Macroeconomics ICMR Workbook
February 21, 2017 | Author: Sarthak Gupta | Category: N/A
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Macroeconomics
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WORKBOOK
The Icfai University Press # 52, Nagarjuna Hills, Hyderabad – 500 082
© 2004 The Icfai University Press. All rights reserved. No
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Ref. No. MACWB 04200404
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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
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Preface
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The ICFAI University has been upgrading the study material so that it is amenable for self study by the Distance Learning Students. We are delighted to publish a Workbook for the benefit of the students preparing for the examinations. The workbook is divided into three different parts.
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Brief Summaries of Chapters
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A brief summary of all the chapters in the textbook are given here for easy recollection of the topics studied.
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Part I: Questions on Basic Concepts and Answers (with Explanatory Notes)
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Students are advised to go through the relevant textbook carefully and understand the subject thoroughly before attempting Part I. Under no circumstances the students should attempt Part I without fully grasping the subject material provided in the textbook.
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Part II: Problems and Solutions
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The students should attempt Part II only after carefully going through all the solved examples in the textbook. A few repetitive problems are provided for the students to have sufficient practice.
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Part III: Model Question Papers (with Suggested Answers)
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The Model Question Papers are included in Part III of this workbook. The students should attempt all model question papers under simulated examination environment. They should self score their answers by comparing them with the model answers.
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Effective from April, 2003, the examinations for all the subjects of DBF/CFA (Level-I) consist of only multiple-choice questions. Each paper consists of Part I and Part II. Part I is intended to test the conceptual understanding of the students. It contains 40 questions carrying one point each. Part II contains problems with an aggregate weightage of 60 points.
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Please remember that the ICFAI University examinations follow high standards that demand rigorous preparation. Students have to prepare well to meet these standards. There are no shortcuts to success. We hope that the students will find this workbook useful in preparing for the ICFAI University examinations. Work Hard. Work Smart. Work Regularly. You have every chance to succeed. All the best.
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Contents
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Questions on Basic Concepts and Answers (with Explanatory Notes)
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Part I
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Brief Summaries of Chapters
Problems and Solutions
Part III :
Model Question Papers (with Suggested Answers)
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Part II :
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Detailed Curriculum Overview of Macroeconomics: Microeconomics vs. Macroeconomics, Fundamental Concerns of Macroeconomic Policy, Objectives and Instruments of Macroeconomics, Aggregate Supply and Aggregate Demand. The National Income and Product Accounts: Gross Domestic Product, Two Measures of National Product: Goods-Flow and Earnings-Flow, Business Accounts and GDP, The Problem of "Double Counting", Details of the National Accounts. Consumption and Investment: Consumption and Saving, The Consumption Function, The Savings Function, Investment: Determinants of Investment, The Investment Demand Curve, Shifts in the Investment Demand Curve.
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Aggregate Demand and the Multiplier: The Downward-Sloping Aggregate Demand Curve, Shifts in Aggregate Demand, Relative Importance of Factors Influencing Demand. Output Determination with Saving and Investment, The Meaning of Equilibrium, Output Determination by Consumption and Investment, The Multiplier, The Multiplier in the AS-AD Framework, The Paradox of Thrift.
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Government, International Trade, and Output: Impact of Fiscal Policy on Output, Fiscal Policy Multipliers, Impact of International Trade on GDP.
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Money and Banking: Money Supply and Interest Rates: Components of Money Supply, Interest Rates: Real vs. Nominal Interest Rates, The Demand for Money, Money's Functions, The Process of Deposit Creation, Balance Sheet of the Central Bank. Credit Control by the Central Bank. The Effects of Money on Output and Prices: The Monetary Transmission Mechanism, The Money Market, Supply of and Demand for Money, The Monetary Mechanism, Monetary Policy in an Open Economy, Monetary Policy in the AD-AS Framework, Monetary Effects in the Long Run.
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Economic Growth and Aggregate Supply: The Four Elements in Development: Human Resources, Natural Resources, Capital Formation, Technological Change and Innovation. Theories of Economic Growth, Determinants of Aggregate Supply, Aggregate Supply in the Short run and Long run.
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Business Cycles and Unemployment: Features of the Business Cycle, Business Cycle Theories, Unemployment: Okun's Law, Impact of Unemployment, Economic Interpretation of Unemployment.
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Price Stability: Inflation: Definition of Inflation, Price Indexes, The Economic Impacts of Inflation, Modern Inflation Theory: Prices in the AS-AD Framework, The Phillips Curve, Anti-inflation Policy.
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Classical, Keynesian and Post-Keynesian Macroeconomics: The Classical Tradition: Say's Law of Markets, Policy Consequences, The Keynesian Revolution, Retreat from Keynes. The Monetarist Approach: The Quantity Theory of Prices. Modern Monetarism, New Classical Macroeconomics: Rational Expectations, Implications for Macroeconomics, Ultra-Classicism: Supply-Side Economics: Macroeconomic Policies.
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Economic Consequences of Debt: Budgets and Fiscal Policy, Definitions, Government Budget Policy, Discretionary Fiscal Policy, Automatic Stabilizers, Fiscal Deficits: Concepts and Trends, Applications of Cyclical and Structural Budgets. The Burden of Deficits and Debts, The Crowding-Out Controversy, CrowdingOut and the Money Market, Impact of Structural Deficits, Government Debt and Economic Growth, External vs. Internal Debt.
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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.
Brief Summaries of Chapters Macroeconomic Analysis: An Overview •
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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.
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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.
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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.
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Measurement of National Income •
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The Simple Keynesian Model of Income Determination
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There are three methods of calculating national income, and they are all conceptually equivalent to each other. They are (a) output method, (b) the expenditure method, and (c) the income method. The output method is followed either by valuing all the final goods and services produced during a year or by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in the economy. The sum of these values added gives the gross domestic product at factor cost, which after a similar adjustment to include net factor income from abroad gives gross national product at factor cost. The expenditure method aggregates all money spent by private citizens, firms and the government within the year, to obtain total domestic expenditure at market prices. It aggregates only the value of final purchases and excludes all expenditures on intermediate goods. However, since final expenditure at market prices include both the effects of taxes and subsidies and our expenditures on imports while excluding the value of our exports, all these transactions have to be taken into account before we obtain gross national product by this method. The income approach to measuring national income does not simply aggregates all incomes. It aggregates only incomes of residents of the nation, corporate and individual, that obtain income directly from the current production of goods and services. It aggregates the money payments made to the different factors of production, i.e. factors income and excludes all incomes which cannot be considered as payment for current services to production.
The principal tool of analysis in the Simple Keynesian Model of Income Determination model is the ‘aggregate demand’. The focus of this model is only the goods market and the influence of the money market on the goods market. The model is build assuming that prices do not change at all and that firms are willing to sell any amount of output at the given level of prices (the aggregate supply curve is perfectly elastic). Aggregate demand is the total amount of goods demanded in the economy and is equal to the sum of consumption spending (C), investment spending (I), government purchases (G), and net exports (NX). AD = C + I + G + NX Equilibrium level of output is that level of output at which the total desired spending on goods and services (desired aggregate demand) is equal to the actual level of output (Y). The concept of multiplier is a very useful one. The multiplier tells what the increase in the level of equilibrium income would be for a unit increase in autonomous spending. Multiplier is given by the ratio of increase in equilibrium income to increase in autonomous spending. The value of the multiplier is the reciprocal of the marginal propensity to save, assuming all other components of aggregate demand I, G and NX are constant and independent of the level of income. The larger the marginal propensity to consume, the lower is the marginal propensity to save, and thus larger is the value of the multiplier. Multiplier, ∝ = 1/MPS Taxes play an important role in determination of disposable income. When tax is considered, the value of the multiplier is equal to 1/[1 – b (1 – t)], where, b is the marginal propensity to consume and t is the rate of tax. Thus, a cut in the tax rate would, therefore, increase the value of multiplier. The value of multiplier in the above case is determined assuming that the other components of aggregate demand, I, G and NX are constant and independent of the level of income. But, in real scenario, the imports are dependent of the level of the income. Mathematically, imports (M) = M(Y) = mY, where m is the marginal propensity to import = ∂M/∂Y. Thus, the value of multiplier is equal to 1/[1 – b (1 – t) + m]
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Income Determination Model including Money and Interest •
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In the simple Keynesian model of income determination, we have determined the level of income assuming that the investment being autonomous. And therefore we completely avoided the role of interest rates (and money supply) in determining the level of income. But, we know that interest rates and money supply have a major role to play in the economy.
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.
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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.
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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.
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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.
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Crowding out happens due to increase in interest rates, and therefore, can be reduced by increasing the money supply.
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Money is one of the most crucial elements of economic science. It acts as a medium of exchange, unit of account, a standard of deferred payment and a store of value. Classical economists viewed that money is demanded only for spending purposes. However, latter Keynes recognized that money was held for other reasons too. In this view money would be held as an asset, a non-interest-paying asset, whereby velocity is affected and tends to change. According to him, the three motives for holding money are transactions, precaution and liquidity or speculation.
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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.
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The aggregate demand schedule (or curve) shows the combinations of the price level and the level of output at which the goods and money markets are simultaneously in equilibrium. The aggregate demand schedule (or curve) slopes downward owing to inverse relationship between price level and the level of output demanded. In addition to price level, there are other factors such as income levels, rate of interest, government policy, exchange rate, expected rate of inflation and business expectations influence the aggregate demand in an economy. When these factors or variables change, the aggregate demand curve will shift.
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In short run, the aggregate supply curve slopes upward from left to right for part of its range because at any point in time there is a limit on the output of goods and services. This limit increases as with increased production, the availability of idle resources decreases and ‘limit’ is reached when the production reaches full employment level of output. When the resources available are fully employed the short run aggregate supply curve becomes vertical. At this
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point, further increases in price level will have no effect on output. In short, the aggregate supply curve, in short run, slopes upward from left to right for a part of its range and straightens at the end. In the short run, the discrepancy between actual and expected price level causes changes in output and employment. But in the long run, if all other things remain constant, the higher price level will come to be accurately expected by firms, narrowing down the difference between expected and actual price levels. This is important because in the long run, the costs incurred by business firms rise as economic agents reach to higher prices.
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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.
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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.
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Most of the factors that affect the position of the aggregate supply curve in short run also affect the position of the aggregate supply curve in the long run, with few exceptions. Some of the important factors affect aggregate supply curve are change in costs of production, supply shocks, investment spending and technological changes, availability of raw materials, supply of labor, human capital and incentives.
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Money 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.
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Determining what should be included in the money supply is not as easy as it appears. Money is sometimes defined as anything generally acceptable as a medium of exchange. Four definitions of money are commonly used – M1 to M4. M1 (known as narrow money) is made up of currency with the public plus demand deposits with the banking system plus other deposits with the RBI. M2 holds M1 plus post office savings bank deposits. M3 (known as broad money) includes M1 plus time deposits with the banking system. And finally M4 includes M3 + total post office deposits (excluding national savings certificates).
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The Reserve Bank of India (RBI) issues money in the form of two rupee notes and above. The central government also issues money in the form of one-rupee notes, coins and small coins. The RBI currency plus the Government money constitutes the monetary base, which is known as High Powered Money. The RBI currency together with the Government money with the commercial banks is treated as Vault Cash. The deposits of the commercial banks comprise of the balances maintained by the banks with the RBI. This is to ensure that the commercial banks can meet all demands for withdrawals on the part of their depositors. The banks may also choose to hold reserves over and above the statutory minimum, known as the ‘excess reserves’. The commercial banks are required to maintain with the RBI a minimum of Cash Reserve Ratio (CRR) as specified by the RBI on a fortnightly basis.
Commercial banks have the ability to multiple the money supply. The money supply multiplier depends on the Cash Reserve Ratio (CRR) specified by the RBI and deposit ratio. CRR specifies the percentage of deposits that every commercial bank must keep on deposit with the Reserve Bank of India. In its simplest form, the money multiplier approach is based on Ms = m. H equation, where m is the money multiplier and Ms is the broad money (M3) and H is the high-powered money. However, m is equal to c + 1/c + r where c is the currency deposit ratio and r is the reserve ratio. Currency deposit ratio depends on the attitude of the people. But, reserve requirement is at the control of the RBI. Thus, RBI changes the reserve ratio in order to manipulate the money supply in the economy.
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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.
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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.
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A well-developed financial system is very essential for the smooth functioning of any economy. One set of important statistical indicators that is used to look at the financial development of a country is financial development ratios. These ratios are (i) Finance ratio, (ii) Financial interrelations ratio, (iii) New issue ratio, and (iv) Intermediation ratio. Finance ratio is the ratio of total financial claims issued during the year to national income of that year. Financial interrelation ratio is the ratio of financial claims issued to net physical capital formation. New issue ratio is the ratio of primary (new) issues by the non-financial sector to the net physical capital formation. And intermediation ratio is the ratio of secondary issues to primary issues.
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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.
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According to classicals, the economy will always be at its full employment level of output. At the full employment level of output, any employment, which might exist, is voluntary and is referred to as the ‘natural’ rate of unemployment, because output cannot be raised above its current level even if the price level rises. There is no more labor available to produce any extra output. Thus, the aggregate supply curve will be vertical (i.e. perfectly price inelastic aggregate supply curve) at a level of output corresponding to full employment of the labor force.
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This classical approach to analyzing economic behavior came under severe criticism due to its unrealistic assumptions of wage price flexibility and the existence of voluntary unemployment. In real world, all unemployment is certainly not voluntary. There are many who wish to work but cannot find work implying the existence of involuntary unemployment. J M Keynes and Keynesian economists disputed the classical assumptions and pointed out that a perfectly efficient ‘wage price’ flexibility is far from real world. Keynesian aggregate supply curve is based on the assumption that the wage does not change much or change at all when there is unemployment, and thus the unemployment can continue for sometime.
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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.
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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.
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Post-Keynesian Macroeconomics – Monetarism, Rational Expectations and Supply-side Economics
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Keynesians suffered a major blow as their postulates failed to explain the happenings during the post-1968 period when the rate of growth of output declined, the rate of inflation increased coupled with rising unemployment. This paradox of stagflation is inconsistent with the tenets of Keynesian economics that cyclical movements in prices and outputs relative to trend are positively correlated. This led to reconsideration of theories underlying policymaking and rival schools of thought such as Monetarist School, Rational Expectations and Supply-side Economics (popularly known as Reaganomics). Supply-side economics represent a return to orthodox classical economics and its recent more formal statement the New Classical Macroeconomics. The school of Monetarism argues that disturbances within the monetary sector are the principal causes of instability in the economy. According to them, the money supply is the principal determinant of the levels of output and employment in the short run and the price level in the long run.
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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.
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Supply side economics is a view emphasizing policy measures to affect aggregate supply or potential output. This approach holds that high marginal tax rates on labor and capital incomes reduce work effort and saving.
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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.
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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.
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The rate of unemployment is one of the key indicators of the conditions prevailing in an economy. Fluctuations in the rate of employment lead to partial changes in the economy and therefore considered as a barometer which points out the condition of an economy. The rate of unemployment gradually decreases during recovery and rapidly decreases during boom or prosperity. By contrast, unemployment rate rises sharply during depression and gradually moves upward during recession. Unemployment rate and phases of business cycles are closely knitted.
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Price Stability •
An increase in the general level of prices in an economy that is sustained over a period of time is called inflation. Inflation plays a major role in an economy. Inflation is a major concern of the governments world over. The effect of inflation on the economy is widespread in its reach, ranging from redistribution of income and wealth among different sections of the society to the worsening of balance of payments position.
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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.
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The Phillips curve shows the relationship between inflation and unemployment. When tracing the link between rate of change in wages and unemployment over nearly a century for the United Kingdom, Phillips discovered an inverse relationship. 7
The 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.
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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.
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The BoP data helps in analyzing whether a particular course of action is likely to be helpful or not in eliminating or reducing a current account deficit. At the same time, BoP data cannot be considered in isolation for predicting a movement in the exchange rates.
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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.
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The levels in composition of taxes, the volume and composition of government expenditures and the level of public debt all have significant microeconomic and macroeconomic effects. Fiscal policy, narrowly interpreted, refers to actions governing and volumes of government expenditure (and hence the resulting deficits or surpluses) and government borrowing. In a broader sense it refers also to the structure of taxation, composition of expenditure, methods of financing deficits and composition of public debt. Fiscal policy is normally the responsibility of the finance ministry or the treasury.
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Modern Macroeconomics: Monetary Policy and Interest Rate Structure •
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A glance at the development or evolution of monetary policy will reveal that its objectives and emphasis have been undergoing significant changes. The monetary policy of any country refers to the regulatory policy, whereby the monetary authority maintains its control over the supply of money for the realization of general economic objectives such as stable prices, full employment, etc. However, in the context of developing economies like India, monetary policy acquires a still wider role and it has to be designed to meet the particular requirements of the economy. Monetary policy as an instrument of economic policy has certain advantages when compared to fiscal policy. The lag between the time when action is needed and when action is actually taken is shorter in the case of monetary policy than fiscal policy. The important tools of monetary policy are
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Minimum reserve requirements
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Discount or bank rate
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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.
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.
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Open market operations involve purchase and sale of securities (generally government securities) by the Central Bank, to regulate the credit creating capacity of the commercial banks. When the Central Bank purchases securities it makes cheque payment to the sellers. The sellers deposit the cheques with the commercial banks, which automatically raise their reserve base. An increase in the reserve base of the banks provides a basis to multiple expansions of credit and deposits. Similarly, when the Central Bank performs open market sale of securities, it results in decrease in the bank reserves. So it can be said that, an open market purchase is expansionary in its effect and an open market sale is contractionary in its effect from the point of view of credit creation.
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Part I: Questions on Basic Concepts Macroeconomic Analysis: An Overview 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.
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Consumer price index.
The relationship between aggregate consumption expenditure and aggregate income of household sector is known as ________ function. Consumption
b.
Saving
c.
Expenditure
d.
Income
e.
None of the above.
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Gross Domestic Product and Gross National Product
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.
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Which of the following variable(s) will come under flow variable(s)? Unemployment.
b.
Foreign exchange reserves.
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Consumption. Money supply.
e.
Both (a) and (b) above.
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The act of replacing worn out assets and creating new assets is capital formation. Then Gross Domestic Capital Formation (GDCF) consists of
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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.
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Which of the following relationships is not correct? a.
Net national savings = National Disposable Income (NDI) – Private consumption expenditure – Government expenditure on current goods and services.
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.
Gross domestic product = Consumption + Gross investment + Government expenditure + Exports.
Part I
If GDP is growing at g% per annum and population at p% per annum, the per capita GDP must be growing at __________ %. ⎡1+ g ⎤ ⎢ ⎥ −1 ⎣1+ p ⎦
b.
(g + p)/2
c.
(g – p)/2
d.
(p – g)
e.
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.
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How competition achieves economic efficiency under laissez faire
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Which of the following statements is not true with respect to stock and flow variables?
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The circular flow model of a free enterprise economy shows
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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.
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10. Which of the following is a “leakage” from the circular flow of income? Mr. Ramesh bought an Indian made color television for Rs.15,000.
b.
Mr. Babu bought a second hand refrigerator from his friend Rajesh.
c.
Mr. Harsha imported a brand new Ferrari car from Germany for Rs.10 lakh.
d.
Mr. Sujit paid Rs.10,000 to his personal secretary towards salary.
e.
Both (a) and (c) above.
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11. Which is the best indicator of economic development of a developing country like India? National income deflator.
b.
GNP at current prices.
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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%.
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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.
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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.
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b.
Decrease
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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?
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a.
Expenditure method.
b.
Income method.
c.
Input method.
d.
Output method.
e.
Saving method.
Part I
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18. The ________ measurement method of national income aggregates all the money spent by private citizens, firms and the government within the year. a. Expenditure b. Income c. Input d. Output e. Saving. 19. Which of the following ratios best describes the GNP deflator? a. Nominal GNP to real GNP. b. Real GNP to nominal GNP. c. Nominal GNP to real GDP. d. Real GNP to nominal GDP. e. Nominal GDP to real GDP. 20. GDP at market price exceeds GDP at factor cost by the amount of revenue raised through _______. a. Direct taxes b. Indirect taxes c. Income tax d. Tax on rents e. Both (b) and (c) above. 21. Which of the following is not true in representing the GDP at market price and GDP at factor price? a. In GDP at factor price, indirect taxes are not considered. b. In GDP at factor price, subsidies are not considered. c. In GDP at market price, exports are considered. d. In GDP at market price, exports are not considered. e. In GDP at factor price, exports are considered. 22. Macroeconomics is the study of a. Inflation b. Unemployment c. Growth d. Both (a) and (b) above e. All of (a), (b) and (c) above.
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23. If the average rate of inflation in the USA and Japan between the years 1960-1973 is 3.2% and 6.1% respectively, then the growth rate of ______.
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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
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.
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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.
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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.
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Transfers from government
c.
Personal income taxes
d.
Dividend payments
e.
Both (b) and (c) above.
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30. The Net Domestic Savings of an economy is defined as
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a.
Net national savings less retained earnings of foreign companies
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.
National disposable income plus consumption of household and government sectors.
Part I
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Services of a teacher.
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31. GDP at market prices is the sum of Consumption, Investment, Government spending and Net Exports. ‘Net’ exports is a. Gross exports minus depreciation b. Exports minus imports c. Gross exports earnings minus capital inflow d. Export minus imports of merchandize e. Imports and depreciation. 32. GDP at factor cost and GDP at market prices are both measures of output in the economy. The item(s) that give(s) rise to the difference(s) in the two measures is/are a. Direct taxes and subsidies b. Direct taxes net of subsidies c. Indirect taxes and subsidies d. Direct taxes and depreciation e. Indirect taxes and depreciation. 33. Which of the following is/are not included in the computation of GNP? a. Spending for National Defense. b. Rs.10,000 spent by a local government to fight crime. c. The price paid for a stolen car.
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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
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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
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.
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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.
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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.
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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.
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Undistributed corporate profits
c.
Personal income taxes
d.
Dividend payments
e.
Personal savings.
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Transfer payments
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43. Nominal GDP is
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The total value of goods and services net of exports
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.
The total value of goods and services produced at full employment.
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.
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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.
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b.
GNP = NNP + Depreciation.
c.
Saving + Taxes = Investment + Government Spending.
d.
Personal Income = Disposable Income + Direct Taxes.
e.
Gross Investment = Net Investment + Depreciation.
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48. National income is
NDP at market prices
b.
NNP at market prices
c.
NDP at factor cost
d.
NNP at factor cost
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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
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?
18
a.
Salary paid to a soldier.
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.
Funding of a new bridge in an urban area.
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
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02
27
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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
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20 04
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).
b.
Wholesale Price Index (WPI).
c.
Index of Industrial Production.
d.
GNP deflator.
e.
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
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.
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02
27
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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.
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20 04
Th e
Ic
fa
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ni
ve rs i
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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
20
a.
Marginal propensity to save
b.
Marginal propensity to import
c.
Investment function of the economy
d.
Proportional income tax rate levied by the government
e.
Both (a) and (b) above.
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
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02
27
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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
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. The change in income to the change in autonomous spending
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
a.
04
77. The value of the expenditure multiplier relates
A movement along a spending line
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.
31
4-
02
27
-4
R
ef .N
a.
o.
78. A change in autonomous spending is represented by
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
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
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02
27
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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
©
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
a.
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
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
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31
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02
27
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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
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.
ii.
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
Marginal propensity to save will be larger.
-4
R
ef .N
o.
M AC
W
B
04
20
i.
04
96. Given that the marginal propensity to consume is larger, which of the following statements are true.
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
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
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27
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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
Schedule of goods market equilibrium where the supply of goods equals the goods produced
d.
Schedule of goods market equilibrium where the supply of goods equals the external demand for goods
e.
Both (a) and (d) above.
©
20 04
Th e
c.
Ic
fa
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ni
ve rs i
a.
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
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.
b.
LM curve becomes horizontal
c.
IS curve becomes vertical
d.
IS curve becomes horizontal
e.
Both (b) and (c) above.
ef .N
LM curve becomes vertical
02
27
-4
R
a.
o.
M AC
W
109. If investment demand is infinitely interest elastic
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.
©
20 04
An increase in the quantity of money demanded and an increase in the rate of interest
Ic
Th e
a.
fa
iU
ni
112. Suppose the money supply and price level are constant, and the demand for money is a function of income and the rate of interest. When the income level increases, there is b.
An increase in the quantity of money demanded and a decrease in the rate of interest
c.
A decrease in the quantity of money demanded and a decrease in the rate of interest
d.
A decrease in the quantity of money demanded and an increase in the rate of interest
e.
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
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
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R
ef .N
o.
a.
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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
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ni
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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
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.
Reduces the real money supply and shifts the LM schedule to the right
b.
Reduces the real money supply and shifts the LM schedule to the left
c.
Increases the real money supply and shifts the LM schedule to the right
d.
Increases the real money supply and shifts the LM schedule to the left
e.
None of the above.
o.
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04
121. An increase in the price level
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.
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a.
b.
Gm = a.Gy – Gp
c.
Gm = a.Gp – Gy
d.
Gm = Gy + a. Gp
e.
Gm = a.Gy + Gp.
re
Gm = Gp – a. Gy
ve rs i
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s
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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
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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
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
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o.
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a.
b.
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
I-S curve will shift to the left.
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a.
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128. If transfer payments are increased, which of the following is true of I-S curve?
s. Al
lr
129. If the demand for money is infinitely interest elastic, which of the following is true? Changes in money stock are totally ineffective in influencing equilibrium output and interest rate.
b.
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.
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d.
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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
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.
b.
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
Varies positively with income and rate of interest
W
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a.
04
132. Transaction demand for money
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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 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
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
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04
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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.
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140. In the standard IS-LM model, which of the following is true if the government raises tax rate and the Reserve Bank of India decides to hold the money supply constant?
ed
.IS
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
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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
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ve rs i
a.
Not affect the position of LM curve but shift IS curve to the right.
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20 04
e.
143. The demand for money is a demand for real money balances for a given interest rate. If there is an increase in the level of income because of increase in real money supply, which of the following statements holds true?
32
a.
IS curve shifts to the left.
b.
LM curve shifts to the left.
c.
IS curve shifts to the right.
d.
LM curve shifts to the right.
e.
Both IS and LM curves shifts to the right.
Part I
Fundamentals of Aggregate Demand and Aggregate Supply
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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
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. Nominal income and nominal interest rate
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.
M AC
W
B
04
20
04
a.
04
152. In the demand function for money, we include
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.
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a.
.IS
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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
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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
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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
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ni
ve rs i
ty
a.
d.
Positively related to the price level because a decline in the price level has a positive effect on the demand for output
e.
None of the above.
156. The slope of aggregate demand becomes flatter
34
a.
The more sensitive the investment spending is to the rate of interest
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.
None of the above.
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
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a.
04
158. Suppose there is full employment and aggregate supply is vertical. A decrease in taxes
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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
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160. When aggregate supply is positively sloped and there is an increase in the real per unit cost of materials, aggregate supply shifts to the Right, the price level falls, and real output increases
b.
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
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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
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c.
ni
a.
Left, the price level increases, the real output decreases
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
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
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a.
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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
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R
a.
D4 only
d.
D2 only
e.
D2 and D4 only.
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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
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s
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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.
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Th e
Ic
fa
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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.
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
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a.
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o.
Money Supply and Banking System
02
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172. In an economy M1 is equal to currency with public + Demand deposits with banks + Demand portion of savings deposits with Banks + Other Deposits with RBI, where currency with public is equal to Currency in circulation less currency with commercial banks
b.
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
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.IS
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a.
s
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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
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Pr es
s. Al
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a.
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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.
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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
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.
Increasing the volume of reserves.
iii.
Decreasing the volume of reserves.
iv.
Increasing reserve requirements.
a.
Only (iii) above
04
ii.
20
Lowering reserve requirements.
M AC
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04
177. The RBI can increase the demand deposit component of the money supply by
Only (iv) above Both (i) and (ii) above
d.
Both (i) and (iii) above
e.
Both (ii) and (iv) above.
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b. c.
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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
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a.
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d. M3 e. Both (a) and (b) above. 179. If you withdraw Rs.100 from your checking account, this transaction a. Increases the supply of money b. Decreases the supply of money c. Does not change the supply of money d. Increases the supply of money by more than 100 e. Decreases the supply of money by less than 100. 180. Read the following statements and choose the best alternatives. i. When you deposit currency in a commercial bank cash goes out of circulation and the money supply declines. ii. If the RBI creates more money, Indians would achieve a higher standard of living. a. (i) and (ii) are true b. (i) and (ii) are false c. (i) is true and (ii) is false d. (i) is false and (ii) is true e. (i) is always true and (ii) is sometimes true. 181. In an economy Cu is equal to currency deposit ratio and r is equal to reserve ratio, then the money multiplier in the economy is equal to a. (1 + Cu)/(r – Cu)
38
b.
(1 + Cu)/r
c. d. e.
(1 + Cu)/(1 – r + Cu) (1 + Cu)/(r + Cu) (1 – Cu)/(r + Cu).
Part I
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
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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.
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a.
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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.
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BN
a.
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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
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ni
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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.
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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
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.
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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.
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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
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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
40
a.
Stock of financial assets/stock of physical assets
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.
None of the above.
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.
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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.
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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.
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197. The difference between M3 and M1 is Demand deposits
b.
Post office savings deposits
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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
Macroeconomics
Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model
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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.
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204. Which of the following is not a postulate of Say’s law? a.
Disequilibrium in the economy can exist for a while.
b.
There might be temporary mismatch between aggregate demand and supply.
c.
In the short run there can be excess production and unemployment.
d.
Prices and wages are sticky downwards.
e.
