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  • 1. BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 Macroeconomics © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS WORKBOOK The Icfai University Press # 52, Nagarjuna Hills, Hyderabad – 500 082
  • 2. © 2004 The Icfai University Press. All rights reserved. No part publication of this may be reproduced, stored in a spreadsheet, or 04 a 04 retrieval system, used in 04 20 transmitted in any form W B or by any means – photocopying M AC electronic, mechanical, or ef .N in writing R permission o. otherwise – without prior 27 -4 from The Icfai University Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 Press. Th e ISBN : 81-314-0227-4 20 04 Ref. No. MACWB 04200404 © For any clarification regarding this book, the students 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.
  • 3. Preface 04 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. 04 20 04 Brief Summaries of Chapters M AC W B A brief summary of all the chapters in the textbook are given here for easy recollection of the topics studied. ef .N o. Part I: Questions on Basic Concepts and Answers (with Explanatory Notes) 4- 02 27 -4 R 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. :8 1- 31 Part II: Problems and Solutions ed .IS BN 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. re se rv Part III: Model Question Papers (with Suggested Answers) Pr es s. Al lr ig ht s 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. fa iU ni ve rs i ty 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. © 20 04 Th e Ic 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.
  • 4. 04 04 Contents 1 W Questions on Basic Concepts and Answers (with Explanatory Notes) : 10 o. M AC Part I B 04 20 Brief Summaries of Chapters Problems and Solutions Part III : Model Question Papers (with Suggested Answers) 98 © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N Part II : 317
  • 5. 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. B 04 20 04 04 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. M AC W Government, International Trade, and Output: Impact of Fiscal Policy on Output, Fiscal Policy Multipliers, Impact of International Trade on GDP. 4- 02 27 -4 R ef .N o. 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. BN :8 1- 31 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. se rv ed .IS Business Cycles and Unemployment: Features of the Business Cycle, Business Cycle Theories, Unemployment: Okun's Law, Impact of Unemployment, Economic Interpretation of Unemployment. ht s 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. Pr es s. Al lr ig 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. Ic fa iU ni ve rs i ty 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. Th e Policies for Growth and Stability: The Interaction of Monetary and Fiscal Policies. © 20 04 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.
  • 6. Brief Summaries of Chapters Macroeconomic Analysis: An Overview • o. M AC W B 04 20 04 04 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. ef .N Measurement of Macroeconomic Aggregates 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 firm’s 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 nation’s capacity to produce goods and services and keep various factors of production employed. The GNP growth rate, the most important indicator of the nation’s economy, shows whether the nation’s 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 economy’s 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 nation’s 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. • 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. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R • 1
  • 7. Measurement of National Income • 27 -4 The Simple Keynesian Model of Income Determination R ef .N o. M AC W B 04 20 04 04 There are three methods of calculating national income, and they are all conceptually equivalent to each other. They are (a) output method, (b) the expenditure method, and (c) the income method. The output method is followed either by valuing all the final goods and services produced during a year or by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in the economy. The sum of these values added gives the gross domestic product at factor cost, which after a similar adjustment to include net factor income from abroad gives gross national product at factor cost. The expenditure method aggregates all money spent by private citizens, firms and the government within the year, to obtain total domestic expenditure at market prices. It aggregates only the value of final purchases and excludes all expenditures on intermediate goods. However, since final expenditure at market prices include both the effects of taxes and subsidies and our expenditures on imports while excluding the value of our exports, all these transactions have to be taken into account before we obtain gross national product by this method. The income approach to measuring national income does not simply aggregates all incomes. It aggregates only incomes of residents of the nation, corporate and individual, that obtain income directly from the current production of goods and services. It aggregates the money payments made to the different factors of production, i.e. factors income and excludes all incomes which cannot be considered as payment for current services to production. The principal tool of analysis in the Simple Keynesian Model of Income Determination model is the ‘aggregate demand’. The focus of this model is only the goods market and the influence of the money market on the goods market. The model is build assuming that prices do not change at all and that firms are willing to sell any amount of output at the given level of prices (the aggregate supply curve is perfectly elastic). Aggregate demand is the total amount of goods demanded in the economy and is equal to the sum of consumption spending (C), investment spending (I), government purchases (G), and net exports (NX). AD = C + I + G + NX Equilibrium level of output is that level of output at which the total desired spending on goods and services (desired aggregate demand) is equal to the actual level of output (Y). The concept of multiplier is a very useful one. The multiplier tells what the increase in the level of equilibrium income would be for a unit increase in autonomous spending. Multiplier is given by the ratio of increase in equilibrium income to increase in autonomous spending. The value of the multiplier is the reciprocal of the marginal propensity to save, assuming all other components of aggregate demand I, G and NX are constant and independent of the level of income. The larger the marginal propensity to consume, the lower is the marginal propensity to save, and thus larger is the value of the multiplier. Multiplier, ∝ = 1/MPS Taxes play an important role in determination of disposable income. When tax is considered, the value of the multiplier is equal to 1/[1 – b (1 – t)], where, b is the marginal propensity to consume and t is the rate of tax. Thus, a cut in the tax rate would, therefore, increase the value of multiplier. The value of multiplier in the above case is determined assuming that the other components of aggregate demand, I, G and NX are constant and independent of the level of income. But, in real scenario, the imports are dependent of the level of the income. Mathematically, imports (M) = M(Y) = mY, where m is the marginal propensity to import = ∂M/∂Y. Thus, the value of multiplier is equal to 1/[1 – b (1 – t) + m] se rv ed .IS BN :8 1- 31 4- 02 • s re • iU ni ve rs i ty Pr es s. Al lr ig ht • 20 04 Th e Ic fa • © • Income Determination Model including Money and Interest • 2 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.
  • 8. 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. • Points on the IS curve indicate equilibrium in the goods market and points on the LM curve indicate equilibrium in the money market. For simultaneous equilibrium in both the goods market and the money market, point indicating such equilibrium will have to lie on both the IS and the LM curves. Such a point exists only at the intersection of the IS and LM curves. • Crowding out happens due to increase in interest rates, and therefore, can be reduced by increasing the money supply. • Money is one of the most crucial elements of economic science. It acts as a medium of exchange, unit of account, a standard of deferred payment and a store of value. Classical economists viewed that money is demanded only for spending purposes. However, latter Keynes recognized that money was held for other reasons too. In this view money would be held as an asset, a non-interest-paying asset, whereby velocity is affected and tends to change. According to him, the three motives for holding money are transactions, precaution and liquidity or speculation. Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 • ty Fundamentals of Aggregate Demand and Aggregate Supply 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. Th e Ic fa iU ni ve rs i • 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 © 20 04 • 3
  • 9. point, further increases in price level will have no effect on output. In short, the aggregate supply curve, in short run, slopes upward from left to right for a part of its range and straightens at the end. In the short run, the discrepancy between actual and expected price level causes changes in output and employment. But in the long run, if all other things remain constant, the higher price level will come to be accurately expected by firms, narrowing down the difference between expected and actual price levels. This is important because in the long run, the costs incurred by business firms rise as economic agents reach to higher prices. • The higher level of output in the short run was possible only because the unanticipated rise in the price level led to higher profits to business firms. As soon as the costs increase in line with final prices, the incentive to produce higher levels of output disappears and the production reverts to its original level. In this situation, the level of output will be at its natural rate and deviations from this state are possible only when actual price level differs from the expected price level in the short run. Thus, in the long run, the natural rate of output is the equilibrium rate of output for the economy. • In the long run, the natural rate of output is the level of output to which the economy will tend to adjust in the long run. This indicates that in the long run the average price level has no effect on the level of output (Y). Any unanticipated price rise in the short run will be offset in the long run by an increase in costs as contracts with the suppliers of inputs are renegotiated. Therefore, in the long run the output of an economy does not depend on the price level, but on factors such as, labor import costs, capital stock, technological progress, etc. These factors are not influenced by changes in the average price level and so is the case with aggregate supply in the long run. Therefore, in the long run, the aggregate supply of an economy is vertical at the natural rate of output. • Most of the factors that affect the position of the aggregate supply curve in short run also affect the position of the aggregate supply curve in the long run, with few exceptions. Some of the important factors affect aggregate supply curve are change in costs of production, supply shocks, investment spending and technological changes, availability of raw materials, supply of labor, human capital and incentives. se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 • re Money Supply and Banking System Money is anything that serves as a commonly accepted medium of exchange. Money also acts as a unit of value and a store of value. In past, commodities such as salt and oxen were used as money but they failed to serve the purpose well. Latter, they were replaced by precious metals such as gold, silver, etc. However, they too did not serve the purpose well. All these were replaced by paper money as it has the basic features of good money, i.e. portability, divisibility, durability, uniformity and storability. • Determining what should be included in the money supply is not as easy as it appears. Money is sometimes defined as anything generally acceptable as a medium of exchange. Four definitions of money are commonly used – M1 to M4. M1 (known as narrow money) is made up of currency with the public plus demand deposits with the banking system plus other deposits with the RBI. M2 holds M1 plus post office savings bank deposits. M3 (known as broad money) includes M1 plus time deposits with the banking system. And finally M4 includes M3 + total post office deposits (excluding national savings certificates). © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s • • 4 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.
  • 10. 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. BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 • ed .IS Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model 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 economy’s tendency to adjust to full employment and the relative effectiveness of monetary and fiscal measures. • 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. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv • • 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. 5
  • 11. 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 Say’s 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. Say’s 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. • 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 economy’s 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. iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 • © 20 04 • Th e Ic fa Post-Keynesian Macroeconomics – Monetarism, Rational Expectations and Supply-side Economics • 6 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.
  • 12. • Rational Expectations School argues that expectations on the future values of economic variables play an important role in macroeconomic analysis and economic analysis in general. The hypothesis of rational expectations has three important implications for macroeconomic analysis and policy. The advocates of rational expectations school contend that their usefulness is limited, because the parameters of the model will change when new policies are given prominence over the others. Since estimates of the effects of the new policies are based on the original set of parameters, the actual implications may be quite different. As a result, economic models are considered not so helpful in selecting an appropriate policy option. b. 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. c. Discretionary monetary and fiscal policy cannot be used to stabilize the economy. 4- 31 • 02 27 -4 R ef .N o. M AC W B 04 20 04 04 a. 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. .IS Economic Fluctuations and Unemployment A business cycle is a swing in total national output, income and employment marked by widespread expansion or contraction in many sectors of the economy. Typically, a business cycle is divided into four phases: (i) the recovery or revival of economic activity (ii) the prosperity or expansion of the activity (iii) the recession or downturn in economic activity, and (iv) the depression or contraction in the economic activity. • A number of theories are proposed to explain the cyclical behavior of business cycles, which includes supply shock theory, multiplier-acceleration and Keynes. But, no theory answered all problems. • The rate of unemployment is one of the key indicators of the conditions prevailing in an economy. Fluctuations in the rate of employment lead to partial changes in the economy and therefore considered as a barometer which points out the condition of an economy. The rate of unemployment gradually decreases during recovery and rapidly decreases during boom or prosperity. By contrast, unemployment rate rises sharply during depression and gradually moves upward during recession. Unemployment rate and phases of business cycles are closely knitted. 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed • © 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
  • 13. The Open Economy and Balance of Payments: India’s 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 country’s 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. M AC W B 04 20 04 04 • ef .N o. Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt 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. • 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. re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R • ht s Modern Macroeconomics: Monetary Policy and Interest Rate Structure • Th e Ic fa 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 © 20 04 – • 8 Minimum reserve requirements – Discount or bank rate – Open Market Operations (OMO). 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 Bank’s 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.
  • 14. 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 s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 • 9
  • 15. Part I: Questions on Basic Concepts Macroeconomic Analysis: An Overview 1. Which of the following variable(s) will come under stock variable(s)? b. Gross domestic product. c. Money supply. d. Exports. e. Both (a) and (c) above. 04 The relationship between aggregate consumption expenditure and aggregate income of household sector is known as ________ function. B 04 20 2. Consumer price index. 04 a. b. Saving c. Expenditure d. Income e. None of the above. M AC o. ef .N R -4 27 Gross domestic savings is the difference between 02 3. Consumption W a. b. Gross Domestic Product and GDCF (Gross Domestic Capital Formation) c. National Disposable Income and Gross Domestic Product d. GDP and Aggregate Consumption e. National Disposable Income and Gross National Product. 31 1- :8 BN .IS ed se rv 4. Gross Domestic Product and Gross National Product 4- a. Which of the following variable(s) will come under flow variable(s)? Unemployment. b. Foreign exchange reserves. lr ig ht s re a. Consumption. Money supply. e. Both (a) and (b) above. ty Pr es s. Al c. d. The act of replacing worn out assets and creating new assets is capital formation. Then Gross Domestic Capital Formation (GDCF) consists of ni ve rs i 5. Making good the depreciation on existing fixed assets Adding to the stock of fixed assets c. Adding to inventories d. Both (a) and (b) above e. All of (a), (b) and (c) above. © 20 04 Th e Ic b. fa iU a. 6. Which of the following relationships is not correct? a. b. Net domestic saving = Net national saving + Retained earnings of foreign companies. c. Gross domestic saving = Net domestic saving + Depreciation provision. d. Gross domestic investment = Gross fixed investment + Change in inventories. e. 10 Net national savings = National Disposable Income (NDI) – Private consumption expenditure – Government expenditure on current goods and services. Gross domestic product = Consumption + Gross investment + Government expenditure + Exports.
  • 16. Part I If GDP is growing at g% per annum and population at p% per annum, the per capita GDP must be growing at __________ %. a. b. (g + p)/2 c. (g – p)/2 d. (p – g) e. None of the above. How the prices of resources, goods and assets are determined c. How resources are distributed d. How production and household sectors interact through markets e. Both (b) and (d) above. 04 b. W M AC ef .N Which of the following statements is not true with respect to stock and flow variables? -4 R 9. How competition achieves economic efficiency under laissez faire B a. 20 04 The circular flow model of a free enterprise economy shows o. 8. ⎡1+ g ⎤ ⎢ ⎥ −1 ⎣1+ p ⎦ 04 7. Both variables have time dimension. b. Flow variables are always determined by stock variables. c. Stock variables are usually affected by flow variables. d. All flow variables need not have stock variable counterparts. e. Flow variables are partly determined by stock variables. .IS BN :8 1- 31 4- 02 27 a. se rv ed 10. Which of the following is a “leakage” from the circular flow of income? Mr. Ramesh bought an Indian made color television for Rs.15,000. b. Mr. Babu bought a second hand refrigerator from his friend Rajesh. c. Mr. Harsha imported a brand new Ferrari car from Germany for Rs.10 lakh. d. Mr. Sujit paid Rs.10,000 to his personal secretary towards salary. e. Both (a) and (c) above. Pr es s. Al lr ig ht s re a. ve rs i ty 11. Which is the best indicator of economic development of a developing country like India? National income deflator. b. GNP at current prices. iU fa Real national income. Ic Th e c. ni a. © 20 04 d. Per capita real national income. e. GDP deflator. Measurement of Macroeconomic Aggregates 12. If GNP deflator is raised by 40% then which of the following statements is correct? a. Nominal GNP will increase at least by 40%. b. Real GNP will increase at least by 40%. c. Both nominal GNP and real GNP will increase by 40%. d. Nominal GNP will increase by 40% but real GNP will decrease by 40%. e. Real GNP will increase by 40% but nominal GNP will decrease by 40%. 11
  • 17. Macroeconomics 13. Which of the following will certainly increase real and nominal GNP? a. Production of more goods and services and decrease in prices. b. Production of more goods and services and rise in prices. c. Production of less goods and services and rise in prices. d. Production of less goods and services and decrease in prices. e. Production of less goods and services and rise in inflation. 14. In an economy narrow money is equal to the sum of ________. RBI currency notes in circulation. ii. Rupee coins and notes in circulation. iii. Small coins. iv. Demand deposits with banks and other deposits with RBI. a. Both (i) and (ii) above b. Both (ii) and (iii) above c. Both (i) and (iii) above d. Only (i), (ii) and (iv) above e. All of (i), (ii), (iii) and (iv) above. 02 27 -4 R ef .N o. M AC W B 04 20 04 04 i. 31 4- 15. In an economy “aggregate monetary resources” are equal to the sum of ________. RBI currency notes in circulation. ii. Rupee coins and notes and small coins in circulation. iii. Time deposits with banks. iv. Demand deposits with banks and other deposits with RBI. a. Both (i) and (ii) above b. Only (ii), (iii) and (iv) above c. Only (i), (ii) and (iii) above d. Only (i), (ii) and (iv) above e. All of (i), (ii), (iii) and (iv) above. Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- i. ve rs i ty 16. In country ‘X’, if NNP at market price remained constant and depreciation increased compared to the previous year then GNP at market prices will _____. Increase b. Decrease © 20 04 iU fa Ic Th e c. ni a. Increase by an amount equal to rise in depreciation d. Decrease by an amount equal to rise in depreciation e. Not change. 17. Which of the following method values the final goods and services produced during a year, by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in an economy? a. b. Income method. c. Input method. d. Output method. e. 12 Expenditure method. Saving method.
  • 18. Part I iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 18. The ________ measurement method of national income aggregates all the money spent by private citizens, firms and the government within the year. a. Expenditure b. Income c. Input d. Output e. Saving. 19. Which of the following ratios best describes the GNP deflator? a. Nominal GNP to real GNP. b. Real GNP to nominal GNP. c. Nominal GNP to real GDP. d. Real GNP to nominal GDP. e. Nominal GDP to real GDP. 20. GDP at market price exceeds GDP at factor cost by the amount of revenue raised through _______. a. Direct taxes b. Indirect taxes c. Income tax d. Tax on rents e. Both (b) and (c) above. 21. Which of the following is not true in representing the GDP at market price and GDP at factor price? a. In GDP at factor price, indirect taxes are not considered. b. In GDP at factor price, subsidies are not considered. c. In GDP at market price, exports are considered. d. In GDP at market price, exports are not considered. e. In GDP at factor price, exports are considered. 22. Macroeconomics is the study of a. Inflation b. Unemployment c. Growth d. Both (a) and (b) above e. All of (a), (b) and (c) above. Th e Ic fa 23. If the average rate of inflation in the USA and Japan between the years 1960-1973 is 3.2% and 6.1% respectively, then the growth rate of ______. © 20 04 a. USA will be more b. Japan will be more c. USA will be twice that of Japan d. Japan will be twice that of USA e. No definite conclusion can be made. 24. In a closed economy savings are equal to __________ at the equilibrium level of income. a. Investments b. Wages c. Income-Investments d. Wages-Consumption e. None of the above. 13
  • 19. Macroeconomics 25. Which of the following methods is/are used for measuring national income? a. Output method. b. Expenditure method. c. Income method. d. Both (a) and (b) above. e. All of (a), (b) and (c) above. 26. Net factor income from abroad is equal to NNP at market prices – NDP at market prices b. NDP at market prices – Indirect taxes + Subsidies c. NDP at factor cost + Depreciation d. NDP at factor cost – Depreciation e. NNP at market prices + Depreciation. o. M AC W B 04 20 04 04 a. ef .N 27. Balance of trade is The difference between current and capital account b. The difference between merchandize export and imports c. Same as the balance of current account d. Same as the balance of capital account e. Same as the overall balance of payments. BN :8 1- 31 4- 02 27 -4 R a. ed .IS 28. Personal disposable income is equal to _______ Wages and salaries – Personal income tax b. Wages and salaries + Dividends paid at home – Personal income tax c. Wages and salaries + Dividends paid at home + Factor income received from abroad – Personal income tax d. Wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government – Personal income tax e. Wages and salaries + Dividends paid at home + Factor income received from abroad – Transfers from government – Personal income tax. ve rs i ty Pr es s. Al lr ig ht s re se rv a. iU ni 29. Personal income equals personal disposable income (Yd) plus Personal savings Ic fa a. Transfers from government c. Personal income taxes d. Dividend payments e. Both (b) and (c) above. © 20 04 Th e b. 30. The Net Domestic Savings of an economy is defined as a. b. Net national savings plus retained earnings of foreign companies c. National disposable income less consumption of household and government sectors d. Gross national savings less depreciation provisions e. 14 Net national savings less retained earnings of foreign companies National disposable income plus consumption of household and government sectors.
  • 20. Part I e. Services of a teacher. 31 Purchase of groceries by a family. :8 1- d. 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 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. BN 34. Macroeconomics is concerned with The level of output of goods and services b. The general level of prices c. The growth of real output d. All of the above ht s re se rv ed .IS a. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig 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. 15
  • 21. Macroeconomics 38. Which of the following is not included in gross investment? a. Business and residential construction. b. Expenditures on consumer goods. c. Additions to business inventory. d. Expenditures on machinery. e. None of the above. 04 39. In a model in which there is a household, business, government and foreign sector, GNP is the sum of Consumption, gross investment, government spending for goods and services, and net exports b. Consumption, net investment, government spending for goods and services, and net exports c. Consumption, gross investment, government spending for goods and services, and gross exports d. Wages, rent, interest, profit and depreciation e. All of the above. -4 R ef .N o. M AC W B 04 20 04 a. 02 27 40. In a three-sector model, Household saving always equals net investment b. Household saving always equals gross investment c. Household saving plus depreciation always equals gross investment plus government spending d. Household saving plus taxes equals net investment plus government spending e. None of the above. se rv ed .IS BN :8 1- 31 4- a. ht s re 41. Which of the following is not correct? NNP – Direct taxes equals national income. b. NNP + Capital consumption allowances equals GNP. c. Gross investment equals net investment plus depreciation. d. Personal income equals disposable personal income plus direct taxes. e. None of the above. ni ve rs i ty Pr es s. Al lr ig a. fa Transfer payments Ic a. iU 42. Personal income includes all of the following except Undistributed corporate profits c. Personal income taxes d. Dividend payments e. Personal savings. © 20 04 Th e b. 43. Nominal GDP is a. b. The total value of goods and services at prices corrected for inflation c. The total value of goods and services produced during periods of low unemployment d. The total value of goods and services measured at current prices e. 16 The total value of goods and services net of exports The total value of goods and services produced at full employment.
  • 22. Part I 44. GDP at factor cost exceeds GDP at market price a. When the factor income from abroad is negative b. When the factor income from abroad is positive c. When depreciation on fixed capital exceeds income in investment d. When direct tax exceeds indirect tax e. When subsidies exceed indirect taxes. 45. The difference between Gross National Product (GNP) and Gross Domestic Product (GDP) is Excess of subsidies over indirect taxes b. Depreciation c. Net foreign income from abroad d. Excess of indirect taxes over subsidies e. Personal disposable income. M AC W B 04 20 04 04 a. ef .N o. 46. NDP does not include Payments made for income taxes b. Depreciation allowances c. Undistributed profits d. Net exports e. The value added from intermediate goods. :8 1- 31 4- 02 27 -4 R a. BN 47. Which of the following is not correct? NNP + Indirect taxes = National Income. b. GNP = NNP + Depreciation. c. Saving + Taxes = Investment + Government Spending. d. Personal Income = Disposable Income + Direct Taxes. e. Gross Investment = Net Investment + Depreciation. Pr es 48. National income is s. Al lr ig ht s re se rv ed .IS a. NDP at market prices b. NNP at market prices c. NDP at factor cost d. NNP at factor cost ve rs i ni iU fa Ic GNP at market prices. Th e e. ty a. © 20 04 49. Which of the following statements is/are true? i. Every increase in real GDP will necessarily improve the welfare of the people. ii. Foodgrains retained by the farmers are excluded from the computation of GDP. iii. GNP at market prices is also known as National Income. iv. Transfer payments are not taken into account while computing national income. a. Both (i) and (ii) above. b. Both (ii) and (iii) above. c. Both (iii) and (iv) above. d. Only (ii) above. e. Only (iv) above. 17
  • 23. Macroeconomics 50. Which of the following is not included in GDP of India? a. Depreciation written off by Reliance Industries Ltd. b. Profits before tax earned by Ford Motors Ltd. in India. c. Salaries paid by Satyam Infoway to an American consultant at its Chennai office. d. Salaries paid by Microsoft USA to Indian programmers employed at New York. e. Dividends earned by a Foreign Institutional Investor in India. 51. GDP is not a very good measure of economic prosperity because The expenditure and production methods to GDP yield different results because of conceptual problems b. It does not include non-monetized transactions/activities c. It is purely a monetary measure d. It does not include environmental degradation e. Both (b) and (d) above. M AC W B 04 20 04 04 a. o. 52. Which of the following statements is not true? GDP deflator is also known as implicit price deflator. b. GDP deflator reflects the change in overall price level of the economy. c. GDP deflator is the most comprehensive index of prices. 27 -4 R ef .N a. GDP deflator reflects on the purchasing power of the people. e. GDP deflator measures economic growth. 31 4- 02 d. Residential investment BN a. :8 1- 53. The difference between personal disposable income and personal income is ed Subsidies se rv c. .IS b. Indirect taxes s Personal taxes. ht e. re d. Transfer payments s. Al lr ig 54. When the addition to capital goods in an economy is more than the capital consumption allowance, the economy experiences Negative net investment b. Zero net investment c. Positive net investment d. Negative gross investment e. Zero gross investment. fa iU ni ve rs i ty Pr es a. 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. None of the above. © 20 04 Th e Ic 55. Which of the following ratios best describes the GNP deflator? 56. Which of the following is an example of a government transfer payment? a. b. Purchase of a new car for the Ministry of Finance. c. Funding of a clinic to provide free vaccinations. d. Free food coupons issued to persons in an anti-poverty program . e. 18 Salary paid to a soldier. Funding of a new bridge in an urban area.
  • 24. Part I 57. Which of the following price indices is/are most widely used for determining of inflation in India? a. Wholesale Price Index (WPI). b. GDP deflator. c. Consumer Price Index (CPI). d. Both (a) and (b) above. e. Both (b) and (c) above. 58. Which of the following is considered as an investment? Arun deposits Rs.10,000 with a nationalized bank in a term deposit for a period of 5 years. b. Barucha invests Rs.5,000 in equity shares of a company. c. Charlie and Co. accumulates unsold inventory worth Rs.1,000 . d. Delta Corp. buys ten used vehicles to strengthen its transportation fleet. e. None of the above. o. M AC W B 04 20 04 04 a. ef .N 59. The net factor income earned within the domestic territory of a country must be equal to Net Domestic Product at factor cost b. Net Domestic Product at market price c. Net National product at factor cost d. Net National Product at market price e. Personal income. BN 60. Both dividends and corporate taxes are part of :8 1- 31 4- 02 27 -4 R a. Corporate profits. ii. National income. i. Personal income. iv. Personal disposable income. a. Both (i) and (ii) above b. Both (ii) and (iii) above c. Both (i) and (iii) above d. (i), (ii) and (iii) above e. (i), (ii) and (iv) above. ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS i Th e a. Ic fa iU 61. Which of the following indices necessarily gives higher weights to services like doctor fees, railway and bus fares? Consumer Price Index (CPI). © Wholesale Price Index (WPI). c. Index of Industrial Production. d. GNP deflator. e. 20 04 b. GDP deflator. 62. Which of the following would not be included in GDP? a. Bobby purchases a new suit to wear at work. b. Amok purchases a new Ford car. c. Community Bank purchases new computers for its loan office. d. Margaret grows tomatoes in her home garden e. Ford India produces but could not sell 100 cars. 19
  • 25. 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. Marginal propensity to consume b. Marginal propensity to save c. Average propensity to save d. Multiplier e. Average propensity to consume. 20 04 04 64. In an economy consumption function is equal to 12 + 0.6Y [then which of the following statements are true? Marginal propensity to consume is 0.6. ii. Marginal propensity to save is 0.4. iii. Marginal propensity to consume is 0.4. iv. Marginal propensity to save is 0.6. v. Autonomous consumption demand is 12. a. Both (iii) and (v) above. b. Both (iv) and (v) above. c. Only (iii), (iv) and (v) above. d. Only (i), (ii) and (v) above. e. Only (ii), (iii) and (v) above. :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 i. BN 65. The “rachet effect” is the situation where households find It difficult to adjust to rising incomes than falling income b. It easier to adjust to rising incomes than falling income c. Supply of goods not sufficient, due to low production d. That inflation is the only reason for high cost consumption e. It is difficult to save, due to low income. lr ig ht s re se rv ed .IS a. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al 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 e. Level of Consumption in the Economy. 68. The balanced budget multiplier is not affected by a. b. Marginal propensity to import c. Investment function of the economy d. Proportional income tax rate levied by the government e. 20 Marginal propensity to save Both (a) and (b) above.
  • 26. Part I 69. Which of the following is false? a. The ‘naive consumption function’ assumes a constant marginal propensity to consume. b. The ‘naive consumption function’ assumes that the ‘autonomous’ component of consumption is constant. c. The average propensity to consume can never exceed unity. d. As income increases, the average propensity to consume decreases. e. Both (c) and (d) above. b. A parameter whose value depends upon the level of disposable income c. A behavioral coefficient d. A dependent variable e. None of the above. 04 The autonomous part of consumption, independent of the level of income, Y M AC W B 04 20 a. 04 70. In the equation C = C + cY, C is ef .N o. 71. Which of the following statements is correct? A variable is endogenous when its value is determined by forces outside the model. b. A change in an exogeneous variable is classified as an autonomous change. c. A variable is exogenous when its value is determined by forces within the model. d. A variable is autonomous when its value is determined by forces within the model. e. All of the above. 1- 31 4- 02 27 -4 R a. BN :8 72. In stating that C = f(Yd, W) It is hypothesized that Yd is a more important determinant of C than W b. It is hypothesized that W is a more important determinant of C than Yd c. W and Yd are dependent variables explaining C d. Yd and W are independent variables explaining C e. Both (c) and (d) above. ig ht s re se rv ed .IS a. s. Al lr 73. Equilibrium occurs in a two-sector model when Saving equals investment Pr es a. Consumption plus investment equals the value of output Planned saving equals planned investment d. Aggregate spending equals the revenues of the business sector e. All of the above. fa iU ni ve rs i ty b. c. a. Output should increase b. Output should decrease c. Output should not change d. Any of the above can happen e. None of the above. © 20 04 Th e Ic 74. When planned saving is greater than planned investment, 75. 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. 21
  • 27. Macroeconomics 76. By definition, the marginal propensity to consume a. Equals ΔC/ΔYd b. Is the behavioral coefficient c in the equation C = a + cYd c. Is the slope of the consumption function d. All of the above e. None of the above. 77. The value of the expenditure multiplier relates b. The change in autonomous spending to the change in income c. The change in consumption to the change in income 20 04 The change in income to the change in consumption All of the above. M AC W B d. e. 04 The change in income to the change in autonomous spending 04 a. 78. A change in autonomous spending is represented by b. A shift of a spending line c. A change in a behavioral coefficient d. Both (a) and (c) above e. None of the above. o. A movement along a spending line 31 4- 02 27 -4 R ef .N a. 1- 79. When Ct = f(Yd, t – 1) There is an imperfect relationship between consumption and disposable income b. There is no relationship between consumption and disposable income c. Consumption spending lags the receipt of disposable income by one period d. The receipt of disposable income lags consumption spending by one period e. Both (a) and (c) above. s re se rv ed .IS BN :8 a. ig ht 80. Dynamic multipliers occur when 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. ni ve rs i ty Pr es s. Al lr a. Th e b. 20 04 © 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 d. Decrease in Foreign Exchange Reserves e. Increase in Foreign Exchange Reserves. 82. Which of the following will not result in an increase in the level of income? a. An increase in autonomous spending. b. A decrease in autonomous taxes. c. An increase in autonomous transfers. d. An increase in net tax revenues. e. Both (a) and (d) above. 83. Ceteris paribus, an income tax 22 c. There is net debit balance in the merchandize account Ic a. fa iU 81. A current account deficit implies that
  • 28. Part I a. Increases the value of the expenditure and net tax revenue multiplier b. Increases the value of the expenditure multipier and decreases the value of the net tax revenue multiplier c. Decreases the value of the expenditure and net tax revenue multiplier d. Decreases the value of the expenditure multiplier and increases the value of the net tax revenue multiplier e. None of the above. 84. If the net export balance is zero, an increase in autonomous investment spending will Increase the net export balance and the income level b. Increase the income level but make the net export balance negative c. Increase the income level and have no effect upon the net export balance d. Have no effect upon the income level but cause the net export balance to become negative e. None of the above. o. M AC W B 04 20 04 04 a. ef .N 85. An increase in the marginal propensity to import Has the same effect upon the multipliers as an increase in the MPC b. Has no effect upon the multipliers c. Increases the value of the multipliers d. Decreases the value of the multipliers e. None of the above. :8 1- 31 4- 02 27 -4 R a. ed .IS BN 86. When an investment spending is negatively related to the rate of interest, equilibrium income in the goods market Is unrelated to the rate of interest b. Is inversely related to the rate of interest c. Is positively related to the rate of interest d. Falls as the rate of interest decreases e. None of the above. Pr es s. Al lr ig ht s re se rv a. 87. Given the consumption function C = 256 + 0.85Y, we may infer that, as Y increases Average propensity to consume remains constant b. The marginal propensity to consume and average propensity to consume will be decreasing c. The average propensity to consume is constant but marginal propensity to consume will be decreasing Th e Ic fa iU ni ve rs i ty a. © 20 04 d. The average propensity to consume will be decreasing but marginal propensity to consume will be constant e. Both the average and marginal propensity to consume will be constant. 88. Which of the following will not increase the value of multiplier? a. Increase in marginal propensity to consume. b. Increase in marginal propensity to save. c. Decrease in tax rate. d. Decrease in marginal propensity to import. e. None of the above. 89. When the balanced budget multiplier is equal to one, increase in government expenditure and 23
  • 29. Macroeconomics the tax revenue by 100 will a. Not change the equilibrium income b. Increase the equilibrium income by 100 c. Increase the equilibrium income by less than 100 d. Decrease the equilibrium income by 100 e. Decrease the equilibrium income by more than 100. 90. Which of the following statements is true? The value of Marginal Propensity to Consume (MPC) lies between zero and infinity. b. The value of multiplier lies between 0 and 1. c. The value of multiplier lies between 1 and infinity. d. The value of multiplier is the inverse of MPC. e. In the linear consumption function average propensity to consume is constant. M AC W B 04 20 04 04 a. o. 91. Which of the following statements is true? Relative Income Hypothesis asserts that people can quickly and easily adjust their living standards downwards but upward adjustment is very difficult. b. Permanent Income Hypothesis states that the transitory component of income significantly influences the consumption behavior. c. Relative income hypothesis assumes that marginal propensity to consume and hence multiplier are constant. d. Life Cycle Hypothesis states that the saving behavior of the individuals during their working life is motivated by their desire to maintain consumption levels after retirement. e. Relative Income Hypothesis states that marginal propensity to consume is lower for increase in income than for decrease in income. re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N a. ht s 92. On the basis of the Keynesian model of output determination, a multiplier of 3 implies that An increase in consumption by Rs.3 will result in an increase in investment by Re.1 b. An increase in investment by Re.1 will result in an increase in consumption by Rs.3 c. An increase in investment by Re.1 will result in an increase in consumption by Rs.2 d. An increase in investment by Re.1 will result in an increase in consumption by Rs.1 e. An increase in income by Re.1 will result in an increase in investment by Rs.2. ni ve rs i ty Pr es s. Al lr ig a. iU 93. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)? Monetary liabilities of the RBI increases. Ic fa a. High-powered money in the economy decreases. c. The value of money multiplier decreases. d. Aggregate demand in the economy increases. e. Price level in the economy increases. © 20 04 Th e b. 94. Consumption demand does not depend upon the level of a. Income b. Propensity to consume c. Propensity to save d. Consumer spending. e. Marginal efficiency of investment. 95. The slope of the consumption curve connotes 24
  • 30. Part I a. Average propensity to save b. Average propensity to consume c. Marginal propensity to consume d. Marginal propensity to save e. Level of consumption in the economy. 96. Given that the marginal propensity to consume is larger, which of the following statements are true. Multiplier value will be larger. iii. Average propensity to consume will be larger. iv. Autonomous consumption will be higher. a. Both (i) and (ii) above b. Both (ii) and (iii) above c. (ii), (iii) and (iv) above d. (i), (ii) and (iii) above e. Both (iii) and (iv) above. 04 ii. 04 Marginal propensity to save will be larger. -4 R ef .N o. M AC W B 04 20 i. 27 Income Determination Model Including Money and Interest 31 4- 02 97. The curve explains the combination of interest rates and levels of output at which planned spending equals income. IS b. LM c. MPC d. MPS e. AD. re se rv ed .IS BN :8 1- a. ht s 98. Which of the following statements is/are incorrect? The IS curve shifts to the left if the tax rate increases. b. The IS curve shifts to the right if tax rate and government expenditure increases. c. The IS schedule shifts to the right if the interest rate falls. d. The IS schedule shifts to the right if the interest rate rises. e. Both (c) and (d) above. ve rs i ty Pr es s. Al lr ig a. iU ni 99. Which of the following statements is/are true regarding IS curve? Larger the multiplier, steeper the IS curve. Ic fa a. Larger the multiplier, flatter the IS curve. c. As the taxes increase, the IS curve becomes steeper. d. As the taxes decrease, the IS curve becomes steeper. e. Both (b) and (c) above. © 20 04 Th e b. 100. An autonomous increase in investment a. Does not affect the IS curve b. Shifts the LM curve to the left c. Shifts the IS curve to the left d. Shifts the IS curve to the right e. Makes the IS curve flat. 101. The LM schedule shifts 25
  • 31. Macroeconomics a. To the right, if the supply of money increases b. To the right, if the demand for money increases c. To the left, if the supply of money increases d. To the left, if the demand for money decreases e. 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 Equilibrium in goods market will be at a point higher than the existing income b. Equilibrium in money market will be at a point higher than the existing income c. Equilibrium in goods market does not change but equilibrium in money market will be at a point higher than the existing income d. Equilibrium in money market does not change but equilibrium in goods markets will be at a point higher than the existing income e. Both (a) and (b) above. o. M AC W B 04 20 04 04 a. ef .N 103. Which of the following is true? The LM curve is vertical if there is no speculative demand for money. b. The LM curve is horizontal if there is no speculative demand for money. c. The changes in money supply will have no effect on the LM curve, if the LM curve is positively sloped. d. The changes in money supply will have no effects on the LM curve, if the LM curve is negatively sloped. e. Both (b) and (d) above. .IS BN :8 1- 31 4- 02 27 -4 R a. ed 104. The basic difference between IS and LM curve is that IS curve explains money market and LM curve explains goods market b. IS curve explains goods market and LM curve explains money market c. IS curve explains money in circulation and LM curve explains goods in demand d. IS curve explains monetary policy and LM curve explains fiscal policy e. IS curve slopes from right to left and LM from left to right. Pr es s. Al lr ig ht s re se rv a. ty 105. The LM schedule is a Schedule of goods market equilibrium where the supply of goods equals the demand for goods b. Schedule of monetary equilibrium where the supply of money equals the demand for money 20 04 Th e c. Ic fa iU ni ve rs i a. 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 e. Both (a) and (d) above. © d. 106. When IS curve shifts rightwards a. Income will fall but interest rates will rise b. Income will rise but interest rates will fall c. Both income and interest rates will fall d. Both income and interest rates will rise e. 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
  • 32. Part I a. Autonomous government expenditure on goods and services b. Transfer payments made by the government c. Marginal propensity to import d. Both (a) and (b) above e. All of (a), (b) and (c) above. 108. The slope of the LM curve is dependent upon the Money supply in the economy b. Price level in the economy c. Transactions demand function for money of the economy d. Money supply and price level in the economy e. Money supply, price level and transactions demand function for money of the economy. B 04 20 04 04 a. M AC W 109. If investment demand is infinitely interest elastic LM curve becomes horizontal c. IS curve becomes vertical d. IS curve becomes horizontal e. Both (b) and (c) above. ef .N b. o. LM curve becomes vertical 02 27 -4 R a. Aggregate demand to the left c. Aggregate supply to the right d. Aggregate supply to the left e. None of the above. 31 b. 1- Aggregate demand to the right re se rv ed .IS BN :8 a. 4- 110. An expansionary monetary and fiscal policy shifts ht s 111. The demand for money is Positively related to the income level and the rate of interest b. Negatively related to the income level and the rate of interest c. Negatively related to the income level and positively related to the rate of interest d. Positively related to the income level and negatively related to the rate of interest e. None of the above. ve rs i ty Pr es s. Al lr ig a. An increase in the quantity of money demanded and an increase in the rate of interest Ic Th e a. fa iU ni 112. Suppose the money supply and price level are constant, and the demand for money is a function of income and the rate of interest. When the income level increases, there is © An increase in the quantity of money demanded and a decrease in the rate of interest c. A decrease in the quantity of money demanded and a decrease in the rate of interest d. A decrease in the quantity of money demanded and an increase in the rate of interest e. 20 04 b. None of the above. 113. Simultaneous equilibrium in the money (LM) and goods (IS) markets exists a. At an unlimited number of income levels and rates of interest b. At only one income level and rate of interest c. At an unlimited number of income levels and only one rate of interest d. At only one income level and an unlimited number of rates of interest e. None of the above. 114. A liquidity effect occurs when 27
  • 33. Macroeconomics a. A reduction in government spending lowers the rate of interest b. A money supply increase lowers the rate of interest c. An increase in government spending increases the rate of interest d. A money supply increase raises the rate of interest e. None of the above. 115. A liquidity effect will normally result in an income effect because Lower interest rates will increase the portfolio demand for money b. Lower interest rates will cause less crowding out c. Lower interest rates will increase interest sensitive spending d. Lower interest rates will cause more crowding out e. None of the above. W M AC 116. A change in the money supply has a greater effect upon equilibrium income if B 04 20 04 04 a. The private sector spending is more interest-sensitive b. The private sector spending is less interest-sensitive c. The expenditure multiplier is smaller than anticipated d. The interest-sensitive money holding to the rate of interest is more e. None of the above. 02 27 -4 R ef .N o. a. :8 1- 31 4- 117. In which of the following situations will an increase in the money supply have no effect upon equilibrium income? LM is steeply sloped and IS is relatively flat. b. LM is vertical and IS is steeply sloped. c. LM is steeply sloped and IS is vertical. d. LM is relatively flat as is IS. e. None of the above. ht s re se rv ed .IS BN a. lr ig 118. Crowding out is more likely to occur when The demand for money is interest-sensitive, and private sector spending is largely interest-insensitive b. The demand for money is interest-sensitive, and private sector spending is interest-sensitive c. The demand for money is interest-insensitive, and private sector spending is interest-insensitive d. The demand for money is interest-insensitive, and private sector spending is interest-sensitive 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al a. e. None of the above. © 119. Crowding out will occur when a. A decrease in the money supply raises interest rates which crowd out interest-sensitive private sector spending b. An increase in taxes of the private sector reduces private sector disposable income and spending c. A reduction in income taxes causes higher interest rates, which crowd out interest-sensitive private sector spending d. A reduction in government spending causes induced consumption spending to fall e. None of the above. 120. Which of the following statements is not true? 28
  • 34. Part I a. When the relative increase in the price level is greater than the relative increase in the nominal money supply, the real money supply decreases. b. When the relative increase in the nominal money supply is greater than the relative increase in the price level, the real money supply increases. c. When the price level decreases, ceteris paribus, the real money supply decreases. d. When the price level increases, ceteris paribus, the real money supply decreases. e. None of the above. 121. An increase in the price level b. Reduces the real money supply and shifts the LM schedule to the left c. Increases the real money supply and shifts the LM schedule to the right d. Increases the real money supply and shifts the LM schedule to the left e. None of the above. 04 Reduces the real money supply and shifts the LM schedule to the right o. M AC W B 04 20 04 a. ef .N 122. If real and nominal interest rates fall, then Investment spending should fall, as well b. Investment spending should rise c. Consumption expenditure should fall as people save more d. The marginal propensity to save should rise, shifting the entire consumption schedule e. Investment spending should rise primarily to take up the slack left by lower consumption expenditure. BN :8 1- 31 4- 02 27 -4 R a. b. Gm = a.Gy – Gp c. Gm = a.Gp – Gy d. Gm = Gy + a. Gp e. Gm = a.Gy + Gp. re Gm = Gp – a. Gy ve rs i ty Pr es s. Al lr ig ht s a. se rv ed .IS 123. Given, growth rate of real output = Gy, income elasticity of demand is (alpha), acceptable rate of inflation is Gp, the money stock growth target (Gm) is given by (all in percentage terms) 124. When economists are concerned about the liquidity preference function, they are interested in The relationship of the demand for money and the rate of interest b. The proportion of liquid (cash) reserves maintained by commercial banks © 20 04 iU fa Ic Th e c. ni a. The preference for a currency backed by gold d. A bank’s desire for accounts receivables as collateral e. The amount of money in circulation. 125. Transmission mechanism shows a. The interrelationship between the money market and the goods market b. Low increase in government expenditure increases income c. The relationship between income and consumption d. The relationship between income and saving e. None of the above. 126. Which of the following statements is/are true? 29
  • 35. Macroeconomics The elasticity of demand is the same at all points on a linear demand curve. ii. Interest rates are inversely related to investment expenditure. iii. An increase in money supply tends to increase interest rates. a. (i) only. b. (ii) only. c. (iii) only. d. (i) and (ii) only. e. (ii) and (iii) only. 04 i. 20 04 127. A ‘supply shock’ such as failure of monsoon or increase in the price of oil Causes a rightward shift of the aggregate supply curve and thus results in higher equilibrium output and lower prices b. Causes a rightward shift of the aggregate supply curve and thus results in higher equilibrium output and higher prices c. Causes a leftward shift of the aggregate supply curve and thus results in lower equilibrium output and higher prices d. Causes a leftward shift of the aggregate supply curve and thus results in lower equilibrium output and lower prices e. Causes a rightward shift of the aggregate supply curve and thus results in lower output and higher prices. 31 4- 02 27 -4 R ef .N o. M AC W B 04 a. :8 1- 128. If transfer payments are increased, which of the following is true of I-S curve? Slope of the I-S curve will increase. c. I-S curve will shift to the right. d. Slope of the I-S curve will decrease. e. I-S curve will not be affected. .IS b. BN I-S curve will shift to the left. ig ht s re se rv ed a. s. Al lr 129. If the demand for money is infinitely interest elastic, which of the following is true? Changes in money stock are totally ineffective in influencing equilibrium output and interest rate. b. Changes in autonomous expenditure are totally ineffective in influencing equilibrium output and interest rate. c. Changes in money stock lead to changes in equilibrium rate of interest only while equilibrium output remains unaffected. Changes in autonomous expenditure affects only the equilibrium output while equilibrium rate of interest remains unchanged. © 20 04 Th e Ic d. fa iU ni ve rs i ty Pr es a. e. Changes in money stock lead to changes in both equilibrium output and rate of interest while changes in autonomous expenditure affect only the interest rate. 130. Which of the following is not true with respect to IS curve? a. It shows the equilibrium in the goods market. b. It is positively sloped. c. If autonomous exports increase, it will shift to the right. d. If government expenditure decreases, it shifts to the left. e. 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
  • 36. Part I a. Excessive investment is undertaken in the economy b. A rise in base money leads to a very tight monetary policy c. Increase in government deficit, due to a tax cut or an increase in government spending reduces the funds available to investment spending d. Funds available for investment spending will be protected by all means e. Both (a) and (c) above. 132. Transaction demand for money Varies positively with income and inversely with rate of interest c. Varies inversely with income and positively with rate of interest d. Varies inversely with income and rate of interest e. Does not depend on income and rate of interest. 04 b. 04 Varies positively with income and rate of interest W B 04 20 a. Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC 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 © 20 04 c. Equilibrium income is determined by the positions of both the I-S and L-M curves d. Equilibrium income is unaffected by the positions of both the I-S and L-M curves e. Fiscal policy is totally ineffective in changing any of the real variables. 137. Japanese economy is facing the problem of liquidity trap. Which of the following statements is not true about liquidity trap? a. Public is willing to hold whatever money is supplied at the current interest rate. b. LM curve is horizontal. c. Fiscal policy is more effective in increasing income. d. Monetary policy is ineffective in affecting interest rate. e. LM curve is vertical. 138. Which of the following better explains the inverse relationship between the interest rate and 31
  • 37. Macroeconomics the demand for money? a. The transaction demand for money. b. The speculative demand for money. c. The precautionary demand for money. d. The inflationary expectations. e. None of the above. The relationship between the interest rate and the demand for money is direct, not inverse. 04 139. Which of the following statements is not true about IS-LM Model? IS function represents the goods market equilibrium. b. LM function represents the money market equilibrium. c. Interest rate is a variable in both IS and LM functions. d. Goods and money markets interact to determine the equilibrium national income. e. IS curve is positively sloped. o. M AC W B 04 20 04 a. b. IS curve shifts to the right. c. LM curve shifts to the left. d. Interest rate falls. e. Interest rate increases. -4 Disposable income remains constant. BN :8 1- 31 4- 02 27 a. R 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? ed .IS 141. The LM curve shows 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 negative relationship between rate of interest and level of investment d. A positive relationship between rate of interest and level of investment e. A positive relationship between level of investment and level of income. Pr es s. Al lr ig ht s re se rv a. ty 142. An increase in government expenditure will 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 IS curve to the left Not affect the position of IS curve but shift LM curve to the right Th e Ic d. fa iU ni ve rs i a. Not affect the position of LM curve but shift IS curve to the right. © 20 04 e. 143. The demand for money is a demand for real money balances for a given interest rate. If there is an increase in the level of income because of increase in real money supply, which of the following statements holds true? a. b. LM curve shifts to the left. c. IS curve shifts to the right. d. LM curve shifts to the right. e. 32 IS curve shifts to the left. Both IS and LM curves shifts to the right.
