital account e. Overall BoP balance. 262. All entries in the balance of payments should collectively sum to a. GDP of that country b. GNP of that country c. Gold reserves of that country d. Zero e. Exports of that country. 263. In the BoP statement, current account includes i. Merchandize, invisible items ii. Government loans from abroad iii. Foreign direct investment. a. (i) only b. Both (i) and (ii) above c. Both (i) and (iii) above d. Both (ii) and (iii) above e. All of (i), (ii) and (iii) above. 264. The changes in foreign exchange reserves and reserves of monetary gold held by the monetary authority will be recorded in __________ account of the BoP statement. a. Current b. Capital c. Errors and omissions d. Official reserve e. None of the above.

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-

The Open Economy and Balance of Payments: Indias Balance of Payments

02

27

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.

-4

ef .N

o.

M AC

04

20

04
51

04

Macroeconomics

265. The deficit on current account implies a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. Exports of merchandize goods, invisibles is less than imports of merchandize goods, invisibles Foreign direct investment in the country is more than exports Domestic industries are financed more by the international financial institutes than local financial institutions Exports of merchandize goods are less than merchandize imports Both (a) and (b) above. The sale of goods by foreign supplier in anothery country at price above than the price at which the supplier sells in domestic market

Distributing the goods in international markets without any consideration

267. The investment income from abroad appears under _________ head of BoP statement. Capital account Official reserve account Unilateral transfer account. Errors and omissions

268. International transfers from abroad means transferring of Goods from one country to another due to bilateral agreement Both (a) and (c) above

a. b. c.

It is a case of BoP surplus

Th e

20 04

d. e. a. b. c. d. e.

270. A current account deficit unmatched or exceeded by a capital account surplus will Cause contraction of money supply Cause domestic interest rate to raise Lead to a fall in government budget deficit Lead to an increase in the propensity to import Cause expansion of money supply.

52

Ic

fa

It is a case of BoP where the official reserve account is in surplus

It is a case of BoP deficit It is a case of BoP disequilibrium None of the above.

iU

ni

269. If the balance on current and capital accounts of Balance of Payments (BoP) taken together is negative, then

ve rs i

ty

All of (a), (b) and (c) above.

Pr es

s. Al

Transfer of assets from one country to another country without consideration

lr

ig

ht

Goods made by the developed countries to undeveloped countries without consideration

re

se rv

ed

.IS

BN

:8

1-

31

4-

Current account

02

27

-4

Giving consumer goods freely to the poor nations.

ef .N

o.

The sale of goods by domestic supplier in another country at price above than the price at which the supplier sells in domestic market

M AC

The sale of goods by foreign supplier in another country at price below than the price at which the supplier sells in domestic market

04

20

04

04

266. Dumping in international trade means

Part I

276. Customs duty is an instrument of

Th e

a.

20 04

b. c. d. e. a. b. c. d. e.

277. Increase in net RBI credit to the Central Government is reflected in ________ deficit. Budget Revenue Monetized Gross primary Gross fiscal. 53

Ic

fa

Fiscal policy Monetary policy Trade policy Revenue policy None of the above.

iU

Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt

ni

ve rs i

271. Transfer Payments are a. Payments made to a factor of production b. Payments transferred from one sector to another c. Payments made for no return service d. Payments made by government of one country to another e. Both (b) and (c) above. 272. A decline in the 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. 273. Which of the following transactions is included in the current account balance of the balance of payments statement? a. Foreign direct investments. b. Portfolio investments. c. External commercial borrowings. d. Dividends earned on portfolio investments. e. External assistance. 274. All entries in the balance of payments statement should collectively sum to a. GDP of the country b. GNP of the country c. Foreign exchange reserves of the country d. Zero e. Exports of the country. 275. Which of the following transactions is included in the current account balance of the Balance of payments statement? a. Foreign direct investments. b. Portfolio investments. c. External commercial borrowings. d. Dividends earned on portfolio investments. e. External assistance.

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

Macroeconomics

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

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

Part I

285. Budgetary deficit + Government borrowing and other liabilities is known as a. b. c. d. e. Revenue deficit Capital deficit Budget deficit Primary deficit Fiscal deficit.

286. If modern economies wish to maintain both full employment and price stability as their policy objectives, then they should a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. Control prices permanently Institute voluntary wage-price guidelines All of (a), (b) and (c) above. Revenue Deficit Interest Payment Budget Deficit Interest Payment Fiscal Deficit Interest Payment Total Receipts Total Expenditure Revenue Receipts Revenue Expenditure. Institute mandatory wage-price guidelines Both (a) and (b) above

287. Primary deficit is given by

Increase in output can cause increase in investment. Increase in investment can cause increase in output.

20 04

290. Which of the following statements is true? a. b. c. d. e. Installing a progressive income tax would have no effect on the Keynesian multiplier. The open economy investment multiplier is lower than the closed economy multiplier even when net exports are not sensitive to changes in GDP. When full employment is reached, increases in money GDP are extremely difficult to achieve. To fulfill all of the characteristics of equilibrium, the C + I + G + X schedule must have a slope steeper than the slope of the 45-degree line. Taxes collected by the government can lower the economys national output, while government expenditures will tend to raise national output.

Th e

Ic

fa

Decrease in taxes can cause increase in output.

Decrease in government spending can cause decrease in output.

iU

ni

ve rs i

Increase in saving can cause increase in current output.

ty

Pr es

289. Which of the following statements is false?

s. Al

Autonomous investment is the part of investment that increases with national income.

lr

ig

A downward shift in the investment schedule has a greater multiplier effect on GDP than an equivalent downward shift in the government-expenditures schedule.

ht

re

se rv

The existence of the progressive personal income tax system increases the size of the government spending multiplier.

ed

Fiscal policy, if properly administered, would eliminate the need for monetary policy.

.IS

BN

An equal increase in government expenditure and taxation can result in an increase in GDP, other things being equal.

:8

1-

288. Which of the following statements is true?

31

4-

02

27

-4

ef .N

o.

M AC

W
55

04

20

04

04

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? a. b. c. The equilibrium income remains unchanged. The equilibrium income increases by the amount of increase in government expenditure. The equilibrium income will increase by the amount of increase in government expenditure if marginal propensity to consume is greater than the investment- income ratio in the investment function. The equilibrium income will increase by the amount of increase in government expenditure if marginal propensity to import is equal to the investment-income ratio in the investment function. The equilibrium income will increase by the amount of increase in government expenditure if marginal propensity to consume is equal to the investment-income ratio in the investment function.

d.

e.

c. d. e. a. b. c. d. e.

Equilibrium income will decrease but interest rate will increase. Equilibrium income will remain unchanged but interest rate will increase. Increases the supply of loanable funds Has no impact on interest rates

293. Government borrowing to finance large deficits increases the demand for loanable funds and

c. d. e.

Increase in forex reserves.

Th e

20 04

295. Automatic stabilizers refer to a. b. c. d. e. 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 The invisible hand mechanisms which automatically bring the economy out of a recession Government revenue and expenditure items that change automatically in response to changes in economic activity Discretionary monetary policy maneuvers designed to keep inflation under control automatically None of the above.

56

Ic

fa

Increase in Government revenue.

Decrease in Government liability.

iU

ni

b.

Increase in the other liabilities of the Government .

ve rs i

a.

Increase in Government market borrowings.

ty

Pr es

294. If Mr. X buys a National Small Savings Certificate, which of the following is likely to happen?

s. Al

Makes it easier for businesses to borrow money.

lr

ig

Puts upward pressure on interest rates

ht

re

se rv

Exerts downward pressure on interest rates

ed

.IS

BN

:8

1-

31

Equilibrium income will increase but interest rate will remain unchanged.

4-

02

27

b.

Equilibrium income and interest rate will decrease.

-4

a.

Equilibrium income and interest rate will increase.

ef .N

292. Given the supply of money, if the government reduces the tax rate which of the following is true?

o.

M AC

04

20

04

04

Part I

296. Which of the following policy measures is/are fiscal policy measure(s)? a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. c. d. e. a. b. c. d. e. The government cuts taxes or raises spending to get the economy out of a recession. The central bank changes the money supply to affect the price level, interest rates and exchange rates. The government restricts imports and stimulates exports . Both (a) and (b) above. Both (a) and (c) above. Money supply in the economy will increase. Interest rate will increase. Primary deficit will increase. Public debt will increase. Revenue deficit will decrease. Rising Falling Constant Falling if there are tax cuts

297. Which of the following is true if the Government monetizes part of its deficit?

298. If a Government is running surplus in its budget, we can expect that public debt will be

Value added tax system Regressive tax system.

Fiscal deficit minus Primary deficit

Th e

b.

20 04

302. Under which of the following tax system, more tax is imposed on the lower income groups? Progressive. Regressive. Proportional. Customs. Value Added Tax. 57

Ic

fa

301. In the Union Budget, profits from public sector undertakings are taken under Revenue receipts Capital receipts Monetized receipts Planned expenditure Fiscal deficit.

iU

ni

RBIs credit to the commercial banks.

ve rs i

ty

Increase in the net RBI credit to the Central Government

Pr es

Borrowings and other liabilities of the Central Government

s. Al

Fiscal deficit minus interest payments

lr

ig

300. Monetized deficit refers to

ht

re

se rv

Indirect tax system

ed

.IS

Progressive tax system

BN

Proportional tax system

:8

299. Personal taxes in India best illustrates a

1-

31

Falling if the government uses the surplus to repay its past debts.

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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. b. c. d. e. Automatic Stabilizers Lagging indicators National income aggregates Real factors Growth variables.

304. Which of the following is true if the Central Bank reduces the Reserve Ratio? a. b. c. d. e. Money supply and loans given by commercial banks will decrease.

Money supply and loans given by commercial banks will increase.

d. e. a. b. c. d. e.

Margins on security loans Moral suasion.

Cause interest rates to fall in the short run

Th e

b. c. d. e. a. b. c. d. e.

20 04

308. In an inflationary period, the appropriate policy for the RBI would be to Sell government securities in the open market Encourage commercial banks to increase their loans Reduce Cash Reserve Ratio Reduce bank rate Extend credit to government.

58

Ic

a.

fa

Increase interest rates, the money supply, and national income

Increase interest rates and the money supply, but decrease national income Increase interest rates, but decrease the money supply and national income Decrease interest rates, but increase the money supply and national income Decrease interest rates, the money supply, and national income.

iU

307. Open-market purchases of government bonds by Reserve Bank of India will have the tendency to

ni

ve rs i

Cause a dramatic upturn in both public and private investment.

ty

Pr es

Cause many commercial banks to close their doors

s. Al

Cause aggregate demand to fall

lr

ig

ht

Cause government spending to fall automatically

re

306. Loose monetary policy coupled with a contraction of aggregate supply should

se rv

ed

.IS

BN

c.

Terms of consumer credit

:8

1-

b.

Open-market operations

31

a.

Reserve requirements

4-

02

305. A reduction in commercial bank reserves due to weekly increases in currency in circulation is

27

-4

Money supply will remain unaffected while the loans given by the commercial banks will decrease.

ef .N

Money supply will increase while loans given by commercial banks will decrease.

o.

M AC

Money supply will decrease while loans given by commercial banks will increase.

04

20

04

04

Modern Macroeconomics: Monetary Policy and Interest Rate Structure

Part I

309. Which of the following is not a contractionary policy? a. b. c. d. Increasing the bank rate. Increasing the CRR. Increasing the refinance limits. Buying of government securities in the open market.

d. e. a. b. c.

Only (i), (ii) and (v) above.

Commercial banks.

Th e

20 04

d. e.

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. b. c. d. e. Increase CRR. Decrease CRR. Decrease discount rate. Buy government securities . None of the above.

Ic

fa

Recognized exporter.

Development financial institution. Both (b) and (c) above. All the three categories mentioned in (a), (b) and (c) are permitted in the forex markets.

iU

ni

313. Which of the following categories is not permitted to trade in the forex market?

ve rs i

Only (i), (ii), (iii) and (iv) above.

ty

Pr es

c.

Only (i), (ii) and (iv) above.

s. Al

b.

Only (i), (ii) and (iii) above.

lr

ig

ht

312. Which of the following policies consists of trade policy? i. Export policy. ii. Import policy. iii. Technological policy. iv. Industrial policy. v. Licensing policy. a. Both (i) and (ii) above.

re

se rv

ed

.IS

BN

:8

1-

31

Trade and Exchange Rate Policies

4-

02

e. None of the above. 310. If RBI wants to sterilize an inflow of foreign exchange, it should a. Lower the bank rate b. Lower the CRR c. Sell government securities in the open market d. Increase the repo rate e. Buy government securities in the open market. 311. If gross domestic capital formation is 3500 and gross domestic savings are 3300, there is a. An inflow of foreign savings of 200 b. An outflow of domestic savings of 200 c. A current account surplus of 200 d. A current account deficit of 200 e. Both (a) and (d) above.

27

-4

ef .N

o.

M AC

04
59

20

04

04

Macroeconomics

315. An expansionary fiscal policy combined with a liberal monetary policy results in i. ii. iii. iv. v. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. A lower level of output. A higher level of output. A lower interest rate. A higher interest rate. A lower or higher interest rate depending on the relative magnitude of fiscal and monetary policies. (i) and (iii) above (i) and (iv) above (ii) and (iii) above (ii) and (v) above (I) and (v) above.

The banking system can no longer affect the supply of money in the economy. The lending capacity of banks would narrow down to zero .

Open market operations (OMO).

Total output falls.

a.

Th e

b. c.

20 04

d. e. a. b. c. d. e.

320. Bank rate means The rate of interest on inter-bank loans The rate of interest charged by banks on borrowers The rate of interest paid by banks to depositors The rate of interest charged by banks for loans given to the central bank of the country The rate of interest charged by the central bank of a country on its loans to other commercial banks.

60

Ic

fa

Recognition lag Administrative lag Outside lag Inside lag Intermediate lag.

iU

319. The time between the interest rate changes and the corresponding changes in the spending decisions of the public forms a part of

ni

ve rs i

ty

Aggregate demand decreases.

Pr es

Interest rates will increase.

s. Al

Rate of inflation increases.

lr

ig

Aggregate supply decreases.

ht

318. Which of the following happens when the central bank increases open market purchases?

re

se rv

Taxes.

ed

.IS

Repo rate.

BN

Bank rate.

:8

Cash reserve ratio (CRR).

1-

31

317. Which of the following policy instruments has the least outside lag?

4-

02

Money supply in the economy will be equivalent to the high-powered money.

27

A rupee deposited in a bank reduces the money supply in the economy by one rupee.

-4

ef .N

The banking sector can create unlimited money supply.

o.

M AC

316. Which of the following is true if the central bank does not impose any reserve ratio?

04

20

04

04

Part I

321. What would be the sequence of events when RBI increases money supply by reducing CRR? i. ii. iii. iv. a. b. c. d. e. Interest rates fall. Increase in investment expenditure. Portfolio disequilibrium. Increase in price of financial assets. (i), (ii), (iii), (iv). (iii), (iv), (i), (ii). (ii), (iii), (iv), (i). (iii), (iv), (ii), (i).

b. c. d. e.

Buying government securities from banks Increasing cash reserve ratio Increasing tax rates Increasing government spending.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

e.

Improvement in productivity of labor.

se rv

d.

Inadequate delegation of powers.

ed

.IS

c.

Existing capital is less productive.

BN

b.

Complicated production procedures.

:8

a.

Low managerial efficiency.

1-

31

323. Which of the following can lead to decrease in Incremental Capital Output Ratio (ICOR)?

4-

02

Economic Growth, Development & Planning

27

-4

ef .N

o.

M AC

a.

Decreasing discount rate

W
61

322. If an economy is already under inflation, and there is increasing inflow of foreign exchange, the central bank can sterilize the impact by

04

20

04

04

(iv), (iii), (ii), (i).

Part I: Answers (with Explanatory Notes)


Macroeconomic Analysis: An Overview
1. (e) The variable that is measured over as period of time is a flow variable and the variable which is measured at a point of time is a stock variable. While GDP and exports are measured over a period, usually one year, CPI and money supply are measured at a specific point of time. Hence, CPI and money supply fall under stock variables. 2. (a) While the consumption function explains how the income is spent on consumption, the saving function describes what part of income is saved. 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). 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.

6. (e) GDP = GNP Net factor income = [Consumption + Investment + Government Expenditure + Net exports] Net factor income . 7. (a) Per capita growth = [(1 + g)/(1 + p)] 1 where g is the growth rate of GDP per annum and p is the growth rate of population per annum. 8. (e) 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. It shows how the prices of resources, goods and assets are determined and how production and household sectors interact through the markets. 9. (b) Stocks and flows variables are very essential in studying macroeconomics. (a) Is not the answer because a stock variable is measured at a specified point of time where as a flow variable is measured for a specified period of time. Both the stock and flow variables have time dimensions. This is a true statement. (b) Is the answer because flow variables are not always determined by stock variables. Although a stock can change only as a result of flows, the flows themselves may be determined in part by changes in stocks. (c) Is not the answer because, stocks variables are usually affected by flow variables. (d) Is not the answer because some macroeconomic variables have a direct counter-part stock macroeconomic variables. Flow variables like, exports, wages, taxes, etc. May not have direct counterparts, and they could indirectly affect other stocks. (e) Is not the answer because flow variables are partly determined by stock variables. 10. (c) Circular flow of income refers to money flow from households in return for goods and services produced by firms and money passes from firms to households in return for factor services provided by households. If any part of the income is not spent with in the flow and hence it represents leakages from the flow. a. Since Mr. Ramesh is spending his money on consumption of goods, which would lead to flow of income from households to the firms and hence no leakage from the system. b. In the process of buying second hand refrigerator income is transferred from Mr. Babu to Mr. Rajesh which represents consumption expenditure and hence income remains in the system. c. As Mr. Harsha imported a new Ferrari car, part of the income has gone out the flow in order to pay for commodity which is not produced within the country. Money spent on Ferrari becomes part of circular flow of exporting country and a leakage for the importing country. Hence the answer is option c. d. Salary paid represents flow of income from Mr. Sujit to his personal secretary. e. Since (a) is not true, therefore e cannot be the answer. 62

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

5. (e) Gross domestic capital formation consists of addition to the inventories, addition to fixed assets, and depreciation.

o.

M AC

04

20

04

04

Part I

11.

(d) Economic developement is defined as a process of economic transition involving the Structural transformation of an economy through industrialization. Economic development leads to improvement in Standard of living of the people. a. National Income deflator is the ratio of current price of National Income to constant price of National Income. It is only a price index, cannot be used to measure economic development. 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. 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. 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.

b.

d.

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.

20 04

Th e

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.

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

s. Al

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.

lr

ig

ht

re

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).

se rv

ed

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.

.IS

BN

:8

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.

1-

31

4-

02

Measurement of Macroeconomic Aggregates

27

-4

e.

GDP deflator is an indicator of price index, on the basis of reason (a), it is not an indicator of economic development.

ef .N

o.

M AC

04

20

04
63

04

c.

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. 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. Thus, net factor income from abroad = NNPMP NDPMP. 27. (b) Balance of trade = Total merchandize exports Total merchandize imports. Personal income Personal taxes = Disposable personal income.

34. (d) Macroeconomics is concerned with the overall performance of the economy. It deals with overall employment, price stability and growth of the economy. 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.

20 04

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).

Th e

40. (d) In a three-sector model, Y = C + I + G = C + S + T. 41. (a) NNP at factor cost = National income = NNP at market prices Indirect taxes + Subsidies 42. (b) Personal income is the total income received by individuals that is available for consumptions, saving and payment of personal taxes. Personal income does not include undistributed corporate profits, as it remains with the enterprise and not distributed to employees or shareholders. 43. (d) Nominal GDP is the measure of total value of goods and services produced during the year at current market prices. 64

Ic

fa

38. (b) Expenditures on consumer goods are not included in gross investment.

GNP = C + I + G + E M.

iU

ni

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.

ve rs i

ty

Pr es

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.

s. Al

lr

ig

ht

re

se rv

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.

ed

.IS

BN

32. (c) GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.

:8

31. (b) Net exports = Total exports Total imports.

1-

31

30. (b) Net national savings + Retained earnings of foreign companies = Net domestic savings.

4-

02

Where, Yd = Total income Taxes.

27

29. (c) Personal income = Personal disposable income (Yd) + Personal income taxes

-4

ef .N

28. (d) National income + Transfer payments + Net interest and dividend = Personal income

o.

M AC

04

26. (a) NNPMP = NDPMP + Net factor income from abroad.

20

04

04

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. 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.

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.

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.

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
65

04

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) (c) Is the answer because GNP deflator is the ratio of Nominal GNP to Real GNP. Is not the answer because GNP deflator is not the ratio of Nominal GNP to Real GDP. (b) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GNP. (d) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GDP.

(b) (c)

(c)

Th e

(e)

20 04

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

Ic

(d) Is not the answer because both Whole Sale Price Index (WPI) and GDP deflator are not used in measuring inflation.

fa

Is not the answer because both GDP deflator and Consumer Price Index. (CPI) are not used in measuring inflation.

iU

ni

Is not the answer because in practice it is difficult to include each and every item for construction of Consumer Price Index. (CPI)

ve rs i

ty

(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.

Pr es

s. Al

lr

ig

ht

(a)

Is the answer because Whole Sale Price Index (WPI) is widely used for determine of inflation in India.

re

se rv

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.

ed

.IS

BN

:8

1-

(e)

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.

31

4-

(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.

02

27

-4

Is not the answer because funding of a clinic to provide free vaccinations is not an examples of government transfer payments.

ef .N

o.

Is not the answer because purchasing of a new car for the Ministry of Finance is not an examples of government transfer payments.

M AC

(a)

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.

04

20

56. (d) Transfer payments are not considered as payment for current services or production. These items are not entered in national income.

04

04

Part I

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.

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
67

04

Macroeconomics

The Simple Keynesian Model of Income Determination


63. (d) The multiplier is used more generally in Economics to mean the effect on some endogenous variable of a unit change in an exogenous variable. The expenditure multiplier relates the change in income to the change in autonomous spending. 64. (d) In the equation, consumption, C = 12 + 0.6 Y, 12 represents the autonomous investment expenditure and 0.6 shows the marginal propensity to consume (MPC). If the marginal propensity to consume (MPC) is 0.6, then the marginal propensity to save (MPS) is equal to (1 0.6) = 0.4. 65. (b) The rachet effect is the situation where households find it easier to adjust to rising incomes than falling incomes.

The stock of wealth Expectations regarding movement of prices and income Taxation policy Age composition, etc.

74. (b) When planned savings are not invested fully, part of the money saved would become ideal and therefore, the output decreases.

20 04

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). 68

Th e

Ic

fa

iU

ni

73. (c) In a two-sector economy, planned savings are equal to planned investments at the equilibrium level of income.

ve rs i

ty

72. (d) C = f(Yd, W) here Yd and W are independent variables explaining C.

Pr es

71. (b) A change in an exogenous variable is categorized as an autonomous change because it is determined by forces outside the economic model.

s. Al

lr

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.

ig

ht

re

se rv

ed

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.

.IS

BN

:8

1-

68. (c) The Average propensity to consume can never exceed unity.

31

4-

67. (c) The slope of the consumption function represents the Marginal Propensity to Consume (MPC).

02

27

-4

ef .N

o.

M AC

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:

04

20

04

04

Part I

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.

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
69

04

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) 94. (e) (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. 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 Is the answer because precautionary demand for money is inversely related to rate of interest and frequency with which income is received.

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.

20 04

Income Determination Model Including Money and Interest


97. (a) The IS curve explains the combination of interest rates and levels of output at which planned spending equals income. 98. (e) The IS curve explains the combination of interest rates and levels of output at which planned spending equals income. Thus, any factor other than interest rates shifts the IS upwards or downwards. An increase or decrease in interest rates at an income level is only a movement along the IS curve.

70

Th e

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.

Ic

fa

iU

ni

ve rs i

Statement (ii) is true because multiplier is reciprocal of MPS and MPS is smaller as said above.

ty

Pr es

Statement (i) is false because as MPC is larger, MPS will be smaller as it is nothing but 1-MPC.

s. Al

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.

lr

ig

ht

re

se rv

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.

ed

.IS

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.

BN

:8

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.

1-

31

4-

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.

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part I

99. (e) IS curve equation can be written as i= A/ Y/. 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.

20 04

107.

108. 109.

110.

Th e

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.

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

106. (d)

lr

ig

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.

ht

re

se rv

104. (b) The basic difference between IS and LM curve is that IS curve explains goods market and LM curve explains money market.

ed

.IS

BN

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.

:8

1-

31

From the graph it is clear that equilibrium in the goods market will be at a higher point than the existing income.

4-

02

27

-4

ef .N

o.

M AC

W
71

04

102. (a)

20

04

04

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. 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).

20 04

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.

72

Th e

Ic

fa

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.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

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.

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part I

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. 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.

20 04

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.

Th e

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.

Ic

fa

iU

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.

ni

ve rs i

ty

Pr es

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.

s. Al

lr

ig

ht

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.

re

se rv

128. (c) The level of autonomous spending is A = C + TR + I + G. Thus, an increase in government purchases or transfer payments will shift the IS curve out and to the right.

ed

.IS

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.

BN

:8

1-

31

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.

4-

02

27

-4

ef .N

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.

o.

M AC

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.

04

20

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.

04
73

04

Macroeconomics

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. 74

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

Part I

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.

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
75

04

Macroeconomics

Fundamentals of Aggregate Demand and Aggregate Supply


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.

20 04

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).

76

Th e

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.

Ic

fa

iU

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.

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

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. 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.

167. (a)

Th e

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.

20 04

(a)

(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. 77

Ic

fa

Is the answer because aggregate supply curve is positively sloped in the short run and vertical in the long run.

iU

ni

ve rs i

ty

Pr es

s. Al

166. (d) When government spending is used as a policy instrument in order to achieve full employment, it is called internal balance.

lr

ig

ht

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.

re

se rv

164. (c) When the depreciation is greater than the net investment, it will lead to the decline of an economys capital stock.

ed

.IS

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.

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

163. (d)

04

162. (c) Decline in the nominal money supply growth reduces the inflation rate and the level of output in the short run.

20

04

04

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. ii. iii. iv. v. a. A change in income Rate of interest Government policy A change in exchange rate and Transfer payments 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. c. d.

Since there is lower demand, prices will decline.

Th e

20 04

c.

d. e.

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. 78

Ic

b.

fa

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. At natural rate the aggregate supply is vertical as it is insensitive to price hence true.

True, input costs play a greater role in the determination of equilibrium output. Since price does not have any impact of output in long run, unanticipated price also has no role. Hence this option is not true.

iU

ni

a.

True, because long equilibrium is characterized by tendency towards natural rate of output

ve rs i

170. (e) In long run the economy will tend towards output which is referred to as natural rate of output.

ty

Pr es

There is excess supply in the economy i.e. there is unsold stock which leads to increase in inventories. Hence true.

s. Al

lr

Since there is excess supply, there is no possibility of providing new employment. At full employment aggregate supply is equal to aggregate demand.

ig

ht

re

se rv

ed

.IS

a.

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.

BN

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.

:8

1-

31

4-

02

27

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.

-4

ef .N

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.

o.

M AC

c.

A decline in government expenditure leads to decrease in aggregate demand as less money is available for various government activities and hence demands fewer goods.

04

20

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.

04

04

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.

Money Supply and Banking System

M4 = M3 + Total post office deposits.

20 04

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.

Th e

Ic

183. (e) Money multiplier = (1 + Cu)/(Cu + r). Thus, if currency deposit increases the multiplier decreases less than proportionately to the increase.

fa

iU

ni

182. (a) The RBI money together with government money constitutes the monetary base which is known as high powered money.

ve rs i

ty

181. (d) Money supply, Ms = (1 + Cu)/(Cu + r) x H.

Pr es

180. (b) Both the statements are wrong, so the answer is b.

s. Al

179. (c) This transaction does not make any change in money supply because it is already in circulation.

lr

ig

ht

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.

re

se rv

ed

Ceteris paribus, a reduction in reserve ratio therefore increases the DD component in the money supply.

.IS

BN

Or, r = Reserve ratio = R/(DD + TD)

:8

Reserves (R) = (DD + TD) r

1-

31

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]

4-

02

27

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.

-4

ef .N

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.

o.

M AC

174. (d) M3 = M1 + Time deposits with the banking system.

W
79

As both Cu and H are constant, an increase in reserve ratio decreases money supply, but at a lesser proportion.

04

20

04

173. (e) Money supply = [(1 + Cu)/(Cu + r)] x H

04

172. (c) The currency with the public is equal to the notes and coins in circulation and demand deposits with banks.

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. 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)

20 04

80

Th e

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.

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

Part I

20 04

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. c. d. e. True, as in short run over production and unemployment are possible. Disequilibrium occurs because of mismatch between demand and supply, hence true. True, in the short run there can be excess production and unemployment. False, in long run price, wages adjust freely and bring about equilibrium. True flexible hence price and wages are not rigid. 81

Th e

Ic

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.

fa

iU

ni

ve rs i

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).

ty

Pr es

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.

s. Al

lr

Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model

ig

ht

re

se rv

(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.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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.

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.

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. 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.

20 04

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

Th e

216. (b) Since nominal wages are assumed flexible upwards the aggregate supply curve will be perfectly price inelastic at the full employment level.

Ic

fa

iU

215. (e) Investors prefer holding money in bonds when they expect an increase in interest rate and capital loss from a bond.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

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.

.IS

BN

210. (e) In Keynesian system, equilibrium takes place at a less than full employment level of output.

:8

1-

31

209. (c) Says law states that supply of goods creates its own demand.

4-

02

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.

27

-4

ef .N

o.

M AC

206. (d) Contrast to classical model, where wage rate is flexible, in the Keynesian model, workers oppose to any decrease in their money wages.

Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Keynesian Model

04

20

04

(e)

Is not the answer because (a), (b) and (c) above cannot be the answer.

04

(d) Is not the answer because both (a) and (b) above cannot be the answer.

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) (c) Is not the answer because there will not be a positive fixed investment in the economy. Is the answer because there will be positive inventory investment in the economy.

(b) Is not the answer because there will not be a negative fixed investment in the economy. (d) Is not the answer because there will not be negative inventory investment in the economy.

(a)

224. (a)

20 04

Th e

(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.

Ic

fa

(a)

Is the answer because unemployment in the Keynesian model is caused by demand deficiency.

iU

ni

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.

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

(e)

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.

ed

.IS

(d) Is not the answer because Keynes argues that an economy facing recession, budget deficit is an important tool to overcome recession.

BN

:8

1-

31

(c)

Is not the answer because Keynes argues that State intervention is essential as full employment is not possible in an economy.

4-

02

(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.

27

-4

ef .N

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.

o.

M AC

223. (e)

W
83

04

20

(e)

Is not the answer because there will be change in the inventory investment in the economy.

04

04

Macroeconomics

Post-Keynesian Macroeconomics Monetarism, Rational Expectations and Supply-side Economics


225. (c) According to monetarists, 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. It is based upon the monetarist formulations of the demand for money function and the transmission mechanism. Monetarists argue that the demand for money is no longer a function solely of the interest rate and income, but that the rate of return on a much wider spectrum of physical and financial assets will influence an individuals demand for money. 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.

i. ii.

Econometric models are not very useful in evaluating alternative economic policies.

228. (a) Discretionary monetary and fiscal policy cannot be used to stabilize the economy. 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) Supply side economics advocates to reduce government controls, to promote competition, to restrict the power of trade unions and to remove institutional barriers. Supply side economics does not recommend to increasing corporate tax rate.

230. (d)

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)

20 04

84

Th e

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).

Ic

fa

iU

(a)

ni

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.

ve rs i

ty

Pr es

s. Al

lr

(e)

Is the answer because supply side economics does not recommend increasing corporate tax rate to improve market efficiency.

ig

ht

(d) Is not the answer because supply side economics recommend removing institutional barriers to improve market efficiency.

re

se rv

ed

(c)

Is not the answer because supply side economics recommend restricting the power of trade unions to improve market efficiency.

.IS

(b) Is not the answer because supply side economics recommend promoting competition to improve market efficiency.

BN

:8

1-

(a)

Is not the answer because supply side economics recommend reducing government controls to improve market efficiency.

31

4-

02

27

-4

ef .N

o.

M AC

There is no trade-off between inflation and unemployment.

04

20

227. (e) The hypothesis of rational expectations has three important implications for macroeconomic analysis and policy.

04

04

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. e. 233. (b) a. Above reasons shows that option a is true. Not true, as this is also a Keynesian proposition . Not true, as it is Keynesian economics which says so and hence demand for money is determined by interest rate. Crowding out is one of the important reasons for ineffectiveness of fiscal policy and hence true. Since, (a) and (d) are true, this is the correct option.

20 04

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

Th e

Economic Fluctuations, Unemployment and Inflation

Ic

fa

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.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

Since (c) and (d) are not correct options, (e) cannot be the answer.

ed

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.

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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). 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.

20 04

Th e

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) It is a true statement that inflation creates inefficiency in the economy because people spent lot of time to find a reasonable price.

86

Ic

fa

(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.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

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.

ig

ht

re

se rv

ed

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)

.IS

BN

:8

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.

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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) Is the answer because all the above statements are correct. 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

(b) Is not the answer because in the case of hyperinflation, price rise is very large and accelerating.

(e) 255. (c)

c.

20 04

257. (b) a. Zero unemployment refers to situation where there is no unemployment

Th e

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).

Ic

fa

256. (a) Stagflation refers to a situation where there is high unemployment and high inflation occurs simultaneously.

iU

ni

ve rs i

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.

ty

Pr es

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.

s. Al

By definition, a business cycle is a swing in total national output, income and employment market by contraction or expansion in many sectors of the economy changes in real GNP brings changes in prices, employment. Hence only the basis of changes in real GDP different phases are classified. Hence real GDP is the correct option.

lr

ig

ht

re

se rv

ed

.IS

BN

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.

:8

1-

31

4-

a.

Mere existence of unemployment cannot be taken as an indicator of recession or depression, as in a country like India, even though the economy is growing these is unemployment. Hence not true.

02

27

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.

-4

ef .N

o.

Is the answer because there is a stagnation combined with inflation prevails in the economy in the period of stagflation.

M AC

(d) Is not the answer because there is a contraction of economic activities in the depression period.

04

20

04
87

(c)

Is not the answer because recession is characterized by the downturn in economic activities in an economy.

04

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. 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. Supply of labor depends on population and has no relation with full employment. Hence the option is not correct. Since (c) and (d) are not correct options, this is not true option. Frictional unemployment occurs when constant changes in the labour market lead to unemployment. It occurs on account of imperfect information. Hence not correct option.

c. d. e. 258. (c) a. b. c.

d. e. 260. (a) a.

20 04

Th e

b.

c.

d.

e.

88

Ic

fa

Recessionary GDP gap signifies higher potential real GDP compared to realized real GDP.

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. 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. 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. Since (b) and (d) are not correct, this is not correct option.

iU

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.

ni

ve rs i

Right ward shift in the supply curve occurs when there is a decrease in prices and hence not the correct option.

ty

Pr es

s. Al

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.

lr

ig

ht

b.

When the productivity of labour increase it leads to lowering the cost of production per unit and hence the prices will decrease.

re

se rv

a.

Decrease in wages leads to decrease in cost of production and hence prices will reduce if the producer passes on to the consumer.

ed

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.

.IS

BN

:8

1-

31

4-

e.

Sectoral unemployment refers to unemployment that exists in any particular sector, for example agricultural sector. Hence not correct option.

02

27

-4

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.

ef .N

Disguised unemployment occurs due to excess labour force depending on agriculture sector. Some laborers are employed, but their contribution to production is zero. Hence the correct option.

o.

M AC

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.

04

20

04

04

Part I

The Open Economy and Balance of Payments: Indias Balance of Payments


261. (b) The trade balance is the difference between merchandize exports and imports. 262. (d) The balance of payments always balances, therefore all entries in the BoP should sum to zero. 263. (a) The current account records all transactions in merchandize and invisibles of the country with the rest of the world. 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. 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.

a. b. c. d.

Th e

Is not the answer because all entries in the balance of payments statement is not collectively sum to Foreign exchange reserves of the country Is the answer because all entries in the balance of payments statement is collectively sum to zero.

20 04

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. b. Is not the answer. Foreign Direct Investment increase the liability of a country, hence falls under Capital Account. Is not the answer. Portfolio Investments increase the liability of a country, hence falls under Capital Account.

Ic

fa

Is not the answer because all entries in the balance of payments statement is not collectively sum to Exports of the country.

iU

Is not the answer because all entries in the balance of payments statement is not collectively sum to GNP of the country

ni

ve rs i

Is not the answer because all entries in the balance of payments statement is not collectively sum to GDP of the country.

ty

Pr es

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.

s. Al

lr

ig

ht

re

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.

se rv

ed

.IS

BN

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.

:8

1-

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.

31

4-

02

269. (c) BoP is in deficit when both current account and capital account balances are in deficit.

27

-4

268. (d) Transfer of assets or goods to a country without any consideration or return are called international transfers.

ef .N

267. (a) The items included under the invisibles of the current account are investment income, travel, transportation, insurance, and other miscellaneous items.

o.

M AC

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.

04

20

04
89

04

Macroeconomics

c. d. e

Is not the answer. External Commercial Borrowings increase the liability of a country, hence falls under Capital Account. Is the answer. Dividends on portfolio investments are an income earned by a factor of production (capital). This is included in Income under Invisibles in Current Account. Is not the answer. External Assistance increases the liability of a country, hence falls under Capital Account.

Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt

a. b. c.

interest payments defense expenditure subsidies.

284. (e) Self-explanatory.

288. (a) Y = C + I + G + X

20 04

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

Th e

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.

Ic

fa

287. (c) Primary deficit = Fiscal deficit Interest payment. Y = a + b(Yd) + I + G + X

iU

ni

286. (b) Mandatory wage price guidelines maintain the full employment and keep the inflation under control.

ve rs i

ty

285. (e) Gross fiscal deficit is computed by deducting total receipts excluding government borrowings from the total expenditure.

Pr es

s. Al

lr

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.

ig

ht

re

se rv

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.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

278. (e) The major components of non-plan expenditure are:

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.

04

20

04

04

276. (a) The tax and expenditure policies together constitute the fiscal policy of the government. Customs duty is an instrument of fiscal policy.

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.

(d) Is not the answer because automatic stabilizer is a discretionary fiscal policy. Fiscal policy refers to policies dealing with taxes and government expenditure including transfer payments.

Th e

(a)

20 04

(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. Is not the answer because both (a) and (c) cannot be the answer.

(d) Is not the answer because both (a) and (b) cannot be the answer. (e)

Ic

fa

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.

iU

296. (a)

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

(c)

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.

se rv

(b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms, which automatically bring the economy out of a recession.

ed

.IS

BN

(a)

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.

:8

1-

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.

31

4-

02

27

-4

ef .N

295. (c)

o.

M AC

(e)

Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not decrease government liability.

(d) Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase government revenue.

04

20

04
91

(c)

Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase in forex reserves.

04

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.

(b) Is not the answer because when there is an excess money supply, interest rate will decline.

(e)

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.

20 04

(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.

Ic

fa

iU

(a)

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.

ni

ve rs i

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.

ty

Pr es

299. (b)

s. Al

lr

ig

(e)

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.

ht

(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.

re

se rv

ed

(c)

Is not the answer because if a government is running surplus in its budget, public debt may not be constant.

.IS

BN

(b) Is not the answer because if a government is running surplus in its budget, public debt may not be falling.

:8

1-

31

(a)

Is not the answer because if a government is running surplus in its budget, public debt may not be rising.

4-

02

If a government has a surplus budget, and the government repays its past debts using its surplus budget, public debt will be falling.

27

-4

298. (e)

ef .N

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.

o.

M AC

(d) Is not the answer because when the government monetizes part of its deficit, public debt will decrease.

04

20

04

(c)

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

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.

b.

d.

20 04

Modern Macroeconomics: Monetary Policy and Interest Rate Structure


304. (c) A reduction in the reserve ratio by the Central Bank enables the commercial banks to lend more money, which lead to an increase in money supply in the economy.

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.

Th e

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.

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

a.

:8

1-

302. (b)

31

4-

02

e.

Fiscal deficit measures the overall borrowings required to finance government expenditure. Hence profits are taken as part of fiscal deficit.

27

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.

-4

ef .N

c.

Monetized receipts.

o.

M AC

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.

04

20

04
93

a.

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.

04

Macroeconomics

Trade and Exchange Rate Policies

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.

20 04

94

Th e

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

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.

ef .N

o.

M AC

GDCF = GDS + Deficit on Current a/c Current a/c deficit = 3,500 3,000 = 200 Alternatively, GDCF = GDS + Foreign savings (in the form of foreign investment). Therefore, foreign savings inflow is equal to 200.

04

20

04

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

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.

Cu = Currency-deposit ratio r = Cash reserve ratio.

Th e

20 04

d. e. a. b. c.

319. (c) The lags that are given below basically refers to lags in the monetary policy Recognition lag refers to the time gap between the requirement of an action and its actual initiation. Hence not the correct option. Administrative lag refers to the time gap between recognition lag and the implementation of monetary policy. Hence not the correct option. 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

Ic

c.

The increase in money supply leads to a downward pressure on interest rate and the interest rates will in fact decrease. 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. Output increases as explained in option (a).

fa

iU

ni

ve rs i

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.

ty

Pr es

a.

The increase in the monetary base leads to more credit creation and hence leads to increase in output that is aggregate supply.

s. Al

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.

lr

ig

ht

re

(e)

Is not the answer because open market operation has not the least outside lag.

se rv

(d) Is the answer because tax has the least outside lag.

ed

.IS

(c)

Is not the answer because repo rate has not the least outside lag.

BN

(b) Is not the answer because bank rate has not the least outside lag.

:8

1-

(a)

Is not the answer because cash reserve ratio has not the least outside lag.

31

4-

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.

02

27

-4

ef .N

o.

Where, H = Monetary Liabilities of Central Bank + Government Money.

M AC

Money supply = H (1+ Cu / Cu + r)

04

(e)

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.

20

(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.

04

04

Macroeconomics

d. e.

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. 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.

b. c. d. e.

The correct sequence is given by option (b). 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.

Th e

20 04

b.

c.

d. e.

96

Ic

fa

a.

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.

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. 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. Not a correct answer it is a fiscal instrument. Increasing government spending is also a fiscal policy instruments.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

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.

ig

ht

re

se rv

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.

ed

.IS

BN

:8

1-

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.

31

4-

02

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

27

-4

Is not the answer because bank rate does not mean the rate of interest paid by banks to depositors

ef .N

o.

Is not the answer because bank rate does not mean the rate of interest charged by banks on borrowers

M AC

a.

Is not the answer because bank rate does not mean the rate of interest on inter-bank loans

04

20

Hence by definition option (e) is correct.

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

Part I

Economic Growth Development and Planning


323. (e) a. 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.

e.

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.

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.

M AC

04

d.

20

04
97

04

c.

Part II: Problems


Measurement of Macroeconomic Aggregates
1. The following information is provided. Item Pulses Rice Cotton Electricity a. b. c. d. e. 2. Item Rice Wheat Milk Cotton cloth Housing Quantity 1991-92 20 kg 10 kg 40 ltrs 15 mtr Single bedroom flat 130.7 134.5 133.5 132.25 132.9. Qty (Qio) 1985-86 10 kg 20 kg 10 mtr 100 unit Price (Pio) 1985-86 Rs.7.5/kg Rs.5/kg Rs.15/mtr Rs.0.50/unit Price (Pit) 1995-96 9.0/kg 7/kg 20/mtr 0.75/unit

3.

4.

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

fa

iU

Year Nominal GNP (Core) 2001-02 2,500 2002-03 3,200

ty

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.

Pr es

s. Al

lr

ig

ht

ni

ve rs i

re

se rv

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?

GNP Deflator 120 145

ed

.IS

BN

Price 1991-92 Rs.10/kg Rs.8/kg Rs.6/ltr Rs.20/mtr Rs.400

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

The value of the Laspeyers consumer, price index is

04

04

Part-II

5.

6.

The growth rate of real GNP from 2001-2002 to 2002-03 is: a. 6% b. 5.9% c. 5.6% d. 5.3% e. 6.1%. The inflation rate in 2002-03 in relation to 2001-02 is: a. 19.61% b. 20.38% c. 20.83% d. 21.12% e. 19.80%. Year 2001-02 2002-03 Nominal GNP (Core) 2,500 3,200 GNP Deflator 100 159.50

9.

10. The following particulars are provided, the GDP of factor cost would be:

Th e

Factor Incomes

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

20 04

Paid to domestic residents Paid to foreign residents Retained profit Corporate profit tax Depreciation a. b. c. d. e. 135 120 125 105 110.

ht

re

Rs. (in crore) 85 15 10 5 10

se rv

ed

.IS

8.

BN

:8

1-

31

4-

02

27

-4

7.

The real GNP in 2001-02 is: a. 2,018 b. 2,106 c. 2,001 d. 2,006 e. 2,011. The real GNP for 2002-03 is: a. 2,500 b. 2,550 e. 2,450 d. 2,600 e. 2,585. The inflation rate in relation to 2001-02 is: a. 58.6% b. 59.8% c. 58.9% d. 58.10% e. 59.5%.

ef .N

o.

M AC

W
99

Based on the following information answer the questions 7 to 9.

04

20

04

04

Macroeconomics

Based on the following information answer the questions 11 to 13. Particulars GNP at market price Personal income tax Corporate tax Subsidies Factor income paid abroad Factor income received from abroad Undistributed profits Indirect taxes Depreciation 11. GDP at Factor Cost is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 4,750 4,950 4,550 4,900 4,850. Rs. 5,000 1,000 800 400 800 200 450 350 900

4,950. 3,800 3,900 2,600 4,100 4,000.

Ic

fa

14. In an economy:

iU

ni

ve rs i

ty

Pr es

s. Al

lr

Th e

20 04

GDP at FC Depreciation GNP at Market price Indirect taxes

The Net Factor Income from Abroad is: a. b. e. d. e. 100 15,000 10,000 15,000 12,500 12,000.

ig

13. The Personal Disposable Income is:

ht

80,000 4,000 95,000 5,000

(Rs.)

re

se rv

4,600

ed

4,850

.IS

4,450

BN

:8

4,500

1-

12. National Income is:

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

15. Dr. Wages & salaries Dividends Retained profits Profit tax Excise tax The GDP at Factor Cost is: a. b. c. d. e. Dr. 300 260 250 280. 290 Production Account Rs. (in crore) 200 Sales to households 40 Fixed investment 50 Net changes in inventories 10 Exports 20 Imports 320 Cr. (Rs.) in Crore 250 20 20 50 20 320

Based on the following information answer the questions 16 to 18.

ef .N

o.

M AC

re

Wages Dividends paid to residents Dividends paid abroad Retained profits Profit tax Excise tax

s. Al

Dr.

lr

ig

ht

Production Account Rs. (in crore) 250 Sales to households 40 Fixed investment 30 Net changes in inventories 40 Exports 30 Imports 10 400

27

-4

se rv

Rs. (in crore) 280 30 50 50 10 400 Cr. Rs. (in crore) 10 30 70 110

16. GDP at factor cost is: a. 360 b. 320 c. 350 d. 330 e. 390. 17. Gross National Product factor cost is: a. 420 b. 360 c. 390 d. 430 e. 300.

20 04

Th e

Ic

fa

iU

ni

ve rs i

Export of goods Factor income received from abroad

ty

Pr es

Foreign Account Rs. (in crore) 50 Imports 60 Factor income paid abroad Surplus 110

ed

.IS

BN

:8

1-

31

4-

02

W
Cr. 101

04

20

04

04

Macroeconomics

18. GNP at market price is: a. b. c. d. e. 420 410 430 390 370. Factor Incomes Factor Income paid to Domestic Residents Factor Income paid to Foreign Residents Retained Profits Corporate Profit Tax Depreciation NDP at factor cost is: a. b. c. d. e. Dr. 195 210 230 225 205. Rs. in crore 25 20 40 5

19. The following informations are provided.

Based on the following information answer the questions 20 to 21.

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

Wages Dividends paid abroad Retained Profits Profit Tax Excise Tax

se rv

Rs. (in crore) 300 48 32 50 30 20 480

.IS

Production Account

Rs. (in crore) Sales to households Fixed investment Net changes in inventories Exports Imports 250 90 60 60 20 480

20 04

20. GDP at Market Price is: a. b. c. d. e. 102 380 430 410 480 460.

Th e

Ic

Dr.

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

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

Dividends paid to residents

ht

re

ed

W
Cr.

04

20

04

04

185

Part-II

21. GNP at Market Price is: a. b. c. d. e. 508 480 390 430 460. Nominal GNP 55,000 1,35,000 Price Level 67.50 121.01

Based on the following information answer the questions 22 to 23 Year 2001 2003 a. b. c. d. e. a. b. c. d. e. 81,481 81,698 81,543 81,491 81,435. 1,12,561 1,11,561 1,12,682 1,11,674 1,11,492. 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

se rv

Based on the following information answer the questions 24 to 27. Rs. in crores 3,850 930 3,000 300 800 4,800 600 510 120 30 100 320 2,920

20 04

24. Net Indirect Taxes is: a. b. c. d. e. 465 445 450 476 480. 103

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

ed

.IS

BN

:8

1-

31

4-

02

27

23. The real GNP for the year 2003 is:

-4

ef .N

o.

M AC

04

22. The real GNP for the year 2001 is:

20

04

04

Macroeconomics

Th e

a. c.

20 04

b. d. e. a. b. c. d. e.

29. NNP is: 6,450 6,750 6,300 6,335 6,400.

104

Ic

28. The Corporate Profit is: 785 735 760 745 720.

fa

iU

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

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

Particulars

Rs. (in crore) 450 1,200 7,200 4,500 900 780 180 1,440 5,775 45 150 480 4,380

4-

02

Based on the following information answer the questions 28 to 31.

27

25. The value taxes Transfers is: a. 930 b. 980 c. 910 d. 880 e. 960. 26. Personal Income is: a. 2,920 b. 3,340 c. 3,460 d. 3,560 e. 3,970. 27. The Net Exports is: a. 45 b. 70 c. 50 d. 48 e. 60.

-4

ef .N

o.

M AC

04

20

04

04

Part-II

30. Personal Disposable Income is: a. b. c. d. e. a. b. c. d. e. 5,735 5,285 5,070 5,175 5,090. 580 570 565 550. Rs. in crore 800 3,800 4,000 3,000 4,000

31. Personal Savings is:

Direct Taxes Indirect Taxes Factor income paid abroad Factor income received from abroad Depreciation Surplus Subsidies National Income a. b. c. d. e. 22,600 22,950 22,800 22,650 22,550. GDP at Market Price is:

Based on the following information answer the questions 33 to 35.

Th e

Net factor income from abroad Depreciation Subsidies Indirect Taxes

Ic

NDP at market price

fa

iU

Particulars

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

Rs. in crore 16,939 46 900 354 2,136

20 04

33. NDP at Factor Cost is: a. b. c. d. e. 15,517 15,751 15,157 15,215 15,257. 105

.IS

BN

2,000

16,000

:8

350

1-

31

4-

02

27

-4

ef .N

o.

Particulars

M AC

32. The following informations are given.

04

20

04

04

590

Macroeconomics

Particulars

Factor income received from abroad Factor Income Paid Abroad Indirect Taxes

s. Al

lr

Subsidies

ig

ht

Personal Income Tax

re

Corporate Income Tax

se rv

GDP at market price

ed

.IS

BN

Million of Currency Units 6,000 1,200 900 475 1,500 1,200 225 900 600

Th e

a. c.

20 04

b. d. e. a. b. c. d. e.

38. National Income is: 5,725 5,475 5,600 5,275 5,550.

106

Ic

37. GNP at Market Price is: 6,300 6,000 6,450 6,200 6,600.

fa

iU

Depreciation

ni

ve rs i

ty

Undistributed Profit

Pr es

:8

Based on the following information answer the questions 37 to 39.

1-

31

34. National Income is: a. 15,111 b. 15,900 c. 16,110 d. 16,011 e. 15,985. 35. GNP at Factor Cost is: a. 16,110 b. 16,280 c. 16,115 d. 16,011 e. 16,105. 36. In an economy which has a capital output ratio of 4:1, population is expected to grow at 2.1% p.a. If the planners fix a target growth rate of 5% p.a. in per capita real GDP, would be the rate of investment (i.e., investment as percentage of GDP) required to achieve the target, (You can ignore depreciation.) a. 29% b. 28.75% c. 28.25% d. 29.5% e. 28.4%.

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

39. Personal Disposable Income is: a. b. c. d. e. 3,200 2,980 2,950 2,840 2,700.

Based on the following information answer the questions 40 to 41. The following is the information drawn from the National Income Account for an economy.

b. c. d. e.

46 67 67 76.

Th e

Corporate Income Tax Undistributed corporate profits Net Exports Dividends Rent Interest Indirect business taxes Gross private domestic investment Compensation to employees Government spending Proprietors Income

fa

Personal Consumption Spending

iU

ni

Capital Consumption Allowance

ve rs i

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

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

a.

77

.IS

41. The Net Exports for the economy is:

Ic

20 04

BN

e.

4,600.

1,000.00 12,500.00 500.00 250.00 25.00 750.00 1000.0 500.00 1,250.00 550.00 8,487.50 912.50 1,250.00

:8

d.

4,446

1-

31

c.

4,544

4-

02

b.

4,306

27

a.

4,850

-4

40. The NNP is:

ef .N

GNP Gross investment Net investment Consumption Government Spending

o.

M AC

W
107

04

20

04

04

Particulars

Amount Rs. crore 4,850 854 310 3,095 968

Macroeconomics

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 Subsidies Indirect Taxes 108 233 4,957 1,772 10,689

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-

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.

31

4-

02

27

-4

ef .N

Based on the following information answer the questions 44 and 45.

o.

M AC

The Gross National Product (GNP) using income method is: a. 13,897.50 b. 13,998.50 c. 13,870.50 d. 13,790.50 e. 13,987.50. 43. In a hypothetical economy, population is expected to grow at 1.9% p.a. Planners in a target per capita GDP growth of 6% p.a. If the capital output ratio is 4:1, assuming no depreciation, what should be the rate of investment (i.e., investment as a percentage of GDP) approximately? a. 30.9%. b. 31.8%. c. 31.1%. d. 30.9%. e. 31.6%.

04

20

04

04

Part-II

49.

50.

51.

52.

GNP at Factor Cost 95,023 Indirect taxes 14,723 NDP at market price 1,00,422 NNP at market price 1,00,575 GNP at market prices 1,07,226 The value of Depreciation is: a. 6,550 b. 6,740 c. 6,651 d. 6,680 e. 6,600. The value of Net Factor Income from abroad is: a. 175 b. 184 c. 150 d. 164 e. 153. The value of Subsidies is: a. 2,520 b. 2,350 c. 2,560 d. 2,480 e. 2,620. Value of NDP at Factor Cost is: a. 88,560 b. 89,153 c. 88,219 d. 88,198 e. 88,225.

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 figures given below pertain to the year 2000-01. (All figures in Rs. crore)

27

Based on the following information answer the questions 49 to 52.

-4

46. NNP at Market Price is: a. 84,543 b. 84,342 c. 84,686 d. 84,233 e. 84,453. 47. GNP at Market Price is: a. 88,550 b. 88,342 c. 89,410 d. 90,200 e. 87,475. 48. NDP at Factor Cost is: a. 75,769 b. 80,493 c. 84,686 d. 78,745 e. 84,453.

ef .N

o.

M AC

W
109

04

20

04

04

Macroeconomics

Based on the following information answer the questions 53 to 56. For the year 2000-01, the national accounts statistics at current prices were as follows: GNP at Factor Cost Depreciation Subsidies Net Factor Income from abroad Indirect Taxes 53. The value of GNP at Market Price is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 1,28,620 1,28,524 1,20,524 1,20,600 1,29,240. 1,20,462 1,24,524 1,21,480 1,21,460 1,20,580. 1,14,601 8,062 2,822 +330 16,745

1,20,145 1,20,160 1,20,132.

20 04

Th e

Based on the following information answer the questions 57 to 59. For the year 2000-01, the national accounts statistics at current prices were as follows: GNP at Factor Cost Depreciation Subsidies Net Factor Income from abroad Indirect Taxes Personal Income Taxes Corporate Profit Taxes Retained Profit 1,14,601 8,062 2,822 +330 16,745 10,000 6,539 30,000

110

Ic

fa

1,05,850.

iU

ni

1,07,250

ve rs i

1,06,209

ty

1,07,125

Pr es

1,06,400

s. Al

56. The value of NDP at Factor Cost is:

lr

ig

ht

re

se rv

1,20,180

ed

.IS

1,20,250

BN

55. The value of NDP at Market Price is:

:8

1-

31

4-

02

27

-4

ef .N

54. The value of NNP at Market Price is:

o.

M AC

04

20

04

04

Part-II

57. The value of Personal Income is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 65,000 75,000 70,500 70,000 72,000. 1,06,539 1,06,445 1,06,579 1,06,750. 65,000 58,000 60,000 66,000 62,000.

58. The value of National Income is:

Personal Disposable Income Personal Income a. c. d. e. a. b. c. d. e.

Pr es

Indirect Taxes

s. Al

Net Factor Income from abroad

ig

ht

Subsidies

re

Depreciation

se rv

GNP at Factor Cost

ed

.IS

lr

ve rs i

National Income

ty

Th e

b.

20 04

61. The value of Retained Profits is: 18,000 20,000 22,000 19,500 21,000. 111

Ic

fa

60. The value of Personal Income Taxes is: 4,800 5,050 4,950 5,000. 5,200

iU

ni

BN

Particulars

Rs. (in crore) 8,062 2,822 +330 16,745 55,000 80,000 60,000

1,14,601

:8

For the year 2000-01, the national accounts statistics at current prices were as follows.

1-

31

Based on the following information answer the questions 60 and 61.

4-

02

27

-4

ef .N

o.