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
42
a.
An increase in the price level
b.
An upward shift of the aggregate demand curve
c.
An increase in the level of output
d.
Both (a) and (b) above
e.
(a), (b) and (c) above.
Part I
Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Keynesian Model 206. In the Keynesian model, workers Accept a decrease in money wages as long as these cuts bring about full employment
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
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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
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a.
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
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.
b.
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.
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Demand creates its own supply
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214. Keynesian model of macroeconomic equilibrium emphasizes that
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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.
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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.
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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.
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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
44
a.
Fall in the prices of goods
b.
Fall in the prices of bonds
c.
An increase in the interest rates
d.
Both (a) and (b) above
e.
Both (b) and (c) above.
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.
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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.
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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.
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222. According to Keynes, the actual expenditure in an economy can differ from the planned expenditure. Which of the following is true if the actual expenditure is less than the planned expenditure in the economy? There will be positive fixed investment in the economy.
b.
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.
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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.
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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
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.
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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.
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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.
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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.
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229. To improve market efficiency, which of the following is not recommended by Supply side economics? Reduce government controls.
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Promote competition.
c.
Restrict the power of trade unions.
d.
Remove institutional barriers.
e.
Increase corporate tax rate.
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230. According to the Laffer curve, as the tax rate increases, tax revenues
46
a.
Rise continuously
b.
Decrease continuously
c.
Initially decrease and then increase
d.
Initially increase and then decrease
e.
Remain constant.
Part I
231. The Chief Economist to the Government told the Cabinet that the government can no longer fool the people by increasing its spending during election years, as people will anticipate this kind of behavior as previous governments used to do so. The economist is an advocate of a.
Classical economics
b.
Rational expectations
c.
Keynesian economics
d.
Supply-side economics
e.
Monetarism.
04
232. Monetarists prefer monetary policy over the fiscal policy because they feel that
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.
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233. According to the school of rational expectations there is no trade off between inflation and unemployment because People make biased forecasts about the future of the economy based on all the available information
b.
People anticipate changes in money supply and accordingly adjust prices and wages
c.
Wages are rigid downwards
d.
Prices are rigid downwards
e.
Both (c) and (d) above.
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234. The curve that depicts the relationship between the rate of change in prices and the rate of unemployment is Laffer curve
b.
Phillips curve
c.
Aggregate supply curve
d.
LM curve
e.
IS curve.
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Economic Fluctuations, Unemployment and Inflation
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235. The bank reserves fall rapidly in _________ stage of business cycle. Recovery
b.
Boom
c.
Recession
d.
Depression
e.
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
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.
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General downturn in business activity
b.
Changes in labor market
c.
Increase in inflation
d.
Structural changes in economy
e.
Frequent changes of jobs by labor.
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239. Natural rate of unemployment increases due to
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240. If the actual rate of unemployment exceeds the natural rate of unemployment then Actual output of the economy will fall below its potential
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a.
Production will increase more than potential
c.
Disguised unemployment increases
d.
Consumption of goods decreases
e.
Both (a) and (d) above.
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241. Unemployment that arises due to regional occupational pattern of job vacancies, which does not match the pattern of workers availability and suitability, is known as Frictional unemployment
b.
Structural unemployment
c.
Cyclical unemployment
d.
Disguised unemployment
e.
Demand pull unemployment.
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242. The inventory stock will be high in _________ stage of a business cycle. Recovery
b.
Boom
c.
Recession
d.
Depression
e.
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
Part I
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244. In which sector of Indian economy will we find a high rate of disguised unemployment? a. Service sector. b. Transport sector. c. Agriculture sector. d. Manufacture sector. e. Mining sector. 245. Stagflation is a period of a. High inflation b. Low inflation c. High unemployment d. Low unemployment e. Both (a) and (c) above. 246. The real rate of interest a. Equals the nominal rate plus the rate of inflation b. Equals the rate of inflation minus the nominal rate c. Equals the nominal rate minus the rate of inflation d. Tends to increase when inflation rises e. Is more relevant to investors than consumers. 247. Unemployment that is caused by a mismatch between the composition of the labor force (in terms of skills, occupation, industries, or geographic location) and the make-up of the demand for labor is called a. Real wage unemployment b. Deficient-demand unemployment c. Frictional unemployment d. Structural unemployment e. Search unemployment. 248. During the recessionary phase of a business cycle a. The purchasing power of money is likely to decline rapidly b. The natural rate of unemployment will increase dramatically c. Potential national income will exceed actual national income d. Actual national income will exceed potential national income e. The real rate of interest will exceed the nominal rate of interest. 249. Monetary theorists believe in the use of a. A stable growth rate for the money supply b. Stable interest rates to stabilize the money supply c. Fiscal policy as the main stabilization tool d. A “stop-and-go” monetary policy for fine tuning the economy e. Input-output planning as the main stabilization tool. 250. The Philips curve shows that a. High unemployment rates are associated with low increases in money wage rates b. Low unemployment rates are associated with low rates of inflation c. High unemployment rates are associated with low rates of inflation d. High inflation rates are associated with higher level of money wage rates e. High inflation rates are associated with small increases in money wage rates.
49
Macroeconomics
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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
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258. When a person is employed in a sector where his/her employment does not make any difference to the output, it signifies the presence of a. Frictional unemployment b. Cyclical unemployment c. Disguised unemployment d. Structural unemployment e. Sectoral unemployment. 259. Cost push inflation occurs when a. Wages are decreased b. Productivity of labor increases c. Cost of raw material increases d. Aggregate supply curve shifts to the right e. New raw material reserves are found. 260. Recessionary GDP gap signifies a. Higher potential real GDP compared to realized real GDP b. Hyper inflationary situation c. Deflationary situation with high unemployment d. Existence of natural rate of unemployment e. Both (b) and (d) above.
4-
The Open Economy and Balance of Payments: India’s Balance of Payments
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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
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.
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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.
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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.
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269. If the balance on current and capital accounts of Balance of Payments (BoP) taken together is negative, then It is a case of BoP surplus It is a case of BoP where the official reserve account is in surplus
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a. 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
52
a.
Cause contraction of money supply
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.
Cause expansion of money supply.
Part I
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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.
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Modern Macroeconomics: Fiscal Policy, Budget Deficits and the Government Debt
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276. Customs duty is an instrument of a.
Fiscal policy
b.
Monetary policy
c.
Trade policy
d.
Revenue policy
e.
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
Macroeconomics
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278. Which of the following items is/are the major components of non-plan expenditure? a. Interest payments. b. Defense expenditure. c. Subsidies. d. Both (a) and (b) above. e. All of (a), (b) and (c) above. 279. Gross fiscal deficit – interest payments of government is equal to a. Revenue deficit b. Capital deficit c. Budget deficit d. Primary deficit e. Monetized deficit. 280. Profits from public sector undertakings come under a. Revenue receipts b. Capital receipts c. Monetized receipts d. Both (a) and (c) above e. Both (b) and (c) above. 281. Large fiscal deficit will have implications on a. Money supply b. Inflation c. Private investments d. Both (a) and (b) above e. All of (a), (b) and (c) above. 282. An increase in Statutory Liquidity Ratio (SLR) will result in a. An increase in fiscal deficit b. A decrease in fiscal deficit c. No change in fiscal deficit d. An increase in fiscal deficit proportion with an increase in SLR e. A decrease in fiscal deficit proportion with an increase in SLR. 283. Monetized deficit is a deficit caused due to a. Increase in net RBI credit to states b. Increase in net government credit to states c. Increase in net RBI credit to commercial banks d. Increase in net government borrowings from market e. Increase in net RBI credit to the Central Government. 284. Which of the following are the examples of external debt? i. Short-term loan from IMF. ii. Bonds issued by Indian company in overseas market. iii. Bonds issued by Central Government in international market. iv. Investment by Non-Resident Indians in Indian companies debentures on repatriation basis. a. Both (i) and (ii) above. b. Both (i) and (iii) above. c. Both (ii) and (iii) above. d. Only (i), (ii), and (iii) above. e. All of (i), (ii), (iii) and (iv) above. 54
Part I
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.
Institute mandatory wage-price guidelines
c.
Institute voluntary wage-price guidelines
d.
Both (a) and (b) above
e.
All of (a), (b) and (c) above.
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Control prices permanently
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286. If modern economies wish to maintain both full employment and price stability as their policy objectives, then they should
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.
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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.
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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.
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a.
Decrease in government spending can cause decrease in output.
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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
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.
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292. Given the supply of money, if the government reduces the tax rate which of the following is true? Equilibrium income and interest rate will increase.
b.
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.
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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.
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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.
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Decrease in Government liability.
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295. Automatic stabilizers refer to
56
a.
Inherent mechanisms in the stock market that automatically cause stock market gains to be cancelled out by losses, which make expected long-run returns equal to zero
b.
The invisible hand mechanisms which automatically bring the economy out of a recession
c.
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.
None of the above.
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. Money supply in the economy will increase.
b.
Interest rate will increase.
c.
Primary deficit will increase.
d.
Public debt will increase.
e.
Revenue deficit will decrease.
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297. Which of the following is true if the Government monetizes part of its deficit?
o.
298. If a Government is running surplus in its budget, we can expect that public debt will be Rising
b.
Falling
c.
Constant
d.
Falling if there are tax cuts
e.
Falling if the government uses the surplus to repay its past debts.
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c.
Indirect tax system
d.
Value added tax system
e.
Regressive tax system.
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300. Monetized deficit refers to
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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.
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301. In the Union Budget, profits from public sector undertakings are taken under Revenue receipts
b.
Capital receipts
c.
Monetized receipts
d.
Planned expenditure
e.
Fiscal deficit.
302. Under which of the following tax system, more tax is imposed on the lower income groups? a.
Progressive.
b.
Regressive.
c.
Proportional.
d.
Customs.
e.
Value Added Tax. 57
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.
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Modern Macroeconomics: Monetary Policy and Interest Rate Structure
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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.
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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.
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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.
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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.
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307. Open-market purchases of government bonds by Reserve Bank of India will have the tendency to
308. In an inflationary period, the appropriate policy for the RBI would be to
58
a.
Sell government securities in the open market
b.
Encourage commercial banks to increase their loans
c.
Reduce Cash Reserve Ratio
d.
Reduce bank rate
e.
Extend credit to government.
Part I
Increasing the bank rate.
b.
Increasing the CRR.
c.
Increasing the refinance limits.
d.
Buying of government securities in the open market.
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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.
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309. Which of the following is not a contractionary policy?
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Trade and Exchange Rate Policies
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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.
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313. Which of the following categories is not permitted to trade in the forex market? Commercial banks. Recognized exporter.
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fa
a. 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
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.
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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.
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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).
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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
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a.
Aggregate demand decreases.
e.
Total output falls.
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Recognition lag
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319. The time between the interest rate changes and the corresponding changes in the spending decisions of the public forms a part of b.
Administrative lag
c.
Outside lag
d.
Inside lag
e.
Intermediate lag.
320. Bank rate means
60
a.
The rate of interest on inter-bank loans
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.
The rate of interest charged by the central bank of a country on its loans to other commercial banks.
Part I
321. What would be the sequence of events when RBI increases money supply by reducing CRR? i.
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
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iii. iv.
Decreasing discount rate
b.
Buying government securities from banks
c.
Increasing cash reserve ratio
d.
Increasing tax rates
e.
Increasing government spending.
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322. If an economy is already under inflation, and there is increasing inflow of foreign exchange, the central bank can sterilize the impact by
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Economic Growth, Development & Planning
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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.
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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
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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).
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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.
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5. (e) Gross domestic capital formation consists of addition to the inventories, addition to fixed assets, and depreciation.
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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
Part I
(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.
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Measurement of Macroeconomic Aggregates
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12. (a) GNP deflator is the ratio of nominal GDP to real GNP. Hence, if GNP deflator increases by 40%, the numerator should at least increase by 40%. If GNP deflator rises, it does not affect Real GNP as Real GNP is adjusted with inflation.
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13. (b) Since real GNP is measured in terms of goods and services, production of more goods and services increases real GNP. Nominal GNP is the value of goods and services in terms of current market prices, thus nominal GDP increases with the increase in price level.
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14. (e) Currency with the public including small coins + Demand deposits with the bank and other deposits with RBI is called narrow money (is denoted by M1).
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15. (e) Broad money (M3) is also known as aggregate monetary resources and is equivalent to M1 + time deposits with the banking system, where M1 is currency with the public + demand deposits with the banking system.
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16. (c) NNP at market prices + Depreciation = GNP at market prices. Thus, if NNP at market prices remains constant, GNP at market prices increases by an amount equal to rise in depreciation.
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17. (d) The output method is followed either by valuing all the final goods and services produced during a year or by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in the economy. The sum of these values added gives the gross domestic product at factor cost, which after a similar adjustment to include net factor income from abroad gives gross national product at factor cost.
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18. (a) Under expenditure method we aggregate all money spent by private citizens, firms and the government within the year to estimate the 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
Macroeconomics
21. (d) GDP at market price = GDP at factor price + Indirect Taxes – Subsidies (or) GDP at factor price = GDP at market price – Indirect Taxes + Subsidies. We consider exports while computing GDP at market price and factor price. 22. (e) Macroeconomics is concerned with the overall performance of the economy. It deals with overall employment, inflation and growth of the economy as a whole. 23. (e) No conclusion can be drawn regarding the growth rate of a country based on the rate of inflation in the country. 24. (a) In a closed economy, savings are equal to investments at the equilibrium level of income.
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25. (e) There are three most popular methods to calculate national income, all the three methods are conceptually equivalent to each other. They are: (a) the output method, (b) the expenditure method and (c) the income method.
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26. (a) NNPMP = NDPMP + Net factor income from abroad.
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27. (b) Balance of trade = Total merchandize exports – Total merchandize imports.
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29. (c) Personal income = Personal disposable income (Yd) + Personal income taxes
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31. (b) Net exports = Total exports – Total imports.
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30. (b) Net national savings + Retained earnings of foreign companies = Net domestic savings.
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32. (c) GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies.
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33. (c) The price paid for a stolen car is not a market transaction, as it is illegal. Thus, while computing GNP price paid for a stolen car is not included.
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34. (d) Macroeconomics is concerned with the overall performance of the economy. It deals with overall employment, price stability and growth of the economy.
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35. (b) Real GNP is expressed in terms of goods and services. So real GNP increases only when there is an increase in the output of goods and services.
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36. (a) The operation of forces in an economy can be expressed in the form of a circular flow of incomes and spending between the households and firms.
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37. (d) In a model where there is no government, investment, net investment, capital replacement or international trade, the market value of final output is equal to the aggregate consumption by the household sector or the sum of returns to all factors of production.
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38. (b) Expenditures on consumer goods are not included in gross investment.
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39. (a) In a model where there is household, business, government and foreign sector, the GNP is given by the sum of the consumption (C), gross investment (I), government expenditure (G), and net exports (E – M). GNP = C + I + G + E – M.
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
Part I
44. (e) GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies Thus, when subsidies are more than indirect taxes, GDP at factor cost exceeds GDP at market price. 45. (c) GNP = GDP + Net factor income from abroad Hence, net factor income from abroad = GNP – GDP. 46. (b) NDP does not include depreciation [Hint: GDP – Depreciation = NDP] 47. (a) NNP at factor cost = NDP at market price + Subsidies – Indirect Taxes 48. (d) NNP at factor cost is also known as National Income.
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49. (e) Transfer payments are not taken into account while computing national income. National income is computed by summing up payments to all factors of production.
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50. (d) Salaries paid by Microsoft USA to Indian programmers employed at New York is a part of Indian GNP but not GDP, as the income is earned outside the boundaries of the country.
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51. (e) National product fails to account the household production because it neither a market transaction nor involve money. It also makes no adjustment for harmful side effects that some times arise from several productive activities and the events of nature (e.g. pollution, noise, etc). 52. (e) GDP Deflator is a price index, which is used to measure the average level of the prices of all goods and services that make up GDP. (a) Is not the answer because it is a true statement that GDP deflator is otherwise known as implicit price deflator. (b) Is not the answer because GDP deflator reflects the change in overall price level in the economy. (c) Is not the answer because GDP deflator is the most comprehensive index of price. (d) Is not the answer because GDP deflator is used to measure real GNP i.e. GNP in rupees of constant purchasing power. If prices are rising, the nominal GNP during the latter period to account for the effects of inflation. (e) Is the answer because GDP deflator does not measure economic growth. 53. (e) Personal disposable income = Personal income – Personal taxes. (a) Is not the answer because the difference between personal disposable income and personal income is not residential investment. (b) Is not the answer because the difference between personal disposable income and personal income is not indirect taxes. (c) Is not the answer because the difference between personal disposable income and personal income is not subsidies. (d) Is not the answer because the difference between personal disposable income and personal income is not transfer payments. (e) Is the answer because the difference between personal disposable income and personal income is personal taxes. 54. (c) Investment is the flow of expenditures devoted to increasing or maintaining the real capital stock. When the addition to capital goods is more than the capital consumption allowance, it will result in a positive net investment. (a) Is not the answer because when the addition to capital goods is less than the capital consumption allowance, it will result in negative net investment. (b) Is not the answer because when the addition to capital goods is more than the capital consumption allowance, it will not result in zero net investment. (c) Is the answer because when the addition to capital goods is more than the capital consumption allowance, it will result in positive net investment. (d) Is not the answer because when the addition to capital goods is more than the capital consumption allowance, it will not result in negative gross investment. Because gross investment is the total investment that occurs in the economy within any specific time period. (e) Is not the answer because when the addition to capital goods is more than the capital consumption allowance, it will not result in zero gross investment. 65
Macroeconomics
55. (a) GNP deflator is a price index, which is used to reveal the cost of purchasing the items included in GNP during the period relative to the cost of purchasing those items during a base year. GNP deflator is used to measure real GNP i.e. in rupees of constant purchasing power. If there is a rise in prices, the nominal GNP is deflated during the latter period to account for the effects of inflation. (a)
Is the answer because GNP deflator is the ratio of Nominal GNP to Real GNP.
(b) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GNP. (c)
Is not the answer because GNP deflator is not the ratio of Nominal GNP to Real GDP.
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(d) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal GDP.
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56. (d) Transfer payments are not considered as payment for current services or production. These items are not entered in national income.
Is not the answer because salary paid to a soldier is the payment for current services and hence it is not an examples of government transfer payments.
(b)
Is not the answer because purchasing of a new car for the Ministry of Finance is not an examples of government transfer payments.
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Is not the answer because funding of a clinic to provide free vaccinations is not an examples of government transfer payments.
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(d) Is the answer because free food coupons issued to a persons in an antipoverty program is not the payment for current services or production and hence it is an examples of government transfer payments. Is not the answer because funding of a new bridge in an urban area is the payment for current services and hence it is not an examples of government transfer payments.
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57. (a) In India, Whole Sale Price Index (WPI) is widely used for determine of inflation. Because the office of the economic advisor to the government of India publishes wholesale price indices for individual commodities, commodity groups and the overall WPI monthly. They are reported in a number of other publications also. Is the answer because Whole Sale Price Index (WPI) is widely used for determine of inflation in India.
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(b) Is not the answer because GDP deflator is not used for determining inflation in India. GDP deflator is used to reveal the cost of purchasing the items included in GNP during the period relative to the cost of purchasing those items during a base year. And it is difficult to bet the data for the two years for comparisons. Is not the answer because in practice it is difficult to include each and every item for construction of Consumer Price Index. (CPI)
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(d) Is not the answer because both Whole Sale Price Index (WPI) and GDP deflator are not used in measuring inflation.
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(e)
Is not the answer because both GDP deflator and Consumer Price Index. (CPI) are not used in measuring inflation.
58. (c) Investment includes expenditure on the plant and machinery produced during the year, expenditure incurred on construction activities (both residential and non-residential) during the year and change in inventories. (a) and (b) are not the answer as both are financial transactions, which do not form part of investment. (c) is the answer as change inventories is considered to be an investment. (d) is not the answer as purchase of used vehicles amounts only to transfer of ownership and not an investment.
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Part I
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59. (a) Since the value added within the domestic territory will belong to the domestic factor inputs, NDP at factor cost must be equal to domestic factor income. Hence answer is (a). (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net Domestic Product at market price. (c) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net National Product at factor cost. (d) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net National Product at market price. (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Personal Income. 60. (a) By definition dividends and corporate taxes are part of corporate profits. National Income refers to the factor income earned by the residents of a country and it includes profits earned by entrepreneurs. Profit includes dividends and corporate tax. Hence dividends and corporate tax are part of national income. Hence dividends and corporate taxes are part of corporate profits and national income. On the basis of the above reason, dividends and corporate taxes are part of corporate profits (i) and National Income (ii). Hence this is true option. Dividends and corporate taxes are not part of personal income, hence not the correct option. On the basis of above reason, the option is not correct. d.e. As given in the reason, dividends and corporate taxes are not part of personal income and personal disposable income. Hence not correct option. 61. (a) All the options that are given measure price indices. Each of which is constructed with a particular objective. a. CPI represents the changes in the price of a basket of goods with respect to the prices existing in the base year. The basket of goods that are considered are those that are used commonly by consumers and they are grouped together as food items, housing, fuel and light etc. Doctor fees, railway and bus fares are the items of expenditure of the consumer, hence in the calculation of consumer price index they are given greater weightage. Hence the option is correct. b. Whole sale price index can be interpreted as an index of prices paid by producers for their inputs. It gives more importance to items used in production process. Hence the option is not correct. c. Index of industrial production is a quantity index which covers mining, manufacturing and electricity generation. Hence the items referred to in the question are not included. Hence the option is not correct. d. GNP deflator is a measure of real GNP i.e. GNP in rupees of constant purchasing power. While calculating it no weights are assigned, hence the option is not correct. e. Same reason as given in option (d). 62. (d) GDP refers to money value of final goods and services produced within the domestic territory of a country including depreciation. There are certain goods which are produced but will not be included in GDP. For example services of house wives. Bobby purchase of a new suit is nothing but the consumption expenditure of bobby, which is part of GDP. Purchase of new Ford car also refers to consumption expenditure and hence part of GDP New computer purchased by Community Bank for its loan office refers to purchase of capital goods. Hence it is part of capital expenditure and hence part of GDP. Tomatoes grown in home garden by Market are not taken as part of GDP Even though goods are produced, they are not taken as part of GDP as it refers to production for self consumption. If she sells them in the market then it becomes part of GDP. Ford India could not sell 100 cars, hence they are part of inventories and hence part of capital expenditure. Hence included in GDP as part of capital goods expenditure. 67
Macroeconomics
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.
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65. (b) The “rachet effect” is the situation where households find it easier to adjust to rising incomes than falling incomes.
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Expectations regarding movement of prices and income
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Taxation policy
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Age composition, etc.
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67. (c) The slope of the consumption function represents the Marginal Propensity to Consume (MPC).
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68. (c) The Average propensity to consume can never exceed unity.
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69. (d) An automatic stabilizer is any mechanism in the economy that reduces the amount by which output changes in response to a change in autonomous demand. The proportional income tax levied by the government is an automatic stabilizer. Hence it does not affect the balanced budget.
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70. (a) In the equation C = C + cY, C and c represent autonomous consumption and marginal propensity to consume respectively. Autonomous consumption expenditure is the consumption expenditure, which is independent to income level, Y. In other words, it is the consumption expenditure when the income level is 0.
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71. (b) A change in an exogenous variable is categorized as an autonomous change because it is determined by forces outside the economic model.
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72. (d) C = f(Yd, W) here Yd and W are independent variables explaining C.
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73. (c) In a two-sector economy, planned savings are equal to planned investments at the equilibrium level of income.
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74. (b) When planned savings are not invested fully, part of the money saved would become ideal and therefore, the output decreases.
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75. (a) When the value of output exceeds planned spending, there is unsold output, which leads to drop in the level of income. 76. (d) Marginal propensity to consume refers to change in consumption as a result of change in income, that is 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
Part I
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80. (d) A single shock in autonomous demand produces a slow or distributed lag effect on output. Dynamic multiplier shows how a given change in autonomous investment affects the level of output overtime. 81. (c) Current account describes the trade in goods and services of a country with the outside world. If current account balance shows a deficit, it represents that foreign exchange outflows on goods and services, gifts and unilateral transfers are more than inflows. 82. (d) An increase in autonomous investment spending, transfers or a decrease in taxes cause an increase in the level of income, but increase in net tax revenues does not cause an increase in income. 83. (c) Ceteris paribus, introduction of taxes reduces the disposable income. This in turn decreases the value of the expenditure and net tax revenue multiplier. 84. (b) Y = C+ I + G + E – M An increase in autonomous investment spending increases the income level in the country that in turn increases imports. Consequently, the net exports become negative. 85. (d) Multiplier = 1/[1 – b + MPI), where MPI is marginal propensity to import. This shows inverse relationship between multiplier and marginal propensity to import. Thus, an increase in the marginal propensity to import decreases the value of the multiplier. 86. (b) If an investment spending is negatively related to the rate of interest, equilibrium income also relates inversely with interest rate, as investment spending is a component of equilibrium income. 87. (d) In the consumption function, C = 256 + 0.85 Y, MPC = 0.85l and it remains constant, whereas average propensity to consume will be changing with the income. 88. (b) Multiplier = 1/MPS where MPS is the marginal propensity to save; thus an increase in marginal propensity to save decreases the value of multiplier. 89. (b) When the multiplier is one (or unity), it implies that output expands precisely by the amount of the increased government purchases without any induced consumption spending. So when the government expenditure increases by 100, the equilibrium income also increases by 100. 90. (c) The term ‘multiplier’ is used more generally in economics to mean the effect on some endogenous variable of a unit due to change in an exogenous variable. The multiplier is necessarily be greater than one in a simple model of income determination. 91. (d) Life Cycle Hypothesis states that the saving behavior of the individuals during their working life is motivated by their desire to maintain consumption levels after retirement. The permanent income theory argues that people gear their consumption behavior to their permanent or long-term opportunities but not to their current level of income. The relative income hypothesis argues that current consumption depends not only on current income but also on the past behavior of the income. 92. (c) The term ‘multiplier’ in macroeconomics refers to the change in an induced variable per unit change in an external variable. Keynes multiplier denotes the number by which the change in investment results in change in total output (or income). Thus, a multiplier of 3 implies that when investment increases by Re.1, income or output increases by Rs.3. But, income Y = C + I + G + NE. Thus, if autonomous investment increases by Re.1, the income increases by Rs.3. Out of that Rs.3; autonomous investment increases by Re.1 (given) and consumption by Rs.2 (i.e. 3 – 1), assuming that government expenditure and net exports are autonomous and do not influenced by the autonomous investment. (Note: Assume that there are no imports). 93. (e) The demand for precautionary balances represents money that is held as a precaution against some unforeseen events such as medical emergency, accident etc. This precautionary demand for money is inversely related to rate of interest and frequency with which income is received. Lower the rate of interest and frequency with which income is received, higher is the precautionary demand for money and vice versa. (a) Is not the answer because precautionary demand for money varies directly with the level of income. (b) Precautionary demand for money is inversely related to rate of interest.
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Macroeconomics
(c)
Is not the answer because precautionary demand for money varies directly with the wealth a person held.
(d) Precautionary demand for money is inversely related to frequency with which income is received. (e)
Is the answer because precautionary demand for money is inversely related to rate of interest and frequency with which income is received.
94. (e)
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(a) Consumption depends on the income and as income increase consumption also increase. Propensity to consume refers to the changes in consumption as a result of change in income. Hence propensity to consume effects consumption.
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Propensity to save refers to changes in savings as a results of changes in income. The level of savings affects the level of consumption. Hence changes in savings does affect consumption d. Consumption demand does not depend upon the level of consumer spending. e. Consumption demand does not depend upon the level of marginal efficiency of investment. 95. (c) Consumption curve depicts the relationship between consumption and income. APS is given by the ratio between saving and Income. Whereas the slope of the curve is given by the ratio between change in consumption and income. Hence not correct
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APC refers to the ratio between consumption and Income, hence not the slope of the consumption curve which as said above is given by changes in consumption as a result of change in income.
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By definition, MPC refers to increase in consumption per unit increase in income. Which is nothing but the slope of the consumption curve. Hence the option is true.
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MPS refers to change in savings as results of change in income and slope of consumption curve gives the changes in consumption as a result of change in income. Hence not true.
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96. (b) Marginal propensity to consume refers to the change in consumption as a result of increase in income. Part of the changed income is saved. Hence MPC is equal to 1-MPS. Multiplier is the reciprocal of 1-MPC or MPS. Hence larger MPC means smaller MPS and hence larger will be the value of the multiplier.
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Statement (i) is false because as MPC is larger, MPS will be smaller as it is nothing but 1-MPC.
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Statement (ii) is true because multiplier is reciprocal of MPS and MPS is smaller as said above.
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Statement (iii) is true. Average propensity to consume will depend on level of consumption and income. Since the MPC is larger, consumption will also be larger and hence average propensity to consume will also be larger. Statement (iv) is false, as autonomous consumption is independent of MPC and hence it is not possible to say anything about autonomous consumption on the basis of MPC. Since both (ii) and (iii) are true, the option (c) is the answer.
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.
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99. (e) IS curve equation can be written as i= A/θ – Y/αθ.
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From this it can be known that larger the multiplier the flatter would be the IS curve. Since the slope of the curve is dependent on the multiplier and the multiplier in turn dependent on the tax rate. An increase in the tax rate increases the steepness of the IS curve. Hence options (b) and (c) are correct. 100. (d) Factors other than interest rate shift the IS curve either upwards or downwards. In other words, IS curve is constructed keeping other factors – autonomous investment, government expenditure, tax rate, etc. – constant. As autonomous increase in investment increases the income, the IS curve shifts toward right. 101. (a) The real money supply is held constant along the LM curve, thus a change in the real money supply shifts the LM curve. Increase in real money supply shifts the LM curve down and to the right.