  • 38. Part I Fundamentals of Aggregate Demand and Aggregate Supply © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 144. 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. 33
  • 39. Macroeconomics 151. An increase in the real wage will increase the quantity of labor supplied, but will reduce the quantity of a. Goods supplied b. Labor demanded c. Goods demanded d. Goods manufactured e. Both (a) and (c) above. 152. In the demand function for money, we include b. Real income and real interest rate c. Real income and nominal interest rate d. Nominal income and real interest rate e. High-powered money and interest rate. 04 Nominal income and nominal interest rate M AC W B 04 20 04 a. ef .N o. 153. Business firms will produce at maximum efficiency because Of the market forces of both supply and demand b. Of government regulatory role c. They assess the basic questions of how the society allocates scarce resources d. Of possible change in prices of goods and services e. Both (b) and (d) above. :8 1- 31 4- 02 27 -4 R a. .IS BN 154. A rightward shift of aggregate demand, with no change in the aggregate supply schedule, results in an increase in Real output and no change in the price level when aggregate supply is upward sloping b. Real output and no change in the price level when aggregate supply is horizontal c. The price level and no change in real output when aggregate supply is upward sloping d. The price level and no change in real output when aggregate supply is horizontal e. None of the above. Pr es s. Al lr ig ht s re se rv ed a. 155. Aggregate demand is Negatively related to the price level because a decline in the price level has a negative effect on the demand for output b. Negatively related to the price level because a decline in the price level has a positive effect on the demand for output Positively related to the price level because a decline in the price level has a negative effect on the demand for output Ic Th e c. fa iU ni ve rs i ty a. 20 04 Positively related to the price level because a decline in the price level has a positive effect on the demand for output e. © d. None of the above. 156. The slope of aggregate demand becomes flatter a. b. The more sensitive the demand for money is to the rate of interest c. The smaller the value of the expenditure multiplier d. The large the nominal money supply e. 34 The more sensitive the investment spending is to the rate of interest None of the above.
  • 40. Part I 157. A neoclassical aggregate supply schedule exists a. At an output rate greater than the natural rate of unemployment b. At an output level determined by the supply of and demand for labor c. When the demand for labor and supply of labor schedules adjust immediately to a change in the price level d. When equilibrium in the labor markets is unaffected by shifts in the supply of labor schedule e. None of the above. Increases the price level and real output b. Increases the price level but has no effect on real output c. Increases real output but has no effect on the price level d. Has no effect on the price level or real output e. None of the above. ef .N o. M AC W B 04 20 04 a. 04 158. Suppose there is full employment and aggregate supply is vertical. A decrease in taxes -4 R 159. Suppose there is full employment and a vertical aggregate supply schedule. An increase in the nominal money supply Causes the real money supply to increase, which changes the composition of output b. Has no effect on the real money supply or the composition of output c. Causes a proportional increase in real output d. Reduces the rate of interest and changes the composition of output e. None of the above. .IS BN :8 1- 31 4- 02 27 a. se rv ed 160. When aggregate supply is positively sloped and there is an increase in the real per unit cost of materials, aggregate supply shifts to the Right, the price level falls, and real output increases b. Left, the price level falls, and real output increases c. Right, the price level increases, and real output decreases d. Left, the price level increases, and real output decreases e. None of the above. Pr es s. Al lr ig ht s re a. ve rs i ty 161. When aggregate supply is positively sloped and there is a decrease in the mark-up on variable cost, aggregate supply shifts to the Left, the price level falls, and real output increases b. Right, the price level falls, and real output increases iU fa Ic Th e c. ni a. Left, the price level increases, the real output decreases © 20 04 d. Right, the price level increases, and real output decreases e. None of the above. 162. The economy is in inflationary equilibrium. A reduction in a. Government spending permanently lowers the economy’s rate of inflation b. Nominal money supply growth lowers the inflation rate with no effect on output in the short run c. Nominal money supply growth lowers the inflation rate and the level of output in the short run d. Government spending lowers the rate of inflation with no effect on output in the short run e. None of the above. 35
  • 41. Macroeconomics 163. With an upward sloping aggregate supply curve in the short run, an increase in aggregate demand can be expected to cause a. Price level to increase b. Price level to fall c. Output to increase d. Price level and output to increase e. Price level to fall even as output increases. 164. An economy’s capital stock must decline if Consumption exceeds investment b. Net investment is zero c. Depreciation is greater than net investment d. Depreciation is greater than gross investment e. Government expenditures on goods and services are greater than tax collections. M AC W B 04 20 04 04 a. ef .N o. 165. Suppose the price elasticity of demand coefficients are given as 1.50, 0.50, 2.00 and 0.75 for demand schedules D1, D2, D3 and D4 respectively. A one percent increase in the price leads to an increase in total revenue for D1 and D4 only b. D1, D2 and D4 only 02 27 -4 R a. D4 only d. D2 only e. D2 and D4 only. :8 1- 31 4- c. BN 166. Internal balance refers to Equilibrium in balance of payments b. Balanced budget of government c. Domestic savings being equal to domestic investment d. Full employment level of output e. Aggregate demand being equal to aggregate supply. lr ig ht s re se rv ed .IS a. s. Al 167. With respect to Aggregate Supply (AS), which of the following is true? AS in the short run is positively sloped and in the long run it is vertical. b. AS is positively sloped both in the short run and in the long run. ve rs i ty Pr es a. © 20 04 Th e Ic fa iU ni c. AS is positively sloped in the short run and negatively sloped in the long run. d. AS is vertical both in the short run and in the long run. e. Costs have greater impact on AS in short run than in the long run. 168. Aggregate demand in an economy increases with the a. Decrease in income of foreigners b. Increase in the private transfers from abroad c. Decrease in government spending d. Increase in interest rates e. Increase in tax rates. 169. Which of the following is likely to happen, when realized output exceeds spending? a. Lower demand increases the unemployment. b. Higher inflation further reduces the aggregate demand. c. Economy attains full employment level. d. Inventory level in the economy increases. e. 36 Both (a) and (d) above.
  • 42. Part I 170. Which of the following statements is not true in the long run? a. Output converges towards natural rate of output. b. Output becomes insensitive to changes in aggregate demand. c. Input costs play a greater role in the determination of equilibrium output. d. Aggregate supply curve is vertical. e. Unanticipated price changes would have adverse impact on output. 171. Aggregate supply curve becomes vertical even in short run, if The economy is facing deficit demand b. There are idle resources c. All available resources are fully employed d. The economy is yet to reach full employment e. All firms are earnings normal profits. M AC W B 04 20 04 04 a. ef .N o. Money Supply and Banking System 02 27 -4 R 172. In an economy M1 is equal to currency with public + Demand deposits with banks + Demand portion of savings deposits with Banks + Other Deposits with RBI, where currency with public is equal to Currency in circulation less currency with commercial banks b. Notes and coins in circulation and cash with banks c. Notes and coins in circulation and demand deposits with banks d. Demand deposits with banks, other deposits and small coins in circulation e. Notes and coins in circulation and saving deposits. se rv ed .IS BN :8 1- 31 4- a. s re 173. In an economy currency deposit ratio (Cu) and high-powered money (h) are constant. The increase in the reserve ratio will ___________. Increase the money supply b. Decrease the money supply c. Not change the money supply d. Decrease money supply in proportion to the increase in reserve ratio e. Decrease money supply lesser in proportion to the increase in reserve ratio. ve rs i ty Pr es s. Al lr ig ht a. iU ni 174. The basic difference between money stock measure M3 and M4 is that M3 is more than M4 Ic fa a. 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, where as in M3 these are not included e. M1 is part of M4 where as M1 is not part of M3. © 20 04 Th e b. 175. Time deposits with banks are included in __________ measure of money stock. a. M1 b. M2 c. M3 d. M4 e. Both (c) and (d) above. 37
  • 43. Macroeconomics 176. “Bank rate” is a. The rate at which Central Bank discounts the government bills b. The rate at which Central Bank discounts the eligible bills of commercial banks c. The rate at which commercial banks give loans to the other commercial banks d. The rate at which commercial banks lend to the public e. The rate at which Central Bank discounts the foreign bills. 177. The RBI can increase the demand deposit component of the money supply by Increasing the volume of reserves. Decreasing the volume of reserves. iv. Increasing reserve requirements. a. Only (iii) above 04 iii. 20 ii. 04 Lowering reserve requirements. M AC W B 04 i. Only (iv) above Both (i) and (ii) above d. Both (i) and (iii) above e. Both (ii) and (iv) above. -4 R ef .N o. b. c. 4- 02 27 178. The quantity of notes and coins in private circulation plus the quantity of cash held by the banking system is called Monetary base b. Stock of high-powered money c. M1 BN :8 1- 31 a. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS 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) b. c. d. e. 38 (1 + Cu)/r (1 + Cu)/(1 – r + Cu) (1 + Cu)/(r + Cu) (1 – Cu)/(r + Cu).
  • 44. Part I 182. In an economy high-powered money is equal to a. Monetary liabilities of Central Bank + Government money b. Monetary liabilities of Central Bank – Government money c. Financial assets + Non-monetary liabilities d. Monetary liabilities of Central Bank + Foreign exchange assets e. Both (a) and (d) above. 183. If reserve ratio is constant and currency deposit ratio increases then money multiplier Increases b. Decreases c. Does not change d. Decreases more than proportionately to the increase of currency deposit ratio e. Decreases less than proportionately to the increase of currency deposit ratio. M AC W B 04 20 04 04 a. o. 184. Financial interrelation ratio is equal to Total issues/National income b. Primary issues/Net capital formation c. Total issues/Net capital formation d. d. Total stock of financial assets/Stock of fiscal assets e. Secondary issues/Net capital formation. 1- 31 4- 02 27 -4 R ef .N a. :8 185. Which of the following statements is true? M1 is high-powered money. b. M2 is high-powered money. c. M3 is high-powered money when time deposits with bank are not taken. d. M4 is high-powered money when total postal deposits are not taken. e. None of the above. ig ht s re se rv ed .IS BN a. s. Al lr 186. Which of the following statement/s is/are true? M1 = Currency with public + Demand portion of savings deposits with banks + Demand deposits with banks + Other deposits with RBI. ii. M2 = M1 + Post office savings deposits. iii. M3 = M1 + Time deposits with banks. iv. M4 = M3 + All post office deposits. a. Only (i) above. Ic fa iU ni ve rs i ty Pr es i. Both (i) and (ii) above. c. Both (ii) and (iii) above. d. Both (i) and (iv) above. e. All of (i), (ii), (iii) and (iv) above. © 20 04 Th e b. 187. If currency deposit ratio is constant and reserve ratio increases then money multiplier a. Increases b. Decreases c. Does not change d. Decreases more than proportionately to the increase of reserve ratio e. Decreases less than proportionately to the increase of reserve ratio. 39
  • 45. Macroeconomics 188. Saving deposits are not a part of money stock measure (M1) because a. They are not recognized as legal tender by the RBI b. They are negligible compared to demand deposits c. They are not a medium of exchange d. They will not generate money supply e. Both (a) and (c) above. 189. An increase in volume of investment will not occur if interest rates Remain constant while the government announces new tax concessions on capital additions b. Are lowered by increasing M3 c. Remain constant while corporate income tax is increased d. Remain constant, while corporate sector exports increase as result of a decrease in personal income tax e. None of the above. R ef .N o. M AC W B 04 20 04 04 a. 27 -4 190. Financial Interrelations ratio is 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. ht s re se rv ed .IS BN :8 1- 31 4- 02 a. s. Al lr ig 191. The link between changes in the money supply and changes in real macroeconomic variables is best described by A change in interest rates that induces a change in spending, a change in aggregate demand, and thus a potential change in real GDP b. 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 c. A change in spending caused directly by the Central Bank’s adjusting its own investment portfolio and which translates into a change in aggregate demand and finally a change in nominal GDP Th e Ic fa iU ni ve rs i ty Pr es a. © 20 04 d. A change in bankers’ interest rates by direct intervention that may or may not alter real GDP by altering spending e. None of the above. 192. New issues ratio is defined as a. b. Primary issues by non-financial sector/total physical asset formation c. Volume of financial instruments issued by financial intermediaries/volume of primary issues by non-financial sectors d. Total financial claims issued during a year/National income for the year e. 40 Stock of financial assets/stock of physical assets None of the above.
  • 46. Part I 193. Commercial banks create money through credit creation. Which of the following statements is true with regard to credit creation? a. Credit creation by commercial banks is limited by CRR . b. Commercial banks can create as much credit as they want. c. RBI has no control over the credit created by Commercial banks. d. CRR has no impact on credit creation. e. None of the above 04 194. Which of the following does not affect the balance sheet of Reserve Bank of India? Central government’s borrowings from RBI. b. Loan taken by one commercial bank from the other. c. Refinancing of NABARD loans. d. Increase in reserves of commercial banks. e. Increase in net foreign exchange assets. ef .N o. M AC W B 04 20 04 a. -4 R 195. Which of the following ratios is not an indicator of financial development of a country? Finance Ratio. b. Financial Interrelations Ratio. c. New Issue Ratio. d. Intermediation Ratio. e. Cost Benefit Ratio. ed .IS BN :8 1- 31 4- 02 27 a. se rv 196. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)? Monetary liabilities of the RBI increases . b. High-powered money in the economy decreases. c. The value of money multiplier decreases . d. Aggregate demand in the economy increases. e. Price level in the economy increases. ve rs i ty Pr es s. Al lr ig ht s re a. 197. The difference between M3 and M1 is Demand deposits b. Post office savings deposits Th e Ic fa iU ni a. © 20 04 c. Savings deposits d. Time deposits e. M2. 198. Other things being equal, an increase in the supply of money a. Lowers both nominal interest rate and aggregate demand b. Raises both nominal interest rate and aggregate demand c. Raises nominal interest rate and lowers aggregate demand d. Lowers nominal interest rate and raises aggregate demand e. Does not change either nominal interest rate or aggregate demand. 41
  • 47. Macroeconomics Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 199. In the classical model, if production function is represented by Y = f(N), where the capital stock is assumed to be constant, then output in the short run depends only on a. Raw material available b. Labor input c. Demand for goods d. Production capacity e. Wages. 200. The demand for labor is derived from the a. Quantity of goods produced by labor b. Price of goods produced by labor c. Incremental cost and incremental revenue generated by the employment of labor d. Incremental cost generated by the employment of labor e. Incremental revenue generated by the employment of labor. 201. Under pure competition a profit maximizing firm hires workers until the real wage is equal to the a. General price level b. General price level multiplied by marginal product of labor c. General price level divided by marginal product of labor d. Marginal product of labor divided by general price level e. Marginal product of labor. 202. An increase in real wages will a. Shift the demand for labor schedule to the right b. Shift the demand for labor schedule to the left c. Increase the quantity of labor demanded d. Decrease the quantity of labor demanded e. Both (b) and (c) above. 203. Marginal product of labor is the a. Change in supply per unit change in the labor employed b. Change in demand per unit change in the labor employed c. Change in labor cost per unit change in the labor employed d. Change in income per unit change in the labor employed e. Change in output per unit change in the labor employed. Th e Ic 204. Which of the following is not a postulate of Say’s law? b. There might be temporary mismatch between aggregate demand and supply. c. In the short run there can be excess production and unemployment. Prices and wages are sticky downwards. e. © Disequilibrium in the economy can exist for a while. d. 20 04 a. Interest rate fluctuations bring about saving and investment equilibrium. 205. In the classical model, the long run effect of an increase in government spending is a. b. An upward shift of the aggregate demand curve c. An increase in the level of output d. Both (a) and (b) above e. 42 An increase in the price level (a), (b) and (c) above.
  • 48. Part I Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Keynesian Model 206. In the Keynesian model, workers a. b. Accept cuts in money wages as long as real wages do not fall c. Resist any decrease in their real wages d. Resist any decrease in their money wages 04 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. Say’s 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 © 20 04 ef .N BN s. Al Ic Th e 211. fa iU ni ve rs i ty Pr es 210. lr ig ht s re se rv ed .IS 209. :8 1- 31 4- 02 27 -4 R 208. o. M AC W B 04 20 04 207. Accept a decrease in money wages as long as these cuts bring about full employment d. Decrease more than proportionately to decrease in price e. None of the above. 212. If real wages increase, then unemployment a. Decreases in proportion of labor demand b. Decreases in proportion to supply of labor c. Decreases more than the proportion of labor demand d. Increases e. Remain at the same level. 43
  • 49. Macroeconomics 213. Which of the following statements is/are true? a. If prices increase then real wages increase. b. If real wages increase then unemployment increases. c. If prices increase then unemployment decreases, nominal wages remaining constant. d. Both (a) and (b) above. e. Both (b) and (c) above. 04 214. Keynesian model of macroeconomic equilibrium emphasizes that Demand depends on supply of money c. Supply creates its own demand d. Supply depends on demand for money e. Both (a) and (d) above. 20 b. 04 Demand creates its own supply ef .N o. M AC W B 04 a. R 215. Investors prefer holding money to bonds if they expect Interest rates to increase b. Interest rates to decrease c. Capital loss from a bond d. Reinvestment rate of return exceeds capital loss from a bond e. Both (a) and (c) above. .IS BN :8 1- 31 4- 02 27 -4 a. ed 216. According to the Keynesian Aggregate Supply Model Aggregate supply varies positively with price level b. Aggregate supply is independent of price level c. Involuntary unemployment cannot exist d. Nominal and real wage are perfectly flexible e. Both (c) and (d) above. Pr es s. Al lr ig ht s re se rv a. ve rs i ty 217. Which of the following is/are true in case of an economy in equilibrium? Aggregate demand is equal to aggregate supply. b. Employment is not necessarily at full employment level. iU fa Unintended investments are zero. Ic Th e c. ni a. © 20 04 d. Both (a) and (b) above. e. All of (a), (b) and (c) above. 218. The term speculative demand for money refers to money balances held in expectation of a. b. Fall in the prices of bonds c. An increase in the interest rates d. Both (a) and (b) above e. 44 Fall in the prices of goods Both (b) and (c) above.
  • 50. Part I 219. Which of the following is true? The classical model assumes a fixed nominal wage and Keynesian model assumes a fixed real wage. b. The classical model assumes a fixed real wage and Keynesian model assumes a fixed real wage. c. 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. d. The classical model assumes fixed nominal wage but Keynesian model assumes instantaneous adjustment of real wages in response to demand supply balance in labor market. e. Both the classical and Keynesian models assume a fixed real wage. 04 20 04 04 a. W B 220. Which of the following is not true? Classical model of income determination assumes wage flexibility. b. Keynesian model of income determination assumes wage rigidity. c. Classical economists consider only transaction demand for money. d. Keynes considers speculative demand for money also. e. Keynesian model of income determination results in a vertical aggregate supply curve at the full employment level of output. 4- 02 27 -4 R ef .N o. M AC a. 31 221. An increase in the autonomous government expenditure will result in Higher level of income and lower rate of interest b. Higher level of income and higher rate of interest c. Lower level of income and lower rate of interest d. Lower level of income and higher rate of interest e. None of the above. re se rv ed .IS BN :8 1- a. s. Al lr ig ht s 222. According to Keynes, the actual expenditure in an economy can differ from the planned expenditure. Which of the following is true if the actual expenditure is less than the planned expenditure in the economy? There will be positive fixed investment in the economy. b. There will be negative fixed investment in the economy. c. There will be positive inventory investment in the economy. d. There will be negative inventory investment in the economy. e. There will be no change in inventory investment in the economy. fa iU ni ve rs i ty Pr es a. Ic 223. Which of the following is not one of the basic Postulates of the Keynesian Model? Full employment occurs only by coincidence is an economy. b. Effective demand determines the level of employment and output. c. Since full employment is not always possible, Government intervention is essential. d. Budget deficit is a tool to fight recession. e. Monetary policy is more effective than fiscal policy. © 20 04 Th e a. 224. The unemployment in the Keynesian model is caused by a. Demand deficiency b. Supply deficiency c. Demand sufficiency d. Supply sufficiency e Both (a) and (b) above. 45
  • 51. Macroeconomics Post-Keynesian Macroeconomics – Monetarism, Rational Expectations and Supply-side Economics 225. According to monetarism, demand for money depends on a. Interest rate on bonds b. Inflation rate c. Rate of return on all assets other than money d. Money supply e. Cost of living. 04 04 226. According to monetarism, in the short run, increase in money supply results in Decrease in output b. Increase in output c. Decrease in price level d. Increase in price level e. Both (b) and (d) above. ef .N o. M AC W B 04 20 a. 227. Which of the following is/are the implications of rational expectation hypothesis? Econometric models are not very useful in evaluating alternative economic policies. ii. There is no trade-off between inflation and unemployment. iii. Discretionary monetary and fiscal policies cannot be used to stabilize the economy. a. Only (i) above. b. Only (iii) above. c. Both (i) and (iii) above. d. Both (i) and (ii) above. e. All of (i), (ii) and (iii) above. se rv ed .IS BN :8 1- 31 4- 02 27 -4 R i. re 228. Basic assumption/s of rational expectation theory is/are Guesses about the future are on average correct b. Guesses about the future are always correct c. Information received will be always correct d. Both (a) and (c) above e. Both (b) and (c) above. ve rs i ty Pr es s. Al lr ig ht s a. iU ni 229. To improve market efficiency, which of the following is not recommended by Supply side economics? Reduce government controls. Ic fa a. Promote competition. c. Restrict the power of trade unions. d. Remove institutional barriers. e. Increase corporate tax rate. © 20 04 Th e b. 230. According to the Laffer curve, as the tax rate increases, tax revenues a. b. Decrease continuously c. Initially decrease and then increase d. Initially increase and then decrease e. 46 Rise continuously Remain constant.
  • 52. Part I 231. The Chief Economist to the Government told the Cabinet that the government can no longer fool the people by increasing its spending during election years, as people will anticipate this kind of behavior as previous governments used to do so. The economist is an advocate of a. Classical economics b. Rational expectations c. Keynesian economics d. Supply-side economics e. Monetarism. 04 232. Monetarists prefer monetary policy over the fiscal policy because they feel that Statistically money demand function can be better determined than consumption or investment demand b. Money is a substitute for financial assets c. Demand for money is determined by rate of interest d. Fiscal policy is ineffective because of ‘crowding out’ effect e. Both (a) and (d) above. ef .N o. M AC W B 04 20 04 a. 27 -4 R 233. According to the school of rational expectations there is no trade off between inflation and unemployment because People make biased forecasts about the future of the economy based on all the available information b. People anticipate changes in money supply and accordingly adjust prices and wages c. Wages are rigid downwards d. Prices are rigid downwards e. Both (c) and (d) above. se rv ed .IS BN :8 1- 31 4- 02 a. ht s re 234. The curve that depicts the relationship between the rate of change in prices and the rate of unemployment is Laffer curve b. Phillips curve c. Aggregate supply curve d. LM curve e. IS curve. ve rs i ty Pr es s. Al lr ig a. iU ni Economic Fluctuations, Unemployment and Inflation Th e a. Ic fa 235. The bank reserves fall rapidly in _________ stage of business cycle. Recovery © Boom c. Recession d. Depression e. 20 04 b. Both (c) and (d) above. 236. If the available workers are unaware of the jobs being offered and the employers are not aware of the available workers, such type of unemployment is called a. Frictional unemployment b. Structural unemployment c. Cyclical unemployment d. Disguised unemployment e. Demand pull unemployment. 47
  • 53. Macroeconomics 237. Unemployment that arises when there is a general downturn in business activity is known as a. Frictional unemployment b. Structural unemployment c. Cyclical unemployment d. Disguised unemployment e. Demand pull unemployment. 238. Full employment is the level at which there is Zero unemployment b. Normal rate of unemployment c. Least demand for labor d. Least supply of labor e. Demand for goods is less than supply. M AC W B 04 20 04 04 a. 239. Natural rate of unemployment increases due to b. Changes in labor market c. Increase in inflation d. Structural changes in economy e. Frequent changes of jobs by labor. o. General downturn in business activity 4- 02 27 -4 R ef .N a. 1- 31 240. If the actual rate of unemployment exceeds the natural rate of unemployment then Actual output of the economy will fall below its potential :8 a. Production will increase more than potential c. Disguised unemployment increases d. Consumption of goods decreases e. Both (a) and (d) above. re se rv ed .IS BN b. lr ig ht s 241. Unemployment that arises due to regional occupational pattern of job vacancies, which does not match the pattern of workers availability and suitability, is known as Frictional unemployment b. Structural unemployment c. Cyclical unemployment d. Disguised unemployment e. Demand pull unemployment. iU ni ve rs i ty Pr es s. Al a. Th e a. Ic fa 242. The inventory stock will be high in _________ stage of a business cycle. Recovery c. Recession Depression e. © Boom d. 20 04 b. Both (a) and (c) above. 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
  • 54. Part I © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 244. In which sector of Indian economy will we find a high rate of disguised unemployment? a. Service sector. b. Transport sector. c. Agriculture sector. d. Manufacture sector. e. Mining sector. 245. Stagflation is a period of a. High inflation b. Low inflation c. High unemployment d. Low unemployment e. Both (a) and (c) above. 246. The real rate of interest a. Equals the nominal rate plus the rate of inflation b. Equals the rate of inflation minus the nominal rate c. Equals the nominal rate minus the rate of inflation d. Tends to increase when inflation rises e. Is more relevant to investors than consumers. 247. Unemployment that is caused by a mismatch between the composition of the labor force (in terms of skills, occupation, industries, or geographic location) and the make-up of the demand for labor is called a. Real wage unemployment b. Deficient-demand unemployment c. Frictional unemployment d. Structural unemployment e. Search unemployment. 248. During the recessionary phase of a business cycle a. The purchasing power of money is likely to decline rapidly b. The natural rate of unemployment will increase dramatically c. Potential national income will exceed actual national income d. Actual national income will exceed potential national income e. The real rate of interest will exceed the nominal rate of interest. 249. Monetary theorists believe in the use of a. A stable growth rate for the money supply b. Stable interest rates to stabilize the money supply c. Fiscal policy as the main stabilization tool d. A “stop-and-go” monetary policy for fine tuning the economy e. Input-output planning as the main stabilization tool. 250. The Philips curve shows that a. High unemployment rates are associated with low increases in money wage rates b. Low unemployment rates are associated with low rates of inflation c. High unemployment rates are associated with low rates of inflation d. High inflation rates are associated with higher level of money wage rates e. High inflation rates are associated with small increases in money wage rates. 49
  • 55. Macroeconomics © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 251. ‘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
  • 56. Part I 02 27 -4 R ef .N o. M AC W B 04 20 04 04 258. 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- The Open Economy and Balance of Payments: India’s Balance of Payments © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 261. 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. 51
  • 57. Macroeconomics 265. The deficit on current account implies a. Exports of merchandize goods, invisibles is less than imports of merchandize goods, invisibles b. Foreign direct investment in the country is more than exports c. Domestic industries are financed more by the international financial institutes than local financial institutions d. Exports of merchandize goods are less than merchandize imports e. Both (a) and (b) above. 04 266. Dumping in international trade means The sale of goods by foreign supplier in anothery country at price above than the price at which the supplier sells in domestic market b. The sale of goods by foreign supplier in another country at price below than the price at which the supplier sells in domestic market c. The sale of goods by domestic supplier in another country at price above than the price at which the supplier sells in domestic market d. Distributing the goods in international markets without any consideration e. Giving consumer goods freely to the poor nations. 27 -4 R ef .N o. M AC W B 04 20 04 a. 02 267. The investment income from abroad appears under _________ head of BoP statement. Current account b. Capital account c. Official reserve account d. Errors and omissions e. Unilateral transfer account. se rv ed .IS BN :8 1- 31 4- a. re 268. International transfers from abroad means transferring of Goods made by the developed countries to undeveloped countries without consideration b. Goods from one country to another due to bilateral agreement c. Transfer of assets from one country to another country without consideration d. Both (a) and (c) above e. All of (a), (b) and (c) above. ve rs i ty Pr es s. Al lr ig ht s a. iU ni 269. If the balance on current and capital accounts of Balance of Payments (BoP) taken together is negative, then It is a case of BoP surplus It is a case of BoP where the official reserve account is in surplus Th e Ic b. fa a. © 20 04 c. It is a case of BoP deficit d. It is a case of BoP disequilibrium e. None of the above. 270. A current account deficit unmatched or exceeded by a capital account surplus will a. b. Cause domestic interest rate to raise c. Lead to a fall in government budget deficit d. Lead to an increase in the propensity to import e. 52 Cause contraction of money supply Cause expansion of money supply.
  • 58. Part I ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 271. ‘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. fa iU ni Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt Th e Ic 276. Customs duty is an instrument of © Fiscal policy b. Monetary policy c. Trade policy d. Revenue policy e. 20 04 a. None of the above. 277. Increase in net RBI credit to the Central Government is reflected in ________ deficit. a. Budget b. Revenue c. Monetized d. Gross primary e. Gross fiscal. 53
  • 59. Macroeconomics © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 278. 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
  • 60. Part I 285. Budgetary deficit + Government borrowing and other liabilities is known as a. Revenue deficit b. Capital deficit c. Budget deficit d. Primary deficit e. Fiscal deficit. 286. If modern economies wish to maintain both full employment and price stability as their policy objectives, then they should Institute mandatory wage-price guidelines Institute voluntary wage-price guidelines d. Both (a) and (b) above e. All of (a), (b) and (c) above. 04 c. 20 b. 04 Control prices permanently M AC W B 04 a. o. 287. Primary deficit is given by Revenue Deficit – Interest Payment b. Budget Deficit – Interest Payment c. Fiscal Deficit – Interest Payment d. Total Receipts – Total Expenditure e. Revenue Receipts – Revenue Expenditure. 31 4- 02 27 -4 R ef .N a. :8 1- 288. Which of the following statements is true? An equal increase in government expenditure and taxation can result in an increase in GDP, other things being equal. b. Fiscal policy, if properly administered, would eliminate the need for monetary policy. c. The existence of the progressive personal income tax system increases the size of the government spending multiplier. d. A downward shift in the investment schedule has a greater multiplier effect on GDP than an equivalent downward shift in the government-expenditures schedule. e. Autonomous investment is the part of investment that increases with national income. s. Al lr ig ht s re se rv ed .IS BN a. Pr es 289. Which of the following statements is false? Increase in output can cause increase in investment. b. Increase in saving can cause increase in current output. c. Increase in investment can cause increase in output. d. Decrease in taxes can cause increase in output. ve rs i ni iU fa Ic Th e e. ty a. Decrease in government spending can cause decrease in output. © 20 04 290. Which of the following statements is true? a. Installing a progressive income tax would have no effect on the Keynesian multiplier. b. The open economy investment multiplier is lower than the closed economy multiplier even when net exports are not sensitive to changes in GDP. c. When full employment is reached, increases in money GDP are extremely difficult to achieve. d. 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. e. Taxes collected by the government can lower the economy’s national output, while government expenditures will tend to raise national output. 55
  • 61. Macroeconomics 291. If the government increases its expenditure and simultaneously adjusts the tax rate such that the budget deficit remains at the original level, then which of the following is true? The equilibrium income remains unchanged. b. The equilibrium income increases by the amount of increase in government expenditure. c. 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. d. 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. e. 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. M AC W B 04 20 04 04 a. ef .N o. 292. Given the supply of money, if the government reduces the tax rate which of the following is true? Equilibrium income and interest rate will increase. b. Equilibrium income and interest rate will decrease. c. Equilibrium income will decrease but interest rate will increase. d. Equilibrium income will increase but interest rate will remain unchanged. e. Equilibrium income will remain unchanged but interest rate will increase. BN :8 1- 31 4- 02 27 -4 R a. .IS 293. Government borrowing to finance large deficits increases the demand for loanable funds and Increases the supply of loanable funds b. Exerts downward pressure on interest rates c. Has no impact on interest rates d. Puts upward pressure on interest rates e. Makes it easier for businesses to borrow money. s. Al lr ig ht s re se rv ed a. ty Pr es 294. If Mr. X buys a National Small Savings Certificate, which of the following is likely to happen? Increase in Government market borrowings. b. Increase in the other liabilities of the Government . c. Increase in forex reserves. Increase in Government revenue. Th e Ic d. fa iU ni ve rs i a. Decrease in Government liability. 20 04 e. 295. Automatic stabilizers refer to The invisible hand mechanisms which automatically bring the economy out of a recession c. Government revenue and expenditure items that change automatically in response to changes in economic activity d. Discretionary monetary policy maneuvers designed to keep inflation under control automatically e. 56 Inherent mechanisms in the stock market that automatically cause stock market gains to be cancelled out by losses, which make expected long-run returns equal to zero b. © a. None of the above.
  • 62. Part I 296. Which of the following policy measures is/are fiscal policy measure(s)? a. The government cuts taxes or raises spending to get the economy out of a recession. b. The central bank changes the money supply to affect the price level, interest rates and exchange rates. c. The government restricts imports and stimulates exports . d. Both (a) and (b) above. e. Both (a) and (c) above. 297. Which of the following is true if the Government monetizes part of its deficit? b. Interest rate will increase. c. Primary deficit will increase. d. Public debt will increase. e. Revenue deficit will decrease. 04 Money supply in the economy will increase. M AC W B 04 20 04 a. o. 298. If a Government is running surplus in its budget, we can expect that public debt will be Rising b. Falling c. Constant d. Falling if there are tax cuts e. Falling if the government uses the surplus to repay its past debts. 1- 31 4- 02 27 -4 R ef .N a. Progressive tax system Indirect tax system d. Value added tax system e. Regressive tax system. .IS c. BN Proportional tax system b. re s ht ig lr 300. Monetized deficit refers to se rv ed a. :8 299. Personal taxes in India best illustrates a Fiscal deficit minus interest payments b. Borrowings and other liabilities of the Central Government c. Increase in the net RBI credit to the Central Government d. Fiscal deficit minus Primary deficit e. RBI’s credit to the commercial banks. iU ni ve rs i ty Pr es s. Al a. Th e a. Ic fa 301. In the Union Budget, profits from public sector undertakings are taken under Revenue receipts © Capital receipts c. Monetized receipts d. Planned expenditure e. 20 04 b. Fiscal deficit. 302. Under which of the following tax system, more tax is imposed on the lower income groups? a. Progressive. b. Regressive. c. Proportional. d. Customs. e. Value Added Tax. 57
  • 63. Macroeconomics 303. The variables that changes the government spending and revenue as the economy fluctuates, without any deliberate effort of the government are called a. Automatic Stabilizers b. Lagging indicators c. National income aggregates d. Real factors e. Growth variables. 04 04 Modern Macroeconomics: Monetary Policy and Interest Rate Structure 20 304. Which of the following is true if the Central Bank reduces the Reserve Ratio? Money supply and loans given by commercial banks will decrease. b. Money supply will decrease while loans given by commercial banks will increase. c. Money supply and loans given by commercial banks will increase. d. Money supply will increase while loans given by commercial banks will decrease. e. Money supply will remain unaffected while the loans given by the commercial banks will decrease. 27 -4 R ef .N o. M AC W B 04 a. 02 305. A reduction in commercial bank reserves due to weekly increases in currency in circulation is Reserve requirements b. Open-market operations c. Terms of consumer credit d. Margins on security loans e. Moral suasion. se rv ed .IS BN :8 1- 31 4- a. s re 306. “Loose” monetary policy coupled with a contraction of aggregate supply should Cause government spending to fall automatically b. Cause aggregate demand to fall c. Cause many commercial banks to close their doors d. Cause interest rates to fall in the short run e. Cause a dramatic upturn in both public and private investment. ve rs i ty Pr es s. Al lr ig ht a. Ic Increase interest rates, the money supply, and national income b. Increase interest rates and the money supply, but decrease national income c. Increase interest rates, but decrease the money supply and national income d. Decrease interest rates, but increase the money supply and national income e. Decrease interest rates, the money supply, and national income. © 20 04 Th e a. fa iU ni 307. Open-market purchases of government bonds by Reserve Bank of India will have the tendency to 308. In an inflationary period, the appropriate policy for the RBI would be to a. b. Encourage commercial banks to increase their loans c. Reduce Cash Reserve Ratio d. Reduce bank rate e. 58 Sell government securities in the open market Extend credit to government.
  • 64. Part I 309. Which of the following is not a contractionary policy? b. Increasing the CRR. c. Increasing the refinance limits. d. Buying of government securities in the open market. 02 27 -4 R ef .N o. M AC W B 04 20 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. 04 Increasing the bank rate. 04 a. 31 4- Trade and Exchange Rate Policies ig ht s re se rv ed .IS BN :8 1- 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. Only (i), (ii) and (iii) above. c. Only (i), (ii) and (iv) above. d. Only (i), (ii) and (v) above. e. Only (i), (ii), (iii) and (iv) above. ve rs i ty Pr es s. Al lr b. iU ni 313. Which of the following categories is not permitted to trade in the forex market? Commercial banks. Recognized exporter. Th e Ic b. fa a. © 20 04 c. Development financial institution. d. Both (b) and (c) above. e. All the three categories mentioned in (a), (b) and (c) are permitted in the forex markets. 314. In the last few months the forex reserves in India have been increasing. Which of the following sterilization policies would the Reserve Bank of India should adopt? a. Increase CRR. b. Decrease CRR. c. Decrease discount rate. d. Buy government securities . e. None of the above. 59
  • 65. Macroeconomics 315. An expansionary fiscal policy combined with a liberal monetary policy results in i. A lower level of output. ii. A higher level of output. iii. A lower interest rate. A higher interest rate. v. A lower or higher interest rate depending on the relative magnitude of fiscal and monetary policies. a. (i) and (iii) above b. (i) and (iv) above c. (ii) and (iii) above d. (ii) and (v) above e. (I) and (v) above. W B 04 20 04 04 iv. M AC 316. Which of the following is true if the central bank does not impose any reserve ratio? The banking system can no longer affect the supply of money in the economy. b. The banking sector can create unlimited money supply. c. The lending capacity of banks would narrow down to zero . d. A rupee deposited in a bank reduces the money supply in the economy by one rupee. e. Money supply in the economy will be equivalent to the high-powered money. 4- 02 27 -4 R ef .N o. a. 1- 31 317. Which of the following policy instruments has the least ‘outside lag’? Cash reserve ratio (CRR). b. Bank rate. c. Repo rate. d. Taxes. e. Open market operations (OMO). re se rv ed .IS BN :8 a. ht s 318. Which of the following happens when the central bank increases open market purchases? Aggregate supply decreases. b. Rate of inflation increases. c. Interest rates will increase. Pr es s. Al lr ig a. Aggregate demand decreases. e. Total output falls. ve rs i ty d. Recognition lag Ic Th e a. fa iU ni 319. The time between the interest rate changes and the corresponding changes in the spending decisions of the public forms a part of © Administrative lag c. Outside lag d. Inside lag e. 20 04 b. Intermediate lag. 320. Bank rate means a. b. The rate of interest charged by banks on borrowers c. The rate of interest paid by banks to depositors d. The rate of interest charged by banks for loans given to the central bank of the country e. 60 The rate of interest on inter-bank loans The rate of interest charged by the central bank of a country on its loans to other commercial banks.