M AC

59. The value of Personal Disposable Income is:

04

20

04

04

1,06,550

Macroeconomics

Based on the following information answer the questions 62 to 65. Particulars GNP at market price Corporate Taxes Personal Income Tax Subsidies Factor Income received from abroad Factor Income paid abroad Undistributed Profits Indirect Taxes Depreciation 62. The value of Personal Disposable Income is: a. 1,800 b. 2,400 c. 2,550 d. 1,850 e. 2,100. 63. The value of GDP at Factor Cost is: a. 3,750 b. 3,350 c. 3,400 d. 3,550 e. 3,600. 64. The value of National Income is: a. 3,500 b. 3,550 c. 3,480 d. 3,600 e. 3,450. 65. The value of GNP at Market Price, is: a. 4,350 b. 4,275 c. 4,150 d. 4,200 e. 4,150. Rs. (in crore) 4,000 800 600 350 1,000 800 150 600 400

20 04

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

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

Part-II

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. 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 67. The value of GNP at Market Price is: a. 6,300 b. 6,390 c. 6,150 d. 6,210 e. 6,100. 68. The value of GNP at National Income is: a. 5,300 b. 5,150 c. 5,200 d. 5,275 e. 5,225. 69. The value of Personal Disposable Income is: a. 3,100 b. 3,150 c. 3,050 d. 3,250 e. 3,283. Rs. (in crore) 6,000 1,200 800 400 1,500 1,800 250 800 400

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

20 04

Th e

The difference between GDP at Market Prices and NNP at Factor Cost is: a. b. c. d. e. 3,400 3,250 3,325 3,425 3,375. 113

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

Macroeconomics

31

The following is the information from the national income accounts for a hypothetical country: GNP

4-

02

Based on the following information answer the questions 73 to 80. Rs. 2,400 400 150 1,500 480 1,925 1,460 160 50 15 60 260 300

73. NNP at Market Prices is:

Th e

a.

20 04

b. c. d. e. a. b. c. d. e.

74. The value of Net Exports is: 25 32 30 20 22.

114

Ic

fa

2,350 2,150 2,200 2,250 2,400.

iU

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

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

27

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

ef .N

o.

M AC

04

20

04

04

Part-II

75. The value of Net Indirect Taxes is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. 235 250 225 210 230. 245 230 228 254. 485 520 515 480 495. 1,820 1,690 1,990 2,100 2,040. 1,550 1,690 1,720 1,780 1,650.

76. The value of Corporate Profits is:

Th e

b. c. e. d.

20 04

Based on the following information answer the questions 81 to 82. The following are the inter-industry transactions in an economy. (The figures represent the money value of output). Industries A B C Total Output A 25 40 15 100 B 10 30 25 120 C 15 20 30 80 Total 100 120 80 115

Ic

fa

190 205

185 198 203.

iU

80. The value of the Personal Savings is:

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

79. The value of Personal Disposable Income is:

re

se rv

ed

.IS

BN

:8

1-

31

78. The value of Personal Income is:

4-

02

27

-4

ef .N

o.

M AC

77. The value of TaxesTransfers is:

04

20

04

04

265

Macroeconomics

Based on the following information answer the questions 85 and 86. 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 85. The value of National Income in the economy is:

Th e

a. c.

20 04

b. d. e.

86. The value added in Industry Y is: a. 65 b. 63 c. 68 d. 58 e. 60. 116

Ic

fa

175 180 183 178 172.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

81. The value of National Income in this economy is: a. 95 b. 98 c. 93 d. 97 e. 90. 82. The value added in industry B is: a. 22 b. 28 c. 30 d. 35 e. 42. 83. In an economy, saving-income ratio is 0.24. The average and incremental capital-output ratio is 6. If the population is growing at 3% per annum, the growth in Per Capita Income would be: a. 1.5% b. 1.2% c. 1.25% d. 2% e. 1%. 84. In an economy the real output grows at the rate of 6% per year. The nominal supply of money grows at the rate of 5% and the income elasticity of money demand is 0.5. The rate of inflation in long-run equilibrium and the rate of growth of nominal income respectively are: a. 2% and 7% b. 3% and 8% c. 2% and 8% d. 2.5% and 7.5% e. 3% and 7%.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

Based on the following information answer the questions 87 to 91. The following information is extracted from the National Income Accountant of a hypothetical economy for the year 2002-03. Payment of Wages and Salaries by Govt. Sector Dividends paid by business Transfer payment by Govt. Sector (Domestic: Foreign, 8: 3) Purchases by Govt. Sector Indirect taxes paid by business Exports of goods and services Personal Income Tax Dividends paid abroad Factor incomes received by personal sector Profit tax paid by business Savings of Personal Sector Savings of Business Sector The value of GDP at Factor Cost is: a. 1,275 b. 1,286 c. 1,234 d. 1,262 e. 1,264. The value of GNP at Factor Cost is: a. 1,232 b. 1,322 c. 1,228 d. 1,230 e. 1,235. The value of GNP at Market Price is: a. 1,375 b. 1,348 c. 1,425 d. 1,380 e. 1,362. The value of GDP at Market Price is: a. 1,392 b. 1,410 c. 1,380 d. 1,425 e. 1,390. The value of Personal Disposable Income is: a. 915 b. 920 c. 912 d. 918 e. 910. 80 120 22 292 130 24 168 30 1,064 104 24 64

89.

90.

20 04

91.

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

88.

BN

:8

1-

31

4-

02

27

-4

87.

ef .N

o.

M AC

W
117

04

20

04

04

Macroeconomics

Based on the following information answer the questions 92 to 98. 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 92. The value of Depreciation is: a. 7,500 b. 7,300 c. 7,200 d. 7,150 e. 7,000. 93. The value of Net Factor Income from abroad is: a. 328 b. 420 c. 415 d. 422 e. 395. 94. The value of Subsidies is: a. 2,000 b. 2,200 c. 1,950 d. 2,275 e. 1,930. 95. The value of NDP at Factor Cost is: a. 88,435 b. 88,422 c. 88,350 d. 88,400 e. 88,398. 96. The value of National Income is: a. 87,500 b. 88,500 c. 83,500 d. 87,750 e. 88,000. 97. The value of Personal Income is: a. 51,500 b. 51,750 c. 52,375 d. 50,975 e. 50,437. 118

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

Part-II

98. The value of Personal Disposable Income is: a. 43,550 b. 42,000 c. 41,500 d. 41,350 e. 43,750. Based on the following information answer the questions 99 to 104. 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 99. The value of GNP at Market Price is: a. 6,01,650 b. 6,01,665 c. 6,02,675 d. 6,02,667 e. 6,01,750. 100. The value of NNP at Market Price is: a. 5,40,858 b. 5,47,691 c. 6,02,667 d. 4,80,079 e. 4,49,429. 101. The value of NDP at Market Price is: a. 5,48,475 b. 5,48,960 c. 5,45,096 d. 5,47,790 e. 5,47,691. 102. The value of NDP at Factor Cost is: a. 4,80,579 b. 4,80,079 c. 4,81,275 d. 4,81,570 e. 4,80,695. 103. The value of GNP at Factor Cost is: a. 5,35,550 b. 5,35,750 c. 5,36,225 d. 5,35,055 e. 5,36,475.

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
119

20

04

04

Macroeconomics

104. The value of Personal Disposable Income is: a. 4,49,429 b. 4,48,736 c. 4,48,368 d. 4,48,578 e. 4,48,698. 105. The following data are extracted from the National Income Accounts of a Country (In million units of currency). GNP a Factor Cost Subsidies NNP at Market Prices Depreciation NDP at Factor Cost (MUC) 1,79,930 588 1,70,992 1,64,182 11,888

106. The value of GDP at Factor Cost is: a. 631 b. 623 c. 648 d. 652 e. 675. 107. The value of GNP at Factor Cost is: a. 622 b. 631 c. 616 d. 681 e. 696. 120

20 04

Th e

Ic

fa

Payment of Wages and Salaries by Govt. Sector Dividends paid by business Transfer payment by Govt. Sector (Domestic 8: Foreign 3) Purchases by Government Sector Indirect Taxes paid by business Export of Goods and Services Personal Income Tax Dividends paid abroad Factor Income received by personal sector Profit Tax paid by business Savings of Personal Sector Savings of Business Sector

BN

:8

Based on the following information answer the questions 106 to 110. 40 60 11 146 65 12 84 15 532 52 12 32

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

1-

31

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.

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

108. The value of GNP at Market Price is: a. b. c. d. e. 688 678 685 669 681.

109. The value of GDP at Market Price is: a. 685

110. The value Personal Disposable Income is: a. 475 b. c. d. e. 456 438 467 452. 7,09,900 92,700 29,100 10,200 1,30,500 14,600 11,000 8,700

111. The value of GNP at Market Price is: a. 9,04,000 b. 9,24,400 c. 8,11,350 d. 8,22,500 e. 8,12,600. 112. The value of NNP at Market Price is: a. 8,12,300 b. 8,12,500 c. 8,11,800 d. 8,11,750 e. 8,11,300. 113. The value of NDP at Market Price is: a. 8,22,500 b. 8,20,450 c. 8,21,500 d. 8,20,850 e. 8,21,750.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

NNP at factor cost Depreciation Subsidies Net Factor Income from abroad Indirect Taxes Personal Income Tax Corporate Tax Retained Profits

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

Based on the following information answer the questions 111 to 116.

4-

02

27

-4

ef .N

o.

M AC

W
121

e.

631.

04

d.

681

20

04

c.

696

04

b.

674

Macroeconomics

114. The value of NDP at Factor Cost is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 7,20,500 7,15,700 7,18,100 7,20,100 7,19,980. 8,02,600 8,12,750 8,22,650 8,21,500. 6,25,600 6,75,600 6,25,250 6,23,600 6,74,500. Particulars Personal Consumption Expenditure Indirect Business Taxes Undistributed Profits Personal Savings Depreciation Corporate Income Tax

115. The value of GNP at Factor Cost is:

.IS

ed

BN

Million units of currency

se rv

re

ig

ht

s. Al

lr

Transfer payments by government

Pr es

Th e

b. c. e. a. b. c. d. e. d.

20 04

118. The value of NNP at Market Price is: 1,268 1,264 1,328 1,245 1,458.

122

Ic

fa

a.

1,280 1,350

1,230 1,420 1,260.

iU

117. The value of Gross National Product at Factor Cost is:

ni

ve rs i

Personal tax payments

ty

:8

1,000 91 50 101 34 87 114 102

1-

31

Based on the following information answer the questions 117 to 121.

4-

02

27

-4

ef .N

o.

M AC

116. The value of Personal Disposable Income is:

04

20

04

04

8,24,600

Part-II

122. The value of NNP a Factor Cost is: a. 7,050 b. 7,150 c. 7,225 d. 7,075 e. 7,125. 123. The value of GDP at Market Price is: a. 7,650 b. 7,375 c. 7,225 d. 7,850 e. 7,550.

20 04

Th e

Ic

fa

Wages and Salaries received by domestic residents Dividends paid to domestic residents Dividends paid to foreign residents Gross Investment Rentals Corporate Profit Tax Indirect Taxes Personal Income Tax payments Retained earnings Subsidies Transfer payments Net factor income received from abroad Net Investment Personal Savings

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

Particulars

4-

02

Based on the following information answer the questions 122 to 124. Million Units of Currency 5,000 600 100 2,000 300 700 500 400 250 100 150 100 1,500 650

27

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

ef .N

o.

M AC

W
123

04

20

04

04

Macroeconomics

124. The value of Personal Consumption Expenditure is: a. 5,350 b. 5,500 c. 5,175 d. 5,400 e. 5,200. 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.

fa

iU

127. The following table gives information about price and units of aggregate output for the years 2002 and 2003.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

Ic

Th e

Goods P Q R S T

2002 Quantity 30 55 45 35 40 Price (Rs.) 2.00 6.00 5.00 4.00 3.00 Quantity 35 65 60 40 50

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

2003 Price (Rs.) 2.50 8.00 6.00 5.00 4.50

20 04

What is the value of GDP deflator for the year 2003? a. b. c. d. e. 124 122. 104. 15. 142. 130.

-4

ef .N

o.

M AC

04

20

04

04

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 a. b. c. d. e. 2,786 MUC. 2,996 MUC. 2,886 MUC. 3,115 MUC. 2,662 MUC.

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).

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

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

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
125

04

20

04

04

Macroeconomics

Based on the following information answer the questions 136 to 138. Production Account Dr. Rs. Cr. Wages paid to domestic residents 400 Sales to Households Wages paid to foreigners 240 Gross Fixed Investment Changes in stock Interest payments on loans taken from foreign banks 10 Retained profits 20 Exports Corporate tax 10 Imports 25 Indirect taxes 15 Depreciation 10 730

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

20 04

Th e

Assume that there is no government sector in the economy. 126

M AC

Cr. Rs. Cr. 550 85 55 40

730

04

20

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.

Part-II

136. For the economy, NDP at market prices is a. b. c. d. e. Rs.650 cr Rs.670 cr Rs.695 cr Rs.640 cr Rs.630 cr.

137. If the Factor Income received from abroad is Rs.200 cr., current account balance for the economy is

a. b. c. d. e.

7,500 MUC 1,250 MUC 300 MUC 1,800 MUC 1,100 MUC.

.IS

BN

139. An economy consists of three sectors: primary, secondary and tertiary sectors. Transactions related to the three sectors are given below: Items Sales Closing Stock Intermediate Consumption Opening Stock Indirect taxes Depreciation Subsidies Primary Sector 100 15 15 10 12 10 7 Secondary Sector 150 20 25 10 13 12 8 (MUC) Tertiary Sector 130 25 15 15 17 15 7

GDP at factor cost for the economy is b. c. e.

Th e

20 04

d.

140. Consider the following data: Particulars Factor income paid abroad by the business sector Factor income received by household sector Transfers to household sector Wages and salaries paid by the business sector Dividends paid by the business sector (of which Rs.10 is paid abroad) Household savings Factor income received from abroad by the household sector MUC 10 160 20 100 20 60 20 127

Ic

fa

300 MUC 271 MUC 258 MUC 342 MUC.

iU

a.

293 MUC

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

:8

1-

31

4-

02

27

-4

ef .N

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

o.

M AC

e.

Rs.55 cr (deficit).

d.

Rs.45 cr (deficit)

04

c.

Rs.35 cr (deficit)

20

04

b.

Rs.35 cr (surplus)

04

a.

Rs.45 cr (surplus)

Macroeconomics

The amount paid by the government to the households towards wages and salaries is a. b. c. d. e. 10 MUC 20 MUC 30 MUC 40 MUC 50 MUC. 356.4 264.9 266.3 164.8 120.3 66.4 253.0 402.1 64.4 105.1

Based on the following information answer the questions 141 and 142. Capital consumption allowance Compensation of employees Business interest payments Indirect business taxes Rental income of persons Corporate profits Proprietors income Corporate dividends Social security contributions Personal Taxes Interest paid by consumers Interest paid by government Government and business transfers Personal consumption expenditures 141. The value of National income is: a. b. c. d. e. a. b. c. d. e. 2,450.4 2,455.8 2,456.4 2,455.3. 3073.9 2,453.2

142. The value of GNP is: 3072.5

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

128

Th e

Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfers to household sector Personal tax payments

Ic

fa

3072.7

3073.1.

iU

3074.7

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

1,991.9

:8

374.5

1-

31

4-

02

27

-4

ef .N

o.

M AC

34.1

04

20

04

04

1,866.3

Part-II

143. The value of National income is: a. b. c. d. 1,512 1,622 1,812 1,775

e. 1,720. 144. The value of Personal disposable income is: a. b. c. d. e. 1,547 1,580 1,625 1,645. Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfers to household sector Personal tax payments Calculate National income. a. b. c. d. e. 1,765 1,882 1,860 1,790 1,920. 1,525 215 95 220 72 180 235 205 1,645

146. Compute National income from the following. GNP at factor cost Corporate income tax Personal income tax Subsidies Factor incomes received from abroad Factor incomes paid abroad Undistributed profits Indirect taxes Depreciation

Pr es

s. Al

lr

ig

ht

re

ve rs i

ty

ni

20 04

Th e

a. b. c. d. e.

Ic

fa

5,250 5,400 5,600 5,700 5,500. 129

iU

se rv

ed

.IS

Rs. 6,000 1,200 800 400 1,500 1,800 250 800 400

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

145. The figures given below are pertaining to year 2001.(Rs. in crore)

04

20

04

04

Macroeconomics

147. From the following information, calculate GNP at Factor Cost. NDP at market prices Net factor income from abroad Depreciation Subsidies Indirect Taxes a. b. c. d. e. 88,065 88,195 88,105 88,275 88,365. 4,82,220 62,725 20,150 6,800 85,450 9,600 7,500 6,850 88,750 260 5,220 1,820 10,825

20 04

a. b. c. d. e.

2,750 2,600 2,450 2,900 2,850.

150.

Th e

Ic

fa

iU

ni

ve rs i

GNP at factor cost Subsidies NNP at market price Depreciation NDP at factor cost

ht

149. From the following National income data, calculate net factor income from abroad. 1,72,250 520 1,63,740 12,180 1,57,170

ty

Pr es

s. Al

lr

ig

re

se rv

Calculate NDP at market price. a. 5,54,450 b. 5,54,320 c. 5,54,650 d. 5,54,280 e. 5,54,560.

ed

.IS

BN

Particulars Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfer payments by government Personal tax payments 130

:8

1-

Million units of currency (MUC) 1,300 105 72 116 45 98 124 112

31

4-

NNP at factor cost Depreciation Subsidies Net factor income from abroad Indirect taxes Personal income taxes Corporate Taxes Retained profits

02

27

-4

ef .N

o.

M AC

148. Following are the National income statistics at current prices.

04

20

04

04

Part-II

Calculate the National income. a. b. c. d. e. 1,432 1,521 1,560 1,476 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. 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 151. Calculate National income. a. b. c. d. e. a. b. c. d. e. 1,74,000 1,54,000 1,76,000 1,58,000 1,60,000. 82,300 Rs. in crores 1,90,000 28,000 2,00,844 2,00,000 2,14,000 20,000 13,000 60,000

152. Calculate Personal Disposable income. 83,000 84,700 84,450 83,600.

GNP at Factor cost Depreciation Subsidies Net factor income from Abroad Indirect taxes Personal income tax Corporate profits tax Retained Profit

ve rs i

153. Following are the national income statistics of an economy. = = = = = = = = 1,14,605 8,165 2,865 350 16,745 12,500 7,250 32,000

20 04

Th e

Calculate National income. a. b. c. d. e. 1,06,440 1,05,525 1,06,530 1,06,205 1,07,125. 131

Ic

fa

iU

ni

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

Macroeconomics

154. From the following information, calculate National income. Particulars Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfers to household sector Personal tax payments a. b. c. d. e. 1,998 1,895 1,989 1,845 1,875. Million units of currency 1,675 230 112 240 72 182 320 210

b. c. d. e.

3,745 3,625 3,775. 3,640

Based on the following information answer the questions 156 to 160.

Personal consumption expenditure Indirect business taxes Undistributed corporate profit Corporate income tax Personal savings Depreciation Transfer to household sector Personal tax payments

20 04

156. The Gross National Product at Market Price is: a. b. c. d. e. 132 2,012.4 2,156.8 2,896.3 2,225.5 2,139.6.

Th e

Ic

fa

iU

ni

ve rs i

Particulars

Pr es

s. Al

lr

ig

ht

re

ty

se rv

ed

a.

3,650

Million of Currency 1,332 180.8 80.0 202.4 68.0 173.6 228.0 203.6

.IS

BN

Subsidies

1,200

:8

Indirect taxes

2,100

1-

31

Depreciation

2,250

4-

Net factor income from abroad

() 625

02

27

155. Calculate the difference between GDP at Market price and NNP at factor cost from the following information.

-4

ef .N

o.

M AC

04

20

04

04

Part-II

The Simple Keynesian Model of Income Determination


161. In an economy, investment expenditure increased by Rs.120 and government expenditure is increased by 40%. The revised GNP when potential GNP of the economy is Rs.2,000, marginal propensity to save is 0.25 would be other relevant information are: Consumption Investment Government expenditure

s. Al

lr

ig

ht

re

se rv

ed

157. The value of NNP at Market Price is: a. 1,845.7 b. 1,827.6 c. 1,838.8 d. 1,842.3 e. 1,836.5. 158. The value of National Income is: a. 1,655 b. 1,664 c. 1,678 d. 1,573 e. 1,658. 159. The value of Personal Income is: a. 1,633.6 b. 1,603.6 c. 1,645.3 d. 1,628.7 e. 1,632.5. 160. The value of Personal Disposable Income is: a. 1,505 b. 1,495 c. 1,378 d. 1,400 e. 1,250.

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.

20 04

Th e

Ic

fa

iU

ni

ve rs i

= = =

ty

Pr es

.IS

BN

1,200 200 50

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
133

04

20

04

04

Macroeconomics

163. The change in Level of Income is: a. 285.7 b. 284.8 c. 243.5 d. 284.6 e. 275.6. 164. The change in level of imports is: a. 27.57 b. 26.89 c. 28.57 d. 26.34 e. 27.43. Tax function Import function Saving function Investment (I) Government expenditure (G) Exports (X) Transfer payments (R) The countrys budget surplus is: a. 33.5 b. 44 c. 40 d. 35 e. 38. 0.35Y 0.15Y 20 + 0.22Yd 45 18 20 8

The following information is given: a. 2.3 b. 2.5 c. 2.6 d. 2.9 e. 2.0. Consumption (C) Investment (I) Government expenditure (G) Exports (E) Imports (M) Marginal propensity to save (MPS) Potential GNP of the economy

20 04

167. 1,000 400 500 200 180 0.35 2,500

134

Th e

Ic

fa

166. The investment multiplier for the economy is: Savings function (S) 40+0.25Yd d Disposable income (Y ) YT Tax function (T) 0.20Y Investment function (I) 120 12i Government expenditure (G) 80 Exports (E) 60 Imports (M) 0.1Y

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

165.

04

20

04

04

Part-II

20 04

171.

Th e

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. Equilibrium income Income tax rate Marginal Propensity to consume

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

170.

For every 100 increase in income the tendency to spend 10 on imports. If the government expenditure increases by 200, The new equilibrium income will be: a. 2,474.2 b. 2,484.3 c. 2,467.2 d. 2,478.5 e. 2,476.2. 135

se rv

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.

ed

2,000 20% 0.85

.IS

BN

:8

1-

31

4-

02

169. The following is the simple model of an economy. Consumption function (C) 250 + 0.75Y Investment function (I) 65 + 0.15Y Government expenditure (G) 90 Exports (X) 125 Import function (M) 0.15Y

27

-4

ef .N

o.

M AC

If the government expenditure increased by 160 and investment expenditure increased by 180, the change in price level is: a. 15.23% b. 15.56% c. 15.48% d. 15.36% e. 15.65%. 168. Marginal Propensity to save (MPS) is 0.3 and the marginal propensity to import (MPI) is 0.10. If the autonomous investment increases by 560, it affect the level of imports would be? a. Increase in import by 560. b. Decrease in import by 235. c. Decrease in import by 140. d. Increase in import by 140. e. No change in import.

04

20

04

04

Macroeconomics

Th e

a.

b. c. d.

20 04

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: a. b. c. d. e. 136 1,000 1,500 1,250 1,100 1,050.

Ic

fa

175. The investment multiplier for the economy is: 4 6 5 7

iU

ni

e.

1,440.

ve rs i

d.

1,398

ty

c.

1,465

Pr es

b.

1,450

s. Al

a.

1,375

lr

ig

174. The equilibrium level of income in the economy is:

ht

C I G E M I

= 200 + 0.6Y = 0.3Y 15i = 100 = 50 = 0.1Y =4

Consumption function Investment function Exogenous government expenditure Exogenous exports Import function Interest

re

se rv

ed

.IS

BN

:8

1-

Based on the following information answer the questions 174 and 175

31

172. Consumption function Ct= 10 + 0.6 Ydt + 0.3 Ct 1 Where Ct and Ct1 denote consumption in period t and t1 respectively and Ydt is the disposal income in period t. Now suppose Ydt increases from 100 to 120 and remains there indefinitely, The change in steady state level of consumption is: a. 17 b. 20 c. 21 d. 32 e. 12. 173. The savings and import functions have been estimated as follows: S = 50 + 0.25Y M = 0.10Y where S is aggregate savings, M is imports and Y is GDP. Private investment increases by 200 and government expenditure decreased by 60. The increase in GDP is would be: a. 440 b. 438 c. 425 d. 400 e. 445.

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

177. Ct = 25 + 0.6Ydt + 0.2 Ct1 Where Ct and Ct 1 denote consumption in periods t and t 1 respectively. Ydt is the disposable income in period t. The disposable income increased from 200 to 250. The increase in disposable income on the steady state level of consumption is: a. b. c. d. e. Ct 39.50 37.75 38.90 37.50. = 12.25 + 0.611 Ydt + 0.276 Ct1

178. Consumption function is given as follows:

a. b. c. d. e.

83.58 84.39 85.28 84.45 83.65. 8 + 0.15 Yd 0.2Y 0.10Y 20 10 5 10

179. The following information is provided: Savings function (S) Tax function (T) Import function (M) Investment ( I ) Govt. expenditure ( G ) Transfer payments (R) Exports ( X)

The value of budget deficit at equilibrium is:

Th e

c. e.

20 04

d.

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. b. c. d. e. 3.33 3.45 3.38 3.15 3.41. 137

Ic

fa

b.

9.50 9.48 9.67 9.88.

iU

a.

9.68

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

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:

o.

M AC

04

20

04

04

38.28

Macroeconomics

181. Value of the equilibrium income is: Particulars Autonomous consumption Marginal propensity to save Autonomous investment Induced investment co-efficient Government expenditure (exogenous) Transfer income (Exogenous) Exports (exogenous) Propensity to import a. b. c. d. e. 2,442 2,457 2,472 2,435. 2,466 Rs. in crore 400.00 0.30 15.00 0.10 150.00 45.00 0.05

Ct1 = Consumption in Period t1

b. c. d. e.

174 181 185.

Based on the following information answer the questions 183 and 184

ty

Pr es

s. Al

lr

ig

176

ve rs i

Consumption function

C Yd I

iU

ni

Disposable income

Th e

Government Expenditure G Exports Import function Where, G and T I

Ic

fa

Investment

20 04

E M C0

E M0

138

ht

re

= C0 +Y d =YT = I = G = E = M0+Y = 80 = 30 = 100 = 0.8 = 120 = 110 = 0.1

se rv

a.

172

ed

If Ydt increases from 700 to 900, The change in steady state level of consumption is:

.IS

Ydt = Disposable income in period t.

BN

:8

1-

Ct = Consumption in period t

31

4-

where,

02

Ct = 20 + 0.75 Ydt + 0.15Ct 1

27

-4

182. Consumption function is given by:

ef .N

o.

M AC

04

20

04

04

20.00

Part-II

183. The value of the Equilibrium level of income is: a. b. c. d. e. a. b. c. d. e. 185. Y=C+I+G+EX Consumption function C = C0 + Y d 657 662 665 654 653. 3.33 3.39 3.56 3.25.

184. The value of the Multiplier is:

Ic

186. The value of investment multiplier is:

fa

iU

= 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.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

Savings function (S) Disposable income (Yd) Tax function (T) Investment function (I) Govt. expenditure ( G ) Exports ( E ) Import (M) 2.5 1.5 2 1 2.3.

20 04

Th e

a. b. c. d. e.

ht

re

= 40 + 0.25Yd =YT = 0.20Y = 120 12i = 80 = 60 = 0.1Y

se rv

ed

= 75 = 35

.IS

BN

where,

C0

:8

Import

= M = 140 = 0.8

1-

31

Exports

= E

4-

02

Disposable income Yd Investment I Government Expenditure G

= G

27

=YT = I

-4

ef .N

o.

M AC

W
139

04

20

04

04

3.42

Macroeconomics

Based on the following information answer the questions 187 and 188. Y C T Yd M
I

= C + I + G + (X M) = C0+ Yd = T0 + tY =YT = M0 + Y = 90 = 65 = 70 = 40 = 0.9 = 0.15 = 0.2 = 20 = 80

G X C0 M0

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. 140

20 04

Th e

Ic

fa

Disposable income (Yd) 400 600 800 900

Pr es

iU

ni

ve rs i

ty

s. Al

189. The value of the multiplier where consumption function C = 80 + Yd. Consumption (C) 380 480 660 720

lr

187. The volume of the multiplier is: a. 2.33 b. 2.41 c. 2.31 d. 2.30 e. 2.38. 188. Income Y (GNP) is: a. 576.42 b. 577.31 c. 575.32 d. 574.42 e. 575.67.

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

t T0

o.

M AC

04

20

04

04

Part-II

191. Saving function= 80 + 0.20Yx Import function = 0.10Y If the Government expenditure is increased by 300, and investment decreases by 50, The impact on GNP would be: a. b. c. d. e. Increase in GNP by 800.50 Increase in GNP by 832.5 Decrease in GNP by 823.5 Decrease in GNP by 800.5 No change in GNP.

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.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

= 120

BN

:8

1-

31

= 0.2 = 0.1 = 120

4-

02

Where,

27

= 0.8

-4

Investment

=I

ef .N

Disposable income Yd Tax T Government expenditure Export function

=YT = T0 + Ty =G =E

o.

M AC

W
141

192. If the Government expenditure increases by 40 and investment by 50, value of the increased income would be: Consumption function C = C0 + Yd

04

20

04

04

Macroeconomics

The equilibrium level of savings is a. 600 MUC b. 700 MUC c. 500 MUC d. 800 MUC e. 900 MUC. 198. In a two-sector economy, the savings function is estimated to be S = 20 + 0.30Yd. If the equilibrium output is 600, the level of investment in the economy is a. 140 MUC b. 150 MUC c. 160 MUC d. 130 MUC e. 170 MUC.

20 04

199. The following data pertains to a hypothetical economy. Consumption function (C) Investment (I) Government spending (G) Tax function (T) = 70 + 0.75Yd = 80 MUC = 70 MUC = 0.2Y

142

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

Taxes (T)

re

Government spending (G)

se rv

Investment (I)

ed

Consumption function (C) = 200 + 0.80Yd, where Yd is disposable income = 500 MUC = 200 MUC = 100 MUC

.IS

BN

:8

197. The following data pertains to national income aggregates of a hypothetical economy:

1-

If the investment expenditure increased by 50 and government expenditure increased by 40, The revised GNP will be: a. 970 b. 985 c. 900 d. 952 e. 960.

31

4-

02

27

-4

ef .N

o.

M AC

195. Marginal Propensity to Consume (MPC)= 0.75 Proportional Tax rate= 0.20 If the Government expenditure increases by 500, the rise in budget deficit will be: a. 265 b. 245 c. 260 d. 270 e. 250. 196. C = 500 I = 100 G = 100 Potential GNP of the economy = 800 2 Marginal propensity to consume = 3

04

20

04

04

Part-II

200.

201.

20 04

204.

Th e

Ic

fa

iU

ni

ve rs i

203.

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

202.

At equilibrium, the budget surplus (deficit) in the economy is a. (30) MUC b. 30 MUC c. 40 MUC d. 50 MUC e. (40) MUC. In an economy the savings function and investment functions are given by S = 50 + 0.3Y and I = 150 5i respectively. If the equilibrium income level,Y = 500, the rate of interest is a. 20.0% b. 15.0% c. 10.0% d. 5.0% e. 12.5%. For a hypothetical economy the following is the estimated steady state consumption function. Ct = 10 + 0.5Yd t + 0.4C t1 Where Ct and Ct-1 denote consumption in periods t and t-1. If the Ydt increased from 400MUC to 500 MUC, what is the amount of change in steady state consumption? a. 53.33 MUC. b. 65.33 MUC. c. 83.33 MUC. d. 75.33 MUC. e. 61.33 MUC. The savings function for an economy is given by S = 50 + 0.25Y and the import function, M= 0.15Y. If the government intends to increase the GNP by 500 MUC, what should be the increase in government expenditure? a. 100 MUC. b. 50 MUC. c. 200 MUC. d. 250 MUC. e. 300 MUC. The full employment output for an economy is estimated to be 700. The current level of output is 600. MPS for the economy is estimated to be 0.2.What should be the change in government spending if the government is committed to bring full-employment level of output? a. 50 MUC. b. 75 MUC. c. 20 MUC. d. 125 MUC. e. 150 MUC. In a two-sector economy the marginal propensity to save is constant at 0.25 and the breakeven income is 12,000 MUC. If the current level of income is 16,000 MUC, the amount of savings in the economy is a. 6,000 MUC b. 1,000 MUC c. 5,000 MUC d. 7,000 MUC e. 2,000 MUC.

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04
143

04

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. b. c. d. e. 500 MUC 1,000 MUC 1,500 MUC 2,000 MUC 2,500 MUC.

c. d. e.

Rs.1,600 cr Rs.1,700 cr Rs.1,300 cr.

Th e

b. c. e. d.

20 04

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 a. b. c. d. e. 144 620 MUC 640 MUC 660 MUC 650 MUC 630 MUC.

Ic

a.

Rs.125. Rs.625.

fa

Rs.525. Rs.425. Rs.325.

iU

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?

ni

ve rs i

ty

Pr es

s. Al

lr

b.

Rs.1,500 cr

ig

ht

a.

Rs.1,400 cr

re

208. Consumption function for an economy is estimated to be C = 400+0.75Yd, where C and Yd are measured in Rs. cr. The level of consumption at which the savings will be zero is

se rv

ed

e.

6.

.IS

BN

d.

:8

c.

1-

31

b.

4-

02

a.

27

207. In a hypothetical economy, if the marginal propensity to consume is 0.75; marginal propensity to import is 0.10; and the tax rate is 20%, then the value of multiplier will be

-4

ef .N

e.

600 MUC.

o.

d.

500 MUC

M AC

c.

400 MUC

b.

300 MUC

04

a.

200 MUC

20

04

206. Acceleration coefficient in an economy is 2. Investment in a period is equal to 75% of the difference between the desired capital stock and the existing capital stock. If income in period t is expected to increase by 200 MUC, investment during the period t will be

04

Part-II

211. The following information pertains to an economy: (MUC) Private consumption expenditure Investment in fixed capital Increase in stock Government expenditure Merchandise exports Imports Money supply The velocity of money in the economy is a. b. c. d. e. 4 5 3 2 1. 750 250 150 100

230

I = 200 G = 200 Potential GNP of the economy is 1600

a. b. c. d. e.

340 360 375 325 310.

20 04

Th e

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. b. c. d. e. 590.50. 588.24. 594.28. 578.75. 560.43.

Ic

213. Consider the following economic functions.

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

If the expenditure increased by 100 and government expenditure increased by 80, the increase in GNP would be:

ig

ht

re

MPC= 2/3

se rv

ed

.IS

BN

:8

C = 1000

1-

31

212. The following are the data related to an economy.

4-

02

27

-4

ef .N

o.

M AC

W
145

04

20

150

04

04

50

Macroeconomics

214. From the following economic relationships calculate Multiplier. Y C T Y I G X C0 M0 T T0 a. b. c. d. e. 2.33 2.35 2.45 2.28 2.50.
d

= = = = = = = = = = = = = =

C + I + G + (X) C0 + Yd T0 + tY YT M0 + Y 90 65 80 70 0.9 0.15 0.2 20 40

M (Imports)

ni

216.

ve rs i

e.

833.7.

ty

d.

831.2.

Pr es

c.

833.9.

s. Al

b.

832.5.

lr

ig

a.

831.5.

ht

If in the economy, government expenditure is increased by 300 and investment decreased by 50, what will be the increase in GNP?

re

Disposable income Yd Tax Import function Export function Investment Where, t T Government expenditure

Th e

Ic

fa

Consumption function C

iU

20 04

E
G

146

se rv

Import function = 0.10Y

= C0 + Yd = YT = T0 + tY = G = M + Y = E = I = 0.8 = 0.2 = 0.1 = 120 = 120

ed

.IS

215. Saving function= 80 + 0.20Y

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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 C = 50 + 0.9Yd Yd = Y T T = 10 + 0.2Y Y=C+I+G

If investment expenditure increased by 50 and government expenditure increased by 40, calculate revised GNP? a. 925. b. 936. c. 945. d. 970. e. 960. 220. The following relations and parameters are specified for a hypothetical economy.

20 04

Th e

Ic

fa

iU

ni

ve rs i

C = 500 I = 100 G = 100 Potential GNP of the economy is 800. MPC = 2/3

ty

Pr es

s. Al

lr

ig

ht

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.

Savings function (S) Tax function (T) Import function (M) Investment (I) Government expenditure (G) Transfer payments (R) Exports (X)

= = = = = = =

re

se rv

8 + 0.15Yd 0.2Y 0.10Y 20 10 5 10 147

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

I = I exogenous

04

20

04

04

Macroeconomics

I G E M

= = = =

I
G

Th e

Ic

where,

fa

iU

ni

ve rs i

M
= = = = = = 140 0.8 75 30 25 35

C0 I E M G

20 04

Find the equilibrium level of income. a. 1,260 b. c. d. e. 148 1,320 1,245 1,275 1,350.

ty

Pr es

C0 + Yd

s. Al

lr

C+I+G+EX

ig

ht

Calculate the budget deficit at equilibrium. a. 9.75 b. 9.23 c. 9.88 d. 9.60 e. 9.15. 221. In an economy the 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, what will be the level of imports? a. 125. b. 110. c. 100. d. 128. e. 135. 222. The following consumption function is estimated for an economy: Ct = 20 + 0.75 Ydt + 0.15Ct1 where, Ct = Consumption in period t Ct1 = Consumption in period t1 Ydt = Disposable income in period t. If Ydt increases from 700 to 900 and remains there indefinitely, calculate the change in the steady state level of consumption. a. 176 b. 170 c. 165 d. 162 e. 182. 223.

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

224. The following relationship are given in an economy C Yd T Y I G = = = = = = 50 + 0.8Yd YT 10 + 0.3Y C+I+G I exogenous G exogenous

20 04

a. b. c. d. e.

1,200. 1,600. 1,100. 1,000. 1,300.

228. Tax function Import function Saving function Investment ( I ) = = = = 0.3Y 0.18Y 20 + 0.25 Yd 50

Th e

Government expenditure ( G ) = 20 = 22 Exports ( X ) Transfer payments = 10 Calculate the budget surplus at equilibrium. 149

Ic

fa

iU

ni

ve rs i

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

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

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. Disposable income (Yd) = 1,000 Consumption (C) = 850 a. 4.28 b. 5.20 c. 3.75 d. 4.17 e. 5.02. 230. Saving function= 82 + 0.22Y Import function = 0.15Y If the government expenditure increased by 500 and investment decreased by 75, what is the increase in GDP? a. 1165.0. b. 1147.5. c. 1232.5. d. 1275.4. e. 1345.7. 231. The following relations represent a simple model of an open economy: Consumption function (C) = 280 + 0.75Y Investment function (I) = 75 + 0.15Y Government expenditure (G) = 94 Exports (X) = 126 Import function (M) = 0.20Y The exports economy increase by 30. Compute the foreign trade multiplier. b. c. d. e. 2.3 4.2 a. 2.5 3.4

Th e

20 04

232.

Ic

Autonomous Consumption Marginal Propensity to Save Autonomous investment Induced investment Coefficient Government Expenditure (Exogenous) Transfer income (Exogenous) Exports (Exogenous) Propensity to Import

fa

4.0. 460 0.3 18 0.1 162 48 25 0.05

150

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

Part-II

Calculate the equilibrium income in the economy. a. b. c. d. e. 2,655.5 2,725.5 2,742.4 2,628.4 2,528.5.

233. In a two-sector economy, Savings and Investment functions are given as S = 62 + 0.25Y 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.

d. e.

472 485.

a. b. c. d. e.

43.55 42.84 43.75 42.15.

b. c. d. e.

2.8 2.5 3.2 2.2.

20 04

Th e

236. Planned consumption: 40 + 0.75Y Planned investment: 60 The value of savings is: a. b. c. d. e. 62 60 53 65 61.

Ic

fa

iU

ni

ve rs i

ty

Pr es

a.

3.1

s. Al

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.

lr

ig

ht

re

se rv

ed

.IS

41.43

BN

:8

1-

If an autonomous investment increased by 150 calculate the change in level of Imports.

31

4-

Marginal Propensity to save (MPS)= 0.30

02

27

234. Marginal Propensity to Import (MPI)= 0.12

-4

ef .N

o.

c.

467

M AC

b.

448

W
151

a.

435

04

20

04

04

I = 78 230i

Macroeconomics

237. The planned consumption (C) = 50 + 0.80Yd Investment (I) = 80 Yd = Y, since there is no government sector. The equilibrium level of income is: a. b. c. d. e. 625 618 650 647

Government expenditure (G) Exports (E) Imports (M) Marginal propensity to save (MPS) Potential GNP of the Economy

600 210 195 0.35 2,700

b. c. d. e.

17.5% 16.2% 18.7% 18.2%.

Investment function (I)

ve rs i

ty

Consumption function (C)

Pr es

239. The following relations represent a simple model of an open economy: 270 + 0.75Y 72 + 0.15Y 120 140 0.13Y

20 04

Th e

Exports (X) Import function (M)

Due to an exogenous boost to the economy, exports increase by 20. The value of the foreign trade multiplier would be: a. b. c. d. e. 4.75 4.35 5.21 3.89 3.57.

152

Ic

fa

iU

Government expenditure (G)

ni

s. Al

lr

ig

ht

re

se rv

a.

16.8%

ed

.IS

If government expenditure increased by 150 and investment expenditure increased by 175, the increase in price level would be:

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

Investment (I)

450

M AC

Consumption (C)

1,200

(Rs. in crore)

04

20

238. The following are the economic information for the year 2002.

04

04

635.

Part-II

Income Determination Model: Money and Interest


240. Given the following relations and parameters: 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: C I Ms Mt Ma = 120 + 0.6Y = 150 80i = 300 = 0.3Y = 120 160i = 40 + 0.25Yd =YT = 0.20Y = 120 12i = 80 = 60 = 0.1Y = 6Y 2,200i = 2,800

242.

Pr es

s. Al

The value of the Interest rate (i) is: a. 0.15% b. 0.10% c. 0.12% d. 0.18% e. 0.13%.

lr

ig

ht

re

se rv

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) The volume of GNP is: a. 785.8 b. 784.3 c. 788.6 d. 774.9 e. 775.8.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

ed

.IS

BN

= 100 + 0.75Yd = 0.20Y =YT = 50 12i = 200 = 20 + 0.1Y = 0.20Y = 130 30i = 300

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
153

04

20

04

04

Macroeconomics

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 Government expenditure ( G ) Transaction demand for money (Mt) Speculative demand for money (Ma) Money Supply (Ms) Import function (M) Exports ( E ) Nominal GNP in 1991-92 The GNP deflator for the year 2002-03 is: a. b. c. d. e. 244. Consumption function (C) Disposable income (Yd) Tax function (T) Import function (M) Exports (E) Investment function (I) Money supply (Ms) Transaction demand for money (Mt) Government expenditure (G) Speculative demand for money (Ma) The velocity of money in the economy is: a. 2.38 b. 2.32 c. 2.51 d. 2.25 e. 2.56. 163.3 167.5 166.5 164.3 164.7. = 600 = 0.22Y = 10 11i = 320 = 0.1Y = 118 = 3,472

(Base year 1981-82; GNP deflator was 100)

20 04

245.

154

Th e

The IS curve is 2,400 40i =Y Transaction demand for money = 0.20Y Speculative demand for money = 400 50i Money supply = 600 If transaction demand for the money changes to 0.25Y, the decrease in equilibrium income will be: a. 75.5 b. 76.8 c. 74.3 d. 73.8 e. 73.5.

Ic

fa

iU

ni

ve rs i

ty

Pr es

= 40+0.80Yd =YT = 0.2Y = 5 + 0.1Y = 100 = 100 120i = 300 = 0.24Y = 220 = 150 10i

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

Part-II

246. Savings function (S) = 40 + 0.2Yd =YT = 0.21Y = 200 10i = 5 + 0.1Y = 0.12Y Disposable income (Yd) Tax function (T) Investment demand function (I) Import function (M) Exports (E) Government expenditure ( G ) Transaction demand for money (Mt) Speculative demand for money (Ma) Supply of money (Ms) a. b. c. d. e. Increase in private investment by 30 Decrease in private investment by 35 Increase in private investment by 38 Decrease in private investment by 28 Increase in private investment by 32.

c. d. e.

206 208 215.

Y = 640 + 0.40Yd 4000i

20 04

248. At what price level is there simultaneous equilibrium in all markets? a. b. c. d. e. 1.09. 1.56. 1.05. 1.87. 1.12.

Th e

The equation for monetary equilibrium is Y = 410 + 5Ms + 1000i and Equilibrium in the labor service market exists at a 600 real income level.

Ic

fa

iU

Commodity equilibrium in real terms is

ni

Based on the following information answer the questions 248 and 249.

ve rs i

ty

Pr es

s. Al

lr

b.

216

ig

ht

a.

210

re

If the exogenous investment increased by 150. The change in equilibrium will be:

se rv

600 = 0.4Y 10i

ed

.IS

800 = 0.4Y + 8i

BN

247. The following are the equations for LM and SM curves.

:8

1-

31

4-

02

27

-4

ef .N

o.

If supply of money is decreased to 220, the impact on private investment.

M AC

= 300

W
155

= 100 20i

04

20

= 0.24Y

04

= 300

04

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. b. c. d. e. 250. C = 60 + 0.75 Yd I = 250 200i T = G = 24 Mt = 0.25Y Ma = 134 500i Ms = 250 Consumption function 672. 640. 645. 678. 664.

Speculative demand for money Money supply.

c. d. e.

26. 28. 24.

251. Consider the following functions: M = 0.15Y

a. b. c. d. e.

500. 525.

Th e

20 04

252. Consider the following relationships: Saving function (S) Investment function (I) Taxes (T) Government expenditure (G) Demand for money (L) Money supply
M p

Ic

fa

515. 490.

475.

iU

ni

ve rs i

ty

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?

Pr es

s. Al

lr

ig

S = 250 + 0.2Y

ht

re

156

se rv

= = = = = =

ed

120 + 0.25Yd 420 10i 150 150 0.20Y 5i 300

.IS

BN

:8

b.

22.

1-

a.

20.

31

4-

If there is a decline of 75 in money supply, what will be the changed equilibrium level of investment?

02

27

-4

ef .N

o.

Transaction demand for money

M AC

Government expenditure.

Investment function

04

20

04

04

Part-II

The value of equilibrium income is: a. 1,815.6 b. 1,811.5 c. 1,816.5 d. 1,812.4 e. 1,815.4. 253. Given the following macroeconomic relationships, the value of interest rate is: Saving function Investment function Taxes Government expenditure Demand for money Money supply a. b. c. d. e. 7.53% 7.90% 8.23% 8.35% 7.33%. = = = = = = (S) (I) (T) (G) (L) = = = = = 120 + 0.25Yd 300 5i 150 150 0.20Y 5i

c. d. e.

1,884 1,848

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

20 04

Ic

fa

1,857.

iU

ni

ve rs i

ty

b.

1,875

Pr es

a.

1,868

s. Al

The value of equilibrium income is:

lr

ig

ht

Money supply

M p

re

se rv

254. Consider the following relationships: Saving function (S) Investment function (I) Taxes (T) Government expenditure (G) Demand for money (L)

120 + 0.25Yd 300 5i 150 240 0.20Y 5i 300

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

M = p

300

W
157

04

20

04

04

Macroeconomics

258. Value of the equilibrium rate of interest is: a. 0.980 b. 0.984 c. 0.988 d. 0.989 e. 0.997. 259. The level of output for the economy is: a. 4,328 b. 4,458 c. 4,567 d. 4,724 e. 4,456. Based on the following information answer the questions 260 and 261. IS curve: 500 = 0.5Y + 6i LM curve:400 = 0.5Y 14i Where Y is income and I is the rate of interest in percent.

20 04

158

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

Equilibrium in goods market Transaction demand for money Speculative demand for money The money supply

= = = =

0.25Y + 220i = 115 0.15Y 75 225i 500

re

se rv

ed

.IS

BN

Based on the following information answer the questions 258 and 259.

:8

255. The value of equilibrium income is: a. 1,588 b. 1,580 c. 1,578 d. 1,590 e. 1,598. 256. The equilibrium trade balance is: a. 98.3 b. 98.5 c. 98.9 d. 97.6 e. 97.1. 257. In a two-sector economy, saving function and investment function given by: S = 50 + 0.25Y I = 65 220i Where Y is the output and i is the rate of interest and it is 10%. The equilibrium level of output is: a. 375 b. 372 c. 364 d. 368 e. 380.

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

262. The equilibrium income is: a. 1,600 b. 1,475 c. 1,500 d. 1,550 e. 1,625. 263. If the government expenditure increases by 135, The crowding out of private investment would be: a. 15 b. 18 c. 21 d. 11 e. 10. 264. If the government does not want to crowd-out private investment and it increases its expenditure by 135, calculate the increase in Money supply. a. 85.67 b. 84.95 c. 84.76 d. 85.75 e. 84.38.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

Savings function Disposable income Tax function Investment demand function Government purchase Transaction demand for money Speculative demand for money Supply of money

(S) = (Yd) = (T) = (I) = (G) = (Mt) = (Ma) = (Ms) =

50 + 0.2Yd YT .25Y 00 10i 400 0.25Y 125 50i 250

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

Based on the following information answer the questions 262 and 263.

27

260. The value of interest i is: a. 6 b. 10 c. 5 d. 3 e. 9. 261. The IS curve is given by: Y = 850 2500i (equilibrium in the goods market) Y = 500 + 5m + 1000i (equilibrium in the money market) Where m is money supply and i is the interest rate. Full employment exists at the real income level of 550. The nominal supply is 200 and current price level is 1. The price level at which there will be simultaneous equilibrium in both markets is: a. 1.073 b. 1.071 c. 1.079 d. 1.075 e. 1.078.

-4

ef .N

o.

M AC

W
159

04

20

04

04

Macroeconomics

Based on the following information answer the questions 265 to 268. C = 20 + 0.75Yd Yd = Y T T = 0.2Y I = 500 15i G = 400 M = 10 + 0.1Y E = 260 Mt = 0.25Y Ma = 125 50i Ms = 250 a. b. c. d. e. a. b. c. d. e. a. b. c. c. d. 7.5% 9% 6% 8% 10%. 2,250 2,225 2,230 2,100. 2,265 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

265. The value of the interest rate:

49.

Th e

c. e.

20 04

d.

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

Ic

b.

362

fa

389

365 367.

iU

a.

368

ni

ve rs i

268. If the exogenous government expenditure is increases by 115, the equilibrium investment will be:

ty

Pr es

43

s. Al

48

lr

ig

40

ht

re

45

se rv

267. The value of the equilibrium trade balance is:

ed

.IS

BN

:8

1-

31

4-

02

266. Calculate the equilibrium income.

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

Mt = 0.25Y Ma = 125 50i Ms = 250

Transactions demand for money Speculative demand for money Supply of money

What is the equilibrium investment? a. 198. b. 187. c. 195. d. 192. e. 190. 272. The value of equilibrium income.

20 04

Th e

C = 60 + 0.75Yd Yd = Y Tx I = 250 200i T x = G = 24 Mt = 0.25y Ma = 134 500i Ms = 200

Ic

fa

iU

ni

ve rs i

C = 60 + 0.75Yd Yd = Y Tx I = 250 200i T x = G = 24 Mt = 0.25y Ma = 150 300i Ms = 250

Consumption function Disposable income Investment function Govt. expenditure Transactions demand for money Speculative demand for money Supply of money

ty

Pr es

Consumption function Disposable income Investment function Govt. expenditure Transactions demand for money Speculative demand for money Supply of money 161

s. Al

lr

ig

ht

re

se rv

271.

ed

e.

178.

.IS

BN

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

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

270.

20

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.

04

Macroeconomics

a. b. c. d. e. 273.

1567 1543 1598 1552 1563.

Money supply = 250 Transaction precautionary demand for money = 0.20Y The speculative demand for money = 150 500i 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. Money supply = 300 Transaction precautionary demand for money = 0.25Y The speculative demand for money = 150 500i

20 04

Based on the following information answer the questions 276 and 278. Savings function (S) Disposable income (Yd) Tax function (T) Private investment function (I) Exogenous Govt. expenditure (G) Transfer payments Exports Import function 162
(R) (E)

Th e

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.

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

(X)

.IS

= = = = =

= 50 = 25 = 0.05Y

BN

720 + 0.3Yd YT+R 0.2Y 20 + 0.10Y 200

:8

1-

31

4-

02

27

-4

ef .N

274.

o.

M AC

04

20

04

04

Part-II

Mt Transaction demand for money P Ma Speculative demand for money P

= 0.25Y = 250 10r = 600

Supply of money

Ms P

re

Based on the following information answer the questions 279 to 282. Savings function Disposable income Transfer payments (S) (Yd)
(R)

se rv

e.

262.82.

ed

d.

236.92

.IS

Exogenous Govt. expenditure (G)

iU

Import function

ni

ve rs i

ty

Tax function (T) Private investment function (I) (M)


(E)

Pr es

s. Al

lr

ig

ht

20 04

Mt Transaction demand for money P Ma Speculative demand for Money P

Th e

Ic

Exports

fa

Supply of Money

Ms P

279. The economic relationships is: a. 9575 b. 9573 c. 9586 d. 9623 e. 9873. 163

BN

c.

263.44

= = = = = = = = = = =

:8

b.

262.35

420 + 0.2Yd + 6i YT+R 100 0.2Y 0.2Y 20i 2000 0.1Y 1400 0.15Y 225i 450

1-

31

a.

262.85

4-

e. 104.591. 278. The budget surplus at equilibrium level of income is:

02

27

-4

276. The equilibrium level of income is: a. 2564.45 b. 2563.10 c. 2568.90 d. 2564.10 e. 2365.05. 277. The trade balance at the equilibrium level of income would be: a. 104.205 b. 103.205 c. 105.382 d. 103.515

ef .N

o.

M AC

04

20

04

04

Macroeconomics

se rv

ed

Savings function (S) Disposable income (Yd) Tax function (T) Investment function (I) Exogenous Govt. expenditure (G) Import function (M) Exports
(E)

= = = = = = =

20 + 0.25Yd YT 40 + 0.2Y 240 10i 300 10 + 0.10Y 200 0.2Y

Pr es

Ma Speculative demand for money P

s. Al

lr

Mt Transaction demand for money P

re

ig

ht

283. The value of Equilibrium level income is: a. 1445 b. 1449 c. 1448 d. 1452 e. 1465. 284. The trade balance of Budget deficit is: a. 50.2 b. 50.4 c. 52.6 d. 52.3 e. 51.5.

20 04

164

Th e

Ic

fa

iU

ni

ve rs i

Money supply

Ms P

ty

.IS

= = =

BN

50 16i 250

:8

1-

31

4-

02

27

280. The value private investment of: a. 2750 b. 2783 c. 2850 d. 2700 e. 2782. 281. The value of demand for money is: a. 455 b. 450 c. 432 d. 438 e. 160. 282. The value of trade balance at equilibrium is: a. 32 b. 46 c. 28 d. 26 e. 25. Based on the following information answer the questions 283 and 285.

-4

ef .N

o.

M AC

04

20

04

04

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. Based on the following information answer the questions 286 to 289. Savings function Disposable income Transfer payments Tax function (T) Investment function Import function Exports
(E)

Exogenous Govt. expenditure (G) (M)

= = = = = =

800 20 + 0.1Y 400

286. The value of Equilibrium income of the economy is: a. 4520 b. 4482 c. 4240 d. 4895 e. 4350. 287. The value of Trade Balance is: a. 48 b. 46 c. 49 d. 40 e. 44. 288. The value of budget deficit is: a. 35 b. 32 c. 36 d. 41 e. 48.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

Ms Money Supply P

BN

:8

450

1-

Ma Speculative demand for Money P

31

130 44i

4-

02

Mt Transaction demand for money P

27

0.2Y

-4

ef .N

o.

M AC

W
165

(I)

= =

0.2Y 1000 15i

04

20

(R)

80

04

(S) (Yd)

= =

60 + 0.25Yd YT+R

04

Macroeconomics

289. If the government expenditure increases by 125, The equilibrium income would be: a. 4462 b. 4469 c. 4460 d. 4486 e. 4468. Based on the following information answer the questions 290 and 292. Savings function Disposable income Transfer payments Tax function Private investment function Exogenous Govt. expenditure Import function Exports (S) (Yd)
(R)

a. b. c. d. e. a. b. c. e.

2100 2250 2125 2200 2275. 6.3 2.8 5.2

Th e

d.

20 04

292. The value of the budget deficit at the equilibrium in the economy is: a. b. c. d. e. 22 26 28 21 20.

166

Ic

fa

5.0 4.8.

iU

ni

ve rs i

ty

291. The value of the Trade Balance at equilibrium in the economy is:

Pr es

s. Al

lr

ig

ht

re

se rv

ed

290. The value of the equilibrium income in the economy is:

.IS

BN

Money supply

Ms P

= 250

:8

1-

31

Ma Speculative demand for money P

4-

= 125 504i

02

27

Mt Transaction demand for money P

-4

= 0.25Y

ef .N

(E)

= 225

o.

(G) (M)

= 400 = 10 + 0.1Y

M AC

(T) (I)

= 0.2Y = 500 15i

04

20

= 40

04

04

= 25 + 0.25Yd =YT+R

Part-II

293. Savings function Transfer payments Tax function (T) (S)


(R)

= = = = = = = = = = =

25 + 0.25Yd YT+R 40 0.2Y 500 15i 745

Disposable income (Yd)

Private investment function (I) Exogenous Gov. expenditure (G) Import function Exports (M)
(E)

ht

e. 2725. Based on the following information answer the questions 294 to 297.

re

se rv

d.

2800

ed

.IS

c.

2700

lr

Savings function Disposable income Transfer payments Tax function

(S) (Y )
(R)
d

= = = = = = = = = = =

ig

Pr es

s. Al

Private investment function (I)

ve rs i

(T)

ty

Th e

Import function Exports

fa

iU

Exogenous Govt. expenditure (G) (M)


(E)

ni

Ic

20 04

Mt Transaction demand for money P Ma Speculative demand for Money P

Money Supply

Ms P

BN

b.

2735

60 + 0.2Yd YT+R 50 0.1Y 250 + 0.1Y 35i 400 20 + 0.1Y 250 0.2Y 120 40i 300

:8

1-

a.

2750

31

The value of the equilibrium income is:

4-

02

Ms Money supply P

27

250

-4

ef .N

Ma Speculative demand for money P

125 504i

o.

M AC

Mt Transaction demand for money P

W
167

0.25Y

04

20

225

04

04

10 + 0.1Y

Macroeconomics

294. The value of equilibrium income in the economy is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 2500 2450 2630 2655 2525. 25 22 16 20. 289 226 230 200 220.

295. The value of the Trade balance at equilibrium is: 18

296. The value of Budget surplus at equilibrium is:

Pr es

s. Al

e. 2975. Based on the following information answer the questions 298 to 301.

lr

ig

ht

d.

2875

re

c.

2850

se rv

b.

2900

ed

.IS

a.

2950

fa

iU

Consumption function (S) Private investment function (I) Disposable income (Yd) Tax function (T)

= = = = = = = = = = =

ni

ve rs i

ty

Th e

Import function Exogenous Exports

Ic

Transfer payments

(R)

(M)
(E)

20 04

Exogenous Govt. expenditure (G) Money Supply


Ms P

Mt Transaction demand for money P Ma Speculative demand for Money P

168

BN

297. If the exogenous government expenditure is increases by 182, the value of the equilibrium income in the economy will be:

400 + 0.8Yd 20i 20 + 0.15Y 60i Y+RT 0.1Y 200 15 + 0.12Y 800 500 400 0.25Y 110 145i

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

298. The value of equilibrium level of income is: a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 5220 5375 5420 5470 5275. 158.73 159.43 159.60 157.98. 158 163 145 178 160.