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103. (a) A vertical (horizontal) LM curve represents zero (high) sensitively to interest rates. Speculative demand for money is highly responsive to changes in interest rates. Hence, the LM curve will be vertical, if there is no speculative demand for money.
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104. (b) The basic difference between IS and LM curve is that IS curve explains goods market and LM curve explains money market.
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105. (b) LM schedule is a schedule of monetary equilibrium where the supply of money equals the demand for money. The equilibrium where the demand for real balances of money equals to its real supply of money is described by the LM schedule.
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106. (d)
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108. 109.
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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.
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Macroeconomics
111. (d) One of the main determinants of the demand for money is the level of income. If prices remain constant larger money balances are required to conduct the larger volume of business with an increase in the quantity of goods bought and sold. Thus if nominal GNP increases the demand for money balances also goes up. This shows direct/positive relationship between the demand for money and income levels. If interest rates go up demand for money balances decreases and people tend to invest or deposit the money, which implies an inverse relationship between the demand for money and interest rates.
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112. (a) When the income level increases, the demand for money function shifts toward right. As a result of upward shift, both quantity of money demanded and rate of interest increase (see figure below).
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113. (b) All the points on IS curve indicate equilibrium in the goods market and all the points on LM curve represent equilibrium in the money market. Therefore, simultaneous equilibrium in both the markets is possible only at the intersection of both the curves that is only at one income level and interest rate.
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115. (c) The liquidity effect refers to the decrease in the real interest rate following an increase in the money supply. Liquidity effect will result in an income effect, as lower interest rates will increase interest-sensitive spending. 116. (a) If the private sector spending is more interest sensitive the change in interest rate caused by the changes in money supply will have a greater effect on the equilibrium income. 117. (c) If the sensitiveness of demand for money to interest rates is high the LM curve is steeply sloped. In that case changes in money stock are totally ineffective in influencing the equilibrium output.
118. (d) Crowding out refers to a situation where due to increase in government spending the interest rate in the market goes up and private investment will come down. Thus, crowding out is more likely to occur when the demand for money is interest-insensitive and private sector spending is interest-sensitive.
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119. (c) Crowding out will occur when a reduction in income taxes causes higher interest rates, which crowd out interest-sensitive private spending. Note that crowding out refers to a situation where due to increase in government spending the interest rate in the market goes up and private investment will come down. 120. (c) Real money supply = Nominal money supply/Price level. Hence, decrease in price level (or inflation) increases the real money supply in the market. 121. (b) Increase in the price level reduces the real money supply and from the LM curve equation it is known that if real money supply decreases LM schedule shifts to the left.
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123. (e) The growth rate in nominal stock of money, Gm = aGy + Gp where Gy is the real GDP growth rate and Gp is the rate of inflation.
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126. (e) Price elasticity of demand for different points on the linear demand curve. A reduction in the rate of interest rate increases the profitability of additions to the capital stock and therefore leads to a larger rate of planned investment spending. This implies a negative relationship between interest rates and investment spending.
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127. (c) A ‘supply shock’ such as failure of monsoon or increase in the price of oil causes a leftward shift in the aggregate supply curve that results in lower equilibrium output and higher prices.
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132. (b) Transaction demand for money varies positively with income and inversely with rate of interest. In words, higher (lower) the income, higher (lower) is the demand for money. On the other hand, higher (lower) the interest rate, lower (higher) is the demand for money. 133. (a) IS curve is negatively sloped indicating that interest rate is negatively associated with the aggregate demand. A rise in the interest rates reduces both consumption and investment, which results in decline in aggregate demand. [Hint: AD = C + I + G]. 134. (c) A rise in government expenditure increases the interest rates in the economy, which lead to reduction in interest-sensitive private investment. 135. (c) When government spending increases at unchanged interest rates, the level of AD increases to meet the increased demand for goods. Because of this increase in income the quantity of money demanded goes up which in turn pushes up the interest rate. So both interest rate and income increase.
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Macroeconomics
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136. (b) If investment is insensitive to the interest rates, IS curve stands vertical indicating a constant level of income. When the level of income remains constant, shifts in LM curve does not change the equilibrium income, but only affect the interest rates in the money. Hence, a shift in IS curve (i.e. changes in the goods market) determines the equilibrium income. 137. (e) Liquidity trap occurs when there is no decrease in the interest rate despite an increase in the money supply. This results in an addition to idle balances. (a) Is not the answer because when the economy is facing a situation of liquidity trap, there is no future expectation of rise in the interest rate. So public hold money rather than using for investment. The statement is true. (b) Is not the answer because LM curve gives the combination of income and interest rates which produce equilibrium in the money market. As the interest rate remains at the critical rate, the speculative demand for money is nil. As the interest elasticity of demand is infinity, the LM curve will be horizontal. The statement is true. (c) Is not the answer because as the interest rate does not increase, a sound fiscal policy such as tax and expenditure policy will help in increasing the income. The fiscal policy has a direct bearing on the level of aggregate demand and the level of economic activity. The is a true statement. (d) Is not the answer because monetary policy is ineffective in affecting the interest rate due to the infinite interest elasticity of demand for money. The is a true statement. (e) Is the answer because LM is not vertical rather than horizontal when there is liquidity in the economy. 138. (b) The amount of wealth that household or business hold in the form of money balances is referred to as demand for money. Individuals and firms may hold part of their wealth in the form of money to take the advantage of decrease in prices. Speculation can be done on price of stock and bonds. Securities prices are linked to interest rates and inversely proportional to a change in interest rates. With a rise in interest rates, prices of securities fall and the speculative demand for money also comes down. Contrary to this, if the interest rates fall, securities prices rise and demand for speculation purposes also rises. Thus speculative demand is inversely proportional to the rate of interest. (a) Is not the answer because transaction demand for money is largely influenced by level of income and the frequency with which income is received. (b) Is the answer because there is an inverse relationship rate of interest and the speculative demand for money. (c) Is not the answer because the demand for precautionary balances represents money that is held as a precaution for some unforeseen events such as medical emergency, an accident etc. The precautionary demand for money is highly influenced by level of income. (d) Is not the answer because an inflationary expectation does not represent an inverse relationship between the interest rate and the demand for money. Is not the answer because the relationship between the interest rate and the demand for money is inverse, not direct. 139. (e) (a) Is not the answer because IS curve shows the combinations of income and interest rates which reflects the goods market equilibrium. (b) Is not the answer because LM curve shows the combinations of income and interest rates, which reflect the money market equilibrium. (c) Is not the answer because interest rate is a variable in both the IS and LM model. (d) Is not the answer because the equilibrium level of national income is determined when there is a simultaneous equilibrium in the goods market and money market. (e) Is the answer because IS curve is not positively sloped rather it is negatively sloped. 74
Part I
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140. (d) If the government raises tax rate, it has an effect on the IS curve because it is a fiscal policy and the IS curve shifts to left. And at the same time the Reserve Bank of India keep the money supply constant. It implies that there is no change in the LM curve. This will result in a fall in the interest rate. (a) Is not the answer because when the Government raises tax rate, disposable income falls. (b) Is not the answer because if the government raises tax rate and the Reserve Bank of India hold the money supply constant, the IS curve shifts to the left. (c) Is not the answer because if the government raises tax rate and the Reserve Bank of India hold the money supply constant, there is no shift in the LM curve. (d) Is the answer because if the government raises tax rate and the Reserve Bank of India hold the money supply constant, the IS curve shifts to the left while LM curve unchanged means that the interest rate falls. (e) Is not the answer because interest rate does not increase. 141. (a) The LM curve gives the combinations of income and interest rates, which produce equilibrium in the money market. For all points in the LM curve, the demand for real balances is equal to supply of real balances. The LM curve shows a positive relationship between rate of interest and level of income. (a) Is the answer because the LM curve shows a positive relationship between rate of interest and level of income. (b) Is not the answer because the LM curve does not show a negative relationship between rate of interest and level of income. (c) Is not the answer because the LM curve does not show a negative relationship between rate of interest and level of investment. (d) Is not the answer because the LM curve does not show a positive relationship between rate of interest and level of investment. (e) Is not the answer because the LM curve does not show a positive relationship between level of investment and level of income. 142. (e) An increase in government expenditure results in an increase in the level of income and an increase in the interest rate. It will shift the IS curve to the right. But LM curve remain unchanged because an increase in government expenditure, a fiscal policy measure, has no impact initially in the asset markets. (a) Is not the answer because an increase in government will not shift both IS and LM curve to the right. (b) Is not the answer because an increase in government will not shift both IS and LM curve to the left. (c) Is not the answer because an increase in government will not shift IS curve to the left. (d) Is not the answer because an increase in government will affect IS curve. (e) Is the answer because an increase in government will not shift the position of LM curve but shift IS curve to the right. 143. (d) The relationship between demand for money and interest rate is given by the LM curve. The relationship between interest rate and demand for money is negative. The LM curve gives the demand schedule for a particular income level. a. If there is an increase in the level of income because of increase in real money supply, there is no shift in the IS curve. b. As at the same interest rate, the demand for money increases with the increase in income level. The LM curve will shift to the right and hence the option is not correct. c. There will be increase in the real balances as income increases, but no shift in the IS curve. d. As per the reason given in the option (b), the LM curve shifts to the right and hence option d is the correct answer. e. The entire increased income need not be used for consumption as part of it goes into savings and hence the increased income need not be equal to changed income. Hence this option is not correct. 75
Macroeconomics
Fundamentals of Aggregate Demand and Aggregate Supply
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144. (a) An increase in the real stock of money tend to bring down interest rates in the market, which in turn increases the aggregate demand (indicated by an upward shift in the AD curve). An increase in real stock of money shifts the LM schedule down and to the right. 145. (a) Expansionary fiscal policies shift the IS and AD curves towards right. 146. (b) Real stock of money = Nominal stock of money/Price level. Hence, any decline in the price level increases the amount of real stock of money. 147. (e) The increase in the price level reduces the real balances and the LM schedule shifts up and to the left until a new equilibrium for supply and demand is reached. 148. (b) If all the resources available are fully employed then aggregate supply curve in the long run will become vertical indicating that the quantity of goods supplied cannot be increased further. 149. (e) All the factors given are determinants of aggregate demand in an economy. 150. (e) All the factors given are determinants of aggregate supply in an economy. 151. (b) Increase in real wages attract more labor, as a result labor supply will increase. But at high wages firms tend to employ lesser labor, leading to lesser demand for labor. 152. (b) The demand for money is the demand for real money balances – real balances for short – because people hold money for what it will buy. Demand for money depends upon the real income and real interest rate. It depends on the level of real income because individuals hold money to pay for their purchases, which in turn, depend on the income. The demand for money also depends upon the cost of holding money, which is indicated by real interest rate. 153. (a) Business firms will produce at maximum efficiency because of the market forces of both supply & demand. 154. (b) From the figure, it is clear that a rightward shift of aggregate demand, with no change in aggregate supply schedule, results in an increase in real output and no change in the price level when aggregate supply is horizontal.
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155. (b) Aggregate demand is negatively related to the price level because a decline in the price level has a positive effect on the demand for output.
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156. (a) The slope of aggregate demand becomes flatter, it indicates more sensitivity to the investment spending to the changes in the rate of interest.
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157. (c) A neoclassical aggregate supply schedule exists when the demand for labor and supply of labor schedules adjust immediately to a change in the price level. 158. (b) Decrease in taxes shift the aggregate demand curve upwards. When the supply curve is vertical, an upward shift in aggregate demand curve increases the price level. However, it will not have any effect on real output (see figure below).
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Part I
159. (b) As the aggregate supply curve is vertical, increase in nominal money supply only lead to increase in price level. But it will not have any effect on the real money supply or the composition of output, because the economy already running at full employment. 160. (d) For given wages, profit margins and labor productivity a change in the real price of the commodities will increase prices simply because it raises costs. The impact is the AS curve shifts upward and to the left at each level of output.
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161. (b) The mark-up pricing singles out 3 determinants of prices the money wages, the unit labor requirement or its reciprocal, labor productivity and the mark-up rate. A rise in any of these 3 determinants will increase the price that firms set for their output. Conversely a decline in wages, a rise in productivity, or a fall in the mark-up rate will lower costs and therefore lower prices and AS schedule shifts to down and right.
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162. (c) Decline in the nominal money supply growth reduces the inflation rate and the level of output in the short run.
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165. (e) Since the price elasticity of demand coefficients for demand schedules D2 and D4 are less than one, total revenue for good 2 and good 4 increases with decrease of price.
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166. (d) When government spending is used as a policy instrument in order to achieve full employment, it is called internal balance. 167. (a)
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The aggregate supply explains the production behavior of an economy. If the actual price achieved is more than the expected price, firms will experience a higher than anticipated level of profits. This will lead to increase in production. 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
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
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Rate of interest Government policy A change in exchange rate and
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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.
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An increase in tax rates will lead to decrease in disposable income in case of direct taxes and investment demand in case of corporate taxes. The net impact is that aggregate demand will decrease.
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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.
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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.
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170. (e) In long run the economy will tend towards output which is referred to as natural rate of output. True, because long equilibrium is characterized by tendency towards natural rate of output In long run output of an economy does not depend on the price level, but on labor, import cost, capital stock, technological progress etc., hence true.
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At natural rate the aggregate supply is vertical as it is insensitive to price hence true.
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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
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
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172. (c) The currency with the public is equal to the notes and coins in circulation and demand deposits with banks.
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173. (e) Money supply = [(1 + Cu)/(Cu + r)] x H
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178. (e) The RBI money together with government money constitutes the monetary base which is known as high powered money. High powered money = Currency with the public + Reserves + Other deposits with RBI.
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179. (c) This transaction does not make any change in money supply because it is already in circulation.
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181. (d) Money supply, Ms = (1 + Cu)/(Cu + r) x H.
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183. (e) Money multiplier = (1 + Cu)/(Cu + r). Thus, if currency deposit increases the multiplier decreases less than proportionately to the increase.
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184. (c) Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net physical capital formation. FIR shows the relation between financial development and the growth of physical investment. 185. (e) The RBI money together with government money constitutes the monetary base which is known as high powered money. High powered money, H = M3/m, where m is the money multiplier. 186. (d) M3 = M1 + Time deposits with banks M2 = M1 + Post office savings deposits. 187. (e) Money Multiplier = [(1 + Cu)/(Cu + r)] Therefore, if reserve ratio, r is constant and currency deposit ratio, Cu increases then money multiplier decreases less than proportionately to the increase of currency deposit ratio.
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Macroeconomics
188. (c) Savings deposits are not a part of money stock measure (M1) because they are not recognized as legal tender by the RBI and are not readily convertible to cash.
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189. (c) Increase in corporate income tax at constant interest rates will discourage the investment. Hence, the volume of investment will not increase. 190 (d) Financial Intermedian Ratio (FIR) is the ratio of financial claims issued to the net physical capital formation. FIR shows the relation between financial development and the growth of physical investment. 191. (a) Change in money supply induces change in interest rates, which affects the investment spending that in turn affects the aggregate demand and output. 192. (b) New issue ratio = Primary issues by non-financial sector/total physical asset formation. 193. (a) Creation of credit is a major function of a commercial bank. When a bank creates credit or advances loans, there tends to be a multiple expansion of credit in the banking systems. (a) Is the answer because credit creation by the commercial bank is limited by the Cash Reserve Ratio(CRR), i.e. every commercial bank must keep on deposit with the Reserve Bank certain amounts of funds equal to a specified percentage of it is own deposit liabilities. (b) Is not the answer because commercial banks cannot create as much credit as they want. Is not the answer because RBI has control over the credit created by commercial banks. (d) Is not the answer because CRR has an impact on credit creation 194. (b) The balance sheet of Reserve Bank of India contains particulars of 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
Part I
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(b) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), high powered money in the economy increases. (c) Is the answer because when the RBI increases Cash Reserve Ratio (CRR), the value of money multiplier decreases. (d) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), aggregate demand in the economy decreases. (e) Is not the answer because when the RBI increases Cash Reserve Ratio (CRR), price level in the economy decreases. 197. (d) M1 = Currency with the public + Demand deposits with the banking system + other deposit with the bank. M3 = M1+ Time deposits with the banking systems. (a) Is not the answer because the difference between M3 and M1 is not the demand deposits. (b) Is not the answer because the difference between M3 and M1 is not the post office savings deposits. (c) Is not the answer because the difference between M3 and M1 is not the savings deposits. (d) Is the answer because the difference between M3 and M1 is the time deposits. (e) Is not the answer because the difference between M3 and M1 is not M2. 198. (d) Given the demand for money, an increase in money supply lowers the nominal rate of interest. Decrease in rate of interest increase interest sensitive expenditure like consumption and investment, thereby increasing AD. a. Is not the answer because other things being equal, an increase in the supply of money does not lowers both nominal interest rate and aggregate demand. b. Is not the answer because other things being equal, an increase in the supply of money does not raises both nominal interest rate and aggregate demand. c. Is not the answer because other things being equal, an increase in the supply of money does not raise nominal interest rate and lowers aggregate demand. d. Is the answer because other things being equal, an increase in the supply of money lowers nominal interest rate and raises aggregate demand. e. Is not the answer because other things being equal, an increase in the supply of money do change nominal interest rate or aggregate demand.
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Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Classical Model
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200. (c) The firms demand the labor so long as the cost of hiring additional worker is less than the revenue gained (i.e. w = P. MPL).
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201. (e) Under pure competition a profit maximizing firm hires workers until the money wage ‘w’ is equal to the general price level P multiplied by Marginal Product of Labor (MPL). Symbolically, w = P.MPL or w/P = MPL, where w/P represents real wage rate.
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202. (d) The amount of labor demanded is negatively related to real wage rate. That is, an increase (decrease) in real wages will increase (decrease) the quantity of labor demanded. 203. (e) Marginal Product of Labor (MPL) represents the change in output per unit change in labor employed. If the change in input is 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.
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Disequilibrium occurs because of mismatch between demand and supply, hence true.
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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.
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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.
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(d) Is not the answer because both (a) and (b) above cannot be the answer.
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Aggregate Supply, Price Level and Employment: Macroeconomic Equilibrium in the Keynesian Model
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213. (e) Increase in prices at a constant nominal money wages decreases real wages and increases employment. At a higher real wage business firms will not wish to hire more workers, resulting in increase in unemployment. 214. (e) As against classical theory, Keynesian analysis was completely a demand side approach. It says that demand induces firms to produce or supply goods and services. Keynes also advocated that demand for money determines the supply of money in the market.
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215. (e) Investors prefer holding money in bonds when they expect an increase in interest rate and capital loss from a bond.
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216. (b) Since nominal wages are assumed flexible upwards the aggregate supply curve will be perfectly price inelastic at the full employment level.
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217. (e) All the three statements given are true in case of an economy in equilibrium. 218. (e) Individuals and firms may want to maintain part of their wealth in the form of money to take advantage of price reduction. This is because, if price reduces, the value of money increases. 219. (c) Classical model assumes that real wages adjusts automatically to bring about equality of demand for and supply of labor; on the other hand, the Keynesian model assumes that nominal wages (w) is rigid downward. 220. (e) The statements a, b, c and d are true with regard to Keynesian model of income determination. Statement ‘c’ is not true. 221. (b) Increase in autonomous government expenditure has direct impact on aggregate demand, which causes production of more goods and services thereby increasing the level of income. This increase in quantity of money demanded will in turn lead to an increase in interest rates. 82
Part I
222. (c) In the Keynesian model, actual expenditure and planned expenditure is same at the equilibrium level of output. When the actual expenditure is less than the planned expenditure in the economy, there will be a positive inventory investment in the economy. (a)
Is not the answer because there will not be a positive fixed investment in the economy.
(b) Is not the answer because there will not be a negative fixed investment in the economy. (c)
Is the answer because there will be positive inventory investment in the economy.
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(d) Is not the answer because there will not be negative inventory investment in the economy. Is not the answer because there will be change in the inventory investment in the economy.
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223. (e)
Is not the answer because Keynes considered the existence of full employment as a special case. The Keynesian underemployment equilibrium is reflecting real life situations.
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(a)
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(b) Is not the answer because aggregate demand or effective demand indicates the total quantity of goods and services that people want to buy. According to Keynes, effective aggregate demand determines the level of employment and output. Is not the answer because Keynes argues that State intervention is essential as full employment is not possible in an economy.
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(c)
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(d) Is not the answer because Keynes argues that an economy facing recession, budget deficit is an important tool to overcome recession. Is the answer because in the Keynesian model, monetary policy is not effective as compared to fiscal policy. Rather it is the fiscal policy, which is very effective and powerful. Keynes argues that government should maintain an active stance with a combination of tax and expenditure policies to maintain the desired levels of output and employment through manipulation of effective demand.
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224. (a)
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Is the answer because unemployment in the Keynesian model is caused by demand deficiency.
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(a)
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In the Keynesian model, unemployment could be reduced if the aggregate demand increases. Therefore, unemployment is caused by demand deficiency. The Keynesian theory of unemployment suggests that governments can play an active role in the economy by adjusting the aggregate demand through its fiscal and monetary instruments.
(b) Is not the answer because unemployment in the Keynesian model is not caused by supply deficiency. (c)
Is not the answer because unemployment in the Keynesian model is not caused by demand sufficiency.
(d) Is not the answer because unemployment in the Keynesian model is not caused by supply sufficiency. (e)
Is not the answer because unemployment in the Keynesian model is not caused by both demand deficiency and supply deficiency.
83
Macroeconomics
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.
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226. (e) The monetarism theory conclusion is that an increase in money supply leads to a significant increase in AD, which in turn leads to increase in price level.
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227. (e) The hypothesis of rational expectations has three important implications for macroeconomic analysis and policy. Econometric models are not very useful in evaluating alternative economic policies.
ii.
There is no trade-off between inflation and unemployment.
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228. (a) Discretionary monetary and fiscal policy cannot be used to stabilize the economy.
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The rational expectations theory suggests that individuals do not make systematic forecasting errors and that their guesses about future are on an average correct. 229. (e)
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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.
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(a)
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(b) Is not the answer because supply side economics recommend promoting competition to improve market efficiency. Is not the answer because supply side economics recommend restricting the power of trade unions to improve market efficiency.
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(d) Is not the answer because supply side economics recommend removing institutional barriers to improve market efficiency. Is the answer because supply side economics does not recommend increasing corporate tax rate to improve market efficiency.
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(e) 230. (d)
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The Laffer curve depicts the relationship between tax revenues and tax rates. The shape of the Laffer curve is backward bending indicating that tax revenues initially increase and then decrease as the tax rate increases. Is not the answer because according to Laffer curve, tax revenues do not rise continuously as the tax rate increases. (b) Is not the answer because tax revenues do not decrease continuously as the tax rate increases. (c) Is not the answer because tax revenues do not decrease initially and then increase as the tax rate increases. (d) Is the answer because tax revenues increase initially and then decrease as the tax rate increases. (e) Is not the answer because tax revenues do not remain constant as the tax rate increases. 231. (b)
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(a)
According to rational expectations school, discretionary monetary and fiscal policy cannot be used to stabilize the economy. Proponents of rational expectation argue that consumers and business firms anticipate the implications of rise in government spending. Moneywage rate and prices will rise, but output and employment will remain the same. So government can no longer fool the people by increasing its spending during elections years. So the answer is (b). 84
Part I
232. (e) Monetarist opines that demand function for money is better determined than consumption or investment function and hence they prefer monetary policy over fiscal policy. Fiscal policy is ineffective because increase in public expenditure leads to decrease private expenditure. (Crowding out) a. b. c.
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.
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e. 233. (b)
School of rational expectation is based on the premise that people do not make systematic forecasting errors. On an average their views about the future are correct and not biased as they behave rationality. Hence the option is wrong. b. Whenever central bank increases the money supply, according to rational expectations theory, people realize that it is the cause of inflation. According workers and business firms adjust wages and prices in response to the changes in money supply. Hence any change in money supply only affects wages and prices. Hence this option is true as only wages and prices are affected and not employment. c. Since the people are assumed to behave rationally, any attempt by the monetary authorities to increase employment will be anticipated by the firms. They accordingly changes prices and wages. Hence wages are flexible and not rigid. Hence the option is not true. Business men anticipate the changes in money supply (which is the primary cause for inflation) and as they are rational, change prices accordingly. The price are flexible and not rigid. Hence the option is not true.
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Since (c) and (d) are not correct options, (e) cannot be the answer.
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234. (b) a. The Laffer curve gives the relationship between tax revenues and tax rates. Hence not correct option. b. Philips curve depicts the relationship between the rate of change in price and the rate of unemployment. c. Aggregate supply curve gives the relationship between net national product that would be supplied at general price level given constant expectations. d. The LM curve signifies the money supply. So this option is not right e. The IS curve shows that combination of interest rates and levels of output such that planned spending equals income. Hence not true option.
Th e
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Economic Fluctuations, Unemployment and Inflation
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235. (d) Bank reserves increase rapidly in boom period; suffer a set back in recession and fall rapidly during depression. 236. (a) Frictional unemployment is the unemployment caused by constant changes in the labor market. 237. (c) Unemployment that arises when there is general downturn in business activity is known as cyclical unemployment. 238. (d) Full employment is defined as the level of employment that results when the rate of unemployment is normal. 239. (e) Natural rate of unemployment is influenced by the structure of workforce and by the changes in public policy. The natural rate of unemployment increases when youthful workers comprise a large proportion of the workforce because they change jobs and move in and out of the employment often. 85
Macroeconomics
240. (e) When the actual rate of unemployment exceeds the natural rate of unemployment the actual output of the economy will fall below its potential and consumption of goods decreases. 241. (b) Unemployment that arises due to structural changes in the economy is called structural unemployment. This arises when the regional or occupational pattern of job vacancies does not match the pattern of workers availability and suitability. 242. (d) Inventory stocks will be very little in boom period whereas the stock levels will be very high during depression. The reason is that during boom (recession) the consumption will be high (low).
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243. (d) Disguised unemployment refers to a situation where more than the required number of people are visibly occupied in some work contributing nothing to the output. 244. (c) In developing countries like India there is wide spread disguised unemployment in agricultural sector. 245. (e) Stagflation is a period characterized by high inflation and high unemployment levels. 246. (c) Real interest rate is the nominal rate of interest ‘minus’ the expected rate of inflation. 247. (d) Unemployment that arises due to structural changes in the economy is called structural unemployment. This arises when the regional or occupational pattern of job vacancies does not match the pattern of workers availability and suitability. 248. (b) During recessionary phase of business cycle the rate of unemployment increases rapidly due to increasing reduction in consumption. 249. (a) Monetarists believe in the use of a stable growth rate for the money supply for the economic development.
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250. (c) Philips curve shows the relationship between inflation rate and unemployment rate. Philips curve indicates an inverse relationship between the rate of inflation and unemployment.
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251. (e) Bottlenecks refer to the obstacles in reaching full employment in the economy. Both (b) and (c) act against achieving full employment. 252. (c)
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In the business cycles theory, after a business peak or boom, the economy enters contraction stage. The sales of most businesses fall and real GNP of an economy grows at a slow pace. There is a large number of unemployment in the labor market. This phase is otherwise known as recession.
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(a) Is not the answer because the inventory stock increases gradually in recession. (b) Is not the answer because business expectation will be pessimistic with cautious decision-making. (c) Is the answer because there is an underutilization of existing capacity in the economy. (d) Is not the answer because bank credit starts falling in the recession phase of business cycle. (e) Is not the answer because there is a decline in the income levels of the people.
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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.
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
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(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.
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(d) Is not the answer because there is a contraction of economic activities in the depression period. Is the answer because there is a stagnation combined with inflation prevails in the economy in the period of stagflation.
255. (c)
The periodic upswings and down swings in the level of economic activity which forms a regular pattern with an expansion of activity followed by a contraction ,succeded by further expansion are referred to as business cycles. Each of the phases is characterized by certain features.
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(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.
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256. (a) Stagflation refers to a situation where there is high unemployment and high inflation occurs simultaneously.
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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
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.
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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.
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259. (c) Cost-push inflation refers to increase in price as a result of the causes originating from the supply side. The left ward shift of the supply curve occurs as a result of increase in the wage level unmatched by the increase in the labour productivity, increase in the profit margins by those who can exercise the market power and supply shocks. Decrease in wages leads to decrease in cost of production and hence prices will reduce if the producer passes on to the consumer.
b.
When the productivity of labour increase it leads to lowering the cost of production per unit and hence the prices will decrease.
c.
As the cost of raw material increases it leads to increase in cost of production which results in increases in prices. Hence this option is correct.
d.
Right ward shift in the supply curve occurs when there is a decrease in prices and hence not the correct option.
e.
Finding of new raw material would lead to lower cost of raw material as the supply of raw material has increased and hence lowers the prices.
88
Recessionary GDP gap signifies higher potential real GDP compared to realized real GDP.
b.
Hyper inflationary situation refers to price rise is very large and accelerating. This occurs when aggregate demand is more than aggregate supply. In case of recessionary GDP gap, prices are falling. Hence not correct option.
c.
When these is necessionary GDP gap, it leads to realized GDP falling short of potential GDP. Hence during prices will be falling and unemployment rate would increase. But there will be high unemployment, which occurs only during depression.
d.
Natural rate of unemployment occurs when potential GDP is equal to realized GDP. Which is not the case when there is recessionary GDP gap. Hence not the correct option.
e.
Since (b) and (d) are not correct, this is not correct option.
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260. (a)
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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.