  • 66. Part I 321. What would be the sequence of events when RBI increases money supply by reducing CRR? i. Interest rates fall. ii. Increase in investment expenditure. Portfolio disequilibrium. Increase in price of financial assets. a. (i), (ii), (iii), (iv). b. (iii), (iv), (i), (ii). c. (ii), (iii), (iv), (i). d. (iv), (iii), (ii), (i). e. (iii), (iv), (ii), (i). 20 04 04 iii. iv. W B 04 322. If an economy is already under inflation, and there is increasing inflow of foreign exchange, the central bank can sterilize the impact by b. Buying government securities from banks c. Increasing cash reserve ratio d. Increasing tax rates e. Increasing government spending. M AC Decreasing discount rate 27 -4 R ef .N o. a. 4- 02 Economic Growth, Development & Planning 1- 31 323. Which of the following can lead to decrease in Incremental Capital Output Ratio (ICOR)? Low managerial efficiency. b. Complicated production procedures. c. Existing capital is less productive. d. Inadequate delegation of powers. e. Improvement in productivity of labor. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 a. 61
  • 67. 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. 20 04 04 3. (d) In a two sector model, it is assumed that the whole income is spent on consumption and savings. Symbolically, this can be represented by Y = C + S. Hence, savings can be known by consumption expenditure from income (i.e. S = Y – C). M AC W B 04 4. (c) The variable which is computed over as period of time is a flow variable and the variable which is measured at a point of time is a stock variable. Unemployment, foreign exchange reserves and money supply are measured at a particular point of time, and hence are stock variables. Consumption is measured over a period of time, so is a flow variable. ef .N o. 5. (e) Gross domestic capital formation consists of addition to the inventories, addition to fixed assets, and depreciation. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R 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
  • 68. 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. 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. b. GNP at current prices measures the money value of final value of goods and services produced by the residents of a country. The value of goods are measured by taking the price goods existing in the current year. A increase in GDP at current prices need not necessarily lead to economic development. c. Real National Income measures the final value of goods and services produced by the residents of a country. The value of goods are measured by taking the prices existing in the base year. An increase in real national income need not lead to economic development if the population is increasing at a faster rate than that of real national income. Hence, cannot be used as an indicator of economic development. d. Per Capita real national income is the best indicator, because an increase in per capita real national income would mean that more goods are available per head, which would mean the standard of living has increased. e. GDP deflator is an indicator of price index, on the basis of reason (a), it is not an indicator of economic development. 27 -4 R ef .N o. M AC W B 04 20 04 04 a. 02 Measurement of Macroeconomic Aggregates :8 1- 31 4- 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. se rv ed .IS BN 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. s 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). s. Al lr ig ht 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. ve rs i ty Pr es 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. Th e Ic fa iU ni 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. © 20 04 18. (a) Under expenditure method we aggregate all money spent by private citizens, firms and the government within the year to estimate the economy’s national income. 19. (a) GNP deflator is a price index constructed to reveal the cost of purchasing the items included in the GNP during the period relative to the cost of purchasing. It is the ratio of nominal GNP to real GNP. 20. (b) GDPMP = GDPFC + [Indirect Taxes – Subsidies]. Where, Net Indirect Taxes = Indirect Taxes – Subsidies. This shows that GDP at market price exceeds GDP at factor cost by the amount of revenue raised through indirect taxes, assuming that subsidies are not given. 63
  • 69. 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. 20 04 04 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. 04 26. (a) NNPMP = NDPMP + Net factor income from abroad. W B Thus, net factor income from abroad M AC = NNPMP – NDPMP. o. 27. (b) Balance of trade = Total merchandize exports – Total merchandize imports. R Personal income – Personal taxes = Disposable personal income. ef .N 28. (d) National income + Transfer payments + Net interest and dividend = Personal income 27 -4 29. (c) Personal income = Personal disposable income (Yd) + Personal income taxes 4- 02 Where, Yd = Total income – Taxes. :8 31. (b) Net exports = Total exports – Total imports. 1- 31 30. (b) Net national savings + Retained earnings of foreign companies = Net domestic savings. BN 32. (c) GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies. se rv ed .IS 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. s re 34. (d) Macroeconomics is concerned with the overall performance of the economy. It deals with overall employment, price stability and growth of the economy. s. Al lr ig ht 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. 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. iU ni ve rs i ty 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. fa 38. (b) Expenditures on consumer goods are not included in gross investment. © 20 04 Th e Ic 39. (a) In a model where there is household, business, government and foreign sector, the GNP is given by the sum of the consumption (C), gross investment (I), government expenditure (G), and net exports (E – M). GNP = C + I + G + E – M. 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
  • 70. 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. 04 04 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. B 04 20 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. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W 51. (e) National product fails to account the household production because it neither a market transaction nor involve money. It also makes no adjustment for harmful side effects that some times arise from several productive activities and the events of nature (e.g. pollution, noise, etc). 52. (e) GDP Deflator is a price index, which is used to measure the average level of the prices of all goods and services that make up GDP. (a) Is not the answer because it is a true statement that GDP deflator is otherwise known as implicit price deflator. (b) Is not the answer because GDP deflator reflects the change in overall price level in the economy. (c) Is not the answer because GDP deflator is the most comprehensive index of price. (d) Is not the answer because GDP deflator is used to measure real GNP i.e. GNP in rupees of constant purchasing power. If prices are rising, the nominal GNP during the latter period to account for the effects of inflation. (e) Is the answer because GDP deflator does not measure economic growth. 53. (e) Personal disposable income = Personal income – Personal taxes. (a) Is not the answer because the difference between personal disposable income and personal income is not residential investment. (b) Is not the answer because the difference between personal disposable income and personal income is not indirect taxes. (c) Is not the answer because the difference between personal disposable income and personal income is not subsidies. (d) Is not the answer because the difference between personal disposable income and personal income is not transfer payments. (e) Is the answer because the difference between personal disposable income and personal income is personal taxes. 54. (c) Investment is the flow of expenditures devoted to increasing or maintaining the real capital stock. When the addition to capital goods is more than the capital consumption allowance, it will result in a positive net investment. (a) Is not the answer because when the addition to capital goods is less than the capital consumption allowance, it will result in negative net investment. (b) Is not the answer because when the addition to capital goods is more than the capital consumption allowance, it will not result in zero net investment. (c) Is the answer because when the addition to capital goods is more than the capital consumption allowance, it will result in positive net investment. (d) Is not the answer because when the addition to capital goods is more than the capital consumption allowance, it will not result in negative gross investment. Because gross investment is the total investment that occurs in the economy within any specific time period. (e) Is not the answer because when the addition to capital goods is more than the capital consumption allowance, it will not result in zero gross investment. 65
  • 71. Macroeconomics 55. (a) GNP deflator is a price index, which is used to reveal the cost of purchasing the items included in GNP during the period relative to the cost of purchasing those items during a base year. GNP deflator is used to measure real GNP i.e. in rupees of constant purchasing power. If there is a rise in prices, the nominal GNP is deflated during the latter period to account for the effects of inflation. (a) Is the answer because GNP deflator is the ratio of Nominal GNP to Real GNP. (b) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GNP. (c) Is not the answer because GNP deflator is not the ratio of Nominal GNP to Real GDP. 04 (d) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GDP. 04 20 04 56. (d) Transfer payments are not considered as payment for current services or production. These items are not entered in national income. Is not the answer because salary paid to a soldier is the payment for current services and hence it is not an examples of government transfer payments. (b) Is not the answer because purchasing of a new car for the Ministry of Finance is not an examples of government transfer payments. (c) Is not the answer because funding of a clinic to provide free vaccinations is not an examples of government transfer payments. -4 R ef .N o. M AC W B (a) 31 4- 02 27 (d) Is the answer because free food coupons issued to a persons in an antipoverty program is not the payment for current services or production and hence it is an examples of government transfer payments. Is not the answer because funding of a new bridge in an urban area is the payment for current services and hence it is not an examples of government transfer payments. BN :8 1- (e) re se rv ed .IS 57. (a) In India, Whole Sale Price Index (WPI) is widely used for determine of inflation. Because the office of the economic advisor to the government of India publishes wholesale price indices for individual commodities, commodity groups and the overall WPI monthly. They are reported in a number of other publications also. Is the answer because Whole Sale Price Index (WPI) is widely used for determine of inflation in India. lr ig ht s (a) ve rs i ty Pr es s. Al (b) Is not the answer because GDP deflator is not used for determining inflation in India. GDP deflator is used to reveal the cost of purchasing the items included in GNP during the period relative to the cost of purchasing those items during a base year. And it is difficult to bet the data for the two years for comparisons. Is not the answer because in practice it is difficult to include each and every item for construction of Consumer Price Index. (CPI) iU ni (c) Th e Ic fa (d) Is not the answer because both Whole Sale Price Index (WPI) and GDP deflator are not used in measuring inflation. © 20 04 (e) Is not the answer because both GDP deflator and Consumer Price Index. (CPI) are not used in measuring inflation. 58. (c) Investment includes expenditure on the plant and machinery produced during the year, expenditure incurred on construction activities (both residential and non-residential) during the year and change in inventories. (a) and (b) are not the answer as both are financial transactions, which do not form part of investment. (c) is the answer as change inventories is considered to be an investment. (d) is not the answer as purchase of used vehicles amounts only to transfer of ownership and not an investment. 66
  • 72. Part I © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 59. (a) Since the value added within the domestic territory will belong to the domestic factor inputs, NDP at factor cost must be equal to domestic factor income. Hence answer is (a). (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net Domestic Product at market price. (c) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net National Product at factor cost. (d) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net National Product at market price. (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Personal Income. 60. (a) By definition dividends and corporate taxes are part of corporate profits. National Income refers to the factor income earned by the residents of a country and it includes profits earned by entrepreneurs. Profit includes dividends and corporate tax. Hence dividends and corporate tax are part of national income. Hence dividends and corporate taxes are part of corporate profits and national income. On the basis of the above reason, dividends and corporate taxes are part of corporate profits (i) and National Income (ii). Hence this is true option. Dividends and corporate taxes are not part of personal income, hence not the correct option. On the basis of above reason, the option is not correct. d.e. As given in the reason, dividends and corporate taxes are not part of personal income and personal disposable income. Hence not correct option. 61. (a) All the options that are given measure price indices. Each of which is constructed with a particular objective. a. CPI represents the changes in the price of a basket of goods with respect to the prices existing in the base year. The basket of goods that are considered are those that are used commonly by consumers and they are grouped together as food items, housing, fuel and light etc. Doctor fees, railway and bus fares are the items of expenditure of the consumer, hence in the calculation of consumer price index they are given greater weightage. Hence the option is correct. b. Whole sale price index can be interpreted as an index of prices paid by producers for their inputs. It gives more importance to items used in production process. Hence the option is not correct. c. Index of industrial production is a quantity index which covers mining, manufacturing and electricity generation. Hence the items referred to in the question are not included. Hence the option is not correct. d. GNP deflator is a measure of real GNP i.e. GNP in rupees of constant purchasing power. While calculating it no weights are assigned, hence the option is not correct. e. Same reason as given in option (d). 62. (d) GDP refers to money value of final goods and services produced within the domestic territory of a country including depreciation. There are certain goods which are produced but will not be included in GDP. For example services of house wives. Bobby purchase of a new suit is nothing but the consumption expenditure of bobby, which is part of GDP. Purchase of new Ford car also refers to consumption expenditure and hence part of GDP New computer purchased by Community Bank for its loan office refers to purchase of capital goods. Hence it is part of capital expenditure and hence part of GDP. Tomatoes grown in home garden by Market are not taken as part of GDP Even though goods are produced, they are not taken as part of GDP as it refers to production for self consumption. If she sells them in the market then it becomes part of GDP. Ford India could not sell 100 cars, hence they are part of inventories and hence part of capital expenditure. Hence included in GDP as part of capital goods expenditure. 67
  • 73. 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. 04 65. (b) The “rachet effect” is the situation where households find it easier to adjust to rising incomes than falling incomes. W B 04 20 04 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: Expectations regarding movement of prices and income • Taxation policy • Age composition, etc. o. • M AC The stock of wealth -4 R ef .N • 4- 02 27 67. (c) The slope of the consumption function represents the Marginal Propensity to Consume (MPC). 1- 31 68. (c) The Average propensity to consume can never exceed unity. se rv ed .IS BN :8 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. s. Al lr ig ht s re 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. 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. ve rs i ty 72. (d) C = f(Yd, W) here Yd and W are independent variables explaining C. iU ni 73. (c) In a two-sector economy, planned savings are equal to planned investments at the equilibrium level of income. Th e Ic fa 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 ΔC/ΔY. ΔC/ΔY 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
  • 74. Part I © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 80. (d) A single shock in autonomous demand produces a slow or distributed lag effect on output. Dynamic multiplier shows how a given change in autonomous investment affects the level of output overtime. 81. (c) Current account describes the trade in goods and services of a country with the outside world. If current account balance shows a deficit, it represents that foreign exchange outflows on goods and services, gifts and unilateral transfers are more than inflows. 82. (d) An increase in autonomous investment spending, transfers or a decrease in taxes cause an increase in the level of income, but increase in net tax revenues does not cause an increase in income. 83. (c) Ceteris paribus, introduction of taxes reduces the disposable income. This in turn decreases the value of the expenditure and net tax revenue multiplier. 84. (b) Y = C+ I + G + E – M An increase in autonomous investment spending increases the income level in the country that in turn increases imports. Consequently, the net exports become negative. 85. (d) Multiplier = 1/[1 – b + MPI), where MPI is marginal propensity to import. This shows inverse relationship between multiplier and marginal propensity to import. Thus, an increase in the marginal propensity to import decreases the value of the multiplier. 86. (b) If an investment spending is negatively related to the rate of interest, equilibrium income also relates inversely with interest rate, as investment spending is a component of equilibrium income. 87. (d) In the consumption function, C = 256 + 0.85 Y, MPC = 0.85l and it remains constant, whereas average propensity to consume will be changing with the income. 88. (b) Multiplier = 1/MPS where MPS is the marginal propensity to save; thus an increase in marginal propensity to save decreases the value of multiplier. 89. (b) When the multiplier is one (or unity), it implies that output expands precisely by the amount of the increased government purchases without any induced consumption spending. So when the government expenditure increases by 100, the equilibrium income also increases by 100. 90. (c) The term ‘multiplier’ is used more generally in economics to mean the effect on some endogenous variable of a unit due to change in an exogenous variable. The multiplier is necessarily be greater than one in a simple model of income determination. 91. (d) Life Cycle Hypothesis states that the saving behavior of the individuals during their working life is motivated by their desire to maintain consumption levels after retirement. The permanent income theory argues that people gear their consumption behavior to their permanent or long-term opportunities but not to their current level of income. The relative income hypothesis argues that current consumption depends not only on current income but also on the past behavior of the income. 92. (c) The term ‘multiplier’ in macroeconomics refers to the change in an induced variable per unit change in an external variable. Keynes multiplier denotes the number by which the change in investment results in change in total output (or income). Thus, a multiplier of 3 implies that when investment increases by Re.1, income or output increases by Rs.3. But, income Y = C + I + G + NE. Thus, if autonomous investment increases by Re.1, the income increases by Rs.3. Out of that Rs.3; autonomous investment increases by Re.1 (given) and consumption by Rs.2 (i.e. 3 – 1), assuming that government expenditure and net exports are autonomous and do not influenced by the autonomous investment. (Note: Assume that there are no imports). 93. (e) The demand for precautionary balances represents money that is held as a precaution against some unforeseen events such as medical emergency, accident etc. This precautionary demand for money is inversely related to rate of interest and frequency with which income is received. Lower the rate of interest and frequency with which income is received, higher is the precautionary demand for money and vice versa. (a) Is not the answer because precautionary demand for money varies directly with the level of income. (b) Precautionary demand for money is inversely related to rate of interest. 69
  • 75. Macroeconomics (c) Is not the answer because precautionary demand for money varies directly with the wealth a person held. (d) Precautionary demand for money is inversely related to frequency with which income is received. (e) Is the answer because precautionary demand for money is inversely related to rate of interest and frequency with which income is received. 94. (e) 04 (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. R ef .N o. M AC W B 04 20 04 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 4- 02 27 -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. :8 1- 31 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. .IS BN 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. se rv ed 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. s. Al lr ig ht s re 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. ty Pr es Statement (i) is false because as MPC is larger, MPS will be smaller as it is nothing but 1-MPC. ni ve rs i Statement (ii) is true because multiplier is reciprocal of MPS and MPS is smaller as said above. © 20 04 Th e Ic fa iU Statement (iii) is true. Average propensity to consume will depend on level of consumption and income. Since the MPC is larger, consumption will also be larger and hence average propensity to consume will also be larger. Statement (iv) is false, as autonomous consumption is independent of MPC and hence it is not possible to say anything about autonomous consumption on the basis of MPC. Since both (ii) and (iii) are true, the option (c) is the answer. 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
  • 76. Part I 99. (e) IS curve equation can be written as i= A/θ – Y/αθ. 20 04 04 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. 27 -4 R ef .N o. M AC W B 04 102. (a) 31 4- 02 From the graph it is clear that equilibrium in the goods market will be at a higher point than the existing income. .IS BN :8 1- 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. se rv ed 104. (b) The basic difference between IS and LM curve is that IS curve explains goods market and LM curve explains money market. lr ig ht s re 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. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al 106. (d) 107. 108. 109. 110. From the graph we can notice that if income and interest rates increase IS curve shifts to the right. (e) A shift in the IS curve occurs when factors other than interest rate affect the IS curve. Changes in all the factors mentioned shift the IS curve upward or downward. (c) The slope of the LM curve is dependent upon the demand function for money in the economy. (d) The steepness of the IS curve depends on the multiplier and investment sensitiveness to changes in interest rates. A steeper (flatter) IS curve indicates lesser (higher) sensitivity to interest rate changes. Since investment demand is infinitely interest elastic in the given problem, the correct answer is (d). (a) An expansionary monetary and fiscal policy increases the aggregate demand in the economy, which leads to shift in AD curve towards right. 71
  • 77. 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. 27 -4 R ef .N o. M AC W B 04 20 04 04 112. (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). ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 113. (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. Ic fa iU ni ve rs i 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. © 20 04 Th e 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
  • 78. 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. 04 122. (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. 04 20 04 123. (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. M AC W B 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. R ef .N o. 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. 31 4- 02 27 -4 126. (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. .IS BN :8 1- 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. se rv ed 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. ig ht s re 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. ty Pr es s. Al lr 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. iU ni ve rs i 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. © 20 04 Th e Ic fa 132. (b) Transaction demand for money varies positively with income and inversely with rate of interest. In words, higher (lower) the income, higher (lower) is the demand for money. On the other hand, higher (lower) the interest rate, lower (higher) is the demand for money. 133. (a) IS curve is negatively sloped indicating that interest rate is negatively associated with the aggregate demand. A rise in the interest rates reduces both consumption and investment, which results in decline in aggregate demand. [Hint: AD = C + I + G]. 134. (c) A rise in government expenditure increases the interest rates in the economy, which lead to reduction in interest-sensitive private investment. 135. (c) When government spending increases at unchanged interest rates, the level of AD increases to meet the increased demand for goods. Because of this increase in income the quantity of money demanded goes up which in turn pushes up the interest rate. So both interest rate and income increase. 73
  • 79. Macroeconomics © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 136. (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
  • 80. Part I © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 140. (d) If the government raises tax rate, it has an effect on the IS curve because it is a fiscal policy and the IS curve shifts to left. And at the same time the Reserve Bank of India keep the money supply constant. It implies that there is no change in the LM curve. This will result in a fall in the interest rate. (a) Is not the answer because when the Government raises tax rate, disposable income falls. (b) Is not the answer because if the government raises tax rate and the Reserve Bank of India hold the money supply constant, the IS curve shifts to the left. (c) Is not the answer because if the government raises tax rate and the Reserve Bank of India hold the money supply constant, there is no shift in the LM curve. (d) Is the answer because if the government raises tax rate and the Reserve Bank of India hold the money supply constant, the IS curve shifts to the left while LM curve unchanged means that the interest rate falls. (e) Is not the answer because interest rate does not increase. 141. (a) The LM curve gives the combinations of income and interest rates, which produce equilibrium in the money market. For all points in the LM curve, the demand for real balances is equal to supply of real balances. The LM curve shows a positive relationship between rate of interest and level of income. (a) Is the answer because the LM curve shows a positive relationship between rate of interest and level of income. (b) Is not the answer because the LM curve does not show a negative relationship between rate of interest and level of income. (c) Is not the answer because the LM curve does not show a negative relationship between rate of interest and level of investment. (d) Is not the answer because the LM curve does not show a positive relationship between rate of interest and level of investment. (e) Is not the answer because the LM curve does not show a positive relationship between level of investment and level of income. 142. (e) An increase in government expenditure results in an increase in the level of income and an increase in the interest rate. It will shift the IS curve to the right. But LM curve remain unchanged because an increase in government expenditure, a fiscal policy measure, has no impact initially in the asset markets. (a) Is not the answer because an increase in government will not shift both IS and LM curve to the right. (b) Is not the answer because an increase in government will not shift both IS and LM curve to the left. (c) Is not the answer because an increase in government will not shift IS curve to the left. (d) Is not the answer because an increase in government will affect IS curve. (e) Is the answer because an increase in government will not shift the position of LM curve but shift IS curve to the right. 143. (d) The relationship between demand for money and interest rate is given by the LM curve. The relationship between interest rate and demand for money is negative. The LM curve gives the demand schedule for a particular income level. a. If there is an increase in the level of income because of increase in real money supply, there is no shift in the IS curve. b. As at the same interest rate, the demand for money increases with the increase in income level. The LM curve will shift to the right and hence the option is not correct. c. There will be increase in the real balances as income increases, but no shift in the IS curve. d. As per the reason given in the option (b), the LM curve shifts to the right and hence option d is the correct answer. e. The entire increased income need not be used for consumption as part of it goes into savings and hence the increased income need not be equal to changed income. Hence this option is not correct. 75
  • 81. Macroeconomics Fundamentals of Aggregate Demand and Aggregate Supply ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 144. (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. iU ni 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. Th e Ic fa 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. © 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
  • 82. 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. 04 04 161. (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. 04 20 162. (c) Decline in the nominal money supply growth reduces the inflation rate and the level of output in the short run. :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 163. (d) .IS BN 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. se rv ed 164. (c) When the depreciation is greater than the net investment, it will lead to the decline of an economy’s capital stock. ig ht s re 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. Pr es s. Al lr 166. (d) When government spending is used as a policy instrument in order to achieve full employment, it is called internal balance. 167. (a) © 20 04 Th e Ic fa iU ni ve rs i ty 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. That’s why the short run aggregate supply curve slopes upward. But in the long run, the difference between expected and actual price levels is negligible. In the long run, the output of an economy does not depend on the price level, but on factors such as labor import costs, capital stock, technological progress, etc. So aggregate supply curve of an economy in long run is vertical. (a) Is the answer because aggregate supply curve is positively sloped in the short run and vertical in the long run. (b) Is not the answer because aggregate supply curve is not positively sloped in the short run as well as in the long run. (c) Is not the answer because aggregate supply curve is not positively sloped in the short run as well as in the long run. (d) Is not the answer because aggregate supply curve is not positively sloped in the short run and negatively sloped in the long run. (e) Is not the answer because in the long run, output of an economy does not depend on the price level, but on factors such as labor import costs, capital stock, technological progress, etc. 77
  • 83. Macroeconomics 168. (b) AD curve gives the relation between quantity of goods and services demanded and price level. Apart from price, AD is also affected by i. A change in income ii. Rate of interest Government policy A change in exchange rate and v. Transfer payments a. A decrease in income of foreigners will have its impact only on the aggregate demand of the country to which they belong to and not on the domestic economy. Hence, there is no impact on the aggregate demand. b. Transfer payments refer to incomes such as pensions, gifts etc. ‘which are unilateral payments. They add to the income of the receiver. Hence private transfers from abroad will add to the income and leads to increase in aggregate demand. c. 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. d. Increase in interest rates makes loans demanded for investment and consumption purposes costlier. The people would prefer to wait until the interest rates come down and hence the aggregate demand will less. e. An increase in tax rates will lead to decrease in disposable income in case of direct taxes and investment demand in case of corporate taxes. The net impact is that aggregate demand will decrease. 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 iii. iv. BN :8 1- 169. (e) Realized output refers to aggregate supply and spending refers to aggregate demand. If aggregate supply is greater than aggregate demand, it results in fall in price, output and employment. Since aggregate demand is falling short of aggregate supply, demand is lower and hence there is not new investments which would mean there will be increase in unemployment. b. Since there is lower demand, prices will decline. c. Since there is excess supply, there is no possibility of providing new employment. At full employment aggregate supply is equal to aggregate demand. d. There is excess supply in the economy i.e. there is unsold stock which leads to increase in inventories. Hence true. Pr es s. Al lr ig ht s re se rv ed .IS a. ve rs i ty 170. (e) In long run the economy will tend towards output which is referred to as natural rate of output. True, because long equilibrium is characterized by tendency towards natural rate of output In long run output of an economy does not depend on the price level, but on labor, import cost, capital stock, technological progress etc., hence true. Th e Ic b. fa iU ni a. 20 04 True, input costs play a greater role in the determination of equilibrium output. d. At natural rate the aggregate supply is vertical as it is insensitive to price hence true. e. © c. Since price does not have any impact of output in long run, unanticipated price also has no role. Hence this option is not true. 171. (c) Aggregate supply curve gives the relationship between net national product that would be supplied at each general price level. Deficit demand refers to a situation where aggregate demand is falling short of aggregate supply, hence price decrease. This results us decrease in supply. Hence the supply curve will be positive sloped. In case there are idle resources, as the prices increase firms can increase supply by utilization of idle resources. Hence the relationship between supply and prices is positive. 78
  • 84. 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 04 172. (c) The currency with the public is equal to the notes and coins in circulation and demand deposits with banks. 20 04 173. (e) Money supply = [(1 + Cu)/(Cu + r)] x H W B 04 As both Cu and H are constant, an increase in reserve ratio decreases money supply, but at a lesser proportion. M AC 174. (d) M3 = M1 + Time deposits with the banking system. o. M4 = M3 + Total post office deposits. R 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. 02 27 -4 176. (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. 31 4- 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] :8 1- Reserves (R) = (DD + TD) r BN Or, r = Reserve ratio = R/(DD + TD) se rv ed .IS Ceteris paribus, a reduction in reserve ratio therefore increases the DD component in the money supply. ig ht s re 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. s. Al lr 179. (c) This transaction does not make any change in money supply because it is already in circulation. Pr es 180. (b) Both the statements are wrong, so the answer is ‘b’. ve rs i ty 181. (d) Money supply, Ms = (1 + Cu)/(Cu + r) x H. iU ni 182. (a) The RBI money together with government money constitutes the monetary base which is known as high powered money. Th e Ic fa 183. (e) Money multiplier = (1 + Cu)/(Cu + r). Thus, if currency deposit increases the multiplier decreases less than proportionately to the increase. © 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. 79
  • 85. 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. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 189. (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 bank’s current assets and liabilities. (a) Is not the answer because central government’s borrowings from RBI constitutes assets of RBI. It will affect the balance sheet. (b) Is the answer because loan taken by one commercial bank from the other is a inter bank loan. It will not affect the balance sheet of the Reserve Bank of India. It is neither a liability nor an asset to the RBI. (c) Is not the answer because refinancing of NABARD loans constitutes assets of RBI. (d) Is not the answer because increase in reserves of commercial banks increases the liabilities of RBI. (e) Is not the answer because increase in net foreign exchange assets increases the assets of RBI. 195. (e) A well-developed financial system is vital for the smooth functioning of an economy. The financial development ratios such as Finance Ratio, Financial Interrelation Ratio, New Issues Ratio and Intermediation Ratio are indicators of financial development of a country. (a) Is not the answer because Finance Ratio is an indicator of financial development of a country. (b) Is not the answer because Financial Interrelation Ratio is an indicator of financial development of a country. (c) Is not the answer because New Issues Ratio is an indicator of financial development of a country. (d) Is not the answer because Intermediation Ratio is an indicator of financial development of a country. (e) Is the answer because Cost Benefit Ratio is not an indicator of financial development of a country. 196. (c) Money supply = H × (1+ Cu / Cu + r) Where, H = Monetary Liabilities of Central Bank + Government Money. Cu = Currency-deposit ratio r = Cash reserve ratio. (a) Is not the answer because when the RBI increases cash reserve ratio (CRR), monetary liabilities of the RBI decreases. 80
  • 86. Part I re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 (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. lr ig ht s Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model Pr es s. Al 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. ve rs i ty 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). Th e Ic fa iU ni 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. © 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 ΔY and change in labor ΔN, then MPL = ΔY/ΔN. 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. True, as in short run over production and unemployment are possible. b. Disequilibrium occurs because of mismatch between demand and supply, hence true. c. True, in the short run there can be excess production and unemployment. d. False, in long run price, wages adjust freely and bring about equilibrium. e. True flexible hence price and wages are not rigid. 81
  • 87. Macroeconomics 205. (b) The long run effect of an increase in government spending in the classical model is to increase the price level as the long-run aggregate supply curve is considered to be vertical. Therefore any increase in demand is simply inflationary. (a) Is not the answer because in the classical model, the long run effect of an increase in government spending is not an increase in the price level. (b) Is the answer because in the classical model, the long run effect of an increase in government spending is an upward shift of the aggregate demand curve. (c) Is not the answer because in the classical model, the long run effect of an increase in government spending is not an increase in the level of output. 04 Is not the answer because (a), (b) and (c) above cannot be the answer. 20 (e) 04 (d) Is not the answer because both (a) and (b) above cannot be the answer. W B 04 Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Keynesian Model 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. -4 R ef .N 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. 4- 02 27 208. (e) As in the classical system Keynesian system also consists of 3 basic markets – the labor market, the money market and the goods market. 1- 31 209. (c) Says law states that supply of goods creates its own demand. BN :8 210. (e) In Keynesian system, equilibrium takes place at a less than full employment level of output. se rv ed .IS 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. s re 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. ve rs i ty Pr es s. Al lr ig ht 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. iU ni 215. (e) Investors prefer holding money in bonds when they expect an increase in interest rate and capital loss from a bond. Th e Ic fa 216. (b) Since nominal wages are assumed flexible upwards the aggregate supply curve will be perfectly price inelastic at the full employment level. © 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
  • 88. Part I 222. (c) In the Keynesian model, actual expenditure and planned expenditure is same at the equilibrium level of output. When the actual expenditure is less than the planned expenditure in the economy, there will be a positive inventory investment in the economy. (a) Is not the answer because there will not be a positive fixed investment in the economy. (b) Is not the answer because there will not be a negative fixed investment in the economy. (c) Is the answer because there will be positive inventory investment in the economy. 04 04 (d) Is not the answer because there will not be negative inventory investment in the economy. Is not the answer because there will be change in the inventory investment in the economy. W B 04 20 (e) M AC 223. (e) Is not the answer because Keynes considered the existence of full employment as a special case. The Keynesian underemployment equilibrium is reflecting real life situations. R ef .N o. (a) 4- 02 27 -4 (b) Is not the answer because aggregate demand or effective demand indicates the total quantity of goods and services that people want to buy. According to Keynes, effective aggregate demand determines the level of employment and output. Is not the answer because Keynes argues that State intervention is essential as full employment is not possible in an economy. :8 1- 31 (c) ed .IS BN (d) Is not the answer because Keynes argues that an economy facing recession, budget deficit is an important tool to overcome recession. Is the answer because in the Keynesian model, monetary policy is not effective as compared to fiscal policy. Rather it is the fiscal policy, which is very effective and powerful. Keynes argues that government should maintain an active stance with a combination of tax and expenditure policies to maintain the desired levels of output and employment through manipulation of effective demand. s. Al lr ig ht s re se rv (e) Pr es 224. (a) fa Is the answer because unemployment in the Keynesian model is caused by demand deficiency. © 20 04 Th e Ic (a) iU ni ve rs i ty In the Keynesian model, unemployment could be reduced if the aggregate demand increases. Therefore, unemployment is caused by demand deficiency. The Keynesian theory of unemployment suggests that governments can play an active role in the economy by adjusting the aggregate demand through its fiscal and monetary instruments. (b) Is not the answer because unemployment in the Keynesian model is not caused by supply deficiency. (c) Is not the answer because unemployment in the Keynesian model is not caused by demand sufficiency. (d) Is not the answer because unemployment in the Keynesian model is not caused by supply sufficiency. (e) Is not the answer because unemployment in the Keynesian model is not caused by both demand deficiency and supply deficiency. 83
  • 89. 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 individual’s demand for money. 04 226. (e) The monetarism theory conclusion is that an increase in money supply leads to a significant increase in AD, which in turn leads to increase in price level. 20 04 227. (e) The hypothesis of rational expectations has three important implications for macroeconomic analysis and policy. Econometric models are not very useful in evaluating alternative economic policies. ii. There is no trade-off between inflation and unemployment. M AC W B 04 i. 228. (a) Discretionary monetary and fiscal policy cannot be used to stabilize the economy. R ef .N o. 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) 4- 02 27 -4 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. Is not the answer because supply side economics recommend reducing government controls to improve market efficiency. :8 1- 31 (a) .IS BN (b) Is not the answer because supply side economics recommend promoting competition to improve market efficiency. Is not the answer because supply side economics recommend restricting the power of trade unions to improve market efficiency. se rv ed (c) ig ht s re (d) Is not the answer because supply side economics recommend removing institutional barriers to improve market efficiency. Is the answer because supply side economics does not recommend increasing corporate tax rate to improve market efficiency. Pr es s. Al lr (e) 230. (d) ni ve rs i ty The Laffer curve depicts the relationship between tax revenues and tax rates. The shape of the Laffer curve is backward bending indicating that tax revenues initially increase and then decrease as the tax rate increases. Is not the answer because according to Laffer curve, tax revenues do not rise continuously as the tax rate increases. (b) Is not the answer because tax revenues do not decrease continuously as the tax rate increases. (c) Is not the answer because tax revenues do not decrease initially and then increase as the tax rate increases. (d) Is the answer because tax revenues increase initially and then decrease as the tax rate increases. (e) Is not the answer because tax revenues do not remain constant as the tax rate increases. 231. (b) © 20 04 Th e Ic fa iU (a) According to rational expectations school, discretionary monetary and fiscal policy cannot be used to stabilize the economy. Proponents of rational expectation argue that consumers and business firms anticipate the implications of rise in government spending. Moneywage rate and prices will rise, but output and employment will remain the same. So government can no longer fool the people by increasing its spending during elections years. So the answer is (b). 84
  • 90. 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. 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. d. 20 04 04 e. 233. (b) School of rational expectation is based on the premise that people do not make systematic forecasting errors. On an average their views about the future are correct and not biased as they behave rationality. Hence the option is wrong. b. Whenever central bank increases the money supply, according to rational expectations theory, people realize that it is the cause of inflation. According workers and business firms adjust wages and prices in response to the changes in money supply. Hence any change in money supply only affects wages and prices. Hence this option is true as only wages and prices are affected and not employment. c. Since the people are assumed to behave rationally, any attempt by the monetary authorities to increase employment will be anticipated by the firms. They accordingly changes prices and wages. Hence wages are flexible and not rigid. Hence the option is not true. Business men anticipate the changes in money supply (which is the primary cause for inflation) and as they are rational, change prices accordingly. The price are flexible and not rigid. Hence the option is not true. ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 a. se rv Since (c) and (d) are not correct options, (e) cannot be the answer. fa iU ni ve rs i ty Pr es s. Al lr ig ht s re 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. Th e Ic Economic Fluctuations, Unemployment and Inflation © 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
  • 91. 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). 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 243. (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. :8 1- 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. se rv ed .IS BN 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) lr ig ht s re 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. Ic fa iU ni ve rs i ty Pr es s. Al (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. © 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) 86 It is a true statement that inflation creates inefficiency in the economy because people spent lot of time to find a reasonable price.
  • 92. 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 04 (b) Is not the answer because in the case of hyperinflation, price rise is very large and accelerating. Is not the answer because recession is characterized by the downturn in economic activities in an economy. 04 20 04 (c) M AC W B (d) Is not the answer because there is a contraction of economic activities in the depression period. Is the answer because there is a stagnation combined with inflation prevails in the economy in the period of stagflation. 255. (c) The periodic upswings and down swings in the level of economic activity which forms a regular pattern with an expansion of activity followed by a contraction ,succeded by further expansion are referred to as business cycles. Each of the phases is characterized by certain features. 02 27 -4 R ef .N o. (e) 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. b. Price levels are only an indicator of purchasing power, which in turn is dependent on income levels of the people also. Hence cannot be taken as primarily indicator of the different phases of business cycles. c. 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. d. Changes in inventory level do give an indication about the different phases, but the changes inventory level are as a result of changes in real GDP. e. Gross investment is dependent on future growth rate, which again based on estimation of real GDP in future. Hence gross investment cannot be primarily indicator. ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- a. Ic fa iU 256. (a) Stagflation refers to a situation where there is high unemployment and high inflation occurs simultaneously. © 20 04 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). 257. (b) a. Zero unemployment refers to situation where there is no unemployment 87
  • 93. Macroeconomics b. Natural rate of unemployment is the long run average of unemployment caused due to frictional and structural changes in labour market. Full employment means that there is certain amount of unemployment which is refered to as natural rate of unemployment. Hence the correct option. c. During full employment, there still exists certain amount of unemployment and hence cannot say that demand for labor is at the lowest . Hence not correct option. d. Supply of labor depends on population and has no relation with full employment. Hence the option is not correct. e. Since (c) and (d) are not correct options, this is not true option. 04 04 258. (c) Frictional unemployment occurs when constant changes in the labour market lead to unemployment. It occurs on account of imperfect information. Hence not correct option. b. Unemployment that arises due to general down turn in business activity is refered to as cyclical unemployment. Hence not related to the output, not the correct option. c. 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. d. Structural unemployment occurs due to structural changes in the economy, and such people are not employed and hence there is no question of contribution to production. Not correct option. e. Sectoral unemployment refers to unemployment that exists in any particular sector, for example agricultural sector. Hence not correct option. 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 a. ed .IS BN :8 259. (c) Cost-push inflation refers to increase in price as a result of the causes originating from the supply side. The left ward shift of the supply curve occurs as a result of increase in the wage level unmatched by the increase in the labour productivity, increase in the profit margins by those who can exercise the market power and supply shocks. Decrease in wages leads to decrease in cost of production and hence prices will reduce if the producer passes on to the consumer. b. When the productivity of labour increase it leads to lowering the cost of production per unit and hence the prices will decrease. c. As the cost of raw material increases it leads to increase in cost of production which results in increases in prices. Hence this option is correct. d. Right ward shift in the supply curve occurs when there is a decrease in prices and hence not the correct option. e. Finding of new raw material would lead to lower cost of raw material as the supply of raw material has increased and hence lowers the prices. 20 04 Th e a. Ic 260. (a) fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv a. 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. c. When these is necessionary GDP gap, it leads to realized GDP falling short of potential GDP. Hence during prices will be falling and unemployment rate would increase. But there will be high unemployment, which occurs only during depression. d. Natural rate of unemployment occurs when potential GDP is equal to realized GDP. Which is not the case when there is recessionary GDP gap. Hence not the correct option. e. Since (b) and (d) are not correct, this is not correct option. © b. 88
  • 94. Part I The Open Economy and Balance of Payments: India’s 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. 04 264. (d) Inventories of foreign countries and gold that could be sold for dollars are held under the official reserves account by central bank that they would sell in the market when there is an excess demand for dollars. Conversely when there is excess supply of dollars they would buy up the dollars. B 04 20 04 265. (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. M AC W 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. ef .N o. 267. (a) The items included under the invisibles of the current account are investment income, travel, transportation, insurance, and other miscellaneous items. 27 -4 R 268. (d) Transfer of assets or goods to a country without any consideration or return are called international transfers. 02 269. (c) BoP is in deficit when both current account and capital account balances are in deficit. 1- 31 4- 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. .IS BN :8 271. (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. s re se rv ed 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. Pr es s. Al lr ig ht 273. (d) Dividends earned on portfolio investments come under the head of invisibles in current account, whereas the other options given come under the capital account of the BoP. 274. (d) Preparation of BoP statement is based on double-entry system of book keeping. Hence, all debt items should equal credit items, and the balance is zero. Is not the answer because all entries in the balance of payments statement is not collectively sum to GDP of the country. b. Is not the answer because all entries in the balance of payments statement is not collectively sum to GNP of the country c. Is not the answer because all entries in the balance of payments statement is not collectively sum to Foreign exchange reserves of the country Th e Ic fa iU ni ve rs i ty a. © 20 04 d. Is the answer because all entries in the balance of payments statement is collectively sum to zero. e Is not the answer because all entries in the balance of payments statement is not collectively sum to Exports of the country. 275. (d) All the transactions which effect the asset or liability position of a country are put under Capital account of the Balance of Payments statement. Other transactions are put under the Current account. a. Is not the answer. Foreign Direct Investment increase the liability of a country, hence falls under Capital Account. b. Is not the answer. Portfolio Investments increase the liability of a country, hence falls under Capital Account. 89
  • 95. Macroeconomics c. Is not the answer. External Commercial Borrowings increase the liability of a country, hence falls under Capital Account. d. 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. e 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 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. W B 04 20 277. (c) The increase in net RBI credit to the central government, comprising the net increase in the holdings of treasury bills of the RBI and its contribution to the market borrowings of the government is called monetized deficit. defense expenditure c. subsidies. ef .N b. o. interest payments R a. M AC 278. (e) The major components of non-plan expenditure are: re se rv ed .IS BN :8 1- 31 4- 02 27 -4 279. (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. Pr es 284. (e) Self-explanatory. s. Al lr ig ht s 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. ve rs i ty 285. (e) Gross fiscal deficit is computed by deducting total receipts excluding government borrowings from the total expenditure. iU ni 286. (b) Mandatory wage price guidelines maintain the full employment and keep the inflation under control. fa 287. (c) Primary deficit = Fiscal deficit – Interest payment. Th e Ic 288. (a) Y = C + I + G + X © 20 04 Y = a + b(Yd) + I + G + X Where Yd = Y – T and T = tY Thus, an increase in taxes decreases the income. But an equal increase in government expenditure increases the income greatly because of multiplier effect. So GDP increases. 289. (b) An increase in savings will not make any changes in current output. 290. (a) Installing a progressive income tax would have no effect on the Keynesian multiplier. 291. (e) Equilibrium income will increase by the amount of increase in government expenditure if the multiplier is one. So MPC is equal to the investment income ratio. 292. (a) When the government spending increases and/or the tax rate decreases, an increase in the aggregate demand (AD) takes place, which in turn leads to increase in the equilibrium real GDP. 90
  • 96. Part I 293. (d) Government borrowing to finance large deficits increases the demand for loanable funds, which puts an upward pressure on interest rates in the market. 294. (b) If somebody buys National Small Saving Certificate, it increases in the other liabilities of the government. (a) Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase government borrowings. (b) Is the answer because if Mr.X buys a National Small Saving Certificate, it will increase in the other liabilities of the government. Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase in forex reserves. 20 04 04 (c) W B 04 (d) Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase government revenue. Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not decrease government liability. o. M AC (e) ef .N 295. (c) :8 1- 31 4- 02 27 -4 R Every economy goes through cyclical fluctuations in output, employment and prices. This will have an automatic impact on certain government expenditures and revenues. The changes in the government spending and revenues that results automatically as the economy fluctuates are called non-discretionary fiscal policy. Automatic stabilizers are features of the government budget that automatically adjust net taxes to stabilize aggregate demand as the economy expands or contracts. Is not the answer because an automatic stabilizer is not a mechanism in the stock market that automatically cause stock market gains to be cancelled out by losses. .IS BN (a) se rv ed (b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms, which automatically bring the economy out of a recession. Is the answer because automatic stabilizer refers to government revenues and expenditures that change automatically in response to changes in economic activity. When the economy is in a contraction phase, these stabilizers increase transfer payments and reduce tax collections in order to stimulate aggregate demand. On the other hand, when the economy begins to expand, the automatic stabilizers increase tax collections and reduce transfer payments in order to restrain growth in the aggregate demand. ve rs i ty Pr es s. Al lr ig ht s re (c) ni (d) Is not the answer because automatic stabilizer is a discretionary fiscal policy. iU 296. (a) Th e Ic fa Fiscal policy refers to policies dealing with taxes and government expenditure including transfer payments. © 20 04 (a) Is the answer because when the government reduces taxes or raises spending to get the economy out of a recession, is a case of fiscal policy measure. (b) Is not the answer because when the central bank changes the money supply to affect the price level, interest rates and exchange rate , it is a monetary policy. (c) Is not the answer because when the government restricts imports and stimulates exports; it is a case of EXIM (Export-Import) policy. (d) Is not the answer because both (a) and (b) cannot be the answer. (e) Is not the answer because both (a) and (c) cannot be the answer. 91
  • 97. Macroeconomics 297. (a) When the government monetizes part of its deficit, it is an increase in net RBI credit to the government, comprising the net increase in the holdings of treasury bills of the RBI and its contribution to the market borrowings of the government. To meet the needs of the government, the RBI prints more money. This will lead to excess money supply in the economy. (a) Is the answer because money supply in the economy increases when the government monetizes part of its deficit. 04 (b) Is not the answer because when there is an excess money supply, interest rate will decline. Is not the answer because when the government monetizes part of its deficit, primary deficit will decrease. Primary deficit is calculated by deducting the interest payments of the government from the gross fiscal deficit. 04 20 04 (c) M AC W B (d) Is not the answer because when the government monetizes part of its deficit, public debt will decrease. Is not the answer because when the government monetizes part of its deficit, revenue deficit will increase. Revenue deficit is the difference between government’s revenue expenditure and revenue receipts. ef .N o. (e) -4 R 298. (e) 02 27 If a government has a surplus budget, and the government repays its past debts using its surplus budget, public debt will be falling. Is not the answer because if a government is running surplus in its budget, public debt may not be rising. 1- 31 4- (a) .IS BN :8 (b) Is not the answer because if a government is running surplus in its budget, public debt may not be falling. Is not the answer because if a government is running surplus in its budget, public debt may not be constant. se rv ed (c) ht s re (d) Is not the answer because if a government is running surplus in its budget, public debt may not be falling if there are tax cuts. Is the answer because if a government is running surplus in its budget, public debt will be falling if the government uses the surplus to repay its past debts. s. Al lr ig (e) Pr es 299. (b) ve rs i ty In India, personal taxes is an example of progressive tax system. Progressive tax system implies that higher the level of income, higher will be the volume of tax burden, represented as a percentage of the total income. Is not the answer because personal tax is not a proportional tax system. In proportional tax systems, the tax imposed is of a particular percent of income irrespective of his income level. Ic fa iU ni (a) © 20 04 Th e (b) Is the answer because personal taxes is an example of progressive tax system. (c) Is not the answer because personal tax is not a direct tax system. (d) Is not the answer because personal tax is not a value added tax system. In value added tax system, the tax is on the value added at each stage. (e) Is not the answer because personal tax is not a regressive tax system. In regressive tax system, people with lower levels of income are imposed with higher taxes as a proportion of their income. 300. (c) Monetized deficit refers to increase in net RBI credit to the Central Government, comprising the net increase in the holdings of T-bills of the RBI and its contribution to the market borrowings of the government. Fiscal deficit = Borrowings and liabilities of the Central Government and primary deficit = Fiscal deficit – interest payments. a. 92 Is not the answer because monetized deficit does not refer fiscal deficit minus interest payments.
  • 98. 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 RBI’s credit to the commercial banks. 301. (a) Government gets its revenue from two sources, i.e. tax revenue and non-tax revenue. Non-tax revenue includes profits from public sector units, interest earned on loans etc. 04 b. Current year receipts of the government are classified under revenue receipts. Profits from public sector units re the returns on investments by the government. Hence it represents current income and hence part of revenue receipts of the government. b. Capital receipts refer to recovery of loans, borrowing and other liabilities. It does not include current earnings of the government from public sector units. Hence profits are not included. c. Monetized receipts. d. Planned expenditure refers to the outflow from the government, as the government is spending money. Whereas in case of profits from public sector units they are inflows, hence cannot be part of planned expenditure. e. Fiscal deficit measures the overall borrowings required to finance government expenditure. Hence profits are taken as part of fiscal deficit. 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 a. :8 1- 302. (b) Progressive tax system refers to imposing more tax on people with greater income. As income increases, tax rate also increases. Hence more tax is imposed on higher income people. This option is not true b. When more tax is imposed on lower income groups it is called regressive tax. d. When tax imposed is of a particular percent of income irrespective of his income slab, is known as proportional tax. Hence a poor person pays less tax as his income is less. Hence not correct option. d, e Customs and value added tax are indirect taxes, where as what is referred to under the is with respect to the direct tax i.e. income tax. Hence cannot be correct answer. 303. (a) Automatic stabilizers are features of the government budget that automatically adjust net taxes to stabilize aggregate demand as the economy expands or contracts. a. By definition this option is true. b. Lagging indicators refer to the time gap between the monetary policy changes and their impact on the economy. They are not related to the fiscal policy of the government. c. National Income aggregates are only indicators of the performance of the economy. d , e. Real factors and growth variables are not related to fiscal policy. Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN a. © 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. 93
  • 99. Macroeconomics 04 308. (a) Sale of government securities in the open market reduces the money supply, which in turn brings down inflation in the economy. 309. (c) Contractionary policies are aimed at reducing money supply in the economy. Increasing the refinance limits is an expansionary policy, as it increases money supply in the market. 310. (c) The acts of Central Bank aimed at correcting the imbalances created by changes in foreign exchange reserves is referred to as ‘sterilization’. If RBI wants to sterilize the inflow of foreign exchange, it would conduct an open market sale of securities, which helps in reducing the increased money supply in the economy. 311. (e) The excess of Gross Domestic Capital formation over Gross Domestic Savings is financed by borrowing from the rest of the world. This shows a current account deficit in the balance of payments. Thus M AC W B 04 20 04 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. Trade and Exchange Rate Policies R ef .N o. 312. (a) Trade policy of any country which has trade relations with other countries constitutes both import policy and export policy. While the former tries to reduce the expenditure on imports, the latter aims at increasing the export earnings. ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 313. (d) Only commercial banks will be authorized to trade in foreign currencies. Permitted commercial banks act as foreign currency dealers and are regulated by FEDAI. 314. (a) In an economy, the high-powered money is the aggregate of monetary liabilities of the central bank and government money. The foreign exchange reserves are the asset of the central bank. When the foreign exchange reserves increases, the monetary liabilities also increase. This in turn increases the high-powered money in the economy and thereby the money supply. If the economy is already affected by inflation, the central bank must step in to curb this expansion of money supply by either contracting its lending its lending to the banking systems (by increasing the discount rate) or by open market operations (sale of government securities) or by increasing the cash reserve ratios of the commercial bank. (a) Is the answer because the Reserve Bank of India increase CRR to correct the imbalances created by changes in foreign exchange reserve. (b) Is not the answer because RBI would not decrease CRR. It will not help in correcting the imbalances created by changes in foreign exchange reserve. (c) Is not the answer because due to increase in foreign exchange reserves, RBI increases the discount rate. (d) Is not the answer because RBI checks the expansion of money supply by open market operations, i.e. sale of government securities. © 20 04 Th e Ic fa iU 315. (d) An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary plicy shifts the LM curve to the right. It will result in a higher level of output, but the level of interest rate is dependent on the relative magnitude of fiscal and monetary policies a. Is not the answer, because an expansionary fiscal policy combined with a liberal monetary policy does not result in a lower level of output and a lower interest rate. b. Is not the answer because an expansionary fiscal policy combined with a liberal monetary policy does not result in a lower level of output and a higher interest rate. c. Is not the answer because an expansionary fiscal policy combined with a liberal monetary policy results in a higher level of output but not a lower interest rate. d. Is not the answer because an expansionary fiscal policy combined with a liberal monetary policy results in a higher level of output but we cannot say that it results in a higher interest rate. e. Is the answer because an expansionary fiscal policy combined with a liberal monetary policy result in higher level of output, but the level of output, but the level of interest rate is dependent on the relative magnitude of fiscal and monetary policies. 94
  • 100. Part I 316. (b) If the central bank does not impose any reserve ratio, the commercial bank need not keep on deposit with the Reserve Bank certain amount of funds equal to a specified percentage of its own deposit liabilities. Then the banking sector can create unlimited money supply. (a) Is not the answer because without the imposition of reserve ratio, the banking system can affect the supply of money through credit creation. (b) Is the answer because if the central bank does not impose any reserve ratio, the banking sector can create unlimited money supply. (c) Is not the answer because without reserve ratio, the lending capacity of banks would not narrow down to zero. 20 04 04 (d) Is not the answer because if the central bank does not impose any reserve ratio, a rupee deposited in a bank does not reduce the money supply in the economy by one rupee. Is not the answer because if the central bank does not impose any reserve ratio, money supply in the economy will not be equivalent to high-powered money. Money supply = H × (1+ Cu / Cu + r) ef .N o. Where, H = Monetary Liabilities of Central Bank + Government Money. M AC W B 04 (e) R Cu = Currency-deposit ratio 27 -4 r = Cash reserve ratio. 31 4- 02 317. (d) Outside lag is the duration involved for output and employment to respond to changes of the implemented of policies. Taxes has the least outside lag. Is not the answer because cash reserve ratio has not the least outside lag. :8 1- (a) BN (b) Is not the answer because bank rate has not the least outside lag. Is not the answer because repo rate has not the least outside lag. ed .IS (c) se rv (d) Is the answer because tax has the least outside lag. Is not the answer because open market operation has not the least outside lag. re (e) s. Al lr ig ht s 318. (b) Open market operations refer to purchase and sale of securities by the central bank. When the central bank purchases securities it increases the reserve base of the commercial banks and hence leads to multiple expansions of credit and deposits. The increase in the monetary base leads to more credit creation and hence leads to increase in output that is aggregate supply. b. As the money supply increases due to open market purchases, in short run production cannot adjust to the increased demand which is a result of higher money supply. The prices tend to increase which results in inflation. Hence b is the correct option. c. The increase in money supply leads to a downward pressure on interest rate and the interest rates will in fact decrease. Th e Ic fa iU ni ve rs i ty Pr es a. Aggregate demand will increase as the increased money supply will lead to decrease in interest rates which will increase the investment demand and consumption demand. e. 20 04 © d. Output increases as explained in option (a). 319. (c) The lags that are given below basically refers to lags in the monetary policy a. Recognition lag refers to the time gap between the requirement of an action and its actual initiation. Hence not the correct option. b. Administrative lag refers to the time gap between recognition lag and the implementation of monetary policy. Hence not the correct option. c. As the monetary makes some changes, it takes some time for the firms and to respond with changes in output and employment. Such time gap is refered to as outside lag. Hence (c) is the correct option. 95
  • 101. Macroeconomics d. Inside lag refers to the time gap between necessity of an action to be taken by central bank and the action actually undertake. Hence not correct option. e. The difference between inside and outside lag is referred to as intermediate lag. Whereas the response of the public due to changes in interest rate is part of outside lag. Hence this option is not correct. 04 04 320. (e) Bank rate is the minimum rate at which the central bank is prepared to discount or rediscount the bills of exchange brought to it by the members of the money market. It is also the interest rate at which the central bank provides loans to the commercial bank when they borrow money from central bank. 04 20 Hence by definition option (e) is correct. Is not the answer because bank rate does not mean the rate of interest on inter-bank loans b. Is not the answer because bank rate does not mean the rate of interest charged by banks on borrowers c. Is not the answer because bank rate does not mean the rate of interest paid by banks to depositors d. Is not the answer because bank rate does not mean the rate of interest charged by banks for loans given to the central bank of the country e. Is the answer because bank rate means the rate of interest charged by the central bank of a country on its loans to other commercial banks. :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B a. se rv ed .IS BN 321. (b) There are two stages in the transmission mechanism. In the first stage when there is an increase in real money supply, portfolio disequilibrium occurs i.e people are holding more money than they want. They try to get rid of excess money they are holding by buying financial assets. This results in increase in prices of financial assets and hence the interest rates fall. s. Al lr ig ht s re In the second stage the changes in the interest rate affects aggregate demand. The fall in the interest rate leads to increase in investment demand as the cost of borrowing has decreased. Hence the sequence of events is portfolio disequilibrium, increases in prices of assets, fall in interest rate and then increase in investment. Pr es The correct sequence is given by option (b). iU ni ve rs i ty 322. (c) Since the economy is already under inflation, any increase in money supply has to be curtailed by the monetary authorities so as to control any further increase in prices. The increase in foreign exchange reserves leads to increase in monetary base and hence the money supply in the economy increases. A decrease in discount rate would result in increased borrowings by the commercial banks from the central bank. This will increase the money supply, hence not the correct option. Th e Ic fa a. c. The central bank by increasing the cash reserve ratio reduces the credit creation capacity of the banking system. This results in decrease in money supply which will compensate the increase in the money supply due to foreign exchange inflow. Hence this option is correct. d. Not a correct answer it is a fiscal instrument. e. 20 04 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. Increasing government spending is also a fiscal policy instruments. © b. 96
  • 102. Part I Economic Growth Development and Planning a. 323. (e) Low managerial efficiency leads decrease in productivity, this .would mean that more input (capital) is required to produce an unit of output. Hence ICOR increases. As the production process becomes complicated, i.e. complex leads to time consuming procedures which leads time over runs. This reduces productivity and hence ICOR increases. Since the existing capital is less productive, it means the returns on the capital are also low and hence ICOR will be high. Inadequate delegation of powers lead to delay in decision making which result in cost and time over runs. This increased costs leads to more capital inputs required to produce an unit of output i.e. higher ICOR. b. 20 04 04 c. M AC W B 04 d. As the productivity of labor increase, less units of input will be required to produce one unit of output. Hence ICOR will decrease Hence this option is correct. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. e. 97
  • 103. Part II: Problems Measurement of Macroeconomic Aggregates 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 133.5 132.25 132.9. W M AC e. o. d. ef .N c. 04 134.5 B 130.7 b. R a. 20 The value of the Laspeyer’s consumer, price index is 04 Qty (Qio) 1985-86 10 kg 20 kg 10 mtr 100 unit Item Pulses Rice Cotton Electricity 04 The following information is provided. 1. 27 02 4- .IS BN Price 1991-92 Rs.10/kg Rs.8/kg Rs.6/ltr Rs.20/mtr Rs.400 31 1- Quantity 1991-92 20 kg 10 kg 40 ltrs 15 mtr Single bedroom flat :8 Item Rice Wheat Milk Cotton cloth Housing -4 2. se rv ed If the price of rice and milk in 1996-97 increased by 20% and 30% respectively, what would be the Retail Price Index for the year 1996-97? ty Pr es s. Al lr ig ht s re a. 107.40. b. 108.50. c. 108.70. d. 108.95. e. 109.30. Based on the following information answer the questions 3 to 6. fa iU ni ve rs i Year Nominal GNP (Core) 2001-02 2,500 2002-03 3,200 If the GNP deflator in 2000-01 is 100, then the real GNP of 2001-02 would be: a. 2031.83 b. 2057.48 c. 2183.83 d. 2083.33 e. 2103.33. The real GNP of 2002-03 is: a. 2,207.00 b. 2,214.70 c. 2,215.50 d. 2,214.60 e. 2,213.20. © 20 04 Th e Ic 3. 4. GNP Deflator 120 145
  • 104. Part-II 04 20 04 B 6. 04 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%. 5. Nominal GNP (Core) GNP Deflator 2,500 100 2002-03 3,200 159.50 ef .N R -4 27 02 431 1:8 s. Al lr ig ht s re se rv ed .IS 8. BN 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%. o. 2001-02 7. M AC Year W Based on the following information answer the questions 7 to 9. fa iU ni ve rs i ty Pr es 9. Th e Ic 10. The following particulars are provided, the GDP of factor cost would be: © 20 04 Factor Incomes Paid to domestic residents Paid to foreign residents Retained profit Corporate profit tax Depreciation a. b. c. d. e. Rs. (in crore) 85 15 10 5 10 135 120 125 105 110. 99
  • 105. Macroeconomics Based on the following information answer the questions 11 to 13. Particulars Rs. GNP at market price 5,000 Personal income tax 1,000 400 800 900 200 450 Depreciation 350 04 Indirect taxes 20 Undistributed profits 04 Factor income received from abroad B Factor income paid abroad W Subsidies 04 800 M AC Corporate tax 11. GDP at Factor Cost is: 4,950 4,550 4,900 4,850. ef .N R -4 e. 27 d. 02 c. 4- b. o. 4,750 31 a. 4,450 4,850 4,600 4,950. BN .IS e. ed d. se rv c. re b. :8 4,500 s a. 1- 12. National Income is: 3,900 2,600 d. 4,100 e. 4,000. Pr es c. ty b. s. Al 3,800 iU ni ve rs i a. lr ig ht 13. The Personal Disposable Income is: 20 04 Th e Ic fa 14. In an economy: GDP at FC Depreciation © GNP at Market price Indirect taxes (Rs.) 80,000 4,000 95,000 5,000 The Net Factor Income from Abroad is: a. b. 10,000 e. 15,000 d. 12,500 e. 100 15,000 12,000.