299. The value of Trade Balance at equilibrium is: 158.60

Pr es

s. Al

e. 23. Based on the following information answer the questions 302 and 303.

lr

ig

ht

d.

21

re

c.

27

se rv

b.

29

ed

a.

24

20 04

Investment function (I) Disposable income (Yd) Govt. expenditure (G) Import function (M)

iU

ni

Transfer payments

ve rs i

Savings function Tax function

(S) (T)
(R)

ty

Th e

Ic

fa

Exports

(E)

Ms Money Supply P Mt Transaction demand for money P

Ma Speculative demand for Money = P

.IS

= = = = = = = = = =

BN

301. If the exogenous government expenditure increases by 225, The change in private investment will be:

502 + 0.20Yd 0.25Y 60 400 + 0.25Y 10i YT+R 300 0.10Y 150 480 0.15Y 30i

:8

1-

31

4-

02

27

-4

ef .N

o.

300. The value budget deficit at the equilibrium in the economy is:

M AC

W
169

04

20

04

04

Macroeconomics

302. The value of equilibrium income is: a. 5250 b. 5200 c. 5320 d. 5375 e. 5150. 303. The value of Trade Balance at equilibrium is: a. 385 b. 342 c. 368 d. 375 e. 370. 304. The following equations are given with respect to a hypothetical economy. Consumption function Investment function Exogenous Government expenditure Transaction demand for money Speculative demand for money Supply of Money Exports Tax function Import function C I G Mt Ma Ms E T M 15 + 0.8 Yd 450 12i 300 MUC 0.20Y 145 60i 300 MUC 225 MUC 0.25Y 5 + 0.2Y

fa

iU

a.

Y=

ni

20 04

Th e

b. c. d. e.

Ic

Y = M+ Y= Y= Y=

170

ve rs i

The equilibrium interest rate in the economy is a. 2.7 % b. 7.2 % c. 5.1 % d. 5.8 % e. 4.5 %. 305. If the demand for money is L = kY hi and the money supply is M , the money market equilibrium is:
M + hi k hi k

M + hi k M hi k hi M . k

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

Income Determination Model Including Money and Interest

04

20

04

04

Part-II

306. For an economy, goods market equilibrium is: 0.5 Y = 3,125 25i. If expansionary monetary polices decrease the rate of interest in the economy by one percentage point, the equilibrium income will a. b. c. d. e. Decrease by 25 MUC Increase by 25 MUC Decrease by 50 MUC Increase by 50 MUC Insufficient data.

a. b. c. d. e.

250 MUC. 375 MUC. 190 MUC. 500 MUC. 225 MUC.

Investment function (I)

ve rs i

Speculative demand for money (Ms) : 350 100i

ty

Pr es

Transaction demand for money (Mt) : 0.50Y : 200 10i : 500 MUC : 20%

20 04

Th e

Tax rate

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. b. c. d. e. 500 MUC. 550 MUC. 600 MUC. 675 MUC. 750 MUC.

Ic

Current equilibrium rate of interest : 8%

fa

iU

Supply of money (Ms)

ni

s. Al

309.

lr

ig

e.

i = 4% and Y = 580.

ht

re

d.

i = 10% and Y = 700.

se rv

c.

i = 7% and Y = 640.

ed

.IS

b.

i = 5% and Y = 600.

BN

a.

i = 3% and Y = 560.

:8

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?

1-

31

4-

02

27

-4

ef .N

o.

M AC

307. In an economy, the investment function is given by I = 2,500 100i. If an increase in government spending by 625MUC increases the interest rate in the economy by 5%, what could be the amount of crowding out in the economy?

04

20

04
171

04

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. Increases from 6.2 % to 6.5%. Increases from 6.1% to 6.5%. Increases from 6.2% to 6.4%. Increases from 6.0 % to 6.4%. None of the above. = = = = = = 250 + 0.30Yd YT 100 11i 500 MUC 40 MUC

Disposable income (Yd) Tax function (T) Investment function (I) Government expenditure (G) Exports (E)

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.

20 04

Th e

LM function Investment function Transaction demand for money Speculative demand for money Supply of money Current equilibrium rate of interest 172 (I) (Mt) (Ma) (Ms) (i)

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

Y = 500 + 200i 200 10i 0.50Y 350 100i 500 MUC 10%

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

0.25Y

04

20

Savings function (S)

04

311. The following relations are given for an economy:

04

Part-II

314. If expansionary fiscal policies increase the equilibrium rate of interest to 12%, the crowding out in the economy is: a. b. c. d. e. 10 MUC 15 MUC 20 MUC 25 MUC 30 MUC.

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?

e.

750 MUC.

(All macro aggregates are in million units of currency and interest in terms of percent per annum) 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. 50 + .50Yd YT+R 80 MUC 0. 40Y 1000 30i 800 MUC 20 + 0.20 Y 450 MUC 0.50Y 250 100i 500 MUC

Based on the following information answer questions 317 and 318. The following relationship are given for an economy:

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

Goods market equilibrium Money market equilibrium Exports Import function 637.5 MUC (surplus) 667.5 MUC (surplus) 687.5 MUC (deficit) 687.5 MUC (surplus) 768.5 MUC (deficit).

s. Al

lr

ig

ht

re

se rv

ed

.IS

20 04

317. The trade balance at equilibrium in the economy is a. b. c. d. e.

BN

0.5Y = 2925 37.5i 0.25Y = 312.5 + 125i 650 MUC 25 + 0.25Y

:8

1-

31

4-

02

27

-4

ef .N

316. The following relations are derived for an economy:

o.

M AC

d.

700 MUC.

W
173

c.

650 MUC.

04

20

b.

600 MUC.

04

a.

100 MUC.

04

Macroeconomics

Th e

b. c. e. d.

20 04

322. The IS and LM curves for an economy are given below. 650 = 0.6Y + 8i 520 = 0.6Y + 18i Where, Y is income and i is interest rate. If the exogenous government expenditure increases by 120 what will be the new equilibrium income? a. b. 174 1,253. 1,132.

Ic

a.

655

fa

648 662 671 640.

iU

C I Ms Mt Ma

= 120 + 0.6Y = 150 80i = 300 = 0.3Y = 120 160i

ni

ve rs i

ty

Pr es

s. Al

The value of income is: a. 750 b. 720 c. 830 d. 800 e. 825. 321. The equilibrium level of income is:

lr

ig

ht

re

se rv

ed

.IS

BN

:8

Suppose C I L M

= = = =

60 + 0.80Y, 116 2i, 0.20Y 5i and 120.

1-

31

4-

02

27

-4

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,

ef .N

o.

M AC

04

20

04

04

Part-II

c. d. e. 323. C I

1,245. 1,268. 1,250. = 120 + 0.6Y = 150 80i

Ms = 300

20 04

Ms = 3,200 exogenous money supply 324. The Budget surplus of the government is: a. 18.6 b. 17.25 c. 16.7 d. 18.5 e. 17.75. 325. The value of equilibrium income when the government expenditure increases to 63 is: a. 375.40 b. 342.45 c. 362.50 d. 358.40 e. 365.75.

Money Supply and Banking System


326. If the government expenditure increases by 60, the value of equilibrium income is: a. b. c. d. e. 5450 5400 5475 5650 5625.

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

Md =

80Y 2400i demand for money function

.IS

31 exogenous government expenditure

BN

150 16i investment function

:8

1-

0.15Y tax function

31

Yd

Y T disposable income

4-

02

75 + 0.80 Yd consumption

27

-4

Calculate the transaction demand for money? a. 194.80. b. 196.50. c. 195.45. d. 195.30. e. 196.10. Based on the following information answer the questions 324 and 325. The following relations have been estimated for an economy:

ef .N

o.

M AC

W
175

04

20

04

04

Mt = 0.3Y Ma = 120 160i

Macroeconomics

Based on the following information answer the questions 327 to 329. New issue ratio Intermediation ratio Financial interrelations ratio Net capital formation 327. The amount of Total Issues is: a. 1,19,387.4 b. 1,18,574.5 c. 1,18,250.5 d. 1,19,457.6 e. 1,17852.5. 328. The amount of Primary Issues is: a. 63,247.1 b. 62,525.5 c. 62,425.5 d. 63,147.1 e. 63,725.7. 329. The amount of Secondary Issues is: a. 45,446.92 b. 44,569.06 c. 44,737.82 d. 45,659.20 e. 45,465.91. 330. = 0.64 = 0.72 = 1.21 = 98,667.3

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%.

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

20 04

176

Th e

Ic

se rv

ed

.IS

19x2 93,102.10 10,201.00 5,203.01 1,301.32 11,021.01

5,035.92 5,016.00 562.04 17,421.03

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

331. 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 Rs. in Crores 620 60 950 875 222 421 40 72 42 60 120

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.

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-

The value of money multiplier

31

4-

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:

02

27

-4

ef .N

o.

M AC

04

20
177

04

04

Macroeconomics

334. Particulars Finance ratio Financial interrelation ratio Intermediation ratio 2001 0.31 0.78 1.24 2002 0.29 0.80 1.18

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.

Finance ratio Financial interrelation ratio Intermediation ratio Secondary issues in 2001

25.69% 1.22 0.82 = 12,000

28.5% 1.32 0.94

20 04

Th e

Particulars Finance ratio Financial interrelation ratio New issue ratio Intermediation ratio

ve rs i

ty

Based on the following information answer the questions 336 to 338. 2001 25.69% 1.22 0.82 = 12,000 = 14,000 2002 28.5% 1.32 0.68

Secondary issues in 2001 Primary issue in 2002

NNP at factor cost in 2001 = 85,000 The NNP at FC is increased in 19x2 by 12%. 336. The net capital formation for the year 2002 is: a. b. c. d. e. 178 20,567 20,547 20,588 20,675 20,450.

Ic

fa

iU

ni

Pr es

Primary Issue in 2002 = 14,000 NNP at Factor cost in 2001 = 85,000 The NNP at FC is increased in 2002 by 12% Calculate the new issue ratio for 2001. a. 0.65 b. 0.67 c. 0.71 d. 0.64 e. 0.68.

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

Particulars

2001

2002

o.

335. The following data is given:

M AC

e.

431.

d.

382

04

c.

445

20

04

b.

341

04

a.

275

Part-II

337. The total issue for the year 2002 is: a. b. c. d. e. a. b. c. d. e. 339. Particulars Consumption (C) Investment (I) Government expenditure (G) Exports (E) Imports (M) Money Supply (Ms) Rs. in Crores 500 150 140 80 60 162 27,184 27,176 27,458 27,750 27,635. 0.94 0.87 0.85 0.89.

338. The Intermediation Ratio for the year 2002 is:

20 04

341.

Th e

The velocity of money in the economy is: a. 3 b. 6 c. 9 d. 7 e. 5. 340. In an economy monetary liability of RBI is Rs.10,000 and government money is Rs.2,000. The currency/deposit ratio is known to be 0.33. The Central Banks money supply target is Rs.45,000. The reserve ratio that RBI must impose on banks to achieve money supply is: a. 0.028 b. 0.025 c. 0.036 d. 0.058 e. 0.061. Reserve with the Central Bank = 4,000 Volume of demand deposits = 16,000 Reserve requirements = 25% If the volume of reserves is decreased by Rs.600 and volume of demand deposits increased by Rs.1,000, the new reserve ratio will be: a. b. c. d. e. 0.35 0.4 0.2 0.6 0.1. 179

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

0.98

Macroeconomics

342. The following information is given: Particulars Currency with the public Deposit money of the public Total post office deposits Time deposits with bank Post office savings bank deposits The value of M3 is: b. c. d. e. 343. Particulars Net worth Other assets Other non-monetary liabilities Government deposits Credit to commercial sector Foreign exchange assets Credit to government Credit to banks Rs. in Crores 800 40 20 140 400 20 1,400 600 1,750 1,800 1,700 1,400. a. 1,650 Rs. in Crores 1,000 400 300 300 200

c. d. e.

90.10 95.25 96.75.

Based on the following information answer the questions 344 and 345. 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)

ni

ve rs i

ty

Pr es

s. Al

lr

b.

94.50

ig

ht

a.

99.76

re

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:

se rv

ed

.IS

20 04

Th e

Ic

fa

iU

180

BN

:8

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

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

344. Percentage change in new issue ratio. a. b. c. d. e. a. b. c. d. e. 4.8 3.6 4.2 5.6 4.6. 23% 22% 19% 18%.

345. Calculate the percentage change in Intermediation ratio.

Based on the following information answer the questions 346 and 347. The currency with the public Banks reserves The currency deposit ratio Central Banks reserve ratio a. b. c. d. e. 12,000 16,000 18,000 22,000 14,000. = = = = Rs.4,000 Crore currency units Rs.1,000 Crore currency units 0.4 0.10

b. c. d. e.

0.2365. 0.3540. 0.3340.

Th e

Finance ratio Financial interrelation ratio New issues ratio Intermediation ratio

Ic

Based on the following information answer the questions 348 to 351. : : : : 0.25 1.60 0.85 0.88

20 04

The National income of the economy is 96,000 Million units of currency. 348. Find out the total issues. a. b. c. d. e. 25,000 24,000 22,300 25,750 23,250. 181

fa

iU

0.3258.

ni

ve rs i

ty

Pr es

a.

0.2285.

s. Al

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?

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

346. The value of money supply in the economy is:

4-

02

27

-4

ef .N

o.

In an economy,

M AC

04

20

04

04

21%

Macroeconomics

349. Compute net capital formation. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. 16,000 12,500 19,000 11,000 15,000. 11,500 12,750 14,200 15,500. 12,460 12,750 11,280 11,220 12,250.

350. Calculate the new issues.

Rest of the world National income

se rv

Domestic sector Net capital formation

ed

Primary issues: Issues of non-financial sectors 9,760 835 13,680 98,865

352. The value of Intermediation ratio is: a. 0.84 b. 0.89 c. 0.93 d. 0.76 e. 0.78. 353. The value of new issue ratio is: a. 0.71 b. 0.82 c. 0.83 d. 0.79 e. 0.77. 354. The stock of high-powered money (H) : 18,950 The Currency Deposit Ratio : 0.5 The reserve ratio : 0.1

20 04

182

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

.IS

BN

Secondary issues: Issues of financial institutions.

:8

Item

1-

31

Based on the following information answer the questions 352 and 353. Amount (Rs in Crores) 8,985

4-

02

27

-4

ef .N

o.

M AC

351. Calculate secondary issues.

04

20

04

04

13,450

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. Based on the following information answer the questions 355 and 356. 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%.

Million units of currency 125 Bank deposits 50 Government deposits 20 Foreign exchange assets 1,000 Net worth 50 Other assets 25 Other non-monetary liabilities 1,750 Credit to government 750 Credit to banks 500 Credit to commercial sector 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.

20 04

Th e

Ic

fa

iU

ni

The following balances have been taken from the Balance Sheet of the Central Bank of an economy:

ve rs i

Based on the following information answer the questions 357 and 358.

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
183

04

04

Macroeconomics

357. The Reserve Ratio is: a. b. c. d. e. 10.6% 11.2% 10.9% 11.5% 9.8%.

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:

e.

25.

c. d. e.

15,468.75 15,400.75.

b. c. d. e.

1,600 1,750

20 04

361. If the currency deposit ratio is 1.2 and the reserve ratio 0.10, the value of the money multiplier is: a. b. c. d. e. 1.63 1.69 1.72 1.75 1.65.

184

Th e

Ic

fa

1,800.

iU

1,450

ni

ve rs i

ty

a.

1,500

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:

s. Al

lr

ig

ht

15,350.75

re

se rv

b.

15,725.75

ed

.IS

a.

15,565.75

BN

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:

:8

1-

31

Financial interrelations ratio

: 1.60

4-

02

Intermediation ratio

: 0.65

27

-4

Finance ratio

: 0.30

ef .N

359. The following indicators of financial development for an economy are available for the year 2000.

o.

M AC

d.

23

c.

21

04

20

b.

26

04

a.

24

04

Part-II

362. The following balances have been taken from the Balance Sheet of the Central Bank of an economy. Million units of currency 500 200 10 5 250 50 7

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

Million units of currency 700 300 20 50 200 10 400 20 10

Government money is negligible and hence can be ignored. The currency-deposit ratio in the economy is 0.35 and the Central Bank wants to fix the total money supply at 2,400 million. The reserve ratio that the Central Bank impose is: a. 15% b. 13% c. 18% d. 12% e. 10%. 364. In an economy the currency with the public is 5,000 and banks reserves are 500. The currency/deposit ratio is known to be 0.3; the Central Banks money supply target is 16,500. The reserve ratio that the Central Bank must impose is: a. .11 b. .18 c. .13

20 04

Th e

d. e.

Ic

fa

.15 .16. 185

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

363. The following balances have been taken from the balance sheet of the Central Bank of an economy:

1-

31

4-

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%.

02

27

-4

ef .N

o.

M AC

04

Credit to government Credit to bank Government deposits Other non-monetary liabilities Net worth Credit to commercial sector Foreign exchange assets Other assets

20

04

04

Macroeconomics

Based on the following information answer the questions 365 and 366. Particulars Credit to government Credit to Bank Government deposits Other non-monetary liabilities Net worth Credit to commercial sector Foreign exchange assets Other assets Million units of currency 950 350 20 5 500 125 65

a. b. c. d. e.

11% 16% 12% 14% 10%.

e.

390.

b. c. e.

Th e

20 04

d.

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 Reserves with the Central Bank Volume of demand deposits Reserve requirement 2,400 9,600 25%

186

Ic

fa

a.

0.2 0.3

0.08 0.1 0.5.

iU

ni

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:

ve rs i

ty

Pr es

s. Al

lr

d.

320

ig

ht

c.

378

re

b.

360

se rv

a.

345

ed

.IS

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:

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

365. The reserve ratio imposed by the Central Bank is:

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.

04

20

04

04

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. b. c. d. e. 369. 100 120 160 125 130. Particulars Secondary Issues: Issues of financial institutions Primary issues: Issues of non financial sectors a. Domestic sectors b. Rest of the world Net Capital Formation (Net physical asset) National income The intermediation ratio for the year 2001. a. b. c. d. e. 0.92 0.88 0.85 0.95 0.98. 8,525.00 725.00 12,333.33 13,850.00 19,230.76 1,775.00 2001 7,862.50 2002 12,500.00

re

370. The following are the indicators of financial development for an economy:

Intermediation ratio

Pr es

Financial interrelations ratio

s. Al

Finance ratio

ig

ht

2001 0.28 1.75 0.75

lr

Ic

fa

Other relevant information is as follows:

iU

ni

(The above ratios are based on total figures pertaining to a year and not on the incremental values.) (Million units of currency) 2001 2002 10,000 12,000

20 04

Th e

New issues

The net capital formation for the year 2001 is: a. b. c. d. e. 15,000 18,000 14,000 11,000 10,000.

ve rs i

ty

se rv

ed

.IS

2002 0.25 1.20 0.70

BN

:8

1-

31

4-

02

27

95,404.16 1,21,456.75

-4

ef .N

o.

M AC

W
187

04

20

04

04

Macroeconomics

Based on the following information answer the questions 371 and 372 Particulars Credit to government Credit to banks Government deposits Other non-monetary liabilities Deposits of banks with Central Bank Credit to commercial sector Currency issued by Central Bank Net worth Foreign exchange assets Other assets Million units of currency 1,080 420 300 350 400 300 400 250

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.

20 04

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 Financial interrelations ratio Intermediation ratio New Issues (Million units of currency) 188 0.27 1.50 0.75 90,000

Th e

Ic

fa

iU

ni

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

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

500

04

20

04

04

800

Part-II

374. The secondary issues for the year 2000 is: a. b. c. d. e. a. b. c. d. e. 65,400 67,300 67,500 66,500 68,750. 1,05,000 1,03,180 1,05,750 1,06,570. 1,01,280

375. The value of net capital formation for the year is:

New Issues (million units of currency) 376. The national income for the year 2001is: a. b. c. d. e. a. b. c. d. e. 10,56,286 10,57,290 10,58,980 10,57,280. 0.98 10,56,280

1,98,240

Th e

20 04

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. b. c. d. e. 4.8% 5.0% 5.2% 4.6% 6.0%. 189

Ic

fa

0.96 0.89

0.91

0.85.

iU

ni

ve rs i

377. The new issue ratio for the year 2001 is:

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

Intermediation ratio

0.76

1-

Financial interrelations ratio

1.60

31

4-

Finance ratio

0.33

02

27

2001

-4

The following are the indicators of financial development for an economy for the year 2001.

ef .N

Based on the following information answer the questions 376 and 375.

o.

M AC

04

20

04

04

Macroeconomics

379. Particulars Credit to government Government deposits Credit to banks Deposit of banks (Reserves) Credit to commercial sector Net worth Foreign exchange assets Other assets Other non-monetary liabilities The currency-deposit ratio is ascertained to be 34%. The amount of government money is 10 million units of currency. Million units of currency 3,500 100 1,500 250 1,000 40 100 50 2,000

Based on the following information answer the questions 380 and 381.

Credit banks

Pr es

Credit to government Government deposits

s. Al

Particulars

ig

ht

The following balances have been taken from the balance sheet of the Central Bank of an economy.

lr

re

se rv

Million units of currency 1,000 400 20 10 500 100 70 14

20 04

Th e

Other assets Foreign exchange assets

The Currency-Deposit Ratio = 0.2 Reserve Ratio a. b. c. d. e. 5058.5 5059.2 5120.2 5109.2 5029.5. = 5%

380. The value of money supply in the economy is:

190

Ic

Credit to commercial sector

fa

iU

Net worth

ni

Other non-monetary Liabilities

ve rs i

ty

ed

e.

10.67%.

.IS

BN

d.

11.56%

:8

c.

12.80%

1-

31

b.

11.26%

4-

a.

10.50%

02

27

The value of the Reserve Ratio is:

-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.

ef .N

o.

M AC

04

20

04

04

Part-II

381. If the Central Bank wants to reduce the money supply by 20%, the new reserve ratio would be: a. b. c. d. e. 382. Particulars Finance ratio Intermediation ratio Financial interrelations ratio Other information: New issues Calculate secondary issues. a. b. c. d. 15,000 14,550 16,750 14,450 Year I 0.27 0.75 1.60 20,000 12.50% 11.75% 12.80% 11.25% 12.20%.

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 Demand for money equation Current money supply in the economy Income elasticity of demand for money 5000 30i 0.3Y 300i 300 million units of currency 1.2 191

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

383. Given the following information

:8

e. 15,600. Based on the following information answer the questions 383 and 384.

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

The following estimates are made for the next year: Rate of inflation Rate of growth of real GDP 5% 3.5%

In the economy the commercial banks charge nominal rate of interest which is 2% higher than the equilibrium rate of interest. 385. The value of the expected stock of money is: a. b. c. d. e. a. b. c. d. e. 337.8 327.6 377.6 358.5 325.8.

11.25% 10.25% 12.75% 10.88%.

Government money is 5 million units of currency. The Currency/Deposit ratio is 0.4 and the Central Bank has imposed a reserveratio of 10%. a. b. c. 27,440 387. The value of money supply in the economy is: 26,570

Th e

d. e.

20 04

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: a. b. c. d. e. 580 620 560 610 635.

192

Ic

fa

28,480 27,720 26,980.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

Credit to banks Government deposits Credit to Government Other non-monetary liabilities Foreign exchange assets Credit to commercial sector Net worth Other assets

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

The following are the balances taken from the balance sheet of the Central Bank. 30,000 1,000 4,000 405 700 7,500 35,000 4,000

4-

02

Based on the following information answer the questions 387 and 388.

27

-4

ef .N

o.

M AC

11.50%

386. The cost of borrowing from the commercial banks is:

04

20

04

04

Part-II

389. The following monetary data on financial development of an economy has been obtained for the year 1998. New issues ratio Net Physical Capital Formation Secondary issues a. b. c. d. e. 0.71 0.82 0.85 0.78 0.91. Rs. in Crores Currency with the public: Notes in circulation Rupee coins Small coins Cash in hand Deposit money of the public: Other deposits with Reserve Bank Time deposits with banks Post office deposits: Post office savings bank deposits Total post office deposits 5,627 Demand deposits with banks 1,44,818 1,942 991 4,986 99,106 0.74 2,00,445 1,15,605

Compute the Intermediation Ratio for the economy.

ht

re

Th e

391. The following balances have been taken from the balance sheet of Central Bank of an economy.

Ic

fa

iU

Calculate measure of money stock (M1) as evolved by Reserve Bank of India. a. 2,42,580 b. 2,57,470 c. 2,48,775 d. 2,52,275 e. 2,45,465.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

se rv

ed

4,83,560 5,041

25,969

.IS

BN

20 04

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

:8

1-

Million Units of Currency 1,500 600 30 15 750 150 21 105

31

4-

02

27

-4

ef .N

o.

M AC

390. The following are the data pertaining to the various components of money supply.

04

20

04

04

Macroeconomics

The money supply in the economy is: a. 5,525.75 b. 5,650.10 c. 5,680.48 d. 5,475.36 e. 5,872.29. Based on the following information answer the questions 392 and 393. Following are the indicators of financial development of an economy for the year 2002-03. 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. 392. The value of the Total Issue is: a. b. c. d. e. a. b. c. d. e. 7,25,000 7,75,000 7,00,000 8,15,000 8,35,000.

12,00,000 12,50,000 15,00,000 11,50,000.

20 04

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

ig

ht

Based on the following information answer the questions 394 and 395. Million units of currency 50 20 1,000 50 25 1,750 750 500 125

394. The Reserve Ratio imposed by the Central Bank would be: a. b. c. d. e. 194 11.76 12.28 10.87 10.67 11.25.

Th e

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.

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

re

se rv

ed

.IS

BN

:8

10,00,000

1-

393. The value of National Income is:

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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. b. c. d. e. 21.5 22.9 20.5 23.8 21.7.

Based on the following information answer the questions 396 and 397. Finance ratio Financial interrelation ratio New issues ratio Intermediation ratio 0.25 1.60 0.85 0.88

396. The value of the Net Capital formulation is: a. b. c. d. e. a. b. c. d. e. 13,500 12,000 14,000 16,000 15,000. 11,250 13,250 12,750 11,500 12,500.

Based on the following information answer the questions 398 and 399. Secondary Issues: Issues of Financial Institutions Primary Issues: Issues of Non-Financial Sectors

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

397. The value of the Secondary Issues is:

BN

:8

1-

ve rs i

ty

Th e

a. Domestic Sectors b. Rest of the World Net Capital Formation (Net Physical Assets) National income

Ic

fa

iU

ni

20 04

398. The value of Finance Ratio is: a. b. c. d. e. 0.70 0.65 0.25 0.42 0.28. 195

31

11,600 1,200 1,600 89,600

4-

2001 9,600

02

27

-4

ef .N

National income during the period is 96,000 million units of currency.

o.

M AC

04

20

04

Following are the indicators of financial development of an economy for the year 2002-03.

04

Macroeconomics

399. Calculate Intermediation Ratio. a. 0.85 b. 0.82 c. 0.71 d. 0.73 e. 0.75. 400. 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. 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

.IS

BN

Million units of currency 1,000 400 20 10 500 100 70 14

The value of Money Supply in the economy is: a. 5,018.5 b. 5,025.2 c. 5,109.8 d. 5,059.2 e. 5,138.5. Particulars Secondary issues Primary issues Net capital formation National income 2001-2002 68,500 47,445 1,16,450 6,50,750

20 04

Based on the following information answer the questions 402 and 403.

196

Th e

Ic

fa

The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a reserve ratio of 5%.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

402. The value of Finance Ratio is: a. b. c. d. e. a. b. c. d. e. 0.178 0.125 0.195 0.182 0.165. 0.417 0.432 0.407 0.412. 2002-03 69,000 50,000 1,20,000 8,00,000

403. The value of New Issues Ratio is:

Based on the following information answer the questions 405 and 406. 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

20 04

405. The value of the total money supply in the economy is: a. b. c. d. e. 4,065 4,078 4,125 4,150 4,275. 197

Th e

Government money in the economy is 10 million units of currency The currency to deposit ratio is 35% The reserve ratio is 10%

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

Following are the extracts from the balance sheet of Central Bank. Million units of currency 1,000 400 80 100 300 20 10 5 300

re

se rv

e.

0.915.

ed

.IS

d.

0.909

BN

c.

0.992

:8

b.

0.986

1-

31

a.

0.998

4-

02

Particulars Secondary Issues Primary Issues Net Capital formation National Income

27

-4

ef .N

o.

M AC

404. From the following financial data, calculate financial interrelations Ratio.

04

20

04

04

0.425

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. Particulars Credit to banks Credit to government Credit to commercial sector Net foreign exchange assets Net worth Government Deposits Deposits of Banks Other assets Million units of currency 2,000 4,500 500 6,000 1,000 300 1,200 200 Following are the extracts from the balance sheet of the Central Bank.

407. The Money supply in the economy is: b. c. d. e. 38,250 36,000 39,000 41,000.

a. b. c. d. e.

12.2 11.5 13.5 10.7

Th e

409. The following are the excepts from the balance sheet of a Central Bank. 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

20 04

198

Ic

12.8.

fa

iU

ni

ve rs i

ty

Pr es

s. Al

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:

lr

ig

ht

re

se rv

ed

.IS

a.

37,500

BN

:8

1-

Government money in the economy is 100 MUC. Reserve ratio imposed by the Central Bank is 10% and currency deposit ratio is 0.30.

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

If the government money is 25 MUC, the high powered money in the economy is: a. b. c. d. e. 1,650 MUC 1,750 MUC 1,725 MUC 1,825 MUC 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: b. c. d. e. 1,040 MUC 1,080 MUC 1,120 MUC. Particulars Private final consumption expenditure Fixed capital formation Increase in inventories Government final consumption expenditure Exports Money supply a. b. c. d. e. 4 5 6 7. Imports The velocity of money in the economy is 3 MUC 750 225 160 40 30 239 1,100 MUC

ve rs i

412. On the basis of following data calculate finance ratio for the year 2003. GDP at market price

ty

Pr es

iU

Particulars

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

ni

Th e

Depreciation Indirect taxes Subsidies Net factor income from abroad Net capital formation Finance interrelation ratio

Ic

fa

20 04

1-

a. b. c. d. e.

28.6% 31.6% 34.6% 26.6% 36.6%. 199

31

MUC 76,500 2,500 1,225 725 200 15,500 1.5

4-

50

02

27

-4

ef .N

o.

411. The following data pertains to a hypothetical economy.

M AC

04

20

04

04

a.

1,060 MUC

Macroeconomics

20 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

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

Part-II

Finance ratio Financial inter-relation ratio

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

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

Loans to the commercial sector 20 If the government money is 100 MUC, high-powered money in the economy is a. 3,000 MUC b. 3,050 MUC c. 3,100 MUC d. 3,300 MUC e. 3,400 MUC. 418. As on september 30, 2003 monetary liabilities of the central bank are 1,200 MUC and government money is 50 MUC. If the currency deposit ratio is 0.20 and the central bank specifies a reserve ratio of 5%, money supply in the economy will be a. 5,000 MUC b. 5,500 MUC c. 6,000 MUC d. 6,550 MUC e. 6,600 MUC. 419. In an economy the high powered money is 500MUC. The currency deposit ratio is estimated to be 0.40 and the reserve ratio is 10%. If foreign exchange assets with the central bank increase by 10 MUC what is the new reserve ratio so that the money supply remains at the previous level? a. 9%. b. 10%. c. 11%. d. 12%. e. 13%. 420. Indicators of financial development of an economy for the year 2002-03 are given below: 0.50 0.32

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04
201

04

Macroeconomics

e. 423.

None of the above. Rs.8,000 Rs.32, 000 25%

Reserves with the Central Bank Volume of demand deposits Reserve requirements

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? a. b. c. d. e. 0.5. 0.2. 0.8. 0.1.

d. e.

15,750 17,320.

Particulars

s. Al

lr

ig

425. The following are the figures from the balance sheet of Central Bank

Credit to banks

ve rs i

ty

Credit to government Government deposits

Pr es

ht

re

Million units of currency 2,500 500 25 18 522 160 75 15

20 04

Th e

Net worth Credit to commercial sector Other assets Foreign exchange assets.

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. a. b. c. d. 202 12,660 12,458 12,980 12,725

Ic

Other non-monetary liabilities

fa

iU

ni

se rv

ed

c.

16,750

.IS

b.

17,280

BN

:8

a.

15,450

1-

31

Calculate Net Capital Formation for the year 19x0, if the New Issues for the year is 18,000 (Million units of currency).

4-

02

27

Finance Ratio: Intermediation Ratio: Financial Interrelations Ratio:

0.35 0.68 1.75

-4

ef .N

o.

424. The following indicators of financial development for an economy are available for the year 19x0.

M AC

04

20

04

04

0.4.

Part-II

e. 426.

12,888. Rs. in Crore 740 75 1,010 890 235 55 76 44 70 130 460

Particulars Share capital Reserve funds Credit to state government Credit to government Deposits of Banks Credit to banks Foreign exchange assets Other non-monetary liabilities Other assets Government deposits Government money

c. d. e.

0.12. 0.22.

Th e

428. From the following calculate M3.

20 04

Currency with the public Deposit money of the public Total post office deposits Time deposits with the bank Post office savings bank deposits

Ic

fa

0.23.

iU

ni

ve rs i

ty

b.

0.16.

Pr es

a.

0.18.

s. Al

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?

lr

ig

ht

Reserves with Central Bank Volume of demand deposits Reserve requirements

= 5000 = 18,000 = 25%

re

se rv

a. b. c. d. e.

3,415 3,225 3,260 3,650 3,420. 203

ed

.IS

427.

2,250 630 478 535 312

BN

e.

5,550.

:8

d.

5,425

1-

31

c.

5,320

4-

02

b.

5,645

27

a.

5,291

-4

In the economy currency deposit ratio is 0.3 and reserve ratio 0.10 is imposed by Central Bank.

ef .N

o.

M AC

04

20

04

04

Macroeconomics

429. 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. The stock of High-powered money (H) = 22,550 The currency deposit ratio (Cu) = 0.6 The reserve ratio (r) = 0.12 The Central bank purchases the government securities worth Rs.12,500. Calculate the increase in money supply in the economy. a. 27,550 b. 26,450 c. 26,840 d. 27,750 e. 15,870.

20 04

432. Assume that the ability of the commercial banking system to create demand deposits depends only upon reserve requirement stipulated by the Central Bank.

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

Reserve with the Central Bank Volume of demand deposits Reserve requirements

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

re

se rv

= 3,200 = 11,500 = 30%

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part-II

433. Particulars Finance ratio Intermediation ratio Finance interrelation ratio New Issues (Million Units of currency) Calculate the new issue ratio. a. b. c. d. e. 0.985 0.922 0.935 0.826 1985 0.26 0.78 1.50 24,000

434. The following are the data pertaining to the various components of money supply. Currency with the public: Notes in circulation Rupee coins Small coins Cash in hand Deposit money of the public: Other deposits with Reserve Bank Time deposits with banks Post office deposits: Total post office deposits a. b. c. d. e. 7,41,540 7,41,030 7,41,145 7,41,160. 7,41,228 Post office savings bank deposits Demand deposits with banks 1,44,818 1,942 991 4,986 99,106

re

se rv

ig

ht

The Open Economy and Balance of Payments: Indias Balance of Payments

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

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

Calculate measure of money stock M3.

s. Al

lr

ed

4,83,560 5,041 25,969

.IS

5,627

BN

:8

1-

31

4-

02

27

-4

ef .N

Rs. in crores

o.

M AC

0.843.

04

20

04

04

Macroeconomics

Export of services Import of services Earnings of loans and investments to abroad Earnings of loans and investments from abroad Short-term loans and investments to abroad Short-term loans and investments from abroad Foreign direct investments to abroad Foreign direct investments from abroad 435. The value of the Trade Balance is: a. b. c. d. e. a. b. c. d. e. 437. Particulars a. b. c. d. e. f. g. Agricultural Exports Aircraft Exports Automobile Imports Dividends paid to foreign investors 2,030 2,125 2,257 2,018 2,125. 5,865 5,546 5,725 5,906 5,645.

31,944 24,928 858 2,108 576 84 70 200

re

se rv

ed

.IS

ht

BN

lr

ig

:8

Rs. in Crores 1,000 450 1,050 100 275 122 900 100 850

Th e

h. i.

20 04

The value of current account Balance is: a. b. c. d. e. +350 345 +347 341 +352.

206

Ic

fa

iU

Donations received from abroad

Direct investment abroad Short-term loans and investment abroad Foreign Direct Investments

ni

ve rs i

Overseas earnings by insurance companies

ty

Pr es

s. Al

1-

31

4-

02

27

436. The overall Balance of Payments is:

-4

ef .N

o.

M AC

04

20

04

04

Part-II

438. The following information is extracted from Indias balance of payments statement, 2002-2003. You are required to prepare the capital account. a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t. u. 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) (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

The Open Economy and Balance of Payments


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.

20 04

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

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

The value of total capital account is: a. 10,242 b. 10,348 c. 10375 d. 10,265 e. 10,328.

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

Macroeconomics

Items Portfolio Investment External Assistance Commercial Borrowings (MT & LT) Commercial Borrowings (Short Term) Commercial Banks Others Rupee Debt Service Other Capital Errors & Omissions

Ic

444. The following information is extracted from the Union Budget for the year 2003-04:

fa

iU

Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt

ni

ve rs i

440. During the year 2002-03, trade deficit for India is a. $ 12,474 million b. $ 12,574 million c. $ 12,974 million d. $ 13,821 million e. $ 13,980 million. 441. During the year 2002-03, current account balance for India is a. $ 3,708 million (surplus) b. $3,708 million (deficit) c. $3,998 million (deficit) d. $3,798 million (surplus) e. $3,888 million (deficit). 442. During the year 2002-03, net foreign investment in India is a. $ 4,755 million b. $ 4,595 million c. $ 4,625 million d. $ 4,555 million e. $ 4,825 million. 443. During the year 2002-03, over all Balance of Payments position for India is a. $18,280 million (surplus) b. $16,980 million (deficit) c. $17,280 million (deficit) d. $17,580 million (surplus) e. $ 16,980 million (surplus).

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

Th e

Particulars

20 04

Tax Revenue (net to center) Non-tax Revenue Recoveries of Loans Other Receipts Borrowings and other Liabilities Non-plan expenditure: On revenue account (excluding interest payment) On capital account Plan Expenditure: On Revenue Account On Capital Account Primary Deficit:

1-

31

2003-2004 Budget Estimates (in Rs. crore) 1,84,169 69,766 18,023 13,200 1,53,637 1,66,161 28,437 76,843 44,131 30,414

208

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Credit 7535 2773 2737 8189 16926 536 6402 634

Debit 6591 5233 4435 7210 8973 246 474 2909

Part-II

The Revenue Deficit for the year 2003-04 is a. Rs.2,53,935 cr b. Rs.1,12,292 cr c. Rs.1,53,637 cr d. Rs.4,38,795 cr e. Rs.1,02,932 cr Based on the following information answer the questions 445 and 446. Budget Estimate for the year 2003-04 Rs. crore Tax Revenue (net to Centre) Non-tax revenue Recoveries of Loans Other Receipts Borrowings and other Liabilities Non-plan Expenditure On Revenue Account (of which Interest Payments is Rs.1,23,223 cr.) On Capital Account Plan Expenditure On Revenue Account On Capital Account 1,84,169 69,766 18,023 13,200 1,53,637 2,89,384 28,437 76,843 44,131

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

20 04

Th e

Ic

ni

Based on the following information answer the questions 447 to 449.

ve rs i

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.

ty

Pr es

s. Al

lr

ig

ht

re

se rv

d.

Rs.1,19,292 cr

ed

.IS

c.

Rs.1,12,292 cr

BN

b.

Rs.1,12,392 cr

:8

a.

Rs.1,13,292 cr

1-

31

445. The estimated revenue deficit for the year 2003-04 is

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

447. The value of the Revenue Receipts is: a. b. c. d. 1,61,984 1,65,948 1,62,895 1,62,750

e. 1,61,994. 448. The value of Capital Receipts is: a. b. c. d. e. 1,05,995 1,05,933 1,05,947 1,05,942 1,05,928.

1-

31

The following items are taken from the Union Budget for the year 2000-01. Tax Revenue (Net) Non-tax Revenue Recoveries of Loans Other Receipts Borrowings and Other Liabilities Non-plan Expenditure: On Revenue Account of which Interest Payments On Capital Account Plan Expenditure: On Revenue Account On Capital Account Rs. in Crore 1,46,209 57,464 13,539 10,000 1,11,275 2,28,768 1,01,266 21,619 52,330 35,770

Th e

a. c.

b. d. e. a. b. c. d. e.

20 04

451. The value of Revenue Deficit is: 77,425 77,275 76,780 76,220 78,650.

210

Ic

fa

450. The Primary Fiscal Deficit is: 10,280 10,265 10,009 10,555 10,256.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

4-

Based on the following information answer the questions 450 and 451.

02

27

450. The value of the Fiscal Deficit is: a. 91,056 b. 91,045 c. 91,025 d. 91,080 e. 91,074.

-4

ef .N

o.

M AC

04

20

04

04

Part-II

Based on the following information answer the questions 452 and 453. (Rs. in Crore) Direct Taxes Indirect Taxes Recovery of Loans Interest Receipts Borrowings and other Liabilities Profit from Public Sector Undertakings Profit from Railways Subsidies Interest Payments Defense Expenditure 452. The value of the Revenue Receipts is: a. 2,05,000 b. 2,03,000 c. 2,03,050 d. 2,02,500 e. 2,02,000. 453. The value of the Non-plan Expenditure is: a. 2,08,500 b. 2,09,000 c. 2,09,250 d. 2,08,750 e. 2,08,400. 40,000 1,20,000 10,000 12,000 22,000 17,000 13,000 1,32,000 30,000 47,000

s. Al

lr

454. The value of Deficit Fiscal from the following data extracted from Union Budget, 1999-2000. (Rs. in crore) 1,32,365 50,475 2,36,987 46,895 1,02,331 88,000 11,087 10,000 Tax Revenue

Non-tax Revenue Total Revenue Expenditure Total Capital Expenditure Non-plan Revenue Expenditure (excl. interest Payments) Interest Payments Loans Recovered Other Capital Receipts

20 04

Th e

a. b. c. d. e.

Ic

fa

78,985 77,998 79,595 79,955 79,050.

iU

ni

ve rs i

ty

Pr es

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
211

04

20

04

04

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) 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 455. The value of Fiscal Deficit is: a. b. c. d. e. a. b. c. d. e. 1,12,575 1,25,750 1,21,275 1,11,275 1,22,475. 1,46,209 57,464 13,539 1,12,275 10,000

77,275 79,280.

Economic Growth, Development & Planning


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?

Th e

d. e.

20 04

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 a. b. c. d. e. 212 3.0 4.5 5.0 4.0 5.5.

Ic

c.

fa

4.0% .

3.5% . 4.5%.

iU

b.

3.0%.

ni

a.

2.0%.

ve rs i

ty

Pr es

s. Al

lr

ig

ht

78,750

re

se rv

77,425

ed

.IS

78,435

BN

456. The value of Revenue deficit is:

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

2,28,768 21,619 52,330 35,770

04

20

04

04

Part-II

Based on the following information answer the questions 459 and 460. Targeted growth rate in real GDP = Incremental capital output ratio = 7.0% 4

Gross domestic savings as a proportion of the GDP for the year is expected to be 24%. 459. The required external financing to achieve the targeted growth rate in GDP is: a. b. c. d. e. a. b. c. d. e. 4% 6% 3.5% 5%. 4.5% 4.3% 4.9% 4.8% 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

ef .N

o.

M AC

W
213

04

460. The per capita GDP, if population is expected to increase by 2% during the same period is:

20

04

04

4.25%

Part II: Solutions


Measurement of Macroeconomic Aggregates
1. (b) Item Qty (Qio) Price (Pio) Price (Pit) 1985 86 1985 86 1995 96 9.00 7.00 20.00 0.75 Price relative 1995 96 (i) 120 140 133 150 Weights (iii) (ii) = (i) x (iii) 0.20 0.27 0.40 0.13 24.0 37.8 53.2 19.5 134.5

:8

1-

Rice Wheat Milk Cotton Cloth Housing

20 10 40 15 Single Bedroom

10 8 6 20 400

120 130 130 100 100

ef .N

0.164 0.066 0.197 0.246 0.328

o.

31

4-

02

27

4. (a) Real GNP of 2002-03

= Nominal GNP 2002-03 (GNP Deflator 2000-01/GNP Deflator 2001-02). 5. (b) Growth Rate 6. 7. = (Real GNP 1996-97/Real GNP 1995-96) 1 = (2,207/2,083) 1 = 0.059 = 5.9%. (c) Inflation Rate = [(GNP Deflator Current Period GNP Deflator Base Period) GNP Deflator Base Period] 100 = [(145 120)/120] 100 = 20.83%. (d) Real GNP2002 03 = Nominal GNP 2002 03 (GNP Deflator 1995-96/GNP Deflator 2002 03) = 3,200 (100/159.5) = 2,006. (a) The real GNP for the period 2001-02 is (2,500/100) 100 = 2,500. (e) Inflation rate in relaxation to 2001-02. = (159.5 100)/100 = 59.5%. (c) GDP at Factor Cost = Wages of salaries (w) + Interest (I) + Gross profits (P) + Rent (R). = 85 + 15 + 10 + 5 + 10 = 125. (e) GDP at Factor Cost = GNP at FC Net Factor Income from Abroad. GNP at FC = GNP at MP Indirect Taxes + Subsidies.

20 04

8. 9. 10. 11.

214

Th e

Ic

fa

iU

ni

ve rs i

= 3,200 (100/145) = 2,207.00.p

ty

Pr es

s. Al

lr

= 2500 (100/120) = 2,083.33.

ig

ht

= Nominal GNP 2001-02 (GNP Deflator 2000-01/ GNP Deflator 2001-02)

re

Real GNP of 2001-02

se rv

= Nominal GNPCurrent Period GNP Deflator base period /GNP Deflator Current Period

ed

3. (d) Real GNPCurrent Period

.IS

BN

Retail price index

-4

M AC

Item

Qty 1991-92

Price 1991-92 Rs.

Price 1996-97 Rs. 12.00 8.00 7.80 20.00 400

Price relative 1996-97 (i)

Weight (ii)

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)

(i) x (ii)

19.68 6.60 25.61 24.60 32.80 109.30

04

20

04

04

Part II

= 5,000 450 + 400 = 4,950 GDP at Factor Cost = 4,950 (900 800) = 4,850. 12. (d) National Income = NNP at Factor Cost. NNP at FC GNP at FC = GNP at FC Depreciation = GNP at MP Indirect Taxes + Subsidies = 5,000 450 + 400 = 4,950
National Income = 4,950 350 = 4,600.

13. (c) Personal Disposable Income Personal Income = National Income Retained Earnings Corporate Tax

14. (b) Net Factor Income from Abroad = GNP at MP GDP at MP where, GDP at MP = GDP at FC + Indirect Taxes Subsidies. = 80,000 + 5,000 0 = 85,000 Net Factor Income from Abroad 15. (a) GDP at FC = 200 + 40 + 50 + 10 = 300. 16. (e) GDP at Factor Cost (i) GNP at MP = GDP at MP + Net Factor Income from Abroad

= Factor Income Received from Abroad Factor Income Paid Abroad.

Th e

18. (c) GNP at MP = GNP at FC + Indirect Taxes Subsidies.

20 04

GNP at FC

Ic

fa

GNP at FC = 390 + 30 = 420. = GDP at FC + Net Income from Abroad

Net Income from Abroad = Factor Income Received from Abroad Factor Income paid Abroad. = 60 30 = 30. GNP at FC = 390 + 30 = 420. GNP at MP = 420 + 10 0 = 430.

19. (a) NDP at FC = GDP at factor cost Depreciation = = Factor Income paid to Residents and Non-residents + Retained Profits + Corporate Profit Tax Depreciation 185 + 25 + 20 + 5 40 = 195. 215

iU

= 60 30 = 30.

ni

ve rs i

ty

Net Income from Abroad

Pr es

17. (a) GNP at FC = GDP at FC + Net Income from Abroad

s. Al

= 250 +40 + 30 +40 +30 = 390.

lr

= Wages + Dividends + Retained Profits + Profit Tax

ig

ht

re

se rv

ed

= Wages and Salaries + Dividends + Retained Profits + Profit tax.

.IS

BN

= 95,000 85,000 = 10,000.

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

Personal Income = 4,600 200 800 = 3,600 Personal Disposable Income = 3,600 1,000 = 2,600.

04

20

04

= Personal Income Personal Income Tax.

04

Macroeconomics

20. (d) GDP at Market Price = GDP at FC + Indirect Taxes Subsidies. GDP at FC = Wages and Salaries + Dividends + Retained Profit + Profit Tax = 300 + 80 + 50 + 30 = 460 GDP at MP = 460 + 20 0 = 480. 21. (a) GNP at Market price = GDP at MP + Net Factor Income from Abroad and GDP at MP = GDP at FC + Indirect Taxes Subsidies. GDP at FC = Wages and Salaries + Dividends + Retained Profit + Profit Tax = 300 + 80 + 50 + 30 = 460 GDP at MP = 460 + 20 0 = 480 GNP at MP = 480 + (60 32) = 480 + 28 = 508. 22. (a) Real GNP for 2001 = Nominal GNP 2001 (100/price level 2001) = 55,000 (100/67.50) = 81,481. 23. (b) Real GNP for the year 2003 24.

25. 26. 27. 28. 29.

30.

= 1,35,000 (100/121.01) = 1,11,561. (c) Net Indirect Taxes = NNP at Market Prices National Income (or) Indirect Taxes Subsidies = (GNP at MP Depreciation) National Income. = GNP at MP (Gross Investment Net Investment) National Income. Where, Gross Investment Net Investment = Depreciation. = 4,800 (800 300) 3,850 = 450. (e) Taxes Transfers = Govt. Purchases + Budget Surplus = 930 + 30 = 960. (e) Personal Income = Wages + Proprietors Income + Net Interest + Dividends + Transfer Payment. = 2,920 + 320 + 120 + 100 + 510 = 3,970. (b) Net Exports = GNP (C + I + G) = 4,800 (3,000 + 800 + 930) = 4,800 4,730 = 70. (b) Corporate Profits = National Income (Wages + Proprietors Income + Net Interest) = 5,775 (4,380 + 480 + 180) = 735. (a) NNP = GNP Depreciation Depreciation = Gross investment Net investment = 1,200 450 = 750 NNP = 7,200 750 = 6,450. (c) Personal Disposable Income = Personal Income Personal Taxes. Personal Income = (National Income Corporate Profits) + Transfer Payments + Dividends. = (5,775 735) + 780 + 150 = 5,970 Personal Disposable Income = 5,970 900 = 5,070.

20 04

216

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

Part II

31. (c) Personal Savings Personal Income

= Personal Disposable Income Consumption = (National Income Corporate Profits) + Transfer Payments + Dividends. = (5,775 735) + 780 + 150 = 5,970 = 5,070 = 570.

Personal Disposable Income = Personal Income Personal taxes

Personal Disposable Income = 5,970 900 Personal Savings = 5,070 4,500 32. (c) NNP at Factor Cost = National Income. NNP at Factor Cost

33. (c) NDP at Factor Cost = NDP at Market Price Indirect taxes+ Subsidies = 16,939 2,136 + 354 = 15,157. 34. (a) National Income = NNP at Factor Cost. = NDP at Factor Cost + Net Income from Abroad = 15,157 46 = 15,111. 35. (d) GNP at Factor Cost 36. (e) Target Per Capita real GDP growth = 5% p.a.

Capital Output ratio = 4:1

Rate of Investment Required = 4 7.1 = 28.4%. = GDP at Market Price + Factor Income Received from Abroad Factor Income Paid Abroad 38. (d) National Income = NNP at Factor Cost

Th e

Ic

fa

= 6,000 + 1,500 1,200 = 6,300. = GNP at Market Prices + Subsidies Indirect Taxes Depreciation. = 6,300 + 475 900 600 = 5,275. = National Income Retained Earnings Corporate Taxes Personal Taxes. = 5,275 225 1,200 900 = 2,950 National Income = NNP at Factor Cost = GNP at Market Prices + Subsidies Indirect Taxes Depreciation. = 6,300 + 475 900 600 = 5,275. 40. (b) NNP = GNP Depreciation (i.e. Gross Investment Net Investment) = 4,850 544 = 4,306. 217

20 04

39. (c) Personal Disposable Income

iU

ni

ve rs i

37. (a) GNP at Market Prices

ty

Pr es

= (Required GDP growth rate) (Capital Output ratio)

s. Al

The required rate of investment as a percentage of GDP

lr

ig

We know that:

ht

re

se rv

Growth required in GDP to achieve target per capita GDP growth = 5 + 2.1 = 7.1% p.a.

ed

Expected Population Growth

= 2.1% p.a.

.IS

BN

:8

= NNP at Factor Cost + Depreciation = 15,111 + 900 = 16,011.

1-

31

4-

02

27

-4

ef .N

o.

M AC

GDP at Market Price

= 16,000 + 8,800 2,000 = 22,800.

04

16,000

= GDP at MP 1,000 4,000 + 2,000 3,800

20

Net Factor Income from Abroad = 3,000 4,000 = 1,000

04

04

= GDP at MP + Net Factor Income from Abroad Depreciation + Subsidies Indirect Taxes.

Macroeconomics

41. (d) Net exports = GNP Domestic Absorption (i.e., C + I + G ) = 4,850 4,917 = 67. 42. (e) Calculation of GNP under Income Method Rs. Indirect Business Taxes Compensation to Employees Rents Interest Proprietors Income Corporate Taxes Dividends Undistributed Profits Total (GNP) 43. (e) Expected Population Growth Target per capita real GDP Growth Hence Rate of Investment 44. (b) Particulars Amount (Rs.) Wages Profits 1,250.00 8,487.50 1,000.00 500.00 500.00 750.00 13,987.50 = 1.9% = 6.0% = 4 7.9 = 31.6%. 1,250.00

:8

1-

Production Account

31

4-

02

Pr es

From/To

20 04

46. (e) NNP at Market Price = NDP at Market Price Net Factor Income from Abroad = 84,686 233 = 84,453. 47. (c) GNP at Market Price = NNP at Market Price + Depreciation = 84,453 + 4,957 = 89,410. 48. (a) NDP at Factor Cost = NDP at Market Price Indirect Taxes + Subsidies. = 84,686 10,689 + 1,772 = 75,769. 218

Th e

Rose Corp. Rs. Rose Corp. ---Perfume Corp ---Bottle Corp. ---House Hold* 2,550 * Including Profits.

s. Al

lr

8,400 45. (c) Input Output Account

re

900 Investment in Stock Net (Increase)

se rv

ed

7,500 Sales to House Holds

.IS

BN

Particulars

27

-4

Hence growth required in GDP to achieve target per capita GDP Growth = 1.9 + 6 = 7.9%

Amount (Rs.) 525 525 8,400

ig

ht

Perfume Corp. Rs. 1,950 ------4,950

Bottle Inventory Corp. Rs. Rs. ---7,200 ---900 600 (300) 225 ----

Value added GDP = 2,250 + 4,950 + 900 = 8,400.

Ic

fa

iU

ni

ve rs i

ty

ef .N

House holds ------7,875 ----

o.

M AC

250.00

04

20

04

04

Part II

NNP at Market Price

Pr es

GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies. = 1,14,601 + 16,745 2,822 = 1,28,524 NNP at Market Price = 1,28,524 8,062 = 1,20,462 NDP at Market Price = NNP at Market Price Net Factor Income from Abroad. NDP at Market Price = 1,20,462 330 = 1,20,132. 56. (c) NDP at Factor Cost = NDP at Market Price Indirect Taxes + Subsidies

ve rs i

GNP at Market Prices NNP at Market Price NDP at Market Price

ty

iU

ni

fa

Th e

NDP at Market Price NDP at Factor Cost

Ic

20 04

57. (d) Personal Income = National Income Retained Earnings Corporate Taxes. National Income = NNP at Factor Cost NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies. NNP at Market Price = GNP at Market Price Depreciation GNP at Market Prices = GNP at Factor Cost + Indirect Taxes Subsidies. = 1,14,601 + 16,745 2,822 = 1,28,524 NNP at Market Price = 1,28,524 8,062 = 1,20,462 219

s. Al

lr

= GNP at Market Price Depreciation = GNP at Factor Cost + Indirect Taxes Subsidies. = 1,14,601 + 16,745 2,822 = 1,28,524 = 1,28,524 8,062 = 1,20,462 = NNP at Market Price Net Factor Income from Abroad = 1,20,462 330 = 1,20,132. = NDP at Market Price Indirect Taxes + Subsidies = 1,20,132 16,745 + 2,822 = 1,06,209.

ig

ht

re

se rv

ed

.IS

55. (e) NDP at Market Price = NNP at Market Price Net Factor Income from Abroad also, NNP at Market Price = GNP at Market Price Depreciation

BN

:8

1-

31

NNP at Market Price

= 1,28,524 8,062 = 1,20,462.

4-

02

= 1,14,601 + 16,745 2,822 = 1,28,524

27

49. (c) Depreciation = GNP at Market Price NNP at Market Price = Rs.1,07,226 1,00,575 = Rs.6,651. 50. (e) Net Factor Income from Abroad = NNP at Market Price NDP at Market Price. Rs.(1,00,575 1,00,422) = Rs.153. 51. (a) Subsidies = GNP at Factor Cost + Indirect Taxes GNP at Market Prices. = 95,023 + 14,723 1, 07,226 = 2,520. 52. (c) NDP at Factor Cost = NDP at Market Price Indirect Taxes + Subsidies. = 1,00,422 14,723 + 2,520 = 88,219. 53. (b) GNP at Market Prices = GNP at Factor Cost + Indirect Taxes Subsidies. = 1,14,601 + 16,745 2,822 = 1,28,524. 54. (a) NNP at Market Price = GNP at Market Price Depreciation also, GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies.