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265. (a) The current account records all transactions in merchandize and invisible with the rest of the world. If the BoP on current account is deficit, it implies that imports of goods and services are more than that of exports.
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266. (b) If a foreign supplier sells the goods in the domestic market at a price less than that of the goods supplied by the domestic supplier, it is called dumping.
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267. (a) The items included under the invisibles of the current account are investment income, travel, transportation, insurance, and other miscellaneous items.
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268. (d) Transfer of assets or goods to a country without any consideration or return are called international transfers.
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269. (c) BoP is in deficit when both current account and capital account balances are in deficit.
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270. (a) When current account balance is not balanced by the capital account surplus the foreign exchange reserves will decline and it causes a contraction in the money supply.
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271. (c) Receipts in cash or kind without a quid pro quo are called transfer of payments, i.e. they are made for no return service, i.e. unilateral.
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272. (b) The foreign exchange reserves of a country apart from serving to balance the BoP statement of an economy have a strong impact on the monetary policy pursued by the central bank in the domestic sector. When foreign exchange reserves contracts, the money supply in the economy decreases.
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273. (d) Dividends earned on portfolio investments come under the head of invisibles in current account, whereas the other options given come under the capital account of the BoP. 274. (d) Preparation of BoP statement is based on double-entry system of book keeping. Hence, all debt items should equal credit items, and the balance is zero. Is not the answer because all entries in the balance of payments statement is not collectively sum to GDP of the country.
b.
Is not the answer because all entries in the balance of payments statement is not collectively sum to GNP of the country
c.
Is not the answer because all entries in the balance of payments statement is not collectively sum to Foreign exchange reserves of the country
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a.
d.
Is the answer because all entries in the balance of payments statement is collectively sum to zero.
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
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
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276. (a) The tax and expenditure policies together constitute the fiscal policy of the government. Customs duty is an instrument of fiscal policy.
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277. (c) The increase in net RBI credit to the central government, comprising the net increase in the holdings of treasury bills of the RBI and its contribution to the market borrowings of the government is called monetized deficit.
defense expenditure
c.
subsidies.
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interest payments
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278. (e) The major components of non-plan expenditure are:
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279. (d) Primary deficit is calculated by deducting interest payments of the government from the gross fiscal deficit. 280. (a) Apart from the tax revenue the other important areas of resource mobilization for the government are non-tax revenues which include profits from PSUs. 281. (e) Large fiscal deficits will have implications upon money supply, growth, inflation and for the access to resources for private investment. 282. (c) SLR refers to the minimum percentage of the total liquid assets that banks have to maintain with themselves. Fiscal deficit is obtained when total receipts excluding government borrowings are subtracted from total expenditure. So change in SLR has no effect on fiscal deficit.
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284. (e) Self-explanatory.
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283. (e) Monetized deficit is the increase in net RBI credit to the Central Government, comprising the net increase in the holdings of Treasury Bills of the RBI and the contribution to the market borrowings of the Government.
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285. (e) Gross fiscal deficit is computed by deducting total receipts excluding government borrowings from the total expenditure.
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286. (b) Mandatory wage price guidelines maintain the full employment and keep the inflation under control.
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287. (c) Primary deficit = Fiscal deficit – Interest payment.
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288. (a) Y = C + I + G + X
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Y = a + b(Yd) + I + G + X
Where Yd = Y – T and T = tY Thus, an increase in taxes decreases the income. But an equal increase in government expenditure increases the income greatly because of multiplier effect. So GDP increases.
289. (b) An increase in savings will not make any changes in current output. 290. (a) Installing a progressive income tax would have no effect on the Keynesian multiplier. 291. (e) Equilibrium income will increase by the amount of increase in government expenditure if the multiplier is one. So MPC is equal to the investment income ratio. 292. (a) When the government spending increases and/or the tax rate decreases, an increase in the aggregate demand (AD) takes place, which in turn leads to increase in the equilibrium real GDP. 90
Part I
293. (d) Government borrowing to finance large deficits increases the demand for loanable funds, which puts an upward pressure on interest rates in the market. 294. (b) If somebody buys National Small Saving Certificate, it increases in the other liabilities of the government. (a)
Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase government borrowings.
(b) Is the answer because if Mr.X buys a National Small Saving Certificate, it will increase in the other liabilities of the government. Is not the answer because if Mr.X buys a National Small Saving Certificate, it will not increase in forex reserves.
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(c)
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(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.
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295. (c)
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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.
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(a)
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(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.
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(d) Is not the answer because automatic stabilizer is a discretionary fiscal policy.
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296. (a)
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Fiscal policy refers to policies dealing with taxes and government expenditure including transfer payments.
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(a)
Is the answer because when the government reduces taxes or raises spending to get the economy out of a recession, is a case of fiscal policy measure.
(b) Is not the answer because when the central bank changes the money supply to affect the price level, interest rates and exchange rate , it is a monetary policy. (c)
Is not the answer because when the government restricts imports and stimulates exports; it is a case of EXIM (Export-Import) policy.
(d) Is not the answer because both (a) and (b) cannot be the answer. (e)
Is not the answer because both (a) and (c) cannot be the answer.
91
Macroeconomics
297. (a) When the government monetizes part of its deficit, it is an increase in net RBI credit to the government, comprising the net increase in the holdings of treasury bills of the RBI and its contribution to the market borrowings of the government. To meet the needs of the government, the RBI prints more money. This will lead to excess money supply in the economy. (a)
Is the answer because money supply in the economy increases when the government monetizes part of its deficit.
04
(b) Is not the answer because when there is an excess money supply, interest rate will decline. Is not the answer because when the government monetizes part of its deficit, primary deficit will decrease. Primary deficit is calculated by deducting the interest payments of the government from the gross fiscal deficit.
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(c)
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(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.
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298. (e)
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(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.
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(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
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(e)
Pr es
299. (b)
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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
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(a)
©
20 04
Th e
(b) Is the answer because personal taxes is an example of progressive tax system. (c)
Is not the answer because personal tax is not a direct tax system.
(d) Is not the answer because personal tax is not a value added tax system. In value added tax system, the tax is on the value added at each stage. (e)
Is not the answer because personal tax is not a regressive tax system. In regressive tax system, people with lower levels of income are imposed with higher taxes as a proportion of their income.
300. (c) Monetized deficit refers to increase in net RBI credit to the Central Government, comprising the net increase in the holdings of T-bills of the RBI and its contribution to the market borrowings of the government. Fiscal deficit = Borrowings and liabilities of the Central Government and primary deficit = Fiscal deficit – interest payments. a. 92
Is not the answer because monetized deficit does not refer fiscal deficit minus interest payments.
Part I
Is not the answer because monetized deficit does not refer borrowings and other liabilities of the Central Government. c. Is the answer because monetized deficit refers Increase in the net RBI credit to the Central Government. d. Is not the answer because monetized deficit does not refer fiscal deficit minus Primary deficit. e. Is not the answer because monetized deficit does not refer 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
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-4
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ef .N
o.
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20
04
a.
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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
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BN
a.
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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
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
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BN
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31
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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.
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315. (d) An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary plicy shifts the LM curve to the right. It will result in a higher level of output, but the level of interest rate is dependent on the relative magnitude of fiscal and monetary policies a. Is not the answer, because an expansionary fiscal policy combined with a liberal monetary policy does not result in a lower level of output and a lower interest rate. b. Is not the answer because an expansionary fiscal policy combined with a liberal monetary policy does not result in a lower level of output and a higher interest rate. c. Is not the answer because an expansionary fiscal policy combined with a liberal monetary policy results in a higher level of output but not a lower interest rate. d. Is not the answer because an expansionary fiscal policy combined with a liberal monetary policy results in a higher level of output but we cannot say that it results in a higher interest rate. e. Is the answer because an expansionary fiscal policy combined with a liberal monetary policy result in higher level of output, but the level of output, but the level of interest rate is dependent on the relative magnitude of fiscal and monetary policies.
94
Part I
316. (b) If the central bank does not impose any reserve ratio, the commercial bank need not keep on deposit with the Reserve Bank certain amount of funds equal to a specified percentage of its own deposit liabilities. Then the banking sector can create unlimited money supply. (a)
Is not the answer because without the imposition of reserve ratio, the banking system can affect the supply of money through credit creation.
(b) Is the answer because if the central bank does not impose any reserve ratio, the banking sector can create unlimited money supply. (c)
Is not the answer because without reserve ratio, the lending capacity of banks would not narrow down to zero.
20
04
04
(d) Is not the answer because if the central bank does not impose any reserve ratio, a rupee deposited in a bank does not reduce the money supply in the economy by one rupee. Is not the answer because if the central bank does not impose any reserve ratio, money supply in the economy will not be equivalent to high-powered money.
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
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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.
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20 04
Th e
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Pr es
a.
d.
Aggregate demand will increase as the increased money supply will lead to decrease in interest rates which will increase the investment demand and consumption demand.
e.
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
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.
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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
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s
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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
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322. (c) Since the economy is already under inflation, any increase in money supply has to be curtailed by the monetary authorities so as to control any further increase in prices. The increase in foreign exchange reserves leads to increase in monetary base and hence the money supply in the economy increases. A decrease in discount rate would result in increased borrowings by the commercial banks from the central bank. This will increase the money supply, hence not the correct option.
b.
When the government buys securities from the people, the money with the people will increase, the money supply will increase and prices also will rise. Hence not the correct option.
c.
The central bank by increasing the cash reserve ratio reduces the credit creation capacity of the banking system. This results in decrease in money supply which will compensate the increase in the money supply due to foreign exchange inflow. Hence this option is correct.
d.
Not a correct answer it is a fiscal instrument.
e.
Increasing government spending is also a fiscal policy instruments.
©
20 04
Th e
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a.
96
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
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31
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27
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R
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e.
97
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
e.
132.9.
04
132.25
B
d.
W
133.5
M AC
c.
o.
134.5
ef .N
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.
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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
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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.
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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.
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Th e
Ic
3.
4.
GNP Deflator 120 145
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.
GNP Deflator
2,500
100
2002-03
3,200
159.50
R -4 27 02 431 1:8 BN
s. Al
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.IS
8.
o.
2001-02
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%.
7.
M AC
Nominal GNP (Core)
ef .N
Year
W
Based on the following information answer the questions 7 to 9.
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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
Macroeconomics
Based on the following information answer the questions 11 to 13.
800
Subsidies
400
Factor income paid abroad
800
Factor income received from abroad
900
Undistributed profits
200
Indirect taxes
450
Depreciation
350
M AC
Corporate tax
04
1,000
20
Personal income tax
04
5,000
B
GNP at market price
04
Rs.
W
Particulars
e.
4,850.
ef .N
4,900
R
d.
-4
4,550
27
4,950
c.
02
b.
4-
4,750
31
a.
o.
11. GDP at Factor Cost is:
4,600
e.
4,950.
:8
d.
BN
4,850
.IS
c.
ed
4,450
se rv
b.
re
4,500
s
a.
1-
12. National Income is:
c.
2,600
d.
4,100
e.
4,000.
s. Al
3,900
Pr es
b.
ty
3,800
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a.
lr
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13. The Personal Disposable Income is:
20 04
Th e
Ic
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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:
100
a.
15,000
b.
10,000
e.
15,000
d.
12,500
e.
12,000.
Part-II
15. Dr.
Cr. (Rs.) in Crore 250 20 20 50 –20 320
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
250
e.
280.
20
d.
04
260
B
c.
W
290
M AC
b.
o.
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
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ht
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BN
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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
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Dr.
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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
Macroeconomics
18. GNP at market price is: a.
420
b.
410
c.
430
d.
390
e.
370.
19. The following information’s are provided.
Corporate Profit Tax
5
Depreciation
40
205.
ef .N
e.
R
225
-4
d.
27
230
02
c.
4-
210
31
b.
1-
195
:8
a.
o.
NDP at factor cost is:
04
20
20
Retained Profits
04
25
B
185
Factor Income paid to Foreign Residents
W
Factor Income paid to Domestic Residents
04
Rs. in crore
M AC
Factor Incomes
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:
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.
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Excise Tax
ty
Profit Tax
Pr es
Retained Profits
s. Al
Dividends paid abroad
ig
Dividends paid to residents
s
re
Wages
Cr.
a.
380
b.
430
c.
410
d.
480
e.
460.
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
e.
81,435.
B
81,491
W
d.
M AC
81,543
o.
c.
ef .N
81,698
R
81,481
b.
-4
a.
04
22. The real GNP for the year 2001 is:
1,12,682
d.
1,11,674
e.
1,11,492.
02 431 ed
c.
1-
1,11,561
:8
b.
BN
1,12,561
.IS
a.
27
23. The real GNP for the year 2003 is:
se rv
Based on the following information answer the questions 24 to 27.
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20 04
Th e
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Pr es
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s
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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
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
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Pr es
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ht
BN .IS ed se rv
s
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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.
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20 04
Th e
a.
29. NNP is:
104
a.
6,450
b.
6,750
c.
6,300
d.
6,335
e.
6,400.
Part-II
30. Personal Disposable Income is: a.
5,735
b.
5,285
c.
5,070
d.
5,175
e.
5,090.
570
d.
565
e.
550.
04
c.
20
590
04
b.
B
580
W
a.
04
31. Personal Savings is:
3,000
Depreciation
4,000
-4
Factor income received from abroad
27
4,000
02
Factor income paid abroad
4-
3,800
:8
1-
Indirect Taxes
R
800
31
Direct Taxes
o.
Rs. in crore
ef .N
Particulars
M AC
32. The following informations are given.
350
BN
Surplus
2,000
.IS
Subsidies
s
22,550.
ht
e.
ig
22,650
lr
d.
s. Al
22,800
Pr es
c.
ty
22,950
ve rs i
22,600
b.
re
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
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Particulars
Ic
NDP at market price
16,939
Net factor income from abroad
– 46
Depreciation
900
Subsidies
354
Th e 20 04 ©
Rs. in crore
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
Macroeconomics
1-
31
4-
02
27
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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
1,200
Pr es
ty
ve rs i
ni
Indirect Taxes
fa
iU
Depreciation
Ic
37. GNP at Market Price is: a.
6,300
b.
6,000
c.
6,450
d.
6,200
e.
6,600.
Th e 20 04
475
Factor Income Paid Abroad Undistributed Profit
©
900 1,500
Factor income received from abroad
38. National Income is:
106
6,000 1,200
s. Al
lr
Subsidies
Million of Currency Units
a.
5,725
b.
5,475
c.
5,600
d.
5,275
e.
5,550.
225 900 600
Part-II
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
e.
4,600.
-4 27 02
4,446
4-
4,544
d.
31
c.
1-
4,306
:8
b.
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
4,850
.IS
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
12,500.00 500.00
Undistributed corporate profits
250.00
Ic
Corporate Income Tax
Th e 20 04 ©
1,000.00
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
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
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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
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ve rs i
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Pr es
s. Al
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s
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se rv
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.IS
BN
:8
The Perfume Corporation paid Rs.4,500 to its workers to convert the roses into perfume. It sold Rs.6,750 (Cost for Perfume Corporation) to the Bottle Corporation for Rs.7,200. To achieve this level of sales, Perfume Corporation drew from its opening inventory. The Bottle Corporation paid Rs.750 as wages. It increased its inventories by Rs.2,259 (at cost to it) and sold the rest of perfume to households for Rs.7,875. All the corporations fully distributed their profits. 44. In the production account, the net investment in the stock would be: a. 475 b. 525 c. 575 d. 600 e. 610. 45. The value added GDP of the economy is: a. 7,650 b. 7,950 c. 8,400 d. 8,200 e. 8,550. Based on the following information answer the questions 46 to 48. From the national accounts for the year 2000-01 at current prices, we have the following information. (All figures in Rs. crore). NDP at market prices 84,686 Net factor income from abroad Depreciation
4,957
Subsidies
1,772
Indirect Taxes 108
233
10,689
Part-II
-4
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
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
1,20,600
e.
1,29,240.
04
d.
20
1,20,524
04
c.
B
1,28,524
W
b.
M AC
1,28,620
o.
a.
04
53. The value of GNP at Market Price is:
e.
1,20,580.
R
1,21,460
-4
d.
27
1,21,480
02
c.
4-
1,24,524
31
b.
1-
1,20,462
:8
a.
ef .N
54. The value of NNP at Market Price is:
e.
1,20,132.
.IS
1,20,160
ed
d.
se rv
1,20,145
re
c.
s
1,20,180
ht
b.
ig
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.
Pr es
b.
ty
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 Depreciation
8,062
Subsidies
2,822
Net Factor Income from abroad
+330
Indirect Taxes
16,745
Personal Income Taxes
10,000
Corporate Profit Taxes
6,539
Retained Profit
110
1,14,601
30,000
Part-II
57. The value of Personal Income is: a.
65,000
b.
75,000
c.
70,500
d.
70,000
e.
72,000.
1,06,445
d.
1,06,579
e.
1,06,750.
04
c.
20
1,06,550
04
b.
B
1,06,539
W
a.
04
58. The value of National Income is:
66,000
e.
62,000.
o.
d.
ef .N
60,000
R
c.
-4
58,000
27
b.
02
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
©
20 04
Th e
a.
Ic
fa
60. The value of Personal Income Taxes is: 4,800
b.
5,200
c.
5,050
d.
4,950
e.
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
Macroeconomics
Based on the following information answer the questions 62 to 65.
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20 04
04 20 04 M AC o. ef .N R -4
27 02 431 1:8 BN
Th e
Ic
fa
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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
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
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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
Macroeconomics
27
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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
©
20 04
Th e
Ic
73. NNP at Market Prices is: a.
2,350
b.
2,150
c.
2,200
d.
2,250
e.
2,400.
74. The value of Net Exports is:
114
a.
25
b.
32
c.
30
d.
20
e.
22.
Rs. 2,400 400 150 1,500 480 1,925 1,460 160 50 15 60 260 300
Part-II
75. The value of Net Indirect Taxes is: a.
235
b.
250
c.
225
d.
210
e.
230.
230
d.
228
e.
254.
04
c.
20
265
04
b.
B
245
W
a.
04
76. The value of Corporate Profits is:
480
e.
495.
o.
d.
ef .N
515
R
c.
-4
520
27
b.
02
485
4-
a.
M AC
77. The value of Taxes–Transfers is:
e.
2,040.
1-
2,100
:8
d.
BN
1,990
.IS
1,690
c.
ed
b.
se rv
1,820
re
a.
31
78. The value of Personal Income is:
1,720
d.
1,780
e.
1,650.
lr
c.
s. Al
1,690
Pr es
b.
ty
1,550
ni
ve rs i
a.
ig
ht
s
79. The value of Personal Disposable Income is:
b.
185
c.
205
d.
198
e.
203.
Th e 20 04 ©
190
Ic
a.
fa
iU
80. The value of the Personal Savings is:
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
Macroeconomics
re
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
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R
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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
©
20 04
Th e
Ic
85. The value of National Income in the economy is: a.
175
b.
180
c.
183
d.
178
e.
172.
86. The value added in Industry Y is: a. 65 b. 63 c. 68 d. 58 e. 60. 116
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
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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
Macroeconomics
Based on the following information answer the questions 92 to 98.
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Th e
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ve rs i
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Pr es
s. Al
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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
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
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fa
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ni
ve rs i
ty
Pr es
s. Al
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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
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
Part-II
108. The value of GNP at Market Price is: a.
688
b.
678
c.
685
d.
669
e.
681.
e.
631.
04
681
20
d.
04
696
B
674
c.
W
b.
04
109. The value of GDP at Market Price is: a. 685
452.
o.
e.
ef .N
467
R
d.
-4
438
27
c.
02
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
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.
8,12,750
d.
8,22,650
e.
8,21,500.
04
c.
20
8,24,600
04
b.
B
8,02,600
W
a.
04
115. The value of GNP at Factor Cost is:
6,23,600
e.
6,74,500.
o.
d.
ef .N
6,25,250
R
c.
-4
6,75,600
27
b.
02
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:
122
a.
1,268
b.
1,264
c.
1,328
d.
1,245
e.
1,458.
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
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
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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?
124
a.
122.
b.
104.
c.
15.
d.
142.
e.
130.
Part-II
128. Given the following information, what would be the national income of the economy? Particulars MUC Compensation to employees 2,325 Interest payments made by the firms 323 Rental Income received 43 Corporate Profits (before tax) 170 Proprietors’ Income 135 Dividends paid by the firms 72 Personal Taxes paid by the individuals 260
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
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
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.
d.
Rs.45 cr (deficit)
e.
Rs.55 cr (deficit).
04
Rs.35 cr (deficit)
20
c.
04
Rs.35 cr (surplus)
B
b.
W
Rs.45 cr (surplus)
M AC
a.
04
137. If the Factor Income received from abroad is Rs.200 cr., current account balance for the economy is
ef .N
o.
138. For an economy, GDP at market prices for the current year is 1500 MUC. If GDP deflator for the current year is 120, real GDP for the current year would be 7,500 MUC
b.
1,250 MUC
c.
300 MUC
d.
1,800 MUC
e.
1,100 MUC.
:8
1-
31
4-
02
27
-4
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.
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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
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
Social security contributions
253.0
Personal Taxes
402.1 64.4
Interest paid by government
105.1
Government and business transfers
374.5
Personal consumption expenditures
1,991.9
M AC o.
:8
BN
.IS se rv
2,455.3.
re
e.
s
2,456.4
ht
d.
ig
2,453.2
lr
c.
s. Al
2,455.8
Pr es
2,450.4
b.
ed
141. The value of National income is: a.
1-
Interest paid by consumers
ef .N
66.4
R
Corporate dividends
-4
120.3
27
Proprietor’s income
02
164.8
4-
Corporate profits
W
34.1
31
Rental income of persons
04
266.3
20
264.9
Indirect business taxes
04
Business interest payments
04
1,866.3
B
Compensation of employees
3073.9
b.
3072.5
c.
3074.7
3072.7
Ic
d.
fa
iU
ni
ve rs i
a.
ty
142. The value of GNP is:
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
Part-II
143. The value of National income is: a.
1,512
b.
1,622
c.
1,812
d.
1,775
1,580
d.
1,625
e.
1,645.
04
c.
20
1,645
04
b.
B
1,547
W
a.
04
e. 1,720. 144. The value of Personal disposable income is:
1,920.
o. ef .N R
27
02 431 1:8 BN ed
e.
se rv
1,790
re
d.
s
1,860
ht
c.
ig
1,882
lr
b.
s. Al
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)
GNP at factor cost
6,000 1,200 800 400 1,500 1,800 250 800 400
Ic
fa
iU
Corporate income tax Personal income tax Subsidies Factor incomes received from abroad Factor incomes paid abroad Undistributed profits Indirect taxes Depreciation
Th e 20 04 ©
Rs.
ni
ve rs i
ty
146. Compute National income from the following.
a.
5,250
b.
5,400
c.
5,600
d.
5,700
e.
5,500. 129
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
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
1,60,000.
4-
1,58,000
e.
31
d.
1-
1,76,000
:8
c.
BN
1,54,000
.IS
b.
ed
1,74,000
se rv
a.
02
151. Calculate National income.
84,450
e.
83,600.
s
d.
ht
84,700
ig
c.
lr
83,000
s. Al
b.
Pr es
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
Macroeconomics
154. From the following information, calculate National income. Particulars
1,845
e.
1,875.
04 04
d.
B
1,989
W
c.
M AC
1,895
o.
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
Subsidies
4-
BN
.IS ed
3,775.
se rv
e.
re
3,640
s
d.
ht
3,625
ig
c.
lr
3,745
s. Al
b.
1,200
Pr es
3,650
31
2,100
1-
Indirect taxes
:8
2,250
02
(–) 625
Depreciation
a.
27
-4
R
155. Calculate the difference between GDP at Market price and NNP at factor cost from the following information.
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:
132
a.
2,012.4
b.
2,156.8
c.
2,896.3
d.
2,225.5
e.
2,139.6.
04 20 04 B W M AC o. ef .N R -4 27 02 431 1:8 BN
se rv
ed
.IS
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
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
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
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.
s. Al
1,450
c.
Pr es
b.
ty
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:
136
a.
1,000
b.
1,500
c.
1,250
d.
1,100
e.
1,050.
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.
37.75
c.
38.90
d.
38.28
e.
37.50.
04
b.
20
39.50
04
a.
04
The disposable income increased from 200 to 250. The increase in disposable income on the steady state level of consumption is:
B
178. Consumption function is given as follows:
M AC
W
= 12.25 + 0.611 Ydt + 0.276 Ct–1
Ct
83.65.
R
e.
-4
84.45
27
d.
02
85.28
4-
c.
31
84.39
1-
b.
:8
83.58
BN
a.
ef .N
o.
Where Ct and Ct – 1 denote consumption in periods t and t – 1 respectively and Ydt is the disposable income in the period t. If Ydt increases from 500 to 600 and remains there indefinitely, The change in the steady state level of consumption would be:
.IS
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
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
Exports (exogenous)
20.00
Propensity to import
0.05
d.
2,472
e.
2,435.
B
2,457
W
c.
M AC
2,466
o.
b.
ef .N
2,442
R
a.
04
45.00
04
Transfer income (Exogenous)
04
150.00
20
Government expenditure (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
185.
se rv
e.
re
181
s
d.
ht
176
ig
174
lr
b. c.
s. Al
172
Pr es
a.
ed
If Ydt increases from 700 to 900, The change in steady state level of consumption is:
ty
Based on the following information answer the questions 183 and 184 C
= C0 +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
138
= 30 I
= 100
β
= 0.8
E
= 120
M0
= 110
μ
= 0.1
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
Exports
E
= E
Import
M
where,
C0 β
= M = 140 = 0.8
R
=Y–T = I
-4
Disposable income Yd Investment I Government Expenditure G
ef .N
= C0 + βY d
27
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
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
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.
Where,
β
= 0.8
T μ E
= 0.2 = 0.1 = 120
G
= 120
M AC
=I
o.
Investment
ef .N
=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
W
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
©
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
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
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
Macroeconomics
205. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC, private savings for the year is a.
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC.
d.
500 MUC
e.
600 MUC.
04
400 MUC
B
c.
W
300 MUC
M AC
b.
o.
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
e.
6.
02
5
4-
d.
31
4
1-
c.
:8
3
BN
b.
.IS
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
b.
Rs.525.
c.
Rs.625.
d.
Rs.425.
e.
Rs.325.
Th e 20 04 ©
Rs.125.
Ic
a.
iU
ni
209. The break-even income of Mr. Ravi is Rs.5,000 and his Marginal Propensity to Consume is 3/4. If his current income is Rs.2,500, how much would Mr. Ravi borrow?
210. In a two sector economy the savings function is S = –60 + 0.25 Yd. If the investment in the economy is 100 Million Units of Currency (MUC), equilibrium income will be
144
a.
620 MUC
b.
640 MUC
c.
660 MUC
d.
650 MUC
e.
630 MUC.
Part-II
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
e.
1.
o.
2
ef .N
d.
R
3
-4
c.
27
5
02
b.
1-
212. The following are the data related to an economy.
4-
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
c.
375
d.
325
e.
310.
Pr es
360
ty
b.
ve rs i
340
fa
iU
ni
a.
s. Al
lr
ig
ht
If the expenditure increased by 100 and government expenditure increased by 80, the increase in GNP would be:
Th e
Ic
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
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
-4
R
ef .N
o.
M AC
W
B
04
20
04
04
=
M (Imports)
2.33
b.
2.35
c.
2.45
d.
2.28
e.
2.50.
:8
1-
31
4-
02
27
a.
BN
Y
d
ed
.IS
215. Saving function= –80 + 0.20Y
se rv
Import function = 0.10Y
d.
831.2.
e.
833.7.
ig
833.9.
lr
c.
s. Al
832.5.
Pr es
b.
ty
831.5.
ve rs i
a.
ht
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
= T0 + tY
Government expenditure
= G
Import function
= M + μY
Export function Investment
= E = I = 0.8
Where,
146
T
= C0 + βYd = Y–T
β t
= 0.2
μ
= 0.1
E
= 120
G
= 120
Part-II
If the government expenditure and investment increased by 40 and 50 respectively, what would be the increase in income? a. 195.6. b. 197.8. c. 194.4. d. 195.8. e. 194.7. 217. The following relationships are given in an economy
04
20
04
04
C = 50 + 0.9Yd Yd = Y – T T = 10 + 0.2Y Y=C+I+G
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
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
148
b.
1,320
c.
1,245
d.
1,275
e.
1,350.
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
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
2.3
c.
3.4
d.
ty
b.
ve rs i
2.5
iU
ni
a.
fa
The exports economy increase by 30. Compute the foreign trade multiplier.
Th e
Ic
4.2
20 04
e.
4.0.
©
232.
150
Autonomous Consumption
460
Marginal Propensity to Save
0.3
Autonomous investment
18
Induced investment Coefficient
0.1
Government Expenditure (Exogenous)
162
Transfer income (Exogenous)
48
Exports (Exogenous)
25
Propensity to Import
0.05
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
d.
472
e.
485.
W
467
M AC
c.
o.
448
ef .N
b.
R
435
-4
a.
B
04
20
Where Y is output for the economy and i is rate of interest which is 10 percent at present. Find the equilibrium level of output for the economy.
02
27
234. Marginal Propensity to Import (MPI)= 0.12
31
4-
Marginal Propensity to save (MPS)= 0.30
e.
42.15.
:8
43.75
BN
d.
.IS
42.84
ed
c.
se rv
41.43
re
b.
s
43.55
ht
a.
1-
If an autonomous investment increased by 150 calculate the change in level of Imports.
c.
2.5
d.
3.2
e.
2.2.