  • 106. Part-II 15. Dr. Cr. (Rs.) in Crore 250 20 20 50 –20 320 Wages & salaries Dividends Retained profits Profit tax Excise tax 04 Production Account Rs. (in crore) 200 Sales to households 40 Fixed investment 50 Net changes in inventories 10 Exports 20 Imports 320 290 260 250 280. 04 B e. W d. M AC c. o. b. 20 300 ef .N a. 04 The GDP at Factor Cost is: R Based on the following information answer the questions 16 to 18. Production Account Rs. (in crore) 250 Sales to households 40 Fixed investment 30 Net changes in inventories 40 Exports 30 Imports 10 400 Cr. 31 4- 02 27 -4 Dr. 400 lr ig ht s re se rv ed .IS BN :8 1- Wages Dividends paid to residents Dividends paid abroad Retained profits Profit tax Excise tax Rs. (in crore) 280 30 50 50 –10 ty Pr es s. Al Dr. Ic fa iU ni ve rs i Export of goods Factor income received from abroad Foreign Account Rs. (in crore) 50 Imports 60 Factor income paid abroad Surplus 110 Cr. Rs. (in crore) 10 30 70 110 © 20 04 Th e 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. 101
  • 107. Macroeconomics 18. GNP at market price is: a. 420 b. 410 c. 430 d. 390 e. 370. 19. The following information’s are provided. Factor Incomes Rs. in crore 25 20 5 40 230 225 205. 04 20 -4 27 02 e. 4- d. 31 c. ef .N 210 1- b. R 195 :8 a. o. NDP at factor cost is: 04 Depreciation B Corporate Profit Tax W Retained Profits 04 185 Factor Income paid to Foreign Residents M AC Factor Income paid to Domestic Residents BN Based on the following information answer the questions 20 to 21. Dr. .IS Production Account Rs. (in crore) se rv ed Rs. (in crore) Ic Th e 20 04 © 20. GDP at Market Price is: a. 380 b. 430 c. 410 d. 480 e. 102 ht lr 300 Sales to households 250 48 Fixed investment 90 32 Net changes in inventories 60 50 Exports 60 30 Imports 20 20 480 480 Foreign Account Cr. Rs. Rs. (in crore) (in crore) Export of goods 60 Imports 20 Factor income received from abroad 60 Factor income paid abroad 32 Surplus 68 120 120 fa Dr. iU ni ve rs i Excise Tax ty Profit Tax Pr es Retained Profits s. Al Dividends paid abroad ig Dividends paid to residents s re Wages Cr. 460.
  • 108. Part-II 21. GNP at Market Price is: a. 508 b. 480 c. 390 d. 430 e. 460. Based on the following information answer the questions 22 to 23 04 Price Level 67.50 121.01 04 Nominal GNP 55,000 1,35,000 20 Year 2001 2003 81,698 81,543 81,491 81,435. W M AC o. e. ef .N d. R c. B 81,481 b. -4 a. 04 22. The real GNP for the year 2001 is: 1,11,561 1,11,492. BN .IS e. 4- 1,11,674 :8 1,12,682 d. ed c. 31 b. 02 1,12,561 1- a. 27 23. The real GNP for the year 2003 is: se rv Based on the following information answer the questions 24 to 27. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re Particulars National Income Government purchase Consumption Net investment Gross investment GNP Personal tax and non-tax payment Transfer payments Net interest Government budget surplus Dividends Proprietor’s income and rental income of persons Wages and Salaries Rs. in crores 3,850 930 3,000 300 800 4,800 600 510 120 30 100 320 2,920 24. Net Indirect Taxes is: a. 465 b. 445 c. 450 d. 476 e. 480. 103
  • 109. Macroeconomics 27 -4 R ef .N o. M AC W B 04 20 04 04 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- 02 Based on the following information answer the questions 28 to 31. Rs. (in crore) 450 1,200 7,200 4,500 900 780 180 1,440 5,775 45 150 480 4,380 fa iU ni ve rs i ty Pr es s. Al lr ig ht BN .IS ed se rv s re Net investment Gross investment GNP Consumption Personal tax and non-tax payment Transfer payments Net interest Government purchases National Income Government Budget Surplus Dividends Proprietors Income Wages :8 1- 31 Particulars Ic 28. The Corporate Profit is: 785 b. 735 c. 760 d. 745 e. 720. © 20 04 Th e a. 29. NNP is: a. b. 6,750 c. 6,300 d. 6,335 e. 104 6,450 6,400.
  • 110. Part-II 30. Personal Disposable Income is: a. 5,735 b. 5,285 c. 5,070 d. 5,175 e. 5,090. 31. Personal Savings is: 590 570 565 550. 04 e. 20 d. 04 c. B b. 04 580 W a. 800 4,000 3,000 27 4,000 02 Depreciation 4- Factor income received from abroad 31 Factor income paid abroad -4 3,800 :8 1- Indirect Taxes R Direct Taxes o. Rs. in crore ef .N Particulars M AC 32. The following informations are given. 350 BN Surplus 2,000 .IS Subsidies 22,950 22,800 22,650 ht ig lr s. Al 22,550. Pr es e. ty d. ve rs i c. s 22,600 b. re GDP at Market Price is: a. 16,000 se rv ed National Income ni Based on the following information answer the questions 33 to 35. fa iU Particulars Ic NDP at market price Rs. in crore 16,939 – 46 Depreciation 900 Subsidies 354 © 20 04 Th e Net factor income from abroad Indirect Taxes 2,136 33. NDP at Factor Cost is: a. 15,517 b. 15,751 c. 15,157 d. 15,215 e. 15,257. 105
  • 111. Macroeconomics 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 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%. BN :8 Based on the following information answer the questions 37 to 39. ed .IS Particulars se rv GDP at market price re Corporate Income Tax ig ht s Personal Income Tax 6,000 1,200 900 475 s. Al lr Subsidies Million of Currency Units 1,500 Factor Income Paid Abroad 1,200 Pr es Factor income received from abroad ve rs i ty Undistributed Profit ni Indirect Taxes fa iU Depreciation Ic 37. GNP at Market Price is: 6,300 b. 6,000 c. 6,450 d. 6,200 e. 6,600. © 20 04 Th e a. 38. National Income is: a. b. 5,475 c. 5,600 d. 5,275 e. 106 5,725 5,550. 225 900 600
  • 112. Part-II 39. Personal Disposable Income is: a. 3,200 b. 2,980 c. 2,950 d. 2,840 e. 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. 04 20 04 B W M AC o. GNP Gross investment Net investment Consumption Government Spending 04 Amount Rs. crore 4,850 854 310 3,095 968 ef .N Particulars 4,306 4,446 4,600. 31 1:8 41. The Net Exports for the economy is: 77 b. – 46 c. 67 d. – 67 e. 76. s. Al lr ig ht s re se rv ed a. BN e. 4- 4,544 d. .IS c. 27 b. -4 4,850 02 a. R 40. The NNP is: ve rs i ty Pr es 42. The following is the data relating to the national accounts of an economy for the year 1995 in million units of currency. Particulars Million units of currency iU ni Capital Consumption Allowance fa Personal Consumption Spending 1,000.00 12,500.00 500.00 Undistributed corporate profits 250.00 © 20 04 Th e Ic Corporate Income Tax Net Exports 25.00 Dividends 750.00 Rent 1000.0 Interest 500.00 Indirect business taxes Gross private domestic investment Compensation to employees Government spending Proprietors’ Income 1,250.00 550.00 8,487.50 912.50 1,250.00 107
  • 113. Macroeconomics o. M AC W B 04 20 04 04 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%. ef .N Based on the following information answer the questions 44 and 45. 1- 31 4- 02 27 -4 R An economy consists of production sector and household sector. The production sector is made up of three Corporations – Rose Corporation, Perfume Corporation, and the Bottle Corporation. In the year 1995, Rose Corporation paid wages of Rs.2,250 to workers who gathered roses. It sold Rs.1,650 (labor cost value) of these roses to the Perfume Corporation, for which the latter paid Rs.1,950. The Rose Corporation added the remainder of its output to its inventories. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 The Perfume Corporation paid Rs.4,500 to its workers to convert the roses into perfume. It sold Rs.6,750 (Cost for Perfume Corporation) to the Bottle Corporation for Rs.7,200. To achieve this level of sales, Perfume Corporation drew from its opening inventory. The Bottle Corporation paid Rs.750 as wages. It increased its inventories by Rs.2,259 (at cost to it) and sold the rest of perfume to households for Rs.7,875. All the corporations fully distributed their profits. 44. In the production account, the net investment in the stock would be: a. 475 b. 525 c. 575 d. 600 e. 610. 45. The value added GDP of the economy is: a. 7,650 b. 7,950 c. 8,400 d. 8,200 e. 8,550. Based on the following information answer the questions 46 to 48. From the national accounts for the year 2000-01 at current prices, we have the following information. (All figures in Rs. crore). NDP at market prices 84,686 Net factor income from abroad 233 Depreciation 4,957 Subsidies 1,772 Indirect Taxes 108 10,689
  • 114. Part-II -4 R ef .N o. M AC W B 04 20 04 04 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. 27 Based on the following information answer the questions 49 to 52. 31 Th e Ic fa iU ni ve rs i ty 50. Pr es s. Al lr ig ht s re 49. se rv ed .IS BN :8 1- 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. 4- 02 The figures given below pertain to the year 2000-01. (All figures in Rs. crore) © 20 04 51. 52. 109
  • 115. 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 1,14,601 Depreciation 8,062 Subsidies 2,822 Net Factor Income from abroad +330 Indirect Taxes 16,745 1,28,524 1,20,524 1,20,600 1,29,240. 20 04 e. B d. W c. M AC b. 04 1,28,620 o. a. 04 53. The value of GNP at Market Price is: 1,24,524 1,21,480 1,21,460 1,20,580. -4 27 02 e. 4- d. 31 c. 1- b. R 1,20,462 :8 a. ef .N 54. The value of NNP at Market Price is: 1,20,180 1,20,145 1,20,160 1,20,132. ed se rv re e. s d. ht c. ig b. .IS 1,20,250 lr a. BN 55. The value of NDP at Market Price is: 1,07,125 c. 1,06,209 d. 1,07,250 e. 1,05,850. ty b. Pr es 1,06,400 Ic fa iU ni ve rs i a. s. Al 56. The value of NDP at Factor Cost is: Th e Based on the following information answer the questions 57 to 59. 20 04 For the year 2000-01, the national accounts statistics at current prices were as follows: GNP at Factor Cost 1,14,601 8,062 Subsidies 2,822 Net Factor Income from abroad © Depreciation +330 Indirect Taxes 16,745 Personal Income Taxes 10,000 Corporate Profit Taxes 6,539 Retained Profit 110 30,000
  • 116. Part-II 57. The value of Personal Income is: a. 65,000 b. 75,000 c. 70,500 d. 70,000 e. 72,000. 58. The value of National Income is: 1,06,550 1,06,445 1,06,579 1,06,750. 04 e. 20 d. 04 c. B b. 04 1,06,539 W a. 58,000 60,000 66,000 62,000. ef .N R e. -4 d. 27 c. 02 b. o. 65,000 4- a. M AC 59. The value of Personal Disposable Income is: 1- 31 Based on the following information answer the questions 60 and 61. :8 For the year 2000-01, the national accounts statistics at current prices were as follows. Rs. (in crore) ed .IS BN Particulars se rv GNP at Factor Cost s re Depreciation ig ht Subsidies 8,062 2,822 +330 16,745 Personal Disposable Income 55,000 ty Indirect Taxes Pr es s. Al lr Net Factor Income from abroad 1,14,601 80,000 Personal Income 60,000 iU ni ve rs i National Income Th e a. Ic fa 60. The value of Personal Income Taxes is: 4,800 © 5,200 c. 5,050 d. 4,950 e. 20 04 b. 5,000. 61. The value of Retained Profits is: a. 18,000 b. 20,000 c. 22,000 d. 19,500 e. 21,000. 111
  • 117. Macroeconomics Based on the following information answer the questions 62 to 65. © 20 04 04 20 04 M AC o. ef .N R -4 27 02 431 1:8 BN Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS 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. W GNP at market price Corporate Taxes Personal Income Tax Subsidies Factor Income received from abroad Factor Income paid abroad Undistributed Profits Indirect Taxes Depreciation 04 Rs. (in crore) 4,000 800 600 350 1,000 800 150 600 400 B Particulars 66. The following information is available about the consumption patterns of a family and prices in the year 1986-87 and 2001-02. Quantity consumed Prices Item 1986-87 2001-02 1986-87 2001-02 Rs.3 per kg Rs.5 per kg Rice (kg.) 30 25 Rs.4 per ltr Rs.6 per ltr Milk (ltr) 20 30 Rs.5 per doz Rs.6.50 per doz Eggs (doz) 1 2 Rs.15 per mtr Rs.25 per mtr Cloth (mtr.) 5 3 Re.30/ unit Re. 0.40/ unit Electricity (units) 100 150 112
  • 118. Part-II 04 20 04 B W M AC o. Rs. (in crore) 6,000 1,200 800 400 1,500 1,800 250 800 400 -4 27 02 431 1:8 BN Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS 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. R ef .N Particulars GDP at Factor Cost Corporate Income Tax Personal Income Tax Subsidies Factor Income received from abroad Factor Income paid abroad Undistributed Profits Indirect Taxes Depreciation 04 The index of Industrial Production for 2001-02 with reference to 1986-87 is: a. 157.68 b. 151.75 c. 154.32 d. 155.58 e. 156.68. Based on the following information answer the questions 67 to 69. © 20 04 Th e 70. You are provided with the following information for an economy: (–)500 Net Factor Income from abroad 2,000 Depreciation 1,900 Indirect Taxes 1,000 Subsidies The difference between GDP at Market Prices and NNP at Factor Cost is: a. 3,400 b. 3,250 c. 3,325 d. 3,425 e. 3,375. 113
  • 119. Macroeconomics 27 -4 R ef .N o. M AC W B 04 20 04 04 71. The GNP of an economy at nominal values and price indices for two years is given below. Year Money GNP Price Level (Rs. in crore) Index 1990 23,200 49.70 2003 1,30,000 105.90 The real GNP for the years 1980 and 2003 are: a. 46,730 and 1,22,757 b. 45,825 and 1,25,734 c. 45,938 and 1,23,757 d. 46,680 and 1,22,757 e. 46,680 and 1,23,725. 72. In an economy the GDP at factor cost is Rs.70,000, NNP at market price is Rs.71,000, depreciation is Rs.2,000 and indirect taxes are Rs.1,000. There are no subsidies. The value of the Net Factor Income from abroad is: a. 2,500 b. 2,300 c. 2,450 d. 2,600 e. 2,000. 4- 02 Based on the following information answer the questions 73 to 80. :8 1- 31 The following is the information from the national income accounts for a hypothetical country: BN GNP fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS Gross Investment Net Investment Consumption Government Purchases of Goods and Services National Income Wages and Salaries Proprietors’ Income + Rental income of persons Dividends Government Budget Surplus Interest Transfer payments Personal tax and non-tax payments Th e Ic 73. NNP at Market Prices is: b. 2,150 c. 2,200 2,250 e. © 2,350 d. 20 04 a. 2,400. 74. The value of Net Exports is: a. b. 32 c. 30 d. 20 e. 114 25 22. Rs. 2,400 400 150 1,500 480 1,925 1,460 160 50 15 60 260 300
  • 120. Part-II 75. The value of Net Indirect Taxes is: a. 235 b. 250 c. 225 d. 210 e. 230. 76. The value of Corporate Profits is: 265 230 228 254. 04 e. 20 d. 04 c. B b. 04 245 W a. 520 515 480 495. ef .N R e. -4 d. 27 c. 02 b. o. 485 4- a. M AC 77. The value of Taxes–Transfers is: 1,990 2,100 2,040. BN .IS e. ed d. 1- 1,690 c. se rv b. :8 1,820 re a. 31 78. The value of Personal Income is: 1,690 d. 1,780 e. 1,650. s. Al 1,720 Pr es c. ty b. lr 1,550 ni ve rs i a. ig ht s 79. The value of Personal Disposable Income is: 190 Ic a. fa iU 80. The value of the Personal Savings is: 185 c. 205 d. 198 e. 203. © 20 04 Th e b. 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
  • 121. Macroeconomics re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 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%. s Based on the following information answer the questions 85 and 86. fa iU ni ve rs i ty Pr es s. Al lr ig ht The following are inter-industry transactions in an economy. (The figures represent money value of output). Industries X Y Z Total output X 50 80 30 200 Y 20 60 50 240 Z 30 40 60 160 200 240 160 Th e Ic 85. The value of National Income in the economy is: b. 180 c. 183 178 e. © 175 d. 20 04 a. 172. 86. The value added in Industry Y is: a. 65 b. 63 c. 68 d. 58 e. 60. 116
  • 122. 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 80 120 22 292 04 04 20 04 B W BN :8 1- 31 4- 02 27 -4 R ef .N o. 104 24 64 © 20 04 Ic Th e 90. fa iU ni ve rs i ty Pr es 89. s. Al lr ig ht s re se rv ed 88. 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. .IS 87. 130 24 168 30 1,064 M AC Indirect taxes paid by business Exports of goods and services Personal Income Tax Dividends paid abroad Factor incomes received by personal sector 91. 117
  • 123. Macroeconomics Based on the following information answer the questions 92 to 98. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS B W M AC o. ef .N R -4 27 02 431 1:8 BN 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. 04 20 04 04 The following information is extracted from the National Income Accounts of an economy for the year 2002-03. Particulars Rs. in crore GNP at factor price 95,000 Indirect taxes 14,000 NDP at market prices 1,00,422 NNP at market prices 1,00,000 GNP at market prices 1,07,000 Personal income taxes 10,000 Corporate profit tax 6,500 Retained profit 30,000 118
  • 124. 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. © 04 R -4 27 02 431 1:8 BN .IS ed 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv 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. ef .N o. M AC W B 04 20 For the year 2001-02 the National Accounts Statistics at current prices were as follows: Particulars Rs. in crore NNP at factor price 4,73,246 Depreciation 61,809 Subsidies 19,431 Net Factor Income from abroad –6,833 Indirect Taxes 87,043 Personal Income Tax 9,759 Corporate Taxes 7,300 Retained Profit 6,758 04 Based on the following information answer the questions 99 to 104. 119
  • 125. 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). 04 1,70,992 ef .N R -4 27 1- 31 4- The indirect tax and Net Factor Income from abroad are: a. 3,638 and 3,760 b. 3,438 and 3,725 c. 3,538 and 3,860 d. 3,425 and 3,658 e. 3,745 and 3,438. o. 1,64,182 02 NDP at Factor Cost W 11,888 M AC Depreciation B NNP at Market Prices 20 588 04 Subsidies 04 (MUC) 1,79,930 GNP a Factor Cost BN :8 Based on the following information answer the questions 106 to 110. fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS 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 © 20 04 Th e Ic 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 40 60 11 146 65 12 84 15 532 52 12 32
  • 126. Part-II 108. The value of GNP at Market Price is: a. 688 b. 678 c. 685 d. 669 e. 681. 109. The value of GDP at Market Price is: a. 685 696 681 631. 04 20 04 e. B d. 04 674 c. W b. 467 452. R -4 e. 27 d. o. 438 02 c. ef .N 456 4- b. M AC 110. The value Personal Disposable Income is: a. 475 re 1:8 se rv ed .IS BN 7,09,900 92,700 29,100 –10,200 1,30,500 14,600 11,000 8,700 s. Al lr ig ht s NNP at factor cost Depreciation Subsidies Net Factor Income from abroad Indirect Taxes Personal Income Tax Corporate Tax Retained Profits 31 Based on the following information answer the questions 111 to 116. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es 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. 121
  • 127. Macroeconomics 114. The value of NDP at Factor Cost is: a. 7,20,500 b. 7,15,700 c. 7,18,100 d. 7,20,100 e. 7,19,980. 115. The value of GNP at Factor Cost is: 8,24,600 8,12,750 8,22,650 8,21,500. 04 e. 20 d. 04 c. B b. 04 8,02,600 W a. 6,75,600 6,25,250 6,23,600 6,74,500. ef .N R e. -4 d. 27 c. 02 b. o. 6,25,600 4- a. M AC 116. The value of Personal Disposable Income is: 1- 31 Based on the following information answer the questions 117 to 121. Million units of currency se rv Indirect Business Taxes ht ig s. Al Pr es 1,000 91 50 101 34 87 Transfer payments by government 114 ty Depreciation lr Personal Savings s re Undistributed Profits Corporate Income Tax ed Personal Consumption Expenditure .IS BN :8 Particulars 102 ve rs i Personal tax payments iU ni 117. The value of Gross National Product at Factor Cost is: 1,280 Ic fa a. 1,230 c. 1,350 d. 1,420 e. 1,260. © 20 04 Th e b. 118. The value of NNP at Market Price is: a. b. 1,264 c. 1,328 d. 1,245 e. 122 1,268 1,458.
  • 128. Part-II 27 -4 R ef .N o. M AC W B 04 20 04 04 119. The value of the Net National Product at Factor Cost is: a. 1,175 b. 1,185 c. 1,136 d. 1,035 e. 1,173. 120. The value of Personal Income is: a. 1,142 b. 1,128 c. 1,185 d. 1,136 e. 1,145. 121. The value of Personal Disposable Income is: a. 1,134 b. 1,034 c. 1,136 d. 1,173 e. 1,264. 4- 02 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 :8 1- 31 Particulars Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN 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 © 20 04 Th e 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. 123
  • 129. Macroeconomics 124. The value of Personal Consumption Expenditure is: a. 5,350 b. 5,500 c. 5,175 d. 5,400 e. 5,200. ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 125. The following information pertains to national income aggregates of a hypothetical economy: Particulars Rs. in crore Compensation to employees paid by the Government 50 Profit distributed as dividends by the firms 70 Old age pension, scholarships etc., distributed by Government 21 Purchases made by the Government sector 246 Indirect taxes paid by the firms 75 Value of exports 22 Factor income paid as dividends abroad 25 Corporate Tax 62 Personal Savings 22 Undistributed profits of the firms 42 Income Tax 94 Factor incomes received by the household sector 632 The Personal Disposable Income in the economy is a. Rs.509 crore b. Rs.539 crore c. Rs.529 crore d. Rs.559 crore e. Rs.549 crore. 126. The personal income of an individual is Rs.5,000, if the income taxes paid is Rs.200, consumption is Rs.4,300, interest payment on loans is Rs.100 and savings is Rs.400, the disposable income of the individual is a. Rs.5,000 b. Rs.4,800 c. Rs.4,300 d. Rs.4,900 d. Rs.4,600. Th e Ic fa iU ni 127. The following table gives information about price and units of aggregate output for the years 2002 and 2003. Goods © 20 04 P Q R S T 2002 2003 Quantity Price (Rs.) Quantity Price (Rs.) 30 55 45 35 40 2.00 6.00 5.00 4.00 3.00 35 65 60 40 50 2.50 8.00 6.00 5.00 4.50 What is the value of GDP deflator for the year 2003? a. b. 104. c. 15. d. 142. e. 124 122. 130.
  • 130. Part-II 128. Given the following information, what would be the national income of the economy? Particulars MUC Compensation to employees 2,325 Interest payments made by the firms 323 Rental Income received 43 Corporate Profits (before tax) 170 Proprietors’ Income 135 Dividends paid by the firms 72 Personal Taxes paid by the individuals 260 W B 04 20 04 04 2,786 MUC. 2,996 MUC. 2,886 MUC. 3,115 MUC. 2,662 MUC. M AC a. b. c. d. e. :8 1- 31 4- 02 27 -4 R ef .N o. 129. The following information is given from the national accounts of a country for the year 2002-03. Particulars MUC Factor income earned within domestic territory 65,000 Gross domestic fixed capital formation 6,000 Net domestic fixed capital formation 4,000 GNP at market prices 85,000 Indirect Taxes 3,000 Subsidies 1,000 © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN The net factor income from abroad for the year 2002-03 is a. 15,000 MUC b. 13,000 MUC c. 16,000 MUC d. 17,000 MUC e. 11,000 MUC. 130. In a hypothetical economy, the nominal income increased by 6%. If the prices increased by 4%, the real income increases by a. 10.00% b. 2.00% c. 1.50% d. 0.67% e. 2.50%. 131. The equilibrium income for the economy is a. 900 MUC b. 825 MUC c. 950 MUC d. 930 MUC e. 910 MUC. 132. Budget deficit/surplus for the economy is a. 10 MUC (deficit) b. 15 MUC (deficit) c. 15 MUC (surplus) d. 20 MUC (deficit) e. 20 MUC (surplus). 125
  • 131. Macroeconomics 04 04 133. The economy is opened to trade in goods and services with the rest of the world, and imports and exports are as given below: Imports (M) = 0.10Y Exports (X) = 420 MUC The multiplier for the economy is a. 2.0 b. 3.0 c. 3.5 d. 4.0 e. 4.5. ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 134. The following data is taken from National Income Accounts of a country: Rs. Cr. GNP at market prices 1,700 Transfer payments 242 Indirect Taxes 173 Personal Taxes 203 Consumption of Capital 190 Undistributed Corporate Profits 28 Corporate Tax 75 Subsidies 20 Personal income in the country is a. Rs.1,363 cr b. Rs.1,121 cr c. Rs.1,230 cr d. Rs.1,296 cr e. Rs.1,496 cr. 135. In an economy the factor income earned within domestic territory for the year 2002-03 is 50,000 MUC. For the year, consumption of capital is 3,000 MUC and the GNP at market prices is 60,000 MUC. If indirect taxes are 2,000MUC and subsidies are 500 MUC, net factor income from abroad is a. 5,000 MUC b. 5,500 MUC c. 6,000 MUC d. 6,500 MUC e. 6,800 MUC. © 20 04 Th e Ic fa iU 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 Assume that there is no government sector in the economy. 126 Cr. Rs. Cr. 550 85 55 40 730
  • 132. Part-II 136. For the economy, NDP at market prices is a. Rs.650 cr b. Rs.670 cr c. Rs.695 cr d. Rs.640 cr e. Rs.630 cr. 137. If the Factor Income received from abroad is Rs.200 cr., current account balance for the economy is Rs.35 cr (surplus) Rs.35 cr (deficit) Rs.45 cr (deficit) Rs.55 cr (deficit). 04 20 e. 04 d. B c. W b. 04 Rs.45 cr (surplus) M AC a. ef .N o. 138. For an economy, GDP at market prices for the current year is 1500 MUC. If GDP deflator for the current year is 120, real GDP for the current year would be 7,500 MUC b. 1,250 MUC c. 300 MUC d. 1,800 MUC e. 1,100 MUC. :8 1- 31 4- 02 27 -4 R a. ve rs i ty Pr es s re se rv Primary Sector 100 15 15 10 12 10 7 ht s. Al lr ig Items Sales Closing Stock Intermediate Consumption Opening Stock Indirect taxes Depreciation Subsidies ed .IS BN 139. An economy consists of three sectors: primary, secondary and tertiary sectors. Transactions related to the three sectors are given below: Secondary Sector 150 20 25 10 13 12 8 (MUC) Tertiary Sector 130 25 15 15 17 15 7 ni GDP at factor cost for the economy is 293 MUC 300 MUC Ic b. fa iU a. 271 MUC d. 258 MUC e. 342 MUC. © 20 04 Th e c. 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
  • 133. Macroeconomics The amount paid by the government to the households towards wages and salaries is a. 10 MUC b. 20 MUC c. 30 MUC d. 40 MUC e. 50 MUC. Based on the following information answer the questions 141 and 142. Capital consumption allowance 356.4 266.3 Proprietor’s income 04 120.3 Corporate dividends 66.4 402.1 Government and business transfers Personal consumption expenditures -4 374.5 1,991.9 2,455.8 2,453.2 2,456.4 :8 BN .IS re s ht ig 2,455.3. lr e. s. Al d. Pr es c. se rv 2,450.4 b. ed 141. The value of National income is: a. 31 105.1 4- 64.4 Interest paid by government 1- Interest paid by consumers 27 Personal Taxes R 253.0 02 Social security contributions o. 164.8 ef .N Corporate profits W 34.1 M AC Rental income of persons 20 264.9 Indirect business taxes B Business interest payments 04 1,866.3 04 Compensation of employees 142. The value of GNP is: b. 3072.5 c. 3074.7 ty 3073.9 3072.7 Ic d. fa iU ni ve rs i a. Th e e. 3073.1. © 20 04 Based on the following information answer the questions 143 and 144. Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfers to household sector Personal tax payments 128 Million of Currency Units 1,475.0 210.8 75.0 212.4 72.0 175.8 235.0 212.6
  • 134. Part-II 143. The value of National income is: a. 1,512 b. 1,622 c. 1,812 d. 1,775 e. 1,720. 144. The value of Personal disposable income is: 1,645 1,580 1,625 1,645. 04 e. 20 d. 04 c. B b. 04 1,547 W a. 1,860 1,790 1,920. o. ef .N R 27 02 431 1:8 BN re s ht e. ig d. lr c. ed 1,882 s. Al b. se rv 1,765 Pr es a. .IS Calculate National income. 1,525 215 95 220 72 180 235 205 -4 Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfers to household sector Personal tax payments M AC 145. The figures given below are pertaining to year 2001.(Rs. in crore) Rs. GNP at factor cost 6,000 ni ve rs i ty 146. Compute National income from the following. 1,200 800 400 1,500 1,800 250 800 400 © 20 04 Th e Ic fa iU Corporate income tax Personal income tax Subsidies Factor incomes received from abroad Factor incomes paid abroad Undistributed profits Indirect taxes Depreciation a. 5,250 b. 5,400 c. 5,600 d. 5,700 e. 5,500. 129
  • 135. Macroeconomics 147. From the following information, calculate GNP at Factor Cost. NDP at market prices Net factor income from abroad Depreciation Subsidies Indirect Taxes 20 04 04 88,065 88,195 88,105 88,275 88,365. 04 a. b. c. d. e. 88,750 –260 5,220 1,820 10,825 M AC o. ef .N R -4 27 02 re se rv ed .IS BN :8 1- 31 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. W 4,82,220 62,725 20,150 –6,800 85,450 9,600 7,500 6,850 4- NNP at factor cost Depreciation Subsidies Net factor income from abroad Indirect taxes Personal income taxes Corporate Taxes Retained profits B 148. Following are the National income statistics at current prices. ig lr 1,72,250 520 1,63,740 12,180 1,57,170 fa iU ni 2,750 2,600 2,450 2,900 2,850. 20 04 Th e Ic a. b. c. d. e. ve rs i ty Pr es s. Al GNP at factor cost Subsidies NNP at market price Depreciation NDP at factor cost ht s 149. From the following National income data, calculate net factor income from abroad. 150. © Particulars Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfer payments by government Personal tax payments 130 Million units of currency (MUC) 1,300 105 72 116 45 98 124 112
  • 136. Part-II Calculate the National income. a. 1,432 b. 1,521 c. 1,560 d. 1,476 e. 1,620. Based on the following information answer the questions 151 and 152. The following are the data pertaining to National income of an economy. -4 R ef .N o. M AC W B 04 20 04 04 Rs. in crores 1,90,000 28,000 2,00,844 2,00,000 2,14,000 20,000 13,000 60,000 27 Particulars GNP at factor prices Indirect taxes NDP at market prices NNP at market prices GNP at Market prices Personal income taxes Corporate Profit taxes Retained Profits 1,76,000 1,58,000 1,60,000. 1:8 e. BN d. .IS c. 4- 1,54,000 ed b. 31 1,74,000 se rv a. 02 151. Calculate National income. 83,000 84,700 83,600. ht e. ig 84,450 lr d. s. Al c. Pr es b. s 82,300 ty a. re 152. Calculate Personal Disposable income. ve rs i 153. Following are the national income statistics of an economy. © 20 04 Th e Ic fa iU ni GNP at Factor cost Depreciation Subsidies Net factor income from Abroad Indirect taxes Personal income tax Corporate profits tax Retained Profit = = = = = = = = 1,14,605 8,165 2,865 350 16,745 12,500 7,250 32,000 Calculate National income. a. 1,06,440 b. 1,05,525 c. 1,06,530 d. 1,06,205 e. 1,07,125. 131
  • 137. Macroeconomics 154. From the following information, calculate National income. Particulars 1,989 1,845 1,875. B W e. M AC d. o. c. 04 1,895 04 1,998 b. ef .N a. 20 Personal consumption expenditure Indirect business taxes Undistributed corporate profits Corporate income tax Personal savings Depreciation Transfers to household sector Personal tax payments 04 Million units of currency 1,675 230 112 240 72 182 320 210 Net factor income from abroad 27 -4 R 155. Calculate the difference between GDP at Market price and NNP at factor cost from the following information. 4- 2,100 Subsidies 3,640 3,775. se rv re s ht ig e. lr d. BN 3,625 s. Al c. .IS 3,745 ed 3,650 b. 1,200 Pr es a. 1- Indirect taxes 31 2,250 :8 Depreciation 02 (–) 625 Based on the following information answer the questions 156 to 160. ve rs i ty Particulars © 20 04 Th e Ic fa iU ni Personal consumption expenditure Indirect business taxes Undistributed corporate profit Corporate income tax Personal savings Depreciation Transfer to household sector Personal tax payments Million of Currency 1,332 180.8 80.0 202.4 68.0 173.6 228.0 203.6 156. The Gross National Product at Market Price is: a. 2,012.4 b. 2,156.8 c. 2,225.5 e. 132 2,896.3 d. 2,139.6.
  • 138. 04 20 04 B W M AC o. ef .N R -4 27 02 431 1:8 BN se rv ed .IS 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. 04 Part-II re The Simple Keynesian Model of Income Determination s. Al lr ig ht s 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: ve rs i ty Pr es Consumption Investment Government expenditure = = = 1,200 200 50 © 20 04 Th e Ic fa iU ni a. 2,015 b. 2,018 c. 2,010 d. 2,016 e. 2,009. Based on the following information answer the questions 162 to 164. 162. Marginal propensity to import (MPI) = 0.10 Marginal propensity to save (MPS) = 0.25 If the autonomous investment increased by Rs.100. The value of Multiplier will be: a. 2.558 b. 2.852 c. 2.857 d. 2.358 e. 2.493. 133
  • 139. Macroeconomics B 04 20 04 04 163. 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. fa iU ni ve rs i ty Pr es s. Al lr ig ht 166. The investment multiplier for the economy is: Savings function (S) 40+0.25Yd d Disposable income (Y ) Y–T Tax function (T) 0.20Y Investment function (I) 120 – 12i Government expenditure (G) 80 Exports (E) 60 Imports (M) 0.1Y © 20 04 Th e Ic The following information is given: a. 2.3 b. 2.5 c. 2.6 d. 2.9 e. 2.0. 167. Consumption (C) Investment (I) Government expenditure (G) Exports (E) Imports (M) Marginal propensity to save (MPS) Potential GNP of the economy 134 ef .N R -4 27 02 431 1:8 BN .IS ed se rv s The country’s budget surplus is: a. 33.5 b. 44 c. 40 d. 35 e. 38. o. 0.35Y 0.15Y –20 + 0.22Yd 45 18 20 8 re Tax function Import function Saving function Investment (I) Government expenditure (G) Exports (X) Transfer payments (R) M AC W 165. 1,000 400 500 200 180 0.35 2,500
  • 140. Part-II M AC W B 04 20 04 04 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. 02 27 -4 R ef .N o. 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 re Yd (Disposable Income) C (Consumption) Rs.400 Rs.360 Rs.500 Rs.400 Rs.600 Rs.580 Rs.700 Rs.670 The Marginal Propensity to consume (MPC) when C = Rs.40 + bYd, where d is the MPC is: a. (C – 42)/Yd b. (C – 40)/bYd c. (C – 45)/Yd d. (C – 40)/Yd e. (C – 41)/Yd. Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s 170. se rv ed .IS BN :8 1- 31 4- When the exports increase by 25, The change in the equilibrium level of income will be: a. 2,220 b. 2,100 c. 2,250 d. 2,218 e. 2,020. © 20 04 171. Equilibrium income Income tax rate Marginal Propensity to consume 2,000 20% 0.85 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
  • 141. Macroeconomics 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 172. Consumption function Ct= 10 + 0.6 Ydt + 0.3 Ct – 1 Where Ct and Ct–1 denote consumption in period t and t–1 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. re se rv ed .IS BN Consumption function Investment function Exogenous government expenditure Exogenous exports Import function Interest s = 200 + 0.6Y = 0.3Y – 15i = 100 = 50 = 0.1Y =4 ht C I G E M I :8 1- Based on the following information answer the questions 174 and 175 1,465 d. 1,398 e. 1,440. Pr es 1,450 c. ty b. s. Al 1,375 iU ni ve rs i a. lr ig 174. The equilibrium level of income in the economy is: 20 04 b. © 4 Ic Th e a. fa 175. The investment multiplier for the economy is: 6 c. 5 d. 7 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. 1,500 c. 1,250 d. 1,100 e. 136 1,000 1,050.
  • 142. Part-II 177. Ct = 25 + 0.6Ydt + 0.2 Ct–1 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: 37.75 38.90 d. 38.28 e. 37.50. 04 c. 20 b. 04 39.50 04 a. B 178. Consumption function is given as follows: M AC W = 12.25 + 0.611 Ydt + 0.276 Ct–1 Ct 84.39 85.28 84.45 83.65. -4 27 02 4- e. 31 d. 1- c. :8 b. R 83.58 BN a. ef .N o. Where Ct and Ct – 1 denote consumption in periods t and t – 1 respectively and Ydt is the disposable income in the period t. If Ydt increases from 500 to 600 and remains there indefinitely, The change in the steady state level of consumption would be: .IS 179. The following information is provided: –8 + 0.15 Yd 0.2Y 0.10Y 20 s re se rv ed Savings function (S) Tax function (T) Import function (M) ig ht Investment ( I ) 5 10 ve rs i ty Exports ( X) Pr es Transfer payments (R) 10 lr s. Al Govt. expenditure ( G ) The value of budget deficit at equilibrium is: – 9.68 b. – 9.50 © 20 04 iU fa Ic Th e c. ni a. – 9.48 d. – 9.67 e. – 9.88. 180. Economy has the break even level income of 900 (i.e. income = consumption) and the equilibrium level of income of 4,500. If the saving in equilibrium is 1,080, The value of the multiplier in the economy. (Approximately) would be: a. 3.33 b. 3.45 c. 3.38 d. 3.15 e. 3.41. 137
  • 143. Macroeconomics 181. Value of the equilibrium income is: Particulars Rs. in crore Autonomous consumption 400.00 Marginal propensity to save 0.30 Autonomous investment 15.00 Induced investment co-efficient 0.10 Government expenditure (exogenous) 150.00 20.00 0.05 2,466 2,457 2,472 2,435. W e. M AC d. o. c. ef .N b. B 2,442 R a. 04 Propensity to import 20 Exports (exogenous) 04 45.00 04 Transfer income (Exogenous) -4 182. Consumption function is given by: 02 27 Ct = 20 + 0.75 Ydt + 0.15Ct – 1 31 4- where, 1- Ct = Consumption in period t .IS Ydt = Disposable income in period t. BN :8 Ct–1 = Consumption in Period t–1 172 176 181 185. s ht ig lr e. s. Al d. re 174 Pr es b. c. se rv a. ed If Ydt increases from 700 to 900, The change in steady state level of consumption is: ty Based on the following information answer the questions 183 and 184 C = C0 +βY d Disposable income Yd =Y–T I = I iU ni ve rs i Consumption function Ic fa Investment = G Exports E = E Import function M = M0+μY Where, C0 = 80 © 20 04 Th e Government Expenditure G G and T = 30 I β = 0.8 E = 120 M0 = 110 μ 138 = 100 = 0.1
  • 144. Part-II 183. The value of the Equilibrium level of income is: a. 657 b. 662 c. 665 d. 654 e. 653. 184. The value of the Multiplier is: 3.33 b. 3.42 c. 3.39 d. 3.56 e. 3.25. M AC W B 04 20 04 04 a. C = C0 + βY d E = E Import M where, C0 β = M = 140 = 0.8 -4 Exports R =Y–T = I 27 Disposable income Yd Investment I Government Expenditure G ef .N Y=C+I+G+E–X Consumption function o. 185. 431 1:8 BN .IS se rv ed = 75 = 35 I 02 = G G iU ni ve rs i ty Pr es s. Al lr ig ht s re = 30 E M = 25 The value of the equilibrium level of income is: a. 1,279 b. 1,237 c. 1,275 d. 1,248 e. 1,267. Ic fa 186. The value of investment multiplier is: © 20 04 Th e Savings function (S) Disposable income (Yd) Tax function (T) Investment function (I) Govt. expenditure ( G ) Exports ( E ) Import (M) a. b. c. d. e. = –40 + 0.25Yd =Y–T = 0.20Y = 120 – 12i = 80 = 60 = 0.1Y 2.5 1.5 2 1 2.3. 139
  • 145. Macroeconomics Based on the following information answer the questions 187 and 188. = C + I + G + (X – M) = C0+β Yd T Yd M = T0 + tY =Y–T = M0 + μY I = 90 G = 65 X C0 M0 β μ = 80 04 04 Y C W B 04 20 = 70 = 40 = 0.9 R -4 27 02 431 1:8 BN .IS ed se rv re lr ig ht s 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. ef .N o. M AC = 0.15 = 0.2 = 20 t T0 s. Al 189. The value of the multiplier where consumption function C = 80 + β Yd. fa iU ni ve rs i ty Pr es Disposable income (Yd) 400 600 800 900 Th e Ic a. 5.0 b. 3.8 c. 4.2 d. 4.8 e. 4.0. 190. Saving function= – 80 + 0.20Y Import function = 0.10Y If the Government expenditure is increased by 200, The impact on GNP would be: a. Increase in GNP by 668.6 b. Decrease in GNP by 568.6 c. Decrease in GNP by 666.9 d. Increase in GNP by 666.6 e. No change in GNP. 20 04 © Consumption (C) 380 480 660 720 140
  • 146. 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: Increase in GNP by 800.50 b. Increase in GNP by 832.5 c. Decrease in GNP by 823.5 d. Decrease in GNP by 800.5 e. No change in GNP. 04 a. B 04 20 04 192. If the Government expenditure increases by 40 and investment by 50, value of the increased income would be: Consumption function C = C0 + β Yd =I = 0.8 T μ E = 0.2 = 0.1 = 120 G = 120 M AC β o. Where, ef .N Investment W =Y–T = T0 + Ty =G =E .IS BN :8 1- 31 4- 02 27 -4 R Disposable income Yd Tax T Government expenditure Export function © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed a. 195.9 b. 194.6 c. 195.3 d. 197.8 e. 196.6. 193. The consumption function C= 40 + PYd, find out MPC = .8 and disposable income Rs.800. The value of the consumption would be: a. 640 b. 860 c. 645 d. 865 e. 680. 194. C = 50 + 0.9Yd Yd = Y – T T = 10 + 0.2Y Y =C+I+G I = I exogenous G = G exogenous The equilibrium income for I = 50, G = 40 is: a. 467.86 b. 478.90 c. 463.80 d. 478.59 e. 460.43. 141
  • 147. 04 20 04 B M AC W 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 Macroeconomics 1- 31 4- 02 27 -4 R ef .N o. 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. BN :8 197. The following data pertains to national income aggregates of a hypothetical economy: ed .IS Consumption function (C) = 200 + 0.80Yd, where Yd is disposable income = 500 MUC se rv Investment (I) = 200 MUC Taxes (T) = 100 MUC ig ht s re Government spending (G) © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr 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. 199. The following data pertains to a hypothetical economy. Consumption function (C) Investment (I) Government spending (G) Tax function (T) 142 = 70 + 0.75Yd = 80 MUC = 70 MUC = 0.2Y
  • 148. Part-II © 20 04 .IS ve rs i Th e Ic fa iU ni 203. ty Pr es s. Al lr ig ht s re se rv ed 202. BN :8 1- 31 4- 02 27 -4 R ef .N o. 201. M AC W B 04 20 04 04 200. 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 t–1 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. 204. 143
  • 149. Macroeconomics 205. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC, private savings for the year is a. 500 MUC b. 1,000 MUC c. 1,500 MUC d. 2,000 MUC e. 2,500 MUC. 300 MUC 400 MUC 500 MUC 600 MUC. B e. W d. M AC c. o. b. 04 200 MUC ef .N a. 20 04 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 3 4 5 6. 431 1- e. :8 d. BN c. .IS b. 02 2 ed a. 27 -4 R 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 re se rv 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 Rs.1,400 cr b. Rs.1,500 cr c. Rs.1,600 cr d. Rs.1,700 cr e. Rs.1,300 cr. ve rs i ty Pr es s. Al lr ig ht s a. fa Rs.125. Ic a. iU ni 209. The break-even income of Mr. Ravi is Rs.5,000 and his Marginal Propensity to Consume is 3/4. If his current income is Rs.2,500, how much would Mr. Ravi borrow? Rs.525. c. Rs.625. d. Rs.425. e. Rs.325. © 20 04 Th e b. 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. 640 MUC c. 660 MUC d. 650 MUC e. 144 620 MUC 630 MUC.
  • 150. Part-II 211. The following information pertains to an economy: (MUC) Private consumption expenditure 750 Investment in fixed capital 250 Increase in stock 150 Government expenditure 100 230 04 Money supply 20 150 W B Imports 04 50 04 Merchandise exports 5 3 2 1. ef .N R -4 e. 27 d. 02 c. 1- 212. The following are the data related to an economy. 4- b. o. 4 31 a. M AC The velocity of money in the economy is BN :8 C = 1000 G = 200 se rv Potential GNP of the economy is 1600 ed .IS I = 200 s re MPC= 2/3 360 375 d. 325 e. 310. ty c. ve rs i b. Pr es 340 fa iU ni a. s. Al lr ig ht If the expenditure increased by 100 and government expenditure increased by 80, the increase in GNP would be: Th e Ic 213. Consider the following economic functions. © 20 04 S = –380 + 0.2Y M= 0.15Y Where I is aggregate saving, M is import and Y is national product. If the private gross domestic investment (I) increases by 280 units and the government spending decreases by 72 units what will be the increase in national product? a. 590.50. b. 588.24. c. 594.28. d. 578.75. e. 560.43. 145
  • 151. Macroeconomics 214. From the following economic relationships calculate Multiplier. Y = C + I + G + (X) C = C0 + βYd = T0 + tY T Y–T = M0 + μY I = 90 G = 65 X = 80 C0 = 70 M0 = 40 β = 0.9 μ = 0.15 T = 0.2 T0 = 20 R ef .N o. M AC W B 04 20 04 04 = M (Imports) -4 Y d 2.33 b. 2.35 c. 2.45 d. 2.28 e. 2.50. BN :8 1- 31 4- 02 27 a. ed .IS 215. Saving function= –80 + 0.20Y se rv Import function = 0.10Y 832.5. 831.2. e. 833.7. lr d. s. Al 833.9. Pr es c. ty b. ig 831.5. ve rs i a. ht s re If in the economy, government expenditure is increased by 300 and investment decreased by 50, what will be the increase in GNP? iU ni 216. fa Consumption function C Th e Ic Disposable income Yd 20 04 Tax T = C0 + βYd = Y–T = T0 + tY = G Import function = M + μY Export function Investment © Government expenditure = E = I = 0.8 Where, β t = 0.2 μ E = 120 G 146 = 0.1 = 120
  • 152. Part-II If the government expenditure and investment increased by 40 and 50 respectively, what would be the increase in income? a. 195.6. b. 197.8. c. 194.4. d. 195.8. e. 194.7. 217. The following relationships are given in an economy 04 20 04 04 C = 50 + 0.9Yd Yd = Y – T T = 10 + 0.2Y Y=C+I+G W B I = I exogenous ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC G= G exogenous Calculate the equilibrium income for I = 50, G = 40. a. 469.85 b. 467.28 c. 466.52 d. 467.86 e. 468.59. 218. In an economy the marginal propensity to consume is 0.75, and the proportional tax rate is 0.20. When there is an increase in government expenditure by Rs.500, calculate the rise in budget deficit. a. 278 b. 265 c. 245 d. 225 e. 250. 219. The following data refer to a hypothetical economy for 19x2. ve rs i ty Pr es s. Al lr C = 500 I = 100 G = 100 Potential GNP of the economy is 800. MPC = 2/3 © 20 04 Th e Ic fa iU ni 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. Savings function (S) = – 8 + 0.15Yd Tax function (T) Import function (M) Investment (I) Government expenditure (G) Transfer payments (R) Exports (X) = = = = = = 0.2Y 0.10Y 20 10 5 10 147
  • 153. Macroeconomics = C+I+G+E–X C = C0 + βYd I = I G = G E = M = M C0 = 140 β = 0.8 I = 75 E = 30 M = 25 G = 35 ve rs i ty Pr es s. Al lr Y fa ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 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 + 0.15Ct–1 where, Ct = Consumption in period t Ct–1 = Consumption in period t–1 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. iU ni E © 20 04 Th e Ic where, Find the equilibrium level of income. a. 1,260 b. c. 1,245 d. 1,275 e. 148 1,320 1,350.