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies NNP at Factor Cost = 1,20,462 16,745 + 2,822 = 1,06,539 Personal Income
NNP at Factor Cost Retained Earnings Corporate Taxes

= 1,06,539 30,000 6,539 = 70,000. 58. (a) National Income = NNP at Factor Cost NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies. NNP at Market Price = GNP at Market Price Depreciation GNP at Market Prices = GNP at Factor Cost + Indirect Taxes Subsidies. = 1,14,601 + 16,745 2,822 = 1,28,524 NNP at Market Price = 1,28,524 8,062 = 1,20,462 NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies NNP at Factor Cost = 1,20,462 16,745 + 2,822 National Income = 1,06,539. (c) Personal Disposable Income = Personal Income Personal Tax Personal Income = National Income Retained earnings Corporate Taxes National Income = NNP at Factor cost NNP at Factor Cost = NNP at market price Indirect taxes + Subsidies. NNP at Market Price = GNP at Market price Depreciation GNP at Market Prices = GNP at Factor Cost + Indirect Taxes Subsidies. = 1,14,601 + 16,745 2,822 = 1,28,524 NNP at Market Price = 1,28,524 8,062 = 1,20,462 NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies NNP at Factor Cost = 1,20,462 16,745 + 2,822 National Income = 1,06,539 Personal Income = 1,06,539 30,000 6,539 = 70,000 Personal Disposable Income = Personal Income Personal Tax = 70,000 10,000 = 60,000. (e) Personal Income Tax = Personal Income Personal Disposable Income. = 60,000 55,000 = 5,000. (b) Retained Profits = National Income Personal Income = 80,000 60,000 = 20,000. (a) Personal Disposable Income = Personal Income Personal Taxes Personal Income = National Income Retained Earnings Corporate Tax National Income = NNP at Factor Cost NNP at Factor Cost = GNP at Factor Cost Depreciation GNP at Factor Cost = GNP at Market Price Indirect Taxes + Subsidies = 4,000 600 + 350 = 3,750 NNP at Factor Cost = 3,750 400= 3,350 Personal Income = 3,350 150 800 = 2,400 Personal Disposable Income = 2,400 600 = 1,800. (d) GDP at Factor Cost = GNP at Factor Cost Net Factor Income from Abroad GNP at Factor Cost = GNP at Market Price Indirect Taxes + Subsidies = 4,000 600 + 350 = 3,750 GDP at Factor Cost = 3,750 (1,000 800) = 3,550.

59.

60. 61. 62.

20 04

63.

220

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

Part II

64. (b) National Income = NNP at Factor Cost. NNP at Factor Cost = GNP at Factor Cost Depreciation GNP at Factor Cost = GDP at Factor Cost + Net Factor Income from Abroad GDP at Factor Cost = GDP at Market Price Indirect Taxes + Subsidies = 4,000 600 + 350 = 3,750 GNP at Factor Cost = 3,750 + (1,000 800) = 3,950 NNP at Factor Cost = 3,950 400 = 3,550 National Income GNP at Factor Cost = 3,550. = GDP at Factor Cost + Net Factor Income from Abroad

66. (a) Item Unit Base year: 1980-81 Current year 1995-96 Base Year Current year Base Year 0 0 qi pi pit Quantities 30 20 1 5 100 Price(Rs.) 3/kg 4/ltr 5/doz 15/mtr 0.3/unit Price (Rs.) 5/kg 6/ltr 6.5/doz 25/mtr 0.4/unit 5 p0q0 i =1 i i

-4

ef .N

o.

GNP at Market Price

= 3,950 + 600 350 = 4200.

Pr es

If the index is computed by using the formula:


t P0 = i =1 n i =1

s. Al

lr

ig

ht

re

ty

se rv

Rice Milk Eggs Cloth Electricity

Kg. Ltr. Doz Meters units

1-

31

4-

( )

( )

( )

02

27

pi0 qi0

90 80 5 75 30 280

ed

ve rs i

pit qi0

.IS

20 04

67. (e) GNP at Market Price GNP at Factor cost GNP at Market Price NNP at Factor Cost

Th e

Ic

Where the weights are calculated using current year quantities = 441.5/280 100 = 157.68. = GNP at Factor Cost + Indirect Taxes Subsidies = GDP at Factor Cost + Net Factor Income from Abroad = 5,700 + 800 400 = 6,100. = NNP at market price Indirect taxes + Subsidies

= 6,000 + (1,500 1,800) = 6,000 300 = 5,700. 68. (a) National Income = NNP at Factor Cost NNP at Market Price = GNP at Market Price Depreciation GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies GNP at Factor Cost = GDP at Factor Cost + Net Factor Income from Abroad = 6,000 + (1,500 1,800) = 6,000 300 = 5,700. 221

fa

iU

pi0 qi0

ni

BN

100

:8

M AC

GNP at Factor Cost

= 3,750 + (1,000 800) = 3,950

150 120 6.5 125 40 441.5 5 p t q0 i=1 i i

W
t 0 pi qi

= 4,000 600 + 350 = 3,750

04

Also GDP at Factor Cost = GDP at Market price Indirect Taxes + Subsidies

20

04

04

65. (d) GNP at Market Price = GNP at Factor Cost + Indirect Taxes Subsidies

Macroeconomics

GNP at Market Price = 5,700 + 800 400 = 6,100 NNP at Market Price = 6,100 400 = 5,700 NNP at Factor Cost National Income Personal Income National Income = 5,700 800 + 400 = 5,300 = 5,300. = National Income Retained Earnings Corporate Taxes = NNP at Factor Cost

69. (c) Personal Disposable Income = Personal Income Personal tax

NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies GNP at market price = GNP at Factor Cost + Indirect Taxes Subsidies GNP at Factor cost = GDP at Factor Cost + Net Factor Income from Abroad = 6,100. = 5,700 = 5,300

GNP at Market Price = 5,700 + 800 400 NNP at Market Price = 6,100 400 NNP at Factor Cost = 5,700 800 + 400 Personal Income = 5,300 250 1,200

i.e. GDP at Market Prices NNP at Factor Cost = 3,400 71. (d) Real GNP for the year 1990:

The real GNP for the years 1990 and 2003 are 46,680 and 1,22,757 Crore. = 71,000 + 2,000

fa

iU

72. (e) GNP at Market Prices

ni

ve rs i

ty

= 1,30,000 (100/105.90)

Pr es

Real GNP for the year 2003

s. Al

= 23,200 (100/49.70)

lr

46,680 Crore 1,22,757 Crore = NNP at Market Price + Depreciation = 73,000. = GDP at Market Price + Net Factor Income from Abroad. = GDP at Factor Cost + Indirect Taxes Subsidies = 70,000 + 1,000 0 = 71,000.

20 04

Th e

GNP at Market Price GDP at Market Prices

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

Ic

ig

ht

The difference between GDP at Market Price and NNP at Factor Cost = 3,400.

re

se rv

ed

= GDP at Market Prices 3,400

.IS

= GDP at Market Prices 500 2,000 + 1,000 1,900

BN

:8

70. (a) NNP at Factor Cost

= GDP at Market Prices + Net Factor Income from Abroad Depreciation + Subsidies Indirect Taxes

1-

31

Personal Disposable Income = 3,850 800 = 3,050.

4-

02

= 5,300 1,450 = 3,850

27

-4

ef .N

o.

M AC

= 6,000 + (1,500 1,800) = 6,000 300 = 5,700.

04

20

04

04

NNP at market price = GNP at Market Price Depreciation

Part II

75. (c) Net Indirect Taxes = NNP National Income. NNP = GNP Depreciation = 2,400 250 = 2,150 Depreciation Net Indirect Taxes 76. (a) Corporate Profits = National Income (Wages and Salaries + Proprietors Income + Rental Income + Net Interest) = 1,925 (1,460 + 160 + 60) = 1,925 1,680 = 245. = 480 + 15 = 495. = (1,925 245) + 260 + 50 = 1,990 Corporate Profits = Gross investment Net investment = 400 150 = 250 = 2,150 1,925 = 225.

= Personal Savings

Personal Disposable Income

re

82. (c) The Total Output of B = 120. Output from A and C and Captive Consumption = 40 + 30 + 20 = 90. Value added = 120 90 = 30. 83. (e) Given saving Income Ratio = 0.24 = 24% Incremental Capital Output Ratio = 6% Rate of growth of national income = Saving Income Ratio/Incremental Capital Output Ratio = 24% / 6% = 4% Rate of growth of Per Capita Income = Rate of growth of National Income Rate of Growth of Population. = 4 3 =1%. 84. (c) Growth rate of real output = 6% Elasticity of money demand = 0.5 Growth in money stock needed in the economy to reach long run equilibrium = 6 0.5 = 3%

20 04

Th e

Ic

fa

iU

ni

ve rs i

81. (e) Since National Income is the ignored. Final sales of A = Final sales of B = Final sales of C =

lr

ig

ht

Pr es

s. Al

total of Final Sales, inter-industry transactions would be 100 (25 + 40 + 15) 100 (10 + 30 + 25) 80 (15 + 20 + 30) Total = = = = 20 55 15 90

ty

se rv

ed

Personal Disposable Income = Personal Income Personal taxes and Non-tax Payments. Personal Income = National Income Corporate Profits + Transfer Payments + Dividends. (1,925 245) + 260 + 50 = 1,990 1,990 300 = 1,690 1,690 1,500 = 190.

.IS

BN

:8

80. (a) Personal Saving = Personal Disposable Income Consumption.

1-

31

Personal Disposable Income = 1,990 300 = 1,690.

4-

02

= (1,925 245) + 260 + 50 = 1,990

27

Personal Income

= National Income Corporate Profits + Transfer Payments + Dividends.

-4

79. (b) Personal Disposable Income

= Personal Income Personal Taxes and Non-Tax Payments.

ef .N

= 1,925 (1,460 + 160 + 60) = 1,925 1,680 = 245.

o.

= National Income (Wages and Salaries + Proprietors Income + Rental Income + Net Interest)

M AC

W
223

04

78. (c) Personal Income = National Income Corporate Profits + Transfer Payments + Dividends

20

04

04

77. (e) Taxes Transfers

= Gross Purchases + Budget Surplus

Macroeconomics

Actual growth rate in nominal supply of money = 5% Rate of inflation in long run equilibrium = 5% 3% = 2% Rate of growth of Nominal Income = Real Growth in Output + Rate of Inflation = 6% + 2% = 8%. 85. (b) The National Income in the economy = Total Final Output in the economy = Sales to Household Sector. The Sales to Household Sector by X, Y, and Z industries are as follows: Y = 240 (20 + 60 + 50) = 110 Z = 160 (30 + 40 + 60) = 30 86. (e) Value added in Industry Y = Output of Y Input from the other industries. = 240 (80 + 60 + 40) = 240 180 = 60. 87. (d) GDP at factor cost National Income = 40 + 110 + 30 = 180.

= 1,064 + 64 + 104 +30 = 1,262

Th e

GNP at Factor Cost = GDP at Factor Cost + Net Factor Income from Abroad GDP at Factor Cost = Factor Income Received by Personal Sector from Business Sector and Government Sector + Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad. = 1,064 + 64 + 104 + 30 = 1,262 GNP at Factor Cost = 1,262 + ( 30) = 1,232 GNP at Market Price = 1,232 + 130 0 = 1,362. 90. (a) GDP at Market Price = GDP at FC + Indirect Taxes Subsidies.

20 04

GDP at Factor Cost

Ic

fa

iU

ni

ve rs i

ty

Pr es

GDP at Market Price

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

s. Al

lr

= Factor Income Received by Personal Sector from Business Sector and Government Sector + Savings of Business Sector + Profit Tax paid by Business + Dividends paid Abroad. = 1,064 + 64 + 104 +30 = 1,262 = 1,262 + 130 0 = 1,392.

ig

89. (e) GNP at Market Price = GNP at FC + Indirect Taxes Subsidies

ht

GNP at Factor Cost = 1,262 + ( 30) = 1,232 GNP at Factor Cost.

re

se rv

ed

= Factor Income Received by Personal Sector from Business Sector and Government Sector + Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad.

.IS

BN

GDP at Factor Cost

:8

88. (a) GNP at Factor Cost

= GDP at Factor Cost + Net Factor Income from Abroad

1-

31

= 1,064 + 64 + 104 +30 = 1,262.

4-

02

= Factor Income received by personal sector from business sector and Government Sector + Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad.

27

-4

ef .N

o.

M AC

04

20

04

04

X = 200 (50 + 80 + 30) = 40

Part II

= GNP at FC + Indirect Taxes GNP at Market Prices = 95,000 + 14,000 1,07,000 = 2,000. 95. (b) NDP at Factor Cost = NDP at Market Price Indirect Taxes + Subsidies. Subsidies = = NDP at FC = GNP at FC + Indirect Taxes GNP at Market Prices. 95,000 + 14,000 1,07,000 = 2,000 1, 00,422 14,000 + 2,000 = 88,422.

94. (a) Subsidies

96. (e) National Income = NNP at Factor Cost. NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies. = 95,000 + 14,000 1,07,000 = 2,000. = 1,00,000 14,000 + 2,000 97. (a) Personal Income = National Income Corporate Profit Tax Retained Profit. NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies. = 95,000 + 14,000 1,07,000 = 2,000 = 1,00,000 14,000 + 2,000 National Income Personal Income Personal Income National income Subsidies National Income Personal Income = 88,000

= 88,000 6,500 30,000 = 51,500.

= NNP at Factor Cost. = GNP at FC + Indirect Taxes GNP at Market Prices.

iU

99. (d) GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect Taxes.

ni

ve rs i

Personal Disposable Income = 51,500 10,000 = 41,500. = 4,73,246 +61,809 19,431 + 87,043 = 6,02,667.

20 04

Th e

100. (a) NNP at Market Price = GNP at MP Depreciation. GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect taxes. = 4,73,246 + 61,809 19,431 + 87,043 = 6,02,667 NNP at Market Price = 6,02,667 61,809 = 5,40,858. 101. (e) NDP at Market Price = NNP at MP Net Factor Income from Abroad NNP at Market Price = GNP at MP Depreciation. GNP at Market Price = NNP at Factor Cost + Depreciation Subsidies + Indirect taxes. = 4,73,246 +61,809 19,431 + 87,043 = 6,02,667. NNP at Market Price = 6,02,667 61,809 = 5,40,858. NDP at Market Price = 5,40,858 ( 6,833) = 5,47,691. 225

Ic

fa

ty

Pr es

= 88,000 = 88,000 6,500 30,000 = 51,500

s. Al

= 95,000 + 14,000 1,07,000 = 2,000 = 1,00,000 14,000 + 2,000

lr

ig

ht

NNP at Factor Cost = NNP at Market Price Indirect taxes + Subsidies.

re

se rv

ed

= National Income Corporate Profit Tax Retained Profit

.IS

98. (c) Personal Disposable Income = Personal Income Personal Income Tax.

BN

:8

1-

31

4-

02

27

-4

Subsidies

= GNP at FC + Indirect Taxes GNP at Market Prices.

ef .N

National Income

= NNP at Factor Cost.

o.

M AC

National Income

= 88,000.

04

20

04

04

Subsidies

= GNP at FC + Indirect Taxes GNP at Market Prices

Macroeconomics

102. (b) NDP at Factor Cost 103. (d) GNP at Factor Cost

= NNP at FC Net Factor Income from Abroad. = 4,73,246 ( 6,833) = 4,80,079. = NNP at FC + Depreciation. = 4,73,246 + 61,809 = 5,35,055.

104. (a) Personal Disposable Income = Personal Income Personal Income Tax. Personal Income = 4,73,246 7,300 6,758 = 4,59,188 Personal Disposable Income = 4,59,188 9,759 = 4,49,429. 105. (c) GNP at MP = GNP at FC + Indirect Taxes Subsidies. (OR)

20 04

Th e

GDP at FC

Ic

fa

GNP at FC

iU

ni

= 447 + 60 + 40 + 52 + 32 GNP at FC GNP at MP GDP at FC

ve rs i

108. (e) GNP at Market Price

ty

= GNP at FC + Indirect Taxes Subsidies = GDP at FC + Net Factor Income from Abroad

= Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector + Profit Tax + Retained Profit. = 631 616 681. = 631 + ( 15) = = 616 + 65 0 = = =

109. (c) GDP at MP = GDP at Factor Cost +Indirect Taxes Subsidies. Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector + Profit Tax + Retained Profit. 447 + 60 + 40 + 52 + 32 = 631 631 + 65 0 = 696

GDP at MP 226

Pr es

Thus, GNP at MP = 1,79,930 + X 588 1,82,880 = 1,79,930 + X 588 X = 3,538 Thus the Indirect Taxes = 3,538 GDP at FC = NDP at FC + Depreciation = 1,64,182 + 11,888 = 1,76,070 GNP at FC = GDP at FC + Net Factor Income from Abroad 1,79,930 = 1,76,070 + X X = 3,860. Hence Net Factor Income from Abroad = 3,860. 106. (a) GDP at FC = Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector + Profit Tax + Retained Profit. = 447 + 60 + 40 + 52 + 32 = 631. 107. (c) GNP at Factor Cost = GDP at FC + Net Factor Income from Abroad. GDP at FC = Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector + Profit Tax + Retained Profit. = 447 + 60 + 40 + 52 + 32 = 631 GNP at FC = 631 + ( 15) = 616.

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

1,70,992 + 11,888 = 1,82,880

04

GNP at MP

NNP at MP + Depreciation

Part II

110. (b) Personal Disposable Income = Personal Income Personal Taxes. = Factor Incomes + Transfer Payments Personal Income Tax. = 532 + 8 84 = 456. 111. (a) GNP at MP =NNP at FC + Depreciation + Indirect taxes Subsidies. = 7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000. 112. (e) NNP at MP = GNP at MP Depreciation GNP at MP NNP at MP NNP at MP GNP at MP = NNP at FC + Depreciation + Indirect taxes Subsidies = 7,09,900 + 92,700 + 1,30,500 29,100 = 9,04,000 = 9,04,000 92,700 = 8,11,300. 113. (c) NDP at Market Price = NNP at MP Net Factor Income from Abroad. = 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

GNP at FC GNP at FC

ve rs i

118. (b) NNP at Market Price = GNP at FC Depreciation + Indirect Taxes

ty

Th e

GNP at FC

Ic

fa

iU

ni

20 04

NNP at Market Price = 1,260 87 + 91 = 1,264. = NNP at MP Indirect Taxes = Personal Consumption Expenditure + Undistributed Corporate Profits + Corporate Income Tax + Personal Savings Transfer Payments by Government + Personal Tax Payments + Depreciation. = 1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260 NNP at Market Price = GNP at FC Depreciation + Indirect Taxes GNP at FC

119. (e) NNP at FC

GNP at FC

NNP at Market Price = 1,260 87 + 91 = 1,264 NNP at FC = 1,264 91 = 1,173. 227

Pr es

1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260. Personal Consumption Expenditure + Undistributed Corporate Profits + Corporate Income Tax + Personal Savings Transfer Payments by Government + Personal Tax Payments + Depreciation.

1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260

s. Al

lr

ig

117. (e) GNP at FC =

Personal Consumption Expenditure + Undistributed Corporate Profits + Corporate Income Tax + Personal Savings Transfer Payments by Government + Personal Tax Payments + Depreciation.

ht

re

= 7,09,900 11,000 8,700 14,600 = 6,75,600.

se rv

116. (b) Personal Disposable Income = NNP at FC Corporate Taxes Retained Profit Personal Income Tax

ed

.IS

GNP at FC

= 9,04,000 1,30,500 + 29,100 = 8,02,600.

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

120. (d) Personal Income =

NNP at FC Undistributed Corporate Profit Corporate Income Tax + Transfer Payments

NNP at FC = NNP at MP Indirect Taxes NNP at Market Price = GNP at FC Depreciation + Indirect Taxes. GNP at FC = Personal Consumption Expenditure + Undistributed Corporate Profits + Corporate Income Tax + Personal Savings Transfer Payments by Government + Personal Tax Payments + Depreciation. = 1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260 1,260 87 + 91 = 1,264 1,173 50 101 + 114 = 1,136. = = 1,264 91 = 1,173

GNP at FC NNP at FC Personal Income

NNP at Market Price =

Personal Income = NNP at FC Undistributed Corporate Profit Corporate Income Tax + Transfer Payments NNP at Market Price = GNP at FC Depreciation + Indirect Taxes

123. (d) GDP at MP

20 04

124. (e) Personal Disposable Income Personal Consumption Personal Disposable Income

Th e

= 5,000 + (600 + 100) + 300 + 700 + 250 + 100 = 7,050

Depreciation = Gross Investment Net Investment = 2,000 1,500 = 500 GDP at MP = 7,050 + 500 100 + 500 100 = 7,850. = Personal Consumption + Personal Savings = Personal Disposable Income Personal Savings. = NNP at FC Corporate Profit Tax Retained Earnings + Transfer Payments Personal Income Tax Payments = 7,050 700 250 +150 400 = 5,850 Personal consumption expenditure = 5,850 650 = 5,200.

228

Ic

fa

iU

NNP at FC

ve rs i

= NNP at FC + Depreciation Net Factor Income from Abroad + Indirect Taxes Subsidies = Wages and Salaries + Dividends + Rentals + Corporate Profit Tax + Retained Earning + Net Factor Income from Abroad.

ni

ty

Pr es

5,000 + (600 +100) + 300 + 700 + 250 +100 = 7,050.

s. Al

lr

ig

122. (a) NNP at FC =

Wages and Salaries + Dividends + Rentals + Corporate Profit Tax + Retained Earning + Net Factor Income from Abroad.

ht

re

Personal Disposable Income = 1,136 102 = 1,034.

se rv

Personal Income

1,173 50 101 + 114 = 1,136

ed

.IS

NNP at FC

1,264 91 = 1,173

BN

NNP at Market Price =

1,260 87 + 91 = 1,264

:8

GNP at FC

1,000 + 50 + 101 + 34 114 + 102 + 87 = 1,260

1-

31

4-

02

27

GNP at FC

Personal Consumption Expenditure + Undistributed Corporate Profits + Corporate Income Tax + Personal Savings Transfer Payments by Government + Personal Tax Payments + Depreciation.

-4

ef .N

NNP at FC

NNP at MP Indirect taxes

o.

M AC

121. (b) Personal Disposable Income = Personal Income Personal Tax Payment.

04

20

04

04

Part II

125. (d) Personal Disposable Income = Personal income Personal taxes = Factor incomes received by the household sector + Transfer payments Personal Taxes = 632 + 21 94 = Rs.559 crore. Note: Compensation to employees paid by the Government and profit distributed as dividends by the firms are included in the factor income received by the household sector. 126. (b) Disposable Income = Personal Income Personal Taxes = 5,000 200 = 4,800 MUC. 127. (e) GDP deflator = Nominal GNP/Real GNP 35 2 = 65 6 = 60 5 = 40 4 = 50 3 = Real GNP = 70 +390 + 300+160 + 150 = 1,070 Nominal GNP = 35 2.5 65 8 60 6 40 5 50 4.50 GDP deflator = = = = = 87.5 520 360 200 225 70 390 300 160 150.

= 2,325 + 135 + 323 + 170 + 43 = 2,996. = 85,000 (6,000 4,000) = 83,000

Net Factor Income from Abroad = 81,000 65,000 = 16,000 MUC. 131. (b) Y = C + I + G

20 04

132. (c) Budget surplus for the economy = T G = 0.20 (825) 150 = 165 150 = 15 MUC. 133. (a) M X = 0.10Y = 420MUC

Th e

Or, Y = 0.60Y + 300 Or, 0.40 Y = 330 Or, Y = 825 MUC.

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

Ic

Or, Y = 100 + 0.75 (Y 0.20Y) + 80 + 150 ( Yd = Y T) Or, Y = 0.75Y 0.15Y + 330

fa

iU

ni

ve rs i

130. (b) Growth rate of Real Income = Nominal Income Price Level = 6% 4% = 2%.

ty

Pr es

= 83,000 3,000 + 1,000 = 81,000

s. Al

NNP at factor cost

= NNP at market prices Indirect Taxes + Subsidies

lr

ig

ht

129. (c) NNP at market price = GNP at market prices Depreciation

re

se rv

ed

128. (b) National income = Compensation of Employees + Proprietors Income + Interest Payments made by the Firms + Corporate Profits

.IS

BN

= 1,392.5/ 1,070 = 130.14 = 130.

:8

Nominal GNP = 87.5 + 520 + 300 + 160 + 150 = 1,392.5

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

t tax marginal propensity to import

Multiplier =

1 1 1 = = = 2. 1 0.75 + ( 0.75 0.20 ) + 0.10 1 0.75 + 0.15 + 0.10 0.5

134. (e) Personal Income = National Income = = Personal Income =

National Income Undistributed Corporate Profit Corporate Tax + Transfer Payments GNP at market price Depreciation Indirect taxes + Subsidies 1,700 190 173 + 20 = 1,357 1,357 28 75 + 242 = Rs.1,496 cr.

NDP at Factor Cost = NDP market price Depreciation Indirect taxes + Subsidies NFIA = 55,500 50,000 NDP at Factor Cost = = = 5,500 MUC.

Pr es

s. Al

138. (b) Real GDP (current year)

lr

ig

139. (e) Value added by factor of production Value added by Primary sector = 100 15 12 + 7 = 80

20 04

Th e

Value added by Secondary sector = 150 25 13 + 8 =120 Value added by Tertiary sector = 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 GDP factor cost

Ic

fa

iU

= Sales Intermediate consumption Indirect taxes + Subsidies

ni

ve rs i

ty

= 10 + 12 + 15 = 305 + 37

ht

1, 500 100 = 1,250 MUC. 120

re

200 + 40 240 25 10 = Rs. 35 cr (deficit).

GDP at Market Pr ice (Current year) 100 GDP Deflator (Current year)

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

se rv

ed

137. (c) Current Account Balance =

Factor Income Received from Abroad + Exports Wages Paid to Foreigners Imports Interest Payment on Loans Taken

= 37 = 342 MUC.

.IS

BN

NDP at market prices = 680 + 15 = Rs.695 cr.

:8

400 + 240 + 10 + 20 + 10 = 680

1-

31

Wages paid to domestic residents + Wages paid to foreigners + Interest payment on loans taken + Retained profits + Corporate tax

4-

02

27

136. (c) NDP at market price = NDP at Factor Cost + Indirect Taxes

-4

ef .N

= 60,000 3,000 2,00 + 500 = 55,500

o.

M AC

NDP at Factor Cost = 50,000 MUC

= NNP at factor cost NDP at factor cost

04

135. (b) Net Factor Income from Abroad (NFIA)

20

04

04

Part II

141. (a) National Income = = Compensation of employees + Business interest payments + Rental income of persons + Corporate Profits + Proprietors Income. 1,866.3 + 264.9 + 34.1 + 164.8 + 120.3 = 2450.4.

142. (e) GNP = NNP + Capital Consumption Allowance NNP = National Income + Indirect Taxes National Income = Compensation of Employees + Business Interest Payments + Rental Income of Persons + Corporate profits + Proprietors income. NNP = 2,450.4 + 266.3 = 2,716.7 The GNP is 3,073.1. 143. (c) We can find out the factor income received by the house hold sector Amount Personal consumption expenditure Personal Tax payments Personal savings 1,475.0 212.6 72.0

Dr

ef .N

o.

Net National Product at Market Prices:

20 04

GNP at market prices = GNP at Factor Cost + Indirect taxes GNP at Factor Cost = Factor incomes received by the household + Undistributed corporate profits + Corporate income tax + Depreciation = 1,524.6 + 75 + 212.4 + 175.8 = 1,987.8 GNP at MP = 1,987.8 + 210.8 = 2,198.6 NNP at MP = 2,198.6 175.8 = 2,022.8 National Income = 2,022.8 210.8 = 1,812. 144. (a) Personal Disposable Income = Personal income Personal Income Tax Personal Income = Factor incomes + Transfer Payments Factor incomes

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

NNP at Market Prices = GNP at Market Prices Depreciation

re

se rv

ed

1,759.6 1,759.6 National Income = NNP at Factor Cost = NNP at market prices Indirect Taxes

.IS

BN

:8

1-

Factor incomes (Balancing figure)

02

Transfer payments

27

-4

Amount 235.0 1,524.6

31

4-

M AC

W
Cr Cr Amount 1475.0 Transfer payments 212.6 Factor incomes (Balancing figure) 72.0 1759.6 Amount 235.0 1524.6 231

GNP = 2,716.7 + 356.4 = 3,073.1

Dr Dr Personal consumption expenditure Personal Tax payments Personal savings

1759.6 = 1524.6 + 235 = 1759.6 Personal Disposable Income = 1759.6 212.6 = 1547.

04

20

04

= 18,66.3 + 2,64.9 + 34.1 + 164.8 + 120.3 = 2,450.4

04

Macroeconomics

145. (b) We can calculate the factor income. Dr 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 NNP at MP GNP at MP GNP at FC = GNP at MP Depreciation = GNP at FC + Indirect taxes Cr Amount 235 1,567 1,802

= Factor income received by the household + Undistributed corporate profits + Corporate Income tax + Depreciation.

GNP at MP NNP at MP

= 2062 + 215 = 2277 = 2277 180 = 2097

GDP at FC

Th e

NNP at Market price

Ic

148. (b) NDP at Market Price = NNP at Market Price Net Factor Income from abroad

fa

iU

GNP at FC

ni

ve rs i

ty

= 88,750 10,825 + 5220 = 83,145

= 83,145 + 5,220 = 88,365

= 88,365 + (260) = 88,105. = GNP at Market Prices Depreciation = NNP at FC + Depreciation Subsidies + Indirect Taxes = 4,82,220 + 62,725 20,150 + 85,450 = 6,10,245 = 6,10,245 62,725 = 5,47,520 = 5,47,520 (6,800) = 5,54,320.

20 04

GNP at Market price NNP at Market price NDP at Market price GNP at FC 1,72,250 X

149. (d) GDP at FC = NDP at FC + Depreciation = 1,57,170 + 12,180 = 1,69,350 = GDP at FC + Net Factor Income from Abroad = 1,69,350 + X = 2,900.

1,72,250 1,69,350 = X

232

Pr es

NDP at FC

= NDP at Market price Indirect taxes + Subsidies

s. Al

GDP at FC

= NDP at FC + Depreciation

lr

ig

147. (c) GNP at FC = GDP at Factor Cost + Net income from Abroad

ht

re

National Income is Rs.5,600.

se rv

NNP at Factor Cost = GNP at Factor Cost Depreciation = 6,000 400 = 5,600

ed

.IS

National Income

= NNP at Factor Cost

BN

GNP at market price is Rs.6,400

:8

= 6,000 + 800 400 = 6,000 + 400 = 6,400

1-

31

= GNP at Factor Cost + Indirect Taxes Subsidies

4-

02

146. (c) GNP at market prices

27

-4

National Income = 2097 215 = 1882.

ef .N

o.

M AC

= 1567 + 95 + 220 + 180 = 2062

04

20

04

04

Part II

150. (b) National Income = NNP at Factor Cost NNP at FC = NNP at MP Indirect Taxes NNP at MP = GNP at FC Depreciation + Indirect Taxes GNP at FC = Personal consumption expenditure + Undistributed corporate profit + Corporate Income Tax + Personal Savings Transfer payments by Government + Personal Tax Payments + Depreciation. = 1,300 + 72 + 116 + 45 124 + 112 + 98 = 1,619 NNP at MP = 1,619 98 + 105 = 1,626 NNP at FC = 1,626 Indirect taxes = 1,626 105 National Income = 1,521. 151. (c) National Income = NNP at Factor Cost Subsidies = GNP at Factor Cost + Indirect Taxes GNP at Market Prices = Rs.1,90,000 + 28,000 2,14,000 crore = Rs.4,000 crore National Income = 2,00,000 28,000 + 4,000 = 1,76,000 crore. = NNP at Market Prices Indirect Taxes + Subsidies

NNP at Factor Cost = 1,20,320 16,745 + 2,865 154. (c) House hold sector account Dr.

Ic

fa

iU

National Income

ve rs i

ty

NNP at Market Price = 1,28,485 8,165 = 1,20,320 = 1,06,440. Cr Rs. 320 1,637 1,957

Th e

ni

Pr es

= 1,14,605 + 16,745 2,865 = 1,28,485

s. Al

GNP at Market Price = GNP at FC + Indirect Taxes Subsidies

lr

NNP at Market Price = GNP at Market Price Depreciation

ig

ht

NNP at Factor Cost = NNP at Market Price Indirect Taxes + Subsidies

re

153. (a) National income = NNP at Factor Cost

20 04

Personal consumption expenditure Personal tax payments Personal savings

National Income NNP at Factor Cost

= NNP at Factor Cost = NNP at Market Price Indirect Taxes

NNP at Market Price = GNP at Market Price Depreciation GNP at Market Price = GNP at Factor Cost + Indirect Taxes GNP at Factor Cost = Factor income received by the households + Undistributed corporate profits + Corporate Income Tax + Depreciation 233

se rv

Personal Income = 1, 03,000 20,000 = 83,000.

ed

Rs. 1,675 Transfer Payments Factor incomes 210 (Balancing figure) 72 1,957

.IS

Personal Income = 1,76,000 13,000 60,000 = 1,03,000

BN

National Income = 2,00,000 28,000 + 4,000 = 1,76,000 Crores

:8

= Rs.1,90,000 + 28,000 2,14,000 crore = Rs.4,000 crore

1-

31

Subsidies = GNP at Factor Cost + Indirect Taxes GNP at Market Prices

4-

02

National Income = NNP at Factor Cost = NNP at Market Prices Indirect Taxes + Subsidies

27

Personal Income = National Income Corporate Profits Taxes Retained Profits

-4

152. (b) Personal Disposable Income = Personal Income Personal Income Tax

ef .N

o.

M AC

04

20

04

04

Macroeconomics

= 1,637 + 112 + 240 + 182 = 2,171 GNP at Market Price = 2,171 + 230 = 2,401 NNP at Market Price = 2,401 182 = 2,219 NNP at Factor Cost National Income = 2219 230 = 1,989 = 1,989.

155. (e) NNP at Factor Cost = GDP at Market Price + Net Factor Income from Abroad Depreciation + Subsidies Indirect Taxes = GDP at MP 3,775 GDP at market Price NNP at Factor Cost = 3,775. 156. (a) GNP at MP = GNP at FC = = GNP at FC GNP at MP GNP at MP GNP at FC = = GNP at FC + Indirect Taxes.

1375.6 + 80 + 202.4 + 173.6 1831.6 1831.6 + 180.8 = 2012.4.

NNP at Market price = 2,012.4 173.6 = 1,838.8. 158. (e) National Income = NNP at Factor Cost = NNP at MP Indirect Taxes NNP at Market Price = GNP at MP Depreciation. GNP at MP = GNP at FC + Indirect Taxes. GNP at FC = Factor Income Received by the Household + Undistributed Corporate Profit + Corporate Income Tax + Depreciation = 1,375.6 + 80 + 202.4 + 173.6 GNP at FC = 1,831.6 GNP at MP = 1,831.6 + 180.8 =2,012.4 NNP at Market Price = 2,012.4 173.6 = 1,838.8 NNP at FC = 1,838.8 180.8 National Income = 1,658. 159. (b) Personal Income = Factor Incomes + Transfer Payments = 1,375.6 + 228 = 1,603.6. 160. (d) Personal Disposable Income = Personal Income Personal Income Tax. Personal Income = Factor Incomes + Transfer Payments = 1,375.6 + 228 = 1,603.6 Personal Disposable Income = 1,603.6 203.6 = 1,400.

20 04

234

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

GNP at MP

= 1,831.6 + 180.8 = 2,012.4

se rv

GNP at FC

= 1,831.6

ed

= 1,375.6 + 80 + 202.4 + 173.6

.IS

BN

= Factor income received by the household + Undistributed Corporate Profit + Corporate Income Tax + Depreciation

:8

1-

= GNP at FC + Indirect Taxes.

31

4-

157. (c) NNP at Market Price = GNP at MP Depreciation.

02

27

-4

ef .N

Factor Income Received by the Household + Undistributed Corporate Profit + Corporate Income Tax + Depreciation

o.

M AC

04

20

04

= GDP at Market price 625 2,250 + 1,200 2,100

04

Part II

The Simple Keynesian Model of Income Determination


161. (c) Marginal Propensity to Save (MPS) = 0.25 Multiplier = 1/MPS = 1/0.25 = 4 Total increase in expenditure = 50 .40 + 120 (Govt. and Individual) = 140 Increase in GNP = (Increase in G + Increase in I) /MPS 140 4 = 560. Present GNP = C + I + G = 1200 + 200 + 50 = 1,450 Revised GNP = 1,450 + 560 = 2,010. 162. (c) Multiplier = 1/(MPS+MPI) Multiplier = 1/(0.25+1) = 2.857. 163. (a) Change in level of Income = 100 Multiplier

Change in Level of Income

= 100 Multiplier = 100 2.857 =285.7

= 169.89

Taxes = (169.89) (0.35) = 59.46

ve rs i

Budget Surplus = Taxes (Govt. expenditure + Transfer payments)

ty

iU

Surplus = 33.46. 166. (e) Investment multiplier =

ni

Pr es

59.46 (18 + 8)
Y I

20 04

Th e

1 1 (1 t ) + = MPC = 0.75; t = 0.20,

multiplier =

= 0.1; Multiplier =

Ic

fa

s. Al

[1 0.75 0.8 + 0.1]

lr

= 20 + 0.507Y + 6.24 + 45 + 18 +20 0.15Y = 109.24 + .357Y

ig

ht

= 20 + 0.78 [(Y 0.35Y) + 8] + 45 +18+ 20 .15Y

167. (b) Multiplier = 1/MPS = 1/0.35 = 2.85 The total increase in investment and government expenditure = 160 + 180 = 340 The increase in GNP = 340 2.85 = 969 235

re

= 20 + 0.78 [(Y T) + R] + 45+18 + 20 0.15Y

se rv

= 20 + 0.78Yd + 45 + 18 + 20 0.15Y

1 = 2. 0.5

ed

Substituting above figures in equation:

.IS

BN

Import Function

= 0.15Y

:8

Tax Function

= 0.35Y

1-

31

Consumption Function = 20 + 0.78Yd

4-

165. (a) GNP (Y) = C+ I + G + (X M)

02

27

Change in Level of Imports = 0.10 285 = 28.57.

-4

ef .N

= 0.10 Change in Level of Income

o.

= 0.10 Multiplier

M AC

164. (c) Change in level of imports = MPI Increase in Income.

= 100 2.857 = 285.7.

04

20

04

04

Macroeconomics

Y 0.75Y 0.25Y = 530

= 530 = 530/0.25 = 2,120

Hence b = MPC = C 40/Yd. 171. (c) Equilibrium Income in the beginning = 2,000 (1) Income Tax Rate = 20% T = 0.2Y Marginal Propensity to Consume = 0.85 C = 0.85Yd Propensity to Import = 0.1 M = 0.1Y Further Yd =YT Yd = Y 0.2Y C = 0.85 (Y 0.2Y) = 0.85 Y 0.17 Y = 0.85Y 0.17Y = 0.68 Y Y =C+I+G+XM Y = 0.68Y + I + G + X 0.1Y Hence Y(1.1 0.68) = I + G + X 0.42 Y = I + G + X Hence Government Expenditure Multiplier i.e., Gt/Y = 1/0.42 Thus when G increases by 200, Y increases by 200/0.42 = 476.2 New income is 2,000 + 476.2 = 2,467.2.

20 04

236

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

In each case C 40 = bYd

re

700

670

90.00

se rv

600

580

0.90

ed

.IS

500

400

0.72

BN

400

360

0.80

:8

Yd

MPC

1-

31

170. (d)

4-

02

Y = 555/0.25 = 2,220.

27

0.25Y = (530 + 25) = 555

-4

When the export increases by 25, the Change in Equilibrium Income will be as follows:

ef .N

o.

M AC

= 530 + 0.75Y

= 250 + 0.75Y + 65 + 0.15Y + 90 +125 0.15Y

04

169. (a) Income (Y) = C + I + G + X M

20

04

So Increase in Import will be 0.10 1,400 = 140.

04

The actual GNP = C + I + G + E M = 1,000 + 400 + 500 + 200 180 = 1,920 GNP after the change in G and I =1,920 + 969 = 2,889 Since potential GNP = 2,500 Increase in Price = (2,889/2,500) 1 100 = 15.56%. 168. (d) MPS = 0.30 MPI = 0.10 Multiplier = 1/(MPS + MPI) = 1/(0.3 + 0.1) = 2.5 When autonomous investment increases by 560, the income will increase by 560 2.5 = 1,400

Part II

172. (a) At the steady state level of consumption Ct The given Ct Since Ct Then Ct Ct 0.3 Ct Ct = Ct 1 = 10 + 0.6Ydt + 0.3 Ct 1 = Ct1 in steady state. = 10 + 0.6 Ydt + 0.3 Ct = 10 + 0.6Ydt = 1/0.7 [10 + 0.6Ydt]

When Ydt increases from 100 to 120, the change in the steady State Level of Consumption is: 173. (d) Y = C + S YC=S GDP of an economy is Y = C + I + G + X M ... (1) C = Consumption Function I = Investment Function G = Exogenous Government Expenditure X = Exogenous Exports M = Imports S = 50 + 0.25Y M= 0.10Y So, C = 50 + 0.75Y Equation (1) can be written as Y or S =C+I+G+XM or Y C = I + G + X M

174. (b) GDP or Y = C + I + G + E M

20 04

Th e

Since i is the level of interest in the economy is given as 4. The equilibrium level of income can be derived as follows: Y Y Y = 200 + 0.6Y + 0.3 Y 15(4) + 100 + 50 0.1Y = 350 60 + 0.8Y = 290/0.2 = 1,450

0.2Y = 290 The equilibrium level of the income in the economy is 1,450. 175. (c) C = Consumption Function = 200 + 0.6Y; a + bY I = Investment Function = 0.3 Y 15 I; w Y pi 237

Ic

fa

iU

So there is an increase in GDP of 400.

ni

There is an increase in private investment by 200 and Government Expenditure decreases by 60. = 1/0.35 (200 60) = 400

ve rs i

ty

= 1/0.35 (50 + I + G + X)

Pr es

0.35 Y

= 50 + I + G + X

s. Al

50 + 0.25Y

= I + G + X 0.10Y

lr

Substituting the value of S and M in equation (2) we get

ig

ht

= I + G + X M ..(2)

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

1/0.7 [10 + 0.6 120] 1/0.7 [10 + 0.6 100] = 0.6/0.7 (120 100) =17.14.

Macroeconomics

(Where I is Exogenously Determined) G E M Y = 100; G = 50; E = Import Function = 0.1Y; mY =C+I+G+EM = a + bY + wY pi + G + E mY Y bY wY + mY = a pi + G + E Y (1 b w + m) = a pi + G + E

The identity is,

Multiplier = 1/ (1 0.90 + 0.10) = 5 = 5 200 = 1,000. Steady level of consumption is

177. (e) Long run propensity to consume = 0.60/1 0.20 = 0.75

So, Steady State Level of Consumption increased by 37.50 (250 212.50). Change in the Steady Level of Consumption when Disposable Income increase from 500 to 600 is
179. (e) Y = C + I + G + X M

Th e

20 04

Y 0.58Y = 52.25 0.42Y Y= = 58.25 52.25 = 124.40 0.42

Taxes = 124.40 0.2 = 24.88


238

Ic

fa

= 8 + 0.85Yd +20 +10 +10 0.10Y = 8 + 0.85 [(Y T) + R] + 20 + 10 + 10 0.10Y = 8 + 0.85 [(Y 0.2Y) + 5] + 20 + 10 + 10 0.10Y = 8 + 0.85 [0.8Y + 5] + 20 + 10 +10 0.10Y = 8 + 0.68Y + 4.25 + 20 + 10 +10 0.10Y = 52.25 0.58Y

iU

= 0.8439(600 500) = 84.39.

ni

ve rs i

178. (b) Long-run propensity to consume = 0.611/1 0.276 = 0.8439

ty

Pr es

= 25 + 0.75 (250) = 212.50

s. Al

Steady Level of Consumption when Disposable Income is 250.

lr

ig

200 = 25 + 0.75 (200) = 175

ht

re

se rv

ed

.IS

With an autonomous increase in investment of 200, the level of income will increase by,

BN

:8

1-

= MPC = 0.90 = MPI = 0.1.

31

4-

176. (a) Multiplier in the economy = 1/ [1 MPC + MPI]

02

27

1 1 = = 5. 1 0.6 0.3 + 0.1 0.2

-4

ef .N

The multiplier for the economy is =

1 1 b w + m

o.

M AC

1 (a pi + G + E ) (1 b w + m)

04

20

04

04

Taking all terms in Y to L.H.S:

Part II

Budget Deficit = Govt. Expenditure + Transfer Payments Taxes = 10 + 5 24.88 = 9.88.


180. (a) Increase in Income at the Equilibrium Level = 4,500 900 = 3,600

Increase in Consumption at the Equilibrium Level = (4,500 1,080) 900 = 3,420 900 = 2,520 Marginal Propensity to Consume (MPC) = Change in Consumption/Change in Income. =
C 2,520 = 0.7 3, 600 Y

where, Y = Equilibrium Income in the Economy. C I


G
E

= Investment Function = Government Expenditure. = Exports = Import Function

= 15 = 150 = 20

ve rs i

ty

= 0.05 =

Pr es

fa

iU

ni

(1 +)

20 04

182. (c) When the consumption is at a Steady State Level Ct = Ct 1

Th e

1 [400 + (0.7 45) + 150 + 2015] (1 0.7 0.1 + 0.05)

Consumption Function is Ct Ct
C t

Ic

1 616.5 = 2,466. 0.25

= 20 + 0.75 Ydt + 0.15 Ct = 23.53 + 0.88Ydt = 0.88 x Ydt

0.85 Ct = 20 + 0.75Ydt

s. Al

lr

ig

= 0.1

ht

+ R + G + E

re

se rv

= (1 0.3) = 0.7

ed

where,

= 400

.IS

BN

Y= + Y + R + + Y + G + E Y

:8

The Equilibrium Income is also expresses as;

1-

31

4-

02

27

-4

ef .N

= Consumption Function

o.

M AC

181. (b) Y = C + I + G + E M

W
239

04

Multiplier in the Economy

1 1 = = 3.33. 1 MPC 1 0.7

20

04

04

Macroeconomics

If Ydt increases from 700 to 900,


Y d t = 200

C t = 0.88 200 = 176


The Steady State Level Consumption increases by 176.
183. (e) Equilibrium Level of Income or Y
C0 T + I + G + E M 0 1 +

= Y

185. (c) Y = C + I + G + E M

20 04

Th e

= 70 + 0.9 [Y (20 + 0.2Y)] + 90 + 65 + 80 [40 + 0.15Y] = 70 + 0.72Y 18 + 90 + 65 + 80 40 0.14Y Y = 247 + 0.57Y Y= 247 = 574.42. 0.43
C 80 Y
d

189. (e) Marginal Propensity to Consume (MPC) =

Ic

fa

= C0 + 0.9Y d + I+ G + X [M0 + Y]

iU

ni

188. (d) GNP Y = C + I + G + (X M)

Multiplier =

240

ve rs i

1 1 1 1 = = or = 4. 1 MPC 1 1 .75 .25

ty

187. (a) Multiplier =

Pr es

1 1 = = 2.33. 1 0.9 + ( 0.9 0.2 ) + 0.15 1 + t +

380 80 300 = = 0.75 400 400

s. Al

Multiplier =

1 1 = = 2. 1 ( 0.75 0.8 ) + 0.1 0.5

lr

ig

ht

MPC = 0.75,

t = 0.20, = 0.1

re

se rv

186. (c) Multiplier =

1 1 (1 t + )

ed

.IS

BN

255 = 1,275. 0.2

:8

1-

= 140 + 0.8Y + 75 + 35 +30 25

31

4-

02

or

C0 + I + G + E M 1

27

-4

Y Y = C0 + I + G + E M

ef .N

or Y = C0 + Y + I + G + E M

o.

M AC

184. (a) Multiplier =

1 1 = = 3.33. 1 0.8 + 0.1 1 +

04

20

04

196 = 80 0.8 30 + 100 + 30 + 120 110 = = 653. 0.30 [1 0.8 + 0.1]

04

Part II

190. (d) Multiplier in the economy =

1 1 +

where,

= 0.80 (Consumption Function) = 0.10 (Import Function)


1 = 3.33 1 08. + 0.10

Multiplier =

Increase in Govt. Expenditure = 200 Impact on GNP = 200 3.33 = 666.66


1 1 +

= 0.10 (Import Function)


Multiplier =
1 = 3.33 1 08. + 0.10

MPC = 0.08 C Yd T Yd
194. (a) C = 50 + 0.9Yd

= 40 + 800 0.08 = 680.

ty

Writing 10 + 0.2Y for T in equation (2) we get

Th e

20 04

Ic

fa

= 10 + 0.2Y

iU

ni

=YT

ve rs i

= Y (10 + 0.2Y) = Y 10 0.2Y ..


d

Pr es

s. Al

. (1) (2) .... (3)

lr

Yd

= 800

ig

ht

193. (e) C

= 40 + Yd

re

= 90 2.17 = 195.3.

se rv

Increase in Income = [Increase in Govt. Expenditure + Increase in investment] Multiplier

ed

.IS

Multiplier

1 = 2.17 1 0.8 + 0.8 0.2 + 0.1

Substituting Y 10 0.2Y for Y in equation (1) we get, C = 50 + 0.9(Y 10 0.2Y) = 50 + 0.9Y 9 0.18Y = 41 + 0.72Y ... (5) (6) Further Y = C + I + G ..

where, C = function of Y: f(Y) = 41 + 0.72Y and I + G = I + G Y(1 0.72) = 41 + I + G

BN

(4)

:8

1-

192. (c) Multiplier =

1 1 + t +

31

4-

02

Increase in GNP = 250 3.33 = 832.5.

27

-4

Overall Increase in Expenditure = 300 50 = 250

ef .N

o.

M AC

where, = 0.80 (Consumption Function)

W
241

04

191. (b) Multiplier in the economy =

20

04

There is an increase in GNP by 666.66.

04

Macroeconomics

41+ I + G 0.28

Given I = 50 and G = 40.


41 + 50 + 40 131 = = 467.86. 0.28 0.28 195. (e) Marginal Propensity to Consume ( ) = 0.75

Proportional Tax Rate (t) Increase in Govt. Expenditure ( G )


(1 b) (1 t) G 1 b (1 t)

= 0.20

MPC = = Y

2 3

The actual GNP prior to increase; Revised GNP = 700 + 270 = 970. Y Or, Y Y S =C+I+G

fa

Th e

Ic

20 04

198. (c) Savings Function S = 20 + 0.30Yd

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

iU

ni

Or, 0.20Y = 820

= 4,100. = 200 + 0.20Yd = 200 + 0.20 (Y 100) = 200 + 0.20 (4100 100) = 200 + 800 = 600 MUC.

ve rs i

= 0.80Y + 120 + 500 + 200

ty

Pr es

197. (a) C

= 200 + 0.80Yd = 200 + 0.80 (Y 100) = 200 + 0.80Y 80 = 0.80Y + 120.

s. Al

lr

ig

= C + I + G = 500 + 100 + 100 = 700.

ht

re

se rv

The increase in GNP = 90 3 = 270

ed

The Total Increase in Investment and Government Expenditure: = 50 + 40 = 90.

.IS

BN

:8

Multiplier =

1 1 = =3 2 1 1 3

1-

31

4-

Y (1 ) = + I + G

02

27

= C + I + G = + Y + I + G

-4

ef .N

o.

196. (a) Marginal Propensity to Consume or

M AC

The budget deficit will be increased by 250.

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

20

04

Increase in Budget Deficit due to Government Expenditure is given by:

04

= 500

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

Or, 50 + 0.3(500) = 150 5i Or, 50 + 150 = 150 5i Or, 5i = 50


201. (c) Ct = 10 + 0.5Yd t + 0.4C t1

In steady state Ct = C t1 Ct 0.4C t = 10 + 0.5Yd t 0.6 Ct Ct = 10 + 0.5Yd t = 1/6 [10 + 0.5Yd t]

MPS = 0.25 MPI = 0.15 Multiplier = 1/(MPS + MPI)

20 04

204. (b) Multiplier = 1/MPS = 1/0.25 = 4.

205. (d) Domestic savings = Private savings + Public savings

Th e

The multiplier is 1/ MPS = 1/0.2 = 5 Change in government spending = 100 / 5 = 20 MUC. Current level of income Break-even income = 16,000 12,000 = 4,000 Required saving in the economy = 4,000/4 = 1, 000 MUC. Private savings = 1500 (500) = 2000 MUC. 243

Ic

fa

700 600 = 100 MUC.

iU

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

ni

ve rs i

ty

= 500/2.5 = 200 MUC.

Pr es

Increase in Government Expenditure

s. Al

= 1/(0.25 + 0.15) = 1/0.4 = 2.5

lr

ig

ht

re

se rv

ed

= 0.15Y

.IS

202. (c) S = 50 + 0.25Y

BN

Change in steady state consumption = 83.33 MUC.

:8

1-

= 350 433.33 = 83.33

31

= 1/6 (210) 1/6 (500)

4-

02

Ct = 1/6 [10 + 0.5 (400)] 1/6 [10 + 0.5Yd t ]

27

-4

When Yd increases from 400 to 500,

ef .N

o.

M AC

Ct

= 10 + 0.5Yd t + 0.4C t

04

20

04

04

Or, i = 10%.

Macroeconomics

The answer is (d).


206. (b) Investment in period t

= 0.75 Desired investment in period t Desired investment in period t = Acceleration coefficient Change in income = 2 200 = 400 Investment in period t = 0.75 400 = 300 MUC. The answer is (b).
207. (a) Multiplier = 1/(1 MPC + MPC Tax Rate + MPI) 208. (c) Consumption function for an economy is estimated to be c = 400 + 0.75 Yd

Y=C+S When S = 0, Y = C Y = 400 + 0.75 Y or, 0.25Y = 400 Yd = 1,600 c = 400 + 0.75 ( 1,600) = 400 + 1,200 = Rs.1,600 cr.
3 = 0.75 4

Y C

= 2,500 =a+bY = 0.75 (2,500) = 1,875.

211. (b) Velocity of money = Y/Ms

Th e

20 04

Ic

fa

or, Yd = 640 MUC. = 750 + 250 + 150 + 100 + 50 150 = 1,150 Velocity of money =
212. (a) MPC = = 2/3
1,150 = 5. 230

Y(1 ) = + I + G

244

iU

ni

60 + 0.25 Yd = 100

ve rs i

At equilibrium level of income, S = I

=C+I+G = + Y + I + G

ty

210. (b) S = 60 + 0.25Yd

Pr es

Borrowed amount = 2,500 1,875 = Rs.625.

s. Al

lr

ig

ht

re

se rv

ed

MPC

.IS

BN

209. (c) Y*

= Rs.5,000

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

= 1/(1 0.75 + 0.75 0.2 + 0.10) = 2.

04

20

04

04

Part II

Hence, Multiplier =

1 1 = =3 1 1 2 3

The total increase in investment and government expenditure = 100 + 80 = Rs.180 The increase in GNP = 180 3 = Rs.540 The actual GNP prior to the increase =C+I+G = 1,000+ 200 + 200 = Rs.1,400 Since the potential GNP is only Rs.1,600, with the GNP going up to Rs.1940, the price level will increase.
213. (c) MPS = 0.20

MPM

= 0.15
1 1 = 0.15 + 0.20 0.35 1 ( G + I ) 0.35

Multiplier =

ht

Pr es

Overall increase in expenditure = 300 50 = 250

s. Al

lr

215. (b) Multiplier in the economy

ve rs i

ty

Increase in GNP

Increase in income = Increase in (Government Expenditure + Investment) Multiplier = (40 + 50) x 2.17 = 195.6. 217. (d) C = 50 + 0.9 Yd ...... (1) d where, Y = Y T .. (2) T = 10 + 0.2Y ...... (3) Writing 10 + 0.2Y for T in equation (2) we get Yd = Y (10 + 0.2Y) = Y 10 0.2Y ...... (4) d Substituting Y 10 0.2Y for Y in equation (1) we get C = 50 + 0.9(Y 10 0.2Y) = 50 + 0.9Y 9 0.18Y C = 41 + 0.72Y .... (5) Further Y = C + I + G ..... (6) where, C = f(Y) = 41 + 0.72Y and I + G = I + G

20 04

Th e

Ic

fa

iU

ni

216. (a) Multiplier in the economy =

ig

= 3.33 250 = 832.5.


1 1 = = 2.17 1 + t + 1 08 + 0.8 0.2 + 0.1

re

214. (a) Multiplier =

1 1 = 1/ (1 0.9 + 0.9 0.2 + 0.15) = = 2.33. 0.43 1 +t + 1 1 = = 3.33 1 + 1 0.8 + 0.10

se rv

ed

The net result of change in both private investment and government spending is that it increases the national product of GDP by 594.28.

.IS

BN

:8

Y =

1 ( 280 72 ) = 594.28. 0.35

1-

31

There is an increase in private investment by 280 and decline in government spending by 72.

4-

02

27

-4

ef .N

o.

M AC

W
245

There will be an increase of 340 in GNP.

04

20

04

04

Revised GNP = Rs.1,400 + 540 = Rs.1,940

Macroeconomics

Y (1 0.72) Y

= 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
218. (e) Given,
41+ 50 + 40 131 = = Rs.467.86. 0.28 0.28

The actual GNP prior to the increase = C + I + G Revised GNP = Rs.700 + 270 = Rs.970.

Pr es

The increase in GNP = 90 x 3 = 270 = 500 + 100 + 100 = Rs.700

iU

220. (c) Given

ni

ve rs i

ty

s. Al

The total increase in investment and government expenditure = 50 + 40 = 90

lr

ig

ht

re

Hence, Multiplier =

1 1 = =3 1 1 2 3

Th e

Ic

Savings function (S) Consumption function (C) Tax function (T) Import function (M) Investment function (I) Government expenditure (G) Transport payments (R) Exports (X) Y=C+I+G+XM

fa

= = = = = = = =

20 04

se rv

ed

Y (1 )

= +1+ G

8 + 0.15 Yd 8 + 0.85 Yd 0.2Y 0.10Y 20 10 5 10

= 8 + 0.85 Yd + 20 + 10 + 10 0.10Y 246

.IS

BN

= +Y +1+ G

:8

=C+I+G

1-

31

4-

219. (d) MPC

= =

2 3

02

27

0.25 0.80 0.20 500 = 500 = 250. 1 ( 0.75 0.80 ) 0.40

-4

ef .N

(1 b )(1 t ) (1 0.75)(1 0.20 ) G = 500 1 b (1 t ) (1 0.75) (1 0.20 )

o.