Pr es
2.8
ty
b.
ve rs i
3.1
Ic
fa
iU
ni
a.
s. Al
lr
ig
235. In an economy the break even level income is 1,200 and the equilibrium level of income is 4,800. If the savings in equilibrium is 1,400, calculate the multiplier in the economy.
©
20 04
Th e
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
Macroeconomics
237. The planned consumption (C) = 50 + 0.80Yd Investment
(I) = 80 Yd = Y, since there is no government sector.
625
b.
618
c.
650
d.
647
e.
635.
04
a.
04
The equilibrium level of income is:
04
20
238. The following are the economic information for the year 2002.
0.35
Potential GNP of the Economy
2,700
W o.
Marginal propensity to save (MPS)
ef .N
195
R
Imports (M)
-4
210
27
Exports (E)
02
600
4-
Government expenditure (G)
31
450
1-
Investment (I)
M AC
1,200
:8
Consumption (C)
B
(Rs. in crore)
18.7%
e.
18.2%.
se rv
d.
re
16.2%
s
c.
ht
17.5%
ig
b.
lr
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)
152
Due to an exogenous boost to the economy, exports increase by 20. The value of the foreign trade multiplier would be: a.
4.75
b.
4.35
c.
5.21
d.
3.89
e.
3.57.
Part-II
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 27 02 431 1-
:8 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%.
BN
= 150 – 80i = 300 = 0.3Y = 120 – 160i
.IS
I Ms Mt Ma
ed
= 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
Macroeconomics
= 0.22Y = 10 – 11i = 320 = 0.1Y = 118
Exports ( E ) Nominal GNP in 1991-92 The GNP deflator for the year 2002-03 is:
04
Transaction demand for money (Mt) Speculative demand for money (Ma) Money Supply (Ms) Import function (M)
20
= 600
04
Government expenditure ( G )
04
243. The following are the economic indicators for the year 2002-03. Savings function (S) = –70 + 0.20Yd Disposable income (Yd) =Y–T Tax function (T) = 0.25Y Investment demand function (I) = 300 – 10i
M AC
W
B
= 3,472
164.3
e.
164.7.
ef .N R
166.5
d.
-4
c.
27
167.5
02
b.
4-
163.3
31
a.
o.
(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.
Part-II
246. = – 40 + 0.2Yd =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
04
20
04
04
Disposable income (Yd)
W
B
(S)
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.
R
b.
-4
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
Savings function
BN
247. The following are the equations for LM and SM curves.
.IS
800 = 0.4Y + 8i
se rv
ed
600 = 0.4Y – 10i
e.
215.
s
208
ht
d.
ig
206
lr
c.
s. Al
216
Pr es
b.
ty
210
ve rs i
a.
re
If the exogenous investment increased by 150. The change in equilibrium will be:
ni
Based on the following information answer the questions 248 and 249.
fa
iU
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
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
28.
e.
24.
31
d.
1-
26.
:8
c.
BN
22.
.IS
b.
ed
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
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
: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
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
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%.
W
b.
M AC
7.5%
-4
R
ef .N
o.
a.
B
265. The value of the interest rate:
e.
2,100.
02
2,265
4-
d.
31
2,230
1-
c.
:8
2,225
BN
b.
.IS
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
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
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.
162
Savings function (S) Disposable income (Yd) Tax function (T) Private investment function (I)
–720 + 0.3Yd Y–T+R 0.2Y 20 + 0.10Y 200
Exogenous Govt. expenditure (G)
= = = = =
Transfer payments
(R)
= 50
Exports
(E)
= 25
Import function
(X)
= 0.05Y
Part-II
⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠
= 0.25Y
⎛ Ma ⎞ Speculative demand for money ⎜ ⎟ ⎝ P ⎠
= 250 – 10r
⎛ Ms ⎞ ⎜ ⎟ ⎝ P ⎠
e.
262.82.
04 20 04 B W M AC o. ef .N
02 4-
236.92
31
d.
1-
263.44
:8
c.
BN
262.35
.IS
b.
ed
262.85
se rv
a.
27
e. –104.591. 278. The budget surplus at equilibrium level of income is:
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
Ic
fa
iU
Import function
Th e 20 04 ©
= = =
Supply of Money
⎛ Ms ⎞ ⎜ ⎟ ⎝ P ⎠
279. The economic relationships is: a. 9575 b. 9573 c. 9586 d. 9623 e. 9873. 163
: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
Part-II
285. The value of equilibrium level of income when the exogenous govt. expenditure increases by 50 is: a. 1,528 b. 1,576 c. 1,448 d. 1,450 e. 1,520. = =
–60 + 0.25Yd 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
(S) (Yd)
20
Savings function Disposable income
04
Based on the following information answer the questions 286 to 289.
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
Macroeconomics
289. If the government expenditure increases by 125, The equilibrium income would be: a. 4462 b. 4469 c. 4460 d. 4486 e. 4468. (S) (Yd)
= –25 + 0.25Yd =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 B W M AC o. ef .N
= 0.25Y
⎛ Ma ⎞ Speculative demand for money ⎜ ⎟ ⎝ P ⎠
= 125 – 504i
⎛ Ms ⎞ ⎜⎜ ⎟⎟ ⎝ P ⎠
.IS
BN
= 250
:8
1-
31
4-
02
27
-4
R
⎛ Mt ⎞ Transaction demand for money ⎜ ⎟ ⎝ P ⎠
Money supply
20
04
Savings function Disposable income
04
Based on the following information answer the questions 290 and 292.
2200
e.
2275.
re
d.
s
2125
ht
c.
ig
2250
lr
b.
s. Al
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.
d.
5.0
e.
4.8.
Th e 20 04 ©
ve rs i
ty
291. The value of the Trade Balance at equilibrium in the economy is:
292. The value of the budget deficit at the equilibrium in the economy is:
166
a.
22
b.
26
c.
28
d.
21
e.
20.
Part-II
293. –25 + 0.25Yd
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
04 20 W M AC o. ef .N R -4
31
2800
1-
d.
:8
2700
BN
c.
.IS
2735
ed
b.
se rv
2750
4-
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.
lr s. Al
Pr es
Disposable income
ve rs i
ty
Transfer payments Tax function
(S)
=
–60 + 0.2Yd
d
(Y )
=
Y–T+R
(R)
=
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
Macroeconomics
294. The value of equilibrium income in the economy is: a.
2500
b.
2450
c.
2630
d.
2655
e.
2525.
d.
–16
e.
–20.
04
–22
20
c.
04
–18
B
b.
W
–25
M AC
a.
04
295. The value of the Trade balance at equilibrium is:
e.
–220.
ef .N
–200
R
d.
-4
–230
27
c.
02
–226
4-
b.
31
–289
1-
a.
o.
296. The value of Budget surplus at equilibrium is:
2875
.IS
d.
ed
2850
se rv
c.
re
2900
s
b.
ht
2950
ig
a.
BN
:8
297. If the exogenous government expenditure is increases by 182, the value of the equilibrium income in the economy will be:
Pr es
s. Al
lr
e. 2975. Based on the following information answer the questions 298 to 301. = = = =
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 ⎠
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.
e.
–160.
ef .N
–178
R
d.
-4
–145
27
c.
02
–163
4-
b.
31
–158
1-
a.
o.
300. The value budget deficit at the equilibrium in the economy is:
d.
21
ed
27
se rv
c.
re
29
s
b.
ht
24
ig
a.
.IS
BN
:8
301. If the exogenous government expenditure increases by 225, The change in private investment will be:
Pr es
s. Al
lr
e. 23. Based on the following information answer the questions 302 and 303. (S) (T)
= =
–502 + 0.20Yd 0.25Y
Transfer payments
(R)
=
60
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
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:
fa Ic
Y = M+
c.
Y=
M + hi k
d.
Y=
M − hi k
e.
Y=
hi − M . k
Th e 20 04
hi k
b.
© 170
M + hi k
ni
Y=
iU
a.
Part-II
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.
500 MUC.
e.
225 MUC.
o.
d.
ef .N
190 MUC.
R
c.
-4
375 MUC.
27
b.
02
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 = 4% and Y = 580.
BN
e.
.IS
i = 10% and Y = 700.
ed
d.
se rv
i = 7% and Y = 640.
re
c.
s
i = 5% and Y = 600.
ht
b.
ig
i = 3% and Y = 560.
lr
a.
:8
1-
31
308. The LM function is Y = 500 + 20i. Which of the following combinations of interest and income does not represent equilibrium in the money market?
s. Al
309.
Pr es
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
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
172
Y = 500 + 200i
Investment function
(I)
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
(i)
10%
Part-II
314. If expansionary fiscal policies increase the equilibrium rate of interest to 12%, the crowding out in the economy is: a.
10 MUC
b.
15 MUC
c.
20 MUC
d.
25 MUC
e.
30 MUC.
d.
700 MUC.
e.
750 MUC.
04
650 MUC.
20
c.
04
600 MUC.
B
b.
W
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
Macroeconomics
= 120 + 0.6Y = 150 – 80i = 300 = 0.3Y = 120 – 160i
a.
655
02 431 1:8 BN
Ic
fa
iU
ni
ve rs i
ty
Pr es
C I Ms Mt Ma b.
648
c.
662
d.
671
e.
640.
Th e 20 04 ©
s. Al
lr
ig
ht
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?
174
a.
1,253.
b.
1,132.
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
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
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
Macroeconomics
334. Particulars
2001
2002
Finance ratio
0.31
0.29
Financial interrelation ratio
0.78
0.80
Intermediation ratio
1.24
1.18
d.
–382
e.
–431.
04
–445
20
c.
04
–341
B
b.
W
–275
M AC
a.
04
Find out the change in indirect tax when NNP at Market price are Rs.75,000 and Rs.85,000 respectively and there are no subsidies. The primary issue in 1981 and 1982 are Rs.10,000 and Rs.11,000, respectively.
Financial interrelation ratio
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
ef .N
28.5%
R
25.69%
-4
Finance ratio
27
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:
178
a.
20,567
b.
20,547
c.
20,588
d.
20,675
e.
20,450.
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
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
d.
1,700
e.
1,400.
04
1,800
20
c.
04
1,750
B
b.
W
1,650
M AC
a.
04
The value of M3 is:
R -4 27 02 431 1:8
.IS
BN
Rs. in Crores 800 40 20 140 400 20 1,400 600
ed
Particulars Net worth Other assets Other non-monetary liabilities Government deposits Credit to commercial sector Foreign exchange assets Credit to government Credit to banks
ef .N
o.
343.
96.75.
s
95.25
e.
ht
d.
ig
90.10
lr
c.
s. Al
94.50
Pr es
b.
ty
99.76
ve rs i
a.
re
se rv
The currency deposit ratio in the economy is 0.3 and reserve ratio is 5%, that should be the amount of government money the economy to have a money supply of 5,942 is:
ni
Based on the following information answer the questions 344 and 345.
©
20 04
Th e
Ic
fa
iU
Particulars 2001 NNP at market prices 89,405.30 Indirect taxes 9,782.00 Subsidies 4,313.02 Direct taxes 1,202.11 Secondary issues 9,031.12 Issues of financial institutions Primary issues of non-financial sector Domestic sector 4,051.11 GDR 6,021.01 ADR 452.04 Net capital formation 16,420.01 (Net physical assets)
180
2002 93,102.01 10,201.00 5,203.01 1,301.32 11,021.01
5,035.92 5,016.00 562.04 17,421.03
Part-II
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.
14,000.
1-
e.
:8
22,000
BN
d.
.IS
18,000
ed
c.
se rv
16,000
re
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
Macroeconomics
349. Compute net capital formation. a.
16,000
b.
12,500
c.
19,000
d.
11,000
e.
15,000.
12,750
d.
14,200
e.
15,500.
04
c.
20
13,450
04
b.
B
11,500
W
a.
04
350. Calculate the new issues.
11,220
e.
12,250.
o.
d.
ef .N
11,280
R
c.
-4
12,750
27
b.
02
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
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
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.
-4
: 1.60
27
Financial interrelations ratio
02
: 0.65
4-
Intermediation ratio
31
: 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.
15,400.75.
.IS
e.
ed
15,350.75
se rv
d.
re
15,468.75
s
c.
ht
15,725.75
ig
b.
lr
15,565.75
s. Al
a.
BN
:8
The value of net capital formation for the year 2000 if the new issues for the year is 15,000 (Million units of currency) is:
b.
1,600
c.
1,450
d.
1,750
ni
iU
fa
Ic
Th e
e.
ty
1,500
ve rs i
a.
Pr es
360. On a given day the stock of high-powered money is 1,000. The currency-deposit ratio is 0.8 while the reserve ratio is 0.2. The money supply is:
1,800.
©
20 04
361. If the currency deposit ratio is 1.2 and the reserve ratio 0.10, the value of the money multiplier is:
184
a.
1.63
b.
1.69
c.
1.72
d.
1.75
e.
1.65.
Part-II
362. The following balances have been taken from the Balance Sheet of the Central Bank of an economy.
04 04
20
Credit to government Credit to bank Government deposits Other non-monetary liabilities Net worth Credit to commercial sector Foreign exchange assets Other assets
04
Million units of currency 500 200 10 5 250 50 7
4-
02
27
-4
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
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
20 500
Credit to commercial sector
125 25
Other assets
65
04
Foreign exchange assets
04
Net worth
04
5
20
Other non-monetary liabilities
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.
e.
390.
se rv
320
re
d.
s
378
ht
c.
ig
360
lr
b.
s. Al
345
Pr es
a.
ed
.IS
BN
:8
366. If there is an increase of 100 million Central Bank credit to Government accompanied by Government purchase of foreign exchange worth 10 million from the Central Bank, the increase in money supply in the economy is:
iU
ni
ve rs i
ty
367. At a point of time, in an economy, high-powered money stock is 800 and narrow money stock (M1) is 4,000. Currency deposit ratio is 0.2. If the Central Bank purchases government securities worth 200 but does not want the money supply to change, the reserve ratio should be increased by: 0.2
0.08
©
20 04
Th e
Ic
b.
fa
a. c.
0.3
d.
0.1
e.
0.5.
368. Assume that the ability of the commercial banking system to create demand deposits depends only upon reserve requirement stipulated by the Central Bank. The following details are available as on a date: Million units of currency
186
Reserves with the Central Bank
2,400
Volume of demand deposits
9,600
Reserve requirement
25%
Part-II
If the volume of reserves is decreased by 500 and the reserve requirement is lowered to 20%, the demand deposits is: a.
100
b.
120
c.
160
d.
125
e.
130.
369.
04
7,862.50
12,500.00
a. Domestic sectors
8,525.00
13,850.00
b. Rest of the world
725.00
1,775.00
B
04
Secondary Issues: Issues of financial institutions
2002
04
2001
20
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
Macroeconomics
Based on the following information answer the questions 371 and 372 Particulars
Million units of currency
Deposits of banks with Central Bank
400
Credit to commercial sector
300
Currency issued by Central Bank
800
Net worth
400
Foreign exchange assets
250
Other assets
500
04
350
20
Other non-monetary liabilities
04
300
B
Government deposits
M AC
420
04
1,080
Credit to banks
W
Credit to government
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
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.
1,01,280
e.
1,06,570.
04
d.
20
1,05,750
04
c.
B
1,03,180
W
b.
M AC
1,05,000
o.
a.
04
375. The value of net capital formation for the year is:
ef .N
Based on the following information answer the questions 376 and 375.
-4
R
The following are the indicators of financial development for an economy for the year 2001.
Intermediation ratio
0.76
02
1.60
4-
Financial interrelations ratio
31
0.33
BN
:8
1-
Finance ratio
27
2001
1,98,240
e.
10,57,280.
re
10,58,980
s
d.
ht
10,57,290
ig
c.
lr
10,56,280
s. Al
b.
Pr es
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
Macroeconomics
379. Particulars
Million units of currency
Credit to government
3,500
Government deposits
100 1,500
Deposit of banks (Reserves)
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
Credit to banks
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.
10.67%.
02
e.
4-
11.56%
31
d.
1-
12.80%
:8
c.
BN
11.26%
.IS
b.
ed
10.50%
se rv
a.
27
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
©
20 04
Th e
Ic
Credit to commercial sector 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:
190
a.
5058.5
b.
5059.2
c.
5120.2
d.
5109.2
e.
5029.5.
Part-II
381. If the Central Bank wants to reduce the money supply by 20%, the new reserve ratio would be: a.
12.50%
b.
11.75%
c.
12.80%
d.
11.25%
e.
12.20%.
382.
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
d.
14,450
ef .N
16,750
R
c.
-4
14,550
27
b.
02
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
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.
327.6
c.
377.6
d.
358.5
e.
325.8.
04
b.
20
337.8
04
a.
04
385. The value of the expected stock of money is:
10.88%.
W
e.
M AC
12.75%
o.
d.
ef .N
10.25%
R
c.
-4
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
d.
27,720
e.
26,980.
Th e 20 04 ©
28,480
Ic
c.
ni
a.
388. The Central Bank provides an additional credit of 250 million units of currency to the government through adhoc purchase of treasury bills, out of which the government immediately used 50 millions for purchase of foreign exchange from the Central Bank. The increase in money supply in the economy would be:
192
a.
580
b.
620
c.
560
d.
610
e.
635.
Part-II
389. The following monetary data on financial development of an economy has been obtained for the year 1998. New issues ratio
0.74
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
Small coins
991
4-
4,986
31
Cash in hand
-4
1,942
27
Rupee coins
R
1,44,818
02
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
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.
8,15,000
e.
8,35,000.
ef .N
d.
R
7,00,000
-4
c.
27
7,75,000
02
b.
4-
7,25,000
31
a.
o.
392. The value of the Total Issue is:
e.
11,50,000.
:8
15,00,000
BN
d.
.IS
12,50,000
ed
c.
se rv
12,00,000
re
10,00,000
b.
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:
194
a.
11.76
b.
12.28
c.
10.87
d.
10.67
e.
11.25.
Part-II
395. There is an increase in Central Bank credit to Government by 550 million units of currency. But the Central Bank desires to contain the money supply at the original level and for this purpose it alters the reserve ratio. The new reserve ratio is: a.
21.5
b.
22.9
c.
20.5
d.
23.8
e.
21.7.
M AC
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.
-4
15,000.
27
e.
02
16,000
4-
d.
31
14,000
1-
c.
:8
12,000
e.
12,500.
se rv
11,500
re
d.
s
12,750
ht
c.
ig
13,250
lr
b.
s. Al
11,250
Pr es
a.
ed
397. The value of the Secondary Issues is:
BN
b.
.IS
13,500
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
©
20 04
Th e
Ic
fa
Primary Issues: Issues of Non-Financial Sectors 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
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
Part-II
402. The value of Finance Ratio is: a.
0.178
b.
0.125
c.
0.195
d.
0.182
e.
0.165.
d.
0.407
e.
0.412.
04
0.432
20
c.
04
0.425
B
b.
404. From the following financial data, calculate financial interrelations Ratio.
e.
0.915.
o. ef .N R -4 27 02 31
0.909
1-
d.
:8
0.992
BN
0.986
c.
.IS
b.
ed
0.998
se rv
a.
2002-03 69,000 50,000 1,20,000 8,00,000
4-
Particulars Secondary Issues Primary Issues Net Capital formation National Income
W
0.417
M AC
a.
04
403. The value of New Issues Ratio is:
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
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.
d.
39,000
e.
41,000.
BN .IS ed
36,000
se rv
c.
re
38,250
s
b.
ht
37,500
ig
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
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.
Fixed capital formation
225
Increase in inventories
50
ef .N -4
750
31
4-
02
Private final consumption expenditure
R
MUC
27
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
6
e.
7.
s
d.
ht
5
ig
c.
lr
3
s. Al
b.
Pr es
4
ty
a.
re
The velocity of money in the economy is
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
76,500
Depreciation
2,500
Indirect taxes
1,225
Th e 20 04 ©
MUC
Subsidies
725
Net factor income from abroad
200
Net capital formation Finance interrelation ratio a.
28.6%
b.
31.6%
c.
34.6%
d.
26.6%
e.
36.6%.
15,500 1.5
199
Macroeconomics
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
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
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
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%
d.
0.8.
e.
0.1.
04
0.2.
20
c.
04
0.4.
B
b.
W
0.5.
M AC
a.
04
If the volume of reserves is decreased by Rs.1200 and volume of demand deposits increased by Rs.2,000, what will be the new reserve ratio?
Finance Ratio: Intermediation Ratio: Financial Interrelations Ratio:
ef .N
o.
424. The following indicators of financial development for an economy are available for the year 19x0.
02
27
-4
R
0.35 0.68 1.75
e.
17,320.
:8
15,750
BN
d.
.IS
16,750
ed
c.
se rv
17,280
re
b.
s
15,450
ht
a.
1-
31
4-
Calculate Net Capital Formation for the year 19x0, if the New Issues for the year is 18,000 (Million units of currency).
s. Al
lr
ig
425. The following are the figures from the balance sheet of Central Bank
Pr es
Particulars
ve rs i
ty
Credit to government
ni
Credit to banks
fa
iU
Government deposits
©
20 04
Th e
Ic
Other non-monetary liabilities
Million units of currency 2,500 500 25 18
Net worth
522
Credit to commercial sector
160
Other assets
75
Foreign exchange 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.
202
a.
12,660
b.
12,458
c.
12,980
d.
12,725
Part-II
e.
12,888.
426. Particulars
Rs. in Crore
Share capital
740
Reserve funds
75 1,010
Credit to government
890
Deposits of Banks
235
Credit to banks
460
130
20
Government money
04
70
B
Government deposits
W
44
M AC
76
Other assets
ef .N
Other non-monetary liabilities
04
55
o.
Foreign exchange assets
04
Credit to state government
5,425
e.
5,550.
27
d.
02
5,320
4-
c.
31
5,645
1-
b.
:8
5,291
BN
a.
-4
R
In the economy currency deposit ratio is 0.3 and reserve ratio 0.10 is imposed by Central Bank.
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
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
Part-II
433. Particulars
1985
Finance ratio
0.26
Intermediation ratio
0.78
Finance interrelation ratio
1.50
d.
0.935
e.
0.843.
04
0.922
20
c.
04
0.826
B
b.
W
0.985
M AC
a.
24,000
04
New Issues (Million Units of currency) Calculate the new issue ratio.
434. The following are the data pertaining to the various components of money supply.
ef .N
o.
Rs. in crores
Cash in hand
4,986
27
BN
:8
Deposit money of the public:
02
991
4-
1,942
Small coins
31
Rupee coins
-4
1,44,818
1-
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
7,41,228
d.
7,41,145
fa
iU
ni
c.
Ic
7,41,160.
Th e
e.
ty
7,41,540
ve rs i
a.
Pr es
Calculate measure of money stock M3.
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
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
– 2,018
e.
– 2,125.
B
d.
W
– 2,257
M AC
c.
o.
– 2,125
ef .N
b.
R
– 2,030
-4
a.
04
435. The value of the Trade Balance is:
5,645.
02
e.
4-
5,906
31
d.
1-
5,725
:8
c.
BN
5,546
.IS
b.
ed
5,865
se rv
a.
27
436. The overall Balance of Payments is:
ht
s
Particulars
re
437. 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
450 1,050
Direct investment abroad
900
h.
Short-term loans and investment abroad
100
i.
Foreign Direct Investments
850
Ic
fa
122
Th e 20 04 ©
1,000
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
a.
g.
The value of current account Balance is:
206
Rs. in Crores
a.
+350
b.
–345
c.
+347
d.
–341
e.
+352.
Part-II
04 20 04 B W M AC
o.
ef .N
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
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
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
d.
Rs.1,19,292 cr
31
Rs.1,12,292 cr
:8
c.
BN
Rs.1,12,392 cr
.IS
b.
ed
Rs.1,13,292 cr
se rv
a.
1-
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
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
1,05,947
d.
1,05,942
e.
1,05,928.
04
c.
20
1,05,933
04
b.
B
1,05,995
W
a.
04
e. 1,61,994. 448. The value of Capital Receipts is:
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.
©
20 04
Th e
a.
Ic
fa
450. The Primary Fiscal Deficit is: 10,280
b.
10,265
c.
10,009
d.
10,555
e.
10,256.
451. The value of Revenue Deficit is:
210
a.
77,425
b.
77,275
c.
76,780
d.
76,220
e.
78,650.
52,330 35,770
Part-II
Based on the following information answer the questions 452 and 453. (Rs. in Crore) Direct Taxes
40,000 10,000
Interest Receipts
12,000
Borrowings and other Liabilities
22,000
Profit from Public Sector Undertakings
17,000
Profit from Railways
13,000
30,000
ef .N R -4 27 02 431 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.
B
Defense Expenditure
W
47,000
o.
Interest Payments
04
1,32,000
M AC
Subsidies
04
Recovery of Loans
04
1,20,000
20
Indirect Taxes
Tax Revenue
Pr es
s. Al
lr
454. The value of Deficit Fiscal from the following data extracted from Union Budget, 1999-2000. 1,32,365 50,475 2,36,987 46,895
©
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
Non-tax Revenue Total Revenue Expenditure Total Capital Expenditure Non-plan Revenue Expenditure (excl. interest Payments) Interest Payments Loans Recovered Other Capital Receipts
(Rs. in crore)
a.
78,985
b.
77,998
c.
79,595
d.
79,955
e.
79,050.
1,02,331 88,000 11,087 10,000
211
Macroeconomics
Based on the following information answer the questions 455 and 456. The following information is extracted from the union budget for the year 2002-03. (Rs. in crore)
1,22,475.
04 04
20
04
B
ed se rv re
79,280.
s
e.
ht
78,750
ig
d.
lr
77,275
s. Al
77,425
c.
.IS
78,435
b.
W
BN
456. The value of Revenue deficit is: a.
M AC
R
e.
-4
1,11,275
27
d.
02
1,21,275
4-
c.
31
1,25,750
1-
b.
:8
1,12,575
2,28,768 21,619 52,330 35,770
ef .N
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
2.0%.
b.
3.0%.
fa
iU
ni
a.
Ic
4.0% .
d.
3.5% .
e.
4.5%.
20 04
Th e
c.
©
ve rs i
ty
457. For an economy, the growth rate of population is likely to be 2% per annum. Given that capital output ratio is 5 and possible level of investment is 25 percent of GDP, what is the possible per capita real GDP growth rate?
458. The Planning Commission is targeting a growth rate of 6% p.a. in per capita income for the next 10 years. To achieve the target, the required domestic savings to income ratio is 32%. If the population is expected to grow at the rate of 2% p.a., capital output ratio for the economy is
212
a.
3.0
b.
4.5
c.
5.0
d.
4.0
e.
5.5.
Part-II
Based on the following information answer the questions 459 and 460. Targeted growth rate in real GDP =
7.0%
Incremental capital output ratio
4
=
Gross domestic savings as a proportion of the GDP for the year is expected to be 24%. 4%
b.
6%
c.
3.5%
d.
4.25%
e.
5%.
20
04
a.
04
459. The required external financing to achieve the targeted growth rate in GDP is:
4.9%
d.
4.8%
e.
5%.
W
c.
M AC
4.3%
o.
b.
ef .N
4.5%
©
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
R
a.
B
04
460. The per capita GDP, if population is expected to increase by 2% during the same period is:
213
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
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
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
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
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
250.00
Total (GNP)
04
Undistributed Profits
20
750.00
04
Dividends
B
500.00
W
Corporate Taxes
04
1,250.00
M AC
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 ----
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 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 NDP 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
= GNP at Market Price – Depreciation
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
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
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
pit qi0
90 80 5 75 30 280
150 120 6.5 125 40 441.5 5 ∑ p t q0 i=1 i i
4-
02
( )
31
Price (Rs.) 5/kg 6/ltr 6.5/doz 25/mtr 0.4/unit 5 ∑ p0q0 i =1 i i
1-
:8
BN
.IS
Kg. Ltr. Doz Meters units
( )
s. Al
lr
ig
ht
s
re
Rice Milk Eggs Cloth Electricity
( )
ed
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
P0t =
∑ 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
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
= 5,700
NNP at Factor Cost = 5,700 – 800 + 400
= 5,300
ef .N R -4
= 5,300 – 250 – 1,200
27
Personal Income
M AC
NNP at Market Price = 6,100 – 400
o.
= 6,100.
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
W
= 6,000 + (1,500 – 1,800) = 6,000 – 300 = 5,700. GNP at Market Price = 5,700 + 800 – 400
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.
lr
ig
71. (d) Real GNP for the year 1990:
s. Al
= 23,200 × (100/49.70) 46,680 Crore
Pr es
Real GNP for the year 2003
ve rs i
ty
= 1,30,000 × (100/105.90) 1,22,757 Crore
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
©
20 04
Th e
Ic
= 71,000 + 2,000
= NNP at Market Price + Depreciation = 73,000.
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
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
=
1,990 – 300 = 1,690
=
1,690 – 1,500 = 190.
s
lr
ig
ht
Personal Savings
(1,925 – 245) + 260 + 50 = 1,990
re
Personal Disposable Income
=
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
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
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
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.
NNP at MP + Depreciation 1,70,992 + 11,888 = 1,82,880
04
= =
20
GNP at MP
04
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)
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.
= 447 + 60 + 40 + 52 + 32
=
631
GNP at FC
= 631 + (– 15) =
616
GNP at MP
= 616 + 65 – 0 =
681.
109. (c) GDP at MP = GDP at Factor Cost +Indirect Taxes – Subsidies. GDP at FC
GDP at MP 226
=
Wages and Salaries from Business + Dividends + Wages and Salaries from Govt. Sector + Profit Tax + Retained Profit.