  • 154. Part-II 224. The following relationship are given in an economy C Yd T Y I G 50 + 0.8Yd Y–T 10 + 0.3Y C+I+G I exogenous G exogenous = = = = = = fa iU ni 1,200. 1,600. 1,100. 1,000. 1,300. © 20 04 Th e Ic a. b. c. d. e. ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 Calculate the equilibrium level of income, aggregate consumption and government budget deficit for I = 60, G = 45. a. 335.7 b. 342.8 c. 328.3 d. 348.2 e. 331.8. 225. For the saving function S = –500 + 0.2Y, at what level of income savings will be equal to investment, if the autonomous investment is Rs.100 crores? a. 3,200. b. 3,500. c. 3,000. d. 3,325. e. 3,450. 226. If the aggregate income rises from 50 lakh to Rs.250 lakh as a result of increase in investment of Rs.20 lakh, find the value of Marginal Propensity to Consume. a. 0.90 b. 0.82 c. 0.75 d. 0.88 e. 0.95. 227. What would be the change in aggregate income and aggregate consumption, when investment increases by Rs.100 crore in 1999? Year Aggregate income Aggregate consumption (Rs. in Crores) (Rs. in Crores) 1997 10,000 9,000 1998 11,000 9,900 228. Tax function Import function Saving function Investment ( I ) = = = = 0.3Y 0.18Y –20 + 0.25 Yd 50 Government expenditure ( G ) = 20 = 22 Exports ( X ) Transfer payments = 10 Calculate the budget surplus at equilibrium. 149
  • 155. 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 + β Yd. .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 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. Pr es s. Al lr ig ht s re se rv ed 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 b. 2.3 c. 3.4 d. fa ve rs i 2.5 iU ni a. ty The exports economy increase by 30. Compute the foreign trade multiplier. Th e Ic 4.2 20 04 e. 4.0. 232. 460 Marginal Propensity to Save 0.3 Autonomous investment 18 Induced investment Coefficient 0.1 Government Expenditure (Exogenous) © Autonomous Consumption 162 Transfer income (Exogenous) Exports (Exogenous) 25 Propensity to Import 150 48 0.05
  • 156. Part-II Calculate the equilibrium income in the economy. a. 2,655.5 b. 2,725.5 c. 2,742.4 d. 2,628.4 e. 2,528.5. 233. In a two-sector economy, Savings and Investment functions are given as S = –62 + 0.25Y 04 04 I = 78 – 230i 04 20 Where Y is output for the economy and i is rate of interest which is 10 percent at present. Find the equilibrium level of output for the economy. 448 467 472 485. W M AC e. o. d. ef .N c. R b. B 435 -4 a. 02 27 234. Marginal Propensity to Import (MPI)= 0.12 31 4- Marginal Propensity to save (MPS)= 0.30 41.43 42.84 43.75 42.15. BN .IS ed e. se rv d. re c. s b. :8 43.55 ht a. 1- If an autonomous investment increased by 150 calculate the change in level of Imports. 2.8 2.5 d. 3.2 e. 2.2. ty c. ve rs i b. Pr es 3.1 Ic fa iU ni a. s. Al lr ig 235. In an economy the break even level income is 1,200 and the equilibrium level of income is 4,800. If the savings in equilibrium is 1,400, calculate the multiplier in the economy. © 20 04 Th e 236. Planned consumption: 40 + 0.75Y Planned investment: 60 The value of savings is: a. 62 b. 60 c. 53 d. 65 e. 61. 151
  • 157. 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: b. 618 c. 650 d. 647 e. 635. 04 625 04 a. 04 20 238. The following are the economic information for the year 2002. W 1,200 600 210 195 0.35 Potential GNP of the Economy 2,700 ef .N R -4 27 02 Marginal propensity to save (MPS) 4- Imports (M) 31 Exports (E) 1- Government expenditure (G) o. 450 :8 Investment (I) M AC Consumption (C) B (Rs. in crore) 17.5% 16.2% 18.7% 18.2%. re s e. ht d. ig c. lr b. se rv 16.8% s. Al a. ed .IS BN If government expenditure increased by 150 and investment expenditure increased by 175, the increase in price level would be: 270 + 0.75Y 72 + 0.15Y ty Consumption function (C) ve rs i Pr es 239. The following relations represent a simple model of an open economy: Government expenditure (G) 120 Exports (X) 140 Import function (M) 0.13Y © 20 04 Th e Ic fa iU ni Investment function (I) Due to an exogenous boost to the economy, exports increase by 20. The value of the foreign trade multiplier would be: a. b. 4.35 c. 5.21 d. 3.89 e. 152 4.75 3.57.
  • 158. Part-II Income Determination Model: Money and Interest 240. Given the following relations and parameters: 04 04 20 04 B W M AC o. ef .N R = 150 – 80i = 300 = 0.3Y = 120 – 160i 02 431 1:8 BN .IS s. Al lr ig ht s re The value of the Interest rate (i) is: a. 0.15% b. 0.10% c. 0.12% d. 0.18% e. 0.13%. ed I Ms Mt Ma 27 = 120 + 0.6Y se rv C = – 40 + 0.25Yd =Y–T = 0.20Y = 120 – 12i = 80 = 60 = 0.1Y = 6Y – 2,200i = 2,800 -4 Savings function (S) Disposable income (Yd) Tax function (T) Investment function (I) Government expenditure (G) Exports (E) Imports (M) Demand for Money (Md) Money supply (Ms) a. 596.48 b. 587.35 c. 578.45 d. 591.84 e. 588.67. 241. Given the following information: Pr es 242. © 20 04 Th e Ic fa iU ni ve rs i ty Consumptions function C Tax function T Disposable income Yd Investment I Government expenditure G Precautionary demand for money (Mp) Transaction demand for money (Mt) Speculative demand for money (Ma) Supply of Money (Ms) = 100 + 0.75Yd = 0.20Y =Y–T = 50 – 12i = 200 = 20 + 0.1Y = 0.20Y = 130 – 30i = 300 The volume of GNP is: a. 785.8 b. 784.3 c. 788.6 d. 774.9 e. 775.8. 153
  • 159. Macroeconomics 243. The following are the economic indicators for the year 2002-03. Savings function (S) = –70 + 0.20Yd Disposable income (Yd) =Y–T Tax function (T) = 0.25Y Investment demand function (I) = 300 – 10i = 0.22Y = 10 – 11i = 320 = 0.1Y = 118 Exports ( E ) Nominal GNP in 1991-92 The GNP deflator for the year 2002-03 is: 04 20 Transaction demand for money (Mt) Speculative demand for money (Ma) Money Supply (Ms) Import function (M) 04 = 600 04 Government expenditure ( G ) M AC W B = 3,472 b. 167.5 164.3 164.7. 27 02 4- e. -4 166.5 d. 31 c. ef .N 163.3 R a. o. (Base year – 1981-82; GNP deflator was 100) .IS BN = 40+0.80Yd =Y–T = 0.2Y = 5 + 0.1Y = 100 = 100 – 120i = 300 = 0.24Y = 220 = 150 – 10i Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed 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. :8 1- 244. © 20 04 245. 154 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.
  • 160. Part-II 246. Savings function = – 40 + 0.2Yd (S) =Y–T Tax function (T) = 0.21Y Investment demand function (I) = 200 – 10i Import function (M) = 5 + 0.1Y Exports (E) = 0.12Y Government expenditure ( G ) = 300 Transaction demand for money (Mt) = 0.24Y Speculative demand for money (Ma) = 100 – 20i Supply of money (Ms) = 300 Decrease in private investment by 35 c. Increase in private investment by 38 d. Decrease in private investment by 28 e. Increase in private investment by 32. -4 b. R Increase in private investment by 30 :8 1- 31 4- 02 27 a. ef .N o. If supply of money is decreased to 220, the impact on private investment. M AC W B 04 20 04 04 Disposable income (Yd) BN 247. The following are the equations for LM and SM curves. .IS 800 = 0.4Y + 8i se rv ed 600 = 0.4Y – 10i 216 206 208 ht ig 215. lr e. s. Al d. Pr es c. ty b. s 210 ve rs i a. re If the exogenous investment increased by 150. The change in equilibrium will be: ni Based on the following information answer the questions 248 and 249. fa iU Commodity equilibrium in real terms is Th e Ic Y = 640 + 0.40Yd – 4000i © 20 04 The equation for monetary equilibrium is Y = –410 + 5Ms + 1000i and Equilibrium in the labor service market exists at a 600 real income level. 248. At what price level is there simultaneous equilibrium in all markets? a. 1.09. b. 1.56. c. 1.05. d. 1.87. e. 1.12. 155
  • 161. 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 sector’s nominal disposable income is 500? a. 672. b. 640. c. 645. d. 678. e. 664. 04 04 250. Consumption function I = 250 – 200i Investment function T = G = 24 Government expenditure. Mt = 0.25Y Transaction demand for money Ma = 134 –500i Speculative demand for money Ms = 250 Money supply. 27 -4 R ef .N o. M AC W B 04 20 C = 60 + 0.75 Yd 22. 26. 28. 24. 1:8 e. BN d. .IS c. ed b. 31 20. s re 251. Consider the following functions: se rv a. 4- 02 If there is a decline of 75 in money supply, what will be the changed equilibrium level of investment? ig ht S = –250 + 0.2Y s. Al lr M = 0.15Y 500. b. 525. c. 515. Ic fa iU ni a. ve rs i ty Pr es Where S is aggregate saving, M is imports, and Y is national product. If the private gross domestic investment increases by 250 units and government spending decreases by 75 units, by what tune the national income will increase? 475. e. 490. 20 04 Th e d. © 252. Consider the following relationships: Saving function (S) Investment function (I) Taxes (T) Government expenditure (G) Demand for money (L) Money supply 156 ⎛M⎞ ⎜ ⎟ ⎜ p⎟ ⎝ ⎠ = = = = = –120 + 0.25Yd 420 – 10i 150 150 0.20Y – 5i = 300
  • 162. 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: 04 04 20 300 1- .IS BN :8 –120 + 0.25Yd 300 – 5i 150 240 0.20Y – 5i 300 lr ig ht s re ⎛M⎞ ⎜ ⎟ ⎜ p⎟ ⎝ ⎠ Money supply = = = = = = se rv 254. Consider the following relationships: Saving function (S) Investment function (I) Taxes (T) Government expenditure (G) Demand for money (L) 31 4- 02 27 -4 R ef .N o. 7.53% 7.90% 8.23% 8.35% 7.33%. ed a. b. c. d. e. 04 ⎛M⎞ ⎜ ⎟= ⎜ p⎟ ⎝ ⎠ B Money supply –120 + 0.25Yd 300 – 5i 150 150 0.20Y – 5i = = = = = W (S) (I) (T) (G) (L) M AC Saving function Investment function Taxes Government expenditure Demand for money 1,875 c. 1,884 d. 1,848 e. 1,857. Pr es b. ty 1,868 Ic fa iU ni ve rs i a. s. Al The value of equilibrium income is: © 20 04 Th e Based on the following information answer the questions 255 and 256. Consumption function Disposable income Tax function Investment function Exogenous Govt. expenditure Transaction demand for money Speculative demand for money Supply of money Exports Import function (C) = (Yd) = (T) = (I) = (G) = (Mt) = (Ma) = (Ms) = (E) = (M) = 15 + 0.80Yd Y–T 0.25Y 450 – 12i 300 0.20Y 145 – 60i 300 225 5 + 0.2Y 157
  • 163. :8 1- 31 4- 02 27 -4 R ef .N o. 04 20 04 B W M AC 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. 04 Macroeconomics ed 0.25Y + 220i = 115 0.15Y 75 – 225i 500 s re se rv = = = = ig ht Equilibrium in goods market Transaction demand for money Speculative demand for money The money supply .IS BN Based on the following information answer the questions 258 and 259. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr 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. 158
  • 164. 04 20 04 27 -4 R ef .N o. M AC W B 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. 04 Part-II s re 31 1- :8 BN .IS lr ig –50 + 0.2Yd Y–T .25Y 00 – 10i 400 0.25Y 125 – 50i 250 ed se rv (S) = (Yd) = (T) = (I) = (G) = (Mt) = (Ma) = (Ms) = ht Savings function Disposable income Tax function Investment demand function Government purchase Transaction demand for money Speculative demand for money Supply of money 4- 02 Based on the following information answer the questions 262 and 263. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al 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. 159
  • 165. 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 04 20 04 04 Consumption function Disposable income Tax function Investment function Exogenous Govt. expenditure Import function Export function Transactions demand for money Speculative demand for money Supply of money 9% c. 6% d. 8% e. 10%. M AC b. W 7.5% -4 R ef .N o. a. B 265. The value of the interest rate: 2,230 2,265 2,100. 31 1- e. :8 d. BN c. 02 2,225 .IS b. 4- 2,250 ed a. 27 266. Calculate the equilibrium income. se rv 267. The value of the equilibrium trade balance is: 45 b. 40 c. 48 c. 43 d. 49. Pr es s. Al lr ig ht s re a. 368 b. 362 c. 389 © 20 04 Th e Ic iU a. fa ni ve rs i ty 268. If the exogenous government expenditure is increases by 115, the equilibrium investment will be: d. 365 e. 367. 269. C = 20 + 0.75Yd Yd = Y – T T = 0.2Y I = 500 – 15i G = 515 M = 10 + 0.1Y E = 260 160 Consumption function Disposable income Tax function Investment function Exogenous Govt. expenditure Import function Export function
  • 166. Part-II Mt = 0.25Y Ma = 125 – 50i Ms = 250 Transactions demand for money Speculative demand for money Supply of money 04 B W M AC o. ef .N R -4 27 02 431 C = 80 + 0.75Yd Consumption function Yd = Y – Tx Disposable income I = 300 – 200i Investment function T x = G = 30 Govt. expenditure Mt = 0.30Y Transactions demand for money Ma = 150 – 300i Speculative demand for money Ms = 270 Supply of money the value of equilibrium investment is: a. 175 b. 179 c. 172 d. 173 178. ed e. .IS BN :8 1- 270. 20 04 04 If to keep the equilibrium investment as it is (at an interest rate of 8%), to what extend money supply should be increased? a. 307.5. b. 305.8. c. 305.2. d. 306.8. e. 307.9. s. Al lr ig ht s re Consumption function Disposable income Investment function Govt. expenditure Transactions demand for money Speculative demand for money Supply of money ve rs i ty Pr es C = 60 + 0.75Yd Yd = Y – Tx I = 250 – 200i T x = G = 24 Mt = 0.25y Ma = 150 – 300i Ms = 250 se rv 271. © 20 04 Th e Ic fa iU ni What is the equilibrium investment? a. 198. b. 187. c. 195. d. 192. e. 190. 272. The value of equilibrium income. C = 60 + 0.75Yd Yd = Y – Tx I = 250 – 200i T x = G = 24 Mt = 0.25y Ma = 134 – 500i Ms = 200 Consumption function Disposable income Investment function Govt. expenditure Transactions demand for money Speculative demand for money Supply of money 161
  • 167. Macroeconomics a. b. c. d. e. 1567 1543 1598 1552 1563. 273. o. M AC W B 04 20 04 What will be the quantity of money available for speculative balance at income level 700? a. 115. b. 110. c. 113. d. 109. e. 100. 04 Money supply = 250 Transaction precautionary demand for money = 0.20Y The speculative demand for money = 150 – 500i ef .N 274. 27 -4 R Money supply = 300 Transaction precautionary demand for money = 0.25Y The speculative demand for money = 150 – 500i 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 The quantity of money available for speculative balance at income level 900 will be: a. 25 b. 30 c. 32 d. 24 e. 29. 275. Equilibrium in the commodity market Y = 850 – 2500i (IS Curve) Equilibrium in the money market Y = –500 + 5m + 1000i (LM curve) ‘m’ represents money supply and ‘i’ represents interest rate. Full employment exists at 650 real income level. If the nominal supply is 200 and the price level is 1, the price level at which simultaneous equilibrium on all markets is: a. 0.934 b. 0.921 c. 0.923 d. 0.918 e. 0.912. Based on the following information answer the questions 276 and 278. –720 + 0.3Yd Y–T+R 0.2Y 20 + 0.10Y 200 = = = = = Transfer payments (R) = 50 Exports (E) = 25 Import function © Exogenous Govt. expenditure (G) 162 Savings function (S) Disposable income (Yd) Tax function (T) Private investment function (I) (X) = 0.05Y
  • 168. Part-II ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.25Y ⎛ Ma ⎞ Speculative demand for money ⎜ ⎟ ⎝ P ⎠ = 250 – 10r ⎛ Ms ⎞ ⎜ ⎟ ⎝ P ⎠ 263.44 236.92 262.82. 04 20 04 B W M AC o. ef .N 02 1:8 e. BN d. .IS c. 4- 262.35 ed b. 31 262.85 se rv a. 27 e. –104.591. 278. The budget surplus at equilibrium level of income is: R 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 04 = 600 -4 Supply of money re Based on the following information answer the questions 279 to 282. ht ig lr s. Al (R) Pr es Transfer payments (S) (Yd) s Savings function Disposable income ve rs i ty Tax function (T) Private investment function (I) ni Exogenous Govt. expenditure (G) = = = –420 + 0.2Yd + 6i Y–T+R 100 = = = 0.2Y 0.2Y – 20i 2000 (M) = 0.1Y Exports (E) = 1400 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.15Y ⎛ Ma ⎞ Speculative demand for Money ⎜ ⎟ ⎝ P ⎠ = – 225i = 450 © 20 04 Th e Ic fa iU Import function Supply of Money ⎛ Ms ⎞ ⎜ ⎟ ⎝ P ⎠ 279. The economic relationships is: a. 9575 b. 9573 c. 9586 d. 9623 e. 9873. 163
  • 169. :8 1- 31 4- –20 + 0.25Yd Y–T –40 + 0.2Y 240 – 10i 300 10 + 0.10Y BN = = = = = = se rv ed .IS Savings function (S) Disposable income (Yd) Tax function (T) Investment function (I) Exogenous Govt. expenditure (G) Import function (M) 02 27 -4 R ef .N o. 04 20 04 B W M AC 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. 04 Macroeconomics = 200 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.2Y ⎛ Ma ⎞ Speculative demand for money ⎜ ⎟ ⎝ P ⎠ = 50 – 16i = 250 Exports ni ve rs i Money supply ty Pr es s. Al lr ig ht s re (E) Th e Ic fa iU 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 © ⎛ Ms ⎞ ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠ 164
  • 170. 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. –60 + 0.25Yd Y–T+R Transfer payments (R) = 80 (I) = = 0.2Y 1000 – 15i Exogenous Govt. expenditure (G) = 800 Import function = 20 + 0.1Y = 400 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.2Y ⎛ Ma ⎞ Speculative demand for Money ⎜ ⎟ ⎝ P ⎠ = 130 – 44i ⎛ Ms ⎞ Money Supply ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠ = 04 B W M AC o. ef .N 02 27 -4 R (E) 4- Exports (M) :8 1- 31 Tax function (T) Investment function 04 = = 04 (S) (Yd) 20 Savings function Disposable income ed .IS BN 450 © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv 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. 165
  • 171. 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. = –25 + 0.25Yd =Y–T+R Transfer payments (R) = 40 Tax function Private investment function (T) (I) = 0.2Y = 500 – 15i Exogenous Govt. expenditure Import function (G) (M) = 400 = 10 + 0.1Y Exports (E) = 225 04 (S) (Yd) ef .N o. M AC W B 04 20 04 Savings function Disposable income = 0.25Y ⎛ Ma ⎞ Speculative demand for money ⎜ ⎟ ⎝ P ⎠ = 125 – 504i -4 27 02 4- 31 1.IS BN = 250 :8 ⎛ Ms ⎞ ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠ Money supply R ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ 2250 2125 2200 s 2275. ht e. ig d. lr c. s. Al b. re 2100 Pr es a. se rv ed 290. The value of the equilibrium income in the economy is: 6.3 b. 2.8 c. 5.2 Ic fa iU ni a. 5.0 e. 4.8. 20 04 Th e d. © ve rs i ty 291. The value of the Trade Balance at equilibrium in the economy is: 292. The value of the budget deficit at the equilibrium in the economy is: a. b. 26 c. 28 d. 21 e. 166 22 20.
  • 172. Part-II 293. –25 + 0.25Yd Disposable income (Yd) = Y–T+R (R) = 40 = 0.2Y Private investment function (I) = 500 – 15i Exogenous Gov. expenditure (G) = 745 Import function (M) = 10 + 0.1Y Exports (E) = 225 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.25Y ⎛ Ma ⎞ Speculative demand for money ⎜ ⎟ ⎝ P ⎠ = 125 – 504i ⎛ Ms ⎞ Money supply ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠ = 250 2800 04 20 W M AC o. ef .N :8 BN .IS ed d. -4 R 2700 se rv c. 31 2735 1- 2750 b. 4- The value of the equilibrium income is: a. B 04 (T) 02 Tax function 27 Transfer payments (S) 04 = Savings function ht s re e. 2725. Based on the following information answer the questions 294 to 297. = –60 + 0.2Yd d (Y ) = Y–T+R (R) lr s. Al Pr es Disposable income ve rs i ty Transfer payments Tax function (S) = 50 = 0.1Y = 250 + 0.1Y – 35i = 400 ig Savings function (T) ni Private investment function (I) fa iU Exogenous Govt. expenditure (G) (M) = 20 + 0.1Y Exports (E) = 250 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.2Y ⎛ Ma ⎞ Speculative demand for Money ⎜ ⎟ ⎝ P ⎠ = 120 – 40i = 300 © 20 04 Th e Ic Import function Money Supply ⎛ Ms ⎞ ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠ 167
  • 173. Macroeconomics 294. The value of equilibrium income in the economy is: a. 2500 b. 2450 c. 2630 d. 2655 e. 2525. 295. The value of the Trade balance at equilibrium is: –18 –22 –16 –20. 04 20 e. 04 d. B c. W b. 04 –25 M AC a. –226 –230 –200 –220. R -4 27 e. 02 d. 4- c. 31 b. ef .N –289 1- a. o. 296. The value of Budget surplus at equilibrium is: 2900 2850 2875 ed se rv re d. s c. ht b. .IS 2950 ig a. BN :8 297. If the exogenous government expenditure is increases by 182, the value of the equilibrium income in the economy will be: Pr es s. Al lr e. 2975. Based on the following information answer the questions 298 to 301. = = = = 400 + 0.8Yd – 20i 20 + 0.15Y – 60i Y+R–T 0.1Y (R) = 200 Import function (M) = 15 + 0.12Y Exogenous Exports (E) = 800 = 500 = 400 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.25Y ⎛ Ma ⎞ Speculative demand for Money ⎜ ⎟ ⎝ P ⎠ = 110 – 145i fa iU ni ve rs i ty Consumption function (S) Private investment function (I) Disposable income (Yd) Tax function (T) © 20 04 Th e Ic Transfer payments Exogenous Govt. expenditure (G) Money Supply 168 ⎛ Ms ⎞ ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠
  • 174. Part-II 298. The value of equilibrium level of income is: a. 5220 b. 5375 c. 5420 d. 5470 e. 5275. 299. The value of Trade Balance at equilibrium is: 158.73 b. 158.60 c. 159.43 d. 159.60 e. 157.98. M AC W B 04 20 04 04 a. –163 –145 –178 –160. R -4 27 e. 02 d. 4- c. 31 b. ef .N –158 1- a. o. 300. The value budget deficit at the equilibrium in the economy is: 29 27 21 se rv re d. s c. ht b. ed 24 ig a. .IS BN :8 301. If the exogenous government expenditure increases by 225, The change in private investment will be: Pr es s. Al lr e. 23. Based on the following information answer the questions 302 and 303. (S) (T) = = –502 + 0.20Yd 0.25Y Transfer payments (R) = 60 Investment function (I) Disposable income (Yd) Govt. expenditure (G) Import function (M) = = = = 400 + 0.25Y – 10i Y–T+R 300 0.10Y (E) = 150 ⎛ Ms ⎞ Money Supply ⎜ ⎜ P ⎟ ⎟ ⎝ ⎠ = 480 ⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠ = 0.15Y © 20 04 Th e Ic fa iU ni ve rs i ty Savings function Tax function Exports ⎛ Ma ⎞ Speculative demand for Money ⎜ ⎟ = ⎝ P ⎠ – 30i 169
  • 175. Macroeconomics B 04 20 04 04 302. 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. M AC W Income Determination Model Including Money and Interest ef .N R -4 27 BN :8 1- 31 4- 02 15 + 0.8 Yd 450 – 12i 300 MUC 0.20Y 145 – 60i 300 MUC 225 MUC 0.25Y 5 + 0.2Y .IS C I G Mt Ma Ms E T M ed Consumption function Investment function Exogenous Government expenditure Transaction demand for money Speculative demand for money Supply of Money Exports Tax function Import function o. 304. The following equations are given with respect to a hypothetical economy. ve rs i ty Pr es s. Al lr ig ht s re se rv 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 ni Y= Ic fa iU a. hi k Y = M+ c. Y= M + hi k d. Y= M − hi k e. Y= hi − M . k © 20 04 Th e b. 170
  • 176. 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 Decrease by 25 MUC b. Increase by 25 MUC c. Decrease by 50 MUC d. Increase by 50 MUC e. Insufficient data. 20 04 04 a. 375 MUC. 190 MUC. 500 MUC. 225 MUC. ef .N R e. -4 d. 27 c. 02 b. o. 250 MUC. 4- a. M AC W B 04 307. 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? i = 5% and Y = 600. i = 7% and Y = 640. i = 10% and Y = 700. .IS ed se rv i = 4% and Y = 580. re e. s d. ht c. ig b. BN i = 3% and Y = 560. lr a. :8 1- 31 308. The LM function is Y = 500 + 20i. Which of the following combinations of interest and income does not represent equilibrium in the money market? s. Al 309. Pr es Transaction demand for money (Mt) : 0.50Y ve rs i ty Speculative demand for money (Ms) : 350 – 100i ni Investment function (I) : 500 MUC fa iU Supply of money (Ms) : 200 – 10i Th e Ic Current equilibrium rate of interest : 8% © 20 04 Tax rate : 20% If the expansionary fiscal policies increase the equilibrium rate of interest to 12% and IS function to Y = 2,900 – 100i, what should be the money supply in the economy to avoid the crowding out? a. 500 MUC. b. 550 MUC. c. 600 MUC. d. 675 MUC. e. 750 MUC. 171
  • 177. 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. Increases from 6.2 % to 6.5%. b. Increases from 6.1% to 6.5%. c. Increases from 6.2% to 6.4%. d. Increases from 6.0 % to 6.4%. e. None of the above. – 250 + 0.30Yd Disposable income (Yd) = Y–T Tax function (T) = 0.25Y Investment function (I) = 100 – 11i Government expenditure (G) = 500 MUC Exports (E) = 40 MUC 20 = R ef .N o. M AC W B 04 Savings function (S) 04 04 311. The following relations are given for an economy: © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 Imports (M) = 0.3Y If the equilibrium output for the economy is to be increased by 100 MUC, investment should be increased by a. 60.0 MUC b. 77.5 MUC c. 70.0 MUC d. 95.0 MUC e. 90.5 MUC. 312. For an economy, the savings function is S = – 300 + 0.2Y and the investment function is I = 200 – 5i. If the equilibrium level of output is 2,250 MUC, interest rate in the economy is a. 6% b. 8% c. 10% d. 12% e. 14%. 313. In an economy, demand for money is L = 0.4Y – 10i and supply of money is 300 MUC. If the government intends to decrease the equilibrium interest rate from the current level of 8% to 6%, what will be the change in the equilibrium level of output? a. 25 MUC Increase. b. 50 MUC Decrease. c. 75 MUC Decrease. d. 50 MUC Increase. e. No change in the equilibrium level of output. Based on the following information answer questions 314 and 315. LM function Y = 500 + 200i Investment function 200 – 10i Transaction demand for money (Mt) 0.50Y Speculative demand for money (Ma) 350 – 100i Supply of money (Ms) 500 MUC Current equilibrium rate of interest 172 (I) (i) 10%
  • 178. Part-II 314. If expansionary fiscal policies increase the equilibrium rate of interest to 12%, the crowding out in the economy is: a. 10 MUC b. 15 MUC c. 20 MUC d. 25 MUC e. 30 MUC. 600 MUC. 650 MUC. 700 MUC. 750 MUC. 20 e. 04 d. B c. W b. 04 100 MUC. M AC a. 04 315. If the government would like to avoid the crowding out as in the above question, what should be the new money supply in the economy? ef .N o. 316. The following relations are derived for an economy: 31 4- 02 27 -4 – 50 + .50Yd Y–T+R 80 MUC 0. 40Y 1000 – 30i 800 MUC 20 + 0.20 Y 450 MUC 0.50Y 250 – 100i 500 MUC iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- Savings Function (S) Disposable income ( Yd) Transfer Payments (R) Tax function (T) Investment function (I) Exogenous government expenditure (G) Import function (M) Export (E) Transaction demand for money (Mt / P) Speculative demand for money (Ma / P) Money supply (Ms / P) The equilibrium level of income in the economy is: a. 1,875 MUC b. 1,985 MUC c. 2,062 MUC d. 2,162 MUC e. 2,281 MUC. R (All macro aggregates are in million units of currency and interest in terms of percent per annum) © 20 04 Th e Ic fa Based on the following information answer questions 317 and 318. The following relationship are given for an economy: Goods market equilibrium Money market equilibrium Exports Import function 0.5Y = 2925 – 37.5i 0.25Y = 312.5 + 125i 650 MUC 25 + 0.25Y 317. The trade balance at equilibrium in the economy is a. b. c. d. e. 637.5 MUC (surplus) 667.5 MUC (surplus) 687.5 MUC (deficit) 687.5 MUC (surplus) 768.5 MUC (deficit). 173
  • 179. Macroeconomics = 120 + 0.6Y = 150 – 80i = 300 = 0.3Y = 120 – 160i a. 02 431 1:8 BN 655 Ic fa iU ni ve rs i ty Pr es C I Ms Mt Ma 648 c. 662 d. 671 e. 640. 20 04 Th e b. © s. Al lr ig ht s re se rv The value of income is: a. 750 b. 720 c. 830 d. 800 e. 825. 321. The equilibrium level of income is: 27 60 + 0.80Y, 116 – 2i, 0.20Y – 5i and 120. .IS = = = = ed Suppose C I L M -4 R ef .N o. M AC W B 04 20 04 04 318. If the government expenditure increases by 475 MUC, the new equilibrium rate of interest will be a. 7.83% b. 8.01% c. 8.83% d. 9.13% e. 9.65%. 319. In the hypothetical economy, IS curve is = 2,500 – 40i = Y Transaction demand for money = 0.25Y Speculative demand for money = 450 – 50i Money supply = 750 The value of equilibrium income is: a. 2,462 b. 2,557 c. 2,325 d. 2,284 e. 2,175. 320. In a two sector economy, 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.
  • 180. Part-II c. 1,245. d. 1,268. e. 1,250. 323. C = 120 + 0.6Y I = 150 – 80i Ms = 300 20 04 B W 27 -4 R ef .N o. M AC 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: 04 04 Mt = 0.3Y Ma = 120 – 160i = 75 + 0.80 Yd consumption Yd = Y – T disposable income T = 0.15Y tax function I = 150 – 16i investment function G = 31 exogenous government expenditure Md = 80Y – 2400i demand for money function se rv ed .IS BN :8 1- 31 4- 02 C © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re 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. 5450 b. 5400 c. 5475 d. 5650 e. 5625. 175
  • 181. Macroeconomics Based on the following information answer the questions 327 to 329. = 0.64 Intermediation ratio Financial interrelations ratio Net capital formation = 0.72 = 1.21 = 98,667.3 04 20 04 B W M AC o. ef .N R -4 27 02 431 1:8 BN .IS se rv 330. ed 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. 04 New issue ratio 19x2 93,102.10 10,201.00 5,203.01 1,301.32 11,021.01 © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re Particulars 19x1 NNP at market price 89,405.30 Indirect taxes 9,782.00 Subsidies 4,313.02 Direct taxes 1,202.11 Secondary issues: 9,031.12 Issue of financial institutions Primary issues: Issues of non-financial sector Domestic sector 4,051.11 GDR 6,021.01 ADR 452.04 Net capital formation 16,420.01 (Net physical asset) The percentage in the Finance Ratio is: a. 5.2% b. 5.4% c. 6.1% d. 6% e. 4.8%. 176 5,035.92 5,016.00 562.04 17,421.03
  • 182. Part-II 331. 20 04 04 Rs. in Crores 620 60 950 875 222 421 40 72 42 60 120 04 Particulars Share capital Reserve funds Credit to state government Credit to government Deposits of banks Credit to banks Foreign exchange asset Other non-monetary liabilities Other assets Government deposits Government money 31 1- The value of money multiplier 4- 02 27 -4 R ef .N o. M AC W B In the economy currency-deposits ratio is 0.3 and reserve ratio 0.10 is imposed by Central Bank. The money supply is: a. 5,321 b. 5,356 c. 5,317 d. 5,385 e. 5,346. 332. The following information in furnished: © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 Particulars Rs. in Crores Net worth 740 Credit to government 1,420 Credit to bank 432 Credit to commercial sector 594 Foreign exchange assets 202 Other assets 114 Government deposits 42 Deposit of commercial banks 220 Money supply in economy = 8,542 Reserve ratio imposed by Central Bank = 7% Government money = 201 a. 3.9062 b. 3.4075 c. 3.6575 d. 3.9842 e. 3.9148. 333. From the below indicators find out New Issue Ratio for the year 2001 when secondary issue are 14,000 and 16,000 respectively for the years. Particulars 2001 2002 Finance ratio 0.32 0.30 Intermediation ratio 0.82 0.79 Financial interrelation ratio 1.24 1.22 a. 0.621 b. 0.653 c. 0.681 d. 0.635 e. 0.679. 177
  • 183. Macroeconomics 334. Particulars 2001 2002 Finance ratio 0.31 0.29 Financial interrelation ratio 0.78 0.80 Intermediation ratio 1.24 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. –341 –445 –382 –431. 04 20 e. 04 d. B c. W b. 04 –275 M AC a. 28.5% 1.22 1.32 Intermediation ratio 0.82 0.94 :8 Pr es s. Al lr ig ht s re se rv ed .IS 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. 1- 31 = 12,000 BN Secondary issues in 2001 R Financial interrelation ratio -4 25.69% 27 Finance ratio ef .N 2002 02 2001 4- Particulars o. 335. The following data is given: ve rs i ty Based on the following information answer the questions 336 to 338. 2001 25.69% 1.22 – 0.82 Secondary issues in 2001 = 12,000 Primary issue in 2002 = 14,000 © 20 04 Th e Ic fa iU ni Particulars Finance ratio Financial interrelation ratio New issue ratio Intermediation ratio 2002 28.5% 1.32 0.68 – 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. 20,547 c. 20,588 d. 20,675 e. 178 20,567 20,450.
  • 184. Part-II 337. The total issue for the year 2002 is: a. 27,184 b. 27,176 c. 27,458 d. 27,750 e. 27,635. 338. The Intermediation Ratio for the year 2002 is: 0.94 b. 0.98 c. 0.87 d. 0.85 e. 0.89. M AC W B 04 20 04 04 a. 339. 31 4- 02 27 -4 R ef .N o. Rs. in Crores 500 150 140 80 60 162 1- Particulars Consumption (C) Investment (I) Government expenditure (G) Exports (E) Imports (M) Money Supply (Ms) Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 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 Bank’s 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. © 20 04 341. 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. 0.35 b. 0.4 c. 0.2 d. 0.6 e. 0.1. 179
  • 185. 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 Rs. in Crores 1,000 400 300 300 200 The value of M3 is: 1,750 1,800 1,700 1,400. 04 20 e. 04 d. B c. W b. 04 1,650 M AC a. R -4 27 02 431 1:8 .IS BN Rs. in Crores 800 40 20 140 400 20 1,400 600 ed Particulars Net worth Other assets Other non-monetary liabilities Government deposits Credit to commercial sector Foreign exchange assets Credit to government Credit to banks ef .N o. 343. 94.50 90.10 ht ig 96.75. lr 95.25 e. s. Al d. Pr es c. ty b. s 99.76 ve rs i a. re se rv The currency deposit ratio in the economy is 0.3 and reserve ratio is 5%, that should be the amount of government money the economy to have a money supply of 5,942 is: ni Based on the following information answer the questions 344 and 345. © 20 04 Th e Ic fa iU Particulars 2001 NNP at market prices 89,405.30 Indirect taxes 9,782.00 Subsidies 4,313.02 Direct taxes 1,202.11 Secondary issues 9,031.12 Issues of financial institutions Primary issues of non-financial sector Domestic sector 4,051.11 GDR 6,021.01 ADR 452.04 Net capital formation 16,420.01 (Net physical assets) 180 2002 93,102.01 10,201.00 5,203.01 1,301.32 11,021.01 5,035.92 5,016.00 562.04 17,421.03
  • 186. Part-II 344. Percentage change in new issue ratio. a. –4.8 b. –3.6 c. –4.2 d. –5.6 e. –4.6. 345. Calculate the percentage change in Intermediation ratio. 23% b. 21% c. 22% d. 19% e. 18%. M AC W B 04 20 04 04 a. Based on the following information answer the questions 346 and 347. 18,000 22,000 14,000. BN .IS ed e. se rv d. re c. 1- 16,000 :8 12,000 b. 31 346. The value of money supply in the economy is: a. R 27 -4 Rs.4,000 Crore currency units Rs.1,000 Crore currency units 0.4 0.10 02 = = = = 4- The currency with the public Bank’s reserves The currency deposit ratio Central Bank’s reserve ratio ef .N o. In an economy, c. 0.3540. d. 0.3340. e. 0.3258. Pr es 0.2365. ty 0.2285. b. fa iU ni ve rs i a. s. Al lr ig ht s 347. The currency deposit ratio changes to 0.2. If the Central Bank wants to maintain the money supply at the present level (14,000) by changing the reserve ratio, what will be the new reserve ratio? © 20 04 Th e Ic Based on the following information answer the questions 348 to 351. Finance ratio Financial interrelation ratio New issues ratio Intermediation ratio : : : : 0.25 1.60 0.85 0.88 The National income of the economy is 96,000 Million units of currency. 348. Find out the total issues. a. 25,000 b. 24,000 c. 22,300 d. 25,750 e. 23,250. 181
  • 187. Macroeconomics 349. Compute net capital formation. a. 16,000 b. 12,500 c. 19,000 d. 11,000 e. 15,000. 350. Calculate the new issues. 13,450 12,750 14,200 15,500. 04 e. 20 d. 04 c. B b. 04 11,500 W a. 12,750 11,280 11,220 12,250. ef .N R e. -4 d. 27 c. 02 b. o. 12,460 4- a. M AC 351. Calculate secondary issues. 1- 31 Based on the following information answer the questions 352 and 353. :8 Item 8,985 .IS BN Secondary issues: Issues of financial institutions. Amount (Rs in Crores) ed Primary issues: Issues of non-financial sectors se rv Domestic sector Th e Ic fa iU ni ve rs i ty Pr es ht 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 © ig s. Al National income lr Net capital formation s re Rest of the world 182 9,760 835 13,680 98,865
  • 188. Part-II If the Central Bank purchases government securities worth Rs.8,970, The increase in money supply will be: a. 21,485 b. 22,470 c. 22,425 d. 21,875 e. 23,105. ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 Item Million Units of Currency Foreign exchange assets 15 Credit to government 1,780 Credit to banks 410 Government deposits 21 Other non-monetary liabilities 11 Net worth 510 Other assets 78 Credit to commercial sector 112 The currency deposit ratio is 0.3 Reserve ratio is 4% The government money is considered to be negligible. 355. The money supply in the economy is: a. 7,125 b. 7,085 c. 7,250 d. 7,158 e. 7,060. 356. If the Central Bank wants to reduce the money supply 18%, The value new reserve ratio is: a. 12.80% b. 12.20% c. 11.25% d. 11.46% e. 13.25%. 04 Based on the following information answer the questions 355 and 356. ve rs i Based on the following information answer the questions 357 and 358. iU ni The following balances have been taken from the Balance Sheet of the Central Bank of an economy: © 20 04 Th e Ic fa 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. 183
  • 189. Macroeconomics 357. The Reserve Ratio is: a. 10.6% b. 11.2% c. 10.9% d. 11.5% e. 9.8%. 04 358. There is an increase in Central Bank credit to government by 550 million units of currency. But the Central Bank desires to contain the money supply at the original level and for this purpose it alters the reserve ratio. The new reserve ratio is: 24 b. 26 c. 21 d. 23 e. 25. M AC W B 04 20 04 a. : 0.65 : 1.60 27 02 4- Financial interrelations ratio 31 Intermediation ratio -4 : 0.30 1- Finance ratio R ef .N o. 359. The following indicators of financial development for an economy are available for the year 2000. 15,725.75 15,468.75 15,350.75 15,400.75. ed se rv re s e. ht d. ig c. lr b. .IS 15,565.75 s. Al a. BN :8 The value of net capital formation for the year 2000 if the new issues for the year is 15,000 (Million units of currency) is: b. 1,600 c. 1,450 d. 1,750 ni iU fa Ic Th e e. ty 1,500 ve rs i a. Pr es 360. On a given day the stock of high-powered money is 1,000. The currency-deposit ratio is 0.8 while the reserve ratio is 0.2. The money supply is: 1,800. 20 04 361. If the currency deposit ratio is 1.2 and the reserve ratio 0.10, the value of the money multiplier is: 1.69 c. 1.72 d. 1.75 e. 184 1.63 b. © a. 1.65.
  • 190. Part-II 362. The following balances have been taken from the Balance Sheet of the Central Bank of an economy. 04 04 20 Credit to government Credit to bank Government deposits Other non-monetary liabilities Net worth Credit to commercial sector Foreign exchange assets Other assets 04 Million units of currency 500 200 10 5 250 50 7 4- 02 27 -4 R ef .N o. M AC W B 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%. s re se rv ed .IS BN Million units of currency 700 300 20 50 200 10 400 20 10 ty Pr es s. Al lr ig ht Particulars Credit to Government Credit to banks Government deposits Deposits of banks Credit to commercial sector Foreign exchange assets Net worth Other assets Other non-monetary liabilities :8 1- 31 363. The following balances have been taken from the balance sheet of the Central Bank of an economy: © 20 04 Th e Ic fa iU ni ve rs i 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 Bank’s money supply target is 16,500. The reserve ratio that the Central Bank must impose is: a. .11 b. .18 c. .13 d. .15 e. .16. 185
  • 191. Macroeconomics Based on the following information answer the questions 365 and 366. Particulars Million units of currency Credit to government 950 Credit to Bank 350 Government deposits 20 Other non-monetary liabilities 5 Net worth 500 Credit to commercial sector 125 65 04 20 Other assets 04 25 04 Foreign exchange assets M AC W B The Currency/Deposit ratio has been ascertained as 0.20. The amount of government money is 10 million units of currency. Total money supply in the economy is 4,000 million units of currency. ef .N o. 365. The reserve ratio imposed by the Central Bank is: 11% b. 16% c. 12% d. 14% e. 10%. 1- 31 4- 02 27 -4 R a. 360 378 320 390. re s ht e. ig d. lr c. s. Al b. se rv 345 Pr es a. ed .IS BN :8 366. If there is an increase of 100 million Central Bank credit to Government accompanied by Government purchase of foreign exchange worth 10 million from the Central Bank, the increase in money supply in the economy is: iU ni ve rs i ty 367. At a point of time, in an economy, high-powered money stock is 800 and narrow money stock (M1) is 4,000. Currency deposit ratio is 0.2. If the Central Bank purchases government securities worth 200 but does not want the money supply to change, the reserve ratio should be increased by: 0.2 0.08 Th e Ic b. fa a. © 20 04 c. 0.3 d. 0.1 e. 0.5. 368. Assume that the ability of the commercial banking system to create demand deposits depends only upon reserve requirement stipulated by the Central Bank. The following details are available as on a date: Million units of currency Reserves with the Central Bank Volume of demand deposits 9,600 Reserve requirement 186 2,400 25%
  • 192. Part-II If the volume of reserves is decreased by 500 and the reserve requirement is lowered to 20%, the demand deposits is: a. 100 b. 120 c. 160 d. 125 e. 130. 369. 12,500.00 a. Domestic sectors 8,525.00 13,850.00 b. Rest of the world 725.00 1,775.00 20 7,862.50 B 04 Secondary Issues: Issues of financial institutions 2002 04 2001 04 Particulars ef .N o. M AC W Primary issues: Issues of non financial sectors 12,333.33 19,230.76 National income 95,404.16 1,21,456.75 27 -4 R Net Capital Formation (Net physical asset) 4- 02 The intermediation ratio for the year 2001. 0.92 b. 0.88 c. 0.85 d. 0.95 e. 0.98. se rv ed .IS BN :8 1- 31 a. re 370. The following are the indicators of financial development for an economy: 2002 0.28 0.25 Financial interrelations ratio 1.75 1.20 Intermediation ratio 0.75 0.70 ig ht s 2001 ve rs i ty Pr es s. Al lr Finance ratio iU ni (The above ratios are based on total figures pertaining to a year and not on the incremental values.) New issues (Million units of currency) 2001 10,000 2002 12,000 © 20 04 Th e Ic fa Other relevant information is as follows: The net capital formation for the year 2001 is: a. 15,000 b. 18,000 c. 14,000 d. 11,000 e. 10,000. 187
  • 193. Macroeconomics Based on the following information answer the questions 371 and 372 Particulars Million units of currency Credit to government 1,080 300 350 400 300 800 Net worth 400 Foreign exchange assets 250 Other assets 500 04 Currency issued by Central Bank 20 Credit to commercial sector 04 Deposits of banks with Central Bank B Other non-monetary liabilities W Government deposits 04 420 M AC Credit to banks iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. Government money is negligible and hence can be ignored. The currency-deposit ratio is ascertained to be 0.2. The Central Bank has imposed a reserve ratio of 5%. 371. The value of money supply in the economy is: a. 7,250 b. 7,200 c. 7,800 d. 7,750 e. 7,450. 372. The Government approached the Central Bank for an additional credit of 500 million units of currency. If the additional credit is provided, The increase in the money supply in the economy would be: a. 2,500 b. 2,650 c. 2,750 d. 2,300 e. 2,400. 373. The following information is available for an economy. Income elasticity of demand for real balances 3.0 Acceptable rate of inflation 6% Money multiplier 3 © 20 04 Th e Ic fa If the real GDP is desired to grow at 4%, the rate at which reserve money should grow would be: a. 7.5 b. 4 c. 9 d. 6 e. 5.8. Based on the following information answer the questions 374 and 375 The following are the indicators of financial development for an economy for the year 2000. 2000 Finance ratio 0.27 Financial interrelations ratio 1.50 Intermediation ratio New Issues (Million units of currency) 188 0.75 90,000
  • 194. Part-II 374. The secondary issues for the year 2000 is: a. 65,400 b. 67,300 c. 67,500 d. 66,500 e. 68,750. 375. The value of net capital formation for the year is: 1,03,180 1,05,750 1,01,280 1,06,570. 04 20 04 e. B d. W c. M AC b. 04 1,05,000 o. a. ef .N Based on the following information answer the questions 376 and 375. -4 R The following are the indicators of financial development for an economy for the year 2001. Intermediation ratio 02 1.60 0.76 31 Financial interrelations ratio 4- 0.33 BN :8 1- Finance ratio 27 2001 1,98,240 10,56,280 10,57,290 10,58,980 s ht 10,57,280. ig e. lr d. s. Al c. Pr es b. re 10,56,286 ty a. se rv ed 376. The national income for the year 2001is: .IS New Issues (million units of currency) 0.98 b. 0.96 © 20 04 iU fa Ic Th e c. ni a. ve rs i 377. The new issue ratio for the year 2001 is: 0.91 d. 0.89 e. 0.85. 378. In an economy the income elasticity of demand for real balances is 2.0 and the acceptable rate of inflation is 5%. The real GDP is expected to grow at 5%, and money multiplier is 3. The rate at which the reserve money should grow is: a. 4.8% b. 5.0% c. 5.2% d. 4.6% e. 6.0%. 189
  • 195. Macroeconomics 379. Particulars Million units of currency Credit to government 3,500 Government deposits 100 Credit to banks 1,500 250 Credit to commercial sector 1,000 Net worth 2,000 100 B 50 W Other non-monetary liabilities 04 Other assets 04 40 20 Foreign exchange assets 04 Deposit of banks (Reserves) M AC The currency-deposit ratio is ascertained to be 34%. ef .N o. The amount of government money is 10 million units of currency. -4 R 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. 11.26% 12.80% 11.56% 10.67%. 431 1:8 e. BN d. .IS c. ed b. 02 10.50% se rv a. 27 The value of the Reserve Ratio is: Based on the following information answer the questions 380 and 381. lr s. Al Particulars ig ht s re The following balances have been taken from the balance sheet of the Central Bank of an economy. Million units of currency 400 ty Credit banks 1,000 Pr es Credit to government 20 Other non-monetary Liabilities 10 500 100 iU Net worth fa ni ve rs i Government deposits Th e Ic Credit to commercial sector © 20 04 Other assets 70 Foreign exchange assets 14 The Currency-Deposit Ratio = 0.2 Reserve Ratio = 5% 380. The value of money supply in the economy is: a. b. 5059.2 c. 5120.2 d. 5109.2 e. 190 5058.5 5029.5.
  • 196. Part-II 381. If the Central Bank wants to reduce the money supply by 20%, the new reserve ratio would be: a. 12.50% b. 11.75% c. 12.80% d. 11.25% e. 12.20%. 382. W B 04 20 04 04 Year I 0.27 0.75 1.60 M AC Particulars Finance ratio Intermediation ratio Financial interrelations ratio Other information: New issues 20,000 16,750 14,450 -4 d. 27 c. ef .N 14,550 02 b. R 15,000 4- a. o. Calculate secondary issues. :8 1- 31 e. 15,600. Based on the following information answer the questions 383 and 384. BN 383. Given the following information © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS Particulars 19x1 Finance ratio 0.26 Intermediation ratio 0.78 Financial interrelations ratio 1.50 Other information: New issues 24,000 The value of national income is: a. 1,64,408.69 b. 1,65,480.75 c. 1,64,307.69 d. 1,63,235.76 e. 1,65,703.90. 384. Calculate the net capital formation from the above given financial indicators. a. 21,435 b. 22,325 c. 20,750 d. 21,875 e. 20,925. Based on the following information answer the questions 385 and 386. The following information pertaining to an economy is available: Commodity market equation 5000 – 30i Demand for money equation 0.3Y – 300i Current money supply in the economy 300 million units of currency Income elasticity of demand for money 1.2 191
  • 197. Macroeconomics The following estimates are made for the next year: Rate of inflation 5% Rate of growth of real GDP 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: 327.6 377.6 d. 358.5 e. 325.8. 04 c. 20 b. 04 337.8 04 a. 12.75% 10.88%. o. ef .N e. R d. W 10.25% -4 c. M AC 11.50% 11.25% 27 a. b. B 386. The cost of borrowing from the commercial banks is: 4- 02 Based on the following information answer the questions 387 and 388. re se rv ed .IS BN :8 1- 30,000 1,000 4,000 405 700 7,500 35,000 4,000 s. Al lr ig ht s Credit to banks Government deposits Credit to Government Other non-monetary liabilities Foreign exchange assets Credit to commercial sector Net worth Other assets 31 The following are the balances taken from the balance sheet of the Central Bank. Pr es 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%. ve rs i ty 387. The value of money supply in the economy is: 27,440 b. 26,570 iU fa 28,480 Ic c. ni a. 27,720 e. 26,980. © 20 04 Th e d. 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. 620 c. 560 d. 610 e. 192 580 635.