M AC

Increase in Budget Deficit due to Increase in Government Expenditure is given by

04

Increase in Government Expenditure (G ) = 500

20

Proportional Tax Rate (t)

= 0.20

04

04

Marginal Propensity to Consume (b)

= 0.75

Part II

= 8 + 0.85 [(Y T) + R] + 20 + 10 + 10 0.10Y = 8 + 0.85 [(Y 0.2Y) + 5] + 20 + 10 + 10 0.10Y = 8 + 0.85 [0.8Y + 5] + 20 + 10 + 10 0.10Y = 8 + 0.68Y + 4.25 + 20 + 10 + 10 0.10Y = 52.25 0.58Y Y 0.58Y 0.42Y Y=
52.25 0.42

= 52.25 = 52.25 = 124.40

MPI Multiplier

= 0.10

Ct 0.85Ct Ct Ct Ydt Ct
223. (d) Y

= 20 + 0.75Ydt + 0.15Ct

Ic

fa

Th e

iU

20 04

Y Y Y Y

224. (e) C = 50 + 0.8Yd

ni

The steady state level consumption increases by 176. =C+I+G+EM = C0 + Y+ I + G + E M


Co + I + G + E M = C0 + I + G + E M = 1

ve rs i

= 140 + 0.8Y + 75 + 35 + 30 25 =
225 = 1,275. 0.2

ty

= 200

= 0.88 200 = 176.

Pr es

If Ydt increases from 700 to 900

s. Al

= 0.88 Ydt

lr

ig

= 23.53 + 0.88Ydt

ht

= 20 + 0.75Ydt

re

se rv

ed

Consumption function is

.IS

222. (a) When the consumption is at a steady state level Ct = Ct1

BN

The increase in imports will be 0.1 x 1,000 = 100.

.. .. ..

:8

1-

5 200

= 1,000

31

With an autonomous increase in investment of 200, the level of income will increase by,

4-

02

27

1 =5 1 0.90 + 0.10

-4

where Y = Y T T Yd = 10 + 0.3Y Writing 10 + 0.3Y in equation (2) we get,

= Y (10 + 0.3Y) = Y 10 0.3Y ..

ef .N

MPC

= 0.90

(1) (2) (3) (4) 247

o.

M AC

221. (c) Multiplier in the economy =

1 1 MPC + MPI

04

= 10 + 5 24.88 = 9.88.

20

Budget deficit = Govt. expenditure + Transfer payments Taxes

04

04

Taxes

= 124.40 x 0.2 = 24.88

Macroeconomics

Substituting Y 10 0.3Y for Yd in equation (1) we get, C C = 50 + 0.8(Y 10 0.3Y) = 50 + 0.8(Y 9 0.24Y) = 41 + 0.56Y .. .. (5) (6)

Further Y = C + I + G where C = f(Y) = 41 + 0.56Y and I+G = I+G

Y(1 0.56)= 41 + I + G

Y Y

= 331.8.

Change in Investment ( I ) Multiplier (K) = K =


1 =10 MPS

= 20 lakh

ve rs i

ty

227. (d) MPC =

C Y

Pr es

MPC= 1 MPS = 1 0.10 = 0.90.

s. Al

MPS = 1/10

= 0.10

lr

ig

ht

re

se rv

Y 200 = 10 = I 20

ed

.IS

BN

:8

226. (a) Change in income ( Y ) = 200 lakh

1-

= 3,000.

31

4-

0.2 Y = 600

02

27

S = 500 + 0.2Y = I = 100

-4

225. (c) Savings is equal to investment at equilibrium. Therefore,

fa

iU

C is the change in consumption and Y is the change in Income =

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

Ic

Y = K I
228. (c) GNP (Y)

Y K= I

= 10 100 = 1,000 crore. = C + I + G + (X M) = 20 + 0.75 Yd = 0.3 Y = 0.18 Y

Consumption function Tax function Import function

Substituting above figures in equation 248

ef .N

900 = 0.90 1,000

o.

41+ 60 + 45 146 = 0.44 0.44

M AC

Substitute the given values of I and G .

04

The equilibrium level of income can be determined if I and G are known.

20

04

04

41+ I + G 0.44

Part II

Y = 20 + 0.75 Yd + 50 + 20+ 22 0.18Y = 20 + 0.75 [(Y T) + R] + 50 + 20 + 22 0.18Y = 20 + 0.75 [(Y 0.30 Y) + 10] + 40 + 20 + 22 0.18Y = 20 + 0.525Y + 7.5 + 50 + 20+ 22 0.18Y Y = 119.5 + 0.345Y Y = 182.44 Taxes= 0.30 182.44 = 54.73 Budget deficit/surplus = 54.73 20 + 10

= C 90/Yd = 850 90/1000 = 0.76


1 1 = 1 .76 1 MPC 1 1 +

231. (e) We know that Y = C + I + G + X M

Y Y 0.25Y Y

= 280 + 0.75Y + 75 + 0.15Y + 94 + 126 0.20Y

20 04

232. (c) Y = C + I + G + E M

Th e

When there is an exogenous increase in exports to the extent of 30, the change in equilibrium income will be as follows: Y = 2,420

0.25Y = (575 + 30) = 605 Increase in equilibrium income is 120 (i.e., 2,420 2,300)

Foreign trade multiplier: = Y/X = 120 /30 Foreign Trade multiplier = 4. where, Y C I = Equilibrium income in the economy = Consumption function = Investment function 249

Ic

fa

iU

ni

ve rs i

= 575 + 0.75Y =2,300

= 575

ty

Pr es

s. Al

lr

Increase in GNP

= 425 x 2.70 = 1147.5.

ig

ht

Overall increase in expenditure = (500 75) = 425

re

1 = 2.70 1 0.78 + 0.15

se rv

ed

.IS

= 0.15 (import function)

BN

where = 0.78 (Consumption function)

:8

1-

31

230. (b) Multiplier in the economy =

4-

02

Multiplier = 4.17.

27

-4

Multiplier =

ef .N

o.

M AC

229. (d) MPC =

04

Surplus = 24.73.

20

04

04

Taxes (Government expenditure + Transfer payments)

Macroeconomics

= Government expenditure = Exports = Import function

E
M

The equilibrium income is also expressed as Y = + (Y + R ) + + Y + G + E Y where, = 460 = (1 0.3) = 0.7 = 18 = 0.1
G = 162

E = 25
= 0.05 Y=
1

= 560 88 = 472.

ni

Th e

Ic

fa

234. (c) Multiplier =

iU

20 04

Multiplier =

Change in level of income = 150 2.38 = 357 Change in level of imports = MPI Increase in income

= 0.12 357 = 42.84. 235. (c) Increase in income at the equilibrium level = 4,800 1,200 = 3,600 Increase in consumption at equilibrium = (4,800 1,400) 1,200 = 2,200 Marginal Propensity to consume (MPC) = Change in consumption/Change in income 250

ve rs i

At I = 10%;

ty

1 MPS + MPI 1 = 2.38 0.30 + 0.12

Pr es

140 220 i 0.25 0.25

s. Al

lr

0.25Y = 140 220 i

ig

ht

78 230i = 62 + 0.25 Y

= 560 880i

re

Under equilibrium conditions (1) = (2)

se rv

= 62 + 0.25Y ....

ed

.IS

233. (d) I = 78 230i

........

BN

1 685.6 0.25

= 2,742.4.

(1)

(2)

:8

1-

31

4-

Y=

1 [ 460 + (480.7) + 162 + 48 18] (1 0.7 0.1 + 0.05 )

02

27

-4

(1 + )

+ R + G + E

ef .N

o.

M AC

R = 48

04

20

04

04

Part II

= 3,600/2,200 = 0.6 Multiplier in the economy = Multiplier Y Y Y C Savings Savings Savings Since C S =C+I = 40 + 0.75Y + 60 = 400 = 40 + (0.75 400) = 340 = Income consumption = 400, = 40 + 0.25(400) = 40 + 100 = 60.
1 1 = 1 MPC 1 0.6

= 2.5.

236. (b) The equilibrium condition is given by

Y 0.75Y = 100 When Y = 400,

= 130/.20

The total increase in investment and government expenditure = 150 + 175 = 325 The actual GNP

Pr es

s. Al

238. (e)

Multiplier =

1 1 = = 2.85 MPS 0.35

lr

ig

ve rs i

The increase in GNP

ty

ni

GNP after the change in G and I = 2,265 + 926.25 = 3,191.25

20 04

239. (b) We know that Y = C + I + G + X M

Th e

Since potential GNP = 2,700


3,191.25 Increase in price level = 1 100 = 18.19 or 18.2%. 2, 700

Y Y Y

0.23Y = 602 = 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

Ic

fa

iU

= 270 + 0.75Y + 72 + 0.15Y + 120 + 140 0.13Y = 602 + 0.77Y

ht

Equilibrium income = 650.

re

= 325 2.85 = 926.25 =C+I+G+EM = 1,200 + 450 + 600 + 210 195 = 2,265

se rv

0.20Y

= 130

ed

.IS

50 + 0.20Y

= 80

BN

The equilibrium condition is determined by equating planned savings and planned I.

:8

1-

= Yd (50 + 0.80Yd) = 50 + 0.20Yd

31

4-

= 50 + 0.80Yd,

02

27

237. (c) Planned savings equals Yd C

-4

ef .N

o.

When income

M AC

04

20

04

04

Macroeconomics

0.23Y = (602 + 28) = 630 Y = 2,739.1 Increase in equilibrium income is 121.7 Foreign trade multiplier: = Y/X = 121.7/28 = 4.35.

Income Determination: Money and Interest


240. (d) GNP (Y) = C + I + G + E M

= 40 + 0.75Yd + 120 12i + 80 +60 0.1Y

300 12i = 600 24i .5

Y = 270 + 0.6Y 80i Y .6Y = 270 80i

iU

ni

ve rs i

The equation of the LM Curve is Ms = Md 300 = 0.3Y + 120 160i Y = 600 + 533.33i .. (2) Putting the value of Y in equation one: 675 200i = 600 + 533.33i 733.33 i = 75
75 = 0.10%. 733.33

20 04

Th e

Ic

fa

i =

242. (c) GNP or Y = C + G + I

= 100 + 0.75Yd + 200 + 50 12i = 100 + 0.75[Y 0.20Y] + 200 + 50 12i = 100 + 0.75Y 15Y + 200 + 50 12i = 350 + 0.60Y 12i
350 12i = 875 30i = IS Curve 0.40

252

ty

Y = 675 200i

Pr es

s. Al

lr

Y = 120 + .06 Y + 150 80i

ig

ht

241. (b) The equation of the IS Curve is;

re

= 600 8.16 = 591.84.

se rv

= 600 (24 0.34)

ed

.IS

GNP (Y) = 600 24i

BN

:8

I=

800 = 0.34 2,344

1-

31

2,344i = 800

4-

02

3,600 144i 2,200i = 2,800

27

6(600 24i) 2,200i = 2,800

-4

6Y 2,200i

= 2,800

.. (1)

ef .N

At equilibrium: Md

= Ms

o.

M AC

Y 0.5Y = 300 12i

04

= 40 + 0.75Y 0.15Y + 120 12i + 80 + 60 0.1Y = 300 + 0.5Y 12i

20

04

= 40 + 0.75 (Y 0.2Y) + 120 12i + 80 + 60 0.1Y

04

= 40 + 0.75(Y T) + 120 12i + 80 + 60 0.1Y

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 Y Y =
150 + 30i 0.30

= 500 + 100i

243. (a) Given Saving Function (S) = 270 + 0.20Yd

= 0.22Y + 100 11i

Th e

2,576 20i

fa

Is Curve = LM Curve = 1,000 + 50i 1,576 1,576 i

Ic

20 04

Substituting the value of i in IS Curve equation, Equilibrium Income (Y) = 2,576 (20 22.51) = 2,125.80 GNP deflator =
Nominal GNP in 1991-92 100 Real GNP in1991-92

iU

ni

Economy will be in equilibrium when Goods Market and Money Market are in simultaneous equilibrium.

ve rs i

= 50 + 20i = 70i = 22.51%

ty

= 1000 + 50i

Pr es

0.22Y = 320 100 + 11i = 220 +11i.. LM Curve

s. Al

0.22Y + 100 11i = 320

lr

Demand for money (Md) = Supply of Money (Ms)

ig

ht

Supply of money in money market equilibrium = 320

re

se rv

= Transactions and precautionary demand for money + Speculation demand for money.

ed

.IS

Demand for Money

BN

= 2,576 20i

:8

0.5Y = 1,288 10i...IS Curve

1-

31

= 1,288 + 0.50Y 10i

4-

02

= 270 + 0.80(Y 0.25Y) + 300 10i + 600 + 118 0.1Y

27

= 270 + 0.80Yd + 300 10i + 600 + 118 0.1Y

-4

=C+I+G+EM

ef .N

Consumption Function (C) = 270 + 0.80 Yd

o.

M AC

GNP =Y = 875 (2.88 30) = 788.6.

W
253

875 500 = 100i + 30i = 375/130 = 2.88

04

875 30i = 500 + 100i

20

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

Macroeconomics

3, 472 100 = 163.3. 2,125.80

244. (d) Y = C + I + G + E M

= 40 + 0.80Yd + 100 120i + 220 + 100 [5 + 0.1Y] = 40 + 0.80(Y 0.2Y) + 100 120i + 220 +100 [5 + 0.1Y] = 40 + 0.80Y 0.16Y + 100 120i + 220 + 100 [5 + 0.1Y] = 455 + 0.54Y 120i
455 120i 0.46

Money Supply = Money Demand 150 = 0.24Y 10i Y = 625 + 42i. LM Curve Equating IS and LM functions: 625 + 42i = 989.13 260.87i 364.13 i Y Y = 302.87i = 1.20%

In equilibrium position:

20 04

Th e

1,000 + 250i = Y Equating LM and IS functions: 2,400 40i 1,400 = 1,000 + 250i = 290i = 4.83 = 1,000 + (250 4.83) = 2,207.5

i
Y

The new LM Curve is; 600 = 0.25Y + 400 50i Y = 800 + 200i New equilibrium 254

Ic

fa

200 + 50i = 0.20Y

iU

600 = 0.20Y + 400 50i

ni

ve rs i

Money supply

ty

Pr es

= 0.20Y + 400 50i

= Money Demanded

s. Al

= Transaction demand for money + Speculative Demand for money

lr

ig

Demand for money (Md)

ht

re

245. (e) LM Curve:

se rv

ed

Velocity of Money =

Y 675.40 = = 2.25. MS 300

.IS

BN

= 675.40

:8

= 625 + (42 1.20)

1-

31

Apply the value of I in to the LM Curve equation.

4-

02

27

-4

ef .N

o.

M AC

300 = 0.24Y + 150 10i

04

20

= 989.13 260.87iIS Curve

04

04

Y =

Part II

2,400 40i = 800 + 200i 1,600 i Y


246. (a) Y

= 240i = 6.67 = 800 + (200 6.67) = 2,134 = = = = = = C+I+G+EM 40 + 0.8Yd 40 + 0.8Yd + 200 10i + 300 + 0.12Y 5 0.1Y 40 + 0.8[Y 0.12Y] + 200 10i + 300 + 0.12Y 5 0.1Y 40 + 0.632Y + 200 10i + 300 + 0.12Y 5 0.1Y 1537 28.7i 535 + 0.652Y 10i

Change in GNP = 2,207.5 2,134 = 73.5 (Decrease). C Y

200 + 20i = 0.24Y 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

= 200 (10 6.30) =137 If supply of money decreases to 220 the Lm Curve will shift to: 220 = 100 20i + 0.24Y 120 + 20i = 0.24Y Y = 500 + 83i Equating LM and IS Curves: 500 + 83i = 1,537 28.7i

ty

Pr es

s. Al

As investment = 200 10i = 200 (10 9.28) = 107 The result will be increase in private investment (137 107) by = 30. 247. (d) 0.4Y = 800 8i IS Curve 0.4Y = 600 + 10iLM Curve Equating LM and IS functions: 800 8i = 600 + 10i

20 04

Th e

Ic

fa

iU

ni

= 1,037 111.7i =

i Y

= 200 + 18i = =

200 = 11.1 18

[800 8 11.1] = 1778 0.40

When exogenous investment increases by 150 the IS Curve equation becomes

lr

ig

ht

1, 037 = 9.28 111.7

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

LM Curve: 300 = 100 20i + 0.24Y

o.

M AC

W
255

04

20

04

04

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

600 = 640 + 600 = 140 +

200 + 4000i .IS Curve p 1000 +1000i ..LM Curve p

250. (a) IS Curve

20 04

Th e

Ic

fa

Y 0.75Y = 316 200i = 1,264 800i = 0.25Y + 134 500i = 116 + 500i = 464 + 2,000i = 464 + 2,000i = 800 = 0.29 = 250 200 (0.29) = 192 LM Curve 250 0.25Y Y

At equilibrium level, IS = LM 1,264 800i 2,800i i Investment

When money supply decreases by 75, the new LM Curve will be 256

iU

ni

= 334 + 0.75Y 18 200i

ve rs i

= 60 + 0.75 + (Y 24) + 250 200i + 24

ty

Pr es

And, i

= 0.05.

s. Al

= 640

lr

ig

Solving these equations, we have

ht

re

Y = 590 + 1,000i.. LM Curve

se rv

Y = 840 4,000i.IS Curve

ed

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.

.IS

BN

:8

The price level must increase from 1 to 1.05 to eliminate the excessive spending.

1-

p = 1.05

31

4-

i = 0.057

02

27

Solving the above two equations, we have

-4

ef .N

o.

M AC

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.

04

20

0.4Y = 800 + 150 8 19.4 = 794.4 Y = 1,986 Change in equilibrium = 1,986 1,778 = 208.

04

04

Part II

175 0.25Y Y

= 0.25Y + 134 500i = 41 + 500i = 164 + 2,000i

And the IS Curve will remain the same. At equilibrium: 164 + 2,000i 2,800i i = 1,264 800i = 1,100 = 0.39

20 04

Th e

0.25Y= 577.5 10i Y IS 810 i = 2,310 40iIS equation = LM = 65i = 12.46 = 1,500 + 25 12.46 = 1,811.5. At equilibrium Y, 2,310 40i = 1,500 + 25i

Apply the value of i into LM Curve equation.

253. (e) The IS function is:

Y =Y=C+I+G 257

Ic

fa

= 120 + 0.75Y 112.5 + 420 10i + 150

= 577.5 + 0.75Y 10i

iU

ni

= 120 + 0.75(Y 150) + 420 10i + 150

ve rs i

=C+I+G

ty

Equilibrium in the goods market:

Pr es

= 1,500 + 25iLM Curve

s. Al

0.20 Y

= 300 + 5i

lr

ig

0.20Y 5i = 300

ht

re

M = p

se rv

ed

252. (b) Equilibrium in the asset market:

.IS

The net result of changes in private investment and government expenditure is that, it increases the GDP by 500.

BN

:8

1-

31

1 [ 250 75] = 500. 0.35

4-

02

The increase in private investment is by 250 and decline in government expenditure by 75.

27

-4

1 [G + I] 0.35

ef .N

o.

Multiplier =

1 1 = 0.15 + 0.20 0.35

M AC

MPM

= 0.15

251. (a) MPS = 0.20

04

20

The change in investment = 192 172 = 20.

04

The changed level of investment = 250 200 (0.39) = 172

04

Macroeconomics

Y = 120 + 0.75 +(Y 150) + 300 5i + 150 = 120 + 0.75Y 112.5 + 300 5i + 150 = 457.5 + 0.75 Y 5i 0.25Y = 457.5 5i Y L = 1,830 20i..IS Curve equation. =
M p

0.20Y 5i = 300 0.20 Y Y = 300 + 5i = 1,500 + 25i..LM Curve equation.

1,830 20i = 1,500 + 25i i = 7.33

254. (c) Y = C + I + G

Y L

= 2,190 20i...IS Curve


M = p

Solve IS and LM for the value of interest: 2,190 20i 690 i Interest = 1,500 + 25i = 45i

ni

Ic

Income Y

fa

iU

20 04

255. (a) First derive the IS Curve:

Th e

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

ve rs i

ty

= 15.333 = 2,190 20i

= 15.3% = 2,190 (20 15.3) = 2,190 306 = 1,884.

Pr es

s. Al

lr

= 1,500 + 25i.LM Curve equation.

ig

ht

0.20 Y

= 300 + 5i

re

0.20Y 5i = 300

se rv

ed

.IS

BN

:8

1-

0.25Y = 547.5 5i

31

4-

= 547.5 + 0.75Y 5i

02

= 120 + 0.75Y 112.5 + 300 5i + 240

27

-4

= 120 + 0.75 + (Y 150) + 300 5i + 240

ef .N

o.

The interest rate is 7.33.

M AC

330

= 45i

04

20

Solve the IS and LM equation:

04

04

Part II

Supply of money
d

= 300

At equilibrium (M ) = Ms 300 .20Y Y IS 867 i Y Y = = = = 0.20Y + 145 60i = 155 + 60i = 775 + 300iLM Curve LM 320i 2.71

Equilibrium income: 1,642 20i = 775 + 300i

= 1,642 (20 2.71) = 1,587.8 = 1,588.

Th e

256. (d) Equilibrium Trade Balance = Exports Imports = 225 5 + 0.2Y 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 20i..IS Curve LM Curve: Demand for money = Mt + Ma = 0.20Y + 145 60i Supply of money = 300 At equilibrium (Md) = Ms 300 = 0.20Y + 145 60i 0.20Y = 155 + 60i Y = 775 + 300i...LM Curve Equilibrium income: IS = LM 1,642 20i = 775 + 300i 867 = 320i i = 2.71 Apply the value of i in IS Curve equation:

Y Y

20 04

Equilibrium Trade Balance = 225 5 0.2Y = 225 5 (0.2 1,588) = 97.6. 257. (b) S = 50 + 0.25Y (1) I = 65 220i. (2) Under equilibrium condition (1) = (2) 65 220i = 50 + 0.25Y 0.25Y = 115 220i Y = 460 880i i = 0.10 259

Ic

fa

= 1,642 (20 2.71) = 1,587.8 = 1,588

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

Apply the value of i in IS Curve equation:

04

20

04

04

Macroeconomics

258.

20 04

261.

Th e

Ic

fa

iU

Substitute the value of Y and i in the LM equation: 550 = 500 5m + (1000 x 0.12) 1050 = 5m = 120 260

ni

ve rs i

300 = 0.12 2500

ty

Pr es

s. Al

260.

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

259.

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

04

20

04

04

Part II

5m
i.e. m

= 930 =
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

Consumption function = 50 + 0.8Yd

Demand for money = Mt + Ma = 0.25Y + 125 50i Supply of money = 250 In equilibrium; Md = Ms 0.25Y + 125 50i = 250 0.25Y Y 1625 25i 1125 i Y = 250 125 + 50i = 500 + 200i.LM Curve = 500 + 200i = 225i =
1125 =5 225

0.40Y = 650 10i LM Curve:

Th e

Demand for money = Mt + Ma = 0.25Y + 125 50i Supply of money


d

Ic

fa

iU

= 1,625 25iIS Curve

ni

ve rs i

ty

= 50 + 0.8(Y 0.25Y) + 200 10i + 400 = 650 + 0.8Y 0.2Y 10i

20 04

In equilibrium; M = Ms = 0.25Y + 125 50i = 250 0.25Y Y = 250 125 + 50i = 500 + 200i.LM Curve

When the money market and goods market are in equilibrium: IS = LM 1625 25i = 500 + 200i 1125 i = 225i = 1125 =5 225

Investment = 200 10i = 200 (10 5) = 150. 261

Pr es

= C+I+G

= 250

s. Al

Consumption function = 50 + 0.8Yd

lr

263. (a) Saving function

= 50 + 0.2Yd

ig

ht

= 1625 (25 5)

= 1,500.

re

se rv

ed

.IS

BN

:8

When the money market and goods market are in equilibrium: IS = LM

1-

31

4-

02

27

-4

ef .N

o.

M AC

LM Curve:

= 1625 25iIS Curve

04

0.40Y

= 650 10i

20

04

= 50 + 0.8(Y0.25Y) + 200 10i + 400 = 650 + 0.8Y 0.2Y 10i

04

=C+I+G

Macroeconomics

When the government expenditure increases by 135, the IS Curve will change to: Y = 50 + 0.8(Y 0.25Y) + 200 10i + (400 + 135) = 50 + 0.8Y 0.2Y + 200 10i + 535 0.4Y = 785 10i Y = 1,962.5 25i. = 500 + 200i = 225i
1462.5 = 6.5 225

When the money market and goods market are in equilibrium: IS = LM 1962.5 25i 1462.5 i

264. (e) Saving function

=C+I+G = 50 + 0.8(Y 0.25Y) + 200 10i + 400 = 650 + 0.8Y 0.2Y 10i

= 500 + 200i..LM Curve

When the money market and goods market are in equilibrium: IS = LM 1125

ni

20 04

Th e

Investment = 200 10i = 200 (10 5) = 150.

Investment will not be crowded out if interest rate is maintained at 5%. This can happen only when LM also shifts to the right. = 50 + 0.8(Y 0.25Y) + 200 10i + (400 + 135) = 50 + 0.8Y 0.2Y + 200 10i + 535 = 785 10i = 1,962.5 25i = 1,962.5 (25 5) = 1,837.5

IS Curve after increase in Government expenditure is: Y 0.4Y Y Y

Substituting i = 5% in the above equation: Substituting the Y and i in the demand for money function: 262

Ic

fa

iU

ve rs i

= 225i
1125 =5 225

ty

1625 25i

= 500 + 200i

Pr es

s. Al

lr

0.25Y

= 250 125 + 50i

ig

ht

= 0.25Y + 125 50i = 250

re

In equilibrium;

Md = Ms

se rv

Supply of money

= 250

ed

= 0.25Y + 125 50i

.IS

BN

Demand for money = Mt + Ma

:8

LM Curve:

1-

31

= 1625 25iIS Curve

4-

0.40Y = 650 10i

02

27

-4

ef .N

o.

Consumption function = 50 + 0.8Yd

M AC

= 50 + 0.2Yd

Crowding output of private investment = 150 135 = 15.

04

Investment (I) = 200 (10 x 6.5) = 135

20

04

04

Part II

Md(Mt + Ma) = 0.25 Y +125 50i = (0.25 1837.5) +125 (50 5) = 459.38 + 125 250 Md = 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 = 20 + 0.75Yd +500 15i + 400 +260 10 + 0.1Y = 20 + 0.75(Y 0.2Y) + 500 15i + 400 + 260 10 0.1Y = 1,170 + 0.5Y 15i Y = 2,340 30i LM Curve: Demand for money (Md) = Ms 0.25Y + 125 50i = 250 0.25Y 0.25Y + 125 50i Y = 250 125 + 50i =250 Supply of money (Ms) in equilibrium: Md = Ms = 0.5Y = 1,170 15i.is Curve

2,340 30i 1,840 i


266. (e) IS Curve:

= 500 + 200i = 230i


1,840 = 8%. 230

Y =C+I+G+EM

= 0.5Y = 1,170 15i.is Curve

20 04

Th e

Y = 2,340 30i LM Curve Demand for money (Md) = Ms 0.25Y + 125 50i = 250 0.25Y = 250 125 + 50i Supply of money (Ms) in equilibrium: Md = Ms 0.25Y + 125 50i = 250 0.25Y Y = 250 125 +50i = 500 + 200iLM Curve

Equilibrium Income: 263

Ic

fa

= 1,170 + 0.5Y 15i

iU

ni

= 20 + 0.75(Y 0.2Y) + 500 15i + 400 + 260 10 0.1Y

ve rs i

= 20 + 0.75Yd +500 15i + 400 +260 10 + 0.1Y

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

At equilibrium, IS = LM

.IS

Equilibrium Income

BN

= 500 + 200iLM Curve

:8

1-

0.25Y = 250 125 + 50i

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

At equilibrium: IS = LM 2,340 30i = 500 + 200i 1,840 i = 230i = 1,840 = 8% 230

Apply the value of interest in IS Curve equation. Y = 2340 (30 x 8) = 2,100.


267. (b) Equilibrium Trade Balance = E M = 260 10 + 0.1Y

= 20 + 0.75(Y 0.2Y) + 500 15i + 400 + 260 10 0.1Y = 1,170 + 0.5Y 15i = 0.5Y = 1,170 15i.is Curve Y = 2,340 30i LM Curve: Demand for money (Md) = Ms 0.25Y + 125 50i = 250 Supply of money (Ms) in equilibrium: Md = Ms 0.25Y = 250 125 +50i Equilibrium Income: At equilibrium, IS = LM 1,840 i = 230i 0.25Y 0.25Y + 125 50i = 250 125 + 50i = 250

Ic

Apply the value of interest in IS Curve equation.

fa

Th e

20 04

EM

268. (d) IS Curve

Y Y

=C+I+G+EM = 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 30i.IS Curve

When the exogenous government expenditure increases by 115 the IS Curve will change to:

Demand for money (Md) = Ms 264

iU

ni

ve rs i

= 2340 (30 8) = 2,100 = 260 [10 + (0.1 2,100)] = 260 220 = 40.

ty

1,840 = 8% 230

Pr es

2,340 30i = 500 + 200i

s. Al

lr

ig

ht

Y = 500 + 200i..LM Curve

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

= 20 + 0.75Yd +500 15i + 400 +260 10 + 0.1Y

04

Y =C+I+G+EM

20

IS Curve:

04

04

Part II

0.25Y + 125 50i = 250 0.25Y = 250 125 +50i Supply of money (Ms) in equilibrium: Md = Ms 0.25Y + 125 50i = 250 0.25Y Y At equilibrium: 230i i = 2,070 = 250 125 +50i = 500 + 200iLM Curve = 500 + 200i

Thus, an increase in Govt. expenditure will increase the equilibrium rate of interest to 9%. = 500 (15 9) = 500 135 = 365. 269. (a) To retain the same level of investment after the increase in govt. expenditure, the interest rate should be maintained in the same rate and money supply should be increased. 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 = 2,570 (30 8) = 2,330 In the money market, the demand for money will be = 0.25Y + 125 50i = (0.25 2,330) + 125 (50 8) = 582.5 + 125 400 = 307.5 The money supply should be increased from 250 to 307.5.

Th e

270. (c) The IS Curve:

Ic

20 04

0.25 Y = 387.5 200i Y Ms 270 = 1550 800iIS Curve = Mt + Ma = 0.30Y + 150 300i LM Curve:

0.30Y = 270 150 + 300i 0.30Y = 120 + 300i 265

fa

iU

=C+I+G = 80 + 0.75Yd + 300 200i + 30 = 80 + 0.75(Y 30) + 300 200i +30

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

The equilibrium Investment will be

o.

M AC

2070 = 9% 230

04

20

04

04

2,570 30i

Macroeconomics

= 400 + 1000i = 400 + 1000i = 1150 =


1150 1800

Equating IS and LM: 1550 800i 1800i i

Investment (I) = 300 200i

0.25Y = 316 200i Y = 1264 + 800i = 0.25Y + 134 500i 0.25Y = 116 + 500i Y = 446 + 2000i LM Curve:

0.25Y = 316 200i Y 200 0.25Y Y LM Curve:

= 1264 + 800i

Th e

At equilibrium: = 264 + 2000i = 1000 = 1000/2800 = 0.36

20 04

1264 800i i Y

2800i

The equilibrium income is: = 1264 + 800i = 1264 + [800 x (0.36)] = 1552.
273. (b) Quantity of money available for speculative balance:

Ic

Transaction demand for money = 700 0.20 = 140. Money available for speculative balances = 250 140 = 110 266

fa

iU

ni

= Money Supply Transaction Demand for Money at Income Level of 700.

ve rs i

= 0.25Y + 134 500i = 264 + 2000i

= 66 + 500i

ty

Pr es

s. Al

lr

= 334 + 0.75Y 18 200i

ig

ht

= 60 + 0.75(Y 24) + 250 200i +24

re

272. (d) IS Curve:

se rv

Investment

= 250 200 x (0.29) = 192.

ed

.IS

800 = 0.285 = 0.29 2800

BN

:8

1,264 800i = 464 + 2000i

1-

31

At equilibrium:

4-

02

27

-4

ef .N

o.

M AC

= 334 + 0.75Y 18 200i

04

= 60 + 0.75 (Y 24) + 250 200i + 24

20

271. (d) IS Curve:

04

04

= 300 200

1150 = 300 128 = 172. 1800

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:

= Money Supply Transaction Demand for Money at Income Level of 700 Transaction demand for money = 900 0.25 = 225 Money available for speculative balances = 250 225 = 25 So at the income level of 900 the money available for speculative balance is 25.
275. (a) Since full employment exists at 650 real income level, we can substitute the real income in the IS equation.

Y = C + I +G + E X

0.39Y = 1000 IS Curve 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

277. (b) Trade Balance

Th e

Hence, equilibrium level of income = 2564.10. = Exports Imports. = 25 0.05Y Y = equilibrium income Savings function Y = = = = 0.39Y = (S) = 720 + 0.3Yd Consumption function (C) = 720 + 0.7Yd 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 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 0.05Y = 1000 + 0.61Y 1000 IS Curve 267

Ic

fa

iU

ni

ve rs i

= 2564.10

ty

Pr es

= 1000 + 0.61Y

s. Al

= 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 0.05Y

lr

ig

= 720 + 0.7(Y 0.2Y + 50) + 20 + 0.10Y + 200 + 25 0.05Y

ht

= 720 + 0.7Yd + 20 + 0.10Y + 200 + 25 0.05Y

re

se rv

ed

Consumption function (C) = 720 + 0.7Yd

.IS

276. (d) Savings function

(S) = 720 + 0.3Yd

BN

:8

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.

1-

31

= 1070/5 = 214

4-

02

5m = 1070

27

-4

650 = 500 + 5m + 80

650 = 500 + 5m + (1000 0.8)

ef .N

= 500 + 5m + 1000i

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.

= 200/2500 = 0.08.

04

2500i = 200

20

04

650

= 850 2500i

04

= 850 2500i

Macroeconomics

2564.10 = T (G
+ R

Trade Balance = 25 (2564.10 0.05) = 103.205.


278. (e) Budget surplus

= 0.2Y (200 + 50) Y = 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 = 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 0.05Y = 1000 + 0.61Y 0.39Y = 1000 IS Curve Y = 2564.10 Budget surplus = (0.2 2564.10) (200 + 50) = 512.82 250 = 262.82. 279. (a) Given the saving function (S) = 420 + 0.2Yd + 6i Consumption function (C) = 420 + 0.8Yd 6i Thus the IS Curve will be: Y = C + I + G + (E M) = 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)

= 3900 + 0.74Y 26i 0.26Y= 3900 26i Y Y 450 Y Y = (3900/0.26) (26i/0.26)

= (450/0.15) + (225i/0.15)

Th e

15000 100i = 3000 + 1500i 1600i = 12000 = 12000/1600 = 7.5 = 15000 (100 7.5) = 14,250 = 420 + 0.8[14250 (0.2 14250) + 100 )] (6 7.5) = 420 + 0.80(14250 2850 + 100) (6 7.5) = 420 + 9200 45 = 9575. i Y

20 04

Substituting the value of i in IS Curve: Consumption at equilibrium =420 + 0.8Yd 6i

280. (d) Private investment at equilibrium = 0.2Y 20i

268

Ic

fa

Thus at equilibrium: IS = LM

iU

Economy will be in equilibrium position when goods market and Money market are in simultaneous equilibrium.

ni

ve rs i

= 3000 + 1500i . LM Curve

ty

Pr es

0.15Y = 450 + 225i

s. Al

= 0.15Y 225i

lr

ig

ht

LM Curve equation:

re

= 15000 100i IS Curve

se rv

ed

.IS

BN

:8

= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y

1-

= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part II

Consumption function (C) = 420 + 0.8Yd 6i Thus the IS Curve will be: Y = 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 0.26Y Y Y = 3900 26i

Thus at equilibrium: IS = LM 15000 100i 1600i i Y = 3000 + 1500i = 12000 = 12000/1600 = 7.5

= 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y 0.26Y= 3900 26i Y

20 04

Th e

LM Curve equation: 452 = 0.15Y 225i 0.15Y= 450 + 225i Y Y = (450/0.15) + (225i/0.15) = 3000 + 1500i.LM Curve = 3000 + 1500i = 12000 = 12000/1600 = 7.5 269

Thus at equilibrium: IS = LM 15000 100i 1600i i

Ic

fa

= (3900/0.26) (26i/0.26) = 15000 100iIS Curve

iU

ni

ve rs i

= 3900 + 0.74Y 26i

ty

Pr es

= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y

s. Al

= 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y)

lr

ig

ht

= C + I + G + (E M)

re

281. (b) Demand for money = 0.15Y ( 225i)

se rv

= (0.2 14,250) (20 7.5) = 2850 150 = 2700.

ed

Private investment at equilibrium

.IS

BN

= 15000 (100 7.5) = 14,250

:8

Substituting the value of i in IS Curve:

1-

31

4-

02

27

-4

ef .N

= 3000 + 1500iLM Curve

o.

= (450/0.15) + (225i/0.15)

M AC

0.15Y

= 450 + 225i

451 = 0.15Y 225i

04

LM Curve equation:

20

= 15000 100iIS Curve

04

04

= (3900/0.26) (26i/0.26)

Macroeconomics

Substituting the value of i in IS Curve, Y = 15000 (100 7.5) = 14,250 = 2137.5 1687.5 = 450.
282. (e) Trade balance at equilibrium = Exports Imports = 1400 0.1Y

Demand for money = (0.15 14250) (225 7.5)

= C + I + G + (E M) = 420 + 0.8Yd 6i + 0.2Y + 2000 + (1400 0.1Y) = 420 + 0.64Y + 80 6i + 0.2Y 20i + 2000 + 1400 0.1Y = 3900 + 0.74Y 26i

Y Y

= (3900/0.26) (26i/0.26) = 15000 100iIS Curve

LM Curve equation: 453 = 0.15Y 225i 0.15Y= 450 + 225i Y Y = (450/0.15) + (225i/0.15) = 3000 + 1500i.LM Curve

283. (c) Given the saving function (S) = 20 + 0.25Yd

Pr es

s. Al

lr

Trade Balance at equilibrium: = 1400 (0.1 x 14250) = 25. Consumption function (C) Y Y = C + I + G + ( E M) = 20 + 0.75Yd

Th e

20 04

0.5Y = 780 10i..IS curve The money market will be in equilibrium when, supply of money (Ms) is equal to Transaction demand for money + speculation demand for money. 250 = 0.2Y + 50 16i 0.2Y = 200 + 16i...LM curve Y = 1000 + 80i = 1000 + 80i When equilibrium is there, IS = LM 1560 20i 270

Ic

fa

= 20 + .75[Y (40 + 0.2Y)] + 240 10i + 300 +200 10 0.10Y

= 20 + 0.75 (Y + 40 0.2Y) + 240 10i + 300 + 200 10 0.10Y = 20 + 0.75Y + 30 0.15Y + 240 10i + 300 + 200 10 0.10Y = 780 + 0.5 10i

iU

ni

ve rs i

Thus the IS curve will be:

ty

ig

ht

= 15000 (100 7.5) = 14,250

re

Substituting the value of i in IS Curve,

se rv

= 12000/1600 = 7.5

ed

1600i

= 12000

.IS

BN

15000 100i = 3000 + 1500i

:8

Thus at equilibrium: IS = LM

1-

31

4-

02

27

-4

ef .N

o.

M AC

0.26Y= 3900 26i

04

20

04

04

= 420 + 0.8(Y 0.2Y + 100) 6i + 0.2Y 20i + 2000 +1400 0.1Y

Part II

1560 1000 560 i Y

= 80i + 20i = 100i = 5.6

= 1560 (20 5.6) = 1560 112 = 1448. = = Govt. expenditure + Transfer payments taxes 300 + 0 [40 + (0.2 x Y)] C + I + G + ( E M) 20 + 0.75(Y + 40 0.2Y) + 240 10i + 300 + 200 10 0.10Y 20 + 0.75Y + 30 0.15Y + 240 10i + 300 + 200 10 0.10Y 780 + 0.5 10i 780 10i..IS Curve 20 + .75[ Y (40 + 0.2Y)] + 240 10i + 300 + 200 10 0.10Y

284. (b) Budget deficit at equilibrium

Y Y

= = = =

0.5Y =

285. (a) Y

= C + I + G + (E M)

= 20 + 0.75[Y (40 + 0.2Y)] + 240 10i + 350 + 200 10 0.10Y = 20 + 0.75(Y + 40 0.2Y) + 240 10i + 350 + 200 10 0.10Y = 20 + 0.75Y + 30 0.15Y + 240 10i + 350 +200 10 0.10Y Y = 830 + 0.5 10i 0.5Y = 830 10i..IS Curve Y = 1,660 20i 250 = 0.2Y + 50 16i 0.2Y = 200 + 16i..LM Curve Y = 1000 + 80i Solve the IS and LM Curve: 1,660 20i = 1000 + 80i i = 6.6% Apply the value of i into IS Curve: Y

20 04

Th e

Ic

fa

= 1660 (20 6.6) = 1660 132 = 1,528.

iU

ni

ve rs i

ty

Pr es

s. Al

= 300 + 0 [40 + (0.2 1448)] = 300 + 40 289.6 = 50.4.

lr

ig

ht

Y = 1560 (20 5.6) = 1560 112 = 1448 Budget deficit at equilibrium

re

se rv

Y = 1000 + 80i When equilibrium is there: IS = LM 1560 20i = 1000 + 80i 1560 1000 = 80i + 20i 560 = 100i i = 5.6

ed

.IS

BN

:8

1-

31

4-

02

0.2Y = 200 + 16i....LM Curve

27

-4

250 = 0.2Y + 50 16i

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.

o.

M AC

W
271

04

20

04

04

Macroeconomics

286. (c) Given saving function is = 60 + 0.25Yd Consumption function = 60 + 0.75Yd The IS Curve is:

= C + I + G + ( E M)

= 60 + 0.75 (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 income 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 Trade Balance = 400 (20 + 0.1 4240) = 400 444 = 44.

20 04

Th e

272

Ic

fa

= 4600 30 12 = 4240

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

= C + I + G + ( E M)

re

Y = 4600 30 12 = 4240. 287. (e) Trade balance = Exports Imports = 400 20 + 0.1Y

se rv

ed

.IS

i = 12 Equilibrium interest is 12%. To find out equilibrium income substitute the value of i in IS Curve equation. Y = 4600 30i

BN

:8

1-

31

4-

02

250i = 3000

27

= 1600 + 220i

-4

= 4600 30i

ef .N

Equilibrium income in economy:

o.

= 1600 + 220i..LM Curve

M AC

0.2Y = 320 + 44i

0.2Y= 130 44i 450

04

450 = 0.2Y + 130 44i

20

= 60 + 0.75 (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

04

04

Part II

288. (b) Budget Deficit

0.2Y = 320 + 44i

Th e

Y Y i

20 04

250i = 3250 = 13 Equilibrium interest is 13%. To find out equilibrium income substitute the value of i in IS Curve equation. Y Y = 4850 30i = 4850 30 13 = 4460.

290. (a) Given saving function is = 25 + 0.25Yd

Consumption function is = 25 + 0.75Yd Y = C+I+G+EM 273

Ic

fa

Equilibrium income in economy: = 4850 30i = 1600 220i

iU

= 1600 + 220i..LM Curve

ni

ve rs i

ty

0.2 Y= 130 44i 450

Pr es

450 = 0.2Y + 130 44i

s. Al

Supply of money = Demand for money

lr

Equilibrium in the money market will be:

ig

ht

= 4850 30i

re

0.5Y = 2425 15i

se rv

= 2425 + 0.50Y 15i

ed

.IS

= 60 + .75 (Y 0.2Y + 80) +1000 15i + 925 + 400 20 0.10Y

BN

289. (c) Y = C + I + G + E M

:8

Budget deficit = (800 + 80) (0.2 4240) = 880 848 = 32.

1-

31

= 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

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

= 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y) = 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y = 1170 + 0.5Y 15i 0.5Y = 1170 15i Y
Ms P

= 2340 30i....IS Curve =


Mt Ma + P P

250 Y

= 0.25Y + 125 50i = 500 + 200i ...LM Curve

230i i Y

= 1840 = 8%

Equilibrium income is: = 2340 30i = 2340 (30 8) = 2100. 291. (d) Trade Balance = Exports Imports = 225 10 + 0.1Y Y =C+I+G+EM

20 04

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

Trade Balance = Exports Imports = 225 10 + (0.1 2100) = 215 210 = 5. 292. (e) Budget Deficit = (Govt. expenditure + Transfer Payments) Taxes = 400 + 40 0.2Y Y = 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y) = 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y = 1170 + 0.5Y 15i 0.5Y = 1170 15i Y = 2340 30i..IS Curve Money supply = Transaction demand for Money + Speculative demand for money 274

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

= 2340 30iIS Curve

se rv

0.5Y = 1170 15i

ed

.IS

= 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y = 1170 + 0.5Y 15i

BN

= 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y)

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

2340 30i = 500 + 200i

04

By equalizing the LM and IS Curves, we will get the equilibrium interest rate.

20

04

04

0.25Y = 125 + 50i

Part II

250 Y

= 0.25Y + 125 50i = 500 + 200i ..LM Curve = 500 + 200i = 1840 = 8%

0.25Y = 125 + 50i By equalizing the LM and IS Curves, we will get the equilibrium interest rate. 2340 30i 230i i Y

Equilibrium income is: Budget Deficit = 400 + 40 0.2Y = 440 (2100 0.2) = 20.
293. (c) Y = 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 745 + 225 (10 + 0.1Y)

= 1170 + 0.5Y 15i 0.5Y = 1515 15i Y = 2030 30i..IS Curve

By equalizing the LM and IS Curves, we will get the equilibrium interest rate.

i Y Y

= 11%

20 04

Th e

Equilibrium in the money market: Ms = Md 300 = 0.2Y + 120 40i 0.2y = 180 + 40i.LM Y = 900 + 200i Economy will be in equilibrium when IS = LM: 3500 125i = 900 + 200i 2600 = 325i i = 8% The equilibrium income is: 275

Ic

fa

0.28Y= 980 35i ...IS = 3500 125i

iU

= 980 + 0.72Y 35i

ni

ve rs i

= 60 + 0.72Y + 40 + 250 + 0.1Y 35i + 400 + 250 20 0.1Y

ty

= 60 + 0.8 [Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]

Pr es

=C+I+G+EM

s. Al

294. (a) Consumption function = 60 + 0.8Yd

lr

ig

= 3030 30i = 3030 (30 11) = 2700.

ht

Equilibrium income is:

re

se rv

ed

230i

= 2530

.IS

3030 30i = 500 + 200i

BN

:8

1-

= 500 + 200i ..LM Curve

31

4-

0.25Y= 125 + 50i

02

250 = 0.25Y + 125 50i

27

-4

Money supply = Transaction Demand for Money + Speculative demand for money

ef .N

o.

M AC

= 25 + 0.6Y + 30 + 500 15i + 745 + 225 10 0.1Y

04

20

04

04

= 2340 30i = 2340 (30 8) = 2100

Macroeconomics

= 3500 125i = 3500 1000 = 2500.

295. (e) Trade Balance = Exports Imports

= 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 0.28Y= 980 35i ..IS Y = 3500 125i The LM Curve equation: Ms = Md 300 = 0.2Y + 120 40i 0.2y = 180 + 40iLM Y = 900 + 200i Economy will be in equilibrium when IS = LM: 3500 125i = 900 + 200i 2600 = 325i i = 8% The equilibrium income is: Y = 3500 125i = 3500 1000 = 2500

0.2y = 180 + 40i.LM Economy will be in equilibrium when IS = LM:

20 04

Th e

3500 125i = 900 + 200i 2600 = 325i i Y = 8% = 3500 125i = 3500 1000 = 2500 = 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 = 1162 35i ...IS Y = 4150 125i

The equilibrium income is: Budget Surplus = 0.1Y (400 + 50) = (0.1 2500) 450 = 250 450 = 200.

297. (b) Y

276

Ic

fa

iU

= 900 + 200i

ni

ve rs i

ty

302 = 0.2Y + 120 40i

Pr es

Ms = Md

s. Al

The LM Curve Equation;

lr

= 3500 125i

ig

ht

0.28Y = 980 35i ..IS

re

= 980 + 0.72Y 35i

se rv

= 60 + 0.72Y + 40 + 250 + 0.1Y 35i+ 400 + 250 20 0.1Y

ed

.IS

= 60 + 0.8[Y 0.1Y + 50] + 250 + 0.1Y 35i + 400 + 250 [20 + 0.1Y]

BN

296. (d) Budget Surplus = T (G + R) = 0.1Y (400 + 50)

:8

Trade Balance = 250 20 + 0.1 2500 = 230 250 = 20.

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part II

The LM Curve equation: Ms = Md 303 = 0.2Y + 120 40i 0.2y = 180 + 40i.LM Y = 900 + 200i Economy will be in equilibrium when IS = LM: 4150 125i = 900 + 200i 3250 = 325i i = 10% The equilibrium income is: Y C Yd C = 4150 125 10 = 4150 1250 = 2900. = 400 + 0.8Yd 20i = Y + R + T = Y + 200 0.1Y = 0.9Y + 200 = 400 + 0.80[0.9Y + 200] 20i = 560 + 0.72Y 20i
298. (a) IS Curve:

400 = 0.25Y + 110 145i Y

iU

ni

299. (b) Trade Balance = Export Imports

Th e

IS Curve: = 400 + 0.8Yd 20i =Y+R+T = Y + 200 0.1Y = 0.9Y + 200 C Y Y Y = 400 + 0.80[0.9Y + 200] 20i = 560 + 0.72Y 20i =C+I+G+EM = 560 + 0.72Y 20i + 20 +0.15Y 60i + 500 + 800 15 0.12y = 1865 + 0.75Y 80i = 7460 320iIS Curve 277 0.25Y = 1865 80i Equilibrium Income:

20 04

Yd

Ic

fa

ve rs i

ty

= 7%

= 7460 320i = 7460 (320 7) = 5220. = 800 15 + 0.12Y

Pr es

6300

= 900i

s. Al

7460 320i

= 1160 + 580i

lr

ig

We can find out the equilibrium interest by equating the IS and LM:

ht

= 1160 + 580i...LM Curve

re

se rv

ed

Md = Mt + Ma

.IS

LM Curve:

BN

= 7460 320i.IS Curve

:8

Y = 1865 + .75Y 80i 0.25Y= 1865 80i

1-

31

4-

02

= 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y

27

Equilibrium Income: Y =C+I+G+EM

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

LM Curve: Md = Mt + Ma 400 = 0.25Y + 110 145i Y = 1160 + 580iLM Curve = 1160 + 580i = 900i = 7% = 7460 (320 7) = 5220 Trade Balance = Export Imports Trade Balance = 158.60.
300. (d) Budget Deficit

We can find out the equilibrium interest by equating the IS and LM: 7460 320i 6300 i Y

= 0.1Y (500 + 200) Y Y Y =C+I+G+EM = 1865 + 0.75Y 80i = 7460 320i.IS Curve

400 = 0.25Y + 110 145i Y

Th e

301. (c) IS Curve:

20 04

C Y Y

Equilibrium Income: =C+I+G+EM = 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y = 1865 + 0.75Y 80i 0.25Y = 1865 80i 278

Ic

fa

Budget Deficit = (0.1 5220) (500 + 200) = 522 700 = 178. = 400 + 0.8Yd 20i =Y+R+T = Y + 200 0.1Y = 0.9Y + 200 = 400 + 0.80[0.9Y + 200] 20i = 560 + 0.72Y 20i

iU

ni

ve rs i

= 7460 320i = 7460 (320 x 7) = 5220

ty

= 7%

Pr es

6300

= 900i

s. Al

7460 320i = 1160 + 580i

lr

ig

We can find out the equilibrium interest by equating the IS and LM:

ht

= 1160 + 580i...LM Curve

re

se rv

ed

Md = Mt + Ma

.IS

LM Curve:

BN

:8

1-

0.25Y= 1865 80i

31

4-

02

= 560 + 0.72Y 20i + 20 + 0.15Y 60i + 500 + 800 15 0.12y

27

-4

ef .N

= T (G + R)

o.

M AC

= 800 (15 + 0.12 5220)

04

20

04

= 7460 320i

04

Part II

= 7460 320i.IS Curve

LM Curve: Md = Mt + Ma 400 = 0.25Y + 110 145i Y = 1160 + 580i.LM Curve We can find out the equilibrium interest by equating the IS and LM: 7460 320i = 1160 + 580i 6300 i Y = 900i = 7460 320i = 7460 (320 7) = 5220 0.27Y Y = (1875 + 225) 80i = 8360 320i

There will not be any change in LM Curve

We can find out the equilibrium interest by equating the IS and LM: 7200 i Y = 900i = 8% = 8360 320i = 8360 (320 8) = 5800 Private Investment (I)= 20 + 0.15Y 60i

Consumption (C) = 502 + 0.80Yd Yd C IS Curve:

ve rs i

ni

Th e

20 04

Ic

fa

=C+I+G+EM = 550 + 0.60Y + 400 + 0.25Y 10i + 300 + 150 0.10y = 1400 + 0.75 10i =

iU

(1400 10i )
0.25

ty

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

Pr es

=YT+R = Y 0.25Y + 60 = 0.75 + 60 = 502 + 0.80 [0.75Y + 60] = 502 + 0.60Y + 48 = 550 + 0.60Y

= 5,600 40i

s. Al

lr

302. (b) Savings (S)

= 502 + 0.80Yd

ig

ht

Change in Investment = 410 383 = 27.

re

Investment after increase in G: 20 + [0.15 5800] (60 8) = 410

se rv

Original investment = 20 + [0.15 5220] (60 7) = 383

ed

.IS

BN

:8

1-

31

4-

02

27

8360 320i

= 1160 + 580i

-4

ef .N

o.

M AC

W
279

If government expenditure increases by 225, the new IS function is:

04

20

04

04

= 7%

Macroeconomics

= 3200 + 200i

By equating IS and LM Curve: 5600 40i = 3200 + 200i 240i i Y Y = 2400 = 10% = 5600 (40 10) = 5200.

303. (e) Trade Balance = Export Import

= Y 0.25Y + 60 = 0.75 + 60 C = 502 + 0.80 [0.75Y + 60] = 502 + 0.60Y + 48 = 550 + 0.60Y IS Curve: Y =C+I+G+EM = 550 + 0.60Y + 400 + 0.25Y 10i + 300 + 150 0.10y

By equating IS and LM Curve: 240i

fa

iU

5600 40i

ni

Th e

Ic

20 04

Y Y

Trade Balance = 150 0.10Y = 150 (0.10 5200) = 370.

Income Determination Model Including Money and Interest


304. (a) Equilibrium rate of interest is determined where IS = LM

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

ve rs i

= 3200 + 200i

ty

= 3200 + 200i = 2400 = 10% = 5600 (40 10) = 5200

Pr es

( 480 + 30i )
0.15

s. Al

lr

0.15Y 30i = 480

ig

ht

Money Market to be in equilibrium, Md = Ms

re

= 0.1Y 30i

se rv

Md = Mt + Ma

ed

LM Curve:

.IS

BN

0.25

= 5,600 40i

:8

(1400 10i )

1-

31

= 1400 + 0.75 10i

4-

02

27

-4

ef .N

o.

M AC

Yd

=YT+R

04

Consumption (C) = 502 + 0.80Yd

20

Savings (S)

= 502 + 0.80Yd

04

04

= 150 0.10Y

Part II

Y = 1641.67 20i (IS curve) Total demand for money = Mt + Ma = 0.20Y + 145 60i Supply of Money = 300 MUC 0.20Y + 145 60i = 300 0.2Y = 155 + 60i Y = 775 + 300i (LM curve) Equilibrium rate of interest is determined where IS = LM 320i = 866.67 i = 2.7%. kY hi = M . kY = M + hi Y = ( M + hi) / k.
306. (d) 0.5Y = 3,125 25i 305. (a) Money market equilibrium is where demand for money = supply of money

i = 5%, i = 4%,

Y = 500 + (20 5) = 600

20 04

Substituting Y = 2,100 and I = 8% in the total demand for money function, 0.50 (2,100) + 350 100(8) = 1,050 + 350 800 = 600 MUC.

310. (c) At equilibrium, IS = LM

Th e

Y = 5700 + 0.5Y 100i 0.5Y = 5700 100i Y = 11400 200i .IS function Y = 5200 + 800i .LM function Thus at simultaneous equilibrium, 11400 200i = 5200 + 800i Or, 6200 = 1000i Or, i = 6.2 281

Ic

Total demand for money function = (Mt /p) + (Ms /p) = 0.50Y + 350 100i

fa

iU

Substituting i = 8%, IS function becomes Y = 2,900 100 (8) = 2,100

ni

ve rs i

This can happen only when IS function shifts to the left

ty

Pr es

i = 3%, Y = 500 + (20 3) = 560 Does not fall on the LM curve hence does not represent an equilibrium in the money market. 309. (c) There will not be any crowding out if i = 8%

s. Al

lr

ig

Y = 500 + (20 4) = 580

ht

re

se rv

i = 7%,

Y = 500 + (20 7) = 640

ed

If,

i = 10%, Y = 500 + (20 10) = 700

.IS

If i decrease by one percentage point, equilibrium income would increase by 50 MUC. 307. (d) Crowding-out refers to decrease in private investment because of increase in interest rate caused by the increase government spending. Crowding out = 100 5 = 500. 308. (a) LM function Y = 500 + 20i

BN

:8

1-

31

4-

02

Y = 6,250 50i

27

-4

ef .N

o.

M AC

04

20

04

04

1,641.67 20i = 775 + 300i

Macroeconomics

When government spending increases by 100, the IS function becomes 0.5Y = (5700 + 100) 100i 0.5Y = 5800 100i Or, Y = 11600 200i Thus, at equilibrium, 5200 + 800i = 11600 200i Or, 1000i = 6400 Or, i = 6.4.
311. (b) S = 250 + 0.30Yd

At equilibrium, demand for money = Supply of money

When, i = 8, 0.4Y 100(8) = 300 Or, Y = 950

20 04

314. (c) When i = 10, Investment, I = 200 10(10) = 100

315. (b) There will not be any crowding out if i = 10%

282

Th e

When I = 6, 0.4Y100 (6) = 300

Or, 0.4Y = 360 Or, Y = 900 Change in the equilibrium level of output = 900 950 = 50 MUC. Because of expansionary fiscal policy, i = 12, Then investment I = 200 10(12) = 80 crowding out = 100 80 = 20 MUC. This can happen only when LM curve shifts to the right. Substituting i = 10%, LM function become Y

Ic

fa

iU

Or, 0.4Y = 380

ni

ve rs i

ty

i.e. 0.4Y 100i = 300

Pr es

s. Al

lr

313. (b) L = 0.4Y 10i

ig

ht

or, i = 10%.

re

or, 5i = 50

se rv

200 5i = 150

ed

.IS

At equilibrium, S = I

BN

At Y = 2,250, S = 300 + 0.20 (2,250) = 300 + 450 = 150

:8

312. (c) S = 300 + 0.20Y

1-

31

4-

Or, I =

100 = 77.5 MUC. 1.29

02

27

Y = mI Or, 100 = 1.29I

-4

ef .N

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

M AC

The value of multiplier = m

T = 0.25Yd M = 0.3Y

04

20

04

C = 250 + 0.70Yd

04

Part II

= 500 + 200(10) = 2,500 Total demand for money function


M = t p
+ Ma p = 0.50Y + 250 100

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

317. (c) Goods market equilibrium:

0.5Y = 2,925 37.5;

Money market equilibrium: or, Y = 1,250 + 500i (LM function)

20 04

318. (e) If Government expenditure increase by 475 MUC,

Th e

At simultaneous equilibrium of goods market and money market, IS = LM 5,850 75i = 1,250 + 500i or, 575i = 4,600 or, i = 8% Y = 5,850 75(8) = 5,850 600 = 5,250 Trade balance at equilibrium = E M = 650 (25 + 0.25Y) = 650 25 .25 (5,250) = 650 25 1,312.50 = 687.50 MUC (deficit).