=
447 + 60 + 40 + 52 + 32 = 631
=
631 + 65 – 0 =
696
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
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
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
=
360
40 × 5
=
200
50 × 4.50
=
225
04 04 20 04 B W ef .N
60 × 6
R
520
-4
=
27
65 × 8
02
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
Macroeconomics
t → tax μ → marginal propensity to import
1 1 1 = = = 2. 1 − 0.75 + ( 0.75 × 0.20 ) + 0.10 1 − 0.75 + 0.15 + 0.10 0.5
134. (e) Personal Income = =
GNP at market price – Depreciation – Indirect taxes + Subsidies
=
1,700 – 190 – 173 + 20 = 1,357
∴Personal Income =
04
National Income
National Income – Undistributed Corporate Profit – Corporate Tax + Transfer Payments
1,357 – 28 – 75 + 242 = Rs.1,496 cr.
04
Multiplier =
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
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
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
27
-4
Cr
Amount
31
Personal consumption expenditure
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
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.
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
= NNP at Factor Cost
NNP at Factor Cost
= NNP at Market Price – Indirect Taxes
Cr Rs. 320 1,637 1,957
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
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
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 41:8 BN
= 0.15Y
Substituting above figures in equation:
.IS
Import Function
ed
= 0.35Y
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
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
B
Y
W
= 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
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
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
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
G
= Government Expenditure.
E
= Exports
M
= Import Function
ef .N
= Investment Function
R
I
-4
= Consumption Function
(
)
η
= 15
π
= 0.1
G
= 150
E
= 20
μ
= 0.05
s ht ig lr s. Al
Pr es
ty =
fa
iU
ni
Y
⇒
©
20 04
Th e
Ic
⇒Y
1-
.IS
= (1 – 0.3) = 0.7
ed
β
se rv
= 400
re
α
ve rs i
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
o.
where, Y = Equilibrium Income in the Economy.
=
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
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
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
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
Proportional Tax Rate (t)
= 0.20
Increase in Govt. Expenditure ( G )
= 500
04
=
0.25 × 0.8 0.2 = (1 − 0.75) (1 − 0.20) × 500 = × 500 = × 500 = 250. 1 − 0.6 .4 1 − [0.75(1 − 0.20)]
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
Y
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
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
ed se rv
=a+bY
re
C
s
= 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
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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)
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.
ΔY
1 ( ΔG + ΔI ) 0.35
27 02 4-
=
ef .N
1 1 = 0.15 + 0.20 0.35
-4
Multiplier =
o.
= 0.15
R
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
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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
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
Proportional Tax Rate (t)
= 0.20
04
= 0.75
20
Marginal Propensity to Consume (b)
04
218. (e) Given,
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
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
= 0.10
W -4
1 =5 1 − 0.90 + 0.10
27
=
02
Multiplier
M AC
MPI
ef .N
= 0.90
R
MPC
1 1 − MPC + MPI
o.
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.
©
20 04
Th e
Ic
fa
223. (d) Y
=C+I+G+E–M = 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
=
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
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 .
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
= 331.8.
R
Y
-4
=
o.
41+ 60 + 45 146 = 0.44 0.44
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
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 Taxes – (Government expenditure + Transfer payments)
=
54.73 – 20 + 10
20
04
=
04
Budget deficit/surplus
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
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
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 M AC
= Income – consumption = 400,
Savings
= –40 + 0.25(400) = –40 + 100
R
= 60.
-4
Savings
o.
When income
ef .N
Savings
B
= 40 + (0.75 × 400) = 340
C
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
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
At equilibrium: Md
= Ms
6Y – 2,200i
= 2,800
W ef .N
o.
M AC
300 − 12i = 600 – 24i .5
R
=
B
Y – 0.5Y = 300 – 12i Y
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
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
©
20 04
Th e
Ic
2,576 – 20i
= 1,000 + 50i
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
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 27 02
= 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-
= 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: 2,400 – 40i
= 1,000 + 250i
1,400
= 290i
i
= 4.83
Y
= 1,000 + (250 × 4.83) = 2,207.5
The new LM Curve is; 600 = 0.25Y + 400 – 50i Y
= 800 + 200i
New equilibrium 254
Part II
2,400 – 40i = 800 + 200i 1,600
= 240i
i
= 6.67
Y
= 800 + (200 × 6.67) = 2,134 C+I+G+E–M
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
=
20
246. (a) Y
04
Change in GNP = 2,207.5 – 2,134 = 73.5 (Decrease).
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
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 250
= 0.25Y + 134 – 500i
0.25Y
= 116 + 500i
Y
= 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
Part II
175
= 0.25Y + 134 – 500i
0.25Y
= 41 + 500i
Y
= 164 + 2,000i
And the IS Curve will remain the same. 164 + 2,000i
= 1,264 – 800i
2,800i
= 1,100
i
= 0.39
04
At equilibrium:
04
The changed level of investment = 250 – 200 (0.39) = 172
04
20
The change in investment = 192 – 172 = 20.
ΔY
1 [ΔG + ΔI] 0.35
-4 27
=
o.
1 1 = 0.15 + 0.20 0.35
R
Multiplier =
M AC
W
= 0.15
ef .N
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
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⎠
Y
= 1,500 + 25i…..LM Curve equation.
04
= 300 + 5i
04
0.20Y – 5i = 300 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
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: LM 775 + 300i
867
=
320i
‘i’
=
2.71
04
20
04
1,642 – 20i =
04
=
B
IS
Y
= 1,587.8 = 1,588.
M AC
= 1,642 – (20 × 2.71)
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
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
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
Y
= 1625 – 25i……IS Curve
B
= 650 – 10i
W
0.40Y
04
20
= 50 + 0.8(Y–0.25Y) + 200 – 10i + 400 = 650 + 0.8Y – 0.2Y – 10i
04
=C+I+G
04
Y
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
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
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
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
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 = 500 + 200i
230i
= 2,070
i
=
04
20
04
2,570 – 30i
04
At equilibrium:
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
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
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.
650
= 850 – 2500i
04
= 850 – 2500i
20
Y
04
275. (a) Since full employment exists at 650 real income level, we can substitute the real income in the IS equation.
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
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
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 = 3900 – 26i
= (3900/0.26) – (26i/0.26)
Y
= 15000 – 100i………………IS Curve
04
04
Y
20
0.26Y
04
LM Curve equation:
W
= (450/0.15) + (225i/0.15)
Y
= 3000 + 1500i………………LM Curve
o.
M AC
= 450 + 225i
Y
ef .N
0.15Y
B
451 = 0.15Y – 225i
-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
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
Y
= 3000 + 1500i………….LM Curve
31
= (450/0.15) + (225i/0.15)
1-
Y
4-
02
27
0.15Y= 450 + 225i
:8
Thus at equilibrium: IS = LM = 12000
i
= 12000/1600 = 7.5
se rv
1600i
ed
.IS
BN
15000 – 100i = 3000 + 1500i
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
Part II
1560 – 1000 560 i
= 80i + 20i = 100i = 5.6
= 1560 – (20 × 5.6) = 1560 – 112 = 1448.
Y
=
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
Govt. expenditure + Transfer payments – taxes
20
=
04
284. (b) Budget deficit at equilibrium
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
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
R
Y
-4
= 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
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
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
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
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
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
C
= 400 + 0.8Yd – 20i
Yd
=Y+R+T = Y + 200 – 0.1Y = 0.9Y + 200
©
20 04
Th e
IS Curve:
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
Macroeconomics
LM Curve: Md = Mt + Ma 400 = 0.25Y + 110 – 145i Y
= 1160 + 580i………LM Curve = 1160 + 580i
6300
= 900i
i
= 7%
Y
= 7460 – 320i
04
7460 – 320i
04
We can find out the equilibrium interest by equating the IS and LM:
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
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
= 8360 – 320i
W M AC
= (1875 + 225) – 80i
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
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 i
= 10%
Y
= 5600 – (40 × 10)
Y
= 5200
Ic
= 2400
Th e 20 04 ©
= 3200 + 200i
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
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
Y = 500 + (20 × 7) = 640
i = 5%,
Y = 500 + (20 × 5) = 600
i = 4%,
Y = 500 + (20 × 4) = 580
ht
s
re
se rv
i = 7%,
ig
If,
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
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
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
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.
ig
lr
i
= –0.10Y + 88
Pr es
s. Al
= 176 – 2i
= 0.20Y – 5i
ty
i
= 0.04Y – 24
iU
ni
ve rs i
=M=L = 0.20Y – 120
fa Ic
= 60 + 0.80Y + 116 – 2i
0.2Y The LM equation 5i
ht
s
320. (d) The IS equation = Y = C + I
re
se rv
ed
.IS
BN
2,500 – 40i
Y
©
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)
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
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
I
= 150 – 16i
G
= 31
04
= 0.15Y
04
20
T
04
Yd = Y – 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
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
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
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
= 20,253
W
For 2002 = 16,000/0.79
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
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
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 o. ef .N
10, 613.96 = 0.61 17, 421.03
R
New Issue Ratio for year 2002 =
-4
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) = 0.10
Th e
Ic
fa
⎡ 1 + Cu ⎤ ⎡ 1 + 0.4 ⎤ Money Supply in the Economy (M) = H ⎢ ⎥ = 5,000 ⎢ ⎥ ⎣ 0.4 + 0.10 ⎦ ⎣ Cu + r ⎦
©
20 04
= 5,000 × 2.8 = 14,000.
⎡ 1 + Cu ⎤ ⎡ 1 + 0.4 ⎤ 347. (a) The money multiplier at the original level = ⎢ ⎥ = ⎢ ⎥ = 2.8 ⎣ 0.4 + 0.10 ⎦ ⎣ Cu + r ⎦
To maintain the money supply at the original level, money multiplier should be maintained at the original level of 2.8. ⎡ 1 + 0.2 ⎤ ⎢ ⎥ ⎣ 0.2 + r ⎦
= 2.8
1.2 = 0.56 + 2.8r r = 1.2 – 0.56/2.8 = 0.2285. The reserve ratio should be increased to 0.2285 i.e., 22.85%. 291
Macroeconomics
348. (b) Finance Ratio = Total Issues/National Income = 0.25
Given National Income = 96,000 = 96,000 × 0.25 = 24,000.
Total Issues
349. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60
Net Capital Formation
= Total Issues/Financial Interrelation Ratio
Total Issues = National Income × Finance Ratio Finance Ratio = Total Issues/National Income = 0.25 = 96,000 × 0.25 = 24,000 = 24,000/1.60 = 15,000.
04
= New Issues/Net Capital Formation
B
350. (c) New Issue Ratio
04
Total Issues Net Capital Formation
04
= 96,000
20
Given National Income
= Total Issues/National Income = 0.25
M AC
Finance Ratio
o.
= National Income × Finance Ratio
ef .N
Total Issues
Given National Income = 96,000
-4
R
= 96,000 × 0.25 = 24,000
Total Issues
W
Net Capital Formation = Total Issues/Financial Interrelation Ratio.
4-
31
New Issues = New Issue Ratio × Net Capital Formation
02
27
Net Capital Formation = 24,000/1.60 = 15,000
:8
1-
= 0.85 × 15,000 = 12,750. 351. (d) Intermediation Ratio = Secondary Issues/New Issues = 0.88
fa
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
New Issues = New Issue Ratio × Net Capital Formation Financial Interrelation Ratio = Total Issues/Net Capital Formation = 1.60 Net Capital Formation = Total Issues/Financial Interrelation Ratio Total Issues = National Income × Finance Ratio Finance Ratio = Total Issues/National Income = 0.25 Given National Income = 96,000 Total Issues = 96,000 × 0.25 = 24,000 Net Capital Formation = 24,000/1.60 = 15,000 New Issues = New Issue Ratio × Net Capital Formation = 0.85 × 15,000 = 12,750 Secondary Issues = Intermediation Ratio × New Issue = 0.88 × 12750 = 11,220.
20 04
Th e
Ic
352. (a) Intermediation Ratio = Secondary Issues/New Issues
= 8,985/10,595 = 0.84.
353. (e) New Issue Ratio = Primary Issues/Net capital formation
©
= 10,595/13,680 = 0.77.
354. (c) The High-Powered Money (H) = 18,950
Current Deposit Ratio
(Cu) = 0.5
Reserve Ratio
(r)
= 0.1
Money Multiplier
⎡1 + Cu ⎤ 1 + 0.5 = ⎢ = 2.5 ⎥ = C + r 0.1 + 0.5 ⎣ u ⎦
Money Supply
= H × 2.5
= 18950 × 2.5
= 47,375………. (1) 292
Part II
Central Bank purchasing Rs.8,970 worth government securities will increase the high powered money by the same amount, i.e., Rs.9,970. = H × 2.5 = (18,850 + 8,970) × 2.5
The Money Supply
= 69,800……………(2) Increase in money supply = (2) – (1)
04 20
04
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets
=
M AC
W
B
Financial Assets =
04
= 69,800 – 47,375 = 22,425. 355. (b) High Powered Money (H) = Monetary Liabilities of Central Bank + Govt. Money Since government money is said to be negligible, High Powered Money (H) = Financial Assets + Other Assets – Non-Monetary Liabilities.
1,780 + 410 + 112 + 15 = 2,317
ef .N
o.
Non-Monetary Liabilities = Government Deposits + Other Non-monetary Liabilities + Net Worth. = 21 + 11 + 510 = 542 = 78 = 2,317 – 542 + 78
Money supply
= H×
-4
R
Other assets H
02
27
= 1,853
BN
:8
356. (d) If the money supply is to be reduced by 18%;
1-
31
4-
1 + Cu 1 + 0.30 = 1,853 × = 7,085. r + Cu 0.40 + 0.3
.IS
The money supply will be:
ed
7,085 – 1,275.3 = 5,809.7
re s
1 + 0.3 r + 0.3
ht
= 1,853 ×
lr
ig
5,809.7
se rv
The new reserve ratio will be:
1 r + 0.3
ty
=
Pr es
=
ni
ve rs i
2.412
1 r + 0.3
s. Al
5,809.7 1 × 1,853 1.3
20 04
Th e
Ic
fa
iU
r + 0.3
=
1 2.412
r
= 0.41463 – 0.3 = 0.1146
r
= 11.46%.
©
357. (a)
Liabilities Non-monetary liabilities Net worth Government deposits Other non-monetary liabilities Monetary liabilities Bank deposits Other monetary liabilities
Amount Assets Financial assets 1,000 Credit to government 50 Credit to banks 25 Credit to commercial sector Foreign exchange assets 125 Other assets 1,970 3,070
Amount 1,750 750 500 20 50 3,070
Monetary Liabilities of the Central Bank = Total Assets – Non-Monetary Liabilities 293
Macroeconomics
= 3,070 – 1,075 = 1,995 High Powered Money (H) = Monetary Liabilities of the RBI + Government Money = 1,995 + 5 = 2,000 million 1 + Cu r + Cu
Money Supply = H × =
0.34 + 1 × 2,000 0.34 + r
3
=
0.34 + 1 0.34 + r
1.02 + 3
= 1.34
3r
= 0.32
r
= 0.106 (or) 10.6%.
o.
M AC
W
B
04
20
04
04
6,000
-4
27
∴ High-Powered Money (H) = 2,000 + 550 = 2,550 million
R
ef .N
358. (d) When the Central Bank credit to Government is increased by 550 million, this affects the financial assets of the Central Bank. Hence high-powered money will increase by 550 million.
02
If the Central Bank wants to contain the money supply at the original level of 6,000 million: =(M) (2,000 + 550)
M
=
6,000 = 2.3529 2,550
M
=
1+ Cu = 2.3529 = Cu + r
1.34
= 0.799 + 2.3529r
r
= 0.541/2.3529
∴r
= 0.23 or 23%.
1+ 0.34 = 2.3529 0.34 + r
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
6,000
Pr es
359. (c) Intermediation Ratio
ve rs i
ty
or, Secondary Issues
Ic
fa
iU
ni
Total Issues
= Secondary Issues/New Issues = Intermediation Ratio × New Issues = 0.65 × 15,000 = 9,750 = Secondary Issues + New Issues = 9,750 + 15,000 = 24,750
Financial Ratio
= Total Issues/Net Capital Formation
Or, Net Capital Formation
= 24,750/1.60 = 15,468.75.
Th e 20 04
31
4-
Money Supply (Ms) = Money Multiplier (M) × High-Powered Money (H)
©
360. (e) Stock of High-Powered Money (H) = 1,000
Currency Deposit Ratio (Cu)
= 0.8
Reserve Ratio (r)
= 0.2
Money Supply and High-Powered Money are related to each other by the following formula:
294
M
⎛ 1 + Cu ⎞ =⎜ ⎟×H ⎝ Cu + r ⎠
M
⎛ 1 + 0.8 ⎞ = ⎜ ⎟ × 1,000 = 1.8 x 1,000 = 1,800. ⎝ 0.8 + 0.2 ⎠
Part II
361. (b) Money Multiplier =
1 + Cu r + Cu
Cu
= 1.2r = 0.1
Multiplier
= 2.2/1.3 = 1.69.
362. (a) High-Powered Money (H)
= Monetary Liabilities of Central Bank + Government Money Since government money is said to be negligible H
= Monetary Liabilities of the Central Bank
04
04
= Financial Assets + Other Assets – Non-Monetary Liabilities.
04
20
Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets
W
B
= 500 + 200 + 50 + 7 = 757
M AC
Other Assets = 35
o.
Non-Monetary Liabilities = Government Deposits + Other Non-monetary Liabilities + Net Worth
ef .N
= 10 + 5 + 250 = 265
-4
R
∴ High-Powered Money = 757 + 35 – 265
02
27
Money = 527
r
= Reserve Ratio
.IS
= 0.05
ht
⎛ 1 + Cu ⎞ = 527 ⎜ ⎟ ⎝ Cu + 0.05 ⎠
s
re
And High Powered Money = 527
se rv
ed
Given Money Supply = 1,957 Reserve Ratio
:8
= Currency – Deposits Ratio
BN
where Cu
1-
31
4-
⎛ 1 + Cu ⎞ Money supply = H ⎜ ⎟ ⎝ Cu + r ⎠
s. Al
lr
ig
1,957
ve rs i
ty
Pr es
1957 1 + Cu = = 3.7135 527 Cu + 0.05
1 + Cu
= 3.7135Cu + 0.1857
Th e
Ic
Cu
fa
iU
ni
2.7135 Cu = (1 – 0.1857) =
0.8143 0.30 = 30%. 2.7135
©
20 04
363. (e)
Liabilities Monetary liabilities Other deposits Other monetary liabilities (Balancing figure) Non monetary liabilities Government deposits Other Net worth
Rs. Assets Financial assets 50 Credit to government 750 Credit to banks Credit to commercial sector 20 Foreign exchange assets 10 Other assets 400 1,230
Rs 700 300 200 10 20 1,230 295
Macroeconomics
High-Powered Money (H) = Monetary Liabilities of Central Bank + Government Money Since the government money is negligible. High-Powered Money (H) = Monetary Liabilities of the Central Bank = 800 ⎛ 1 + Cu ⎞ Money Supply = H ⎜ ⎟ ⎝ Cu + r ⎠
04
Given that the total money supply is 2400 and Cu is 0.35
=
r
= 10%.
20 04
r
B
= 1.35
W
3 x (0.35 + r)
04
⎛ 1 + 0.35 ⎞ 1.35 2400 = 800 × ⎜ =3 ⎟ ⎝ 0.35 + r ⎠ 0.35 + r
= Currency + Reserves
R
364. (c) Stock of Currency (H)
ef .N
o.
M AC
1.35 − 1.05 = 0.10 3
Money Supply (M)
= 16,500
Reserve Ratio (r)
= Let us assume ‘X’
27
= 0.3
:8
1-
31
4-
02
Currency-Deposit Ratio (Cu)
-4
= 5,000 + 500 = 5500
⎛ 1 + Cu ⎞ ⎜ ⎟ xH ⎝ Cu + r ⎠
ed
.IS
BN
Money Supply and High-Powered Money (that is with the public) are related to each other by the following formula.
s
= 2200
= 0.13
ni
X
ve rs i
16,500 X
= 4950 + 16,500X
ty
7150
= 16,500 (0.3 + X)
Pr es
(1 + 0.3) × 5,500
s. Al
lr
ig
ht
⎛ 1 + 0.3 ⎞ ⎜ ⎟ × 5,500 = 16,500 ⎝ 0.3+ X ⎠
re
se rv
= M
fa
iU
∴ The reserve ratio that the Central Bank must impose (approximately) is 0.13.
Ic
365. (e) High-Powered Money (H) = Monetary Liabilities of RBI + Government Money
©
20 04
Th e
Monetary Liabilities of RBI
= Financial Assets + Other Assets – Non-Monetary Liabilities
Financial Assets = Credit to Government + Credit to Bank + Credit to Commercial Sector + Foreign Exchange Assets = 950 + 350 + 125 + 25 = 1450
Other Assets = 65 Non-Monetary Liabilities = Government Deposits + Other Non-Monetary Liabilities + Net Worth = 20 + 5 + 500 = 525 Monetary Liabilities
= 1,450 + 65 – 525 = 990
Government Money
= 10
High Powered Money (H) = 990 + 10 = 1,000
296
Part II
⎛ 1 + Cu ⎞ =⎜ ⎟×H ⎝ Cu + r ⎠
Total Money Supply
Given, Total Money Supply = 4,000 Currency Deposit Ratio
= 0.20
High Powered Money (H) = 1,000
1.2
= 0.8 + 4r
r
=
04
⎛ 1 + 0.20 ⎞ = ⎜ ⎟=4 ⎝ 0.20 + r ⎠
20
04
1.20 − 0.8 = 0.10. 4
04
Money Multiplier
ef .N
o.
M AC
W
B
Reserve Ratio is 10%. 366. (b) When the Central Bank credit to Government is increased by 100 millions, and simultaneously Government purchases foreign exchange worth 10 millions from the Central Bank, the net increase in the financial assets of the Central Bank is 90. Hence, high powered money will increase by 90.
02
27
-4
R
⎛ 1 + 0.20 ⎞ = ⎜ ⎟ =4 ⎝ 0.20 + r ⎠
Money Multiplier
31
4-
Given the Money Multiplier = 4
ed
se rv
where, Cu = Currency Deposit Ratio r = Reserve Ratio
.IS
BN
:8
⎛ 1 + Cu ⎞ 367. (d) Money multiplier in the economy = ⎜ ⎟ ⎝ Cu + r ⎠
1-
Increase in Money Supply = 90 × 4 = 360 million units of currency.
Pr es
s. Al
lr
ig
ht
s
re
Money Supply in the Economy = Money Multiplier × High-Powered Money Central Bank purchase of Government Securities worth 200 will increase the High-Powered Money from the initial 800 to 1,000. If the money supply is to remain at 4,000;
ve rs i
ty
Money Multiplier should be reduced to =4
=4
1 + 0.2 = 4 r + 0.2
fa
iU
ni
⎛ 1 + Cu ⎞ ⎜ ⎟ ⎝ Cu + r ⎠
4000 1000
©
20 04
Th e
Ic
1.2 = 4r + 0.8 = 0.4 – 4r r = 0.1. 368. (a) When reserves are decreased by 500, the new reserve will be: 2400 – 500 = 1900 Reserve requirement = 20% Demand deposits that can be supported with the lower reserves and lower reserve requirement are: 1900/0.20 = 9500 Decrease in demand deposits = 9600 – 9500 = 100. 369. (c) Intermediation Ratio = Secondary Issues/Primary Issues For year 2001 =
7,862.50 7862.50 = 0.85. = 9250 8525 + 725
297
Macroeconomics
370. (e) Financial Interrelations Ratio = Secondary Issues/New Issues
Secondary Issues = Intermediation Ratio × New Issues
Other Assets
M AC
W
B
04
20
04
04
Secondary Issue for 2001 = 0.75 × 10,000 = 7,500 Total Issues = Secondary Issues + New issues Total Issues for 2001 = 7,500 + 10,000 = 17,500 Financial Intermediation Ratio = Total Issues/Net Capital Formation Net Capital Formation = Total Issues/Financial Intermediation Ratio. Net Capital Formation for 2001 = 17,500/1.75 = 10,000. 371. (b) Monetary Liability of the Central Bank = Financial Assets + Other Assets – Non-Monetary Liabilities Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets = 1,080 + 300 + 420 + 250 = 2,050 = 500
ef .N
o.
Non-Monetary Liabilities
R
= Government Deposits + Net Worth + Other Non-Monetary Liabilities
27
-4
= 300 + 400 + 350 = 1,050
02
Monetary Liabilities = 2,050 + 500 – 1,050 = 1,500
1-
31
4-
(Currency issued by Central Bank and deposits of banks with Central Bank are apart of monetary liability).
:8
High-Powered Money = Monetary Liabilities of the Central Bank + Government Money
.IS
BN
Since Government Money is negligible and can be ignored,
ed
High-Powered Money (H) = 1,500
ht
s
re
se rv
⎛ 1 + Cu ⎞ Money Supply in the Economy = H ⎜ ⎟ ⎝ Cu + r ⎠
s. Al
lr
ig
⎛ 1 + 0.2 ⎞ Money Supply = 1500 ⎜ ⎟ = 7,200 million units of currency. ⎝ 0.2 + 0.05 ⎠
Pr es
372. (e) Monetary Liability of the Central Bank
Financial Assets + Other Assets – Non-Monetary Liabilities
ve rs i
ty
=
Financial Assets
ni
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets
fa
iU
=
Th e
Ic
=
1,080 + 300 + 420 + 250 = 2,050
©
20 04
Other Assets = 500 Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities = 300 + 400 + 350 = 1,050 Monetary Liabilities = 2,050 + 500 – 1,050 = 1,500 (Currency issued by Central Bank and deposits of banks with Central Bank are apart of monetary liability) High-Powered Money = Monetary Liabilities of the Central Bank + Government Money Since Government money is negligible and can be ignored, High-Powered Money (H)
298
= 1,500
Part II
If an additional credit of 500 million units of currency is granted to government, the highpowered money will be 1,500 + 500 = 2,000 Money Supply = 2,000 × 4.8 = 9,600 Money Supply will increase by 9,600 – 7,200 = 2400 million units of currency. 373. (d) Given,
o.
375. (a) Net Capital Formation = Total Issues/Financial Interrelations Ratio
ef .N
Total Issue = Primary issue + Secondary Issue
27
-4
90,000 × 0.75 = 67,500
R
Secondary Issues = Primary Issues × Intermediation Ratio
31 1:8
1,57,500 = 1,05,000. 1.5
4-
02
Total Issue = 90,000 + 67,500 = 1,57,500 Net Capital Formation =
04
M AC
= 90,000 × 0.75 = 67,500.
=
20 W
= (3 × 4) + 6 = 18% Given money multiplier is 3 Rate of growth of reserve money = 18/3 = 6%. 374. (c) Secondary Issues = Primary Issues × Intermediation Ratio
04
3.0 4% and 6% a.gY + gP
04
= = = =
B
Income elasticity of demand for real balances (a) Expected rate of growth in real GDP (gY) Acceptable rate of inflation (gP) Rate of growth of money stock (gM)
BN
376. (e) National Income = Total Issues/Finance Ratio
ed
.IS
Total Issues = Primary Issue + Secondary Issue
se rv
Secondary Issue = Primary Issue × Intermediation Ratio.
re
= 1,98,240 × 0.76 = 1,50,662.4
= 1,50,662.4 + 1,98,240
ht
s
Total Issue
s. Al
lr
ig
National Income = 3,48,902.4 × 0.33 = 10,57,280.
Pr es
377. (c) New Issue Ratio = Primary Issues/Net Capital Formation
Net Capital Formation = Total Issues/Financial Interrelations Ratio
ve rs i
ty
Total Issues = Primary Issues + Secondary Issue
iU
ni
Secondary Issues = Primary Issues × Intermediation Ratio = 1,98,240 × 0.76 = 1,50,662.4
Ic
fa
Total Issues = 1,98,240 + 1,50, 662.4 = 3,48,902.4
Th e
Net Capital Formation = 3,48,902.4 × 1.60 = 2,18,064
©
20 04
New Issues Ratio = 1,98,240/2,18,064 = 0.91. 378. (b) Given, Income elasticity of demand for real balances (a)
= 2.0
Expected rate of growth in real GDP (gY) Acceptable rate of inflation (gP) Rate of growth of money stock (gM)
= 5% = 5% = a.gY + gP = (3 × 4) + 6 = 18%
Given money multiplier is 3 Rate of growth of reserve money
= 15/3 = 5%.
299
Macroeconomics
379. (e) Financial Assets of the Central Bank = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets = 3,500 + 1,500 + 1,000 + 40 = 6,040 million units of currency Other Assets = 100 million units of currency Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities
= 100 + 2,000 + 50
04
= 2,150 million units of currency
04
Monetary Liabilities = FA + Other Assets – Non-Monetary Liabilities
04
20
= 6,040 + 100 – 2,150
B
= 3,990 million units of currency
M AC
W
High-Powered Money (H) = Monetary Liabilities of the Central Bank + Government Money = 3,990 + 10 = 4,000 million units of currency
R
ef .N
o.