  • 198. Part-II 389. The following monetary data on financial development of an economy has been obtained for the year 1998. New issues ratio 0.74 Net Physical Capital Formation 2,00,445 Secondary issues 1,15,605 Compute the Intermediation Ratio for the economy. 0.71 b. 0.82 c. 0.85 d. 0.78 e. 0.91. B 04 20 04 04 a. M AC W 390. The following are the data pertaining to the various components of money supply. o. Rs. in Crores 1,44,818 991 4- 4,986 31 Cash in hand 27 Small coins -4 1,942 02 Rupee coins R Notes in circulation ef .N Currency with the public: Other deposits with Reserve Bank 5,041 25,969 lr ig ht s re Post office savings bank deposits se rv Post office deposits: Total post office deposits 5,627 4,83,560 ed Time deposits with banks BN 99,106 .IS Demand deposits with banks :8 1- Deposit money of the public: fa iU ni ve rs i ty Pr es s. Al 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. © 20 04 Th e Ic 391. The following balances have been taken from the balance sheet of Central Bank of an economy. Credit to government Credit to bank Government deposits Other non-monetary liabilities Net worth Credit to commercial sector Foreign exchange assets Others assets Million Units of Currency 1,500 600 30 15 750 150 21 105 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
  • 199. 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. M AC W B 04 20 04 04 Finance ratio 0.70 Financial interrelation ratio 1.40 New issues ratio 0.80 Intermediation ratio 0.75 The net capital formation is 5,00,000 million units of currency. 392. The value of the Total Issue is: 7,75,000 7,00,000 8,15,000 8,35,000. ef .N R -4 e. 27 d. 02 c. 4- b. o. 7,25,000 31 a. 12,00,000 12,50,000 15,00,000 11,50,000. BN .IS ed e. se rv d. re c. :8 10,00,000 b. s a. 1- 393. The value of National Income is: ig ht Based on the following information answer the questions 394 and 395. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr Particulars Government Deposits Foreign Exchange Assets Net worth Other assets Other non-monetary liabilities Credit to government Credit to banks Credit to commercial Sector Deposits of Banks Million units of currency 50 20 1,000 50 25 1,750 750 500 125 The currency deposit ratio has been ascertained as 34%. The amount of Government money is 5 million units of currency. Total money supply in the economy is 6,000 million units of currency. 394. The Reserve Ratio imposed by the Central Bank would be: a. b. 12.28 c. 10.87 d. 10.67 e. 194 11.76 11.25.
  • 200. Part-II 395. There is an increase in Central Bank credit to Government by 550 million units of currency. But the Central Bank desires to contain the money supply at the original level and for this purpose it alters the reserve ratio. The new reserve ratio is: a. 21.5 b. 22.9 c. 20.5 d. 23.8 e. 21.7. M AC W B 04 0.25 1.60 0.85 0.88 ef .N National income during the period is 96,000 million units of currency. 12,000 14,000 16,000 15,000. 27 02 431 1:8 e. 397. The value of the Secondary Issues is: 13,250 12,750 11,500 12,500. se rv re s ht e. ig d. lr c. s. Al b. ed 11,250 Pr es a. BN d. .IS c. -4 13,500 b. R 396. The value of the Net Capital formulation is: a. o. Finance ratio Financial interrelation ratio New issues ratio Intermediation ratio 20 04 Following are the indicators of financial development of an economy for the year 2002-03. 04 Based on the following information answer the questions 396 and 397. ve rs i ty Based on the following information answer the questions 398 and 399. 9,600 iU ni Secondary Issues: Issues of Financial Institutions 2001 Th e Ic fa Primary Issues: Issues of Non-Financial Sectors © 20 04 a. Domestic Sectors 11,600 b. Rest of the World 1,200 Net Capital Formation (Net Physical Assets) 1,600 National income 89,600 398. The value of Finance Ratio is: a. 0.70 b. 0.65 c. 0.25 d. 0.42 e. 0.28. 195
  • 201. Macroeconomics 399. Calculate Intermediation Ratio. a. 0.85 b. 0.82 c. 0.71 d. 0.73 e. 0.75. 400. .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 Secondary Issues: 12,000 Issues of Financial Institutions Primary Issues: Issues of Non-Financial Sectors a. Domestic Sectors 13,400 b. Rest of the World 1,600 Net Capital Formation 20,000 (Net Physical Assets) National income 1,00,000 The value of Finance Interrelations Ratio is: a. 1.38 b. 1.35 c. 1.42 d. 1.48 e. 1.29. 401. The following balances have been taken from the balance sheet of the Central Bank of an economy. re s 1,000 400 20 10 500 100 70 14 ni ve rs i ty Pr es s. Al lr ig ht Credit to government Credit to banks Government deposits Other non-monetary liabilities Net worth Credit to commercial sector Other assets Foreign exchange assets Million units of currency se rv ed Particulars Ic fa iU The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a reserve ratio of 5%. © 20 04 Th e 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. Based on the following information answer the questions 402 and 403. Particulars Secondary issues Primary issues Net capital formation National income 196 2001-2002 68,500 47,445 1,16,450 6,50,750
  • 202. Part-II 402. The value of Finance Ratio is: a. 0.178 b. 0.125 c. 0.195 d. 0.182 e. 0.165. 403. The value of New Issues Ratio is: 0.425 0.432 0.407 0.412. 04 20 e. 04 d. B c. 404. From the following financial data, calculate financial interrelations Ratio. 0.986 0.992 0.909 0.915. o. ef .N R -4 27 02 1:8 e. BN d. .IS c. ed b. 31 0.998 se rv a. 2002-03 69,000 50,000 1,20,000 8,00,000 4- Particulars Secondary Issues Primary Issues Net Capital formation National Income W b. 04 0.417 M AC a. re Based on the following information answer the questions 405 and 406. ht s Following are the extracts from the balance sheet of Central Bank. © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig Particulars Credit to Government Credit to Banks Government Deposits Deposits of Banks Credit to commercial sector Foreign exchange assets Other assets Other non-monetary liabilities Net worth Million units of currency 1,000 400 80 100 300 20 10 5 300 Government money in the economy is 10 million units of currency The currency to deposit ratio is 35% The reserve ratio is 10% 405. The value of the total money supply in the economy is: a. 4,065 b. 4,078 c. 4,125 d. 4,150 e. 4,275. 197
  • 203. Macroeconomics 406. An additional inflow of 50 million unit currency of foreign exchange assets is expected during the coming year. However, the Central Bank wants to maintain the money supply at the original level by altering the reserve ratio. The new reserve ratio is: a. 10.98% b. 11.66% c. 11.75% d. 12.85% e. 12.76%. Based on the following information answer the questions 407 and 408. 04 20 04 B W M AC o. ef .N R -4 27 Million units of currency 2,000 4,500 500 6,000 1,000 300 1,200 200 02 Particulars Credit to banks Credit to government Credit to commercial sector Net foreign exchange assets Net worth Government Deposits Deposits of Banks Other assets 04 Following are the extracts from the balance sheet of the Central Bank. 1- 31 4- Government money in the economy is 100 MUC. Reserve ratio imposed by the Central Bank is 10% and currency deposit ratio is 0.30. c. BN 38,250 36,000 41,000. ht s re 39,000 e. ig d. ed b. .IS 37,500 se rv a. :8 407. The Money supply in the economy is: Pr es s. Al lr 408. If there is a foreign exchange inflow of 450 million, then the required reserve ratio to sterilize the effect of foreign exchange inflow is: 12.2 b. 11.5 c. 13.5 d. 10.7 e. 12.8. Ic fa iU ni ve rs i ty a. © 20 04 Th e 409. The following are the excepts from the balance sheet of a Central Bank. 198 Particulars Notes in circulation Other deposits Other non-monetary liabilities Statutory and contingency reserves Credit to Central Government Shares & loans to financial institutions Central bank claims on Commercial banks Net foreign exchange assets Other assets MUC 100 50 100 420 1,120 550 350 150 50
  • 204. Part-II If the government money is 25 MUC, the high powered money in the economy is: a. 1,650 MUC b. 1,750 MUC c. 1,725 MUC d. 1,825 MUC e. 1,650 MUC. 410. In an economy the demand for money is estimated to be L = 0.25Y – 10i. If the interest rate is 6% and money supply is 200 MUC, the equilibrium level of output is: 1,060 MUC b. 1,040 MUC c. 1,080 MUC d. 1,100 MUC e. 1,120 MUC. M AC W B 04 20 04 04 a. ef .N MUC 225 Increase in inventories 50 27 Fixed capital formation -4 750 31 4- 02 Private final consumption expenditure R Particulars o. 411. The following data pertains to a hypothetical economy. 160 1- Government final consumption expenditure BN :8 Exports .IS Imports 30 239 se rv ed Money supply 40 The velocity of money in the economy is 3 5 6 7. s ht ig e. lr d. s. Al c. Pr es b. re 4 ty a. iU ni ve rs i 412. On the basis of following data calculate finance ratio for the year 2003. Particulars Ic fa GDP at market price MUC 76,500 2,500 Indirect taxes 1,225 © 20 04 Th e Depreciation Subsidies 725 Net factor income from abroad 200 Net capital formation Finance interrelation ratio a. 31.6% c. 34.6% d. 26.6% e. 1.5 28.6% b. 15,500 36.6%. 199
  • 205. Macroeconomics 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 413. The central bank’s 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
  • 206. Part-II se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 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 s re Finance ratio Financial inter-relation ratio © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht If the national income for the year 2002-03 is 19,200MUC, the total issues will be a. 7,800 MUC b. 8,200 MUC c. 8,700 MUC d. 9,000 MUC e. 9,600 MUC. 421. In an economy, the high-powered money and money supply are 4,300 MUC and 17,200 MUC respectively. If the reserve ratio is 10%, currency deposit ratio for the economy is a. 0.17 b. 0.20 c. 0.24 d. 0.27 e. 0.29. 422. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and total demand for money is Rs.5,000, then the amount required by banks to meet the reserve requirement is equal to a. Rs.250 b. Rs.2,250 c. Rs.2,500 d. Rs.5,000 201
  • 207. Macroeconomics e. None of the above. 423. Reserves with the Central Bank Volume of demand deposits Reserve requirements Rs.8,000 Rs.32, 000 25% 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? 0.4. 0.2. 0.8. 0.1. 04 20 e. 04 d. B c. W b. 04 0.5. M AC a. Finance Ratio: Intermediation Ratio: Financial Interrelations Ratio: ef .N o. 424. The following indicators of financial development for an economy are available for the year 19x0. 02 27 -4 R 0.35 0.68 1.75 17,280 16,750 15,750 17,320. BN .IS ed e. se rv d. re c. s b. :8 15,450 ht a. 1- 31 4- Calculate Net Capital Formation for the year 19x0, if the New Issues for the year is 18,000 (Million units of currency). s. Al lr ig 425. The following are the figures from the balance sheet of Central Bank Pr es Particulars ve rs i ty Credit to government ni Credit to banks fa iU Government deposits Th e Ic Other non-monetary liabilities Million units of currency 2,500 500 25 18 20 04 Net worth 522 Credit to commercial sector 160 75 Foreign exchange assets. © Other assets 15 The currency-deposit ratio has been ascertained as 0.2 and the Central Bank has imposed a reserve ratio of 5%. Calculate the money supply in the economy. a. b. 12,458 c. 12,980 d. 202 12,660 12,725
  • 208. Part-II e. 12,888. 426. Particulars Rs. in Crore Share capital 740 Reserve funds 75 Credit to state government 1,010 890 Deposits of Banks 235 Credit to banks 460 44 70 130 B W M AC Government money o. Government deposits 04 76 Other assets ef .N Other non-monetary liabilities 04 55 20 Foreign exchange assets 04 Credit to government R In the economy currency deposit ratio is 0.3 and reserve ratio 0.10 is imposed by Central Bank. 5,645 5,320 5,425 5,550. 27 02 4- e. 31 d. 1- c. :8 b. -4 5,291 BN a. ht s re se rv = 5000 = 18,000 = 25% ig Reserves with Central Bank Volume of demand deposits Reserve requirements ed .IS 427. 0.16. c. 0.12. d. 0.22. e. 0.23. Pr es b. ty 0.18. Ic fa iU ni ve rs i a. s. Al lr If the volume of reserves is decreased by 750 and volume of demand deposits increased by 1,200 what will be the new reserve ratio? © 20 04 Th e 428. From the following calculate M3. Currency with the public 2,250 Deposit money of the public 630 Total post office deposits 478 Time deposits with the bank 535 Post office savings bank deposits 312 a. 3,415 b. 3,225 c. 3,260 d. 3,650 e. 3,420. 203
  • 209. Macroeconomics 429. re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 Rs. in crore Net worth 820 Other assets 48 Other non-monetary liabilities 22 Government deposits 165 Credit to commercial sector 435 Foreign exchange assets 25 Credit to Government 1,525 Credit to banks 675 The currency deposit ratio in the economy is 0.4 and reserve ratio is 6%, then how much should be the Government money in the economy to have a money supply of 6,325? a. 357.8. b. 368.5. c. 354.2. d. 384.6. e. 377.2. 430. In an economy, the currency with the public is Rs.6,500 crore and bank’s reserve are Rs.2,200 crore. The currency deposit ratio is 0.5 and the Central Bank imposes a reserve ratio of 0.12. Calculate the money supply in the economy. a. 20,350 b. 20,570 c. 20,455 d. 20,635 e. 20,215. 431. Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s 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 Th e 432. Assume that the ability of the commercial banking system to create demand deposits depends only upon reserve requirement stipulated by the Central Bank. Reserve with the Central Bank Volume of demand deposits Reserve requirements = 3,200 = 11,500 = 30% If the volumes of reserves are decreased by 700 and reserve requirement is lowered to 25%, find out the estimated demand deposit. a. 10,000 b. 11,200 c. 12,150 d. 12,300 e. 12,600. 204
  • 210. Part-II 433. Particulars 1985 Finance ratio 0.26 Intermediation ratio 0.78 Finance interrelation ratio 1.50 New Issues (Million Units of currency) Calculate the new issue ratio. 0.826 0.922 0.935 0.843. 04 20 e. 04 d. B c. W b. 04 0.985 M AC a. 24,000 434. The following are the data pertaining to the various components of money supply. ef .N o. Rs. in crores 991 4,986 4- BN :8 Deposit money of the public: 31 Cash in hand 02 1,942 Small coins 1- Rupee coins -4 1,44,818 27 Notes in circulation R Currency with the public: 99,106 .IS Demand deposits with banks 4,83,560 se rv Time deposits with banks 5,627 ed Other deposits with Reserve Bank s re Post office deposits: s. Al lr Total post office deposits ig ht Post office savings bank deposits 5,041 25,969 b. 7,41,030 ty 7,41,540 ve rs i a. Pr es Calculate measure of money stock M3. 7,41,228 d. 7,41,145 iU fa Ic 7,41,160. Th e e. ni c. 20 04 The Open Economy and Balance of Payments: India’s Balance of Payments © 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
  • 211. Macroeconomics Export of services 31,944 Import of services 24,928 Earnings of loans and investments to abroad 858 Earnings of loans and investments from abroad 2,108 Short-term loans and investments to abroad 576 Short-term loans and investments from abroad 84 Foreign direct investments to abroad 70 04 04 200 20 Foreign direct investments from abroad – 2,125 – 2,257 – 2,018 – 2,125. W M AC e. o. d. ef .N c. R b. B – 2,030 -4 a. 04 435. The value of the Trade Balance is: 5,725 5,906 5,645. 31 1:8 e. BN d. .IS c. 02 5,546 ed b. 4- 5,865 se rv a. 27 436. The overall Balance of Payments is: ht s Particulars re 437. Rs. in Crores Agricultural Exports b. Aircraft Exports c. Automobile Imports d. Overseas earnings by insurance companies 100 e. Dividends paid to foreign investors 275 f. Donations received from abroad 1,000 450 1,050 122 Direct investment abroad 900 h. Short-term loans and investment abroad 100 i. Foreign Direct Investments 850 © 20 04 Th e Ic g. fa iU ni ve rs i ty Pr es s. Al lr ig a. The value of current account Balance is: a. b. –345 c. +347 d. –341 e. 206 +350 +352.
  • 212. Part-II 04 20 04 B W M AC o. ef .N R -4 27 02 Merchandize Imports Merchandize Exports Travel (net) Transportation (net) Earnings on Loans and Investments Abroad Transfers (debit) Transfers (credit) External Assistance to India (net) External Assistance by India Direct Investments abroad (net) Foreign Direct Investments in the country Portfolio Investment in India (net) Short-term Loans and Investments to India Commercial Borrowings (long-term) by India Commercial Borrowings (long-term) to India (net) Deposits made by NRIs (net) Net assets of Commercial banks Net liabilities of Commercial banks Miscellaneous Banking Capital (net) Rupee Debt service Other Capital (net) ed Pr es s. Al lr ig ht s re se rv The value of total capital account is: a. 10,242 b. 10,348 c. 10375 d. 10,265 e. 10,328. .IS BN :8 1- 31 4- a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s. t. u. (US $ million) 55,383 38,285 11,865 15,721 1,931 34 12,290 901 10 –74 2,167 3,024 377 20 +313 2,140 790 –26 –177 711 1,508 04 438. The following information is extracted from India’s balance of payments statement, 2002-2003. You are required to prepare the capital account. The Open Economy and Balance of Payments © 20 04 Th e Ic fa iU ni ve rs i ty 439. The capital inflows and outflows in an economy during the year 2002-03 are 6,300 MUC and 4,500 MUC respectively. Suppose there is no change in the official foreign reserve assets held by the central bank, what could be the current account balance for the economy? a. 1,500 MUC (Deficit). b. 1,800 MUC (Surplus). c. 1,800 MUC (Deficit). d. 1,500 MUC (Surplus). e. Zero. Based on the following information answer the questions 440 and 443. India’s 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
  • 213. Macroeconomics 04 04 20 ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC 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). 04 Portfolio Investment External Assistance Commercial Borrowings (MT & LT) Commercial Borrowings (Short Term) Commercial Banks Others Rupee Debt Service Other Capital Errors & Omissions Debit 6591 5233 4435 7210 8973 246 474 2909 — B Credit 7535 2773 2737 8189 16926 536 — 6402 634 W Items iU ni Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt © 20 04 Th e Ic fa 444. The following information is extracted from the Union Budget for the year 2003-04: 208 Particulars 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: 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
  • 214. 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 04 20 o. M AC W B 04 1,84,169 69,766 18,023 13,200 1,53,637 2,89,384 28,437 -4 R ef .N 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 04 Rs. crore Rs.1,12,392 cr Rs.1,12,292 cr Rs.1,19,292 cr :8 BN d. .IS c. ed b. 1- Rs.1,13,292 cr se rv a. 31 445. The estimated revenue deficit for the year 2003-04 is 4- 02 27 76,843 44,131 ve rs i ty Pr es s. Al lr ig ht s re e. Rs.1,19,922 cr. 446. The estimated primary deficit for the year 2003-04 is a. Rs.31,814 cr b. Rs.30,814 cr c. Rs.31,414 cr d. Rs.30,414 cr e. Rs.32,414 cr. ni Based on the following information answer the questions 447 to 449. © 20 04 Th e Ic fa iU The following estimates are extracted from the Union Budget for the year 2002-03. Tax Revenue Non-tax revenue Recoveries of Loans Other Capital Receipts Borrowings/other Liabilities Non-plan Expenditure: On Revenue Account (of which interest payment is Rs.75,000 Crore) On Capital Account Plan Expenditure: On Revenue Account On Capital Account Rs. in Crore 1,16,857 45,137 9,908 5,000 91,025 1,66,301 29,624 43,761 28,241 209
  • 215. Macroeconomics 447. The value of the Revenue Receipts is: a. 1,61,984 b. 1,65,948 c. 1,62,895 d. 1,62,750 e. 1,61,994. 448. The value of Capital Receipts is: 1,05,933 1,05,947 1,05,942 1,05,928. 04 e. 20 d. 04 c. B b. 04 1,05,995 W a. 02 27 -4 R ef .N o. M AC 450. The value of the Fiscal Deficit is: a. 91,056 b. 91,045 c. 91,025 d. 91,080 e. 91,074. 4- Based on the following information answer the questions 450 and 451. .IS ed se rv Rs. in Crore 1,46,209 57,464 13,539 10,000 1,11,275 2,28,768 1,01,266 21,619 iU ni ve rs i ty Pr es s. Al lr ig ht s re 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 BN :8 1- 31 The following items are taken from the Union Budget for the year 2000-01. Th e a. Ic fa 450. The Primary Fiscal Deficit is: 10,280 © 10,265 c. 10,009 d. 10,555 e. 20 04 b. 10,256. 451. The value of Revenue Deficit is: a. b. 77,275 c. 76,780 d. 76,220 e. 210 77,425 78,650. 52,330 35,770
  • 216. Part-II Based on the following information answer the questions 452 and 453. (Rs. in Crore) Direct Taxes 40,000 Indirect Taxes 1,20,000 12,000 Borrowings and other Liabilities 22,000 Profit from Public Sector Undertakings 17,000 Profit from Railways 13,000 1,32,000 30,000 W ef .N R -4 27 02 4- 31 1:8 BN ig ht s re se rv ed .IS 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. M AC Defense Expenditure B 47,000 o. Interest Payments 04 Subsidies 04 Interest Receipts 04 10,000 20 Recovery of Loans Tax Revenue Pr es s. Al lr 454. The value of Deficit Fiscal from the following data extracted from Union Budget, 1999-2000. 1,32,365 50,475 2,36,987 46,895 © 20 04 Th e Ic fa iU ni ve rs i ty Non-tax Revenue Total Revenue Expenditure Total Capital Expenditure Non-plan Revenue Expenditure (excl. interest Payments) Interest Payments Loans Recovered Other Capital Receipts (Rs. in crore) a. 78,985 b. 77,998 c. 79,595 d. 79,955 e. 1,02,331 88,000 11,087 10,000 79,050. 211
  • 217. Macroeconomics Based on the following information answer the questions 455 and 456. The following information is extracted from the union budget for the year 2002-03. (Rs. in crore) 1,25,750 1,21,275 1,11,275 1,22,475. 78,750 79,280. 04 04 20 04 B re s ht ig lr e. s. Al d. ed 77,275 se rv 77,425 c. .IS 78,435 b. W BN 456. The value of Revenue deficit is: a. M AC -4 27 02 431 e. 1- d. :8 c. R 1,12,575 b. 2,28,768 21,619 52,330 35,770 ef .N 455. The value of Fiscal Deficit is: a. 1,46,209 57,464 13,539 1,12,275 10,000 o. Tax Revenues Non-tax Revenues Recoveries of Loans Borrowings and other Liabilities Other Receipts (Of which disinvestment proceeds committed for redemption of Public debt 1,000 cr.) Non-plan Revenue Expenditure (incl. Interest payments of Rs.101266 cr.) Non-plan Capital Expenditure Planned Revenue Expenditure Planned Capital Expenditure Pr es Economic Growth, Development & Planning ve rs i ty 457. For an economy, the growth rate of population is likely to be 2% per annum. Given that capital output ratio is 5 and possible level of investment is 25 percent of GDP, what is the possible per capita real GDP growth rate? 2.0%. b. 3.0%. iU fa Ic 4.0% . d. 3.5% . e. 4.5%. © 20 04 Th e c. ni a. 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. 4.5 c. 5.0 d. 4.0 e. 212 3.0 5.5.
  • 218. Part-II Based on the following information answer the questions 459 and 460. Targeted growth rate in real GDP = 7.0% Incremental capital output ratio 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: b. 6% c. 3.5% d. 4.25% e. 5%. 04 4% 20 04 a. 04 460. The per capita GDP, if population is expected to increase by 2% during the same period is: 4.3% 4.9% 4.8% 5%. W e. M AC d. o. c. ef .N b. B 4.5% © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R a. 213
  • 219. Part II: Solutions Measurement of Macroeconomic Aggregates 1. (b) 24.0 37.8 53.2 19.5 134.5 04 0.20 0.27 0.40 0.13 04 120 140 133 150 20 9.00 7.00 20.00 0.75 (i) x (ii) R ef .N o. M AC Weight (ii) -4 120 130 130 100 100 27 10 8 6 20 400 02 20 10 40 15 Single Bedroom Price relative 1996-97 (i) 4- Rice Wheat Milk Cotton Cloth Housing Price 1996-97 Rs. 12.00 8.00 7.80 20.00 400 31 Price 1991-92 Rs. 1- Qty 1991-92 0.164 0.066 0.197 0.246 0.328 19.68 6.60 25.61 24.60 32.80 Retail price index 109.30 .IS BN :8 Item W B Pulse 10 Kg 7.50 Rice 20 Kg 5.00 Cotton cloth 10/Mtr 15.0 Electricity 100 Unit 0.50 Laspeyer’s consumer price Index 2. (e) Weights (iii) (ii) = (i) x (iii) Price relative 1995 – 96 (i) 04 Qty (Qio) Price (Pio) Price (Pit) 1985 – 86 1985 – 86 1995 – 96 Item ed 3. (d) Real GNPCurrent Period se rv = Nominal GNPCurrent Period × GNP Deflator base period /GNP Deflator Current Period re Real GNP of 2001-02 ig ht s = Nominal GNP 2001-02 × (GNP Deflator 2000-01/ GNP Deflator 2001-02) s. Al lr = 2500 × (100/120) = 2,083.33. Pr es 4. (a) Real GNP of 2002-03 = Nominal GNP 2002-03 × (GNP Deflator 2000-01/GNP Deflator 2001-02). ve rs i ty = 3,200 × (100/145) = 2,207.00.p = (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. Ic Th e 6. fa iU ni 5. (b) Growth Rate © 20 04 7. 8. 9. 10. 11. 214
  • 220. 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 – Depreciation GNP at FC = GNP at MP – Indirect Taxes + Subsidies = 5,000 – 450 + 400 = 4,950 ∴ National Income = 4,950 – 350 = 4,600. 13. (c) Personal Disposable Income 04 M AC W B Personal Income = 4,600 – 200 – 800 = 3,600 ∴ Personal Disposable Income = 3,600 – 1,000 = 2,600. 14. (b) Net Factor Income from Abroad o. …………(i) ef .N = GNP at MP – GDP at MP 20 National Income – Retained Earnings – Corporate Tax 04 Personal Income = 04 = Personal Income – Personal Income Tax. R GNP at MP = GDP at MP + Net Factor Income from Abroad 27 -4 where, GDP at MP 02 = GDP at FC + Indirect Taxes – Subsidies. :8 1- 31 4- = 80,000 + 5,000 – 0 = 85,000 ∴ Net Factor Income from Abroad BN = 95,000 – 85,000 = 10,000. .IS 15. (a) GDP at FC se rv ed = Wages and Salaries + Dividends + Retained Profits + Profit tax. re = 200 + 40 + 50 + 10 = 300. ht s 16. (e) GDP at Factor Cost lr ig = Wages + Dividends + Retained Profits + Profit Tax s. Al = 250 +40 + 30 +40 +30 = 390. Pr es 17. (a) GNP at FC = GDP at FC + Net Income from Abroad ve rs i ty Net Income from Abroad = Factor Income Received from Abroad – Factor Income Paid Abroad. iU ni = 60 – 30 = 30. Ic fa GNP at FC = 390 + 30 = 420. © 20 04 Th e 18. (c) GNP at MP = GNP at FC + Indirect Taxes – Subsidies. GNP at FC = 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
  • 221. 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. 4- s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 20 04 ty ve rs i ni Th e 28. Ic fa 27. iU 26. © 29. 30. = (5,775 – 735) + 780 + 150 = 5,970 Personal Disposable Income = 5,970 – 900 = 5,070. 216 04 20 04 B W M AC = 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 + Proprietor’s 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. Pr es 25. o. 02 27 -4 = 55,000 × (100/67.50) = 81,481. 23. (b) Real GNP for the year 2003 24. ef .N R = Nominal GNP 2001 × (100/price level 2001) 04 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
  • 222. Part II 31. (c) Personal Savings = Personal Disposable Income – Consumption 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 Personal Savings = 5,070 – 4,500 32. (c) NNP at Factor Cost = National Income. = 570. NNP at Factor Cost 04 04 = GDP at MP + Net Factor Income from Abroad – Depreciation + Subsidies – Indirect Taxes. GDP at Market Price = 16,000 + 8,800 – 2,000 = 22,800. W ef .N o. M AC 33. (c) NDP at Factor Cost = NDP at Market Price – Indirect taxes+ Subsidies = 16,939 – 2,136 + 354 = 15,157. 04 = GDP at MP – 1,000 – 4,000 + 2,000 – 3,800 B 16,000 20 Net Factor Income from Abroad = 3,000 – 4,000 = –1,000 34. (a) National Income -4 R = NNP at Factor Cost. 02 27 = NDP at Factor Cost + Net Income from Abroad 31 4- = 15,157 – 46 = 15,111. 1- 35. (d) GNP at Factor Cost BN :8 = NNP at Factor Cost + Depreciation = 15,111 + 900 = 16,011. .IS 36. (e) Target Per Capita real GDP growth = 5% p.a. = 2.1% p.a. ed Expected Population Growth se rv Growth required in GDP to achieve target per capita GDP growth = 5 + 2.1 = 7.1% p.a. s re Capital Output ratio = 4:1 lr ig ht We know that: s. Al The required rate of investment as a percentage of GDP Pr es = (Required GDP growth rate) × (Capital – Output ratio) ty Rate of Investment Required = 4 × 7.1 = 28.4%. ve rs i 37. (a) GNP at Market Prices iU ni = GDP at Market Price + Factor Income Received from Abroad – Factor Income Paid Abroad fa = 6,000 + 1,500 – 1,200 = 6,300. © 20 04 Th e Ic 38. (d) National Income = NNP at Factor Cost = GNP at Market Prices + Subsidies – Indirect Taxes – Depreciation. = 6,300 + 475 – 900 – 600 = 5,275. 39. (c) Personal Disposable Income = 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
  • 223. 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 1,250.00 Compensation to Employees 8,487.50 Rents 1,000.00 Interest 500.00 750.00 250.00 Total (GNP) 04 B Undistributed Profits W Dividends 20 500.00 M AC Corporate Taxes 04 1,250.00 04 Proprietor’s Income 13,987.50 = 6.0% R Target per capita real GDP Growth o. = 1.9% ef .N 43. (e) Expected Population Growth = 4 × 7.9 = 31.6%. 4- 02 Hence Rate of Investment 27 -4 Hence growth required in GDP to achieve target per capita GDP Growth = 1.9 + 6 = 7.9% 31 44. (b) :8 1- Production Account Particulars Amount (Rs.) BN .IS 7,500 Sales to House Holds 525 se rv ed Wages Amount (Rs.) Particulars 900 Investment in Stock Net (Increase) 525 s re Profits 8,400 s. Al lr ig ht 8,400 45. (c) Input Output Account Rose Corp. Rs. Rose Corp. ---Perfume Corp ---Bottle Corp. ---House Hold* 2,550 * Including Profits. Perfume Corp. Rs. 1,950 ------4,950 Bottle Inventory Corp. Rs. Rs. ---7,200 ---900 600 (300) 225 ---- 20 04 Th e Ic fa iU ni ve rs i ty Pr es From/To Value added GDP = 2,250 + 4,950 + 900 = 8,400. © 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 House holds ------7,875 ----
  • 224. 04 20 04 B W 27 -4 R ef .N o. M AC 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. 04 Part II 4- 02 = 1,14,601 + 16,745 – 2,822 = 1,28,524 = 1,28,524 – 8,062 = 1,20,462. 1- 31 NNP at Market Price ed .IS BN :8 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 Pr es s. Al lr ig ht s re se rv 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 ty NNP at Market Price iU ni ve rs i GNP at Market Prices = 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 NDP at Market Price = NNP at Market Price – Net Factor Income from Abroad Th e Ic fa NNP at Market Price = 1,20,462 – 330 = 1,20,132. NDP at Factor Cost = NDP at Market Price – Indirect Taxes + Subsidies = 1,20,132 – 16,745 + 2,822 = 1,06,209. © 20 04 NDP at Market Price 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
  • 225. 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. © 20 04 fa Th e Ic 62. iU ni 61. ve rs i ty 60. Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R 59. ef .N o. M AC W B 04 04 20 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. 04 58. (a) National Income = NNP at Factor Cost 63. 220
  • 226. 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 = 3,550. GDP at Factor Cost + Net Factor Income from Abroad 04 Also GDP at Factor Cost = GDP at Market price – Indirect Taxes + Subsidies 04 = 20 GNP at Factor Cost 04 65. (d) GNP at Market Price = GNP at Factor Cost + Indirect Taxes – Subsidies = 3,950 + 600 – 350 = 4200. M AC = 3,750 + (1,000 – 800) = 3,950 GNP at Market Price 66. (a) 27 Quantities 30 20 1 5 100 Price(Rs.) 3/kg 4/ltr 5/doz 15/mtr 0.3/unit pi0 qi0 t 0 pi qi 90 80 5 75 30 280 150 120 6.5 125 40 441.5 5 ∑ p t q0 i=1 i i 4- 02 ( ) Price (Rs.) 5/kg 6/ltr 6.5/doz 25/mtr 0.4/unit 5 ∑ p0q0 i =1 i i 31 :8 BN .IS ed Kg. Ltr. Doz Meters units ( ) s. Al lr ig ht s re Rice Milk Eggs Cloth Electricity ( ) 1- Unit se rv Item -4 R Base year: 1980-81 Current year 1995-96 Base Year Current year Base Year 0 0 qi pi pit ef .N o. GNP at Factor Cost W B = 4,000 – 600 + 350 = 3,750 Pr es If the index is computed by using the formula: ty n ni ve rs i t P0 = ∑ pit qi0 i =1 n × 100 ∑ pi0 qi0 fa iU i =1 Th e Ic Where the weights are calculated using current year quantities = 441.5/280 × 100 = 157.68. © 20 04 67. (e) GNP at Market Price GNP at Factor cost = GNP at Factor Cost + Indirect Taxes – Subsidies = GDP at Factor Cost + Net Factor Income from Abroad = 6,000 + (1,500 – 1,800) = 6,000 – 300 = 5,700. GNP at Market Price = 5,700 + 800 – 400 = 6,100. 68. (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 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
  • 227. Macroeconomics GNP at Market Price = 5,700 + 800 – 400 = 6,100 NNP at Market Price = 6,100 – 400 = 5,700 NNP at Factor Cost = 5,700 – 800 + 400 = 5,300 National Income = 5,300. 69. (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 04 04 NNP at market price = GNP at Market Price – Depreciation NNP at Factor Cost = 5,700 – 800 + 400 M AC = 5,700 = 5,300 ef .N R -4 = 5,300 – 250 – 1,200 27 Personal Income o. = 6,100. NNP at Market Price = 6,100 – 400 W = 6,000 + (1,500 – 1,800) = 6,000 – 300 = 5,700. GNP at Market Price = 5,700 + 800 – 400 431 Personal Disposable Income = 3,850 – 800 = 3,050. 02 = 5,300 – 1,450 = 3,850 :8 1- = GDP at Market Prices + Net Factor Income from Abroad – Depreciation + Subsidies – Indirect Taxes BN 70. (a) NNP at Factor Cost 04 = GDP at Factor Cost + Net Factor Income from Abroad B GNP at Factor cost 20 GNP at market price = GNP at Factor Cost + Indirect Taxes – Subsidies .IS = GDP at Market Prices – 500 – 2,000 + 1,000 – 1,900 se rv ed = GDP at Market Prices – 3,400 re i.e. GDP at Market Prices – NNP at Factor Cost = 3,400 ht s The difference between GDP at Market Price and NNP at Factor Cost = 3,400. 46,680 Crore s. Al = 23,200 × (100/49.70) lr ig 71. (d) Real GNP for the year 1990: Pr es Real GNP for the year 2003 1,22,757 Crore ve rs i ty = 1,30,000 × (100/105.90) ni The real GNP for the years 1990 and 2003 are 46,680 and 1,22,757 Crore. fa iU 72. (e) GNP at Market Prices Th e Ic = 71,000 + 2,000 = NNP at Market Price + Depreciation = 73,000. © 20 04 GNP at Market Price = GDP at Market Price + Net Factor Income from Abroad. GDP at Market Prices = GDP at Factor Cost + Indirect Taxes – Subsidies = 70,000 + 1,000 – 0 = 71,000. Net Factor Income from Abroad = GNP at Market Prices – GDP at Market Prices = 73,000 – 71,000 = 2,000. 73. (b) NNP = GNP – Depreciation = 2,400 – 250 = 2,150 where : Depreciation = Gross Investment – Net Investment = 400 – 150 = 250. 74. (d) Net Exports = GNP – (C + I + G) = 2,400 – (1,500 + 400 + 480) = 2,400 – 1,380 = 20. 222
  • 228. Part II 75. (c) Net Indirect Taxes = NNP – National Income. NNP = GNP – Depreciation = 2,400 – 250 = 2,150 Depreciation = Gross investment – Net investment = 400 – 150 = 250 Net Indirect Taxes = 2,150 – 1,925 = 225. 76. (a) Corporate Profits = National Income – (Wages and Salaries + Proprietor’s Income + Rental Income + Net Interest) = 1,925 – (1,460 + 160 + 60) = 1,925 – 1,680 = 245. 04 = Gross Purchases + Budget Surplus 04 77. (e) Taxes – Transfers 20 = 480 + 15 = 495. B 04 78. (c) Personal Income = National Income – Corporate Profits + Transfer Payments + Dividends M AC W = (1,925 – 245) + 260 + 50 = 1,990 = National Income – (Wages and Salaries + Proprietor’s Income + Rental Income + Net Interest) o. Corporate Profits ef .N = 1,925 – (1,460 + 160 + 60) = 1,925 – 1,680 = 245. = Personal Income – Personal Taxes and Non-Tax Payments. = National Income – Corporate Profits + Transfer Payments + Dividends. 02 31 Personal Disposable Income = 1,990 – 300 = 1,690. 4- = (1,925 – 245) + 260 + 50 = 1,990 27 -4 Personal Income R 79. (b) Personal Disposable Income :8 1- 80. (a) Personal Saving = Personal Disposable Income – Consumption. se rv ed .IS BN Personal Disposable Income = Personal Income – Personal taxes and Non-tax Payments. Personal Income = National Income – Corporate Profits + Transfer Payments + Dividends. = = ni ve rs i ty Pr es s. Al 81. (e) Since National Income is the ignored. Final sales of A = Final sales of B = Final sales of C = iU = 1,690 – 1,500 = 190. s lr ig ht Personal Savings 1,990 – 300 = 1,690 re Personal Disposable Income (1,925 – 245) + 260 + 50 = 1,990 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 © 20 04 Th e Ic fa 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% 223
  • 229. 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: 04 04 X = 200 – (50 + 80 + 30) = 40 20 Y = 240 – (20 + 60 + 50) = 110 04 Z = 160 – (30 + 40 + 60) = 30 M AC W B National Income = 40 + 110 + 30 = 180. 86. (e) Value added in Industry Y ef .N o. = Output of Y – Input from the other industries. = 240 – (80 + 60 + 40) = 240 – 180 = 60. -4 R 87. (d) GDP at factor cost 4- 02 27 = Factor Income received by personal sector from business sector and Government Sector + Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad. 1- = GDP at Factor Cost + Net Factor Income from Abroad :8 88. (a) GNP at Factor Cost 31 = 1,064 + 64 + 104 +30 = 1,262. BN GDP at Factor Cost se rv ed .IS = Factor Income Received by Personal Sector from Business Sector and Government Sector + Savings of Business Sector + Profit Tax Paid by Business + Dividends paid Abroad. re = 1,064 + 64 + 104 +30 = 1,262 ht s GNP at Factor Cost = 1,262 + (– 30) = 1,232 GNP at Factor Cost. lr ig 89. (e) GNP at Market Price = GNP at FC + Indirect Taxes – Subsidies GDP at Factor Cost © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al 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. = 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 GDP at Market Price = 1,262 + 130 – 0 = 1,392. 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
  • 230. Part II 94. (a) Subsidies = 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. 96. (e) National Income = NNP at Factor Cost. NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies. 04 = GNP at FC + Indirect Taxes – GNP at Market Prices 04 Subsidies 20 = 95,000 + 14,000 – 1,07,000 = 2,000. B W = 88,000. M AC National Income 04 = 1,00,000 – 14,000 + 2,000 97. (a) Personal Income = National Income – Corporate Profit Tax – Retained Profit. o. = NNP at Factor Cost. ef .N National Income R NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies. = GNP at FC + Indirect Taxes – GNP at Market Prices. 31 4- = 1,00,000 – 14,000 + 2,000 02 = 95,000 + 14,000 – 1,07,000 = 2,000 27 -4 Subsidies = 88,000 Personal Income = 88,000 – 6,500 – 30,000 = 51,500. BN :8 1- National Income .IS 98. (c) Personal Disposable Income = Personal Income – Personal Income Tax. = National Income – Corporate Profit Tax – Retained Profit National income = NNP at Factor Cost. re se rv ed Personal Income ht s NNP at Factor Cost = NNP at Market Price – Indirect taxes + Subsidies. = GNP at FC + Indirect Taxes – GNP at Market Prices. lr ig Subsidies ty Personal Income = 88,000 Pr es National Income s. Al = 95,000 + 14,000 – 1,07,000 = 2,000 = 1,00,000 – 14,000 + 2,000 = 88,000 – 6,500 – 30,000 = 51,500 ve rs i Personal Disposable Income = 51,500 – 10,000 = 41,500. iU ni 99. (d) GNP at Market Price = NNP at Factor Cost + Depreciation – Subsidies + Indirect Taxes. Ic fa = 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
  • 231. Macroeconomics 102. (b) NDP at Factor Cost = NNP at FC – Net Factor Income from Abroad. = 4,73,246 – (– 6,833) = 4,80,079. 103. (d) GNP at Factor Cost = 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) 04 NNP at MP + Depreciation 1,70,992 + 11,888 = 1,82,880 04 = = 20 GNP at MP Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC W B 04 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. iU ni ve rs i ty 108. (e) GNP at Market Price Ic fa GNP at FC 20 04 Th e GDP at FC = 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 GNP at FC = 631 + (– 15) = 616 GNP at MP © = 447 + 60 + 40 + 52 + 32 = 616 + 65 – 0 = 681. 109. (c) GDP at MP = GDP at Factor Cost +Indirect Taxes – Subsidies. GDP at FC 226 Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector + Profit Tax + Retained Profit. = GDP at MP = 447 + 60 + 40 + 52 + 32 = 631 = 631 + 65 – 0 = 696
  • 232. 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 FC + Depreciation + Indirect taxes – Subsidies 04 = 9,04,000 – 92,700 = 8,11,300. 20 NNP at MP 04 = 7,09,900 + 92,700 + 1,30,500 – 29,100 = 9,04,000 B W = NNP at MP = GNP at MP – Depreciation = NNP at FC + Depreciation + Indirect taxes – Subsidies. = 7,09,900 + 92,700 + 1,30,500 – 29,100 = 9,04,000 NNP at MP = 9,04,000 – 92,700 = 8,11,300 NDP at Market Price = 8,11,300 – (–10,200) = 8,21,500. 114. (d) NDP at FC = NNP at FC – Net Factor Income from Abroad. NDP at Factor Cost = 7,09,900 – (–10,200) = 7,20,100. 115. (a) GNP at FC = GNP at MP – Indirect Taxes + Subsidies GNP at MP = NNP at FC + Depreciation + Indirect Taxes – Subsidies = 7,09,900 + 92,700 + 1,30,500 – 29,100 = 9,04,000 BN :8 1- 31 4- 02 27 -4 R ef .N o. M AC NNP at MP GNP at MP 04 113. (c) NDP at Market Price = NNP at MP – Net Factor Income from Abroad. = 9,04,000 – 1,30,500 + 29,100 = 8,02,600. .IS GNP at FC se rv ed 116. (b) Personal Disposable Income = NNP at FC – Corporate Taxes – Retained Profit – Personal Income Tax ig ht 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. ty GNP at FC Pr es s. Al lr 117. (e) GNP at FC = s re = 7,09,900 – 11,000 – 8,700 – 14,600 = 6,75,600. ve rs i 118. (b) NNP at Market Price = GNP at FC – Depreciation + 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 Th e Ic fa iU ni GNP at FC © 20 04 GNP at FC NNP at Market Price = 1,260 – 87 + 91 = 1,264. 119. (e) 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. GNP at FC = 1,000 + 50 + 101 + 34 – 114 + 102 + 87 = 1,260 NNP at Market Price = 1,260 – 87 + 91 = 1,264 NNP at FC = 1,264 – 91 = 1,173. 227
  • 233. 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. GNP at FC = 1,000 + 50 + 101 + 34 – 114 + 102 + 87 = 1,260 1,260 – 87 + 91 = 1,264 NNP at FC = 1,264 – 91 = 1,173 Personal Income = 1,173 – 50 – 101 + 114 = 1,136. 04 20 04 04 NNP at Market Price = W B 121. (b) Personal Disposable Income = Personal Income – Personal Tax Payment. = NNP at MP – Indirect taxes -4 R NNP at Market Price = GNP at FC – Depreciation + Indirect Taxes ef .N NNP at FC o. M AC Personal Income = NNP at FC – Undistributed Corporate Profit – Corporate Income Tax + Transfer Payments = Personal Consumption Expenditure + Undistributed Corporate Profits + Corporate Income Tax + Personal Savings – Transfer Payments by Government + Personal Tax Payments + Depreciation. GNP at FC = 1,000 + 50 + 101 + 34 – 114 + 102 + 87 = 1,260 :8 1- 31 4- 02 27 GNP at FC 1,260 – 87 + 91 = 1,264 NNP at FC = 1,264 – 91 = 1,173 Personal Income = 1,173 – 50 – 101 + 114 = 1,136 se rv ed .IS BN NNP at Market Price = ig ht Wages and Salaries + Dividends + Rentals + Corporate Profit Tax + Retained Earning + Net Factor Income from Abroad. ty 123. (d) GDP at MP 5,000 + (600 +100) + 300 + 700 + 250 +100 = 7,050. Pr es = s. Al lr 122. (a) NNP at FC = s re Personal Disposable Income = 1,136 – 102 = 1,034. 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. Ic fa iU ni NNP at FC © 20 04 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. 124. (e) Personal Disposable Income = Personal Consumption + Personal Savings Personal Consumption = Personal Disposable Income – Personal Savings. Personal Disposable Income = 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
  • 234. 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 40 × 5 = = 04 04 20 04 200 50 × 4.50 B 360 225 R = -4 60 × 6 W 520 27 = 02 65 × 8 ef .N 87.5 4- = 31 35 × 2.5 70 390 300 160 150. M AC = o. Nominal GNP = 1,392.5/ 1,070 = 130.14 = 130. BN GDP deflator :8 1- Nominal GNP = 87.5 + 520 + 300 + 160 + 150 = 1,392.5 se rv ed .IS 128. (b) National income = Compensation of Employees + Proprietor’s Income + Interest Payments made by the Firms + Corporate Profits re = 2,325 + 135 + 323 + 170 + 43 = 2,996. ht s 129. (c) NNP at market price = GNP at market prices – Depreciation = NNP at market prices – Indirect Taxes + Subsidies s. Al NNP at factor cost lr ig = 85,000 – (6,000 – 4,000) = 83,000 Pr es = 83,000 – 3,000 + 1,000 = 81,000 ty Net Factor Income from Abroad = 81,000 – 65,000 = 16,000 MUC. ve rs i 130. (b) Growth rate of Real Income = Nominal Income – Price Level = 6% – 4% = 2%. iU ni 131. (b) Y = C + I + G Th e Ic fa Or, Y = 100 + 0.75 (Y – 0.20Y) + 80 + 150 (∴ Yd = Y – T) Or, Y = 0.75Y – 0.15Y + 330 © 20 04 Or, Y = 0.60Y + 300 Or, 0.40 Y = 330 Or, Y = 825 MUC. 132. (c) Budget surplus for the economy = T – G = 0.20 (825) – 150 = 165 – 150 = 15 MUC. 133. (a) M X = 0.10Y = 420MUC ∴ When the economy is opened to trade in goods and services with rest of the world, the 1 multiplier in the economy will be 1 − β + βt + μ where, β → marginal propensity to consumer 229
  • 235. Macroeconomics t → tax μ → 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 = GNP at market price – Depreciation – Indirect taxes + Subsidies = 1,700 – 190 – 173 + 20 = 1,357 ∴Personal Income = 04 = 1,357 – 28 – 75 + 242 = Rs.1,496 cr. 04 National Income National Income – Undistributed Corporate Profit – Corporate Tax + Transfer Payments 04 20 135. (b) Net Factor Income from Abroad (NFIA) W B = NNP at factor cost – NDP at factor cost M AC NDP at Factor Cost = 50,000 MUC o. NDP at Factor Cost = NDP market price – Depreciation – Indirect taxes + Subsidies ∴NFIA = 55,500 – 50,000 ef .N = 60,000 – 3,000 – 2,00 + 500 = 55,500 -4 R = 5,500 MUC. 4- Wages paid to domestic residents + Wages paid to foreigners + Interest payment on loans taken + Retained profits + Corporate tax 400 + 240 + 10 + 20 + 10 = 680 :8 = 1- 31 NDP at Factor Cost = 02 27 136. (c) NDP at market price = NDP at Factor Cost + Indirect Taxes .IS BN ∴ NDP at market prices = 680 + 15 = Rs.695 cr. Factor Income Received from Abroad + Exports – Wages Paid to Foreigners – Imports – Interest Payment on Loans Taken s 200 + 40 – 240 – 25 –10 = Rs. –35 cr (deficit). ht = re se rv ed 137. (c) Current Account Balance = GDP at Market Pr ice (Current year) × 100 GDP Deflator (Current year) = 1, 500 × 100 = 1,250 MUC. 120 ig = ve rs i ty Pr es s. Al lr 138. (b) Real GDP (current year) ni 139. (e) Value added by factor of production fa iU = Sales – Intermediate consumption – Indirect taxes + Subsidies Th e Ic ∴Value added by Primary sector = 100 – 15 – 12 + 7 = 80 © 20 04 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 = 10 + 12 + 15 = 37 ∴GDP factor cost = 305 + 37 = 342 MUC. 140. (c) Wages and salaries paid by the government = Factor income received by households – (wages and salaries paid by the business sector + Dividends paid to house holds + Factors income receive abroad) = 160 – 100 – 10 – 20 = 30 MUC. 230
  • 236. Part II 141. (a) National Income = Compensation of employees + Business interest payments + Rental income of persons + Corporate Profits + Proprietor’s 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 04 = Compensation of Employees + Business Interest Payments + Rental Income of Persons + Corporate profits + Proprietor’s income. 20 04 = 18,66.3 + 2,64.9 + 34.1 + 164.8 + 120.3 = 2,450.4 04 NNP = 2,450.4 + 266.3 = 2,716.7 The GNP is 3,073.1. ef .N 143. (c) We can find out the factor income received by the house hold sector o. M AC W B GNP = 2,716.7 + 356.4 = 3,073.1 Cr 1,475.0 Transfer payments 235.0 212.6 Factor incomes (Balancing figure) 1,524.6 02 4- Amount 72.0 BN Personal savings :8 1- Personal Tax payments 31 Personal consumption expenditure 27 Amount -4 R Dr se rv ed .IS 1,759.6 1,759.6 National Income = NNP at Factor Cost = NNP at market prices – Indirect Taxes re Net National Product at Market Prices: ht s NNP at Market Prices = GNP at Market Prices – Depreciation © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig 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 Cr Dr Dr Amount Personal consumption expenditure Personal Tax payments Personal savings 1475.0 Transfer payments 235.0 212.6 Factor incomes (Balancing figure) 1524.6 72.0 1759.6 = 1524.6 + 235 = 1759.6 Personal Disposable Income Amount 1759.6 = 1759.6 – 212.6 = 1547. 231
  • 237. Macroeconomics 145. (b) We can calculate the factor income. Dr Cr Amount 235 1,567 Amount 1,525 Transfer payments 205 Factor incomes 72 1,802 National Income = NNP at factor cost = NNP at MP – Indirect taxes Personal consumption expenditure Personal tax payments Personal savings 1,802 = GNP at MP – Depreciation GNP at MP = GNP at FC + Indirect taxes GNP at FC = Factor income received by the household + Undistributed corporate profits + Corporate Income tax + Depreciation. W B 04 20 04 04 NNP at MP NNP at MP = 2277 – 180 = 2097 o. = 2062 + 215 = 2277 ef .N GNP at MP M AC = 1567 + 95 + 220 + 180 = 2062 27 -4 R National Income = 2097 – 215 = 1882. 02 146. (c) GNP at market prices = NNP at Factor Cost 31 :8 ed .IS National Income BN GNP at market price is Rs.6,400 1- = 6,000 + 800 – 400 = 6,000 + 400 = 6,400 4- = GNP at Factor Cost + Indirect Taxes – Subsidies se rv NNP at Factor Cost = GNP at Factor Cost – Depreciation = 6,000 – 400 = 5,600 s re National Income is Rs.5,600. ig ht 147. (c) GNP at FC = GDP at Factor Cost + Net income from Abroad = NDP at FC + Depreciation NDP at FC = NDP at Market price – Indirect taxes + Subsidies Pr es s. Al lr GDP at FC ve rs i ty = 88,750 – 10,825 + 5220 = 83,145 = 83,145 + 5,220 = 88,365 GNP at FC = 88,365 + (–260) = 88,105. iU ni GDP at FC Ic fa 148. (b) NDP at Market Price = NNP at Market Price – Net Factor Income from abroad = GNP at Market Prices – Depreciation GNP at Market price = NNP at FC + Depreciation – Subsidies + Indirect Taxes = 4,82,220 + 62,725 – 20,150 + 85,450 = 6,10,245 © 20 04 Th e NNP at Market price NNP at Market price = 6,10,245 – 62,725 = 5,47,520 NDP at Market price = 5,47,520 – (–6,800) = 5,54,320. 149. (d) GDP at FC = NDP at FC + Depreciation = 1,57,170 + 12,180 = 1,69,350 GNP at FC = GDP at FC + Net Factor Income from Abroad 1,72,250 = 1,69,350 + X 1,72,250 – 1,69,350 = X X 232 = 2,900.