Ic

fa

iU

0.25Y = 312.5 + 125;

ni

ve rs i

or, Y = 5,850 75i (IS Function)

ty

Pr es

s. Al

lr

= 2,577.78 296.64 = 2,281.14 = 2,281MUC (approximately).

ig

ht

Y = 2,577.78 33.33 (8.9)

re

or, i = 8.9%

se rv

or, 233.33i = 2,077.78

ed

500 + 200i = 2,577.78 33.33

.IS

BN

By equating the IS and LM function, we can get the equilibrium rate of interest.

:8

or, Y = 500 + 200i .LM Curve

1-

31

or, 0.50Y = 250 + 100i

4-

or, 500 = 0.5Y + 250 100i

02

27

-4

Ms

M M = t + a p p

ef .N

Or, Y = 2,577.78 33.33i..IS Curve

o.

Or, 0.90Y = 2,320 30i

M AC

Or, Y = 2,320 + 0.1Y 30i

W
283

Or, Y = 50 + 0.50Y 0.2Y + 40 +1,000 30i + 800 + 450 20 0.20Y

04

Or, Y = 50 + 0.50 (Y 0.40Y + 80) + 1,000 30i + 800 + 450 (20 + 0.20Y)

20

Y=C+I+G+EM

04

04

Hence, consumption function = 50 + 0.50 Yd

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
319. (d) LM Curve

Demand for Money (Md) = 0.25Y + 450 50i In equilibrium position: Money Supply = Money Demanded 750 300 + 50i 1,200 + 200 2,500 40i 1,300 i Y = 0.25Y + 450 50i = 0.25Y =Y = 1,200 + 200i = 240i = 5.42

= 1,200 + (200 5.42) = 2,284. Y 0.2Y i = 60 + 0.80Y + 116 2i = 0.10Y + 88 = 0.20Y 5i = 0.20Y 120 = 0.04Y 24 = 0.04Y 24

Th e

The simultaneous equilibrium for IS and LM is; 0.10Y + 88

20 04

So, Y = 800 and i = 8%. Y Y Y = 120 + 0.6Y + 150 80i = 270 + 0.6Y 80i = 675 200i .......(i)

321. (a)

Y 0.6Y = 270 80i The equation of the LM Curve is Ms = Md 300 = 0.3Y + 120 160i Y = 600 + 533.33i ..... (ii) 284

Ic

fa

iU

5i

ni

ve rs i

ty

The LM equation

Pr es

=M=L

s. Al

= 176 2i

lr

ig

ht

320. (d) The IS equation = Y = C + I

re

se rv

ed

.IS

BN

:8

1-

Equating LM and IS functions:

31

4-

02

27

-4

ef .N

o.

M AC

= Transaction demand for money + Speculative demand for money

04

20

04

Or, i = 9.65%.

04

Part II

Putting the value of Y in equation (i), we have: 675 200i = 600 + 533.33i 733.33i i i = 75 =
75 733.33

= 0.10%

Y = 675 200 0.10 = 655.


322. (b) The given equations can be rewritten as

0.6Y = 520 + 18i LM Curve 0.6Y = 650 + 100 8i And LM Curve will not change. At equilibrium: 0.6Y 750 + 8i = 0.6Y 520 18i 26i = 230 i = 8.85 Equilibrium income will be 0.6Y = 750 (8 8.85) = 679.2 Y = 1,132. First we can calculate Y

Y = 120 + 0.6Y + 150 80i Y 0.6Y = 270 80i The equation of the LM Curve is Ms = Md

Th e

or 300 = 0.3Y + 120 160i or Y = 600 + 533.33i 675 200i = 600 + 533.33i i = 75/733.33 i = 0.10% Y = 675 200 0.10 Y = 655 ... (ii) Putting the value of Y in equation (i), we have: 733.33i = 75

20 04

Transaction demand for money = 0.3Y = 0.3 655 = 196.50.


324. (e) We know that

Ic

fa

iU

or Y = 675 200i

ni

ve rs i

ty

Y = 270 + 0.6Y 80i

Pr es

s. Al

The equation of the IS Curve is:

lr

ig

ht

323. (b) Transaction demand for money (Mt) = 0.3Y

re

se rv

ed

....(i)

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

When government expenditure is increased by 100, the IS Curve equation becomes:

o.

M AC

0.6Y = 650 8i IS Curve

W
285

Since IS Curve has a negative slope and LM Curve has a positive slope,

04

20

0.6Y = 520 + 18i

04

0.6Y = 650 8i

04

Macroeconomics

Y C I G C T I G

= C + I + G .......(1) = Consumption function = Investment function = Exogenous government expenditure and the estimated relations for an economy = 75 + 0.80 Yd = 0.15Y = 31

Where,

Yd = Y T = 150 16i

Md = 80Y 2,400i Substituting C, I and T values in equation (1) we get Y = 75 + 0.80(Y 0.15Y) + 150 16i + 31 = 75 + 0.80Y 0.12Y + 150 16i + 31 Y(1 0.68) = 256 16i

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

20 04

286

Th e

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

Ic

fa

iU

ni

ve rs i

ty

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:

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

Ms = 3,200

04

20

04

04

Part II

72,000 6,400i = 3,200 6,400i = 68,800 i = 10.75 By substituting the value of i in equation (1) we get Y = 900 50 (10.75) = 900 537.5 = 362.50 The equilibrium income will be 362.50. = 502 + 0.80Yd =YT+R = Y 0.25Y + 60 = 0.75 + 60 C IS Curve: Y =C+I+G+EM

Consumption (C) = 502 + 0.80 Yd

= 0.1Y 30i 0.15Y 30i = 480

Th e

240i i

Ic

fa

5840 40i = 3200 + 200i = 2640 = 11% = 3200 + (200 11) = 5400. = = = = Financial Interrelations Ratio Net Capital Formation. 1.21 98,667.3 = 1,19,387.4. New Issue Ratio Net Capital Formation. 0.64 98,667.3 = 63,147.1. 287

20 04

Y Y

327. (a) Amount of Total Issue

328. (d) Amount of Primary Issues

iU

ni

By equating IS and LM Curve:

ve rs i

= 3200 + 200i

ty

Pr es

( 480+30i )
0.15

s. Al

lr

ig

ht

Money Market to be in equilibrium, Md = Ms

re

se rv

ed

Md = Mt + Ma

.IS

LM Curve:

BN

:8

0.25

1-

(1460 10i )

= 5,840 40i

31

4-

= 550 + 0.60Y + 400 + 0.25Y 10i + 360 + 150 0.10y = 1460 + 0.75 10i

02

27

-4

ef .N

= 502 + 0.80 [0.75Y + 60] = 502 + 0.60Y + 48 = 550 + 0.60Y

o.

M AC

Yd

04

20

326. (b) Savings (S)

04

04

Money Supply and Banking System

Macroeconomics

329. (e) Amount of Secondary Issues

= =
330. (b)

Intermediation ratio Primary Issues 0.72 63,147.1 = 45,465.91.

National Income for 2001 = NNP at Factor Cost NNP at Factor Cost = NNP at MP Indirect Taxes + Subsidies = 89,405.3 9,782.00 + 4,313.02 = 83,936.32 National Income for 2002 = 93,103.01 10,201.00 + 5,203.01 = 88,104.02 = 9,031.12 + 10,524.16 [i.e., 4051.11 + 6021.01 + 452.04] = 19,555.28 Total Issue for 2002 = 11,021.01 + 10613.96 = 21,634.97 Financial Ratio for 2001 = Total Issues/National Income x 100 = Financial ratio for 2002 =
21,634.97 100 = 24.55 88,104.62

19,555.28 100 = 23.29 83,936.32

ve rs i

Liabilities A. Monetary liabilities Other deposits Other monetary liabilities B. Non-monetary liabilities Government deposits Others Share capital Reserves

lr

ig

ht

222 1,294

se rv

ed

Rs.

.IS

where H is High Powered Money = Money Liabilities of Central Bank + Government Money. Rs. Assets Financial assets Credit to government 1,516 Credit to State Govt. Credit to banks Foreign exchange assets Other assets Rs. Rs.

BN

:8

1+ Cu 331. (c) Money supply = H Cu + r

1-

31

4-

23.29

02

Percentage in Financial Ratios =

27

( 24.55 23.29 )

1.26 100 = 5.4%. 23.29

-4

ef .N

Pr es

s. Al

re

60 72 620 60

812 2,328

ty

o.

M AC

875 950 421 40 2,286 42

iU

ni

= 1516 + 120 = 1636


1 + 0.3 = 5,317. 0.3 + 0.10

332. (a)

20 04

Th e

Liabilities Government deposits Net worth Monetary Liabilities Bank deposits Other liabilities High Powered Money

Ic

Money supply = 1636

fa

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. 42 740

Rs.

= Monetary liabilities of Central Bank + Government money = 1,980 + 201= 2,181 288

Rs. 1,420 432 594 202 42 2,726

B
2,328

04

20

04

Total Issues for 2001 = Secondary Issues + Primary Issues

04

Part II

1 + Cu Money supply substituting figures in the above formula = H Cu + r

8,542

1 + Cu = 2181 Cu + 0.07

8,542 Cu + 597.94 = 2,181 + 2,181Cu 631Cu Cu = 1,583.06 = 1,583/631 = 0.25 (approx.)


1 + 0.25 = 3.9062. 0.25 + 0.07

For 1981 = For 1982 =

As there are no subsidies: For 1981 = 75,000 72,258 = 2,742 Change in Indirect Tax = 2,311 2,742 = 431.

20 04

Th e

335. (b) New Issue Ratio = Primary Issues/Net Capital Formation

Primary Issues = Secondary Issues/Intermediation Ratio = 12,000/0.82 = 14,634 Net Capital Formation = Total Issues/Financial Interrelation Ratio = (12,000 +14,634)/1.22 = 21,831 New Issue Ratio = 14, 634 = 0.67.
21,831

336. (c) Net Capital Formation = Primary Issues/New Issue Ratio

Ic

fa

iU

For 1982 = 85,000 82,689 = 2,311

14, 000 = 20,588. 0.68

ni

ve rs i

Indirect Taxes = NNP at Mp National Income

ty

Pr es

National Income = NNP at MP Indirect taxes + subsidies

s. Al

lr

12,980 + 11, 000 = 82,689 0.29

ig

ht

re

12, 400 + 10, 000 = 72,258 0.31

se rv

ed

National Income = Total Issues/Finance Ratio

.IS

BN

For 1982 = 11,000 1.18 = 12,980

:8

For 1981 = 10,000 1.24 = 12,400

1-

31

334. (e) Secondary Issues = Primary Issue Intermediation Ratio.

4-

02

New Issue Ratio 2001 =

17, 073 = 0.681. 25, 058

27

-4

For 2001

= 25,058

ef .N

Net Capital Formation = Total Issues/Financial Interrelation Ratio

o.

For 2002 = 16,000/0.79

= 20,253

M AC

For 2001 = 14,000/0.82

= 17,073

W
289

New Issues = Secondary Issues/Intermediation Ratio

04

333. (c) New Issue Ratio = New Issues/Net Capital Formation

20

04

Money Multiplier =

04

Macroeconomics

337. (b) Total Issue = Financial Interrelation Ratio Net Capital Formation

Net Capital Formation = Primary Issues/New Issue Ratio = Total Issue = 1.32 20,588 = 27,176.

14, 000 = 20,588 .68

338. (a) Intermediation Ratio = Secondary Issues/Primary Issues

Secondary Issues = Total Issues Primary Issues Total Issue = Financial Interrelation Ratio Net Capital Formation. Net Capital Formation = Primary Issues/New Issue Ratio = Total Issue = 1.32 20,588 = 27,176 Secondary Issues = 27,176 14,000 = 13,176
Y Ms 14, 000 = 20,588 0.68

339. (e) Velocity of Money =

Y Velocity of Money

= C + I + G + E M = 500 + 150 + 140 + 80 60 = 810

1.33 45,000 = 12,000 0.33 +


1,110 = 0.025 45, 000

Th e

342. (d) M3 = Currency with public + Deposits money of the public + Time deposits with banks.

Ic

fa

Reserve Requirements= 3,400/17,000 = 0.2. = 1,000 + 400 +300 = 1,700. Rs. Assets 20 Credit to banks 800 Credit to commercial sector 1,500 Foreign exchange assets Other assets 2,460 Rs. 1,400 600 400 20 40 2,460

20 04

343. (a)

Liabilities Government deposits Other non-monetary liabilities Net worth Monetary liabilities (Balancing figure)

iU

ni

Volume of demand deposits increased by 1,000 = 16,000 + 1,000 = 17,000

ve rs i

341. (c) Reserves are decreased by 600 = 4,000 600 = 3,400

ty

The Reserve Requirements = 0.025.

Pr es

s. Al

r =

lr

ig

45,000 [0.33 + r] = 15,960 14,850

ht

290

re

se rv

140 Credit to government

ed

Money Supply

(M) = 45,000

.IS

BN

Currency-Deposit Ratio (Cu) = 0.33

:8

= 10,000 + 2,000 = 12,000

1-

= Monetary Liabilities of Central Bank + Government Money

31

4-

340. (b) High-powered money (H)

02

27

-4

= 810/162 = 5.

ef .N

o.

M AC

Intermediation Ratio = 13,176/14,000 = 0.94.

04

20

04

04

Part II

Money Supply = where, Cu r and, H where, x 5,942 2079.7 x

1+ C u xH r + Cu

= 0.3 = 5% = 1,500 + x = Government Money =


1+ 0.3 [1500 + x ] 0.05 + 0.3 129.7 = 99.76. 1.3

ht

re

Intermediation ratio for year 2002 =

se rv

11,021.01 = 1.04 10,613.96

ed

Intermediation Ratio for year 2001 =

9,031.12 = 0.86 1024.16

Th e

1 + Cu 1 + 0.4 Money Supply in the Economy (M) = H = 5,000 0.4 + 0.10 Cu + r

Ic

fa

iU

ni

346. (e) High-powered money in the economy (H) = Currency + Reserves = 4,000 + 1,000 = 5,000 Given, Currency Deposit Ratio (Cu) = 0.4 Reserve ratio (r) = 0.10

ve rs i

ty

Pr es

s. Al

Percentage change in Intermediation Ratio =

lr

ig

20 04

= 5,000 2.8 = 14,000.

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

1.2 = 0.56 + 2.8r r = 1.2 0.56/2.8 = 0.2285. The reserve ratio should be increased to 0.2285 i.e., 22.85%. 291

.IS

BN

345. (b) Intermediation Ratio = Secondary Issues/Primary Issues

1.04 0.86 100 = 21%. 0.86

:8

1-

Percentage change in New Issue Ratio =

0.03 100 = 4.6%. .64

31

4-

02

Percentage change = 0.61 0.64 = 0.03

27

-4

New Issue Ratio for year 2002 =

10, 613.96 = 0.61 17, 421.03

ef .N

New Issue Ratio for year 2001 =

10,524.16 = 0.64 16,420.01

o.

M AC

344. (e) New Issue Ratio = Primary Issues/ Net Capital Formation Primary Issues = 4,051.11 + 6,021.01 + 452.04 = 10,524.16

04

20

04

04

= 1950 + 1.3x

Macroeconomics

348. (b) Finance Ratio = Total Issues/National Income = 0.25

Given National Income = 96,000 Total Issues Net Capital Formation = 96,000 0.25 = 24,000. = Total Issues/Financial Interrelation Ratio
349. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60

Total Issues = National Income Finance Ratio Finance Ratio = Total Issues/National Income = 0.25 Given National Income Total Issues Net Capital Formation
350. (c) New Issue Ratio

= 96,000 = 24,000/1.60 = 15,000.

Total Issues Finance Ratio Total Issues

= National Income Finance Ratio = Total Issues/National Income = 0.25 = 96,000 0.25 = 24,000

Given National Income = 96,000

Th e

352. (a) Intermediation Ratio = Secondary Issues/New Issues

Ic

fa

New Issues = New Issue Ratio Net Capital Formation Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60 Net Capital Formation = Total Issues/Financial Interrelation Ratio Total Issues = National Income Finance Ratio Finance Ratio = Total Issues/National Income = 0.25 Given National Income = 96,000 Total Issues = 96,000 0.25 = 24,000 Net Capital Formation = 24,000/1.60 = 15,000 New Issues = New Issue Ratio Net Capital Formation = 0.85 15,000 = 12,750 Secondary Issues = Intermediation Ratio New Issue = 0.88 12750 = 11,220.

iU

ni

ve rs i

ty

20 04

353. (e) New Issue Ratio = Primary Issues/Net capital formation

354. (c) The High-Powered Money (H) = 18,950

Current Deposit Ratio Reserve Ratio Money Multiplier Money Supply

Pr es

= 10,595/13,680 = 0.77. (Cu) = 0.5 (r) = 0.1


1 + Cu 1 + 0.5 = = 2.5 = Cu + r 0.1 + 0.5

s. Al

= 8,985/10,595 = 0.84.

lr

= H 2.5

ig

ht

re

= 47,375. (1) 292

se rv

ed

= 18950 2.5

.IS

BN

:8

= 0.85 15,000 = 12,750. 351. (d) Intermediation Ratio = Secondary Issues/New Issues = 0.88

1-

31

4-

New Issues = New Issue Ratio Net Capital Formation

02

27

Net Capital Formation = 24,000/1.60 = 15,000

-4

ef .N

o.

M AC

Net Capital Formation = Total Issues/Financial Interrelation Ratio.

04

= New Issues/Net Capital Formation

20

04

04

= 96,000 0.25 = 24,000

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. The Money Supply = H 2.5 = (18,850 + 8,970) 2.5 = 69,800(2) Increase in money supply = (2) (1) = 69,800 47,375 = 22,425. 355. (b) High Powered Money (H) = Monetary Liabilities of Central Bank + Govt. Money Since government money is said to be negligible, High Powered Money (H) = Financial Assets + Other Assets Non-Monetary Liabilities. Financial Assets = =

1,780 + 410 + 112 + 15 = 2,317 = 21 + 11 + 510 = 542

Other assets H Money supply

= 78 = 2,317 542 + 78 = H = 1,853

The money supply will be: 7,085 1,275.3 = 5,809.7 The new reserve ratio will be: 5,809.7 = 1,853
1 + 0.3 r + 0.3

Ic

fa

Th e

iU

r + 0.3

ni

20 04

357. (a)

Liabilities Non-monetary liabilities Net worth Government deposits Other non-monetary liabilities Monetary liabilities Bank deposits Other monetary liabilities

ve rs i

2.412

= 0.41463 0.3 = 0.1146 = 11.46%. 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

Monetary Liabilities of the Central Bank = Total Assets Non-Monetary Liabilities 293

ty

Pr es

5,809.7 1 1,853 1.3

1 r + 0.3

1 r + 0.3 1 2.412

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

356. (d) If the money supply is to be reduced by 18%;

1-

31

1 + Cu 1 + 0.30 = 1,853 = 7,085. r + Cu 0.40 + 0.3

4-

02

27

-4

ef .N

o.

Non-Monetary Liabilities = Government Deposits + Other Non-monetary Liabilities + Net Worth.

M AC

Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets

04

20

04

04

Macroeconomics

= 3,070 1,075 = 1,995 High Powered Money (H) = Monetary Liabilities of the RBI + Government Money = 1,995 + 5 = 2,000 million Money Supply = H 6,000 3 1.02 + 3 3r r = =
1 + Cu r + Cu

0.34 + 1 2,000 0.34 + r 0.34 + 1 0.34 + r

= 0.106 (or) 10.6%.

Pr es

359. (c) Intermediation Ratio

s. Al

= 0.23 or 23%. = Secondary Issues/New Issues = Intermediation Ratio New Issues = 0.65 15,000 = 9,750 = Secondary Issues + New Issues = 9,750 + 15,000 = 24,750 = Total Issues/Net Capital Formation = 24,750/1.60 = 15,468.75. = 0.8 = 0.2

20 04

360. (e) Stock of High-Powered Money (H) = 1,000

Th e

Financial Ratio Or, Net Capital Formation

Currency Deposit Ratio (Cu) Reserve Ratio (r)


1 + Cu = H Cu + r

Money Supply and High-Powered Money are related to each other by the following formula: M

294

Ic

fa

1 + 0.8 = 1,000 = 1.8 x 1,000 = 1,800. 0.8 + 0.2

iU

Total Issues

ni

ve rs i

ty

or, Secondary Issues

lr

ig

= 0.541/2.3529

ht

1.34

= 0.799 + 2.3529r

re

se rv

1+ Cu = 2.3529 = Cu + r

.IS

ed

BN

6,000 = 2.3529 2,550

:8

1+ 0.34 = 2.3529 0.34 + r

1-

6,000

=(M) (2,000 + 550)

31

4-

Money Supply (Ms) = Money Multiplier (M) High-Powered Money (H)

02

If the Central Bank wants to contain the money supply at the original level of 6,000 million:

27

-4

High-Powered Money (H) = 2,000 + 550 = 2,550 million

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.

o.

M AC

= 0.32

= 1.34

04

20

04

04

Part II

361. (b) Money Multiplier =

1 + Cu r + Cu

Cu Multiplier

= 1.2r = 0.1 = 2.2/1.3 = 1.69.

362. (a) High-Powered Money (H)

= Monetary Liabilities of Central Bank + Government Money Since government money is said to be negligible H = Monetary Liabilities of the Central Bank

High-Powered Money = 757 + 35 265 Money = 527


1 + Cu Money supply = H Cu + r

where Cu r Reserve Ratio

= Currency Deposits Ratio

And High Powered Money = 527

1 + Cu

iU

2.7135 Cu = (1 0.1857) Cu
363. (e)

fa

20 04

Th e

Ic

Liabilities Monetary liabilities Other deposits Other monetary liabilities (Balancing figure) Non monetary liabilities Government deposits Other Net worth

ni

ve rs i

= 3.7135Cu + 0.1857 0.8143 0.30 = 30%. 2.7135 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

ty

1957 1 + Cu = = 3.7135 527 Cu + 0.05

Pr es

s. Al

lr

1,957

1 + Cu = 527 Cu + 0.05

ig

ht

re

se rv

= 0.05

ed

Given Money Supply = 1,957

.IS

= Reserve Ratio

BN

:8

1-

31

4-

02

27

-4

ef .N

= 10 + 5 + 250 = 265

o.

Non-Monetary Liabilities = Government Deposits + Other Non-monetary Liabilities + Net Worth

M AC

Other Assets = 35

= 500 + 200 + 50 + 7 = 757

04

Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets

20

04

04

= Financial Assets + Other Assets Non-Monetary Liabilities.

Macroeconomics

High-Powered Money (H) = Monetary Liabilities of Central Bank + Government Money Since the government money is negligible. High-Powered Money (H) = Monetary Liabilities of the Central Bank = 800
1 + Cu Money Supply = H Cu + r

Given that the total money supply is 2400 and Cu is 0.35


1 + 0.35 1.35 2400 = 800 =3 0.35 + r 0.35 + r

r r

1.35 1.05 = 0.10 3

7150 16,500 X X

ve rs i

Ic

365. (e) High-Powered Money (H) = Monetary Liabilities of RBI + Government Money

fa

iU

The reserve ratio that the Central Bank must impose (approximately) is 0.13.

ni

ty

Pr es

(1 + 0.3) 5,500

= 16,500 (0.3 + X)

= 4950 + 16,500X = 2200

= 0.13

s. Al

20 04

Th e

Monetary Liabilities of RBI

Financial Assets = Credit to Government + Credit to Bank + Credit to Commercial Sector + Foreign Exchange Assets = 950 + 350 + 125 + 25 = 1450

Other Assets = 65 Non-Monetary Liabilities = Government Deposits + Other Non-Monetary Liabilities + Net Worth = 20 + 5 + 500 = 525 Monetary Liabilities Government Money = 1,450 + 65 525 = 990 = 10

High Powered Money (H) = 990 + 10 = 1,000

296

lr

1 + 0.3 5,500 = 16,500 0.3+ X

ig

ht

= Financial Assets + Other Assets Non-Monetary Liabilities

re

se rv

1 + Cu xH Cu + r

= M

ed

.IS

Money Supply and High-Powered Money (that is with the public) are related to each other by the following formula.

BN

:8

Reserve Ratio (r)

= Let us assume X

1-

31

Money Supply (M)

= 16,500

4-

02

Currency-Deposit Ratio (Cu)

= 0.3

27

= 5,000 + 500 = 5500

-4

364. (c) Stock of Currency (H)

= Currency + Reserves

ef .N

= 10%.

o.

M AC

3 x (0.35 + r)

= 1.35

04

20

04

04

Part II

Total Money Supply

1 + Cu = H Cu + r

Given, Total Money Supply = 4,000 Currency Deposit Ratio = 0.20


1 + 0.20 = =4 0.20 + r
1.20 0.8 = 0.10. 4

High Powered Money (H) = 1,000 Money Multiplier 1.2 r

Pr es

s. Al

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;

lr

ig

ht

re

Money Multiplier should be reduced to


1 + Cu Cu + r

se rv

where, Cu = Currency Deposit Ratio r = Reserve Ratio

ed

ve rs i

ty

4000 1000

.IS

1 + Cu 367. (d) Money multiplier in the economy = Cu + r

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

20 04

Th e

Ic

fa

iU

ni

=4

1 + 0.2 = 4 r + 0.2

For year 2001 =

7,862.50 7862.50 = 0.85. = 9250 8525 + 725

BN

=4

:8

1-

Increase in Money Supply = 90 4 = 360 million units of currency.

31

4-

Given the Money Multiplier = 4

02

27

-4

Money Multiplier

1 + 0.20 = =4 0.20 + r

ef .N

Reserve Ratio is 10%. 366. (b) When the Central Bank credit to Government is increased by 100 millions, and simultaneously Government purchases foreign exchange worth 10 millions from the Central Bank, the net increase in the financial assets of the Central Bank is 90. Hence, high powered money will increase by 90.

o.

M AC

04

20
297

04

04

= 0.8 + 4r

Macroeconomics

370. (e) Financial Interrelations Ratio = Secondary Issues/New Issues

Secondary Issues = Intermediation Ratio New Issues Secondary Issue for 2001 = 0.75 10,000 = 7,500 Total Issues = Secondary Issues + New issues Total Issues for 2001 = 7,500 + 10,000 = 17,500 Financial Intermediation Ratio = Total Issues/Net Capital Formation Net Capital Formation = Total Issues/Financial Intermediation Ratio. Net Capital Formation for 2001 = 17,500/1.75 = 10,000. 371. (b) Monetary Liability of the Central Bank = Financial Assets + Other Assets Non-Monetary Liabilities Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets = 1,080 + 300 + 420 + 250 = 2,050 Other Assets = 500 Non-Monetary Liabilities = 300 + 400 + 350 = 1,050 Monetary Liabilities = 2,050 + 500 1,050 = 1,500

= Government Deposits + Net Worth + Other Non-Monetary Liabilities

1 + Cu Money Supply in the Economy = H Cu + r 1 + 0.2 Money Supply = 1500 = 7,200 million units of currency. 0.2 + 0.05

Financial Assets

fa

20 04

Th e

Other Assets = 500 Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities = 300 + 400 + 350 = 1,050 Monetary Liabilities = 2,050 + 500 1,050 = 1,500 (Currency issued by Central Bank and deposits of banks with Central Bank are apart of monetary liability) High-Powered Money = Monetary Liabilities of the Central Bank + Government Money Since Government money is negligible and can be ignored, High-Powered Money (H) = 1,500

298

Ic

iU

ni

ve rs i

Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets 1,080 + 300 + 420 + 250 = 2,050

ty

Financial Assets + Other Assets Non-Monetary Liabilities

Pr es

372. (e) Monetary Liability of the Central Bank

s. Al

lr

ig

ht

re

se rv

ed

High-Powered Money (H) = 1,500

.IS

BN

Since Government Money is negligible and can be ignored,

:8

High-Powered Money = Monetary Liabilities of the Central Bank + Government Money

1-

(Currency issued by Central Bank and deposits of banks with Central Bank are apart of monetary liability).

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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, Income elasticity of demand for real balances (a) Expected rate of growth in real GDP (gY) Acceptable rate of inflation (gP) Rate of growth of money stock (gM) = = = = 3.0 4% and 6% a.gY + gP

375. (a) Net Capital Formation = Total Issues/Financial Interrelations Ratio

377. (c) New Issue Ratio = Primary Issues/Net Capital Formation

Net Capital Formation = Total Issues/Financial Interrelations Ratio Secondary Issues = Primary Issues Intermediation Ratio

ni

20 04

New Issues Ratio = 1,98,240/2,18,064 = 0.91. 378. (b) Given, Income elasticity of demand for real balances (a) Expected rate of growth in real GDP (gY) Acceptable rate of inflation (gP) Rate of growth of money stock (gM) Given money multiplier is 3 Rate of growth of reserve money = 2.0 = 5% = 5% = a.gY + gP = (3 4) + 6 = 18% = 15/3 = 5%.

Th e

Net Capital Formation = 3,48,902.4 1.60 = 2,18,064

Ic

Total Issues = 1,98,240 + 1,50, 662.4 = 3,48,902.4

fa

iU

ve rs i

ty

Total Issues = Primary Issues + Secondary Issue = 1,98,240 0.76 = 1,50,662.4

Pr es

s. Al

lr

National Income = 3,48,902.4 0.33 = 10,57,280.

ig

ht

Total Issue

= 1,50,662.4 + 1,98,240

re

= 1,98,240 0.76 = 1,50,662.4

se rv

Secondary Issue = Primary Issue Intermediation Ratio.

ed

.IS

Total Issues = Primary Issue + Secondary Issue

BN

376. (e) National Income = Total Issues/Finance Ratio

:8

1-

Net Capital Formation =

1,57,500 = 1,05,000. 1.5

31

4-

02

Total Issue = 90,000 + 67,500 = 1,57,500

27

90,000 0.75 = 67,500

-4

Secondary Issues = Primary Issues Intermediation Ratio

ef .N

Total Issue = Primary issue + Secondary Issue

o.

M AC

= 90,000 0.75 = 67,500.

W
299

= (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

20

04

04

Macroeconomics

379. (e) Financial Assets of the Central Bank = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets = 3,500 + 1,500 + 1,000 + 40 = 6,040 million units of currency Other Assets = 100 million units of currency Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities

= 100 + 2,000 + 50 = 2,150 million units of currency Monetary Liabilities = FA + Other Assets Non-Monetary Liabilities = 6,040 + 100 2,150 = 3,990 million units of currency

Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets = 1,000 + 400 + 100 + 14 = 1,514 Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities

20 04

= 5059.2 million units of Currency. 381. (d) If the money supply is to be reduced by 20%, the money multiplier value is to be reduced by 20%.
1 + Cu 1 + 0.2 = = 4.8 0.2 + 0.05 Cu + r Reduce 20% of 4.8

300

Th e

= 1,514 + 70 530 = 1,054 Since Government Money is negligible, High-Powered Money (H) = 1,054 Given the Currency-Deposit Ratio (Cu) is 0.2, and Reserve Ratio (r) is 5%
1 + Cu 1 + 0.2 Money Supply in the Economy = 1, 054 = Cu + r 0.2 + 0.05

Ic

fa

Monetary Liabilities = Financial Assets + Other Assets Non-Monetary Liabilities

iU

= 20 + 500 + 10 = 530

ni

ve rs i

ty

Other Assets

= 70

Pr es

s. Al

lr

380. (b) Financial Assets of Central Bank are:

ig

ht

1.34 1.02 = 10.67%. 3

re

se rv

1 + Cu Cu + r

ed

=3=

1 + 0.34 = 3 = 1.02 + 3r = 1.34 0.34 + r

.IS

BN

:8

Desired Money Supply/High Powered Money =

12,000 =3 4,000

1-

31

Given the desired money supply is 12,000, money multiplier is:

4-

02

r = Reserve Ratio

27

where Cu = Currency Original Ratio

-4

1 + Cu Money Supply = H Cu + r

ef .N

o.

M AC

High-Powered Money (H) = Monetary Liabilities of the Central Bank + Government Money = 3,990 + 10 = 4,000 million units of currency

04

20

04

04

Part II

The new money multiplier = 4.8 0.8 = 3.84 New Reserve Ratio: 3.84 = (1 + 0.2)/(0.2 + r) r = (1.2/3 .84) 0.2 r = 11.25%. 382. (a) Intermediation Ratio = Secondary Issues/New Issues Secondary Issues = Intermediation Ratio New Issues = 0.75 20,000 = 15,000. 383. (c) National Income = Total Issues/Finance ratio Total Issues = Primary Issues + Secondary Issues Secondary Issues Total Issues National Income = Intermediation Ratio New Issues = 0.78 24,000 = 18,720 = 24,000 + 18,720 = 42,720 = 42,720/0.26 = 1, 64,307.69.

Total Issues = Primary Issues + Secondary Issues Intermediation Ratio = Secondary Issues/New Issues Secondary Issues = Intermediation Ratio New Issues = 0.75 x 20,000 = 15,000 Net Capital Formation = (20,000 + 15,000)/1.6 = 35,000/1.6 = 21,875. The demand for money equation = 0.3Y 300i The LM equation will be: 0.3Y 300i = 300

The IS equation is Y = 5,000 30i

Equating the IS and LM equations gives the equilibrium rate of interest:

Th e

Ic

fa

iU

1,000 + 1,000i = 5,000 30i

1030i = 4,000
= 3.88%

20 04

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

= Income elasticity of demand for money = 1.2

gp = Rate of inflation = 5% gY = Rate of growth of real GDP = 3.5% 301

ni

ve rs i

ty

Pr es

0.3Y = 300 + 300i Y = 1,000 + 1,000i ---- LM equation

s. Al

lr

ig

ht

re

se rv

The current money supply in the economy = 300 (MUC)

ed

.IS

BN

385. (b) The commodity market equation = 5,000 30i

:8

1-

31

4-

02

27

-4

ef .N

o.

384. (d) Net Capital Formation = Total Issues/Financial Interrelations Ratio

M AC

04

20

04

04

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:

Real Rate of Interest + Rate of Inflation + Higher charge by Commercial Banks The rate of real interest is: The commodity market equation The demand for money equation The current money supply in the economy The LM equation will be; 0.3Y 300i = 300 = = = 5,000 30i 300 (MUC)

The IS equation is: Y = 5,000 30i

= 3.88%

FA (RBI)

fa

= Financial Assets of RBI + Other Assets of RBI Non-Monetary Liabilities of RBI = 30,000 + 4,000 + 700 + 7,500 = 42,200 (MUC) = 4,000 MUC

20 04

M =9800 x 1.4/0.5 = 27,440. 388. (c) Money supply in the economy,


1 + Cu M = H Cu + r

302

Th e

OA (RBI) Thus,

NML (RBI) = 1,000 + 405 + 35,000 = 36,405 MUC ML (RBI) = 42,200 + 4,000 36,405 = 9,795 MUC Hence, H = 9,795 + 5 = 9,800 MUC

H = High-Powered Money

Ic

iU

ni

Monetary Liabilities of RBI

ve rs i

= Monetary Liabilities of RBI + Government Money

ty

Cu = Currency to Deposit Ratio

Pr es

= Reserve Ratio

s. Al

= High-Powered Money

lr

ig

ht

1+ Cu H Cu + r

re

se rv

387. (a) Money supply in the economy,

ed

3.88 + 5 + 2 = 10.88%.

.IS

The cost of borrowing from the commercial banks will be:

BN

:8

1-

1030i

= 4,000

31

4-

1,000 + 1,000i = 5,000 30i

02

Equating the IS and LM equations gives the equilibrium rate of interest:

27

-4

ef .N

0.3Y = 300 + 300i Y = 1,000 + 1,000i ---- LM equation

o.

M AC

04

20

04

04

0.3Y 300i

Part II

20 04

Liabilities Government Deposits Other Non-Monetary Liabilities Net Worth Monetary Liabilities

ve rs i

ty

Increase in Money supply = 28,000 27,440 = 560. 389. (d) Net Issue Ratio = Primary Issues by Non-Financial Sector/Total Physical Assets Formation 0.74 = X/2,00,445 X = 0.74 2,00,445 = 1,48,329.3 units Hence, Primary Issues by Non-Financial Sector are 1,48,329.3 units. Intermediation Ratio = Volume of Financial Instruments issued by Financial Intermediaries/Volume of Primary Issues by Non-Financial Sectors = 1,15,605/1,48,329.3 = 0.779 or 0.78%. 390. (b) M1 = Currency with Public + Demand Deposits with Banks + Demand Portion of Savings Deposit with Banks + Other Deposits with RBI = 1,52,737 + 99,106 + 5,627 = 2,57,470. 391. (e)

Pr es

s. Al

lr

ig

ht

re

Th e

Ic

fa

MUC Asset 30 Credit to Government 15 Credit to Banks 750 Credit to Commercial Sector 1,581 Foreign Exchange Assets Other assets 2,376

se rv

ed

.IS

BN

:8

1-

31

4-

02

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

27

-4

iU

ni

* Monetary Liabilities (ML) = Total Assets Non-Monetary Liabilities (NML) OR Monetary Liabilities = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets + Other Assets Government Deposits Other Non-Monetary Liabilities Net Worth = 1,500 + 600 + 150 + 21 + 105 30 15 750 303

ef .N

o.

MUC 1,500 600 150 21 105 2,376

M AC

04

20

04

04

Macroeconomics

= 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%
1 + Cu Money Supply (M) = H r + Cu

New Issue Ratio Primary Issues Secondary Issues Total Issues

Primary Issues /Net Capital formation

= 4,00,000 + 3,00,000 = 7,00,000.

Primary Issues = 5,00,000 0.80 = 4,00,000 Secondary Issues = Intermediation Ratio x Primary Issue Total Issues = 4,00,000 + 3,00,000 = 7,00,000 National Income = 7,00,000/0.7 = 10,00,000.
394. (d) High-Powered Money (H)

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

Ic

fa

iU

= Monetary Liabilities of the RBI + Government Money

= C+R

ni

ve rs i

ty

Pr es

= 0.75 x 4,00,000 = 3,00,000

s. Al

lr

ig

Intermediation Ratio = Secondary Issues/Primary Issues

ht

re

se rv

New Issue Ratio = Primary Issues/Net Capital Formation

ed

Total Issues = Primary Issues + Secondary Issues

.IS

393. (a) Finance Ratio = Total Issues/National Income

BN

:8

1-

= 0.75 4,00,000 = 3,00,000

31

4-

= Intermediation Ratio x Primary Issue

02

Intermediation Ratio = Secondary Issues/Primary Issues

27

-4

= 5,00,000 0.80 = 4,00,000

ef .N

392. (c) Total Issues

= Primary Issues + Secondary Issue

o.

M AC

1 + 0.30 = 1,581 = 5,872.29 million units of Currency. 0.05 + 0.30

04

20

04

04

Part II

1.34 =3 0.34 + r

1.02 + 3r = 1.34
3r r = 0.32 = 0.32/3 = 0.1067 = 10.67%.

395. (b) As per the given information, the high power money is:

High-Powered Money (H) = Monetary Liabilities of the RBI + Government Money = C + R Or ML (RBI) = FA (RBI) + OA (RBI) NML (RBI) Hence, ML (RBI) = (1,750 + 500 + 750 + 20) + 50 (1,000 + 25 + 50) Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI

Net Capital Formation

Pr es

Total Issue

= 0.25 96,000 = 24,000 = 24,000/1.6 = 15,000.

ni

Finance Ratio = Total Issue/National Income Net Capital Formation = 24,000/1.6 = 15,000

Th e

New Issue ratio = Primary Issues/Net Capital Formation Primary Issues Total Issue 24,000 = 15,000 0.85 = 12,750 = Primary Issue + Secondary Issue = 12,750 + Secondary Issue

20 04

Secondary Issue = Total Issue Primary Issue = 24,000 12,750 = 11,250.


398. (c) Finance Ratio = Total Issues/National Income

Total Issues = Secondary Issues + Primary Issues = 9,600 + 12,800 = 22,400 Finance Ratio = 22,400/89,600 = 0.25.
399. (e) Intermediation Ratio = Secondary Issues/Primary Issues

Secondary Issues = 9,600/12,800 = 0.75.

Ic

fa

iU

Total Issue

ve rs i

397. (a) Financial Interrelation Ratio = Total Issues/Net Capital Formation

= 0.25 96,000 = 24,000

ty

s. Al

Finance Ratio = Total Issue/National Income

lr

ig

396. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation

ht

re

1.34 0.8 0.54 = 2.35 2.35

se rv

= 0.229 or 22.9%.

ed

0.80 + 2.35r = 1.34

.IS

BN

1.34 0.34 + r

= 2.35

:8

1-

31

1 + 0.34 2,550 = 6,000 r + 0.34

4-

02

27

High-Powered Money (H) = 1,995 + 5 = 2,000 The Central Bank credit to Government increases by 550. Hence the financial assets of RBI increase by 550. Thus, the High-powered money now becomes: H = 2,000 + 550 = 2,550 The new reserve ratio will be:

-4

ef .N

o.

M AC

W
305

= 3,020 + 50 1075 = 1,995

04

20

04

04

Macroeconomics

400. (b) Financial Interrelations Ratio = Total Stock of Financial Assets Incremental Physical Assets

Total Stock of Financial Assets = Primary Issues + Secondary Issues = 12,000 + (13,400 + 1,600) = 27,000 Incremental Physical Assets = Net Physical Asset = 20,000 Financial Interrelations Ratio = 27,000 20,000 = 1.35. 401. (d) We can prepare the Balance Sheet in order to find out the Monetary Liabilities. Liabilities Monetary Liabilities (Balancing figure) Government Deposits Other non-Monetary Liabilities Net Worth Rs. Assets 1,054 Credit to government 20 Credit to Banks 10 Credit to Commercial Sector 500 Foreign Exchange Assets Other Assets 1,584 Rs 1,000 400 100 14 70 1,584

The Monetary Liabilities of the Central Bank are 1,054. Ms


1 + Cu = 1,054 Cu + r 1 + 0.2 1.2 = 1,054 = 1,054 = 5,059.2. 0.2 + 0.05 0.25

Pr es

Financial Interrelations Ratio = 1,19,000/1,20,000


405. (a) Money supply in the economy (Ms) = H.m.

ve rs i

ty

20 04

Th e

High-Powered Money (H) = Government Money + Monetary Liability of RBI

Monetary Liability of RBI = Credit to Government + Credit to Banks + Credit to Commercial Sector Foreign Exchange Assets + Other Assets Government Deposits Net Worth Other Non-Monetary Liabilities. = 1,000 + 400 + 300 + 20 + 10 80 300 5 = 1,345 H = 1345 + 10 = 1355 MUC = 1355 3 = 4,065. =
1+0.35 =3 0.35+0.10

Money Supply

406. (b) Money Multiplier (m)

High-Powered Money (H) = Government Money + Monetary Liability of RBI Monetary Liability of RBI

306

Ic

fa

iU

Money Multiplier (m) =

ni

s. Al

= 69,000 + 50,000 = 1,19,000 = 0.99166 = 0.992.


1 + 0.35 =3 0.35 + 0.10

lr

Total Issues = Primary Issue + Secondary Issues

ig

ht

404. (c) Financial Interrelations ratio = Total Issues/Net Capital Formation

re

= 47,445/1,16,450 = 0.407.

se rv

403. (d) New Issue Ratio = Primary Issues/Net Capital Formation

ed

.IS

Finance Ratio

1, 15,945/6, 50,750 = 0.178.

BN

68,500 + 47,445 = 1, 15,945

:8

Total Issues

Primary Issues + Secondary Issues

1-

31

402. (a) Finance Ratio

Total Issues/National Income

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part II

= Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets + Other Assets Government Deposits Net Worth Other NonMonetary liabilities. = 1,000 + 400 + 300 + 20 + 10 80 300 5 H H = 1,345 + 10 = 1,355 + 50 = 1,355 MUC = 1,405 = 1,345

If there is an additional inflow of foreign exchange assets, the If the money supply is to be maintained at 4065 MUC,

M H r m

408. (b)

fa

iU

Money Supply = m. H

ni

20 04

Th e

M H

Ic

Cu r m

Monetary Liabilities of RBI (MLRBI) = Credit to Banks + Credit to Government + Credit to Commercial Sector + Net Foreign Eexchange Assets + Net Worth Government Deposits + Other Assets MLRBI = 2,000 + 4,500 + 500 + 6,000 1,000 300 + 200 = 11,900 307

ve rs i

ty

Money Supply

1 + Cu = Cu + r

= Monetary Liability of RBI + Government Money = 0.30 = 0.10


1.30 1.30 = 3.25 = = 0.30 + 0.10 0.40

Pr es

High-Powered Money (H) = 11,900 + 100 = 12,000 = 3.25 12,000 = 39,000 MUC.

s. Al

Government Money = 100

lr

MLRBI = 2,000 + 4,500 + 500 + 6,000 1,000 300 + 200 = 11,900

ig

ht

= Credit to Banks + Credit to Government + Credit to Commercial Sector + Net Foreign Exchange Assets Net Worth Government Deposits + Other Assets

re

se rv

Monetary Liabilities of RBI (MLRBI)

ed

.IS

1.30 1.30 = 3.25 = = 0.30 + 0.10 0.40

BN

:8

1-

= 0.10

31

4-

Cu = 0.30

02

27

= Monetary Liability of RBI + Government Money

-4

1 + Cu = Cu + r

ef .N

o.

407. (d) Money Supply = m.H

M AC

= 0.4666 0.35 = 0.1166 = 11.66%.

04

0.35 + r

1,405 1.35 4,065

20

04

04

4,065

1 + 0.35 1405 0.35 + r

Macroeconomics

Government Money = 100 High-Powered Money (H) = 11,900 + 100 = 12,000 When foreign exchange inflow increases by 450 million MUC: H = 12,000 + 450 = 12,450
1.30 12,450 0.30 + r 1.30 12,450 = 0.415 39,000

If the money supply should remain at 39,000 MUC 39,000 =

= 1,120 + 350 + 550 + 150 + 50 = 2,220 Non-Monetary Liabilities = 100 + 420 = 520 Monetary Liabilities of Central Bank = 2,170 470 = 1,700 High Powered Money = 1,700 + 25 = 1,725 MUC.
410. (b) Demand for Money is estimated to be

At i= 6 %, L = 0.25Y 60.

Y = C+ I + G + E M

= 750 + 275 + 160 + 40 30=1,195


412. (b) Finance Ratio = Total Issues/National Income 100

iU

Total Issues = Financial Interrelation Ratio Net Capital Formation

Th e

GNP at Market Prices = GDP at Market Price + Net Factor Income from Abroad = 76,500 + 200 = 76,700 NNP at Market Prices = 76,700 2500 = 74,200 National Income = NNP at Factor Cost = NNP at Market Prices Indirect Taxes + Subsidies = 74,200 1,225 + 725 = 73,700 Finance Ratio = (23,250/73,700) 100 = 31.6.

20 04

413. (a) High Powered Money = Monetary Liabilities + Government Money

= 10,500 + 1,500 = 12,000 Ms = H

Ic

fa

ni

ve rs i

Velocity of Money = 1,195 / 239 = 5.

= 1.5 15,500 = 23,250

{(1 + C ) / ( C
u

ty

Pr es

308

s. Al

+ r )}

lr

411. (c) Velocity of Money = Y/MS

ig

ht

Y = 1,040 MUC.

re

0.25Y= 260

se rv

0.25Y 60 = 200

ed

At equilibrium demand for money = Supply of Money

.IS

BN

:8

L = 0.25Y 10i.

1-

31

4-

02

27

-4

ef .N

Financial Assets = Credit to Government + Credit to Government + Credit to Commercial Sectors + Foreign Exchange Assets

o.

M AC

Monetary Liabilities of Central Bank = Financial Assets + Other Assets Non-Monetary Liabilities

409. (c) High Powered Money = Monetary Liabilities of Central Bank + Government Money

04

= 0.115 = 11.5%.

20

04

04

(0.30 + r) =

Part II

48,000 =

12,000

{(1 + 0.25) / ( 0.25 + r )}

= 4r r = =

(1 + 0.25)/(0.25 + r) = 4 = 1 + 4r = 1 0.25 0.25 0.0625 = 6.25%.

414. (e) Md = 500 + 0.2Y 20i

At equilibrium Ms = Md. 2,340 = 0.2Y Y = = = 500 + 0.2Y (20 8) 2,340 500 + 160 2,000

50% of total money which is held in the form of currency is Rs.2,500. Demand deposit component of money supply is Rs.2,500.

ty

Reserve Ratio (r)

Pr es

Current Deposit Ratio (Cu) = 0.20 = 0.05 =


1 + Cu H Cu + r 1 + 0.20 1, 250 = 4.8 1,250 = 6,000 MUC. 0.20 + 0.05

Money Supply Ms

iU

ni

ve rs i

Th e

Ic

419. (c) Money Supply, M =

20 04

If there is an additional inflow of 10 MUC of foreign exchange assets, H = 500 + 10 = 510 If money supply is to be maintained at 1,400 MUC, 1,400 = 510

fa

1 + 0.40 500 = 2.8 500 = 1,400 MUC 0.40 + 0.10

( 0.40 + r )
1.40 1, 400

1.40

or, 0.40 + r = 510 or, 0.40 + r = 0.51 or, r = 0.11 = 11%.

s. Al

= Monetary Liabilities of the Central Bank + Government Money = 1,250 MUC

1 + Cu H Cu + r

lr

M = 3,300 + 100 = 3,400 MUC. 418. (c) Stock of High Powered Money (H)

ig

ht

re

se rv

Monetary Liabilities = Financial Assets + Other Assets Non Monetary Liabilities = 3,520 + 60 280 = 3,300

ed

.IS

= 1,200 + 800 + 20 + 1,500 = 3,520

BN

Financial Assets = Loans given to Government + Credit to Banks + Loans given to Commercial Section + Foreign Exchange Assets

:8

1-

31

Non Monetary Liabilities = 200 + 80 = 280

4-

417. (e) High-Powered Money (H) = Monetary Liabilities or Central Bank + Government Money.

02

27

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

ef .N

o.

M AC

W
309

415. (a) Total money = Rs.5,000.

04

10,000 MUC.

20

04

04

Macroeconomics

420. (e) Finance Ratio =

Total issue National Income

Total Issue = Finance Ratio National Income = 0.50 19,200 = 9,600 MUC.
421. (b) Money supply = High Powered Money Money Multiplier

17,200 = 4,300. m or, m = m=


17, 200 =4 4, 300

or, 1+ Cu = 4Cu + 0.40 or, 3Cu = .06 or, Cu = 0.20.


422. (a) Demand for money = Rs.5,000

31

4-

Reserve Ratio = 10%

02

Currency held in money form = Rs.2,500

Th e

Net Capital Formation = 30,240/1.75 = 17,280. 425. (e) Liabilities Monetary Liabilities (Balancing Figure) Government Deposits Other Non-Monetary Liabilities Net Worth Total

Ic

fa

iU

Financial Interrelations Ratio = Total Issues/Net Capital Formation

ni

= 0.68 18,000 = 12,240 Total Issues = Secondary Issues + New Issues = 12,240 + 18,000 = 30,240

ve rs i

ty

Pr es

Secondary Issues = Intermediation Ratio New Issues

s. Al

424. (b) Intermediation Ratio = Secondary Issues/New Issues

lr

ig

ht

Reserve requirements =

6,800 = 0.2. 34,000

re

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

se rv

= 32,000 + 2,000 = 34,000

ed

Volume of demand deposit increased by 2,000

.IS

423. (c) Reserves are decreased by 1,200 = 8,000 1,200 = 6,800

BN

:8

Amount required by banks to meet the reserve requirement =

1-

27

-4

2, 500 10 = Rs.250. 100

20 04

Thus Monetary Liabilities of the Central Bank is 2,685 1 + Cu 1 + 0.2 1.2 Ms = 2,685 = 2,685 = 2,685 = 12,888. 0.25 Cu + r 0.2 + 0.05 310

ef .N

Rs 2,500 500 160 15 75 3,250

o.

M AC

1 + Cu =4 Cu + 0.10

04

20

1 + Cu Cu + r

04

04

Part II

426. (a)

Liabilities Monetary Liabilities Other Deposits Other Monetary Liabilities

Amount

Assets Financial Assets 235 Credit to Government 1,263 Credit to State Govt. Credit to Banks Foreign Exchange Assets Other Assets

Amount 890 1,010 460 55 44

429. (e)

Th e

where Cu = 0.4 r = 6% = 1,701 + X


1 + 0.4 (1,701 + X) 0.06 + 0.4

20 04

and H

where X = Government Money =

6,325(0.06 + 0.4) = 1 + 0.4 (1,701 + X) 2,909.5 2,909.5 1.4 X 1.4 X X = 1.4 (1,701 + X) = 2,381.4 + 1.4X = 2,909.5 2,381.4 = 528.1 = 528.1/1.4 = 377.2. 311

Ic

fa

iU

Money Supply =

ni

ve rs i

ty

Monetary Liabilities (Balancing figure)

Pr es

s. Al

Liabilities Government Deposits Other Non-Monetary Liabilities Net Worth

se rv

Assets Credit to Government Credit to Banks Credit to Commercial Sector 1,701 Foreign Exchange Assets Other Assets 2,708

ed

Rs. 165 22 820

.IS

= 2,250 + 630 + 535 = 3,415.

BN

428. (a) M3 = Currency with Public +Deposit Money of the Public + Time Deposits with Banks

:8

1-

Reserve requirements =

4,250 = 0.22. 19,200

31

4-

02

Volume of demand deposits increased by 1,200 = 18,000 + 1,200 = 19,200

27

1+ 0.3 = 5,291. 0.3+ 0.10 427. (d) Reserves are decreased by 750 = 5,000 750 = 4,250

Money Supply

= 1,628

-4

lr

ig

ht

re

1 + Cu H r + Cu

ef .N

o.

= 1,498 + 130 = 1,628

Rs. 1,525 675 435 25 48 2,708

M AC

H = Total Monetary Liabilities + Government Money

2,459

04

Non-Monetary Liabilities Government Deposits Others Share Capital Reserves

70 76 740 75 2,459

20

04

04

Macroeconomics

430. (b) High-Powered Money in the Economy (H)

= Currency + Reserves = 6,500 + 2,000 = 8,500 Given Currency Deposit Ratio = 0.5 Reserve Ratio (r) = 0.12 Money Supply in the Economy (M)
1+ Cu 1 + 0.5 = H = 8,500 = 8,500 2.4193 = 8,500 2.42 = 20,570. Cu + r 0.5 + 0.12

Secondary Issues = Intermediation Ratio New Issues Financial Interrelations Ratio = Total Issues/Net Capital Formation

Ic

fa

Net Capital Formation

iU

ni

ve rs i

ty

Pr es

Net Capital Formation = Total Issues/Financial Interrelations Ratio = 0.78 24,000 = 18,720 = Total Issues/Financial Interrelations Ratio = (24,000 + 18,720)/1.50 = 28,480

20 04

434. (b) M3 = M1 + Time Deposits (i.e., Fixed Deposits) with Banks

Th e

New Issues ratio = 24,000/28,480 = 0.843.

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.

The Open Economy and Balance of Payments: Indias Balance of Payments


435. (a) Trade Balance = Merchandise Exports Merchandise Imports

= 34,954 36,984 = 2,030.

312

s. Al

lr

433. (e) New Issue Ratio

= New Issues/Net Capital Formation

ig

ht

Demand deposits that can be supported with the lower reserves and lower reserve requirement are 2,500/0.25 = 10,000.

re

se rv

Reserve requirement = 25%

ed

432. (a) When reserves are decreased by 700, the new reserve will be: 3,200 700 = 2,500

.IS

BN

Increase in Money Supply = (ii) (i) =77,811 50,061

:8

= 35050 2.22 = 77,811

(ii)

1-

31

= (22,550 + 12,500) 2.22

4-

= 27,750.

02

The Money Supply = H 2.5

27

Central Bank purchases Rs.12,500 worth Government securities will increase the high powered money by the same amount,

-4

ef .N

Money Supply

= H 2.22 = 50,061 .. (i)

o.

M AC

Money Multiplier = 1 + Cu/r + Cu =

1+ 0.6 = 2.22 0.6 + 0.12

Reserve Ratio (r) = 0.12

04

20

Current Deposit Ratio (Cu)

= 0.6

04

04

431. (d) The High-Powered Money (H) Rs.22,550

Part II

436. (d)

Balance of Payment Statement for the year, 2000-2001 Credit 34,954 34,300 31,944 248 2,108 69,254 (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 70 0 0 0 70 658 82 576 728 130 200 200 0 70 538 46 492 408

lr

ig

ht

re

se rv

I II

iU

a. In India

ve rs i

Foreign Investment (a + b)

ty

Particulars

Pr es

438. (a)

s. Al

Particulars Merchandize Invisibles (a + b + c) a. Services b. Transfers c. Investment income Total current account

Credit 1,450 222 100 122 0 1,672

Debit 1,050 275 0 0 1,325

BN

ed

.IS

Capital Account Credit Debit

:8

437. (c)

1-

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.

+347 Net 5,117 5,191 2,167 3,024 74 1,601 891 10 901 333 20 313 377 313

10

Ic

fa

20 04

Th e

b. Abroad

II Loans ( a + b + c) a. External Assistance By India To India b. Commercial Borrowings By India To India c. Short Term

ni

Direct Portfolio

31

Net 400 53 100 122

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

Particulars III Bank Capital ( a + b) a. Commercial Banks Assets Liabilities Non-Resident Deposits b. Others IV Rupee Debt Service V Other Capital Total Capital Account ( I to V)

Credit 0

Debit 711

Net 2,727 2,904 790 26 2,140 177 1508 10,242 711

439. (c) Capital Inflows Capital Outflows = 6,300 4,500 = 1,800 MUC (Deficit).