⎛ 1 + Cu ⎞ Money Supply = H ⎜ ⎟ ⎝ Cu + r ⎠
27
-4
where Cu = Currency Original Ratio
02
r = Reserve Ratio
31
4-
Given the desired money supply is 12,000, money multiplier is:
1-
:8
.IS
1 + 0.34 = 3 = 1.02 + 3r = 1.34 0.34 + r
se rv
=3=
ed
⎛ 1 + Cu ⎞ ⎜ ⎟ ⎝ Cu + r ⎠
re
1.34 −1.02 = 10.67%. 3
s
=
ig
ht
r
12,000 =3 4,000
BN
Desired Money Supply/High Powered Money =
s. Al
lr
380. (b) Financial Assets of Central Bank are:
Pr es
Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets = 1,000 + 400 + 100 + 14 = 1,514
ty
= 70
ve rs i
Other Assets
Non-Monetary Liabilities = Government Deposits + Net Worth + Other Non-Monetary Liabilities
iU
ni
= 20 + 500 + 10 = 530
Ic
fa
Monetary Liabilities = Financial Assets + Other Assets – Non-Monetary Liabilities
©
20 04
Th e
= 1,514 + 70 – 530 = 1,054 Since Government Money is negligible, High-Powered Money (H) = 1,054 Given the Currency-Deposit Ratio (Cu) is 0.2, and Reserve Ratio (r) is 5% ⎛ 1 + Cu ⎞ ⎛ 1 + 0.2 ⎞ Money Supply in the Economy = ⎜ ⎟ ×1, 054 ⎟ =⎜ ⎝ Cu + r ⎠ ⎝ 0.2 + 0.05 ⎠
= 5059.2 million units of Currency. 381. (d) If the money supply is to be reduced by 20%, the money multiplier value is to be reduced by 20%. ⎛ 1 + Cu ⎞ ⎛ 1 + 0.2 ⎞ = ⎜ ⎜ ⎟ ⎟ = 4.8 ⎝ 0.2 + 0.05 ⎠ ⎝ Cu + r ⎠ Reduce 20% of 4.8
300
Part II
The new money multiplier = 4.8 × 0.8 = 3.84 New Reserve Ratio: 3.84 = (1 + 0.2)/(0.2 + r) r = (1.2/3 .84) – 0.2 r = 11.25%. 382. (a) Intermediation Ratio = Secondary Issues/New Issues = Intermediation Ratio × New Issues
Secondary Issues
Total Issues
= 0.78 × 24,000 = 18,720 = 24,000 + 18,720 = 42,720
National Income
= 42,720/0.26 = 1, 64,307.69.
20
= Intermediation Ratio × New Issues
o.
ef .N
384. (d) Net Capital Formation = Total Issues/Financial Interrelations Ratio
M AC
W
B
04
Secondary Issues
04
04
= 0.75 × 20,000 = 15,000. 383. (c) National Income = Total Issues/Finance ratio Total Issues = Primary Issues + Secondary Issues
Total Issues = Primary Issues + Secondary Issues
-4
R
Intermediation Ratio = Secondary Issues/New Issues
02
27
Secondary Issues = Intermediation Ratio × New Issues
4-
= 0.75 x 20,000 = 15,000
1:8
= 35,000/1.6 = 21,875.
31
Net Capital Formation = (20,000 + 15,000)/1.6
.IS
BN
385. (b) The commodity market equation = 5,000 – 30i
ed
The demand for money equation = 0.3Y – 300i
se rv
The current money supply in the economy = 300 (MUC)
re
The LM equation will be:
ht
s
0.3Y – 300i = 300
Pr es
s. Al
lr
ig
⇒ 0.3Y = 300 + 300i ⇒ Y = 1,000 + 1,000i ---- LM equation The IS equation is
ve rs i
ty
Y = 5,000 – 30i
ni
Equating the IS and LM equations gives the equilibrium rate of interest:
iU
1,000 + 1,000i = 5,000 – 30i
©
20 04
Th e
Ic
fa
⇒ 1030i = 4,000
i
= 3.88%
Thus, Y = 5,000 – 30 × 3.88 = 4883.6 MUC The growth rate in nominal stock of money will be: gm = η gY + gp where, gm = Growth in nominal money stock
η
= Income elasticity of demand for money = 1.2
gp = Rate of inflation = 5% gY = Rate of growth of real GDP = 3.5% 301
Macroeconomics
Hence, gm = (1.2 × 3.5 ) + 5 = 9.2% Hence, Expected nominal stock of money = 300 × 1.092 = 327.6 MUC. 386. (e) The cost of borrowing from the commercial banks will be:
=
5,000 – 30i
The demand for money equation
=
0.3Y – 300i
The current money supply in the economy
=
300 (MUC)
04
20
04
The rate of real interest is: The commodity market equation
04
Real Rate of Interest + Rate of Inflation + Higher charge by Commercial Banks
B
The LM equation will be;
M AC
W
0.3Y – 300i = 300
ef .N
o.
⇒ 0.3Y = 300 + 300i ⇒ Y = 1,000 + 1,000i ---- LM equation
R
The IS equation is:
27
-4
Y = 5,000 – 30i
02
Equating the IS and LM equations gives the equilibrium rate of interest:
31
= 3.88%
1-
i
:8
= 4,000
BN
⇒ 1030i
4-
1,000 + 1,000i = 5,000 – 30i
.IS
The cost of borrowing from the commercial banks will be:
ig
ht
s
re
⎛ 1+ Cu ⎞ H⎜ ⎟ ⎝ Cu + r ⎠
=
lr
M
se rv
387. (a) Money supply in the economy,
ed
⇒ 3.88 + 5 + 2 = 10.88%.
= High-Powered Money
r
= Reserve Ratio
Pr es
s. Al
H
ty
Cu = Currency to Deposit Ratio = Monetary Liabilities of RBI + Government Money
ve rs i
H
iU
ni
Monetary Liabilities of RBI
fa
= Financial Assets of RBI + Other Assets of RBI – Non-Monetary Liabilities of RBI
Th e
Ic
FA (RBI)
©
20 04
OA (RBI)
= 30,000 + 4,000 + 700 + 7,500 = 42,200 (MUC) = 4,000 MUC
NML (RBI) = 1,000 + 405 + 35,000 = 36,405 MUC Thus, ML (RBI) = 42,200 + 4,000 – 36,405 = 9,795 MUC Hence, H = 9,795 + 5 = 9,800 MUC
M =9800 x 1.4/0.5 = 27,440. 388. (c) Money supply in the economy, ⎛ 1 + Cu ⎞ M = H⎜ ⎟ ⎝ Cu + r ⎠
H = High-Powered Money 302
04 20
02
27
-4
R
ef .N
o.
M AC
W
B
04
r = Reserve Ratio Cu = Currency to Deposit Ratio H = Monetary Liabilities of RBI + Government Money Monetary Liabilities of RBI = Financial Assets of RBI + Other Assets of RBI – Non-Monetary Liabilities of RBI FA (RBI) = 30,000 + 4,000 + 700 + 7,500 = 42,200 (MUC) OA (RBI) = 4,000 MUC NML (RBI) = 1,000 + 405 + 35,000 = 6,405 MUC Thus, ML (RBI) = 42,200 + 4,000 – 36,405 = 9,795 MUC Hence, H = 9,795 + 5 = 9,800 MUC M = 9800 x 1.4/0.5 = 27,440 The net increase in H = 250 – 50 = 200 MUC H = 9,800 + 200 = 10,000 ⎛ 1 + 0.4 ⎞ M = 10,000 × ⎜ ⎟ = 28,000 ⎝ 0.4 + 0.1 ⎠
04
Part II
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
31
4-
Increase in Money supply = 28,000 – 27,440 = 560. 389. (d) Net Issue Ratio = Primary Issues by Non-Financial Sector/Total Physical Assets Formation 0.74 = X/2,00,445 X = 0.74 × 2,00,445 = 1,48,329.3 units Hence, Primary Issues by Non-Financial Sector are 1,48,329.3 units. Intermediation Ratio = Volume of Financial Instruments issued by Financial Intermediaries/Volume of Primary Issues by Non-Financial Sectors = 1,15,605/1,48,329.3 = 0.779 or 0.78%. 390. (b) M1 = Currency with Public + Demand Deposits with Banks + Demand Portion of Savings Deposit with Banks + Other Deposits with RBI = 1,52,737 + 99,106 + 5,627 = 2,57,470. 391. (e) MUC Asset 30 Credit to Government 15 Credit to Banks
MUC 1,500 600
750 Credit to Commercial Sector 1,581 Foreign Exchange Assets Other assets 2,376
150 21 105 2,376
©
20 04
Th e
Ic
fa
iU
ni
Liabilities Government Deposits Other Non-Monetary Liabilities Net Worth Monetary Liabilities
* Monetary Liabilities (ML) = Total Assets – Non-Monetary Liabilities (NML) OR Monetary Liabilities = Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets + Other Assets – Government Deposits – Other Non-Monetary Liabilities – Net Worth = 1,500 + 600 + 150 + 21 + 105 – 30 – 15 – 750 303
Macroeconomics
04
= 1,581 million Units of Currency Stock of High-Powered Money (H) = Monetary Liabilities of Central Bank + Government Money As the government money constitutes a negligible proportion of total money supply, 1,581 million units represents total stock of High-Powered Money (H). We have, High-Powered Money (H) = 1,581 million units of currency Currency-Deposits Ratio (Cu) = 0.30 Reserve Ratio (r) = 5%
04
20
04
⎛ 1 + Cu ⎞ Money Supply (M) = H × ⎜ ⎟ ⎝ r + Cu ⎠
ef .N
=
o.
= Primary Issues + Secondary Issue
New Issue Ratio
Primary Issues /Net Capital formation
R
392. (c) Total Issues
M AC
W
B
⎛ 1 + 0.30 ⎞ = 1,581 × ⎜ ⎟ = 5,872.29 million units of Currency. ⎝ 0.05 + 0.30 ⎠
27
= Intermediation Ratio x Primary Issue = 4,00,000 + 3,00,000 = 7,00,000.
BN
:8
Total Issues
1-
= 0.75 × 4,00,000 = 3,00,000
31
4-
Secondary Issues
02
Intermediation Ratio = Secondary Issues/Primary Issues
-4
= 5,00,000 × 0.80 = 4,00,000
Primary Issues
.IS
393. (a) Finance Ratio = Total Issues/National Income
ed
Total Issues = Primary Issues + Secondary Issues
se rv
New Issue Ratio = Primary Issues/Net Capital Formation
s
re
Primary Issues = 5,00,000 × 0.80 = 4,00,000
ig
ht
Intermediation Ratio = Secondary Issues/Primary Issues
s. Al
lr
Secondary Issues = Intermediation Ratio x Primary Issue
Pr es
= 0.75 x 4,00,000 = 3,00,000
ve rs i
ty
Total Issues = 4,00,000 + 3,00,000 = 7,00,000 National Income = 7,00,000/0.7 = 10,00,000.
ni
394. (d) High-Powered Money (H)
iU
= Monetary Liabilities of the RBI + Government Money
Ic
fa
= C+R
©
20 04
Th e
Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI Or ML (RBI) = FA (RBI) + OA (RBI) – NML (RBI) Hence, ML (RBI) = (1,750 + 500 + 750 + 20) + 50 – (1,000 + 25 + 50) = 3,020 + 50 – 1,075 = 1,995 High-Powered Money (H) = 1995 + 5 = 2,000 ⎛ 1 + Cu ⎞ Ms = H × ⎜ ⎟ ⎝ r + Cu ⎠ ⎛ 1 + 0.34 ⎞ 6,000= 2,000 × ⎜ ⎟ ⎝ r + 0.34 ⎠
304
Part II
1.34 =3 0.34 + r
⇒
⇒ 1.02 + 3r = 1.34 3r
= 0.32
r
= 0.32/3 = 0.1067 = 10.67%.
395. (b) As per the given information, the high power money is:
High-Powered Money (H)
04
Monetary Liabilities of RBI = Financial Assets of RBI + Net Non-Monetary Liabilities of RBI
04
= Monetary Liabilities of the RBI + Government Money = C + R
20
Or ML (RBI) = FA (RBI) + OA (RBI) – NML (RBI)
B
04
Hence, ML (RBI) = (1,750 + 500 + 750 + 20) + 50 – (1,000 + 25 + 50)
M AC
W
= 3,020 + 50 – 1075 = 1,995
27
-4
R
ef .N
o.
High-Powered Money (H) = 1,995 + 5 = 2,000 The Central Bank credit to Government increases by 550. Hence the financial assets of RBI increase by 550. Thus, the High-powered money now becomes: H = 2,000 + 550 = 2,550 The new reserve ratio will be:
1.34 0.34 + r
:8
1-
31
4-
02
⎛ 1 + 0.34 ⎞ 2,550 × ⎜ ⎟ = 6,000 ⎝ r + 0.34 ⎠
.IS
BN
= 2.35
1.34 − 0.8 0.54 = 2.35 2.35
se rv
=
= 0.229 or 22.9%.
s
re
r
ed
0.80 + 2.35r = 1.34
ig
ht
396. (e) Financial Interrelation Ratio = Total Issues/Net Capital Formation
s. Al
lr
Finance Ratio = Total Issue/National Income = 0.25 × 96,000 = 24,000
Pr es
Total Issue
= 24,000/1.6 = 15,000.
ty
Net Capital Formation
ve rs i
397. (a) Financial Interrelation Ratio = Total Issues/Net Capital Formation
ni
Finance Ratio = Total Issue/National Income = 0.25 × 96,000 = 24,000
fa
iU
Total Issue
Th e
Ic
Net Capital Formation = 24,000/1.6 = 15,000
©
20 04
New Issue ratio = Primary Issues/Net Capital Formation Primary Issues
= 15,000 × 0.85 = 12,750
Total Issue
= Primary Issue + Secondary Issue
24,000
= 12,750 + Secondary Issue
Secondary Issue = Total Issue – Primary Issue = 24,000 – 12,750 = 11,250. 398. (c) Finance Ratio = Total Issues/National Income
Total Issues = Secondary Issues + Primary Issues = 9,600 + 12,800 = 22,400 Finance Ratio = 22,400/89,600 = 0.25. 399. (e) Intermediation Ratio = Secondary Issues/Primary Issues
Secondary Issues = 9,600/12,800 = 0.75.
305
Macroeconomics
400. (b) Financial Interrelations Ratio = Total Stock of Financial Assets ÷ Incremental Physical Assets
Total Stock of Financial Assets = Primary Issues + Secondary Issues = 12,000 + (13,400 + 1,600) = 27,000 Incremental Physical Assets = Net Physical Asset = 20,000
The Monetary Liabilities of the Central Bank are 1,054.
Primary Issues + Secondary Issues
=
68,500 + 47,445 = 1, 15,945
=
1, 15,945/6, 50,750 = 0.178.
04
BN
:8
1-
=
ed
Finance Ratio
Total Issues/National Income
.IS
Total Issues
=
31
402. (a) Finance Ratio
4-
02
27
-4
⎛ 1 + 0.2 ⎞ ⎛ 1.2 ⎞ =⎜ ⎟ × 1,054 = ⎜ ⎟ × 1,054 = 5,059.2. 0.2 + 0.05 ⎝ 0.25 ⎠ ⎝ ⎠
R
ef .N
o.
⎛ 1 + Cu ⎞ = ⎜ ⎟ × 1,054 ⎝ Cu + r ⎠
Ms
20
400 100 14 70 1,584
04
20 Credit to Banks 10 Credit to Commercial Sector 500 Foreign Exchange Assets Other Assets 1,584
B
Rs 1,000
W
Rs. Assets 1,054 Credit to government
M AC
Liabilities Monetary Liabilities (Balancing figure) Government Deposits Other non-Monetary Liabilities Net Worth
04
Financial Interrelations Ratio = 27,000 ÷ 20,000 = 1.35. 401. (d) We can prepare the Balance Sheet in order to find out the Monetary Liabilities.
se rv
403. (d) New Issue Ratio = Primary Issues/Net Capital Formation
re
= 47,445/1,16,450 = 0.407.
ht
s
404. (c) Financial Interrelations ratio = Total Issues/Net Capital Formation
lr
ig
Total Issues = Primary Issue + Secondary Issues
s. Al
= 69,000 + 50,000 = 1,19,000
Pr es
Financial Interrelations Ratio = 1,19,000/1,20,000
ve rs i
ty
= 0.99166 = 0.992.
ni
405. (a) Money supply in the economy (Ms) = H.m. 1 + 0.35 =3 0.35 + 0.10
Ic
fa
iU
Money Multiplier (m) =
©
20 04
Th e
High-Powered Money (H) = Government Money + Monetary Liability of RBI
Monetary Liability of RBI = Credit to Government + Credit to Banks + Credit to Commercial Sector Foreign Exchange Assets + Other Assets – Government Deposits – Net Worth – Other Non-Monetary Liabilities. = 1,000 + 400 + 300 + 20 + 10 – 80 – 300 – 5 = 1,345 H
= 1345 + 10
Money Supply
= 1355 MUC = 1355 × 3 = 4,065.
406. (b) Money Multiplier (m)
=
1+0.35 =3 0.35+0.10
High-Powered Money (H) = Government Money + Monetary Liability of RBI Monetary Liability of RBI
306
Part II
= Credit to Government + Credit to Banks + Credit to Commercial Sector + Foreign Exchange Assets + Other Assets – Government Deposits – Net Worth – Other NonMonetary liabilities. = 1,000 + 400 + 300 + 20 + 10 – 80 – 300 – 5 H
= 1,345 + 10
= 1,345
= 1,355 MUC
If there is an additional inflow of foreign exchange assets, the H
= 1,355 + 50
= 1,405
1 + 0.35 × 1405 0.35 + r
0.35 + r
=
1,405× 1.35 4,065
04 B W
= 0.4666 – 0.35 = 0.1166 = 11.66%.
M AC
r
04
=
20
4,065
04
If the money supply is to be maintained at 4065 MUC,
o.
407. (d) Money Supply = m.H
⎛ 1 + Cu ⎞ = ⎜ ⎟ ⎝ Cu + r ⎠
H
= Monetary Liability of RBI + Government Money
02
27
-4
R
ef .N
M
31
4-
Cu = 0.30 = 0.10
m
⎛ ⎞ 1.30 1.30 = 3.25 = ⎜ ⎟ = ⎝ 0.30 + 0.10 ⎠ 0.40
se rv
Monetary Liabilities of RBI (MLRBI)
ed
.IS
BN
:8
1-
r
ht
s
re
= Credit to Banks + Credit to Government + Credit to Commercial Sector + Net Foreign Exchange Assets – Net Worth – Government Deposits + Other Assets
lr
ig
MLRBI = 2,000 + 4,500 + 500 + 6,000 – 1,000 – 300 + 200 = 11,900
s. Al
Government Money = 100
ty
= 3.25 × 12,000 = 39,000 MUC.
ve rs i
Money Supply
Pr es
High-Powered Money (H) = 11,900 + 100 = 12,000
ni
408. (b)
fa
iU
Money Supply = m. H ⎛ 1 + Cu ⎞ = ⎜ ⎟ ⎝ Cu + r ⎠
H
= Monetary Liability of RBI + Government Money
Cu
= 0.30
r
= 0.10
m
⎛ 1.30 ⎞ 1.30 = 3.25 = ⎜ ⎟= 0.30 + 0.10 ⎝ ⎠ 0.40
©
20 04
Th e
Ic
M
Monetary Liabilities of RBI (MLRBI) = Credit to Banks + Credit to Government + Credit to Commercial Sector + Net Foreign Eexchange Assets + Net Worth – Government Deposits + Other Assets MLRBI = 2,000 + 4,500 + 500 + 6,000 – 1,000 – 300 + 200 = 11,900 307
Macroeconomics
Government Money = 100 High-Powered Money (H) = 11,900 + 100 = 12,000 When foreign exchange inflow increases by 450 million MUC: H
= 12,000 + 450 = 12,450
If the money supply should remain at 39,000 MUC
= 0.115 = 11.5%.
04
r
1.30 × 12,450 = 0.415 39,000
04
(0.30 + r) =
1.30 × 12,450 0.30 + r
04
=
20
39,000
W
B
409. (c) High Powered Money = Monetary Liabilities of Central Bank + Government Money
M AC
Monetary Liabilities of Central Bank = Financial Assets + Other Assets – Non-Monetary Liabilities
ef .N
o.
Financial Assets = Credit to Government + Credit to Government + Credit to Commercial Sectors + Foreign Exchange Assets
R
= 1,120 + 350 + 550 + 150 + 50 = 2,220
27
02
Monetary Liabilities of Central Bank = 2,170 – 470 = 1,700
-4
Non-Monetary Liabilities = 100 + 420 = 520
31
4-
High Powered Money = 1,700 + 25 = 1,725 MUC.
1-
410. (b) Demand for Money is estimated to be
BN
:8
L = 0.25Y – 10i.
.IS
At i= 6 %, L = 0.25Y – 60.
ed
At equilibrium demand for money = Supply of Money
se rv
∴ 0.25Y – 60 = 200
re
0.25Y= 260
ig
ht
s
Y = 1,040 MUC.
s. Al
lr
411. (c) Velocity of Money = Y/MS
Pr es
Y = C+ I + G + E – M
= 750 + 275 + 160 + 40 – 30=1,195
ve rs i
ty
∴ Velocity of Money = 1,195 / 239 = 5.
ni
412. (b) Finance Ratio = Total Issues/National Income × 100
Ic
fa
iU
Total Issues = Financial Interrelation Ratio × Net Capital Formation = 1.5 × 15,500 = 23,250
©
20 04
Th e
GNP at Market Prices = GDP at Market Price + Net Factor Income from Abroad = 76,500 + 200 = 76,700
NNP at Market Prices = 76,700 – 2500 = 74,200 National Income = NNP at Factor Cost = NNP at Market Prices – Indirect Taxes + Subsidies = 74,200 –1,225 + 725 = 73,700 Finance Ratio = (23,250/73,700) × 100 = 31.6.
413. (a) High Powered Money = Monetary Liabilities + Government Money
= 10,500 + 1,500 = 12,000 Ms = H ×
308
{(1 + C ) / ( C u
u
+ r )}
Part II
48,000 =
12,000
{(1 + 0.25) / ( 0.25 + r )}
=
(1 + 0.25)/(0.25 + r) = 4 = 1 + 4r = 1 – 0.25
4r
=
0.25
r
=
0.0625 = 6.25%.
414. (e) Md = 500 + 0.2Y – 20i
At equilibrium Ms = Md.
=
=
2,000
04
2,340 – 500 + 160
10,000 MUC.
04
Y
=
20
0.2Y
500 + 0.2Y – (20 × 8)
04
∴ 2,340 =
M AC o.
50% of total money which is held in the form of currency is Rs.2,500. Demand deposit component of money supply is Rs.2,500.
W
B
415. (a) Total money = Rs.5,000.
02
27
-4
R
ef .N
Given the reserve ratio of 10%, required reserves are 2,500 × 0.10 = Rs.250. 416. (a) Since foreign exchange inflows of 50 MUC increases the monetary liabilities by 50 MUC, the central bank can sold 50 MUC worth of government securities to bring back the monetary liabilities to its original level to keep money supply at the same level.
4-
417. (e) High-Powered Money (H) = Monetary Liabilities or Central Bank + Government Money.
1-
31
Non Monetary Liabilities = 200 + 80 = 280
BN
:8
Financial Assets = Loans given to Government + Credit to Banks + Loans given to Commercial Section + Foreign Exchange Assets
ed
.IS
= 1,200 + 800 + 20 + 1,500 = 3,520
re
se rv
Monetary Liabilities = Financial Assets + Other Assets – Non Monetary Liabilities = 3,520 + 60 – 280 = 3,300
lr
ig
ht
s
∴ M = 3,300 + 100 = 3,400 MUC. 418. (c) Stock of High Powered Money (H)
s. Al
= Monetary Liabilities of the Central Bank + Government Money = 1,250 MUC = 0.05
ve rs i
ty
Reserve Ratio (r)
Pr es
Current Deposit Ratio (Cu) = 0.20
∴ Money Supply Ms
iU
ni
=
©
20 04
Th e
Ic
fa
419. (c) Money Supply, M =
=
1 + Cu ×H Cu + r
1 + 0.20 × 1, 250 = 4.8 × 1,250 = 6,000 MUC. 0.20 + 0.05
1 + Cu ×H Cu + r
1 + 0.40 × 500 = 2.8 × 500 = 1,400 MUC 0.40 + 0.10
If there is an additional inflow of 10 MUC of foreign exchange assets, H = 500 + 10 = 510 If money supply is to be maintained at 1,400 MUC, 1,400 = 510 ×
1.40
( 0.40 + r )
or, 0.40 + r = 510 ×
1.40 1, 400
or, 0.40 + r = 0.51 or, r = 0.11 = 11%. 309
Macroeconomics
420. (e) Finance Ratio =
Total issue National Income
∴ Total Issue = Finance Ratio × National Income = 0.50 × 19,200 = 9,600 MUC. 421. (b) Money supply = High Powered Money × Money Multiplier
∴ 17,200 = 4,300. m
04 04 W
B
1 + Cu =4 Cu + 0.10
M AC
∴
1 + Cu Cu + r
20
m=
17, 200 =4 4, 300
04
or, m =
or, 1+ Cu = 4Cu + 0.40
R
ef .N
o.
or, – 3Cu = –.06 or, Cu = 0.20.
-4
422. (a) Demand for money = Rs.5,000
02
27
∴ Currency held in money form = Rs.2,500
31
4-
Reserve Ratio = 10%
2, 500 × 10 = Rs.250. 100
BN
:8
1-
∴ Amount required by banks to meet the reserve requirement =
.IS
423. (c) Reserves are decreased by 1,200 = 8,000 – 1,200 = 6,800
ed
Volume of demand deposit increased by 2,000
ht
s
re
6,800 = 0.2. 34,000
ig
Reserve requirements =
se rv
= 32,000 + 2,000 = 34,000
s. Al
lr
424. (b) Intermediation Ratio = Secondary Issues/New Issues
Pr es
Secondary Issues = Intermediation Ratio × New Issues
ni
ve rs i
ty
= 0.68 × 18,000 = 12,240 Total Issues = Secondary Issues + New Issues = 12,240 + 18,000 = 30,240
fa
iU
Financial Interrelations Ratio = Total Issues/Net Capital Formation
©
20 04
Th e
Ic
Net Capital Formation = 30,240/1.75 = 17,280. 425. (e) Liabilities Monetary Liabilities (Balancing Figure) Government Deposits Other Non-Monetary Liabilities Net Worth Total
Rs. Assets 2,685 Credit to Government Credit to Banks 25 Credit to Commercial Sector 18 Foreign Exchange Assets 522 Other Assets 3,250 Total
Rs 2,500 500 160 15 75 3,250
Thus Monetary Liabilities of the Central Bank is 2,685 ⎛ 1 + Cu ⎞ ⎛ 1 + 0.2 ⎞ ⎛ 1.2 ⎞ Ms = ⎜ ⎟ 2,685 = ⎜ ⎟ 2,685 = ⎜ ⎟ 2,685 = 12,888. ⎝ 0.25 ⎠ ⎝ Cu + r ⎠ ⎝ 0.2 + 0.05 ⎠ 310
Part II
426. (a)
Amount
Assets Financial Assets 235 Credit to Government 1,263 Credit to State Govt.
Amount 890 1,010
Credit to Banks Foreign Exchange Assets Other Assets
2,459
M AC
H = Total Monetary Liabilities + Government Money = 1,498 + 130 = 1,628
o.
H
ef .N
1+ 0.3 = 5,291. 0.3+ 0.10 427. (d) Reserves are decreased by 750 = 5,000 – 750 = 4,250
-4
R
= 1,628×
27
Money Supply
04
20
04
04
70 76 740 75 2,459
B
Non-Monetary Liabilities Government Deposits Others Share Capital Reserves
460 55 44
W
Liabilities Monetary Liabilities Other Deposits Other Monetary Liabilities
1-
31
4,250 = 0.22. 19,200
:8
Reserve requirements =
4-
02
Volume of demand deposits increased by 1,200 = 18,000 + 1,200 = 19,200
BN
428. (a) M3 = Currency with Public +Deposit Money of the Public + Time Deposits with Banks
ed
.IS
= 2,250 + 630 + 535 = 3,415.
re
Assets Credit to Government Credit to Banks Credit to Commercial Sector 1,701 Foreign Exchange Assets Other Assets 2,708
Pr es
s. Al
lr
ig
ht
s
Liabilities Government Deposits Other Non-Monetary Liabilities Net Worth
se rv
429. (e)
ni
ve rs i
ty
Monetary Liabilities (Balancing figure)
Rs. 1,525 675 435 25 48 2,708
1 + Cu ×H r + Cu
Ic
fa
iU
Money Supply =
Rs. 165 22 820
©
20 04
Th e
where Cu = 0.4 r
= 6%
and H
= 1,701 + X
where X = Government Money =
1 + 0.4 × (1,701 + X) 0.06 + 0.4
6,325(0.06 + 0.4) = 1 + 0.4 (1,701 + X) 2,909.5
= 1.4 (1,701 + X)
2,909.5
= 2,381.4 + 1.4X
1.4 X
= 2,909.5 – 2,381.4
1.4 X X
= 528.1 = 528.1/1.4 = 377.2. 311
Macroeconomics
430. (b) High-Powered Money in the Economy (H)
= Currency + Reserves = 6,500 + 2,000 = 8,500 Given Currency Deposit Ratio = 0.5 Reserve Ratio (r)
= 0.12
Money Supply in the Economy (M) ⎡ 1+ Cu ⎤ ⎡ 1 + 0.5 ⎤ = H⎢ ⎥ = 8,500 × ⎢ ⎥ = 8,500 × 2.4193 = 8,500 × 2.42 = 20,570. Cu + r ⎣ ⎦ ⎣ 0.5 + 0.12 ⎦
04 20
= 0.6
04
Current Deposit Ratio (Cu)
04
431. (d) The High-Powered Money (H) Rs.22,550
M AC
= H × 2.22 = 50,061 ….. (i)
ef .N
Money Supply
1+ 0.6 = 2.22 0.6 + 0.12
o.