  • 238. 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 04 NNP at FC = 1,626 – Indirect taxes = 1,626 – 105 04 National Income = 1,521. 04 20 151. (c) National Income = NNP at Factor Cost W o. = Rs.1,90,000 + 28,000 – 2,14,000 crore = Rs.4,000 crore M AC Subsidies = GNP at Factor Cost + Indirect Taxes – GNP at Market Prices B = NNP at Market Prices – Indirect Taxes + Subsidies ef .N National Income = 2,00,000 – 28,000 + 4,000 = 1,76,000 crore. -4 R 152. (b) Personal Disposable Income = Personal Income – Personal Income Tax 27 Personal Income = National Income – Corporate Profits Taxes – Retained Profits 4- 02 National Income = NNP at Factor Cost = NNP at Market Prices – Indirect Taxes + Subsidies 1- 31 Subsidies = GNP at Factor Cost + Indirect Taxes – GNP at Market Prices :8 = Rs.1,90,000 + 28,000 – 2,14,000 crore = Rs.4,000 crore BN National Income = 2,00,000 – 28,000 + 4,000 = 1,76,000 Crores ed .IS Personal Income = 1,76,000 – 13,000 – 60,000 = 1,03,000 se rv Personal Income = 1, 03,000 – 20,000 = 83,000. re 153. (a) National income = NNP at Factor Cost ht s NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies lr ig NNP at Market Price = GNP at Market Price – Depreciation Pr es s. Al GNP at Market Price = GNP at FC + Indirect Taxes – Subsidies = 1,14,605 + 16,745 – 2,865 = 1,28,485 ve rs i ty NNP at Market Price = 1,28,485 – 8,165 = 1,20,320 NNP at Factor Cost = 1,20,320 – 16,745 + 2,865 iU ni National Income = 1,06,440. © 20 04 Th e Ic fa 154. (c) House hold sector account Dr. Personal consumption expenditure Personal tax payments Personal savings Rs. 1,675 Transfer Payments Factor incomes 210 (Balancing figure) 72 1,957 National Income 1,957 = NNP at Factor Cost NNP at Factor Cost Cr Rs. 320 1,637 = 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
  • 239. 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 = 2219 – 230 = 1,989 National Income = 1,989. 155. (e) NNP at Factor Cost 04 = GDP at Market Price + Net Factor Income from Abroad – Depreciation + Subsidies – Indirect Taxes 04 = GDP at Market price – 625 – 2,250 + 1,200 – 2,100 04 20 = GDP at MP – 3,775 W GNP at FC + Indirect Taxes. = Factor Income Received by the Household + Undistributed Corporate Profit + Corporate Income Tax + Depreciation = 1375.6 + 80 + 202.4 + 173.6 GNP at FC = 1831.6 GNP at MP = 1831.6 + 180.8 = 2012.4. 4- 31 157. (c) NNP at Market Price = GNP at MP – Depreciation. 02 27 -4 R ef .N o. GNP at FC M AC 156. (a) GNP at MP = B GDP at market Price – NNP at Factor Cost = 3,775. = GNP at FC + Indirect Taxes. GNP at FC = Factor income received by the household + Undistributed Corporate Profit + Corporate Income Tax + Depreciation .IS BN :8 1- GNP at MP ed = 1,375.6 + 80 + 202.4 + 173.6 = 1,831.6 GNP at MP = 1,831.6 + 180.8 = 2,012.4 s re se rv GNP at FC © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht 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. 234
  • 240. Part II The Simple Keynesian Model of Income Determination 04 20 04 04 161. (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 W B = 100 × 2.857 = 285.7. M AC 164. (c) Change in level of imports = MPI × Increase in Income. ef .N = 0.10 × Change in Level of Income o. = 0.10 × Multiplier = 100 × Multiplier = 100 × 2.857 =285.7 -4 R Change in Level of Income 02 41- = 0.15Y ed Substituting above figures in equation: .IS BN :8 = 0.35Y Import Function 31 Consumption Function = 20 + 0.78Yd Tax Function 27 Change in Level of Imports = 0.10 × 285 = 28.57. 165. (a) GNP (Y) = C+ I + G + (X – M) = 20 + 0.78Yd + 45 + 18 + 20 – 0.15Y se rv Y re = 20 + 0.78 [(Y – T) + R] + 45+18 + 20 – 0.15Y ig ht s = 20 + 0.78 [(Y – 0.35Y) + 8] + 45 +18+ 20 – .15Y = 169.89 Pr es Y s. Al lr = 20 + 0.507Y + 6.24 + 45 + 18 +20 – 0.15Y = 109.24 + .357Y Taxes = (169.89) (0.35) = 59.46 ve rs i ty Budget Surplus = Taxes – (Govt. expenditure + Transfer payments) 59.46 – (18 + 8) ni = fa iU Surplus = 33.46. Th e Ic 166. (e) Investment multiplier = 1 ⎡1 − β (1 − t ) + μ ⎦ ⎤ ⎣ β = MPC = 0.75; t = 0.20, 20 04 © ΔY ΔI multiplier = μ = 0.1; ∴ Multiplier = 1 [1 − 0.75 × 0.8 + 0.1] = 1 = 2. 0.5 167. (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
  • 241. Macroeconomics 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 20 04 So Increase in Import will be 0.10 × 1,400 = 140. = 530 + 0.75Y Y – 0.75Y = 530 0.25Y = 530 = 530/0.25 = 2,120 W Y B = 250 + 0.75Y + 65 + 0.15Y + 90 +125 – 0.15Y ef .N o. M AC Y 04 169. (a) Income (Y) = C + I + G + X – M R When the export increases by 25, the Change in Equilibrium Income will be as follows: 27 -4 0.25Y = (530 + 25) = 555 4- 02 Y = 555/0.25 = 2,220. 400 360 0.80 500 400 0.72 600 580 0.90 700 670 90.00 .IS ed se rv re s ht In each case C – 40 = bYd 1- MPC :8 C BN Yd 31 170. (d) © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig 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 =Y–T 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+X–M 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. 236
  • 242. Part II 172. (a) At the steady state level of consumption Ct = Ct – 1 The given Ct = 10 + 0.6Ydt + 0.3 Ct –1 Since Ct = Ct–1 in steady state. Then Ct = 10 + 0.6 Ydt + 0.3 Ct Ct – 0.3 Ct = 10 + 0.6Ydt Ct = 1/0.7 [10 + 0.6Ydt] When Ydt increases from 100 to 120, the change in the steady State Level of Consumption is: 04 1/0.7 [10 + 0.6 × 120] – 1/0.7 [10 + 0.6 × 100] = 0.6/0.7 (120 – 100) =17.14. 20 04 173. (d) Y = C + S 04 Y–C=S W B GDP of an economy is M AC Y = C + I + G + X – M ……………………... (1) o. C = Consumption Function ef .N I = Investment Function R G = Exogenous Government Expenditure 27 -4 X = Exogenous Exports 4- 02 M = Imports 31 S = – 50 + 0.25Y :8 1- M= 0.10Y BN So, C = 50 + 0.75Y ed =C+I+G+X–M = I + G + X – M …..……………(2) ht s or S re or Y – C = I + G + X – M se rv Y .IS Equation (1) can be written as lr ig Substituting the value of S and M in equation (2) we get = I + G + X – 0.10Y 0.35 Y = 50 + I + G + X Y = 1/0.35 (50 + I + G + X) ty Pr es s. Al –50 + 0.25Y ni ve rs i There is an increase in private investment by 200 and Government Expenditure decreases by 60. = 1/0.35 (200 – 60) = 400 fa iU So there is an increase in GDP of 400. © 20 04 Th e Ic 174. (b) GDP or Y = C + I + G + E – M 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 = 200 + 0.6Y + 0.3 Y – 15(4) + 100 + 50 – 0.1Y Y = 350 – 60 + 0.8Y 0.2Y = 290 Y = 290/0.2 = 1,450 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
  • 243. Macroeconomics (Where I is Exogenously Determined) G = 100; G E = 50; E M = Import Function = 0.1Y; mY The identity is, Y =C+I+G+E–M = a + bY + wY – pi + G + E – mY 04 Taking all terms in Y to L.H.S: 20 04 Y – bY – wY + mY = a – pi + G + E B M AC o. ef .N 1 1 = = 5. 1 − 0.6 − 0.3 + 0.1 0.2 -4 = 1 1− b − w + m R The multiplier for the economy is = W 1 (a – pi + G + E ) (1 − b − w + m) 27 = 02 Y 04 Y – (1 – b – w + m) = a – pi + G + E 31 4- 176. (a) Multiplier in the economy = 1/ [1 – MPC + MPI] :8 1- = MPC = 0.90 = MPI = 0.1. BN Multiplier = 1/ (1 – 0.90 + 0.10) = 5 .IS With an autonomous increase in investment of 200, the level of income will increase by, se rv ed = 5 × 200 = 1,000. 177. (e) Long run propensity to consume = 0.60/1 – 0.20 = 0.75 s re Steady level of consumption is ig ht 200 = 25 + 0.75 (200) = 175 s. Al lr Steady Level of Consumption when Disposable Income is 250. Pr es = 25 + 0.75 (250) = 212.50 ty So, Steady State Level of Consumption increased by 37.50 (250 – 212.50). ve rs i 178. (b) Long-run propensity to consume = 0.611/1 – 0.276 = 0.8439 ni Change in the Steady Level of Consumption when Disposable Income increase from 500 to 600 is fa iU = 0.8439(600 – 500) = 84.39. © 20 04 Th e Ic 179. (e) Y = C + I + G + X − M = 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 Y – 0.58Y = 52.25 0.42Y = 58.25 ∴Y= 52.25 = 124.40 0.42 ∴ Taxes = 124.40 × 0.2 = 24.88 238
  • 244. 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. 20 1 1 = = 3.33. 1 − MPC 1 − 0.7 04 = B Multiplier in the Economy 04 04 ΔC 2,520 = 0.7 3, 600 ΔY = M AC W 181. (b) Y = C + I + G + E – M where, Y = Equilibrium Income in the Economy. = Investment Function = Government Expenditure. = Exports M = Import Function ef .N E R G -4 I o. = Consumption Function ( ) η = 15 π = 0.1 G = 150 E = 20 μ = 0.05 s ht ig lr s. Al Pr es ty ve rs i = fa iU ni Y ⇒Y Ic Th e 20 04 © ⇒ 1- .IS = (1 – 0.3) = 0.7 se rv β ed = 400 re α where, BN Y= α + β Y + R + η + πY + G + E − μY :8 The Equilibrium Income is also expresses as; 31 4- 02 27 C = 1 ⎡α + βR + G + E − η⎤ ⎦ (1−β− π+μ) ⎣ 1 × [400 + (0.7 × 45) + 150 + 2015] (1 − 0.7 − 0.1 + 0.05) 1 × 616.5 = 2,466. 0.25 182. (c) When the consumption is at a Steady State Level Ct = Ct – 1 Consumption Function is Ct = 20 + 0.75 Ydt + 0.15 Ct 0.85 Ct = 20 + 0.75Ydt Ct = 23.53 + 0.88Ydt ΔC t = 0.88 x Δ Ydt 239
  • 245. Macroeconomics If Ydt increases from 700 to 900, ΔY d t = 200 ∴ ΔC t = 0.88 × 200 = 176 The Steady State Level Consumption increases by 176. 183. (e) Equilibrium Level of Income or Y C0 − βT + I + G + E − M 0 1− β + μ = 04 20 W B 04 1 1 = = 3.33. 1 − 0.8 + 0.1 1− β + μ M AC 184. (a) Multiplier = 04 196 = 80 − 0.8 × 30 + 100 + 30 + 120 − 110 = = 653. 0.30 [1 − 0.8 + 0.1] Y 185. (c) Y = C + I + G + E – M ef .N o. or Y = C0 +β Y + I + G + E − M -4 27 C0 + I + G + E − M 1− β = Y = 140 + 0.8Y + 75 + 35 +30 – 25 Y = 31 1BN .IS ed 1 ⎡1 − β (1 − t + μ ) ⎤ ⎣ ⎦ se rv 186. (c) Multiplier = :8 255 = 1,275. 0.2 4- 02 Y re or R Y – β Y = C0 + I + G + E − M β − MPC = 0.75, ht s t = 0.20, μ = 0.1 s. Al lr ig 1 1 = = 2. ⎡1 − ( 0.75 × 0.8 ) + 0.1⎤ 0.5 ⎣ ⎦ Pr es Multiplier = 1 1 = = 2.33. 1 − 0.9 + ( 0.9 × 0.2 ) + 0.15 1 − β + βt + μ ve rs i ty 187. (a) Multiplier = ni 188. (d) GNP Y = C + I + G + (X – M) Ic fa iU = C0 + 0.9Y d + I+ G + X − [M0 + μ Y] Th e = 70 + 0.9 [Y – (20 + 0.2Y)] + 90 + 65 + 80 – [40 + 0.15Y] © 20 04 = 70 + 0.72Y – 18 + 90 + 65 + 80 – 40 – 0.14Y Y = 247 + 0.57Y Y= 247 = 574.42. 0.43 189. (e) Marginal Propensity to Consume (MPC) = β β = C − 80 Y d Multiplier = 240 = 380 − 80 300 = = 0.75 400 400 1 1 1 1 = = or = 4. 1 − MPC 1 − β 1 − .75 .25
  • 246. Part II 1 1− β + μ 190. (d) Multiplier in the economy = β = 0.80 (Consumption Function) where, μ = 0.10 (Import Function) Multiplier = 1 = 3.33 1 − 08. + 0.10 Increase in Govt. Expenditure = 200 04 Impact on GNP = 200 × 3.33 = 666.66 04 There is an increase in GNP by 666.66. W B 04 20 1 1− β + μ 191. (b) Multiplier in the economy = M AC where, β = 0.80 (Consumption Function) ef .N 1 = 3.33 1 − 08. + 0.10 R Multiplier = o. μ = 0.10 (Import Function) 27 -4 Overall Increase in Expenditure = 300 – 50 = 250 41:8 .IS BN 1 = 2.17 1 − 0.8 + 0.8 × 0.2 + 0.1 ed = 31 1 1 − β + βt + μ 192. (c) Multiplier = Multiplier 02 Increase in GNP = 250 × 3.33 = 832.5. se rv Increase in Income = [Increase in Govt. Expenditure + Increase in investment] × Multiplier re = 90 × 2.17 = 195.3. ht ig Yd s = 40 + β Yd 193. (e) C s. Al lr = 800 Pr es MPC = 0.08 = 40 + 800 × 0.08 = 680. ty C =Y–T …………………… (2) T = 10 + 0.2Y ……..…………….. (3) fa Yd ni ……………….…… (1) iU ve rs i 194. (a) C = 50 + 0.9Yd Th e Ic Writing 10 + 0.2Y for ‘T’ in equation (2) we get © 20 04 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 = 41 + 0.72Y …………….……….. Further Y = C + I + G ……………….. (5) (6) where, C = function of Y: f(Y) = 41 + 0.72Y and I + G = I + G Y(1 – 0.72) = 41 + I + G 241
  • 247. Macroeconomics Y = 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 ( β ) = 0.75 Y = Increase in Govt. Expenditure ( G ) = 500 04 = 0.20 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)] W B 04 (1 − b) (1 − t) ×G 1 − b (1 − t) M AC The budget deficit will be increased by 250. ef .N -4 R 2 3 27 = C + I + G = α +β Y + I + G 02 Y o. 196. (a) Marginal Propensity to Consume or MPC = β = 31 4- Y (1 – β ) = α + I + G BN :8 1- 1 1 = =3 2 1− β 1− 3 .IS Multiplier = 04 ∴ Increase in Budget Deficit due to Government Expenditure is given by: s re The actual GNP prior to increase; se rv The increase in GNP = 90 × 3 = 270 ed The Total Increase in Investment and Government Expenditure: = 50 + 40 = 90. ig ht = C + I + G = 500 + 100 + 100 = 700. s. Al lr Revised GNP = 700 + 270 = 970. = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120. Pr es 197. (a) C =C+I+G ty Y = 0.80Y + 120 + 500 + 200 ve rs i Or, Y ni Or, 0.20Y = 820 = 4,100. fa iU Y © 20 04 Th e Ic S = – 200 + 0.20Yd = – 200 + 0.20 (Y – 100) = – 200 + 0.20 (4100 – 100) = – 200 + 800 = 600 MUC. 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 20 Proportional Tax Rate (t)
  • 248. 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 04 04 Or, i = 10%. 20 201. (c) Ct = 10 + 0.5Yd t + 0.4C t–1 B 04 In steady state Ct = C t–1 M AC W = 10 + 0.5Yd t + 0.4C t ∴Ct Ct – 0.4C t = 10 + 0.5Yd t = 10 + 0.5Yd t Ct = 1/6 [10 + 0.5Yd t] R ef .N o. 0.6 Ct 27 -4 When Yd increases from 400 to 500, 02 Ct = 1/6 [10 + 0.5 (400)] – 1/6 [10 + 0.5Yd t ] 31 4- = 1/6 (210) – 1/6 (500) :8 1- = 350 – 433.33 = – 83.33 BN ∴ Change in steady state consumption = 83.33 MUC. ed = 0.15Y se rv M .IS 202. (c) S = –50 + 0.25Y re MPS = 0.25 lr ig Multiplier = 1/(MPS + MPI) ht s MPI = 0.15 s. Al = 1/(0.25 + 0.15) = 1/0.4 = 2.5 Pr es Increase in Government Expenditure ve rs i ty = 500/2.5 = 200 MUC. iU ni 203. (c) The change in government spending if the government is committed to a balanced budget to bring output to the full-employment level is Ic fa 700 – 600 = 100 MUC. © 20 04 Th e The multiplier is 1/ MPS = 1/0.2 = 5 Change in government spending = 100 / 5 = 20 MUC. 204. (b) Multiplier = 1/MPS = 1/0.25 = 4. Current level of income – Break-even income = 16,000 – 12,000 = 4,000 Required saving in the economy = 4,000/4 = 1, 000 MUC. 205. (d) Domestic savings = Private savings + Public savings Private savings = 1500 – (–500) = 2000 MUC. 243
  • 249. 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’ 04 = 0.75 × 400 = 300 MUC. 04 ∴The answer is (b). M AC Y=C+S ef .N o. When S = 0, Y = C R ∴ Y = 400 + 0.75 Y 27 -4 or, 0.25Y = 400 02 Yd = 1,600 31 4- ∴ c = 400 + 0.75 ( 1,600) :8 1- = 400 + 1,200 = Rs.1,600 cr. 209. (c) Y* BN = Rs.5,000 =a+bY se rv re s C ed = 2,500 s. Al = 1,875. lr = 0.75 (2,500) ht Y ig = .IS 3 = 0.75 4 MPC Pr es ∴ Borrowed amount = 2,500 – 1,875 = Rs.625. ty 210. (b) S = – 60 + 0.25Yd ve rs i At equilibrium level of income, S = I iU ni – 60 + 0.25 Yd = 100 fa or, Yd = 640 MUC. Th e Ic 211. (b) Velocity of money = Y/Ms © 20 04 Y = 750 + 250 + 150 + 100 + 50 – 150 = 1,150 ∴ Velocity of money = 1,150 = 5. 230 212. (a) MPC = β = 2/3 Y =C+I+G = α + βY + I + G Y(1 − β) = α + I + G 244 W = 1/(1 – 0.75 + 0.75 × 0.2 + 0.10) = 2. 208. (c) Consumption function for an economy is estimated to be c = 400 + 0.75 Yd B 04 20 207. (a) Multiplier = 1/(1 – MPC + MPC × Tax Rate + MPI)
  • 250. Part II Hence, Multiplier = 1 1 = =3 1− β 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 04 Revised GNP = Rs.1,400 + 540 = Rs.1,940 04 20 04 Since the potential GNP is only Rs.1,600, with the GNP going up to Rs.1940, the price level will increase. W B There will be an increase of 340 in GNP. = 0.15 1 ( ΔG + ΔI ) 0.35 27 02 4- = R ΔY ef .N 1 1 = 0.15 + 0.20 0.35 -4 Multiplier = o. MPM M AC 213. (c) MPS = 0.20 :8 1 ( 280 − 72 ) = 594.28. 0.35 BN ΔY = 1- 31 There is an increase in private investment by 280 and decline in government spending by 72. re 1 1 = 1/ (1 − 0.9 + 0.9 × 0.2 + 0.15) = = 2.33. 0.43 1 − β +βt + μ ig ht s 214. (a) Multiplier = se rv ed .IS The net result of change in both private investment and government spending is that it increases the national product of GDP by 594.28. s. Al lr 215. (b) Multiplier in the economy = 1 1 = = 3.33 1 − β + μ 1 − 0.8 + 0.10 ve rs i ty Increase in GNP Pr es Overall increase in expenditure = 300 – 50 = 250 iU ni 216. (a) Multiplier in the economy = = 3.33 × 250 = 832.5. 1 1 = = 2.17 1 − β + β × t + μ 1 − 08 + 0.8 × 0.2 + 0.1 © 20 04 Th e Ic fa 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 245
  • 251. Macroeconomics Y (1 – 0.72) = 41 + I + G ∴ = Y 41+ I + G 0.28 The equilibrium level of income can be determined if I and G are made known. Given I = 50, and G = 40 Y = 41+ 50 + 40 131 = = Rs.467.86. 0.28 0.28 218. (e) Given, = 0.20 04 Proportional Tax Rate (t) 04 = 0.75 20 Marginal Propensity to Consume (b) B 04 Increase in Government Expenditure (G ) = 500 M AC W Increase in Budget Deficit due to Increase in Government Expenditure is given by =C+I+G ef .N se rv ed = α +1+ G re 1 1 = =3 1− β 1− 2 3 ig ht s Hence, Multiplier = -4 .IS BN = α +βY +1+ G Y (1 − β ) 27 4- 02 2 3 1- Y = β= 31 219. (d) MPC R 0.25 × 0.80 0.20 × 500 = × 500 = 250. 1 − ( 0.75 × 0.80 ) 0.40 :8 = o. (1 − b )(1 − t ) (1 − 0.75)(1 − 0.20 ) ×G = ×500 1 − b (1 − t ) (1 − 0.75) (1 − 0.20 ) s. Al lr The total increase in investment and government expenditure = 50 + 40 = 90 Pr es The increase in GNP = 90 x 3 = 270 The actual GNP prior to the increase = C + I + G ve rs i ty = 500 + 100 + 100 = Rs.700 ni Revised GNP = Rs.700 + 270 = Rs.970. iU 220. (c) Given –8 + 0.15 Yd Consumption function (C) = 8 + 0.85 Yd Tax function (T) = –0.2Y Import function (M) = –0.10Y Investment function (I) = 20 Government expenditure (G) = 10 Transport payments (R) = 5 Exports (X) = 10 fa = © 20 04 Th e Ic Savings function (S) ∴Y=C+I+G+X–M = 8 + 0.85 Yd + 20 + 10 + 10 – 0.10Y 246
  • 252. 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 = 52.25 0.42Y = 52.25 = 124.40 Taxes = 124.40 x 0.2 = 24.88 04 ∴ 52.25 0.42 04 ∴Y= 20 ∴ Budget deficit = Govt. expenditure + Transfer payments – Taxes W = 0.10 -4 1 =5 1 − 0.90 + 0.10 27 = 02 Multiplier ef .N MPI o. = 0.90 R MPC 1 1 − MPC + MPI M AC 221. (c) Multiplier in the economy = B 04 = 10 + 5 – 24.88 = –9.88. 5 × 200 31 4- With an autonomous increase in investment of 200, the level of income will increase by, BN The increase in imports will be 0.1 x 1,000 = 100. :8 1- = 1,000 .IS 222. (a) When the consumption is at a steady state level Ct = Ct–1 se rv ed ∴ Consumption function is = 20 + 0.75Ydt + 0.15Ct 0.85Ct = 20 + 0.75Ydt Ct = 23.53 + 0.88Ydt ΔCt = 0.88 × ΔYdt s. Al lr ig ht s re Ct Pr es If Ydt increases from 700 to 900 ΔYdt ty = 200 = 0.88 × 200 = 176. ve rs i ∴ ΔCt iU ni The steady state level consumption increases by 176. Th e Ic fa 223. (d) Y = C0 + βY+ I + G + E – M Y Y – βY ⎡Co + I + G + E − M ⎤ ⎦ = C0 + I + G + E – M = ⎣ 1−β Y = 140 + 0.8Y + 75 + 35 + 30 – 25 Y 20 04 © =C+I+G+E–M = 225 = 1,275. 0.2 224. (e) C = 50 + 0.8Yd …………….. (1) where Y = Y – T …………….. (2) T …………….. (3) = Y – (10 + 0.3Y) = Y – 10 – 0.3Y …………….. (4) d = 10 + 0.3Y Writing 10 + 0.3Y in equation (2) we get, Yd 247
  • 253. Macroeconomics Substituting Y – 10 – 0.3Y for Yd in equation (1) we get, C = 50 + 0.8(Y – 10 – 0.3Y) = 50 + 0.8(Y – 9 – 0.24Y) C = 41 + 0.56Y …………….. …………….. Further Y = C + I + G (5) (6) where C = f(Y) = 41 + 0.56Y and = I+G I+G Y(1 – 0.56)= 41 + I + G 04 41+ I + G 0.44 04 = 20 Y B 04 The equilibrium level of income can be determined if I and G are known. M AC W Substitute the given values of I and G . 41+ 60 + 45 146 = 0.44 0.44 o. = 331.8. 225. (c) Savings is equal to investment at equilibrium. Therefore, 27 S = –500 + 0.2Y = I = 100 31 4- 02 ⇒ 0.2 Y = 600 = 3,000. 1- Y .IS ed s ht = 0.10 s. Al MPS = 1/10 re 1 =10 MPS se rv ΔY 200 = 10 = ΔI 20 ig = = 20 lakh lr Multiplier (K) = BN Change in Investment ( ΔI ) :8 226. (a) Change in income ( ΔY ) = 200 lakh K ef .N Y R = -4 Y ty ΔC ΔY ve rs i 227. (d) MPC = Pr es MPC= 1 – MPS = 1 – 0.10 = 0.90. Ic fa iU ni ΔC is the change in consumption and ΔY is the change in Income = © 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 (ΔY) and aggregate consumption is ΔY = K Δ I ΔY ⎞ ⎛ ⎜∴ K= ΔI ⎟ ⎝ ⎠ 228. (c) GNP (Y) = 10 × 100 = 1,000 crore. = C + I + G + (X – M) Consumption function = 20 + 0.75 Yd Tax function = 0.3 Y Import function = 0.18 Y Substituting above figures in equation 248 900 = 0.90 1,000
  • 254. 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 04 Taxes – (Government expenditure + Transfer payments) 20 04 = 04 Surplus = 24.73. M AC W B 229. (d) MPC = β = C − 90/Yd β ef .N -4 R 1 1 = 1 − .76 1 − MPC 27 Multiplier = o. = 850 − 90/1000 = 0.76 31 1- ed se rv 1 = 2.70 1 − 0.78 + 0.15 re = .IS = 0.15 (import function) BN where β = 0.78 (Consumption function) μ 4- 1 1− β + μ :8 230. (b) Multiplier in the economy = 02 Multiplier = 4.17. ig ht s Overall increase in expenditure = (500 – 75) = 425 = 425 x 2.70 = 1147.5. s. Al lr Increase in GNP Pr es 231. (e) We know that Y = C + I + G + X – M = 280 + 0.75Y + 75 + 0.15Y + 94 + 126 – 0.20Y Y = 575 + 0.75Y ve rs i ty Y =2,300 iU Y = 575 ni 0.25Y © 20 04 Th e Ic fa When there is an exogenous increase in exports to the extent of 30, the change in equilibrium income will be as follows: 0.25Y = (575 + 30) = 605 Y = 2,420 Increase in equilibrium income is 120 (i.e., 2,420 – 2,300) Foreign trade multiplier: = ΔY/ΔX = 120 /30 Foreign Trade multiplier = 4. 232. (c) Y = C + I + G + E – M where, Y = Equilibrium income in the economy C = Consumption function I = Investment function 249
  • 255. Macroeconomics = Government expenditure G E = Exports M = Import function The equilibrium income is also expressed as Y = α + β (Y + R ) + η + πY + G + E − μY α = 460 where, β = (1 – 0.3) = 0.7 04 η = 18 20 04 π = 0.1 B 04 G = 162 M AC W R = 48 E = 25 ef .N 1 R ⎡ α + βR + G + E − η ⎤ ⎦ -4 (1 − β − π + μ ) ⎣ 27 Y= o. μ = 0.05 4- 02 1 [ 460 + (48×0.7) + 162 + 48 −18] (1 − 0.7 − 0.1 + 0.05 ) BN ........ = – 62 + 0.25Y ...…. se rv S = 2,742.4. .IS 233. (d) I = 78 – 230i :8 1 × 685.6 0.25 ed = 1- 31 ⇒Y= (1) (2) iU Th e Ic fa 234. (c) Multiplier = 20 04 s s. Al = 560 – 88 = 472. ni Y © = 560 – 880i ve rs i At I = 10%; Pr es 140 220 − i 0.25 0.25 ty = lr 0.25Y = 140 – 220 i Y ht ig ∴ 78 – 230i = –62 + 0.25 Y re Under equilibrium conditions (1) = (2) ∴ Multiplier = 1 MPS + MPI 1 = 2.38 0.30 + 0.12 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
  • 256. Part II = 3,600/2,200 = 0.6 Multiplier in the economy = Multiplier 1 1 = 1 − MPC 1 − 0.6 = 2.5. 236. (b) The equilibrium condition is given by Y =C+I Y = 40 + 0.75Y + 60 = 400 04 Y 04 Y – 0.75Y = 100 04 20 When Y = 400, W = Income – consumption M AC Savings B = 40 + (0.75 × 400) = 340 C = 400, Savings = –40 + 0.25(400) = –40 + 100 ef .N R = 60. -4 Savings o. When income 02 27 237. (c) Planned savings equals Yd – C 31 4- = 50 + 0.80Yd, Since C :8 1- = Yd – (50 + 0.80Yd) = –50 + 0.20Yd S BN The equilibrium condition is determined by equating planned savings and planned I. = 80 0.20Y = 130 Y = 130/.20 re se rv ed .IS –50 + 0.20Y ig ht s Equilibrium income = 650. lr 1 1 = = 2.85 MPS 0.35 Pr es s. Al Multiplier = 238. (e) The total increase in investment and government expenditure = 150 + 175 = 325 = 325 × 2.85 = 926.25 The actual GNP =C+I+G+E–M = 1,200 + 450 + 600 + 210 – 195 = 2,265 fa iU ni ve rs i ty The increase in GNP Th e Ic GNP after the change in G and I = 2,265 + 926.25 = 3,191.25 © 20 04 Since potential GNP = 2,700 ⎡ 3,191.25 ⎤ Increase in price level = ⎢ − 1⎥ × 100 = 18.19 or 18.2%. ⎣ 2, 700 ⎦ 239. (b) We know that Y = C + I + G + X – M Y = 270 + 0.75Y + 72 + 0.15Y + 120 + 140 – 0.13Y Y = 602 + 0.77Y 0.23Y = 602 Y = 2,617.4 When there is an exogenous increase in exports to the extent of 28, the change in equilibrium income will be as follows: 251
  • 257. Macroeconomics 0.23Y = (602 + 28) = 630 Y = 2,739.1 Increase in equilibrium income is 121.7 Foreign trade multiplier: = ΔY/ΔX = 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 04 = 40 + 0.75(Y – T) + 120 – 12i + 80 + 60 – 0.1Y 04 = 40 + 0.75Y – 0.15Y + 120 – 12i + 80 + 60 – 0.1Y = 300 + 0.5Y – 12i W M AC 300 − 12i = 600 – 24i .5 o. = B Y – 0.5Y = 300 – 12i Y 6Y – 2,200i = 2,800 ef .N = Ms R At equilibrium: Md 27 -4 6(600 – 24i) – 2,200i = 2,800 4- 02 3,600 – 144i – 2,200i = 2,800 1- 31 –2,344i = – 800 :8 800 = 0.34 2,344 BN I= ed .IS GNP (Y) = 600 – 24i se rv = 600 – (24 × 0.34) re = 600 – 8.16 = 591.84. ht s 241. (b) The equation of the IS Curve is; s. Al lr ig Y = 120 + .06 Y + 150 – 80i Pr es Y = 270 + 0.6Y – 80i Y – .6Y = 270 – 80i .…. (1) ve rs i ty Y = 675 – 200i The equation of the LM Curve is Ms = Md Th e Ic fa iU ni 300 = 0.3Y + 120 – 160i Y = 600 + 533.33i ….. (2) Putting the value of Y in equation one: 20 04 675 – 200i = 600 + 533.33i © 733.33 i = 75 i = 75 = 0.10%. 733.33 242. (c) GNP or Y = C + G + I Y = 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 Y 252 = 20 04 = 40 + 0.75 (Y – 0.2Y) + 120 – 12i + 80 + 60 – 0.1Y 350 − 12i = 875 – 30i = IS Curve 0.40
  • 258. Part II LM Curve: Demand for Money = [Precaution + Transaction + Speculative Demand] At equilibrium, Ms = 300. 300 = 20 + 0.10Y + 0.20Y + 130 – 30i = 150 + 0.30Y – 30i 150 + 30i 0.30 Y = Y = 500 + 100i 04 04 Equilibrium Level of Income is determined at the point where both goods and Money Markets are in equilibrium simultaneously, which occurs at the point of interaction of the Is and Lm Curves. So, we have, 04 20 875 – 30i = 500 + 100i W B 875 – 500 = 100i + 30i = 375/130 = 2.88 M AC GNP =Y = 875 – (2.88 × 30) = 788.6. o. 243. (a) Given Saving Function (S) = 270 + 0.20Yd =C+I+G+E–M R Y ef .N Consumption Function (C) = 270 + 0.80 Yd 27 -4 = 270 + 0.80Yd + 300 – 10i + 600 + 118 – 0.1Y 4- 02 = 270 + 0.80(Y – 0.25Y) + 300 – 10i + 600 + 118 – 0.1Y 31 = 1,288 + 0.50Y – 10i :8 = 2,576 – 20i BN Y 1- 0.5Y = 1,288 – 10i…………….…..IS Curve ed .IS Demand for Money se rv = Transactions and precautionary demand for money + Speculation demand for money. re = 0.22Y + 100 – 11i ht s Supply of money in money market equilibrium = 320 s. Al 0.22Y + 100 – 11i = 320 lr ig Demand for money (Md) = Supply of Money (Ms) Pr es 0.22Y = 320 – 100 + 11i = 220 +11i…………………….. LM Curve = 1000 + 50i ve rs i ty Y iU ni Economy will be in equilibrium when Goods Market and Money Market are in simultaneous equilibrium. fa Is Curve = LM Curve Th e Ic 2,576 – 20i = 1,000 + 50i © 20 04 1,576 = 50 + 20i 1,576 = 70i i = 22.51% 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 in1991-92 253
  • 259. 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 04 04 455 − 120i 0.46 Y = 04 20 = 989.13 – 260.87i…………IS Curve B Money Supply = Money Demand M AC W 300 = 0.24Y + 150 – 10i 150 = 0.24Y – 10i o. = 625 + 42i…………………. LM Curve ef .N Y Equating IS and LM functions: -4 = 1.20% Y = 675.40 :8 = 625 + (42 × 1.20) ed Y 675.40 = = 2.25. MS 300 se rv Velocity of Money = .IS BN Y 1- Apply the value of I in to the LM Curve equation. 4- 02 27 = 302.87i i 31 364.13 R 625 + 42i = 989.13 – 260.87i ht ig Demand for money (Md) s re 245. (e) LM Curve: Pr es = 0.20Y + 400 – 50i s. Al lr = Transaction demand for money + Speculative Demand for money = Money Demanded ve rs i Money supply ty In equilibrium position: iU ni 600 = 0.20Y + 400 – 50i Ic fa 200 + 50i = 0.20Y 20 04 Th e 1,000 + 250i = Y Equating LM and IS functions: = 1,000 + 250i 1,400 = 290i i = 4.83 Y © 2,400 – 40i = 1,000 + (250 × 4.83) = 2,207.5 The new LM Curve is; 600 = 0.25Y + 400 – 50i Y = 800 + 200i New equilibrium 254
  • 260. Part II 2,400 – 40i = 800 + 200i 1,600 = 240i i = 6.67 Y = 800 + (200 × 6.67) = 2,134 Change in GNP = 2,207.5 – 2,134 = 73.5 (Decrease). C = 40 + 0.8Yd Y = 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 = 535 + 0.652Y – 10i = 1537 – 28.7i 04 B W M AC Y 04 C+I+G+E–M 04 = 20 246. (a) Y ef .N o. LM Curve: 300 = 100 – 20i + 0.24Y R 200 + 20i = 0.24Y ed .IS BN :8 1- 31 4- 02 27 -4 Y = 833 + 83i Equating LM and IS functions: 1,537 – 28.7i = 833 + 83i 704 = 111.7i i = 6.30 In the problem; Investment = 200 – 10i ve rs i ty Pr es s. Al lr ig ht s re se rv = 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 = 1,037 – 111.7i = 1, 037 = 9.28 111.7 fa iU ni i © 20 04 Th e Ic 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 + 10i……LM Curve Equating LM and IS functions: 800 – 8i = 600 + 10i ‘i’ = 200 + 18i = Y = 200 = 11.1 18 [800 − 8 × 11.1] = 1778 0.40 When exogenous investment increases by 150 the IS Curve equation becomes 255
  • 261. Macroeconomics Y= 1 (800 − 8i + 150) 0.4 Since 150 is an autonomous component, it has to be added to (800 – 8i) to get the multiplier effect. Again equating LM and IS functions: 800 + 150 – 8i = 600 + 10i ‘i’ = 350 = 19.4 18 20 04 04 0.4Y = 800 + 150 – 8 × 19.4 = 794.4 Y = 1,986 Change in equilibrium = 1,986 – 1,778 = 208. M AC 200 + 4000i …….IS Curve p R 1000 +1000i …..LM Curve p -4 600 = –140 + ef .N o. 600 = 640 + W B 04 248. (c) There is simultaneous equilibrium in all markets at a 600 real income level. Therefore, substituting Y = 600, Yd = 500/p and Ms = 200/p into the IS and LM equations respectively. 02 27 Solving the above two equations, we have 31 4- ‘i’ = 0.057 1- ‘p’ = 1.05 BN :8 The price level must increase from 1 to 1.05 to eliminate the excessive spending. Y = 840 – 4,000i…….IS Curve s re Y = 590 + 1,000i…….. LM Curve se rv ed .IS 249. (b) If the price level is 1, the real money supply is 200 and real balances equal 200. Substituting Yd = 500 and Ms = 200 into IS and LM equations respectively. ig ht Solving these equations, we have = 640 And, ‘i’ = 0.05. s. Al Pr es ty 250. (a) IS Curve lr Y = 60 + 0.75 + (Y – 24) + 250 – 200i + 24 ve rs i Y iU ni = 334 + 0.75Y – 18 – 200i 20 04 Th e Y Ic fa Y – 0.75Y = 316 – 200i = 1,264 – 800i LM Curve = 0.25Y + 134 – 500i 0.25Y = 116 + 500i Y © 250 = 464 + 2,000i At equilibrium level, IS = LM 1,264 – 800i = 464 + 2,000i 2,800i = 800 ‘i’ = 0.29 Investment = 250 – 200 (0.29) = 192 When money supply decreases by 75, the new LM Curve will be 256
  • 262. Part II 175 = 0.25Y + 134 – 500i 0.25Y = 41 + 500i Y = 164 + 2,000i And the IS Curve will remain the same. At equilibrium: = 1,264 – 800i 2,800i = 1,100 i = 0.39 04 164 + 2,000i 04 The changed level of investment = 250 – 200 (0.39) = 172 04 20 The change in investment = 192 – 172 = 20. W = 0.15 1 [ΔG + ΔI] 0.35 -4 27 = ef .N ΔY o. 1 1 = 0.15 + 0.20 0.35 R Multiplier = M AC MPM B 251. (a) MPS = 0.20 31 4- 1 [ 250 − 75] = 500. 0.35 :8 1- = ΔY 02 The increase in private investment is by 250 and decline in government expenditure by 75. ht s re se rv ⎛M⎞ = ⎜ ⎟ ⎜ p⎟ ⎝ ⎠ L ed 252. (b) Equilibrium in the asset market: .IS BN The net result of changes in private investment and government expenditure is that, it increases the GDP by 500. lr ig 0.20Y – 5i = 300 = 300 + 5i Y = 1,500 + 25i……LM Curve Pr es s. Al 0.20 Y ty Equilibrium in the goods market: =C+I+G ve rs i Y iU ni = 120 + 0.75(Y – 150) + 420 – 10i + 150 fa = 120 + 0.75Y – 112.5 + 420 – 10i + 150 Ic = 577.5 + 0.75Y – 10i Th e Y © 20 04 0.25Y= 577.5 – 10i Y = 2,310 – 40i…………IS equation At equilibrium Y, IS = LM 2,310 – 40i = 1,500 + 25i 810 = 65i ‘i’ = 12.46 Apply the value of ‘i’ into LM Curve equation. ∴Y = 1,500 + 25 × 12.46 = 1,811.5. 253. (e) The IS function is: Y =Y=C+I+G 257
  • 263. 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 = 1,830 – 20i………..IS Curve equation. L = ⎛M⎞ ⎜ ⎟ ⎜ p⎟ ⎝ ⎠ 0.20Y – 5i = 300 Y = 1,500 + 25i…..LM Curve equation. 04 = 300 + 5i 04 0.20 Y 04 20 Solve the IS and LM equation: = 7.33 W = 45i ‘i’ M AC 330 B 1,830 – 20i = 1,500 + 25i ef .N o. The interest rate is 7.33. R 254. (c) Y = C + I + G -4 = 120 + 0.75 + (Y – 150) + 300 – 5i + 240 02 27 = 120 + 0.75Y – 112.5 + 300 – 5i + 240 31 4- = 547.5 + 0.75Y – 5i se rv ed .IS ⎛M⎞ = ⎜ ⎟ ⎜ p⎟ ⎝ ⎠ L :8 = 2,190 – 20i…………….……..IS Curve BN Y 1- 0.25Y = 547.5 – 5i re 0.20Y – 5i = 300 = 300 + 5i Y = 1,500 + 25i….LM Curve equation. s. Al lr ig ht s 0.20 Y Pr es Solve IS and LM for the value of interest: = 1,500 + 25i 690 = 45i ve rs i ty 2,190 – 20i = 15.333 fa iU Interest ni ‘i’ Th e Ic Income ‘Y’ = 15.3% = 2,190 – 20i = 2,190 – (20 × 15.3) = 2,190 – 306 = 1,884. © 20 04 255. (a) First derive the IS Curve: Y =C+I+G+E–M = 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 258
  • 264. Part II Supply of money = 300 d At equilibrium (M ) = Ms 300 = 0.20Y + 145 – 60i .20Y = 155 + 60i Y = 775 + 300i…………LM Curve Equilibrium income: IS = LM 867 = 320i ‘i’ = 2.71 04 775 + 300i B 04 20 04 1,642 – 20i = Y M AC = 1,642 – (20 × 2.71) = 1,587.8 = 1,588. ef .N o. Y W Apply the value of ‘i’ in IS Curve equation: © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R 256. (d) Equilibrium Trade Balance = Exports – Imports = 225 – 5 + 0.2Y Y =C+I+G+E–M = 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 = 1,642 – (20 × 2.71) = 1,587.8 = 1,588 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
  • 265. Macroeconomics © 20 04 M AC s. Al Th e Ic fa iU ni ve rs i ty Pr es 260. lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 27 -4 R ef .N o. 259. W B 04 20 04 04 258. Y = 460 – 88 = 372. t (e) M + Ma = Money supply 0.15Y + 75 – 225i = 500 0.15Y = 425 + 225i Y = 2833.3 + 1500i…LM 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 + 14i…………LM Curve At equilibrium, IS = LM 0.5Y – 500 + 6i = 0.5Y – 400 – 14i ∴ 20i = 100 ‘i’ = 5. (d) Since the full employment exists at the real income level of 550, we can substitute the real income in the IS equation. The IS equation will become: Y = 500 = 850 – 2500i 2500i = 850 – 550 = 300 261. ∴i = 300 = 0.12 2500 Substitute the value of ‘Y’ and ‘i’ in the LM equation: 550 = 500 5m + (1000 x 0.12) 1050 = 5m = 120 260
  • 266. Part II ∴ 5m = 930 i.e. m = 930 = 186 5 Since the real money supply is 186, and the nominal money supply is 200, the price level to 200 achieve simultaneous equilibrium in the commodity and money market will be: = 1.075. 186 262. (c) Saving function = –50 + 0.2Yd Consumption function = 50 + 0.8Yd 20 = 50 + 0.8(Y–0.25Y) + 200 – 10i + 400 = 650 + 0.8Y – 0.2Y – 10i 04 =C+I+G 04 Y = 1625 – 25i……IS Curve B Y 04 = 650 – 10i W 0.40Y M AC LM Curve: = 250 ef .N Supply of money o. Demand for money = Mt + Ma = 0.25Y + 125 – 50i R In equilibrium; Md = Ms 27 -4 0.25Y + 125 – 50i = 250 = 250 – 125 + 50i Y = 500 + 200i…………….LM Curve 31 4- 02 0.25Y = 225i ‘i’ = ed re se rv 1125 =5 225 = 1625 – (25 × 5) s = 1,500. ht Y BN = 500 + 200i 1125 .IS 1625 – 25i :8 1- When the money market and goods market are in equilibrium: IS = LM = –50 + 0.2Yd lr ig 263. (a) Saving function = C+I+G Pr es Y s. Al Consumption function = 50 + 0.8Yd ve rs i ty = 50 + 0.8(Y – 0.25Y) + 200 – 10i + 400 = 650 + 0.8Y – 0.2Y – 10i 0.40Y = 650 – 10i = 1,625 – 25i……IS Curve iU ni Y Ic fa LM Curve: © 20 04 Th e Demand for money = Mt + Ma = 0.25Y + 125 – 50i Supply of money = 250 d In equilibrium; M = Ms = 0.25Y + 125 – 50i = 250 0.25Y = 250 – 125 + 50i Y = 500 + 200i…….LM Curve When the money market and goods market are in equilibrium: IS = LM 1625 – 25i = 500 + 200i 1125 = 225i ‘i’ = 1125 =5 225 Investment = 200 – 10i = 200 – (10 × 5) = 150. 261
  • 267. 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. When the money market and goods market are in equilibrium: IS = LM 1962.5 – 25i = 500 + 200i 1462.5 = 225i ‘i’ = 20 04 04 1462.5 = 6.5 225 04 Investment (I) = 200 – (10 x 6.5) = 135 W = –50 + 0.2Yd M AC 264. (e) Saving function B ∴ Crowding output of private investment = 150 – 135 = 15. ef .N Y o. Consumption function = 50 + 0.8Yd =C+I+G -4 R = 50 + 0.8(Y – 0.25Y) + 200 – 10i + 400 02 27 = 650 + 0.8Y – 0.2Y – 10i 31 = 1625 – 25i……………IS Curve 1- Y 4- 0.40Y = 650 – 10i :8 LM Curve: = 250 Md = Ms re In equilibrium; se rv Supply of money ed = 0.25Y + 125 – 50i .IS BN Demand for money = Mt + Ma ig ht s = 0.25Y + 125 – 50i = 250 = 250 – 125 + 50i Y = 500 + 200i…..LM Curve Pr es s. Al lr 0.25Y When the money market and goods market are in equilibrium: IS = LM ty = 500 + 200i ve rs i 1625 – 25i = 225i fa Ic ‘i’ iU ni 1125 = 1125 =5 225 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. © IS Curve after increase in Government expenditure is: 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 Substituting i = 5% in the above equation: Y = 1,962.5 – (25 × 5) = 1,837.5 Substituting the ‘Y’ and ‘i’ in the demand for money function: 262