= Merchandise (credit) Merchandise (debit) = 53,000 65,474 = $12,474 million. = Merchandise + Services + Transfer + Income = 53,000 + 24,986 + 15,225 + 2,826 = 96,037 Total Current Account (Debit) = 65,474 + 18,780 + 367 + 7,708 = 92,329

444. (b) Revenue Deficit = Revenue Expenditure Revenue Taxes

20 04

Th e

Non-Plan Expenditure = 1,66,161 + 1,23,223 = 2,89,384 Revenue Expenditure = 2,89,384 + 76,843 = 3,66,227 Revenue Receipts Revenue Deficit = 1,84,169 + 69,766 = 2,53,935. = 3,66,227 2,53,935 = Rs.1,12,292 crore.

445. (c) Revenue Deficit = Revenue Expenditure Revenue Receipt

Revenue Expenditure = Non Plan Revenue Expenditure + Plan Revenue Expenditure = 2,89,384 + 76,843 = 3,66,227 Revenue Receipts = Tax Revenue + Non. Tax Revenue = 1,84,169 + 69,766 = 2,53,935 Revenue Deficit = 3,66,227 2,53,935 = Rs.1,12,292 cr. 314

Ic

= 1,53,637 30,414 = 1,23,223

fa

iU

Interest Payment = Fiscal Deficit Primary Deficit

ni

Revenue Receipts = Tax Revenue + Non-Tax Revenue

ve rs i

Revenue Expenditure = Non-Plan Expenditure + Plan Expenditure

ty

Pr es

Modern Macroeconomics: Fiscal policy, Budget deficit, and Government Debt

s. Al

= 1,46,559 1,29,579 = $ 16,980 million (surplus).

lr

ig

ht

443. (e) Overall Balance of Payment = Total Credit of the Bop Total Debit of the Bop

re

= 4,790 + 7,535 1,179 6,591 = $ 4,555 Million.

se rv

442. (d) Net Foreign Investment in India = Foreign Direct Investment (credit) + Portfolio Investment (credit) Foreign Direct Investment (debit) Portfolio Investment (debit)

ed

.IS

Current Account Balance = 96,037 92,329 = $ 3,708 million (surplus).

BN

:8

1-

31

4-

02

27

-4

441. (a) Total Current Account ( Credit)

ef .N

440. (a) Trade Deficit for the year 2002-03

o.

M AC

The Open Economy and Balance of payments

04

20

04

04

Part II

446. (d) Primary Deficit = Fiscal Deficit Interest Payment

Fiscal Deficit = Borrowings and Other Liabilities Primary Deficit = 1,53,637 1,23,223 = Rs.30,414 cr.
447. (e) Revenue Receipts = Tax Revenue + Non-Tax Revenue

= 1,16,857 + 45,137 = 1,61,994.


448. (b) Capital Receipts = Recoveries of Loan + Other Capital Receipts + Borrowings and Other liabilities 449. (c)

= 1,16,857 + 45,137 = 1,61,994 Fiscal Deficit = 2,67,927 (1,61,994 + 9,908 + 5,000) = 91,025.
450. (c) Primary Fiscal Deficit = Fiscal Deficit Interest Payments

Revenue Deficit = 2,81,098 2,03,673 = 77,425 crore.

454. (d) Fiscal Deficit = Borrowing and Other Liabilities (or)

20 04

Th e

Working notes:

Total Expenditure = Total Revenue Expenditure + Total Capital Expenditure = 2,36,987 + 46,895 = Rs.2,83,882 crore. = Total Revenue Receipts + Total Capital Receipts

Total Receipts = =

Ic

= [2,83,882 (2,03,927 + X X)] = Rs.79,955.

fa

455. (d) Fiscal Deficits

iU

= Total Expenditure [Total Receipts Borrowings]

ni

ve rs i

[Tax and Non-Tax Revenue Receipts]+ [Loans Recovered + Other Capital Receipts + Borrowings (not given)] [1,32,365 + 50,475] + [11,087 + 10,000 + X] = Rs.2,03,927cr + X. = = Total Borrowings Any other receipts of which divestment proceeds committed for redemption of Public Debt 1,12,275 1,000 = 1,11,275.

Total Borrowings

ty

= 47,000 + 1,32,000 + 30,000 = 2,09,000.

Pr es

453. (b) Non-Plan Expenditure = Interest Payments + Subsidies + Defense Expenditure

s. Al

= 40,000 + 120,000 + 12,000 + (17,000 + 13,000) = 2,02,000 cr.

lr

ig

452. (e) Revenue Receipts = Direct Taxes + Indirect Taxes + Interest Receipts + Total Profits

ht

re

se rv

= 1,46,209 57,464 = 2,03,673

ed

Revenue Receipts = Tax Revenue Non-Tax Revenue

.IS

BN

= 2,28,768 + 52,330 = 2,81,098

:8

Revenue Expenditure = Non-Plan Revenue Expenditure + Plan Revenue Expenditure

1-

31

451. (a) Revenue Deficit = Revenue Expenditure Revenue Receipts

4-

02

Primary Fiscal Deficit = 1,11,275 1,01,266 = 10,009.

27

Fiscal Deficit = Borrowings and Other Liabilities = 1,11,275

-4

ef .N

o.

M AC

W
315

Revenue Receipts = Tax Revenue + Non-Tax Revenue

04

= Total Expenditure (Revenue Receipts + Recoveries of Loan + Other Capital Receipts)

20

Fiscal Deficit

04

04

= 9,908 + 5,000 + 91,025 = 1,05,933.

Macroeconomics

456. (b) Revenue Deficit = Total Revenue Expenditure Total Revenue Receipts

Total Revenue Expenditure = Non-Plan Revenue Expenditure + Plan Expenditure = 2,28,768 + 52,330 = 2,81,098 Total Revenue Receipt = Tax Revenue + Non Tax Revenue = 1,46,209 + 57,464 = 2,03,673 Revenue Deficit = 2,81,098 2,03,673 = 77,425.

Economic Growth, Development & Planning


457. (b) Possible GDP growth = Possible level of investment/Capital Output Ratio = 25/5 = 5 %

Growth rate = 6 + 2 = 8% Capital Output ratio = 32 = 4. 8

= (1+growth rate in GDP)/(1+growth rate in Population)

20 04

316

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

= (1.07/102) 1 = 0.049 = 4.9%.

re

se rv

ed

460. (c) Increase in per capita GDP

.IS

Required external savings are = 28 24 = 4% of GDP.

BN

Domestic savings are 24% of GDP

:8

1-

Required savings are 28% of GDP

31

= 4 7 = 28%

4-

02

= The incremental capital out put ratio Targeted growth rate

27

-4

459. (a) Required savings to achieve the targeted growth rate in GDP is

ef .N

o.

M AC

Expected population growth = 2%

Required domestic savings to income = 32%

04

20

458. (d) Target growth rate = 6% p.a.

04

Possible per capita GDP growth = 5 2 =3%.

04

Part III: Model Question Papers (with Suggested Answers)


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.

Model Question Paper I


Time: 3 Hours Part A: Basic Concepts (40 Points)
1.

b.

c. d. e. 2.

Macroeconomics studies the behavior of large firms, while microeconomics studies the behavior of small firms.

a. b. c.

Population has grown less rapidly than the growth of the capital stock.

Th e

20 04

d. e.

3.

Personal income taxes are examples of a. b. c. d. e. Fiscal policy instruments Monetary policy instruments Trade policy instruments Income policy instruments Wage policy instruments.

Ic

fa

The percentage of GDP used to finance investment in physical capital has been roughly constant. The rate of profit has been gradually but steadily declining. Per capita income has increased by 4% during the last 5 years.

iU

There has been a strong upward trend in real wage rates.

ni

ve rs i

Which of the following cannot be identified as a basic trend of economic development?

ty

Pr es

Microeconomics involves studying the economy as a whole, while macroeconomics involves studying the behavior of individual industries, firms and households.

s. Al

lr

There is no difference, basically macroeconomics and microeconomics are one and the same.

ig

ht

re

se rv

ed

Macroeconomics concentrates on those parts of the economy involving very large amounts of money, while microeconomics concentrates on those parts of the economy involving small sums of money.

.IS

BN

:8

1-

a.

Macroeconomics involves studying the economy as a whole, while microeconomics involves studying the behavior of individual industries, firms and households.

31

4-

What is the fundamental difference between macroeconomics and microeconomics?

02

Answer all the questions. Each question carries one point.

27

-4

ef .N

Total Points: 100

o.

M AC

04

20

04

04

Macroeconomics

4.

Positive price inflation necessarily means that a. b. c. d. e. All prices are increasing at the same time Prices are climbing but wages are not Though some prices may be falling, prices are, on the average, climbing The associated rate of unemployment is rising Interest rate is rising.

5.

In a model in which there is no government, net investment, capital replacement or international trade, the market value of final output equals

e. 6.

None of the above.

Th e

a.

20 04

b. c. d. e. a.

10. Saving is performed By individuals, separately and collectively, for a variety of reasons To facilitate the formation of new capital By government, in the form of a budget deficit When an individuals MPS is greater than one When consumption is less than income. b. c. d. e. 318

Ic

9. The value of existing houses bought in a particular period is

fa

Included in GNP but not GDP Included in GDP but not GNP Included in both GDP and GNP Sometimes included in GNP but never in GDP Neither included in GDP nor GNP.

iU

8. NDP does not include a. Payments of corporate taxes b. Net factor income from abroad c. Undistributed profits d. Net exports e. The value added from intermediate goods.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

7. A reduction in the money supply a. Lowers interest rates now and in the future b. May eventually lower interest rates if it makes price inflation subside c. Increases the interest rate in the short run d. Tends to be offset by an equivalent drop in aggregate demand e. Both (b) and (c) above.

ht

re

se rv

ed

.IS

BN

:8

e.

Production is less than it could be if all resources were fully employed.

1-

31

d.

Comparisons should be made in nominal terms

4-

02

c.

There is probably some unemployment in the country

27

b.

Inflation has increased from the year before

-4

a.

Exports must be greater than imports

ef .N

If potential GDP is greater than actual GDP, then

o.

M AC

d.

All of the above

c.

The sum of wages, rent, interest and profit

04

20

b.

The sum of the receipts of economic resources

04

a.

Aggregate consumption

04

Part III

11. The investment demand curve depicts the relationship between a. b. c. d. e. Consumption and savings Investment and consumption Investment and interest rates Consumption and interest rates Savings and investment rates.

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? b. c. d. e. Output will remain the same. Output will rise. Prices will rise and inventories will accumulate. Savings will increase.

13. A reduction in the legal required reserve ratio will tend to a. b. c. d. e. Reduce the money supply and reduce commercial bank loans

a. b. c. d. e.

Personal income taxes Transfer payments Dividend payments Personal savings.

20 04

16. In the inventory theory the transaction demand for money a. b. c. d. e. Varies positively with income but less than proportionately Varies inversely with the rate of interest and is proportional to the square root of income Varies positively with income but more than proportionately Varies inversely with income and interest rates None of the above.

Th e

Ic

fa

iU

Residual wages

ni

ve rs i

ty

15. Personal income equals disposable income plus

Pr es

e.

Is more relevant to investors than consumers.

s. Al

lr

d.

Tends to increase when inflation rises

ig

ht

c.

Equals the nominal rate minus the rate of inflation

re

b.

Equals the rate of inflation minus the nominal rate

se rv

a.

Equals the nominal rate plus the rate of inflation

ed

.IS

14. The real rate of interest

BN

Leave the money supply unaffected.

:8

1-

Increase the money supply and decrease commercial bank loans

31

4-

Increase the money supply and increase commercial bank loans

02

27

Reduce the money supply and increase commercial bank loans

-4

ef .N

o.

M AC

W
319

04

20

04

a.

Output will fall.

04

Macroeconomics

17. Which of the following are the sources of change in high-powered money in Indian economy? i. ii. iii. iv. v. a. b. c. d. e. Change in RBI credit to government. Change in RBI credit to banks. Change in RBI credit to commercial sector. Change in net foreign exchange assets of RBI. Change in net non-monetary liabilities. Both (i) and (ii) above. Only (i), (ii) and (iii) above. Only (i), (ii) and (iv) above. All of (i), (ii), (iii), (iv) and (v) above. Both (i) and (iii) above.

18. Average Propensity to Consume (APC) is the ratio of a. b. c. d. e. Consumption to income Consumption to disposable income Consumption to savings Consumption to household investment

19. Which of the following statements is true?

b. c. d. e.

APC is the ratio of total consumption to total income and MPC is the ratio of incremental consumption to incremental income. APC is the ratio of total consumption to total income and MPC is the ratio of incremental consumption to incremental disposable income.

Th e

i.

20 04

ii.

iii. iv. a. b. c. d. e.

320

Ic

fa

20. Which of the following factors will affect the aggregate demand curve? Change in income. Change in business expectation. Change in expected rate of inflation. Change in cost of production. Both (i) and (ii) above. Only (i), (ii) and (iii) above. Only (ii), (iii) and (iv) above. Only (i), (iii) and (iv) above. Only (i), (ii) and (iv) above.

iU

ni

ve rs i

APC is the ratio of total consumption to total savings and MPC is the ratio of incremental consumption to incremental income.

ty

Pr es

MPC is the ratio of total consumption to total income and APC is the ratio of incremental consumption to incremental disposable income.

s. Al

lr

ig

ht

re

se rv

ed

.IS

a.

MPC is the ratio of total consumption to total income and APC is the ratio of incremental consumption to incremental income.

BN

:8

1-

31

Rate of change in consumption to rate of change in income.

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part III

21. Increase in real stock of money will shift the a. b. c. d. e. LM curve towards right LM curve towards left IS curve towards right IS curve towards left None of the above.

22. Fiscal expansion policy in the economy will shift b. c. d. e. LM curve towards left and AD curve towards right IS curve towards left and AD curve towards right IS curve towards right and AD curve towards right LM curve towards left and IS curve towards right.

iii. iv. a. b. c. d. e.

GNP at market prices = GNP at factor cost + Indirect taxes Subsidies. Both (i) and (ii) above. Both (i), (ii) and (iii) above. Only (i), (ii) and (iv) above. Only (ii), (iii) and (iv) above.

a. b. c. d. e.

20 04

Th e

25. NNP at market prices is equal to a. b. c. d. e. GNP at factor cost Depreciation GNP at market prices Depreciation NNP at market prices Net factor income from abroad GNP at factor cost + Indirect taxes Net income from abroad NDP at factor cost + Depreciation.

Ic

fa

It is equal to Wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government. It is equal to Wages and salaries + Dividends paid at home + Factor income received from abroad + Corporate tax.

It is equal to Wages and salaries + Dividends paid abroad + Transfers from government Personal income tax.

iU

ni

ve rs i

It is equal to Wages and salaries + Dividends paid abroad + Factor income received from abroad + Transfers from government Personal income tax.

ty

Pr es

It is equal to Wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government Personal income tax.

s. Al

lr

24. Which of the following statements is true regarding the personal disposable income?

ig

ht

All of (i), (ii), (iii) and (iv) above.

re

se rv

ed

.IS

BN

:8

1-

31

GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.

4-

02

27

ii.

GNP at factor cost = GDP at factor cost + Net factor income from abroad.

-4

i.

GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax.

ef .N

23. Which of the following statements are true?

o.

M AC

W
321

04

20

04

04

a.

LM curve towards right and AD curve towards left

Macroeconomics

26. Laffer curve shows the relationship between a. b. c. d. e. Price level and unemployment Tax rates and tax revenue Interest rate and income level Income and money supply Demand for money and supply of money.

27. When there is an equal decrease in taxes and the government spending,

d. e.

The income level will fall but the level of investment will decrease

28. Bottlenecks in the context of macroeconomics refer to a. b. c. d. e. Inadequate spending in a sector of the economy Shortage of materials at full employment

a. b. c.

Change in imports as a result of a unit of change of income

Th e

d. e.

20 04

31. The value-added approach to GDP measurement a. b. c. d. e. Adds up the difference between the value of output and costs of intermediate goods Adds up all income received by the household sector in the economy Removes the effect of inflation from the nominal GDP Adds up all the expenditures incurred on the goods and services produced by the domestic sector Adds the total money value of goods and services purchased by their ultimate buyers.

322

Ic

Percentage change in imports as a results of percentage change in production

fa

Change in imports as a result of change in GDP Percentage change in imports due to percentage change in consumption.

iU

Change in imports as a result of a change in exports

ni

ve rs i

ty

30. Marginal propensity of import is the

Pr es

e.

Both (a) and (c) above.

s. Al

d.

The economic model which uses price elasticity

lr

ig

ht

c.

The economic model which takes exogenous variables

re

b.

It is an alternative term from macroeconomics

se rv

a.

The economic model which uses the quantitative methods

ed

.IS

29. Quantitative Economics means

BN

Both (b) and (c) above.

:8

1-

Inadequate supply of specific resources in an economy below full employment

31

4-

Inadequate supply of labor at full employment economy

02

27

-4

ef .N

o.

The income level will fall but the level of consumption and investment will increase.

M AC

c.

The income level will fall but level of investment will increase

04

b.

The income level will fall but the level of consumption will increase

20

04

04

a.

The income level will fall by the change in the government expenditure but the level of consumption and investment remains the same

Part III

32. Which of the following statements is not true? a. b. c. d. e. When the price level increases, nominal GDP increases even if no additional goods and services are produced. Personal disposable income is either consumed or paid as taxes. Net investment equals gross investment less depreciation. The higher the interest rate, the higher will be the opportunity cost of holding money. When the value of goods imported exceeds the value of goods exported, the country faces a trade deficit.

e.

None of the above.

35. Which of the following is not a transfer payment? b. c. d. e. Flood relief.

36. According to the classical economists, the Aggregate Supply Curve is

Th e

c.

20 04

d. e.

37. Which of the following is not a component of aggregate expenditure in an economy? a. b. c. d. e. Consumption. Investment. Government purchases. Net exports. Taxes.

Ic

b.

fa

Horizontal

First horizontal and then vertical First vertical and then horizontal Positively sloped.

iU

a.

Vertical

ni

ve rs i

ty

Scholarships.

Pr es

Salaries paid to Members of Parliament.

s. Al

Government pensions.

lr

ig

ht

a.

Invalidity benefit.

re

se rv

ed

e.

None of the above.

.IS

BN

d.

Average Propensity to Consume

:8

c.

Marginal Propensity to Save

1-

31

b.

Marginal Propensity to Consume

4-

02

a.

Average Propensity to Save

27

-4

34. The slope of the consumption function represents

ef .N

o.

d.

Reciprocal of Marginal Propensity to Import

M AC

c.

Marginal Propensity to Consume

W
323

b.

Capital Output Ratio

04

a.

Slope of the Consumption Function

20

04

33. The Coefficient of Acceleration is

04

Macroeconomics

38. In which sector of Indian economy do we find a high rate of disguised unemployment? a. b. c. d. e. Service sector. Transport sector. Agriculture sector. Manufacture sector. Mining sector.

39. Which of the following is included in GDP of a country? b. c. d. e. The sale of an old house. The sale of stocks and bonds. None of the above. The fee paid to a broker for selling a stock.

e.

Perfect unemployment.

Indirect Taxes

Pr es

s. Al

Gross National Product at Market Prices Factor Income Paid Abroad

lr

ig

Particulars

ht

re

41. The following information is available from National Income Accounts of a country: MUC 10,000 900 500 400 300 1,700 350 1,100

fa

Th e

Ic

20 04

The Net National Product of the country at factor cost is a. b. c. d. e. 8,700 MUC 8,800 MUC 8,900 MUC 9,000 MUC 9,100 MUC. (2 points)

324

iU

ni

ve rs i

Factor Income Received From Abroad Subsidies Gross Corporate Profits Corporate Profit Tax Net Corporate Profits

ty

se rv

Solve all the problems. Points are indicated against each problem.

ed

.IS

Part B: Problems (60 Points)

BN

:8

1-

d.

Disguised unemployment

31

4-

c.

Frictional unemployment

02

27

b.

Cyclical unemployment

-4

a.

Structural unemployment

ef .N

40. Imperfect information about the labor market leads to

o.

M AC

04

20

04

04

a.

The sale of a used car.

Part III

42. The following information is extracted from the balance sheet of a Central Bank. Particulars 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 Million Units of Currency 6,000 10,000 5,000 150 4,000 9,000 3,000 50 100

a. b. c. d. e.

80,000 MUC. 75,000 MUC. 78,000 MUC. 72,000 MUC. None of the above.

02

27

-4

ef .N

o.

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?

a. b. c. d. e.

10.77%. 10.23%. 11.45%. 11.89%. 12.00%.

Pr es

s. Al

lr

ig

ht

re

se rv

ed

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 $?

.IS

BN

:8

1-

31

4-

44. The following items are taken from the Union Budget for the year 2001- 2002. Tax Revenue (Net) Borrowings and Other Liabilities Non-Plan Expenditure: On Revenue Account (which includes interest payments of Rs.1,12,300 crore) On Capital Account Plan Expenditure On Capital Account The fiscal deficit and primary deficit of the government are a. Rs.1,16,314 crore and Rs.3,910 crore b. Rs.1,06,783 crore and Rs.3,910 crore c. Rs.1,16,314 crore and Rs.4,014 crore d. Rs.1,06,783 crore and Rs.4,014 crore e. None of the above. Rs. crore 1,63,031 1,16,314 2,50,341 24,782 95,100 34,875

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

04

(3 points)

(3 points)

(2 points) 325

20

04

04

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. b. c. d. e. 2.91%. 3.23%. 2.41%. 2.03%. None of the above. (2 points) 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).

Disposable Income (Y ) Transfer Payments R Tax Function (T) Private Investment Function (I)

At equilibrium, the budget deficit of the economy is a. b. c. d. e. 20 MUC 25 MUC 30 MUC 35 MUC 40 MUC.

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

M Money Supply s P

ig

ht

M Speculative Demand for Money a P

se rv

ed

M Transaction Demand for Money t P

BN

:8

Export Function E

()

1-

31

Import Function (M)

.IS

re

s. Al

lr

4-

02

Exogenous Government Expenditure G

( )

27

: 500 15i

: 400

: 10 + 0.10 Y : 225 : 0.25Y

: 125 50i

: 250

-4

: 0.2Y

ef .N

( )

: YT+R : 40

o.

M AC

W
(3 points) (3 points)

Savings Function (S)

: 25 + 0.25 Yd

20 04

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.

326

04

20

04

04

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). Savings function Transfer payments Tax function Private investment function Government expenditure Import function Exports (S) (R) (T) (I) 400 + 0.40 Yd + 20i 200 0.25Y 250 + 0.15 Y 75i 680

(G )
(E )

(M) 100 + 0.10 Y

:8

e.

None of the above.

1-

31

d.

28.95%.

4-

02

c.

30.55%.

27

b.

27.30%.

-4

a.

33.20%.

ef .N

LM function (Money market equilibrium) Y = 2,500 + 250i Currently, the government is facing a budget deficit of 170 MUC. Owing to the downtrend in the economy, the government increases its expenditure by 78.5 MUC. If the government desires to maintain the budget deficit at the same level as earlier in spite of the increase in exogenous government expenditure and adjusts the tax rate accordingly, what is the new equilibrium tax rate?

o.

M AC

se rv

ed

49. The following information is extracted from the budget of union government. Find out the revenue deficit of the government.

.IS

BN

Borrowings and Other Liabilities

Pr es

Recoveries of Loans

s. Al

Non Tax Revenue

ig

ht

Tax Revenue (Net)

re

Rs. crore 1,63,031 68,714 15,164 1,16,314

ni

ve rs i

Non-Plan Expenditure: On Revenue Account (which includes interest payments of Rs.1,12,300 crore) On Capital Account Plan Expenditure: On Revenue Account On Capital Account 2,50,341 24,782 95,100 60,225 34,875

20 04

Th e

a. b. c. d. e.

Ic

fa

Rs.75,023 crore Rs.78,821 crore Rs.82,034 crore Rs.83,032 crore Rs.85,234 crore. (2 points)

iU

ty

lr

04

(3 points)

20

04
327

450

04

Macroeconomics

50. The following information is available from National Income Accounts of a country: Particulars Gross Corporate Profits Corporate Profit Tax Net Corporate Profits Dividends Personal Tax Payments Transfer Payments GNP at Factor Cost The income earned by the households in the country is a. b. c. d. e. 7,800 MUC 7,900 MUC 7,950 MUC 8,000 MUC. 7,850 MUC Million Units of Currency (MUC) 1,700 350 1,100 250 450 50 9,400

ef .N

o.

M AC

W
(1 point)

Out of total personal income, the personal consumption expenditure made is a. b. c. d. e. 6,350 MUC 6,450 MUC 6,750 MUC 6,550 MUC

Ic

fa

None of the above. (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) 328

20 04

Th e

iU

ni

ve rs i

ty

Pr es

s. Al

lr

Net Domestic Savings Budget Deficit Gross Corporate Profits Corporate Profit Tax Net Corporate Profits Dividends Personal Tax Payments Personal Income

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

Particulars

Million Units of Currency (MUC) 1,600 100 1,700 350 1,100 250 450 8,000

4-

02

27

51. The following information is available from National Income Accounts of a country:

-4

04

20

04

04

Part III

se rv

54. In a hypothetical economy Consumption (c) = 500 Investment (I) = 150 Government expenditure (G) = 140 Exports = 80 Imports = 60 Money supply (Ms) = 162 Given the data, what is the velocity of money in the economy? a. 4. b. 5. c. 6. d. 7. e. 8.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
(1 point) 329

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 Transfer payments Tax function Private investment function Government expenditure Import function Exports Real demand for money Money supply

Ic

fa

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)

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

(R )
(T) (I)

(S)

400 + 0.20 Yd + 20i 100 0.25Y 250 + 0.30 Y 80i 600 100 + 0.10 Y 450 0.2Y + 50 20i 410

(G)
(M)

(E)
Md Ms

04

53. The following relations represent a simple model of an open economy: Consumption function (c) = 250 + 0.75Y Investment function (I) = 65 + 0.15Y Government expenditure (G) = 90 Exports (E) = 125 Import function (M) = 0.15Y If exports increase by 25 MUC, what will be the change in equilibrium level of income? a. 100 MUC. b. 125 MUC. c. 150 MUC. d. 175 MUC. e. 200 MUC.

(2 points)

20

04

04

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. b. c. d. e. 25.00%. 24.30%. 28.45%. 27.65%. 28.25%. (4 points) Finance Ratio Intermediation Ratio 0.30

Financial Interrelation Ratio 1.25 If the secondary issues are 15,000, the New Issue Ratio for the economy is a. b. c. d. e. 0.55 0.60 0.65 0.70 0.75.

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W se rv ed
Rs.2,000cr. Rs.200 cr. Rs.542cr. Rs.2,292 cr.

0.80

c. d. e.

Rs.450 cr Rs.292 cr Rs.742 cr.

iU

ni

ve rs i

ty

Pr es

b.

Rs.342 cr

s. Al

a.

Rs.50 cr

lr

ig

GDP at factor cost Net factor income from abroad Indirect taxes GNP at market prices

= = = =

ht

re

.IS

58. From the following information, compute subsidies

BN

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?

20 04

Th e

a. b. c. d. e.

Ic

fa

320 MUC. 500 MUC. 800 MUC. 850 MUC. None of the above. (2 points)

330

B
(2 points) (1 point)

04

20

57. Following are the financial ratios for an economy:

04

04

Part III

60. The following consumption function has been estimated for an economy: Ct = 10 + 0.7Ydt + 0.3Ct-1 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? a. b. c. d. e. 10 MUC. 70 MUC. 30 MUC. 100 MUC. (2 points) 143 MUC.

a. b. c. d. e.

21 MUC 30 MUC 43 MUC 100 MUC None of the above.

02

27

-4

ef .N

o.

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

c. d. e.

21% of GDP. 45% of GDP. 51% of GDP.

lr

ig

ht

re

se rv

b.

14% of GDP.

ed

.IS

a.

10% of GDP.

BN

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%?

:8

1-

31

4-

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

ve rs i

ty

Balance of payments of a country for the year 2002 MUC 20,000 18,000 16,000 12,000 400 1,000 200 150 30 20 10 150 200 40 331

20 04

Th e

Ic

fa

iU

ni

Pr es

Answer Questions 63-65 based on the following information:

s. Al

04

(1 point)

(2 points)

20

04

04

Macroeconomics

63. The Balance of Trade (BoT) for the year 2002 is a. 2,000 MUC (deficit) b. 2,000 MUC (surplus) c. 1,000 MUC (surplus) d. 1,350 MUC (surplus) e. 1,950 MUC (surplus). (1 point) 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.). 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.).

M AC

W
(2 points)

31

4-

02

27

-4

ef .N

o.

20 04

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

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

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)

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

B
(2 points)

04

20

04

04

Part III

69. The following data is taken from balance sheet of a Central Bank. Particulars Net worth Credit to government Credit to commercial sector Government deposits Credit to banks Other non-monetary liabilities Other deposits with the central bank MUC 6,000 10,000 5,000 150 4,000 3,000 50

a. b. c. d. e.

8,500 MUC 9,000 MUC 9,750 MUC 10,050 MUC 10,000 MUC.

4-

02

27

-4

ef .N

o.

M AC

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

s. Al

lr

e.

800 MUC.

ig

ht

d.

750 MUC

re

c.

700 MUC

se rv

b.

550 MUC

ed

a.

200 MUC

.IS

BN

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

:8

1-

31

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

04

(3 points)

(1 point)

20

04
333

04

Model Question Paper I


Suggested Answers
Part A: Basic Concepts
1. (a) Macroeconomics involves studying of economy as a whole, while microeconomics involves studying the behavior of individual industries, firms and households.

14. (c) Real interest rate = Nominal interest rate Rate of inflation.

20 04

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.

Th e

Ic

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.

fa

iU

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.

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.

s. Al

lr

10. (a) Savings is done by individuals, separately and collectively, for various reasons.

ig

ht

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.

re

se rv

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.

ed

.IS

BN

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.

:8

1-

31

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.

02

27

-4

ef .N

5. (c) In a model in which there is no government, net investment, capital replacement or international trade, the market value of final output equals the sum of wages, rent, interest and profit.

o.

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.

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.

20

04

04

2. (d) Rate of profit is not a measure of economic development.

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 Change in the exchange rate Change in the expected rate of inflation. Change in business expectations.

i. ii. iii. iv.

GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax

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

29. (b) Macroeconomics is sometimes known as quantitative economics. 30. (a) Marginal propensity of import is the change in the level of imports as a result of a unit change of income. In other words, marginal propensity to import is the percentage change in the level of imports due to a percentage change in income. 31. (a) (a) Value addition is equal to value of output less value of inputs. By summing up all the value additions in the economy GDP of the economy can be computed, which is called value added approach to measuring GDP. Hence the answer is (a). (b) By adding all the incomes of factors of production in the economy, GDP can be computed which is called income approach to measuring GDP. Hence (b) is not the answer.

Th e

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

s. Al

lr

ig

ht

26. (b) Laffer curve shows the relationship between tax rates and tax revenue.

re

se rv

25. (b) NNP at market (factor) prices = GNP at market (factor) prices Depreciation.

ed

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.

.IS

BN

:8

1-

24. (a) Personal income = Wages and salaries + Dividends + Transfer payments; and

31

4-

GDP at market prices = GDP at factor cost + Indirect taxes Subsidies.

02

27

GNP at market prices = GNP at factor cost + Indirect taxes Subsidies

-4

GNP at factor cost = GDP at factor cost + Net factor income from abroad

ef .N

o.

23. (e) The following statements are true.

M AC

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.

04

20

04
335

21. (a) Any increase in real stock of money will shift the LM curve to words right.

04

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. 32. (b) (a) 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. Is not the answer. Slope of consumption function is Marginal Propensity to Consume.

33. (b) (a)

20 04

Th e

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. Is not the answer. A positively sloped Aggregate Supply curve is not possible under the classical assumption of perfectly flexible wages.

(d) Is not the answer. Aggregate Supply curve with such a shape does not exist. (e)

336

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

s. Al

lr

(c) Is not the answer. Marginal Propensity to Save is equal to S/Yd. (d) Is not the answer. Average Propensity to Consume is equal to C/Yd.

ig

ht

re

(b) Is the answer. Marginal Propensity to Consume is equal to C/Yd.

se rv

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.

ed

.IS

BN

:8

1-

31

4-

(c) Is not the answer. Marginal Propensity to Consume is equal to C/Y. (d) Is not the answer. Reciprocal of Marginal Propensity to Import is equal to Y/Imports.

02

27

-4

(b) Is the answer. Coefficient of acceleration is equal to K/Y, which is called Capital Output Ratio.

ef .N

o.

M AC

04

20

04

04

Part III

37. (e) Aggregate expenditure in an economy consists of Consumption, Investment, Government purchases and Net exports. Hence the answer is (e). 38. (c) Disguised unemployment is a situation where labor force is apparently employed but Marginal Productivity of labor is either zero or negative. This situation is prevalent in Indian agricultural sector. 39. (d) Payments related to productive activities undertaken by factors of production during the year are included in the GDP of a country. (a) (c) Not included since the car is not produced during the current year (b) Not included since the house is not constructed during the current year Not included since sale of stocks and bonds are financial transactions only.

40. (c) Unemployment caused by imperfect information about the available jobs and skills in the market is called frictional unemployment.

ty

iU

ni

NNPFC

ve rs i

Th e

42. (a) Money Supply in the Economy (Ms) = Money Multiplier (m) x High Powered Money (H)

Ic

20 04

m =

H = Monetary Liabilities of Central Bank + Government Money Monetary Liabilities of Central Bank (ML) = Financial Assets + Other Assets Non-Monetary Liabilities. Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector + Net Foreign Exchange Assets. = = 10,000 + 4,000 + 5,000 + 9,000 28,000 MUC

fa

1 + Cu 1 + 0.20 1.2 = = =4 Cu + r 0.20 + 0.10 0.3

Pr es

Depreciation

s. Al

b. NNPFC

= GDPFC Depreciation + NFIA = Gross Corporate Profits Net Corporate Profits

= 1,700 1,100 = 600 MUC = 9,500 600 + (100) = 8,800 MUC.

lr

ig

ht

= 9,500 MUC

re

GDPFC

= 10,000 (100) 600

se rv

= 900 300 = 600 MUC

ed

Net Indirect Taxes = Indirect Taxes Subsidies

.IS

BN

= 400 500 = 100 MUC

:8

1-

NFIA

= Factor Income Received from Abroad Factor Income Paid Abroad

31

4-

a. GDPFC

= GNPMP NFIA Net Indirect Taxes

02

27

41. (b)

-4

Part B: Problems

ef .N

o.

M AC

(d) Is included in GDP as the fee is earned for rendering brokerage services and is an income.

04

20

04
337

04

Macroeconomics

Non-Monetary Liabilities = Net Worth + Government Deposits + Other Non Monetary Liabilities. = = ML = = H = = 6,000 + 150 + 3,000 9,150 MUC. 28,000 9,150 + 100 18,950 MUC 18,950 + 1,050 20,000 MUC. = 80,000 MUC.

Primary deficit

iU

45. (a) Rate of Economic Growth (gy)

ni

ve rs i

ty

Pr es

s. Al

lr

44. (c) Fiscal deficit

= = = = =

Borrowings and other liabilities Rs.1,16,314 cr. Fiscal Deficit Instant payments Rs.(1,16,314 1,12,300) cr. Rs.4,014 cr. = =
Savings / Income ratio ICOR

Th e

Ic

fa

ig

ht

re

se rv

= =

ed

.IS

1.20 0.2 + r 3.90 r

1.20 (0.2 x 3.90) 1 (1.20 0.78) 3.90 0.10769 10.77%.

20 04

Growth rate in PCI Where gp is growth rate in population Growth rate in PCI

= =

338

BN

24 = 6% 4

(1 + g y ) 1 x 100 (1 + g p )

1.06 1 x 100 1.03

2.91%.

:8

3.90

1-

31

4-

02

New m

27

-4

Ms Target

ef .N

Now, H

o.

M AC

43. (a) Foreign Exchange Inflow

= = = = = =

US $ 10 m 10 x 50 MUC 500 MUC 20,000 + 500 20,500 80,000 80,000 = 3.90 20,500

04

20

04

Money supply = 20,000 x 4

04

Part III

Equating the IS and LM functions, we can get the equilibrium interest rate. 2,340 30i = 500 + 200i 230i = 1,840
1,840 = 8% 230

= 2,340 30(8)

= 10 + 0.1 (2,100) = 10 + 210 = 220 E = 225

Th e

Hence, at equilibrium, 2,340 30i 230i i = 500 + 200i = 1,840 =


1,840 = 8% 230

20 04

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

Ic

fa

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.

iU

ni

ve rs i

Budget deficit

ty

tY

= 0.2 x 2,100 = 420 = 440 420 = 20 MUC.

Pr es

G + R = 400 + 40

s. Al

Hence, trade balance = 225 220 = 5 (surplus) = 440

lr

ig

ht

re

se rv

ed

= 10 + 0.1Y

.IS

= 2,340 240 = 2,100

BN

:8

1-

= 2,340 30i

31

4-

02

i =

27

-4

ef .N

Hence,

o.

M AC

46. (a) IS Function Savings function = 25 + 0.25Yd Hence, consumption function = 25 + 0.75Yd Y = C+I+G+EM Y = 25 + 0.75 (Y 0.2Y + 40) + 500 15i + 400 + 225 (10 + 0.1Y) Y = 25 + 0.6Y + 30 + 500 15i + 400 + 225 10 0.1Y Y = 1,170 0.5Y 15i 0.5Y = 1,170 15i Y = 2,340 30i ..... IS function LM Function Ms Mt Ma = + P P P 250 = 0.25Y + 125 50i 0.25Y = 125 + 50i Y = 500 + 200i LM function

04

20

04

04

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.

49. (b) Revenue Deficit = Revenue Expenditure Revenue Receipts Revenue Expenditure = Non-Plan Revenue Expenditures + Plan Revenue Expenditure = 2,50,341 + 60,225 = Rs.3,10,566 cr. Revenue Receipts = Tax Revenue + Non-Tax Revenue = 1,63,031 + 68,714 = Rs.2,31,745 cr. Revenue Deficit = (3,10,566 2,31,745) = Rs.78,821 cr.

20 04

340

Th e

Ic

fa

iU

ni

ve rs i

Tax rate (t) =

788.5 T = 24.45%. = Y 3, 225.57

ty

Pr es

At Equilibrium, IS = LM 4015.43 271.43i = 2,500 + 250i 1515.43 = 521.43i i = 2.91 Y = 3,225.57

s. Al

lr

ig

ht

re

se rv

1,405.4 95i 0.35

ed

.IS

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

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part III

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. 51. (a) Personal Disposable Income (PDI) Personal Savings PDI = Personal Income Personal Tax Payments = 8,000 450 = 7,550 MUC. Personal Savings = Net Domestic Savings Retained Earnings + Budget Deficit Retained Earnings = Net Corporate Profits Corporate Profit Tax Dividends = 1,100 350 250 = 500 MUC Personal Savings = 1,600 500 + 100 = 1,200 MUC Personal consumption = 7,550 1,200 = 6,350 MUC.

52. (c) At equilibrium, demand for money (Md) = Supply of money (Ms). 4,10,000 15,000i = 3,50,000 15,000i = 60,000 i = 4%. If interest rate is to be decreased by one percentage point, equilibrium rate should be 3%. If i = 3%

To ensure equilibrium, Md = Ms.

Pr es

Ms

53. (a) Multiplier = 1/(1 MPC + MPV + MPI) where, MPC = Marginal Propensity to Consume, MPV = Marginal Propensity to Invest and MPI = Marginal Propensity to Import. Thus, multiplier = 1/(1 0.75 + 0.15 0.15) = 1/0.25 = 4. Thus, if exports increase by 25, the income will increase by 4 x 25 = 100 MUC. 54. (b) Velocity of money = Y/Ms Y = C + I + G + E M = 500 + 150 + 140 + 80 60 = 810 Thus, velocity of money = 810/162 = 5. 341

20 04

Th e

Ic

fa

iU

If the Central Bank buy government securities worth 3,000 MUC, the equilibrium rate of interest can be decreased by one percentage point.

ni

ve rs i

ty

s. Al

lr

= 3,65,000 3,50,000 = 15,000 MUC


= M s 15,000 = = 3,000 MUC m 5

ig

Required change in the money supply

ht

Ms

= 3,65,000.

re

se rv

ed

= 3,65,000.

.IS

Md

= 4,10,000 (15,000 x 3)

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

55. (a) Ms = [(1 + Cu)/(Cu + r)] x High-powered money 45,000 = 12,000 [(1 + 0.33)/(0.33 + r)] 3.75 or, r = [1.33/(0.33 + r)] = 0.025.

56. (e) Derivation of IS Function: At equilibrium, Y = AD Y = C + I + G + NE = (400 + 0.8Yd 20i) + 250 + 0.3Y 80i + 600 + 450 100 0.1Y Y = 400 + 0.8(Y 0.25Y + 100) 20i + 250 Y = 1680 + 0.8Y 100i Y = 8400 500i Derivation of LM function: At equilibrium, real money demand = real money supply 360 = 0.2Y 20i 0.2Y = 360 + 20i Y = 1800 + 100i Thus, at simultaneous equilibrium, 8400 500i = 1800 + 100i 1320 = 120i Or, i = 11 And, Y = 8400 500 (11) = 2900 = 0.25(2900) 600 100 = 25 410 = 0.2Y + 50 20i 0.2Y = 1680 100i + 0.3Y 80i + 1050 100 0.1Y

If government wants to maintain the same budget surplus even after the increase of government expenditure, then or, T = 25 + (600 + 100) + 100 = 825 Now, new IS function = C + I + G + NE = Y or, Y = 1120 + Y 100i 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%. 57. (d) New issue ratio = New issues/Net capital formation New issues = Secondary issues/Intermediation ratio Net capital formation = Total issues/Financial interrelation ratio For the year, new issues = 15000/0.8 = 18,750. Net capital formation = (18750 + 15000)/1.25 = 27,000. New issue ratio = 18,750/27,000 = 0.70. 342

20 04

Th e

Ic

fa

Or, 100i = 1120

iU

ni

ve rs i

Y = 400 + 0.8(Y 725) 20i + 250 + 0.3Y 80i + 700 + 450 100 0.1Y

ty

Pr es

And, Yd = Y 825 + 100 = Y 725

s. Al

lr

ig

Tax revenue (T) {New Government spending (G) + Transfer payments (R)} = 25

ht

re

se rv

ed

.IS

Budget surplus (deficit): Tax revenues Government expenditure Transfer payments

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part III

58. (c) GNPMP = GDPFC + NFIA + Indirect taxes Subsidies 2292 = 2000 + 200 + 542 X X = 2292 +2200 + 542 = Rs.450 cr. 59. (d) Marginal propensity to consume (MPC) = C/ Y = 80/100 = 0.8 Multiplier = Y/ I = 100/40 = 2.5 = 1/(1 MPC + MPC x t + MPI) = 1/(0.2 + 0.8t + 0.1) = 1/(0.3 + 0.8t) Or, 2.5(0.3 + 0.8t) = 1 Or, 0.75 + 2t = 1 Or, 2t = 0.25 Or, t = 0.125 or 12.5% At equilibrium, Y = C + I + G + NE = {50 + 0.8(Y 0.125Y)}+ 50 + 140 + 100 0.1Y Y = 340 + 0.7Y 0.1Y Or, 0.4Y = 340 Or, Y = 850 MUC. 60. (d) At the steady state level of consumption, Ct = Ct-1 Given the equation, Ct = 10 + 0.7Ydt + 0.3Ct-1

20 04

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 = = 5 9.18% = 45.9% of GDP 45% of GDP. 343

Th e

Ic

fa

iU

ni

ve rs i

62. (d) Required nominal growth rate = Real GDP growth rate + Population growth rate = 3% + 6% = 9%

ty

Pr es

61. (d) C = 8 + 0.7Y S = 8 + 0.3Y At equilibrium, S = I 8 + 0.3Y = 22 0.3Y = 30 Y = 100 MUC.

s. Al

lr

ig

ht

re

se rv

ed

.IS

Or, Ct/ Ydt = 0.7/0.7 = 1 Thus, if Ydt increases by 100, then the steady state level of consumption also increases by 100 MUC.

BN

:8

1-

31

Ct = 10 + 0.7Ydt + 0.3Ct since Ct = Ct-1 Or, 0.7Ct = 10 + 0.7Ydt

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

63. (a) Balance of Trade (BoT) = Merchandise imports Merchandise exports = 20,000 18,000 = 2,000 MUC (deficit). 64. (a) Current account balance = Merchandise exports Merchandise imports + Software exports Software imports + Earnings on loans and investments abroad Earnings on loans and investments by foreigners + Private remittances from abroad Private remittances to abroad = 18,000 20,000 + 16,000 12,000 + 400 1,000 + 150 200 = 1,350 MUC Cr. 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.

67. (a) LM function Y = 500 + 20i If, i = 10%, Y = 500 + (20 10) i = 7%, i = 5%, i = 4%, i = 2%, Y = 500 + (20 7) Y = 500 + (20 5) Y = 500 + (20 4) Y = 500 + (20 2) = 700 = 640 = 600 = 580 = 540

Change in tax income = Tax rate (t) x Change in income (Y) = 2 x (-250) x 0.285 = 142.5 Change in budget deficit = 250 142.5 = 107.5 MUC. 80000 = H x {(1 + 0.2)/(0.2 + 0.1)}

20 04

70. (c) Transaction demand for money = 500 Speculation demand for money = 250 (5 10) = 200 Demand for money = 500 + 200 = 700 Money supply = 700 MUC.

344

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.

Ic

fa

Total assets = Total liabilities (Non-Monetary Liabilities + Monetary Liabilities)

iU

ni

Or, ML = 20000 1050 = 18950.

ve rs i

H = Monetary Liabilities of the Central Bank + Government money = ML + 1050

ty

Or, H = 20,000 MUC

Pr es

s. Al

69. (b) Money supply = High-powered money (H) x Money multiplier

lr

ig

ht

Change in government expenditure (G) = 250

re

se rv

ed

= 1/(1 0.7 + 0.7 x 0.285) = 2

.IS

68. (a) Multiplier = 1/(1 MPC + MPC x t)

BN

:8

(a) does not fall on the LM curve hence does not represent an equilibrium in the money market.

1-

31

4-

02

27

-4

ef .N

o.

M AC

= Rs.400 crore.

04

20

66. (d) Y=Multiplier I =

1 100 1 0.75

04

04

Model Question Paper II


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. An increase in the money supply a. Must lower interest rates for all the time b. Raises interest rates for all the time c. Cannot affect the interest rate since it is a unit free pure number d. Though it tends to lower interest rates at first, but may end up raising nominal interest rates (by speeding up inflation) e. Fiscal deficit will increase. 2. Net factor income from abroad is equal to a. GDP GNP b. GNP GDP c. GDP/GNP d. GNP/GDP e. None of the above. Potential GDP is a. b. c. d. e. 4. a. b. c. d. e. 5.

Total Points: 100

The total value of goods and services measured at current prices The total value of goods and services measured at prices corrected for inflation The total value of goods and services net of government spending The total value of goods and services that could be produced at full efficiency. The sources of inflation, unemployment, economic growth. The reasons, why some economies succeed and some fail. Policies that can be enacted to improve the likelihood of success in achieving macroeconomic objectives.

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. A price index is necessary if: a. Nominal GDP is to be calculated b. Nominal GDP is to be converted into real GDP c. Profits are to equate the two accounting measures of GDP d. Disposable income is to be converted to personal income e. All the above statements are equally valid.

20 04

6.

Th e

Ic

fa

All of the above.

iU

ni

ve rs i

ty

Pr es

The foundations of aggregate behavior.

s. Al

lr

ig

The study of macroeconomics includes, among other topics, which of the following?

ht

re

se rv

ed

.IS

The total value of goods and services that could be produced at full employment

BN

:8

1-

3.

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

7.

Suppose that people were suddenly to decide to save less of their disposable incomes. You should expect to observe a. b. c. d. e. An increase in the marginal propensity to consume A reduction in the marginal propensity to consume An increase in the marginal propensity to save An increase in the sum of the marginal propensity to consume and the marginal propensity to save

a. b. c. d. e. a. b. c. d. e.

Whenever there is full employment Whenever there is full employment without government interference Whenever the desired saving equals the desired investment Whenever actual saving equals actual investment.

Tax reductions tend to increase personal savings.

c. d. e. a.

Stabilization

11. Aggregate supply in the economy depends upon

Th e

b. c. d. e. a. b. c. d. e.

20 04

12. Philips curve shows the relationship between GDP and investment Unemployment rate and rate of inflation CPI and inflation Savings rate and equilibrium output None of the above.

346

Ic

fa

The availability of inputs The level of technology The level of wages The level of import prices

All of the above.

iU

ni

Exchange mechanism.

ve rs i

Monetary mechanism

ty

Pr es

b.

Sterilization

s. Al

a.

Transmission mechanism

lr

ig

ht

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

re

se rv

ed

.IS

Tax reductions tend to increase consumption.

BN

Tax reductions tend to stimulate output.

:8

1-

Tax reductions can cause inflation.

31

Whatever else tax reductions do, the personal consumption resulting from tax reductions must stimulate the real GDP.

4-

02

27

9. Which of the following statements is false?

-4

ef .N

o.

M AC

Only if marginal propensity to save equals marginal propensity to invest

04

20

8.

On the basis of the Keynesian model of output determination, GDP is in equilibrium

04

04

An increase in the marginal propensity to consume and a corresponding increase in the sum of the marginal propensity to consume and marginal propensity to save.

Part III

13. Which of the following g is most important in increasing the rate of economic growth? a. b. c. d. e. 14. A highly progressive tax structure. High interest rates on time deposits. Increasing the percentage of GDP used for investment. A constant supply of funds available to investors. Reducing inequality of income distribution and wealth.

Keynes held that money is used a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. To settle transactions To meet unexpected contingencies To take advantage of fluctuating rates of interest All of (a), (b) and (c) above. Policy variables Exogenous variables Endogenous variables Macroeconomic variables of an economy None of the above. Both (a) and (b) above

15. Unemployment, inflation and the rate of growth of actual GDP are all examples of

There is too much liquidity in the economy The firms in the economy are facing credit crunch The country faces a severe shortage of foreign exchange Interest rates do not decrease, no matter how much the money supply is expanded None of the above.

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

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

17. Liquidity trap refers to a situation where

ig

ht

Retained profit = National income Personal income.

re

GDP at factor cost = GNP at market prices Indirect taxes + Subsidies.

se rv

National income = NNP at factor cost Depreciation.

ed

.IS

Personal income = National income Retained earnings Corporate taxes.

BN

Personal income = National income Retained earnings + Corporate taxes.

:8

16. Which of the following relationships is true?

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Macroeconomics

20. Curve that illustrates the relationship between the rate of change in prices and the rate of unemployment is known as a. b. c. d. e. Lucas supply curve Laffer curve Philips curve Classical aggregate supply curve Keynesian aggregate supply curve.

22. Velocity of circulation means a. b. c. d. e. a. b. c. d. e. a. b. c. d. The ratio of money supply to income The ratio of money demand to income The ratio of money demand to money supply

The average turnover of money in a period, relative to the national income

23. Which of the following is true regarding Laffer curve? Increase in tax rate always leads to a decrease in tax revenue since people search for alternatives to evade tax. Increase in tax rate, up to a certain level, leads to an increase in tax revenue and later results in decrease of tax revenue.

24. Supply of money remaining constant, an increase in demand for money, will result in An increase in the rate of interest

Th e

20 04

e. a. b. c. d. e.

25. A neoclassical aggregate supply schedule exists At an output rate greater than the natural rate of unemployment At an output level determined by the supply of and demand for labor When the demand for labor and supply of labor schedules adjust immediately to a change in the price level When equilibrium in the labor markets is unaffected by shifts in the supply of labor schedule None of the above.

348

Ic

fa

A decrease in the rate of interest Both (a) and (c) above.

An increase in level of income and employment

iU

ni

A fall in the level of prices

ve rs i

ty

None of the above.

Pr es

Decrease in tax rate leads to an increase in tax revenue since more people will come forward to pay taxes.

s. Al

lr

ig

ht

re

se rv

ed

Increase in tax rate always leads to an increase in tax revenue.

.IS

BN

:8

The ratio of money demand to supply of high-powered money.

1-

31

4-

02

27

-4

ef .N

o.

e.

Swap market.

M AC

d.

Spot market

c.

Future market

04

b.

Forward market

20

04

a.

Euro currency market

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

Part III

26. A current account deficit implies that a. b. c. d. e. There is net debt balance in the merchandise account There is net credit balance in the merchandise account 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 Decrease in Foreign Exchange Reserves Increase in Foreign Exchange Reserves.

d. e.

Reduces the rate of interest and changes the composition of output None of the above.

29. Other things remaining constant, an increase in the marginal propensity to import will a. b. c. d. e. Increase the multiplier Increase the consumption in the economy Reduce the multiplier

Not affect the income in the economy.

30. An expansionary monetary and fiscal policy shifts b. c. d. Aggregate demand to the left Aggregate supply to the right Both (a) and (c) above. Aggregate supply to the left

20 04

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. Gross National Product at market prices Gross Domestic Product at market prices Net National Product at market prices Gross National Product at factor cost Gross Domestic Product at factor cost.

Th e

e.

Ic

fa

iU

a.

Aggregate demand to the right

ni

ve rs i

ty

Pr es

s. Al

Decrease the investment in the economy

lr

ig

ht

re

se rv

ed

e.

None of the above.

.IS

BN

d.

An increase in the price level and a decrease in real output

:8

c.

An increase in the price level and real output

1-

31

b.

No change in real output and proportional increases in the price level

4-

02

a.

No change in the price level and proportional increases in real output

27

28. When the aggregate supply schedule is positively sloped, continuous increases in the nominal money supply, ceteris paribus, result in

-4

ef .N

o.

M AC

c.

Causes a proportional increase in real output

W
349

b.

Has no effect on the real money supply or the composition of output

04

20

a.

Causes the real money supply to increase, which changes the composition of output

04

27. Suppose there is full employment and a vertical aggregate supply schedule. An increase in the nominal money supply

04

Macroeconomics

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. 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.

a. b. c. d. e. a. b. c. d. e. a. b. c. d. e.

Remain unchanged

Rise, but by less than the anticipated increase in the rate of inflation

Domestic income exceeds domestic spending Domestic savings exceed domestic investment

Shift both IS and LM curves to the right Shift both IS and LM curves to the left Not affect the position of IS curve but shift the LM curve to right

20 04

a. b. c.

Th e

d. e.

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

Ic

37. Increase in net RBI credit to the Central Government is reflected in which of the following?

fa

Budget deficit. Revenue deficit. Monetized deficit. Gross primary deficit. Gross fiscal deficit.

iU

Not affect the position of LM curve but shift the IS curve to right.

ni

ve rs i

ty

Not affect the position of LM curve but shift the IS curve to left

Pr es

s. Al

lr

36. An increase in government expenditure will

ig

ht

None of the above.

re

se rv

Exports exceeds imports

ed

.IS

BN

Domestic spending exceeds domestic income

:8

35. A current account deficit implies that

1-

31

Fall, but by less than the anticipated increase in the rate of inflation.

4-

02

27

Fall by the same percentage as the increase in the anticipated rate of inflation

-4

Rise by the same percentage as the increase in the anticipated rate of inflation

ef .N

o.

34. If the anticipated rate of inflation rises, other things remaining constant, we would expect the nominal interest rate to

M AC

04

20

04

04

Part III

Part B: Problems (60 Points)


Solve all the problems. Points are indicated against each problem. 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 (Million units of currency) 5,000 1,500 700 1,300 500 600 200 50 Nil

41. The following information is available from National Income Accounts of a country:

ve rs i

ty

The Net Domestic Product of the country at market prices is a. 6,500 MUC b. 7,000 MUC c. 7,500 MUC d. 8,000 MUC e. 8,500 MUC.

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

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.

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)

20 04

Th e

Ic

fa

iU

42. The following information is available from National Income Accounts of a country:

ni

04

(2 points)

20

04
351

04

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) Savings Function Disposable income Transfer payment Tax Function Private investment function Exogenous government expenditure Import function Exports Transaction demand for money Speculative demand for money Money supply The equilibrium income of the above economy is a. 4,500 MUC b. 4,525 MUC c. 4,550 MUC d. 4,575 MUC e. 4,600 MUC. (S) (Yd) (R) (T) (I) 80 + 0.1875 Yd + 5i YT+R 80 0.2Y 600 + 0.05Y 15i 965 20 + 0.10Y 0.25Y 200 50i 600 450

(G )
(M)

20 04

Disposable income Transfer payment Tax function Exogenous government expenditure

fa

iU

(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.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

(Yd) (R) (T)

BN

:8

Th e

Ic

(G)

Goods market equilibrium (IS) 0.4Y = 2140 20i Money market equilibrium (LM) 0.25Y = 400 + 50i Suppose exports increase by 100 MUC, what is the impact on the budget deficit? a. b. c. d. e. Decrease by 60 MUC. Increase by 60 MUC. Decrease by 50 MUC. Decrease by 70 MUC. None of the above. (3 points) 352

1-

31

YT+R 80 0.2Y 965

4-

02

27

-4

ef .N

Ms P

o.

M AC

Ma P

04

Mt P

20

04

04

(E)

Part III

46. The following are the indicators of financial development of the economy: 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.

se rv

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.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
(1 point) (1 point) 353

47. The following are the indicators of financial development of the economy:

20 04

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 (Million units of currency) 1,000 50 100 1,500 800 1,200 200 300

Th e

New is sues ratio 0.74 Net physical capital formation 2,00,445 Secondary issues 1,15,605 What is the Intermediation Ratio in the economy? a. 0.69. b. 0.86. c. 0.78. d. 0.92. e. None of the above.

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

48. The following monetary data on financial development of an economy has been obtained for the year 2000-2001.

ig

ht

re

04

(2 points)

20

04

04

Macroeconomics

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. 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)

Particulars Merchandize exports Merchandize imports Services rendered by Indians to rest of the world

BN

.IS

:8

51. The following information is related to external transactions of India for the year 2000-01. US $ million 44,894 59,264 19,185

Services rendered by rest of the 16,392 world to Indians Foreign investment in India 12,617 Foreign investment abroad 9,706 Loans by India 18,545 Loans to India 23,076 Transfers and income to India 15,577 Transfers and income from India 6,264 Other capital (credit) 16,133 Other capital (debit) 16,088 Errors and omissions (credit) 633 What are the current and capital account balances of the country for the year 2001? a. b.

20 04

Th e

c. d. e.

Ic

fa

$2,264 million and $ 7,487 million respectively. $ (2,126) million and $ (7,487) million respectively. $ (2,392) million and $ 6,235 million respectively. $ 2,448 million and $ (6,235) million respectively. None of the above. (2 points)

354

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

(3 points)

04

Part III

52. The following estimates are extracted from the Union Budget for the year 2001-02. 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.