  • 268. 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+E–M 04 20 + 0.75Yd +500 – 15i + 400 +260 – 10 + 0.1Y = 04 = 20 + 0.75(Y – 0.2Y) + 500 – 15i + 400 + 260 – 10 – 0.1Y 04 20 = 1,170 + 0.5Y – 15i W B = 0.5Y = 1,170 – 15i……….is Curve M AC Y = 2,340 – 30i o. LM Curve: ef .N Demand for money (Md) = Ms -4 = 250 – 125 + 50i 27 0.25Y R 0.25Y + 125 – 50i = 250 4- =250 31 0.25Y + 125 – 50i 02 Supply of money (Ms) in equilibrium: Md = Ms :8 = 500 + 200i………LM Curve BN Y 1- 0.25Y = 250 – 125 + 50i .IS Equilibrium Income = 500 + 200i 1,840 = 230i i = ht s re 2,340 – 30i se rv ed At equilibrium, IS = LM s. Al lr ig 1,840 = 8%. 230 Pr es 266. (e) IS Curve: ty Y =C+I+G+E–M ve rs i = 20 + 0.75Yd +500 – 15i + 400 +260 – 10 + 0.1Y iU ni = 20 + 0.75(Y – 0.2Y) + 500 – 15i + 400 + 260 – 10 – 0.1Y fa = 1,170 + 0.5Y – 15i Th e Ic = 0.5Y = 1,170 – 15i……….is Curve © 20 04 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 = 250 – 125 +50i Y = 500 + 200i…LM Curve Equilibrium Income: 263
  • 269. Macroeconomics At equilibrium: IS = LM 2,340 – 30i = 500 + 200i 1,840 = 230i i = 1,840 = 8% 230 Apply the value of interest in IS Curve equation. Y = 2340 – (30 x 8) = 2,100. 04 04 267. (b) Equilibrium Trade Balance = E – M = 260 – 10 + 0.1Y 20 IS Curve: B 04 Y =C+I+G+E–M M AC W = 20 + 0.75Yd +500 – 15i + 400 +260 – 10 + 0.1Y = 20 + 0.75(Y – 0.2Y) + 500 – 15i + 400 + 260 – 10 – 0.1Y ef .N o. = 1,170 + 0.5Y – 15i R = 0.5Y = 1,170 – 15i……….is Curve 27 -4 Y = 2,340 – 30i 02 LM Curve: 31 4- Demand for money (Md) = Ms :8 = 250 – 125 + 50i BN 0.25Y 1- 0.25Y + 125 – 50i = 250 ed = 250 se rv 0.25Y + 125 – 50i .IS Supply of money (Ms) in equilibrium: Md = Ms re 0.25Y = 250 – 125 +50i ht s Y = 500 + 200i…..LM Curve s. Al At equilibrium, IS = LM lr ig Equilibrium Income: Pr es 2,340 – 30i = 500 + 200i = 230i ve rs i ty 1,840 = iU ni i 1,840 = 8% 230 Ic fa Apply the value of interest in IS Curve equation. = 2340 – (30 × 8) = 2,100 E–M = 260 – [10 + (0.1 × 2,100)] = 260 – 220 = 40. © 20 04 Th e Y 268. (d) IS Curve Y =C+I+G+E–M 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 – 30i…………………….IS Curve Demand for money (Md) = Ms 264
  • 270. 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 = 250 – 125 +50i = 500 + 200i………LM Curve At equilibrium: 230i = 2,070 i = 04 = 500 + 200i 04 20 04 2,570 – 30i M AC W B 2070 = 9% 230 o. Thus, an increase in Govt. expenditure will increase the equilibrium rate of interest to 9%. ef .N The equilibrium Investment will be 02 27 -4 R = 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. lr ig ht s re se rv ed .IS BN :8 1- 31 4- IS Curve Y = C+I+G+E–M 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 – 30i…………………IS Curve The new IS Curve will be: Y = 2,570 – 30i ty Pr es s. Al = 2,570 – (30 × 8) = 2,330 In the money market, the demand for money will be = 0.25Y + 125 – 50i Ic fa iU ni ve rs i = (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: 20 04 Y =C+I+G = 80 + 0.75Yd + 300 – 200i + 30 © = 80 + 0.75(Y – 30) + 300 – 200i +30 0.25 Y = 387.5 – 200i Y = 1550 – 800i……………IS Curve LM Curve: Ms = Mt + Ma 270 = 0.30Y + 150 – 300i 0.30Y = 270 – 150 + 300i 0.30Y = 120 + 300i 265
  • 271. Macroeconomics Y = 400 + 1000i Equating IS and LM: 1550 – 800i = 400 + 1000i 1800i = 1150 i = 1150 1800 Investment (I) = 300 – 200i 04 1150 = 300 – 128 = 172. 1800 04 = 300 – 200 × Y = 334 + 0.75Y – 18 – 200i 04 = 60 + 0.75 (Y – 24) + 250 – 200i + 24 M AC W B Y 20 271. (d) IS Curve: 0.25Y = 316 – 200i o. = 1264 + 800i ef .N Y LM Curve: -4 R = 0.25Y + 134 – 500i 02 = 446 + 2000i 4- Y 27 0.25Y = 116 + 500i 1- 31 At equilibrium: BN 800 = 0.285 = 0.29 2800 = 250 – 200 x (0.29) = 192. se rv Investment .IS = ed i :8 1,264 – 800i = 464 + 2000i re 272. (d) IS Curve: = 60 + 0.75(Y – 24) + 250 – 200i +24 Y = 334 + 0.75Y – 18 – 200i Pr es 0.25Y = 316 – 200i = 1264 + 800i ve rs i LM Curve: ty Y = 0.25Y + 134 – 500i = 66 + 500i Ic fa iU 0.25Y ni 200 Y s. Al lr ig ht s Y = 264 + 2000i 1264 – 800i 2800i © 20 04 Th e At equilibrium: i = 264 + 2000i = 1000 = 1000/2800 = 0.36 The equilibrium income is: Y = 1264 + 800i = 1264 + [800 x (0.36)] = 1552. 273. (b) Quantity of money available for speculative balance: = Money Supply – Transaction Demand for Money at Income Level of 700. Transaction demand for money = 700 × 0.20 = 140. Money available for speculative balances = 250 – 140 = 110 266
  • 272. 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. = 850 – 2500i 04 650 04 = 850 – 2500i 20 Y B = 200/2500 = 0.08. W i 04 2500i = 200 = –500 + 5m + 1000i ef .N Y 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. R 650 = –500 + 5m + (1000 × 0.8) 27 -4 650 = –500 + 5m + 80 4- = 1070/5 = 214 31 m 02 5m = 1070 (S) = 720 + 0.3Yd .IS 276. (d) Savings function BN :8 1- Since the nominal money supply is 200 while the real money supply is 214, all markets will be in equilibrium when the price level is 200/214 = 0.934. se rv ed Consumption function (C) = 720 + 0.7Yd Y = C + I +G + E – X ht s re = 720 + 0.7Yd + 20 + 0.10Y + 200 + 25 – 0.05Y lr ig = 720 + 0.7(Y – 0.2Y + 50) + 20 + 0.10Y + 200 + 25 – 0.05Y Pr es = 1000 + 0.61Y s. Al = 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 – 0.05Y ty 0.39Y = 1000 …………IS Curve = 2564.10 ve rs i Y Th e Ic fa iU ni Note that consumption function is given as interest inelastic. So IS Curve will be a horizontal line in the r-Y plane. This means equilibrium output will be determined solely in the goods market and the position of LM Curve does not matter for the determination of equilibrium output. 20 04 Hence, equilibrium level of income = 2564.10. 277. (b) Trade Balance = Exports – Imports. = 25 – 0.05Y © Y = equilibrium income Savings function (S) = 720 + 0.3Yd Consumption function (C) = 720 + 0.7Yd 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 267
  • 273. Macroeconomics Y = 2564.10 Trade Balance = 25 – (2564.10 × 0.05) = –103.205. 278. (e) Budget surplus = T – (G + R ) = 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 04 = 720 + 0.56Y + 35 + 20 + 0.10Y + 200 + 25 – 0.05Y = 1000 + 0.61Y 20 = 2564.10 04 Y 04 0.39Y = 1000 …………IS Curve W B Budget surplus = (0.2 × 2564.10) – (200 + 50) M AC = 512.82 – 250 = 262.82. 279. (a) Given the saving function (S) ef .N o. = – 420 + 0.2Yd + 6i Consumption function (C) = 420 + 0.8Yd – 6i -4 27 = C + I + G + (E – M) 31 4- = 420 + 0.8Yd – 6i + 0.2Y + 2000 + (1400 – 0.1Y) 02 Y R Thus the IS Curve will be: 1- = 420 + 0.8(Y – 0.2Y + 100) – 6i + 0.2Y – 20i + 2000 +1400 – 0.1Y BN :8 = 420 + 0.64Y + 80 – 6i + 0.2Y – 20i + 2000 + 1400 – 0.1Y .IS = 3900 + 0.74Y – 26i ed 0.26Y= 3900 – 26i = (3900/0.26) – (26i/0.26) Y = 15000 – 100i ………………IS Curve s re se rv Y ig Pr es 0.15Y = 450 + 225i lr = 0.15Y – 225i s. Al 450 ht LM Curve equation: = (450/0.15) + (225i/0.15) Y = 3000 + 1500i …………. LM Curve ve rs i ty Y iU ni Economy will be in equilibrium position when goods market and Money market are in simultaneous equilibrium. Ic fa Thus at equilibrium: IS = LM 20 04 Th e 15000 – 100i = 3000 + 1500i 1600i = 12000 i = 12000/1600 = 7.5 © Substituting the value of i in IS Curve: Y = 15000 – (100 × 7.5) = 14,250 Consumption at equilibrium =420 + 0.8Yd – 6i = 420 + 0.8[14250 – (0.2 × 14250) + 100 )] – (6 × 7.5) = 420 + 0.80(14250 – 2850 + 100) – (6 × 7.5) = 420 + 9200 – 45 = 9575. 280. (d) Private investment at equilibrium = 0.2Y – 20i 268
  • 274. 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 = 3900 – 26i = (3900/0.26) – (26i/0.26) Y = 15000 – 100i………………IS Curve 20 04 04 Y 04 LM Curve equation: W = 450 + 225i M AC 0.15Y B 451 = 0.15Y – 225i Y = 3000 + 1500i………………LM Curve o. = (450/0.15) + (225i/0.15) ef .N Y -4 R Thus at equilibrium: IS = LM = 3000 + 1500i 1600i = 12000 i = 12000/1600 = 7.5 1- 31 4- 02 27 15000 – 100i :8 Substituting the value of ‘i’ in IS Curve: .IS BN = 15000 – (100 × 7.5) = 14,250 Y ed Private investment at equilibrium se rv = (0.2 × 14,250) – (20 × 7.5) = 2850 – 150 = 2700. ht = C + I + G + (E – M) ig Y s re 281. (b) Demand for money = 0.15Y – (– 225i) s. Al lr = 420 + 0.8Yd – 6i + 0.2Y + 2000 + (1400 – 0.1Y) Pr es = 420 + 0.8(Y – 0.2Y + 100) – 6i + 0.2Y – 20i + 2000 +1400 – 0.1Y ty = 420 + 0.64Y + 80 – 6i + 0.2Y – 20i + 2000 + 1400 – 0.1Y ve rs i = 3900 + 0.74Y – 26i © 20 04 fa Th e Y = (3900/0.26) – (26i/0.26) Ic Y iU ni 0.26Y= 3900 – 26i = 15000 – 100i………………IS Curve LM Curve equation: 452 = 0.15Y – 225i 0.15Y= 450 + 225i Y = (450/0.15) + (225i/0.15) Y = 3000 + 1500i………….LM Curve Thus at equilibrium: IS = LM 15000 – 100i = 3000 + 1500i 1600i = 12000 i = 12000/1600 = 7.5 269
  • 275. Macroeconomics Substituting the value of ‘i’ in IS Curve, = 15000 – (100 × 7.5) = 14,250 Y Demand for money = (0.15 × 14250) – (225 × 7.5) = 2137.5 – 1687.5 = 450. 282. (e) Trade balance at equilibrium = Exports – Imports = 1400 – 0.1Y Y = C + I + G + (E – M) = 420 + 0.8Yd – 6i + 0.2Y + 2000 + (1400 – 0.1Y) 04 04 = 420 + 0.8(Y – 0.2Y + 100) – 6i + 0.2Y – 20i + 2000 +1400 – 0.1Y 20 = 420 + 0.64Y + 80 – 6i + 0.2Y – 20i + 2000 + 1400 – 0.1Y B 04 = 3900 + 0.74Y – 26i Y = 15000 – 100i………………IS Curve o. = (3900/0.26) – (26i/0.26) ef .N Y M AC W 0.26Y= 3900 – 26i LM Curve equation: -4 R 453 = 0.15Y – 225i 02 27 0.15Y= 450 + 225i = 3000 + 1500i………….LM Curve 31 Y 4- = (450/0.15) + (225i/0.15) 1- Y :8 Thus at equilibrium: IS = LM .IS BN 15000 – 100i = 3000 + 1500i i = 12000/1600 = 7.5 ed = 12000 se rv 1600i re Substituting the value of ‘i’ in IS Curve, = 15000 – (100 × 7.5) = 14,250 ig ht s Y s. Al lr Trade Balance at equilibrium: = 1400 – (0.1 x 14250) = –25. Pr es 283. (c) Given the saving function (S) = –20 + 0.25Yd = 20 + 0.75Yd ty Consumption function (C) ve rs i Thus the IS curve will be: = C + I + G + ( E – M) Y = 20 + .75[Y – (–40 + 0.2Y)] + 240 – 10i + 300 +200 – 10 – 0.10Y fa iU ni Y 20 04 Th e Ic = 20 + 0.75 (Y + 40 – 0.2Y) + 240 – 10i + 300 + 200 – 10 – 0.10Y Y = 20 + 0.75Y + 30 – 0.15Y + 240 – 10i + 300 + 200 – 10 – 0.10Y = 780 + 0.5 – 10i © 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 When equilibrium is there, IS = LM 1560 – 20i 270 = 1000 + 80i
  • 276. Part II 1560 – 1000 560 i = 80i + 20i = 100i = 5.6 = 1560 – (20 × 5.6) = 1560 – 112 = 1448. Y 284. (b) Budget deficit at equilibrium 300 + 0 – [–40 + (0.2 x Y)] Y = C + I + G + ( E – M) Y = 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 04 B W 780 – 10i…………………..IS Curve o. 0.5Y = M AC Y 04 = 04 Govt. expenditure + Transfer payments – taxes 20 = R ef .N The money market will be in equilibrium when, supply of money (Ms) is equal to Transaction demand for money + speculation demand for money. -4 250 = 0.2Y + 50 – 16i 02 431 1:8 BN .IS ed se rv Y = 1000 + 80i When equilibrium is there: IS = LM 1560 – 20i = 1000 + 80i 1560 – 1000 = 80i + 20i 560 = 100i i = 5.6 27 0.2Y = 200 + 16i……………..……..LM Curve ig ht s re Y = 1560 – (20 × 5.6) = 1560 – 112 = 1448 Budget deficit at equilibrium Pr es s. Al lr = 300 + 0 – [–40 + (0.2 × 1448)] = 300 + 40 – 289.6 = 50.4. = C + I + G + (E − M) ty 285. (a) Y © 20 04 Th e Ic fa iU ni ve rs i = 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 = 1660 – (20 × 6.6) = 1660 – 132 = 1,528. 271
  • 277. Macroeconomics 286. (c) Given saving function is = –60 + 0.25Yd Consumption function = 60 + 0.75Yd The IS Curve is: = C + I + G + ( E – M) Y 20 04 04 = 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 04 450 = 0.2Y + 130 – 44i W B –0.2Y= 130 – 44i – 450 = 1600 + 220i………..LM Curve o. Y M AC 0.2Y = 320 + 44i = 1600 + 220i -4 Y R = 4600 – 30i 27 Y ef .N Equilibrium income in economy: 4- 02 250i = 3000 ed .IS BN :8 1- 31 i = 12 Equilibrium interest is 12%. To find out equilibrium income substitute the value of ‘i’ in IS Curve equation. Y = 4600 – 30i s ht = C + I + G + ( E – M) Y re se rv Y = 4600 – 30 × 12 = 4240. 287. (e) Trade balance = Exports – Imports = 400 – 20 + 0.1Y © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig = 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 = 4600 – 30 × 12 = 4240 Trade Balance = 400 – (20 + 0.1 × 4240) = 400 – 444 = –44. 272
  • 278. Part II 04 20 04 31 4- 02 27 -4 R ef .N o. M AC W B = Govt. expenditure + Transfer payments – Taxes = (800 + 80) – (0.2 × Y) Y = 60 + .75 (Y – 0.2Y + 80) +1000 – 15i + 800 + 400 – 20 – 0.10Y Y = 2300 + 0.50Y – 15i 0.5Y = 2300 – 15i Y = 4600 – 30i Equilibrium in the money market will be: Supply of money = demand for money 450 = 0.2Y + 130 – 44i – 0.2Y = 130 – 44i – 450 0.2Y = 320 + 44i Y = 1600 + 220i………………..LM Curve Equilibrium rate of interest in economy: Y = 4600 – 30i Y = 1600 – 220i 250i = 3000 = i = 12 Equilibrium interest is 12%. To find out equilibrium income substitute the value of ‘i’ in IS Curve equation. Y = 4600 – 30i Y = 4600 – 30 × 12 = 4240 04 288. (b) Budget Deficit :8 1- Budget deficit = (800 + 80) – (0.2 × 4240) = 880 – 848 = 32. BN 289. (c) Y = C + I + G + E – M = 2425 + 0.50Y – 15i se rv Y ed .IS = 60 + .75 (Y – 0.2Y + 80) +1000 – 15i + 925 + 400 – 20 – 0.10Y s = 4850 – 30i ht Y re 0.5Y = 2425 – 15i lr ig Equilibrium in the money market will be: s. Al Supply of money = Demand for money Pr es 450 = 0.2Y + 130 – 44i ve rs i ty –0.2 Y= 130 – 44i – 450 0.2Y = 320 + 44i = 1600 + 220i………..LM Curve iU ni Y © 20 04 Th e Y Ic fa Equilibrium income in economy: Y = 4850 – 30i = 1600 – 220i 250i = 3250 i = 13 Equilibrium interest is 13%. To find out equilibrium income substitute the value of i in IS Curve equation. Y = 4850 – 30i Y = 4850 – 30 × 13 = 4460. 290. (a) Given saving function is = –25 + 0.25Yd Consumption function is = 25 + 0.75Yd Y = C+I+G+E–M 273
  • 279. 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 = 2340 – 30i……..………..……IS Curve Ms P = 250 = 0.25Y + 125 – 50i Mt Ma + P P 04 = 500 + 200i ………………...LM Curve 20 Y 04 0.25Y = 125 + 50i B M AC W 2340 – 30i = 500 + 200i –230i = –1840 o. = 8% ef .N i Equilibrium income is: R = 2340 – 30i -4 Y 4- 02 27 = 2340 – (30 × 8) = 2100. 291. (d) Trade Balance = Exports – Imports 1- 31 = 225 – 10 + 0.1Y =C+I+G+E–M :8 Y 04 By equalizing the LM and IS Curves, we will get the equilibrium interest rate. BN = 25 + 0.75 (Y – 0.2Y + 40) + 500 – 15i + 400 + 225 – (10 + 0.1Y) ed .IS = 25 + 0.6Y + 30 + 500 – 15i + 400 + 225 – 10 – 0.1Y = 1170 + 0.5Y – 15i = 2340 – 30i……………………IS Curve re Y se rv 0.5Y = 1170 – 15i © 20 04 Th e Ic fa iU ni ve rs i ty Pr es s. Al lr ig ht s 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
  • 280. Part II 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: 04 04 = 2340 – 30i = 2340 – (30 × 8) = 2100 Y 20 Budget Deficit = 400 + 40 – 0.2Y = 440 – (2100 × 0.2) = 20. B 04 293. (c) Y = 25 + 0.75 (Y – 0.2Y + 40) + 500 – 15i + 745 + 225 – (10 + 0.1Y) M AC W = 25 + 0.6Y + 30 + 500 – 15i + 745 + 225 – 10 – 0.1Y = 1170 + 0.5Y – 15i ef .N = 2030 – 30i………………..…IS Curve R Y o. 0.5Y = 1515 – 15i -4 Money supply = Transaction Demand for Money + Speculative demand for money 02 27 250 = 0.25Y + 125 – 50i 31 1- = 500 + 200i ………………..LM Curve :8 Y 4- 0.25Y= 125 + 50i BN By equalizing the LM and IS Curves, we will get the equilibrium interest rate. = 11% re i ed = –2530 se rv –230i .IS 3030 – 30i = 500 + 200i ht s Equilibrium income is: = 3030 – 30i = 3030 – (30 × 11) = 2700. lr ig Y s. Al 294. (a) Consumption function = 60 + 0.8Yd =C+I+G+E–M Pr es Y ty = 60 + 0.8 [Y – 0.1Y + 50] + 250 + 0.1Y – 35i + 400 + 250 – [20 + 0.1Y] ve rs i = 60 + 0.72Y + 40 + 250 + 0.1Y – 35i + 400 + 250 – 20 – 0.1Y iU ni = 980 + 0.72Y – 35i © 20 04 Th e Y Ic fa 0.28Y= 980 – 35i …………….…………..IS = 3500 – 125i 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
  • 281. Macroeconomics Y = 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 31 4- 02 27 -4 R ef .N o. M AC W B 04 20 04 04 0.28Y= 980 – 35i …………………………..IS Y = 3500 – 125i The LM Curve equation: 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: Y = 3500 – 125i = 3500 – 1000 = 2500 :8 1- Trade Balance = 250 – 20 + 0.1 × 2500 = 230 – 250 = –20. BN 296. (d) Budget Surplus = T – (G + R) = 0.1Y – (400 + 50) = 60 + 0.8[Y – 0.1Y + 50] + 250 + 0.1Y – 35i + 400 + 250 – [20 + 0.1Y] ed .IS Y = 980 + 0.72Y – 35i ig = 3500 – 125i Pr es Ms = Md s. Al The LM Curve Equation; lr Y ht s 0.28Y = 980 – 35i …………..IS re se rv = 60 + 0.72Y + 40 + 250 + 0.1Y – 35i+ 400 + 250 – 20 – 0.1Y ve rs i ty 302 = 0.2Y + 120 – 40i 0.2y = 180 + 40i…………………….……LM = 900 + 200i iU ni Y Ic fa Economy will be in equilibrium when IS = LM: © 20 04 Th e 3500 – 125i = 900 + 200i 2600 = 325i i = 8% The equilibrium income is: Y = 3500 – 125i = 3500 – 1000 = 2500 Budget Surplus = 0.1Y – (400 + 50) = (0.1 × 2500) – 450 = 250 – 450 = –200. 297. (b) Y = 60 + 0.8[Y – 0.1Y + 50] + 250 + 0.1Y – 35i + 582 + 250 – [20 + 0.1Y] = 60 + 0.72Y + 40 + 250 + 0.1Y – 35i + 582 + 250 – 20 – 0.1Y = 1162 + 0.72Y – 35i 0.28Y = 1162 – 35i ………………….…..IS Y = 4150 – 125i 276
  • 282. 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 20 04 04 i = 10% The equilibrium income is: 04 = 4150 – 125 × 10 = 4150 – 1250 = 2900. Y W B 298. (a) IS Curve: = 400 + 0.8Yd – 20i = Y + R + T = Y + 200 – 0.1Y = 0.9Y + 200 C = 400 + 0.80[0.9Y + 200] – 20i = 560 + 0.72Y – 20i ef .N o. M AC C Yd 27 -4 R Equilibrium Income: Y =C+I+G+E–M 4- 02 = 560 + 0.72Y – 20i + 20 + 0.15Y – 60i + 500 + 800 – 15 – 0.12y 1:8 = 7460 – 320i………….………IS Curve BN Y 31 Y = 1865 + .75Y – 80i 0.25Y= 1865 – 80i .IS LM Curve: se rv ed Md = Mt + Ma re 400 = 0.25Y + 110 – 145i = 1160 + 580i……..……….…LM Curve ht s Y lr ig We can find out the equilibrium interest by equating the IS and LM: = 1160 + 580i 6300 = 900i i = 7% ty Pr es s. Al 7460 – 320i = 7460 – 320i = 7460 – (320 × 7) = 5220. ve rs i Y = 800 – 15 + 0.12Y Ic fa iU ni 299. (b) Trade Balance = Export – Imports Th e IS Curve: = 400 + 0.8Yd – 20i Yd =Y+R+T = Y + 200 – 0.1Y = 0.9Y + 200 © 20 04 C C = 400 + 0.80[0.9Y + 200] – 20i = 560 + 0.72Y – 20i Equilibrium Income: Y =C+I+G+E–M = 560 + 0.72Y – 20i + 20 +0.15Y – 60i + 500 + 800 – 15 – 0.12y Y = 1865 + 0.75Y – 80i 0.25Y = 1865 – 80i Y = 7460 – 320i…………IS Curve 277
  • 283. Macroeconomics 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: 6300 = 900i i = 7% Y = 7460 – 320i 04 = 1160 + 580i 04 7460 – 320i 04 20 = 7460 – (320 × 7) = 5220 B Trade Balance = Export – Imports M AC W = 800 – (15 + 0.12 × 5220) Trade Balance = 158.60. o. = T – (G + R) ef .N 300. (d) Budget Deficit -4 =C+I+G+E–M 27 Y R = 0.1Y – (500 + 200) 4- = 1865 + 0.75Y – 80i 31 Y 02 = 560 + 0.72Y – 20i + 20 + 0.15Y – 60i + 500 + 800 – 15 – 0.12y :8 = 7460 – 320i………………….IS Curve BN Y 1- 0.25Y= 1865 – 80i .IS LM Curve: se rv ed Md = Mt + Ma re 400 = 0.25Y + 110 – 145i = 1160 + 580i……………...…LM Curve ht s Y lr ig We can find out the equilibrium interest by equating the IS and LM: s. Al 7460 – 320i = 1160 + 580i = 900i i = 7% Y = 7460 – 320i ve rs i ty Pr es 6300 iU ni = 7460 – (320 x 7) = 5220 fa Budget Deficit = (0.1 × 5220) – (500 + 200) = 522 – 700 = –178. Th e Ic 301. (c) IS Curve: d Y = 400 + 0.8Yd – 20i =Y+R+T = Y + 200 – 0.1Y © 20 04 C = 0.9Y + 200 C = 400 + 0.80[0.9Y + 200] – 20i = 560 + 0.72Y – 20i Equilibrium Income: Y =C+I+G+E–M = 560 + 0.72Y – 20i + 20 + 0.15Y – 60i + 500 + 800 – 15 – 0.12y Y = 1865 + 0.75Y – 80i 0.25Y = 1865 – 80i 278
  • 284. Part II Y = 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 = 900i i = 7% Y = 7460 – 320i 20 04 04 6300 04 = 7460 – (320 × 7) = 5220 Y W M AC = (1875 + 225) – 80i = 8360 – 320i ef .N o. 0.27Y B If government expenditure increases by 225, the new IS function is: There will not be any change in LM Curve 7200 = 900i i = 8% Y = 8360 – 320i 27 = 1160 + 580i :8 1- 31 4- 02 8360 – 320i -4 R We can find out the equilibrium interest by equating the IS and LM: .IS ed Private Investment (I)= 20 + 0.15Y – 60i BN = 8360 – (320 × 8) = 5800 se rv Original investment = 20 + [0.15 × 5220] – (60 × 7) = 383 re Investment after increase in G: 20 + [0.15 × 5800] – (60 × 8) = 410 ig ht s Change in Investment = 410 – 383 = 27. = –502 + 0.80Yd s. Al lr 302. (b) Savings (S) Pr es Consumption (C) = 502 + 0.80Yd Yd =Y–T+R ve rs i ty = Y – 0.25Y + 60 = 0.75 + 60 iU ni C = 502 + 0.80 [0.75Y + 60] = 502 + 0.60Y + 48 = 550 + 0.60Y Ic fa IS Curve: © 20 04 Th e Y Y =C+I+G+E–M = 550 + 0.60Y + 400 + 0.25Y – 10i + 300 + 150 – 0.10y = 1400 + 0.75 – 10i = (1400 −10i ) 0.25 = 5,600 – 40i LM Curve: Md = Mt + Ma = 0.1Y – 30i Money Market to be in equilibrium, Md = Ms 0.15Y – 30i = 480 Y = ( 480 + 30i ) 0.15 279
  • 285. Macroeconomics Y = 3200 + 200i By equating IS and LM Curve: 5600 – 40i = 3200 + 200i 240i = 2400 i = 10% Y = 5600 – (40 × 10) Y = 5200. 303. (e) Trade Balance = Export – Import 04 04 = 150 – 0.10Y 20 = –502 + 0.80Yd Savings (S) Yd 04 Consumption (C) = 502 + 0.80Yd M AC W B =Y–T+R = Y – 0.25Y + 60 = 0.75 + 60 o. = 502 + 0.80 [0.75Y + 60] ef .N C = 502 + 0.60Y + 48 = 550 + 0.60Y -4 27 =C+I+G+E–M 02 Y R IS Curve: 4- = 550 + 0.60Y + 400 + 0.25Y – 10i + 300 + 150 – 0.10y 0.25 1:8 (1400 −10i ) = 5,600 – 40i BN = .IS Y 31 = 1400 + 0.75 – 10i ed LM Curve: se rv Md = Mt + Ma re = 0.1Y – 30i ig ht s Money Market to be in equilibrium, Md = Ms s. Al lr 0.15Y – 30i = 480 ( 480 + 30i ) = Y = 3200 + 200i Pr es Y ve rs i ty 0.15 ni By equating IS and LM Curve: fa iU 5600 – 40i = 3200 + 200i = 2400 i = 10% Y = 5600 – (40 × 10) Y = 5200 © 20 04 Th e Ic 240i 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 +E–M 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
  • 286. 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 04 04 ∴1,641.67 – 20i = 775 + 300i 20 320i = 866.67 W M AC 305. (a) Money market equilibrium is where demand for money = supply of money B 04 i = 2.7%. kY– hi = M . ef .N o. kY = M + hi R Y = ( M + hi) / k. 27 -4 306. (d) 0.5Y = 3,125 – 25i 02 Y = 6,250 – 50i .IS BN :8 1- 31 4- 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 ed i = 10%, Y = 500 + (20 × 10) = 700 If, Y = 500 + (20 × 7) = 640 i = 5%, Y = 500 + (20 × 5) = 600 i = 4%, Y = 500 + (20 × 4) = 580 ig ht s re se rv i = 7%, ty Pr es s. Al lr 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% ve rs i This can happen only when IS function shifts to the left fa iU ni Substituting i = 8%, IS function becomes Y = 2,900 – 100 (8) = 2,100 Ic Total demand for money function = (Mt /p) + (Ms /p) = 0.50Y + 350 – 100i 20 04 Th e 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 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
  • 287. 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. 04 311. (b) S = – 250 + 0.30Yd 20 04 ∴ C = 250 + 0.70Yd W B 04 T = 0.25Yd M = 0.3Y o. 1 1 1 1 = = = = 1.29 1 − β (1 − t ) + μ 1 − 0.70 (1 − 0.25 ) + 0.3 1 − 0.70 ( 0.75 ) + 0.3 0.775 ef .N = M AC ∴ The value of multiplier = m -4 27 02 31 4- 100 = 77.5 MUC. 1.29 1- Or, I = R Y = mI Or, 100 = 1.29I :8 312. (c) S = – 300 + 0.20Y BN At Y = 2,250, S = – 300 + 0.20 (2,250) = –300 + 450 = 150 ed .IS At equilibrium, S = I se rv ∴200 – 5i = 150 re or, – 5i = – 50 ig ht s or, i = 10%. s. Al lr 313. (b) L = 0.4Y – 10i Pr es At equilibrium, demand for money = Supply of money ve rs i ty i.e. 0.4Y – 100i = 300 ni When, i = 8, 0.4Y – 100(8) = 300 iU Or, 0.4Y = 380 Ic fa Or, Y = 950 © 20 04 Th e When I = 6, 0.4Y–100 (6) = 300 Or, 0.4Y = 360 Or, Y = 900 ∴ Change in the equilibrium level of output = 900 – 950 = 50 MUC. 314. (c) When i = 10, Investment, I = 200 – 10(10) = 100 Because of expansionary fiscal policy, i = 12, Then investment I = 200 – 10(12) = 80 ∴ crowding out = 100 – 80 = 20 MUC. 315. (b) There will not be any crowding out if i = 10% This can happen only when LM curve shifts to the right. Substituting i = 10%, LM function become Y 282
  • 288. 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 04 04 Hence, consumption function = 50 + 0.50 Yd 20 Y=C+I+G+E–M W B Or, Y = 50 + 0.50Y – 0.2Y + 40 +1,000 – 30i + 800 + 450 – 20 – 0.20Y M AC Or, Y = 2,320 + 0.1Y – 30i o. Or, 0.90Y = 2,320 – 30i -4 R M M = ⎛ t ⎞+⎛ a ⎞ ⎜ p⎟ ⎜ p⎟ ⎝ ⎠ ⎝ ⎠ 27 p ef .N Or, Y = 2,577.78 – 33.33i……………..IS Curve Ms 04 Or, Y = 50 + 0.50 (Y– 0.40Y + 80) + 1,000 – 30i + 800 + 450 – (20 + 0.20Y) 4- 02 or, 500 = 0.5Y + 250 – 100i :8 or, Y = 500 + 200i ………………….LM Curve 1- 31 or, 0.50Y = 250 + 100i BN By equating the IS and LM function, we can get the equilibrium rate of interest. ed .IS ∴500 + 200i = 2,577.78 – 33.33 se rv or, 233.33i = 2,077.78 s ig ht ∴ Y = 2,577.78 – 33.33 (8.9) re or, i = 8.9% s. Al lr = 2,577.78 – 296.64 = 2,281.14 = 2,281MUC (approximately). Pr es 317. (c) Goods market equilibrium: 0.5Y = 2,925 – 37.5; ve rs i ty or, Y = 5,850 – 75i (IS Function) ni Money market equilibrium: iU 0.25Y = 312.5 + 125; Ic fa or, Y = 1,250 + 500i (LM function) © 20 04 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). 318. (e) If Government expenditure increase by 475 MUC, 283
  • 289. Macroeconomics IS function becomes 0.5Y = 2,925 + 475 – 37.5i or, 0.5Y = 3,400 – 37.5i or, Y = 6,800 – 75i At simultaneous equilibrium, IS = LM Or, 6,800 – 75i = 1,250 + 500i Or, 575i = 5,500 04 04 Or, i = 9.65%. 04 20 319. (d) LM Curve = 0.25Y + 450 – 50i 300 + 50i = 0.25Y 1,200 + 200 =Y -4 = 0.25Y + 450 – 50i 31 4- 02 27 750 R Money Supply = Money Demanded :8 1- Equating LM and IS functions: = 1,200 + 200i 1,300 = 240i i = 5.42 Y = 1,200 + (200 × 5.42) = 2,284. ht s 320. (d) The IS equation = Y = C + I re se rv ed .IS BN 2,500 – 40i ig = 60 + 0.80Y + 116 – 2i lr Y = 176 – 2i i = –0.10Y + 88 Pr es s. Al 0.2Y ni = 0.20Y – 5i i = 0.04Y – 24 fa Ic =M=L = 0.20Y – 120 iU 5i ve rs i ty The LM equation © 20 04 Th e The simultaneous equilibrium for IS and LM is; – 0.10Y + 88 = 0.04Y – 24 So, Y = 800 and i = 8%. 321. (a) Y = 120 + 0.6Y + 150 – 80i Y = 270 + 0.6Y – 80i Y – 0.6Y = 270 – 80i Y = 675 – 200i .......(i) The equation of the LM Curve is Ms = Md 300 = 0.3Y + 120 – 160i Y = 600 + 533.33i ..... (ii) 284 W ef .N o. In equilibrium position: M AC = Transaction demand for money + Speculative demand for money B Demand for Money (Md)
  • 290. Part II Putting the value of Y in equation (i), we have: 675 – 200i = 600 + 533.33i 733.33i = 75 i = i = 0.10% 75 733.33 Y = 675 – 200 × 0.10 = 655. 04 322. (b) The given equations can be rewritten as 04 0.6Y = 650 – 8i 04 20 0.6Y = 520 + 18i M AC W 0.6Y = 650 – 8i → IS Curve B Since IS Curve has a negative slope and LM Curve has a positive slope, o. 0.6Y = 520 + 18i → LM Curve ef .N When government expenditure is increased by 100, the IS Curve equation becomes: R 0.6Y = 650 + 100 – 8i 27 -4 And LM Curve will not change. 4- 02 At equilibrium: 31 0.6Y – 750 + 8i = 0.6Y – 520 – 18i :8 1- ∴ 26i = 230 .IS BN ∴ i = 8.85 Equilibrium income will be se rv re ∴ Y = 1,132. ed 0.6Y = 750 – (8 × 8.85) = 679.2 ig lr First we can calculate Y ht s 323. (b) Transaction demand for money (Mt) = 0.3Y Pr es s. Al The equation of the IS Curve is: Y = 120 + 0.6Y + 150 – 80i ve rs i ty Y = 270 + 0.6Y – 80i ni Y – 0.6Y = 270 – 80i iU or Y = 675 – 200i ....(i) Ic fa The equation of the LM Curve is Ms = Md © 20 04 Th e or 300 = 0.3Y + 120 – 160i or Y = 600 + 533.33i ... (ii) Putting the value of Y in equation (i), we have: 675 – 200i = 600 + 533.33i 733.33i = 75 i = 75/733.33 i = 0.10% Y = 675 – 200 × 0.10 Y = 655 Transaction demand for money = 0.3Y = 0.3 × 655 = 196.50. 324. (e) We know that 285
  • 291. Macroeconomics Y = C + I + G .......(1) Where, C = Consumption function I = Investment function G = Exogenous government expenditure and the estimated relations for an economy C = 75 + 0.80 Yd Yd = Y – T = 150 – 16i G = 31 04 I 04 = 0.15Y 04 20 T B Md = 80Y – 2,400i M AC W Ms = 3,200 Substituting C, I and T values in equation (1) we get o. = 75 + 0.80(Y – 0.15Y) + 150 – 16i + 31 ef .N Y R = 75 + 0.80Y – 0.12Y + 150 – 16i + 31 27 -4 Y(1 – 0.68) = 256 – 16i ty Pr es s. Al lr ig ht s re se rv ed .IS BN :8 1- 31 4- 02 0.32Y = 256 – 16i Y = 800 – 50i ...... (2) At equilibrium: Md = Ms 80Y – 2,400i = 3,200 Substituting the value of Y in equation (2) 80 (800 – 50i) – 2,400i = 320 64,000 – 4,000i – 2,400i = 3,200 6,400i = 60,800 i = 9.5 By substituting the value of i in equation (2) we get the equilibrium level of income Y = 800 – 50(9.5) = 800 – 475 = 325 Once the equilibrium level of income is found out the other variables can be estimated: © 20 04 Th e Ic fa iU ni ve rs i T = 0.15 Y = 15/100 × 325 = 48.75 Budget surplus of the government = T – G = 48.75 – 31 = 17.75 ∴ Budget surplus of the government is 17.75. 325. (c) Y = C + I + G When the government expenditure increases to 63, Y = 75 + 0.80(Y – 0.15Y) + 150 – 16i + 63 Y = 75 + 0.80Y – 0.12Y + 150 + 16i + 63 0.32Y = 288 – 16i Y = 900 – 50i ...... (1) At equilibrium: Md = Ms 80 Y – 2,400i = 3,200 Substituting the value of Y i.e., equation (1), we get 80 (900 – 50i) – 2,400i = 3,200 72,000 – 4,000i – 2,400i = 3,200 286
  • 292. 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. 04 04 Money Supply and Banking System 20 = –502 + 0.80Yd 326. (b) Savings (S) B Yd 04 Consumption (C) = 502 + 0.80 Yd M AC W =Y–T+R o. = Y – 0.25Y + 60 = 0.75 + 60 = 502 + 0.80 [0.75Y + 60] = 502 + 0.60Y + 48 = 550 + 0.60Y ef .N C -4 27 =C+I+G+E–M 02 Y R IS Curve: 0.25 31 = 5,840 – 40i 1- (1460 − 10i ) :8 = BN Y 4- = 550 + 0.60Y + 400 + 0.25Y – 10i + 360 + 150 – 0.10y = 1460 + 0.75 – 10i .IS LM Curve: se rv ed Md = Mt + Ma re = 0.1Y – 30i ig ht s Money Market to be in equilibrium, Md = Ms s. Al lr 0.15Y – 30i = 480 ( 480+30i ) = Y = 3200 + 200i Pr es Y ve rs i ty 0.15 iU ni By equating IS and LM Curve: Ic fa 5840 – 40i = 3200 + 200i = 2640 i = 11% Y = 3200 + (200 × 11) Y = 5400. © 20 04 Th e 240i 327. (a) Amount of Total Issue = Financial Interrelations Ratio × Net Capital Formation. = 1.21 × 98,667.3 = 1,19,387.4. 328. (d) Amount of Primary Issues = New Issue Ratio × Net Capital Formation. = 0.64 × 98,667.3 = 63,147.1. 287
  • 293. Macroeconomics 329. (e) Amount of Secondary Issues = Intermediation ratio × Primary Issues = 0.72 × 63,147.1 = 45,465.91. 330. (b) 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 04 National Income for 2002 = 93,103.01 – 10,201.00 + 5,203.01 = 88,104.02 04 Total Issues for 2001 = Secondary Issues + Primary Issues 04 20 = 9,031.12 + 10,524.16 [i.e., 4051.11 + 6021.01 + 452.04] = 19,555.28 W B Total Issue for 2002 = 11,021.01 + 10613.96 = 21,634.97 23.29 M AC R -4 1.26 × 100 = 5.4%. 23.29 27 = 02 ( 24.55 − 23.29 ) Percentage in Financial Ratios = ef .N 21,634.97 ×100 = 24.55 88,104.62 4- Financial ratio for 2002 = 19,555.28 ×100 = 23.29 83,936.32 o. Financial Ratio for 2001 = Total Issues/National Income x 100 = BN :8 1- 31 ⎡ 1+ Cu ⎤ 331. (c) Money supply = H× ⎢ ⎥ ⎣ Cu + r ⎦ ht s re 222 1,294 lr s. Al Pr es ty ve rs i 60 72 620 60 ed Assets Financial assets Credit to government 1,516 Credit to State Govt. Credit to banks Foreign exchange assets Other assets 812 2,328 Rs. Rs. 875 950 421 40 2,286 42 2,328 = 1516 + 120 = 1636 iU ni H Rs. se rv Rs. ig Liabilities A. Monetary liabilities Other deposits Other monetary liabilities B. Non-monetary liabilities Government deposits Others Share capital Reserves .IS where H is High Powered Money = Money Liabilities of Central Bank + Government Money. Th e Ic fa Money supply = 1636 × 1 + 0.3 = 5,317. 0.3 + 0.10 © 20 04 332. (a) Liabilities Government deposits Net worth Monetary Liabilities Bank deposits Other liabilities Rs. 42 740 Rs. Assets Credit to government 782 Credit to Bank Credit to commercial sector 220 Foreign Exchange assets 1,760 1,980 Other assets 2,762 High Powered Money = Monetary liabilities of Central Bank + Government money = 1,980 + 201= 2,181 288 Rs. 1,420 432 594 202 42 2,726
  • 294. Part II ⎡ 1 + Cu ⎤ Money supply substituting figures in the above formula = H × ⎢ ⎥ ⎣ Cu + r ⎦ ⎡ 1 + Cu ⎤ = 2181 × ⎢ ⎥ ⎣ Cu + 0.07 ⎦ 8,542 8,542 Cu + 597.94 = 2,181 + 2,181Cu 631Cu = 1,583.06 Cu = 1,583/631 04 04 1 + 0.25 = 3.9062. 0.25 + 0.07 20 Money Multiplier = = 0.25 (approx.) 04 333. (c) New Issue Ratio = New Issues/Net Capital Formation W For 2002 = 16,000/0.79 = 20,253 M AC = 17,073 o. For 2001 = 14,000/0.82 B New Issues = Secondary Issues/Intermediation Ratio -4 27 17, 073 = 0.681. 25, 058 4- New Issue Ratio 2001 = R = 25,058 02 For 2001 ef .N Net Capital Formation = Total Issues/Financial Interrelation Ratio 1- 31 334. (e) Secondary Issues = Primary Issue × Intermediation Ratio. BN .IS For 1982 = 11,000 × 1.18 = 12,980 :8 For 1981 = 10,000 × 1.24 = 12,400 12, 400 + 10, 000 = 72,258 0.31 For 1982 = 12,980 + 11, 000 = 82,689 0.29 s. Al lr ig ht s re se rv For 1981 = ed National Income = Total Issues/Finance Ratio Pr es National Income = NNP at MP – Indirect taxes + subsidies As there are no subsidies: ve rs i ty Indirect Taxes = NNP at Mp – National Income ni For 1981 = 75,000 – 72,258 = 2,742 fa iU For 1982 = 85,000 – 82,689 = 2,311 Ic 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 = 14, 000 = 20,588. 0.68 289
  • 295. Macroeconomics 337. (b) Total Issue = Financial Interrelation Ratio × Net Capital Formation Net Capital Formation = Primary Issues/New Issue Ratio = Total Issue 14, 000 = 20,588 .68 = 1.32 × 20,588 = 27,176. 338. (a) Intermediation Ratio = Secondary Issues/Primary Issues Secondary Issues = Total Issues – Primary Issues Total Issue = Financial Interrelation Ratio × Net Capital Formation. 04 14, 000 = 20,588 0.68 04 Net Capital Formation = Primary Issues/New Issue Ratio = 20 Total Issue = 1.32 × 20,588 = 27,176 B 04 Secondary Issues = 27,176 – 14,000 = 13,176 Y M AC o. Y Ms ef .N 339. (e) Velocity of Money = W Intermediation Ratio = 13,176/14,000 = 0.94. = C + I + G + E – M = 500 + 150 + 140 + 80 – 60 = 810 -4 R = 810/162 = 5. 02 27 Velocity of Money 4- 340. (b) High-powered money (H) 1- 31 = Monetary Liabilities of Central Bank + Government Money :8 = 10,000 + 2,000 = 12,000 (M) = 45,000 ⎡ 1.33 45,000 = 12,000 ⎢ ⎣ 0.33 + ⎤ ⎥ r⎦ ht s re se rv ed Money Supply .IS BN Currency-Deposit Ratio (Cu) = 0.33 s. Al 1,110 = 0.025 45, 000 Pr es ∴r = lr ig 45,000 [0.33 + r] = 15,960 – 14,850 ty The Reserve Requirements = 0.025. ve rs i 341. (c) Reserves are decreased by 600 = 4,000 – 600 = 3,400 iU ni Volume of demand deposits increased by 1,000 = 16,000 + 1,000 = 17,000 fa Reserve Requirements= 3,400/17,000 = 0.2. 20 04 Th e Ic 342. (d) M3 = Currency with public + Deposits money of the public + Time deposits with banks. = 1,000 + 400 +300 = 1,700. © 343. (a) Liabilities Government deposits Other non-monetary liabilities Net worth Monetary liabilities (Balancing figure) Rs. Assets 140 Credit to government 20 Credit to banks 800 Credit to commercial sector 1,500 Foreign exchange assets Other assets 2,460 290 Rs. 1,400 600 400 20 40 2,460
  • 296. Part II Money Supply = 1+ C u xH r + Cu where, Cu r and, H where, x = 0.3 = 5% = 1,500 + x = Government Money 5,942 = 2079.7 = 1950 + 1.3x x = 04 04 1+ 0.3 × [1500 + x ] 0.05 + 0.3 04 20 129.7 = 99.76. 1.3 W M AC 10, 613.96 = 0.61 17, 421.03 ef .N R -4 New Issue Ratio for year 2002 = o. 10,524.16 = 0.64 16,420.01 27 New Issue Ratio for year 2001 = B 344. (e) New Issue Ratio = Primary Issues/ Net Capital Formation Primary Issues = 4,051.11 + 6,021.01 + 452.04 = 10,524.16 1- 31 −0.03 × 100 = –4.6%. .64 :8 ∴ Percentage change in New Issue Ratio = 4- 02 Percentage change = 0.61 – 0.64 = –0.03 BN 345. (b) Intermediation Ratio = Secondary Issues/Primary Issues ed .IS 9,031.12 = 0.86 1024.16 se rv Intermediation Ratio for year 2001 = 11,021.01 = 1.04 10,613.96 ig ht s re Intermediation ratio for year 2002 = s. Al lr Percentage change in Intermediation Ratio = 1.04 − 0.86 × 100 = 21%. 0.86 iU ni ve rs i ty Pr es 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.