02

27

-4

ef .N

o.

M AC

W
(3 points) (2 points) 355

20 04

54.

Th e

Particulars Sales to government Indirect taxes Corporate profits Corporate profit tax Depreciation Transfer payments Dividends Subsidies Personal tax payments Personal savings

Ic

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.

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

(Million units of currency) 1,500 700 2,000 800 600 300 200 50 200 150

ed

.IS

BN

:8

1-

53. The following information is available from National Income Accounts of a country:

31

4-

04

20

04

04

Macroeconomics

The Gross Domestic Savings for the current year is a. b. c. d. e. 1,450 1,550 1,600 1,700 1,650. (2 points) 55. The consumption function for an economy is ascertained as 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)? a. b. c. d. e. 759.50 MUC. 782.35 MUC. 794.15 MUC. 802.25 MUC. 808.10 MUC. Ct = 250 + 0.60 Ytd + 0.20 Ct1

4-

02

27

-4

ef .N

o.

M AC

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) b. c. d. e. 10.50%. 11.25%. 15.00%. 16.00%.

ve rs i

ty

Pr es

s. Al

lr

ig

a.

10.04%.

ht

re

se rv

ed

.IS

BN

:8

1-

31

Ic

fa

57. The following information relates to an economy: Particulars National income Wages & Salaries Interest income Rental income MUC 300 180 45 30

20 04

Th e

The profit in the economy is a. b. c. d. e. 15 MUC 25 MUC 35 MUC 45 MUC 55 MUC. (1 point)

356

iU

ni

04

(2 points)

(2 points)

20

04

04

Part III

Answer Questions 58-61 based on the following information: 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 MUC 5,000 4,200 1,075 800 750 75 100 650 350 350 950 300 150

31

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.

4-

02

27

-4

ef .N

o.

M AC

W
(1 point) (2 points) (1 point) (3 points) 357

61. The current account balance in the economy is a. 225 MUC b. 325 MUC c. 375 MUC d. 875 MUC e. None of the above. 62. The following information is extracted from National Income Accounts of an economy: Investment by business sector = 100 MUC Corporate profit tax = 50 MUC Dividends paid by the business sector = 15 MUC Retained earnings = 20 MUC

20 04

Th e

Ic

fa

iU

60. Personal income in the economy is a. 3,525 MUC b. 3,375 MUC c. 3,675 MUC d. 4,725 MUC e. 5,025 MUC.

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

59. The value of GDP at factor cost is a. 4,100 MUC b. 4,150 MUC c. 4,250 MUC d. 4,300 MUC e. 4,400 MUC.

re

se rv

ed

.IS

BN

:8

1-

04

20

04

04

Macroeconomics

Corporate profits for the economy is a. 20 MUC b. 35 MUC c. 85 MUC d. 150 MUC e. 185 MUC. (1 point) 63. Consider the following data: 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 a. b. c. d. e. 10 MUC 20 MUC 30 MUC 40 MUC 50 MUC.

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

Pr es

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.

s. Al

lr

ig

ht

re

se rv

ed

.IS

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.

ve rs i

65. The following information is extracted from the National Income Accounts of an economy: MUC 500 20 200 25 60 15 100 5 100

20 04

Th e

Ic

fa

iU

ni

ty

358

04
(2 points) (1 point) (2 points)

20

04

04

Part III

se rv

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%.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

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:

ef .N

o.

M AC

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%. (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

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

04

(1 point)

20

04

04

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 a. b. c. d. e. 0.1% 1.0% 3.0% 10.0% 30.0%. (1 point)

b. c. d. e.

Rs.2,250 Rs.2,500 Rs.5,000 None of the above.

27

-4

ef .N

o.

M AC

a.

Rs.250

W ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 131 402


(1 point) (1 point) (1 point)

74. There are different stages in the production of good Zebra. The values at each stage are given as under: 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 a. b. c. d. e. 20 and 120, respectively 50 and 120, respectively 20 and 100, respectively 50 and 100, respectively 20 and 50, respectively.

Th e

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. c. d. e.

20 04

b.

360

Ic

fa

2 3 4 5 6.

iU

ni

ve rs i

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

04

20

04

04

Macroeconomics

Model Question Paper II


Suggested Answers
Part A: Basic Concepts
1. (d) Increase in money supply reduces the interest rates but it may end up raising the nominal rates by increasing inflation. 2. (b) GNP = GDP + Net factor income from abroad. 3. (b) Potential GDP is the maximum feasible GDP of an economy when all the resources are fully employed.

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

20 04

Th e

Ic

fa

iU

ni

ve rs i

12. (b) Philips curve shows the relationship between the inflation rate and unemployment rate.

ty

Pr es

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).

s. Al

lr

ig

10. (b) Sterilization is neutralization of changes in the money supply caused by changes in the foreign exchange reserves of a country.

ht

re

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.

se rv

ed

.IS

BN

8. (d) According to the Keynesian model of output determination, GDP is in equilibrium when planned savings equals planned investment.

:8

1-

31

7. (a) If the people decide to save less, MPS decreases. So MPC increases. [Hint: MPC = Y MPS].

4-

02

27

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].

-4

ef .N

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.

o.

M AC

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.

04

20

04

04

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. 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.

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. b. c. d. e. 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. 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. NNPMP is GNPMP depreciation. 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. 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

Th e

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.

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

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.

s. Al

lr

ig

ht

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.

re

se rv

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.

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

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.

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.

20

04

04

Part III

32. (a) Quantity theory of money (QTM) says MV = PY Where, M = money supply V = velocity of money P = price level Y = real GDP PY = nominal GDP Assuming V is a constant, a change in M leads to an equal percentage change in PY. 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.

Th e

b. c. d. e.

20 04

40. (d) Financial Inter relations ratio = Or =


Total Financial Claims Issued Net Physical Capital Formation Total Stock of Financial Assets Total Stock of Physical Assets

Therefore, the Answer is (d).

Ic

fa

iU

ni

ve rs i

39. (d)

a.

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.

ty

Pr es

38. (d) M2 = M1 + Post office savings Bank Deposits M3 = M1 + Time Deposits M4 = M3 + All post office deposits. The answer is (d).

s. Al

lr

ig

ht

37.

(c) Increase in net RBI credit to government is called Monetized deficit.

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04
363

04

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. 42. (a) GNP at factor cost = NDPMP + Depreciation Indirect taxes + Subsides + Net factor income from abroad

Yd

= =

(Y T + R) = (Y 0.2Y + 80) 0.8Y + 80 80 + 0.8125 [0.8Y + 80] 5i = 145 + 0.65Y 5i.

0.25Y Y

Equilibrium Y and i can be found by equating (1) and (2) 5,350 50i

iU

ni

ve rs i

ty

Pr es

= 400 + 50i = 1,600 + 200i . (2)

= = = = =

s. Al

600

= 0.25Y + 200 50i

Ic

fa

250i

Th e

i Y

20 04

44. (a) At equilibrium, 5,350 50i = 1,600 + 200i 250i = 3,750 i = 3,750/250 = 15 Hence, Y = 5,350 50 (15) = 4,600. Trade balance = 450 [20 + 0.10 (4,600) ] = 30 MUC. 364

lr

ig

Money Supply = 600

ht

1,600 + 200i 3,750 15% 5,350 (50 x 15) 4,600.

re

Money demand (Md) = 0.25Y + 200 50i

se rv

2,140 + 0.60Y 20i 2,140 20i Y = = 5350 50i . (1) 0.40 LM Function

ed

.IS

BN

:8

1-

145 +0.65Y 5i + 600 + 0.05Y 15i + 965 + 450 (20 + 0.10Y)

31

4-

C + I + G + (E M)

02

27

IS Function

-4

ef .N

o.

M AC

80 + 0.8125 Yd 5i

04

43. (e)

80 + 0.1875 Yd + 5i

20

= 7,500 + 600 700 + 50 + 0 = 7,450.

04

04

Part III

45. (e) 0.4Y = 2,140 20i Y = 5,350 50i 0.25Y = 400 + 50i Y = 1,600 + 200i At equilibrium, 5,350 50i = 1,600 + 200i 250i = 3,750 Or, i = 15%. Hence, Y = 5,350 50(15) = 4,600. Budget deficit = T G R = 0.2(4,600) 965 80. 920 965 80 = 125. If exports increase by 100, the new IS function would be 0.4Y = 2,140 + 100 20i Or, Y = 5,600 50i At equilibrium, IS = LM Thus, 5,600 50i = 1,600 + 200i 250i = 4,000 i = 16%. Y = 5,600 50(16) = 4,800

= 12,000 + 8,400 = 20,400 (MUC) FIR

iU

ni

ve rs i

ty

Total Issues Net Physical Capital Formation (NPCF)


20,400 = 17,000 (MUC). 1.20

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.

Th e

Ic

fa

NPCF =

Pr es

s. Al

lr

Total issues = New issues + Secondary issues

ig

ht

= 8,400 (MUC)

re

Secondary issues for the year 2001= (0.70 x 12,000)

se rv

ed

46. (b)

IR =

Secondary issues New issues

.IS

BN

Thus, budget deficit = T G R = 0.2(4,800) 965 80 = 85. Thus, decrease in budget deficit=12585=40 MUC.

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
365

0.4Y = 2,240 20i

04

20

04

04

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 1 + 0.2 0.2 + 0.10

= 3,000 MUC

Since Government money is negligible, H equals MLRBI.

ht

51. (e)

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. US $ Millions Credit 4489 34762 19185 15577 79656 Debit 59264 22656 16392 6264 81920 Net (1437) 12106 2793 9313 (2264)

A.

Current Account i. ii.

Merchandise

iU

ni

Th e

B.

20 04

Ic

fa

Total current Account (i + ii)

Capital Account i. ii. iii. Foreign investment Loans Other capital 12617 23076 16133 51826 633 132115 9706 18545 16088 44339 126259 5856 2911 4531 45 7487 633 5856 (5856)

Total Capital Account (i + ii + iii) C. D. E. Errors and Omissions Overall Balance (A + B +C) Foreign Exchange Reserves

366

ve rs i

Invisibles (a + b)

a.

b.

ty

Services

Transfers and Income

Pr es

s. Al

lr

ig

ed

.IS

Reserve Ratio = CRR + Excess Reserve Ratio = 0.1 + 0.1 = 0.2

BN

Cu = 0.2

:8

Ms = 12,000

1-

31

50. (b) H = 3,000

4-

02

Therefore, net foreign exchange assets of the country are 500 MUC.

27

NFEA

3,000 2,500 = 500 MUC.

-4

3,000

3,500 + NFEA + 300 1,300

ef .N

1,000 + 100 + 200 = 1,300 MUC.

o.

NMLRBI

Net Worth + Government Deposits + Other Non-Monetary Liabilities

M AC

1,500 + 800 + 1,200 + NFEA = 3,500 + NFEA.

04

FARBI

Credit to Government + Credit to Commercial Sector + Credit to banking sector + Net Foreign Exchange Assets (NFEA).

20

04

MLRBI

Financial Assets of RBI (FARBI) + Other Assets Non-monetary Liabilities (NMLRBI).

04

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 PDI PI NNPFC PI PDI Personal Savings = Personal Disposable Income (PDI) Personal Consumptions = Personal Income (PI) Personal Income Tax = NNPFC Corporate profits + Dividends + Transfer payments = GNPFC Depreciation = 7,450 600 = 6,850 MUC = 5,350 200 = 5,150 MUC = 6,850 2,000 + 200 + 300 = 5,350 MUC = 5,150 5,000 = 150 MUC.

Ct

When

iU

ni

If

20 04

56. (e) Money multiplier = {(1 + 0.4)/(0.4 + 0.10)} = 2.8 Money supply (before increase of foreign exchange reserves) = 2.8 x H = 2.8 x (50000) = 140,000. Computation of new CRR: 140,000 = {(1 + 0.4)/(0.4 + r)} (50000 + 500 12) 140,000 = {1.4/(0.4 + r)} 56000 0.4 + r = (1.4 x 56000/140,000) or, r = 0.56 0.4 = 0.16 =16%. 367

Th e

Ytd

Ic

Ct+1 = 250 + (0.60 x 600) + (0.20 x 687.5) = 747.50 MUC Ct+2 = 250 + (0.60 x 600) + (0.20 x 747.50) = 759.50 MUC. Consumption in the second period, Ct+2, is 759.50.

fa

increase by 100,

ve rs i

Ytd = 500
= 312.5 + (0.75 x 500) = 687.5 MUC

Ct

ty

= 312.5 + 0.75 Ytd .

Pr es

250 + 0.60Ytd 0.80

s. Al

lr

ig

0.80 Ct

= 250 + 0.60 Ytd

ht

re

Ct = 250 + 0.60 Ytd + 0.20 Ct

se rv

At steady state level of consumption.

ed

.IS

Ct = Ct-1

BN

At steady state level of consumption.

:8

1-

55. (a)

Ct = 250 + 0.60 Ytd + 0.20 Ct 1

31

4-

Gross Domestic Savings = 1,000 150 + 150 + 600 = 1,600 MUC.

02

27

-4

BS = Tax Revenue Government Purchases Transfer Payments Subside = (700 + 800 + 200) 1,500 300 50 = 150 MUC

ef .N

RE = Corporate ProfitsCorporate Profit tax Dividends = 2,000 800 200 = 1,000 MUC

o.

M AC

54. (c) Gross Domestic Savings = Retained earnings (RE) + Budget surplus + Personal savings + Depreciation.

04

20

04

04

Macroeconomics

64. (d) At break-even level of disposable income, savings are zero. 0.25 Yd Yd = 300

66. (c) At simultaneous equilibrium, 0.5Y = 2860 60i (or) Y = 5720 120i is equal to Y = 2600 + 400i Or, 5720 120i = 2600 + 400i Or, 3120 = 520i Or, i = 6 Thus, Y = 2600 + 400(6) = 5000 When government spending is raised to meet the objective, Y = 5000 + 10% = 5500. If Y = 5500, then using LM function, 400i = 5500 2600 (or) i = 7.25% Initial investment = 800 50 (6) = 500 New investment = 800 50 (7.25) = 437.5 Change in investment = 500 437.5 = 62.5 MUC. 67. (b) Money supply = Money demand = (Transaction-cum-precautionary demand for money + speculative demand for money) Thus, 250 = (0.2 x 700) + (150 50i) Or, 110 = 150 50i Or, 50i = 40 Or, i = 0.8%. 368

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

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.

lr

ig

ht

re

300 = 1,200 MUC. 0.25

se rv

ed

.IS

= 300 + 0.25Yd = 0

BN

:8

1-

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.

31

4-

02

27

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.

-4

ef .N

o.

M AC

04

20

04

04

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 = NFIA = = = GNP = = GDP + NFIA Factor income received from abroad Factor income paid abroad. 100 200 100 8000 100 7900 MUC.

Money supply (Ms) = Money demand (Md) = 0.25(600) + 150 20(3) = 240 Ms = 240 Thus, velocity of money = 600/240 = 2.5 (Working notes: Y = 600 = 750 50i Or, i = 150/50 = 3). 72. (d) Money supply (Ms) 6000 Or, r

50% of total money which is held in the form of currency is Rs.2,500. Given the reserve ratio of 10%, required reserves are 2,500 0.10 = Rs.250. 74. (a) Total value added in the process = Market value of the final product = 120 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.

ty

Pr es

s. Al

lr

ig

ht

Demand deposit component of money supply is Rs.2,500.

re

se rv

73. (a) Total money = Rs.5,000.

ed

.IS

= 10%.

BN

= (2000 - 500) {(1 + 0.2)/(0.2 + r)

:8

= High-powered money (H) x {(1 + Cu)/(Cu + r)}

1-

31

4-

02

27

-4

ef .N

o.

M AC

71. (d) Velocity of money = Y/Ms

W
369

04

20

04

04

Model Question Paper III


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. Ceteris paribus, if government expenditure increases a. b. c. d. e. 2. The output is likely to fall

Total Points: 100

a. b. c. d. e. 3.

Goods that are very expensive. Goods that are in scarce or limited supply.

Which of the following could be an objective of monetary policy?

b. c. d. e. 4.

Lower the inflation rate.

Lower the unemployment rate.

a. b.

An increase in output is greater than the increase in investment

Th e

c.

20 04

d. e.

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. Higher prices with no change in output Higher prices with higher output Higher prices with lower output Lower prices with higher output Lower prices with no change in output.

Ic

fa

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

An increase in output equal to the amount of investment An increase in output has less than the amount of investment.

iU

ni

ve rs i

ty

For an economy operating below its potential, the effect on GDP of an increase in intended investment will normally be

Pr es

s. Al

All of the above.

lr

ig

Both (a) and (b) above.

ht

re

se rv

ed

a.

Change the prevailing interest rate.

.IS

BN

:8

1-

All of the above.

31

Goods that are vital to an individuals welfare.

4-

02

Goods that a country produces and then trades to another country.

27

-4

ef .N

o.

What are economic goods?

M AC

None of the above.

The trade deficit is likely to come down

04

20

The private investment is likely to increase because of fall in interest rate

04

The private investment is likely to fall because of increase in interest rate

04

Part III

6.

Which of the following is least applicable to the concept of NDP? a. b. c. d. e. A measure of output. A market value of final goods and services. The sum of all transactions involving money in an economy. A measure of income. GDP minus depreciation. Equilibrium in balance of payments Domestic savings being equal to domestic investment Full employment level of output Aggregate demand being equal to aggregate supply. Increases in output can cause increases in investment. Increases in saving can cause increases in current output. Increases in investment can cause increases in output. Decreases in taxes can cause increases in output.

7.

Internal balance refers to a. b. c. d. e.

8.

Which of the following statements is false? a. b. c. d. e.

c. d. e. a. b. c. d. e. a.

Coins, currency and all bank deposits Coins and currency only.

Expand the money supply and raise interest rates Contract the money supply and raise interest rates Expand the money supply with same interest rates. Contract the money supply and lower interest rates

11. The demand for money is

Th e

b. c.

20 04

d. e. a. b. c. d. e.

12. Which of the following situations would you expect to see during a period of recession? Falling tax receipts. Falling corporate profits. Falling stock prices. Falling business investment. All of the above. 371

Ic

fa

Positively related to the income level and the rate of interest Negatively related to the income level and the rate of interest Negatively related to the income level and positively related to the rate of interest Positively related to the income level and negatively related to the rate of interest None of the above.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

Expand the money supply and lower interest rates

ig

ht

10. Raising the discount rate, if effective, tends to

re

se rv

All currencies, both in banks and in the hands of the public

ed

.IS

BN

b.

Coins, currency and demand deposits

:8

a.

Coins, currency and time deposits

1-

31

9.

The definition of M1 includes

4-

Decreases in government spending can cause decreases in output.

02

27

-4

ef .N

o.

M AC

04

20

04

04

Balanced budget of government

Macroeconomics

13. GDP differs from NDP by a. The amount of total taxes b. Government expenditure on goods and services c. Government transfer payments d. The difference between gross investment and net investment e. Purchases by business firms from other business firms. 14. The marginal propensity to save can be described as a. The desire to save more and consume less b. The fraction of extra income that goes into extra savings c. The fraction of extra income that fluctuates between consumption and savings d. The conditioned reflex or habit to be thrifty e. The fraction of total income that is saved. a. b. c. d. e. a. b. c. d. e. The percentage of income paid as taxes increases as income increases The absolute amount of tax paid is directly proportional to income

18. When the value of output exceeds planned spending a. There is unsold output, and the level of income will fall b. There is unsold output, and the level of income will rise c. There is no unsold output, and the level of income does not change d. Any of the above can happen e. None of the above. 19. Which of the following is/are true? a. The tax revenue will be zero when tax rate is zero. b. The tax revenue will be zero when tax rate is 100%. c. The tax revenue will be highest when tax rate is 100%. d. Laffer curve takes U shape when tax rate and tax revenue are taken on X and Y axes respectively. e. Both (a) and (b) above.

20 04

372

Th e

Ic

fa

iU

ni

ve rs i

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.

ty

Pr es

s. Al

lr

ig

ht

re

When subsidies exceed indirect taxes.

se rv

When direct taxes exceed indirect taxes

ed

When depreciation on fixed capital exceeds income from investment

.IS

BN

When the factor income from abroad is positive

:8

When the factor income from abroad is negative

1-

31

16. GDP at factor cost exceeds GDP at market price

4-

02

None of the above.

27

The tax rate is constant

-4

ef .N

The percentage of income paid as taxes decreases as income increases

o.

M AC

15. A tax is regressive if

04

20

04

04

Part III

20. An a. b. c. d. e.

increase in the marginal propensity to import Has the same effect upon the multipliers as an increase in the MPC Has no effect upon the multipliers Increases the value of the multipliers Decreases the value of the multipliers None of the above.

a. b. c. d. e. a. b. c. d. e.

Rightward shift of the LM curve Rightward shift of the IS curve Leftward shift of the LM curve Leftward shift of the IS curve None of the above.

None of the above.

d. e. a.

Falls as the rate of interest decreases

Th e

20 04

b. c. d. e. a.

26. Which of the following is not included in gross investment? Business and residential construction. Expenditures on consumer goods. Additions to business inventory. Expenditures on machinery. All of the above. 373 b. c. d. e.

Ic

fa

25. Which of the following theories is called as the Neoclassical theory of interest? The Keynesian Theory. Liquidity Preference Theory. The Time Preference Theory. Expectations Theory. Loanable Fund Theory.

iU

ni

None of the above.

ve rs i

ty

c.

Is positively related to the rate of interest

Pr es

b.

Is inversely related to the rate of interest

s. Al

a.

Is unrelated to the rate of interest

lr

ig

24. When investment spending is negatively related to the rate of interest, equilibrium income in the goods market

ht

re

se rv

Nominal income and real interest rate

ed

.IS

Real income and nominal interest rate

BN

Real income and real interest rate

:8

1-

Nominal income and nominal interest rate

31

23. In the demand for money function we include

4-

02

27

-4

ef .N

o.

M AC

22. In the IS-LM model of income determination, an increase in the propensity to save leads to a

21. Which of the following relationships is not true? a. NDP at Factor Cost = GDP at Factor Cost + Depreciation. b. GDP at Market Prices = GDP at Factor Cost + Indirect Taxes Subsidies. c. Net Domestic Saving = Net National Saving + Retained Earnings of Foreign Companies. d. Gross Domestic Capital Formation = Gross Fixed Investment + Change in Inventories. e. None of the above.

04

20

04

04

Macroeconomics

27. When the actual rate of inflation turns out to be higher than expected a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. Borrower will gain Lender will gain The gain depends on the extent of difference between the actual rate of inflation and the expected rate of inflation Both (a) and (c) above None of the above.

28. The value of the expenditure multiplier relates The change in autonomous spending to the change in income The change in consumption to the change in income None of the above. Seasonal unemployment Cyclical unemployment Disguised unemployment Structural unemployment Voluntary unemployment. Structural budget. Revenue budget. Capital budget. Cyclical budget. None of the above. The change in income to the change in consumption

30. Which budget calculates the effect of business cycle on budget?

31. The IS curve shows a. A positive relationship between rate of interest and level of income b. A negative relationship between rate of interest and level of income c. A positive relationship between rate of interest and level of investment d. A negative relationship between rate of interest and level of investment e. A positive relationship between level of income and level of investment. 32. Laffer curve shows the relationship between a. Price level and unemployment b. Tax rates and tax revenue c. Interest rate and income level d. Income and money supply e. Demand for money and supply of money. 33. 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.

20 04

374

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.

29. A situation in which the marginal physical productivity of labor is zero is known as

M AC

04

20

04

04

The change in income to the change in autonomous spending

Part III

38. Which of the following is not a stock variable? b. c. d. e. a. b. c. d. e. a. b. c. d. e. Public debt. Wealth of a country. Money supply. Inflation.

Th e

20 04

40. Liquidity trap refers to a situation wherein There is too much liquidity in the economy The firms in the economy are facing credit crunch Interest rates does not decrease, no matter how much the money supply is expanded The country faces severe shortage of foreign exchange Excessive government borrowing reduces the availability of credit in the market.

Ic

fa

Equilibrium income depends solely on the position of IS curve There is no speculative demand for money

Speculative demand for money is infinity Fiscal policy is totally ineffective in changing any of the real variables.

iU

ni

Equilibrium income depends solely on the position of LM curve

ve rs i

39. If interest elasticity of demand for investment and consumption is zero

ty

Pr es

s. Al

lr

ig

ht

a.

Foreign exchange reserves.

re

se rv

ed

e.

GNP at market price.

.IS

d.

NNP at factor cost

BN

c.

NDP at factor cost

:8

1-

b.

NNP at market prices

31

a.

NDP at market prices

4-

02

37. National Income is

27

-4

e.

When subsidies exceed indirect taxes.

d.

When direct taxes exceed indirect taxes

ef .N

34. Money earned abroad and remitted to home country is a. Included in home country GDP b. Included in home country GNP c. Included in both home country GDP and GNP d. Excluded from both home country GDP and GNP e. Included in home country GDP but excluded from home country GNP. 35. The basic difference between money stock measures M3 and M4 is that a. M3 is more than M4 b. M2 is part of M3 where as 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, where as in M3 these are not included e. M1 is part of M4 where as M1 is not part of M3. 36. GDP at factor cost exceeds GDP at market price a. When the net factor income from abroad is negative b. When the net factor income from abroad is positive c. When depreciation of fixed capital exceeds gross investment

o.

M AC

W
375

04

20

04

04

Macroeconomics

Part B: Problems (60 Points)


Solve all the problems. Points are indicated against each problem. 41. The following balances are taken from balance sheet of the Central Bank of an economy. 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)

20 04

376

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

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. 3,800 MUC and 140 MUC 3,750 MUC and 150 MUC 3,750 MUC and 160 MUC 3,800 MUC and 170 MUC 3,800 MUC and 180 MUC.

b. c. d. e.

TB decreases by 40 MUC and private investment decreases by 15.

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.

s. Al

(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.

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

None of the above.

-4

TB decreases by 40 MUC and private investment decreases by 20 MUC.

fa

iU

ni

ve rs i

ty

Pr es

ef .N

TB decreases by 30 MUC and private investment decreases by 20 MUC.

o.

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

20 04

Th e

Ic

M AC

a.

TB decreases by 30 MUC and private investment decreases by 15 MUC.

W
(3 points) 377

(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?

04

20

04

04

Macroeconomics

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) 49. The following information pertains to the balance of payments of country X for the year 2001. 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? b. c. d. e. 1,450 Dr. 1,400 Dr. 1,450 Cr. 1,600 Cr. MUC 20,000 18,000 16,000 12,000 400 1,000 100 150 50 20

re

se rv

ed

.IS

BN

:8

1-

a.

1,400 Cr.

31

4-

02

27

-4

ef .N

o.

M AC

W
(2 points) 50 20 30 40 (2 points)

Particulars

s. Al

lr

50. The following information pertains to the balance of payments of country Y for the year 2001. MUC 400 1,000

Earnings of loans and investments abroad Government loans to abroad

Ic

fa

iU

Government loans from abroad Direct investments abroad Foreign direct investment in country Y Short-term loans and investments abroad

ni

ve rs i

Earnings of loans and investments in country Y by foreigners

ty

Pr es

ig

ht

Th e

150 300

20 04

Foreign short-term loans and investments in country Y What is the capital account balance of country X for the year 2001? a. b. c. d. e. (150) MUC. (160) MUC. (170) MUC. (180) MUC. (190) MUC.

378

04

20

04

04

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) a. b. c. d. e. 950 MUC. (1,000) MUC. (1,050) MUC. 1,100 MUC. 1,150 MUC. (2 points)

(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

20 04

Th e

e.

Ic

fa

500 MUC. (1 point) 379

iU

ni

ve rs i

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.

31

4-

(1 point) 53. The following information is taken from the national income accounts of a hypothetical economy:

02

27

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

-4

a. b. c. d. e.

3,870 MUC. 3,750 MUC. 3,720 MUC. 3,840 MUC. 3,920 MUC.

ef .N

MUC 3,000 600 200 1,400 600 2,000 1,500

o.

M AC

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?

04

20

04

04

Macroeconomics

55. The following information is taken from the national income accounts of a hypothetical economy: Particulars National income Wages and salaries Proprietors income + Rental income Net interest Dividends Transfer payments Personal tax payments MUC 2,000 1,500 200 100 50 200

a. b. c. d. e.

200 MUC and 1,750 MUC 250 MUC and 1,750 MUC 200 MUC and 1,850 MUC 250 MUC and 1,850 MUC None of the above.

02

27

-4

ef .N

o.

M AC

The amount of profits earned by the corporates and the total disposable income of the households are

56. The following information is extracted from National Income Accounts of a country: Particulars NDP at market prices Gross domestic investment Subsidies Million Units of Currency

BN

:8

1-

31

.IS

4-

10,000 1,600 200 1,300 1,900

b. c. d. e.

8,240 MUC. 8,720 MUC.

8,800 MUC.

fa

iU

ni

ve rs i

8,600 MUC.

ty

Pr es

a.

7,350 MUC.

s. Al

What is the value of GDP at factor cost?

lr

ig

ht

Indirect taxes

re

Net domestic investment

se rv

ed

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. b. c. d. e. Rs.1,53,637 crore Rs.1,35,747 crore Rs.1,05,215 crore Rs. 30,414 crore None of the above. (1 point)

20 04

380

Th e

Ic

04

(2 points)

(2 points)

20

04

04

300

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 a. b. c. d. e. 10,000 MUC 11,000 MUC 12,000 MUC 13,000 MUC 14,000 MUC.

(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) 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%.

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

b. c. d. e.

80 MUC 0 MUC 250 MUC

330 MUC.

fa

iU

ni

ve rs i

ty

Pr es

a.

580 MUC

s. Al

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

lr

ig

ht

re

se rv

62. The following are the indicators of financial development of an economy: Financial Interrelations Ratio = 1.2 Finance Ratio = 0.25 Intermediation Ratio = 0.70 If new issues for the year are 24,000 (MUC), what would be the Net Physical Capital Formation for the year? a. 34,000 MUC. b. 16,800 MUC. c. 40,800 MUC. d. 24,000 MUC. e. 12,580 MUC. (2 points) 381

20 04

Th e

Ic

04

(1 point)

(1 point)

20

04

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) Answer the questions 64 and 65 based on the following information: And the autonomous investment in the economy is 100 MUC.

re

se rv

a. b. c. d. e.

800 MUC. 1,000 MUC. 850 MUC. 950 MUC. 1,050 MUC.

ed

.IS

BN

:8

1-

31

65. Suppose the autonomous investment increases from 100 MUC to 150 MUC, what would be the consumption at the equilibrium?

4-

02

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)

27

-4

ef .N

o.

M AC

Services rendered to foreigners Gifts sent to non-residents by the residents

ve rs i

ty

Merchandize exports

Pr es

Merchandize imports

s. Al

Particulars

lr

ig

66. The following information pertains to the balance of payments of a country for the year 2002-03: MUC 1,40,240 1,16,320 2,30,010 1,25,234 2,000 4,000 1,000

20 04

382

Th e

Cash remitted by non-residents for their family maintenance Income earned by residents on ownership of financial assets

Foreign direct investment 1,00,000 If the capital account balance (credit) is 202,000 MUC, what is the change in foreign exchange reserves? a. 69,056 MUC. b. 1,79,056 MUC. c. 2,85,856 MUC. d. 23,920 MUC. e. 1,23,144 MUC. (2 points)

Ic

fa

iU

ni

Services rendered by foreigners to residents

ht

04

(2 points)

20

04

04

For a two-sector economy, the consumption function is C = 100 + 0.75Y

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. b. c. d. e. Rs.4,900 Rs.5,000 Rs.6,000 Rs.7,000 Rs.8,000. (1 point) 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) Price of Bread (Rs. per unit) 2002 20 2003 25 68. Nominal GDP for the year 2002 is Year a. b. c. d. e. Rs.67,500 Rs.87,500 Rs.33,750 Rs.43,750 Rs.23,450. Price of Butter (Rs. per unit) 15 20

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

Pr es

s. Al

69. GDP deflator for the year 2003 is a. 125 b. 142 c. 140 d. 130 e. 121.

lr

ig

ht

re

se rv

ed

.IS

Government spending (G)

ve rs i

ty

70. Consider an economy described by the following equations: = 1,000 MUC = 1,000 MUC = 500 + 0.75Yd = 100 50i Taxes (T)

20 04

Th e

Investment demand (I)

Transaction demand for money (Mt/P) = 0.25Y Money supply (Ms/P) = 500 MUC

Speculative demand for money (Ma/P) =125 50i The amount of domestic saving in the economy is a. b. c. d. e. 0 MUC (52.5) MUC (137.5) MUC (102.5) MUC 102.5 MUC. (3 points) 383

Ic

fa

Consumption (C)

iU

ni

04

(1 point)

(2 points)

20

04

04

Questions 68 and 69 are based on the following information:

Macroeconomics

71. The following information is available for an economy: Income elasticity of demand for real balances Acceptable inflation rate Money multiplier If the real GDP is desired to grow at 5%, what is the grow? a. b. c. d. e. 14.0%. 3.5%. 32.0%. 8.0%. 5.5%. 2.0 4% 4 rate at which reserve money should

02

27

a. b. c. d. e.

Rs.1,100 Rs.1,200 Rs.800 Rs.1,000 None of the above.

-4

ef .N

o.

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

20 04

384

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-

04

(2 points)

(1 point)

20

04

04

Model Question Paper III


Suggested Answers
Part A: Basic Concepts
1. (b) Other things being equal, increase in government expenditure increases the interest rates in the economy, which in turn crowds out private investment. 2. (b) Economic goods are those goods that are scare or limited in supply. 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).

20 04

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.

Th e

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.

Ic

fa

iU

ni

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.

ve rs i

ty

Pr es

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.

s. Al

lr

ig

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.

ht

re

se rv

9. (b) M1 = Currency with the public + Demand deposits with the banks.

ed

.IS

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.

BN

:8

1-

31

7. (d) When government spending is used as a policy instrument in order to achieve full employment, it is called internal balance.

4-

02

27

6. (c) The sum of all transactions involving money in an economy is least applicable to the concept of NDP.

-4

ef .N

5. (b) Increase in government spending is an expansionary fiscal policy which increases the price level and output in the economy.

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.

04

20

04

04

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). 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. 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. 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.

32. (b) Laffer curve shows the relationship between tax rates and tax revenue. 33. (c) Nominal rate of interest = Real rate of interest + Inflation.

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

Th e

Therefore the answer is (c).

Ic

fa

iU

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.

ni

ve rs i

ty

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.

s. Al

lr

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.

ig

ht

re

28. (a) The value of expenditure multiplier relates the change in income (Y) as a result of change in the autonomous spending (J).

se rv

ed

27. (a) The borrower will gain and lenders will loss, as the purchasing power of money will decrease by a greater amount than expected.

.IS

BN

:8

26. (b) Expenditure on consumer goods comes under consumption expenditure and hence does not included in gross investment.

1-

31

4-

25. (d) Rational expectations theory is called neo-classical theory of interest.

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part III

36. (e) GDPFC = GDPMP Indirect taxes + Subsidies If GDPFC > GDPMP, Subsidies > Indirect taxes. 37. (d) NNPFC is also called a National Income. 38. (d) A variable is defined as a stock variable if it is measured at a point of time and as a flow variable if it is measured over a period of time. Of all the variables listed, only inflation is measured over a period of time and hence is a flow variable. 39. (b) If interest elasticity of demand for investment and consumption is zero, IS curve is

Hence, equilibrium income depends on the position of IS curve only.

Part B: Problems

Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial sector + Net Foreign Exchange Assets Other Assets = 65 MUC.

Government money = 10 MUC. High powered money = 990 + 10 = 1,000 MUC. Money Supply = H x m

ve rs i

ty

Pr es

Th e

20 04

m=

1 + Cu Cu + r

Ic

4,000 = 1,000 m
4,000 = 4. 1,000

1+ 0.2 =4 0.2 + r

1.2 = 0.8 + 4r r=
1.20 0.8 = 0.10 = 10%. 4

fa

iU

=4

ni

m = money multiplier =

s. Al

1 + Cu Cu + r

lr

Monetary liabilities = 1,450 + 65 525 = 990 MUC.

ig

ht

20 + 5 + 500 = 525 MUC.

re

Non-monetary liabilities = Government deposits + Other non-monetary liabilities + Net worth

se rv

ed

.IS

950 + 350 + 125 + 25 = 1,450 MUC

BN

:8

1-

31

Monetary liabilities of RBI = Financial Assets + Other Assets Non-monetary liabilities.

4-

02

High powered money = Monetary Liabilities of RBI + Government Money

27

41. (b)

-4

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.

04

20
387

04

04

Y=

A 1 b(1 t)

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. 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 600 = 0.25Y + 250 50i 0.25Y = (600 250) + 50i

Budget deficit = 900 680 MUC = 220 MUC. 44. (a) 0.5Y = 1850 15i and 0.25Y = 350 + 50i. When E increase by 200 and imports decrease by 30, the IS function will be 0.5Y = 1,850 + 200 ( 30) 15i 0.5Y = 2,080 15i Or, Y = 4,160 30i LM function 0.25Y = 350 + 50i can be written as Y = 1,400 + 200i By equating IS & LM functions, 4,160 30i = 1,400 + 200i

20 04

Th e

Ic

fa

iU

ni

Y Tax revenue

Budget deficit = 900 760 = 140 MUC.

388

ve rs i

ty

Pr es

Taxes = 0.20Y = (0.20 3,400) = 680 MUC

2,760 = 12% 230 = 4,160 (30 12) = 3,800 MUC. = (0.20 3,800) = 760 MUC

s. Al

i = 10% Y = 3,700 30i = 3,400 MUC. Budget deficit = Government expenditure Tax revenue

lr

ig

ht

re

3,700 30i = 1,400 + 200i 230i = 3,700 1,400 = 2,300

se rv

ed

Both the markets will be simultaneously in equilibrium when, IS = LM

.IS

BN

350 + 50i = 1,400 + 200i. LM function 0.25

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part III

Where,

g = GDP growth rate

P = growth rate of population = 0.04 1 + g = 1.04 1.02 g

= 0.0608 = 6.08%

Target per capita real GDP growth = 4% p.a.

Th e

Expected population growth Capital output ratio = 5:1

Ic

fa

Alternative approach: = 2.0% p.a.

20 04

Growth required in GDP to achieve target per capita GDP growth = 4 + 2 = 6% p.a. The required rate of investment as a percentage of GDP = 5 6 = 30% approx.

47. (b) In crore of rupee 2,92,418 1,14,928 27,078 2,24,550 389

iU

Tax revenues Non-tax revenues Recoveries of loans Borrowings and other liabilities

ni

6.08 5 = 30.4% of GDP.

ve rs i

Given COR of 5, required investment is

ty

Pr es

s. Al

lr

ig

To achieve the targeted per capita GDP growth rate of 4%.

ht

re

se rv

ed

.IS

Per capita GDP growth rate

(1 + g) (1 + p)

BN

:8

46. (b)

1-

45. (a) Before increase of autonomous investment: By equating IS and LM functions, 3,700 30i = 1,400 + 200i 2,300 = 230i i = 10 When i =10, then Y = 3,700 30(10) = 3,400 MUC. Thus, trade balance = 450 0.1(3,400) = 110 (surplus) Investment = 400 15(10) = 250 MUC. When autonomous investment increases by 230 MUC, the IS function would become Y = 3,700 30i + 230 = 3,930 30i By equating IS and LM functions, At equilibrium, 3,930 30i = 1,400 + 200i 2,530 = 230i i = 11% When i =11, then equilibrium income Y = 3,930 30(11) = 3,600. If Y = 3,600, then trade balance = 450 0.1Y = 450 0.1(3,600) = 90. Private investment = 400 15(11) = 235. Thus, trade balance decrease by 110 90 = 30 and investment decrease by 250 235 = 15.

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04

04

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) Non-plan capital expenditure Planned revenue expenditure Planned capital expenditure 20,000 4,57,536 43,238 1,04,660 71,540

Capital surplus/Deficit = Recoveries of loans + Borrowings and other liabilities + Other receipts Non-plan capital expenditure Plan capital expenditure Disinvestment proceeds = 27,078 + 2,24,550 + 20,000 43,238 71,540 2,000 = Rs.1,54,850 crore. 48. (a) Fiscal Deficit = Borrowings and Liabilities = Rs.2,24,550 crore

Primary Deficit = Fiscal Deficit Interest payments = 2,24,550 2,02,532 = Rs.22,018 crore.

a. Services b. Income c. Transfers

se rv

ed

II. Invisibles (a + b + c)

.IS

BN

I. Merchandize

18,000

:8

Item

Credit

1-

31

49. (d)

4-

02

Debit 20,000

27

-4

16,000 400 150 34,550

12,000 1,000 100 33,100

re

ht

ef .N

Net (2,000)

4,000 (600) 50 1,450

50. (c)

ty

ve rs i

Item

Pr es

s. Al

Current account balance (I + II)

lr

ig

Credit Debit 150 60 210 30

Net 120

iU

ni

I. Foreign investment II. Loan capital Capital account balance (I + II)

Ic

fa

350 (290) 380 (170)

51. (c) Gross Domestic Savings (GDS) = GDI + Current Account Balance (CAB) GDS = = Household savings + Gross retained earnings of business sector + Budget surplus of government 5,500 + 2,000 + BS = 7,500 + BS

20 04

Th e

GDI = 5,000 MUC CAB = 1,450 MUC 7,500 + BS = 5,000 + 1,450 BS = 6,450 7,500 = 1,050 MUC (Budget deficit). 390

o.

M AC

04

= 2,92,418 + 1,14,928 4,57,536 1,04,660 = Rs.(1,54,850) crore.

20

04

Revenue surplus/Deficit = Revenue receipts Revenue expenditure = [Tax revenues + Non-tax revenues] [Planned revenue expenditure + Un-plan revenue expenditure]

04

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. Ms = 3 1,280 = 3,840 MUC.

53. (c) NNP at Market Prices = GNP at Market Prices depreciation Depreciation = Gross investment Net investment = 600 200 = 400 MUC

= 3,000 (1,400 + 600 + 600) = 3,000 2,600 = 400 MUC.

2,000 (1,500 + 200 + 100) = 2,000 1,800 = 200 MUC.

Where Fiscal deficit = Borrowings and other liabilities of the government = Rs.1,53,637 Cr.

20 04

59. (a) APC + APS = 1 Thus, APS = 1 APC = 1 1.05 = 0.05.

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.

Th e

Aggregate consumption function = (100 x 50) + 0.7Yd = 5,000 + 0.7Yd = 5,000 + 0.7(50,000) = 40,000. Thus, Investment (I) = Saving (S) = 50,000 40,000 = 10,000 MUC.

Ic

fa

iU

58. (a) At equilibrium, Y = C + I = C + S

ni

ve rs i

ty

Pr es

= Rs.1,53,637 Cr. 1,23,223 Cr. = Rs.30,414 Cr.

s. Al

57. (a) Primary deficit

= Fiscal deficit Interest payment

lr

ig

ht

GDPMP Indirect taxes + Subsidies = GDPFC = 10,300 1,900 + 200 = 8,600 MUC.

re

NDPMP + Depreciation = GDPMP = 10,000 + (1,600 1,300) = 10,300 MUC

se rv

56. (c)

ed

.IS

= 2,150 200 = 1,950 MUC.

BN

Personal disposable income = Personal income Personal taxes

:8

1-

2,000 200 + 300 + 50 = 2,150 MUC.

31

4-

Personal income =

National income Corporate profits + Transfer payments + Dividends

02

27

-4

National income (Wages and salaries + Rental income + Proprietors income + Net interest)

ef .N

55. (e) Corporate profits =

o.

M AC

W
391

54. (c)

Net Exports = GNPMP (C + I + G)

04

= 2,600 2,000 = 600 MUC.

20

04

Net indirect taxes

= NNP at market prices National income

04

NNP at market prices = 3,000 400 = 260

Macroeconomics

62. (a) Intermediation Ratio = Secondary issues/New issues Or, secondary issues = Intermediation ratio x New issues = 0.7 x 24,000 = 16,800 MUC Total issues = New issues + Secondary issues = 24,000 + 16,800 = 40,800 MUC Financial Interrelations Ratio = Total issues/Net Physical Capital Formation (NPCF) Or, Net Physical Capital Formation (NPCF) = Total issues/Financial Interrelations Ratio = 40,800/1.2 = 34,000 MUC. 63. (b) Growth rate of Real income = Nominal income Price level = 6% 4% = 2%.

Thus, multiplier = 1/0.25 = 4

66. (c) Change in foreign exchange reserves = Current account balance + Capital account balance Current account balance = (116,320 + 230,010 + 4000 + 1000) - (140,240 + 125,234 + 2000) = 351330 267474 = 83856 i.e. current account surplus (Credit)

a = 20,000 14,000 = Rs.6,000.

iU

ni

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.

20 04

70. (c) Goods market will be in equilibrium when Y = AD = C + I + G Y Y = 500 + 0.75(Y T) + 100 50i + 1000 = 1600 + 0.75(Y 1000) 50i = 850 + 0.75Y 50i 0.25Y = 850 50i .. IS curve

392

Th e

= (87500/67500) x 100 = 1.296 x 100 = 129.6 or 130.

Money market will be in equilibrium when: Money supply (Ms) = Money demand (Md) 500 = 0.25Y + 125 50i 375 = 0.25Y 50i

Ic

GDP deflator =

fa

ve rs i

ty

Nominal GDP 100 Real GDP

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.

s. Al

lr

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.

ig

ht

re

se rv

ed

If MPS = 0.3, MPC = 1 0.3 = 0.7. Thus, 20,000 = a + (0.7 x 20,000)

.IS

BN

C = a + bY; where a = Autonomous Consumption, and b = Marginal Propensity to Consume (MPC)

:8

1-

31

67. (c) When saving is zero, Y = C + S = C + I; C = Y = Rs.20,000

4-

02

Thus, change in foreign exchange reserves = 83856 + 202,000 = 285856 MUC.

27

-4

ef .N

o.

Therefore, consumption = 100 + 0.75(1000) = 850 MUC.

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.

04

20

65. (c) Multiplier = 1/MPS (in a two-sector economy)

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.

Part III

0.25Y = 375 + 50i 850 50i = 375 + 50i 475 = 100i i = 4.75

.. LM curve

Thus, at simultaneous equilibrium,

When i = 4.75, 0.25Y = 375 + 50 (4.75) = 612.5 Or, Y = 612.5/0.25 = 2450. i. ii. iii. Private saving = Y T C = 2450 1000 [500 + 0.75(2450 1000)] Public saving = T G = 1000 1000 = 0 Domestic saving = Private saving + Public saving = (137.5) + 0 = (137.5) MUC.

Where, a = income elasticity of demand for real balances gY = expected rate of growth in real GDP gP = acceptable rate of inflation Thus, gM = (2 x 5) + 4 = 14% Given money multiplier is 4, Rate of growth of reserve money = 14/4 = 3.5%.

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

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).

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

W
393

71. (b) Rate of growth of money stock (gM) = a.gY + gP

04

20

04

04

= 1450 [500 + 1087.5] = (137.5)

Model Question Paper IV


Time: 3 Hours Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. 1. Which of the following statements is correct? a. b. c. d. e. 2. a. b. c. d. e. 3. a. b. c. d. e. 4. A variable is endogenous when its value is determined by forces outside the model. A change in an exogenous variable is classified as an autonomous change. A variable is autonomous when its value is determined by forces within the model. A variable is exogenous when its value is determined by forces within the model. None of the above. Saving equals investment Consumption plus investment equals the value of output Planned saving equals planned investment

Total Points: 100

GDP/GNP GNP/GDP None of the above.

b. c. d. e. 5. a. c. d. e. 6.

An increase in recruiting labor force. Requests for wage increases.

Th e

20 04

b.

Which of the following is not a function of money? a. Medium of exchange. b. Unit of account. c. Supply of reserves. d. Store of value. e. A standard of deferred payments.

Ic

fa

Velocity of money is given by Money supply/GDP Money supply/investment Investment/money supply GDP/money supply None of the above.

iU

All of the above.

ni

ve rs i

ty

An upward movement of the price level.

Pr es

s. Al

a.

A depletion of inventories.

lr

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?

ig

ht

re

se rv

ed

.IS

BN

Nominal GDP/real GDP

:8

Real GDP/nominal GDP

1-

31

GDP deflator is given by

4-

02

Both (b) and (c) above.

27

Aggregate spending equals the revenues of the business sector

-4

ef .N

o.

M AC

Equilibrium occurs in a two-sector model when

04

20

04

04

Part III

c. d. e. a. b. c.

Subtracting profits retained by firms from gross investment

Subtracting capital depreciation.

Th e

20 04

d. e. a. b. c. d. e.

13. Which of the following would be a liability of a commercial bank? Deposits in the bank. Loans made by the bank to individuals. Loans made by the bank to other banks. Bonds purchased by the bank. Investments made in mutual funds.

Ic

fa

Income

Wealth

Expectations Both (a) and (b) above All of the above.

iU

12. Factors affecting consumption include

ni

ve rs i

ty

Reducing gross investment by the rupee value of business ventures that failed during a stated period

Pr es

s. Al

lr

b.

Adjusting gross investment for inflation

ig

ht

a.

Subtracting inventory costs from gross investment

re

7. Which of the following cannot be identified as a basic trend of economic development? a. Population has grown less rapidly than the growth of the capital stock. b. There has been a strong upward trend in real wage rates. c. The percentage of GDP used to finance investment in physical capital has been roughly constant. d. The rate of profit has been gradually but steadily declining. e. Both (b) and (d) above. 8. During the course of typical business fluctuations, there is more variation in a. Industrial price than in real industrial output b. Consumer goods production than in capital goods production c. Agricultural production than in non-agricultural production d. Durable goods production than in non-durable goods production e. Government production than in private production. 9. Which of the following statements is true? a. Investment and interest rates are negatively related. b. Investment and interest rates are positively related. c. An increase in government expenditure is likely to cause a drop in income. d. Both (a) and (c) above. e. Both (b) and (c) above. 10. Policies directed at stimulating exports can influence a. The domestic employment b. Price stability c. The growth of actual GDP relative to potential GDP d. The foreign trade balance e. All of the above. 11. Net investment is derived from gross investment by

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04
395

04

Macroeconomics

14. When a Central Bank wishes to increase the quantity of money held by the public, it a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. Sells bonds Buys bonds Sells goods or services Buys goods or services None of the above. There is an imperfect relationship between consumption and disposable income There is no relationship between consumption and disposable income Consumption spending lags the receipt of disposable income by one period None of the above. Budget deficit. Fiscal deficit. Capital deficit. Revenue deficit. Primary deficit. The receipt of disposable income lags consumption spending by one period

15. When Ct = f(Yd, t 1)

e.

Expectation Hypothesis.

a. b. c.

The tax increase was not passed onto consumer

Th e

d. e. a. b. c. d. e.

20 04

19. Which of the following is true of I-S curve? When transfer payments are increased, I-S curve will shift to the left Slope of the I-S curve will increase I-S curve will shift to the right Slope of the I-S curve will decrease I-S curve will not affect.

396

Ic

fa

Income elasticity of demand for cigarettes is very high None of the above.

Demand for cigarettes is price inelastic

iU

People smoke more when cigarette prices go up

ni

ve rs i

18. When excise tax on cigarettes was hiked, it was found that total expenditure on cigarettes increased. A possible explanation is that

ty

Pr es

s. Al

lr

d.

Inventory Theoretic Approach.

ig

ht

c.

Life Cycle Hypothesis.

re

b.

Permanent Income Hypothesis.

se rv

a.

Relative Income Hypothesis.

ed

.IS

17. Which of the following model explains that people can quickly and easily adjust their living standards upwards but downward adjustment is very difficult?

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

16. Which of the following is the largest deficit for the government?

M AC

04

20

04

04

Part III

20. GDP is not a very good measure of economic prosperity because a. b. c. d. e. The expenditure and production methods of estimating GDP yield different results because of conceptual problems It does not include non-monetized transactions/activities It is purely a monetary measure It does not include environmental degradation Both (b) and (d) above.

21. The impact of a recession is likely to have a stronger impact on the economy when

d. e.

MPS is smaller Both (b) and (c) above.

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. There is net debit balance in the merchandize account There is net credit balance in the merchandize account 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 Decrease in Foreign Exchange Reserves Increase in Foreign Exchange Reserves. 397

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

c.

MPS is larger

04

b.

MPC is smaller

20

04

a.

MPC is larger

04

Macroeconomics

27. Dynamic multipliers occur when a. The assumption of ceteris paribus is dropped b. The economy is not in equilibrium c. Consumption is unrelated to disposable income d. There is a lagged response between consumption and disposable income e. None of the above. 28. If the RBI raises the reserve ratio a. High-powered money and money supply must increase b. High-powered money will increase and money supply will decrease c. Both high-powered money and Money supply will decrease d. High-powered money will remain unchanged and money supply will decrease e. Outstanding bank credit will increase. 29. Stagflation is a period of a. High inflation b. Low inflation c. High unemployment d. Low unemployment e. Both (a) and (c) above. a. b. c. d. e.

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

a. b. c. d. e. 398

Ic

fa

Plan expenditure Transfer payments Consumption expenditure Past expenditure Either (b) or (d) above.

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

30. Which of the following statements is true?

02

27

-4

ef .N

o.

M AC

04

20

04

04

Part III

34. Which of the following is/are not considered in the calculation of national income? i. ii. iii. iv. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. d. e. a. b. c. Teaching in a class. Shirt stitched by a father for his son. Patient attended to by a doctor. Services of a housewife. Both (i) and (ii) above. Both (i) and (iv) above. Both (ii) and (iv) above. All (i), (ii), (iii) and (iv) above. Affect aggregate demand mainly by causing changes in the interest rate Affect aggregate demand mainly by causing changes in the price level Alone cannot affect output or employment All of the above. Indirect taxes Subsidies Indirect taxes + subsidies Depreciation. Output method. Expenditure method. All of the above. Indirect taxes subsidies Both (ii) and (iii) above.

35. J M Keynes held that changes in the money supply

37. Which method is used to compute national income in India? Income method.

38. The best single indicator of the standard of living is

Th e

20 04

d. e. a. b. c. d. e.

39. Large government borrowings to finance its deficit will Increase the supply of loanable funds Exert downward pressure on interest rates Have no impact on interest rates Put upward pressure on interest rates Makes it easier for the commercial sector to borrow money.

Ic

fa

Real GNP Per capita Real GNP None of the above.

Per capita Normal GNP

iU

Normal GNP

ni

ve rs i

ty

Both (a) and (b) above.

Pr es

s. Al

lr

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

36. National product at market prices is higher than national product at factor cost by the amount of

27

-4

ef .N

Affect aggregate demand mainly by causing changes in the velocity of money

o.

M AC

W
399

04

20

04

04

Macroeconomics

40. If the Average Propensity to Save (APS) is negative, then the Average Propensity to Consume (APC) is a. b. c. d. e. Negative Zero Positive but less than one One Greater than one.

Part B: Problems (60 Points)


41. The following balances are taken from the Balance Sheet of the Central Bank of a country.

Credit to Government Credit to Banks Government Deposits Other non-monetary liabilities Net worth Credit to commercial sector Net foreign exchange assets Deposits of banks Other Deposits Other assets

7,000 4,000 500

4-

31

:8

1-

02

BN

ed

.IS

c. d. e.

90,400 MUC. 96,200 MUC.

ni

ve rs i

95,300 MUC.

ty

Pr es

b.

85,500 MUC.

s. Al

a.

80,600 MUC.

lr

ig

ht

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?

re

se rv

27

1,000 2,000 100 6,000 600

11,000

-4

25

ef .N

o.

M AC

W
(3 points)

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

400

Th e

Ic

fa

iU

Particulars

Million units of currency (MUC)

04

20

04

Solve all the problems. Points are indicated against each problem.

04

Part III

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)

20 04

Th e

Ic

fa

iU

ni

ve rs i

ty

Pr es

s. Al

lr

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)

ig

ht

re

se rv

ed

.IS

BN

:8

1-

31

4-

02

27

-4

ef .N

o.

M AC

04

20

04
401

04

Macroeconomics

d. e.

2.6% of GDP. 2.8% of GDP.

ht

re

se rv

ed

c.

2.1% of GDP.

.IS

b.

1.3% of GDP.

BN

a.

1.8% of GDP.

:8

1-

(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?

31

4-

02

27

-4

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.

ef .N

o.

M AC

W
(3 points) (3 points)

s. Al

49. The following information is taken from Union Budget for the year 2002-03: Tax Revenue (Net) Non-tax revenue Recoveries of loans Other capital receipts Borrowings & Other liabilities Non-plan revenue expenditure (Of which, interest payments is Rs.1,17,390 crore).

lr

ig

Pr es

Rs. crore 1,72,965 72,140 17,680 12,000 1,35,524 2,70,169

20 04

402

Th e

Non-plan capital expenditure 26,640 Planned revenue expenditure 70,313 Planned capital expenditure 43,187 The fiscal and primary deficit of the country for the year 2002-03 a. Rs.1,35,524 crore and Rs.18,134 crore b. Rs.1,35,524 crore and Rs.20,226 crore c. Rs.1,28,342 crore and Rs.18,134 crore d. Rs.1,28,342 crore and Rs.20,226 crore e. Rs.1,35,524 crore and Rs.22,144 crore.

Ic

fa

iU

ni

ve rs i

ty

04

20

04

04

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 a. b. c. d. e. 0.63 0.78 0.84 0.87 0.90. 0.74 2,00,445 1,15,605

Particulars

se rv

ed

Income elasticity of demand for real balances 3.0 Acceptable rate of inflation 6% Money multiplier 3 If the real GDP is desired to grow at 4%, the rate at which reserve money should grow is a. 5.5% b. 5.0% c. 6.0% d. 6.5% e. 7.0%. (2 points) 52. The following information is extracted from the National Income Accounts of an economy:

.IS

BN

:8

1-

31

4-

Factor incomes received by domestic residents from Business sector Foreigners Gross investment Business savings Net investment Subsidies Corporate profit taxes Personal income taxes Net factor income from abroad Budget deficit Net transfer to household sector Consumption expenditure Indirect taxes The GDP of the economy at market price is

ig

ht

re

02

27

-4

Million units of currency (MUC) 500 20 200 25 150 10 15 100 5 10 7 319 70

20 04

Th e

a. b. c. d. e.

Ic

fa

625 MUC 650 MUC 675 MUC 700 MUC 725 MUC. (2 points) 403

iU

ni

ve rs i

ty

Pr es

s. Al

lr

ef .N

o.

M AC

51. The following information is available for an economy.

04

(2 points)

20

04

04

Macroeconomics

53. The following information is extracted from the National Income Accounts of an economy: Particulars 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