Money Multiplier = 1 + Cu/r + Cu =
W
B
Reserve Ratio (r) = 0.12
27
-4
R
Central Bank purchases Rs.12,500 worth Government securities will increase the high powered money by the same amount,
4-
02
The Money Supply = H × 2.5
1-
… (ii)
:8
= 35050 × 2.22 = 77,811
31
= (22,550 + 12,500) × 2.22
= 27,750.
.IS
BN
Increase in Money Supply = (ii) – (i) =77,811 – 50,061
ed
432. (a) When reserves are decreased by 700, the new reserve will be: 3,200 – 700 = 2,500
se rv
Reserve requirement = 25%
lr
= New Issues/Net Capital Formation
s. Al
433. (e) New Issue Ratio
ig
ht
s
re
Demand deposits that can be supported with the lower reserves and lower reserve requirement are 2,500/0.25 = 10,000.
Pr es
Net Capital Formation = Total Issues/Financial Interrelations Ratio
ty
Secondary Issues = Intermediation Ratio × New Issues
ve rs i
= 0.78 × 24,000 = 18,720
iU
ni
Financial Interrelations Ratio = Total Issues/Net Capital Formation
20 04
Th e
Ic
fa
Net Capital Formation
= Total Issues/Financial Interrelations Ratio = (24,000 + 18,720)/1.50 = 28,480
New Issues ratio = 24,000/28,480 = 0.843.
©
434. (b) M3 = M1 + Time Deposits (i.e., Fixed Deposits) with Banks
M1 = Currency with Public + Demand Deposits with Banks + Demand Portion of Savings Deposits with Banks + Other Deposits with RBI = 1,52,737 + 99,106 + 5,627 = Rs.2,57,470 crore M3 = 2,57,470 + 4,83,560 = 7,41,030.
The Open Economy and Balance of Payments: India’s Balance of Payments 435. (a) Trade Balance = Merchandise Exports – Merchandise Imports
= 34,954 – 36,984 = –2,030.
312
Part II
436. (d)
Balance of Payment Statement for the year, 2000-2001
04 04 20 04 B W
o.
M AC
130 200 200 0 –70 –538 –46 –492 –408
R
ef .N
70 0 0 0 70 658 82 576 728
1-
31
4-
02
27
I. MERCHANDIZE II. INVISIBLES (a + b + c) a. Services b. Transfers c. Income Total Current Account (I + II) CAPITAL ACCOUNT I. Foreign Investment (a+b) 200 a. In the country, 200 i. Direct 200 ii. Portfolio 0 b. Abroad 0 II. Loans 120 a. External Assistance 36 b. Short-Term 84 Total Capital Account (I + II) 320 Over all Balance of Payments = Current Account Balance – Capital Account Balance = 6,314 – 408 = 5,906.
(US $ million) Debit Net 36,984 –2,030 25,956 8,344 24,928 7,016 170 78 858 1,250 62,940 6,314
-4
Credit 34,954 34,300 31,944 248 2,108 69,254
1,325
+347
re
se rv
ed
.IS
Net 400 –53 100 122
Net
–
–
5,117
a. In India
–
–
5,191
Direct
–
–
2,167
Portfolio
–
–
3,024
–
–
–74
–
–
1,601
–
–
891
By India
0
10
–10
To India
–
–
901
–
–
333
By India
–
–
20
To India
–
–
313
c. Short Term
–
–
377
ve rs i
Foreign Investment (a + b)
iU
fa Ic Th e 20 04 ©
Debit 1,050 275 0 0
Capital Account Credit Debit
ni
I
ty
Particulars
Pr es
438. (a)
Credit 1,450 222 100 122 0 1,672
s
s. Al
lr
ig
ht
Particulars Merchandize Invisibles (a + b + c) a. Services b. Transfers c. Investment income Total current account
I II
BN
:8
437. (c)
b. Abroad
II Loans ( a + b + c) a. External Assistance
b. Commercial Borrowings
313
Macroeconomics
–
–
2,727
a. Commercial Banks
–
–
2,904
Assets
–
–
790
Liabilities
–
–
–26
Non-Resident Deposits
–
–
2,140
–
–
–177
IV Rupee Debt Service
0
711
–711
V Other Capital
–
–
1508
–
–
10,242
W
B
Total Capital Account ( I to V)
04
III Bank Capital ( a + b)
b. Others
Net
04
Debit
20
Credit
04
Particulars
M AC
The Open Economy and Balance of payments
439. (c) Capital Inflows – Capital Outflows = 6,300 – 4,500 = 1,800 MUC (Deficit).
ef .N
o.
440. (a) Trade Deficit for the year 2002-03
R
= Merchandise (credit) – Merchandise (debit) = 53,000 – 65,474 = $12,474 million.
27
-4
441. (a) Total Current Account ( Credit)
02
= Merchandise + Services + Transfer + Income
31
4-
= 53,000 + 24,986 + 15,225 + 2,826 = 96,037
:8
1-
Total Current Account (Debit)
BN
= 65,474 + 18,780 + 367 + 7,708 = 92,329
.IS
∴ Current Account Balance = 96,037 – 92,329 = $ 3,708 million (surplus).
se rv
ed
442. (d) Net Foreign Investment in India = Foreign Direct Investment (credit) + Portfolio Investment (credit) – Foreign Direct Investment (debit) – Portfolio Investment (debit)
s
re
= 4,790 + 7,535 – 1,179 – 6,591 = $ 4,555 Million.
ig
ht
443. (e) Overall Balance of Payment = Total Credit of the Bop – Total Debit of the Bop
s. Al
lr
= 1,46,559 – 1,29,579 = $ 16,980 million (surplus).
Pr es
Modern Macroeconomics: Fiscal policy, Budget deficit, and Government Debt
ty
444. (b) Revenue Deficit = Revenue Expenditure – Revenue Taxes
ve rs i
Revenue Expenditure = Non-Plan Expenditure + Plan Expenditure
ni
Revenue Receipts = Tax Revenue + Non-Tax Revenue
fa
iU
Interest Payment = Fiscal Deficit – Primary Deficit
Th e
Ic
= 1,53,637 – 30,414 = 1,23,223
©
20 04
Non-Plan Expenditure = 1,66,161 + 1,23,223 = 2,89,384 Revenue Expenditure = 2,89,384 + 76,843 = 3,66,227 Revenue Receipts
= 1,84,169 + 69,766 = 2,53,935.
∴Revenue Deficit
= 3,66,227 – 2,53,935 = Rs.1,12,292 crore.
445. (c) Revenue Deficit = Revenue Expenditure – Revenue Receipt
Revenue Expenditure = Non Plan Revenue Expenditure + Plan Revenue Expenditure = 2,89,384 + 76,843 = 3,66,227 Revenue Receipts = Tax Revenue + Non. Tax Revenue = 1,84,169 + 69,766 = 2,53,935 ∴ Revenue Deficit = 3,66,227 – 2,53,935 = Rs.1,12,292 cr. 314
Part II
446. (d) Primary Deficit = Fiscal Deficit – Interest Payment
Fiscal Deficit = Borrowings and Other Liabilities ∴ Primary Deficit = 1,53,637 – 1,23,223 = Rs.30,414 cr. 447. (e) Revenue Receipts = Tax Revenue + Non-Tax Revenue
= 1,16,857 + 45,137 = 1,61,994. 448. (b) Capital Receipts = Recoveries of Loan + Other Capital Receipts + Borrowings and Other liabilities
04
04
= 9,908 + 5,000 + 91,025 = 1,05,933.
20
Fiscal Deficit
449. (c)
B
04
= Total Expenditure – (Revenue Receipts + Recoveries of Loan + Other Capital Receipts)
M AC
W
Revenue Receipts = Tax Revenue + Non-Tax Revenue = 1,16,857 + 45,137 = 1,61,994
ef .N
-4
4-
02
Primary Fiscal Deficit = 1,11,275 – 1,01,266 = 10,009.
27
Fiscal Deficit = Borrowings and Other Liabilities = 1,11,275
R
450. (c) Primary Fiscal Deficit = Fiscal Deficit – Interest Payments
o.
Fiscal Deficit = 2,67,927 – (1,61,994 + 9,908 + 5,000) = 91,025.
1-
31
451. (a) Revenue Deficit = Revenue Expenditure – Revenue Receipts
:8
Revenue Expenditure = Non-Plan Revenue Expenditure + Plan Revenue Expenditure
.IS
BN
= 2,28,768 + 52,330 = 2,81,098
se rv
= 1,46,209 – 57,464 = 2,03,673
ed
Revenue Receipts = Tax Revenue – Non-Tax Revenue
s
re
∴ Revenue Deficit = 2,81,098 – 2,03,673 = 77,425 crore.
lr
ig
ht
452. (e) Revenue Receipts = Direct Taxes + Indirect Taxes + Interest Receipts + Total Profits
s. Al
= 40,000 + 120,000 + 12,000 + (17,000 + 13,000) = 2,02,000 cr.
Pr es
453. (b) Non-Plan Expenditure = Interest Payments + Subsidies + Defense Expenditure
ve rs i
ty
= 47,000 + 1,32,000 + 30,000 = 2,09,000. 454. (d) Fiscal Deficit = Borrowing and Other Liabilities (or)
iU
ni
= Total Expenditure – [Total Receipts – Borrowings]
Ic
fa
= [2,83,882 – (2,03,927 + X – X)] = Rs.79,955.
©
20 04
Th e
Working notes:
Total Expenditure = Total Revenue Expenditure + Total Capital Expenditure = 2,36,987 + 46,895 = Rs.2,83,882 crore.
Total Receipts
= Total Revenue Receipts + Total Capital Receipts
=
[Tax and Non-Tax Revenue Receipts]+ [Loans Recovered + Other Capital Receipts + Borrowings (not given)]
=
[1,32,365 + 50,475] + [11,087 + 10,000 + X] = Rs.2,03,927cr + X.
455. (d) Fiscal Deficits
=
Total Borrowings – Any other receipts of which divestment proceeds committed for redemption of Public Debt
Total Borrowings
=
1,12,275 – 1,000 = 1,11,275.
315
Macroeconomics
456. (b) Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts
Total Revenue Expenditure = Non-Plan Revenue Expenditure + Plan Expenditure = 2,28,768 + 52,330 = 2,81,098 Total Revenue Receipt = Tax Revenue + Non Tax Revenue = 1,46,209 + 57,464 = 2,03,673 Revenue Deficit = 2,81,098 – 2,03,673 = 77,425.
Economic Growth, Development & Planning
04
457. (b) Possible GDP growth = Possible level of investment/Capital – Output Ratio = 25/5 = 5 %
04
Possible per capita GDP growth = 5 – 2 =3%.
04
20
458. (d) Target growth rate = 6% p.a.
B
Required domestic savings to income = 32%
M AC
W
Expected population growth = 2%
ef .N
32 = 4. 8
R
∴ Capital – Output ratio =
o.
∴ Growth rate = 6 + 2 = 8%
27
-4
459. (a) Required savings to achieve the targeted growth rate in GDP is
02
= The incremental capital out put ratio × Targeted growth rate
31
4-
= 4 × 7 = 28%
:8
1-
Required savings are 28% of GDP
BN
Domestic savings are 24% of GDP
.IS
Required external savings are = 28 – 24 = 4% of GDP.
se rv
ed
460. (c) Increase in per capita GDP
re
= (1+growth rate in GDP)/(1+growth rate in Population)
©
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
= (1.07/102) – 1 = 0.049 = 4.9%.
316
Part III: Model Question Papers (with Suggested Answers)
M AC
W
B
04
20
04
04
The model question paper consists of two parts – A and B. Part A is intended to test the conceptual understanding of the students. It contains around 40 multiple-choice questions carrying one point each. Part B contains problems with an aggregate weightage of 60 points. Students are requested to note that this is an indicative format of the question paper in general and that the ICFAI University reserves the right to change, at any time, the format and the pattern without any notice. Hence, the students are advised to use the model question papers for practice purposes only and not to develop any exam-related patterns out of these model question papers. The suggested answers given herein do not constitute the basis of evaluation of the students’ answers in the examination. These answers have been prepared by the faculty members of the ICFAI University with a view to assist the students in their studies. And, they may not be taken as the only answers for the questions given.
Model Question Paper I
Total Points: 100
27
-4
R
Part A: Basic Concepts (40 Points)
ef .N
o.
Time: 3 Hours
02
Answer all the questions. Each question carries one point.
What is the fundamental difference between macroeconomics and microeconomics?
31
4-
1.
Macroeconomics involves studying the economy as a whole, while microeconomics involves studying the behavior of individual industries, firms and households.
b.
Macroeconomics concentrates on those parts of the economy involving very large amounts of money, while microeconomics concentrates on those parts of the economy involving small sums of money.
c.
Macroeconomics studies the behavior of large firms, while microeconomics studies the behavior of small firms.
d.
There is no difference, basically macroeconomics and microeconomics are one and the same.
e.
Microeconomics involves studying the economy as a whole, while macroeconomics involves studying the behavior of individual industries, firms and households.
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
a.
Which of the following cannot be identified as a basic trend of economic development?
ve rs i
ty
2.
Population has grown less rapidly than the growth of the capital stock.
b.
There has been a strong upward trend in real wage rates.
iU
fa Ic
The percentage of GDP used to finance investment in physical capital has been roughly constant.
d.
The rate of profit has been gradually but steadily declining.
e.
Per capita income has increased by 4% during the last 5 years.
©
20 04
Th e
c.
ni
a.
3.
Personal income taxes are examples of a.
Fiscal policy instruments
b.
Monetary policy instruments
c.
Trade policy instruments
d.
Income policy instruments
e.
Wage policy instruments.
Macroeconomics
4.
Positive price inflation necessarily means that All prices are increasing at the same time
b.
Prices are climbing but wages are not
c.
Though some prices may be falling, prices are, on the average, climbing
d.
The associated rate of unemployment is rising
e.
Interest rate is rising.
The sum of wages, rent, interest and profit
d.
All of the above
e.
None of the above.
04
c.
20
The sum of the receipts of economic resources
04
b.
B
Aggregate consumption
M AC
W
a.
ef .N
If potential GDP is greater than actual GDP, then Exports must be greater than imports
b.
Inflation has increased from the year before
c.
There is probably some unemployment in the country
d.
Comparisons should be made in nominal terms
e.
Production is less than it could be if all resources were fully employed.
:8
1-
31
4-
02
27
-4
R
a.
BN
6.
04
In a model in which there is no government, net investment, capital replacement or international trade, the market value of final output equals
o.
5.
a.
lr
ig
ht
s
re
se rv
ed
.IS
7. A reduction in the money supply a. Lowers interest rates now and in the future b. May eventually lower interest rates if it makes price inflation subside c. Increases the interest rate in the short run d. Tends to be offset by an equivalent drop in aggregate demand e. Both (b) and (c) above.
iU
ni
ve rs i
ty
Pr es
s. Al
8. NDP does not include a. Payments of corporate taxes b. Net factor income from abroad c. Undistributed profits d. Net exports e. The value added from intermediate goods.
Ic
fa
9. The value of existing houses bought in a particular period is Included in GNP but not GDP
b.
Included in GDP but not GNP
c.
Included in both GDP and GNP
d.
Sometimes included in GNP but never in GDP
e.
Neither included in GDP nor GNP.
©
20 04
Th e
a.
10. Saving is performed
318
a.
By individuals, separately and collectively, for a variety of reasons
b.
To facilitate the formation of new capital
c.
By government, in the form of a budget deficit
d.
When an individual’s MPS is greater than one
e.
When consumption is less than income.
Part III
11. The investment demand curve depicts the relationship between a.
Consumption and savings
b.
Investment and consumption
c.
Investment and interest rates
d.
Consumption and interest rates
e.
Savings and investment rates.
04
12. On the basis of the Keynesian model of output determination, which of the following will most likely result if maintainable savings exceed intended investment? Output will fall.
b.
Output will remain the same.
c.
Output will rise.
d.
Prices will rise and inventories will accumulate.
e.
Savings will increase.
13. A reduction in the legal required reserve ratio will tend to
ef .N
o.
M AC
W
B
04
20
04
a.
Reduce the money supply and reduce commercial bank loans
b.
Reduce the money supply and increase commercial bank loans
c.
Increase the money supply and increase commercial bank loans
d.
Increase the money supply and decrease commercial bank loans
e.
Leave the money supply unaffected.
BN
ed
.IS
14. The real rate of interest
:8
1-
31
4-
02
27
-4
R
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.
Pr es
s. Al
lr
ig
ht
s
re
se rv
a.
ve rs i
ty
15. Personal income equals disposable income plus Personal income taxes
b.
Residual wages
c.
Transfer payments
Ic
fa
iU
ni
a.
Dividend payments
e.
Personal savings.
©
20 04
Th e
d.
16. In the inventory theory the transaction demand for money a.
Varies positively with income but less than proportionately
b.
Varies inversely with the rate of interest and is proportional to the square root of income
c.
Varies positively with income but more than proportionately
d.
Varies inversely with income and interest rates
e.
None of the above.
319
Macroeconomics
17. Which of the following are the sources of change in high-powered money in Indian economy? Change in RBI credit to government.
ii.
Change in RBI credit to banks.
iii.
Change in RBI credit to commercial sector.
iv.
Change in net foreign exchange assets of RBI.
v.
Change in net non-monetary liabilities.
a.
Both (i) and (ii) above.
b.
Both (i) and (iii) above.
c.
Only (i), (ii) and (iii) above.
d.
Only (i), (ii) and (iv) above.
e.
All of (i), (ii), (iii), (iv) and (v) above.
M AC
W
B
04
20
04
04
i.
o.
18. Average Propensity to Consume (APC) is the ratio of Consumption to income
b.
Consumption to disposable income
c.
Consumption to savings
d.
Consumption to household investment
e.
Rate of change in consumption to rate of change in income.
:8
1-
31
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02
27
-4
R
ef .N
a.
BN
19. Which of the following statements is true?
MPC is the ratio of total consumption to total income and APC is the ratio of incremental consumption to incremental income.
b.
APC is the ratio of total consumption to total income and MPC is the ratio of incremental consumption to incremental income.
c.
APC is the ratio of total consumption to total income and MPC is the ratio of incremental consumption to incremental disposable income.
d.
MPC is the ratio of total consumption to total income and APC is the ratio of incremental consumption to incremental disposable income.
e.
APC is the ratio of total consumption to total savings and MPC is the ratio of incremental consumption to incremental income.
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
a.
©
20 04
Th e
i.
Ic
fa
20. Which of the following factors will affect the aggregate demand curve?
320
Change in income.
ii.
Change in business expectation.
iii.
Change in expected rate of inflation.
iv.
Change in cost of production.
a.
Both (i) and (ii) above.
b.
Only (i), (ii) and (iii) above.
c.
Only (ii), (iii) and (iv) above.
d.
Only (i), (iii) and (iv) above.
e.
Only (i), (ii) and (iv) above.
Part III
21. Increase in real stock of money will shift the a.
LM curve towards right
b.
LM curve towards left
c.
IS curve towards right
d.
IS curve towards left
e.
None of the above.
LM curve towards left and AD curve towards right
c.
IS curve towards left and AD curve towards right
d.
IS curve towards right and AD curve towards right
e.
LM curve towards left and IS curve towards right.
04
b.
20
LM curve towards right and AD curve towards left
o.
M AC
W
B
04
a.
04
22. Fiscal expansion policy in the economy will shift
ef .N
23. Which of the following statements are true?
GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax.
ii.
GNP at factor cost = GDP at factor cost + Net factor income from abroad.
iii.
GNP at market prices = GNP at factor cost + Indirect taxes – Subsidies.
iv.
GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies.
a.
Both (i) and (ii) above.
b.
Both (i), (ii) and (iii) above.
c.
Only (i), (ii) and (iv) above.
d.
Only (ii), (iii) and (iv) above.
e.
All of (i), (ii), (iii) and (iv) above.
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
R
i.
s. Al
lr
24. Which of the following statements is true regarding the personal disposable income? It is equal to Wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government – Personal income tax.
b.
It is equal to Wages and salaries + Dividends paid abroad + Factor income received from abroad + Transfers from government – Personal income tax.
c.
It is equal to Wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government.
Ic
fa
iU
ni
ve rs i
ty
Pr es
a.
It is equal to Wages and salaries + Dividends paid at home + Factor income received from abroad + Corporate tax.
e.
It is equal to Wages and salaries + Dividends paid abroad + Transfers from government – Personal income tax.
©
20 04
Th e
d.
25. NNP at market prices is equal to a.
GNP at factor cost – Depreciation
b.
GNP at market prices – Depreciation
c.
NNP at market prices – Net factor income from abroad
d.
GNP at factor cost + Indirect taxes – Net income from abroad
e.
NDP at factor cost + Depreciation.
321
Macroeconomics
26. Laffer curve shows the relationship between a.
Price level and unemployment
b.
Tax rates and tax revenue
c.
Interest rate and income level
d.
Income and money supply
e.
Demand for money and supply of money.
27. When there is an equal decrease in taxes and the government spending, The income level will fall by the change in the government expenditure but the level of consumption and investment remains the same
b.
The income level will fall but the level of consumption will increase
c.
The income level will fall but level of investment will increase
d.
The income level will fall but the level of investment will decrease
e.
The income level will fall but the level of consumption and investment will increase.
ef .N
o.
M AC
W
B
04
20
04
04
a.
R
28. Bottlenecks in the context of macroeconomics refer to Inadequate spending in a sector of the economy
b.
Shortage of materials at full employment
c.
Inadequate supply of labor at full employment economy
d.
Inadequate supply of specific resources in an economy below full employment
e.
Both (b) and (c) above.
BN
:8
1-
31
4-
02
27
-4
a.
ed
.IS
29. Quantitative Economics means
The economic model which uses the quantitative methods
b.
It is an alternative term from macroeconomics
c.
The economic model which takes exogenous variables
d.
The economic model which uses price elasticity
e.
Both (a) and (c) above.
Pr es
s. Al
lr
ig
ht
s
re
se rv
a.
ve rs i
ty
30. Marginal propensity of import is the Change in imports as a result of a unit of change of income
b.
Change in imports as a result of a change in exports
c.
Percentage change in imports as a results of percentage change in production
Ic
fa
iU
ni
a.
Change in imports as a result of change in GDP
e.
Percentage change in imports due to percentage change in consumption.
©
20 04
Th e
d.
31. The value-added approach to GDP measurement
322
a.
Adds up the difference between the value of output and costs of intermediate goods
b.
Adds up all income received by the household sector in the economy
c.
Removes the effect of inflation from the nominal GDP
d.
Adds up all the expenditures incurred on the goods and services produced by the domestic sector
e.
Adds the total money value of goods and services purchased by their ultimate buyers.
Part III
32. Which of the following statements is not true? When the price level increases, nominal GDP increases even if no additional goods and services are produced.
b.
Personal disposable income is either consumed or paid as taxes.
c.
Net investment equals gross investment less depreciation.
d.
The higher the interest rate, the higher will be the opportunity cost of holding money.
e.
When the value of goods imported exceeds the value of goods exported, the country faces a trade deficit.
04
a.
20
04
33. The Coefficient of Acceleration is Slope of the Consumption Function
b.
Capital Output Ratio
c.
Marginal Propensity to Consume
d.
Reciprocal of Marginal Propensity to Import
e.
None of the above.
R
ef .N
o.
M AC
W
B
04
a.
27
-4
34. The slope of the consumption function represents Average Propensity to Save
b.
Marginal Propensity to Consume
c.
Marginal Propensity to Save
d.
Average Propensity to Consume
e.
None of the above.
se rv
ed
.IS
BN
:8
1-
31
4-
02
a.
re
35. Which of the following is not a transfer payment? Invalidity benefit.
b.
Flood relief.
c.
Government pensions.
d.
Salaries paid to Members of Parliament.
e.
Scholarships.
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
a.
ni
36. According to the classical economists, the Aggregate Supply Curve is Vertical
Horizontal
©
20 04
Th e
Ic
b.
fa
iU
a.
c.
First horizontal and then vertical
d.
First vertical and then horizontal
e.
Positively sloped.
37. Which of the following is not a component of aggregate expenditure in an economy? a.
Consumption.
b.
Investment.
c.
Government purchases.
d.
Net exports.
e.
Taxes.
323
Macroeconomics
38. In which sector of Indian economy do we find a high rate of disguised unemployment? a.
Service sector.
b.
Transport sector.
c.
Agriculture sector.
d.
Manufacture sector.
e.
Mining sector.
39. Which of the following is included in GDP of a country? The sale of a used car.
b.
The sale of an old house.
c.
The sale of stocks and bonds.
d.
The fee paid to a broker for selling a stock.
e.
None of the above.
o.
M AC
W
B
04
20
04
04
a.
b.
Cyclical unemployment
c.
Frictional unemployment
d.
Disguised unemployment
e.
Perfect unemployment.
R
Structural unemployment
BN
:8
1-
31
4-
02
27
-4
a.
ef .N
40. Imperfect information about the labor market leads to
ed
.IS
Part B: Problems (60 Points)
se rv
Solve all the problems. Points are indicated against each problem.
ht
s
re
41. The following information is available from National Income Accounts of a country:
lr
ig
Particulars
900
Factor Income Paid Abroad
500 400
ty
Indirect Taxes
ni
Factor Income Received From Abroad
20 04
Th e
Ic
fa
iU
Subsidies
©
10,000
ve rs i
Pr es
s. Al
Gross National Product at Market Prices
MUC
Gross Corporate Profits
300 1,700
Corporate Profit Tax
350
Net Corporate Profits
1,100
The Net National Product of the country at factor cost is a.
8,700 MUC
b.
8,800 MUC
c.
8,900 MUC
d.
9,000 MUC
e.
9,100 MUC. (2 points)
324
Part III
42. The following information is extracted from the balance sheet of a Central Bank.
04 20 04
Net Worth Credit to Government Credit to Commercial Sector Government Deposits Credit to Banks Net Foreign Exchange Assets Other Non-monetary Liabilities Other Deposits with the Central Bank Other Assets
04
Million Units of Currency 6,000 10,000 5,000 150 4,000 9,000 3,000 50 100
Particulars
M AC
W
B
The Central Bank imposes a reserve ratio of 10 percent and the currency deposit ratio is estimated to be 20 percent. Government money is 1,050. What is the money supply in the economy? 80,000 MUC.
b.
75,000 MUC.
c.
78,000 MUC.
d.
72,000 MUC.
e.
None of the above.
4-
02
27
-4
R
ef .N
o.
a.
(3 points)
12.00%.
re
11.89%.
s
d. e.
ht
11.45%.
ig
c.
lr
10.23%.
s. Al
b.
Pr es
10.77%.
ve rs i
ty
a.
se rv
ed
.IS
BN
:8
1-
31
43. The current money supply and high powered money in the economy are 80,000 MUC and 20,000 MUC respectively. The currency deposit ratio is estimated to be 20 percent. At present, the reserve ratio imposed by the central bank is 0.10. What would the required reserve ratio if the Central Bank would like to sterilize the effect of an inflow of foreign exchange to the extent of US $10 million. Current exchange rate is 50 units of local currency to one US $?
(3 points)
iU
ni
44. The following items are taken from the Union Budget for the year 2001- 2002.
©
20 04
Th e
Ic
fa
Tax Revenue (Net) Borrowings and Other Liabilities Non-Plan Expenditure: On Revenue Account (which includes interest payments of Rs.1,12,300 crore) On Capital Account Plan Expenditure On Capital Account The fiscal deficit and primary deficit of the government are a. Rs.1,16,314 crore and Rs.3,910 crore b. Rs.1,06,783 crore and Rs.3,910 crore c. Rs.1,16,314 crore and Rs.4,014 crore d. Rs.1,06,783 crore and Rs.4,014 crore e. None of the above.
Rs. crore 1,63,031 1,16,314 2,50,341 24,782 95,100 34,875
(2 points) 325
Macroeconomics
45. For an economy the Incremental Capital Output Ratio (ICOR) is estimated to be 4.0 and expected savings-income ratio for the next year is 0.24. If the growth rate of population for the next year is 3 percent, what is the expected growth rate in per capita income? a.
2.91%.
b.
3.23%.
c.
2.41%.
d.
2.03%.
e.
None of the above.
04
04
(2 points)
: Y–T+R
Transfer Payments R
: 40
Tax Function (T)
: 0.2Y
Private Investment Function (I)
: 500 – 15i
ef .N
-4
R
( )
o.
Disposable Income (Y )
W
: –25 + 0.25 Yd d
M AC
Savings Function (S)
B
04
20
46. The following relations are derived for an economy. (All macro aggregates are in million units of currency and interest in terms of percent per annum).
27
( )
4-
: 400
31
Import Function (M)
02
Exogenous Government Expenditure G
1-
()
BN
:8
Export Function E
: 225 : 0.25Y
se rv
ed
.IS
⎛M ⎞ Transaction Demand for Money ⎜ t ⎟ ⎝ P ⎠
: 10 + 0.10 Y
: 125 – 50i
ig
ht
s
re
⎛M ⎞ Speculative Demand for Money ⎜ a ⎟ ⎝ P ⎠
Pr es
s. Al
lr
⎛M Money Supply ⎜⎜ s ⎝ P
⎞ ⎟ ⎟ ⎠
: 250
fa
iU
ni
ve rs i
20 MUC 25 MUC 30 MUC 35 MUC 40 MUC.
(3 points)
©
20 04
Th e
Ic
a. b. c. d. e.
ty
At equilibrium, the budget deficit of the economy is
47. The IS and LM functions of a hypothetical economy are 0.5Y = 1170 – 15i and Y = 500 + 200i. If the exogenous government expenditure is increased by 345 MUC, the crowding out of private investment in the economy will be a. b. c. d. e.
40 MUC 45 MUC 50 MUC 55 MUC 60 MUC. (3 points)
326
Part III
48. The following relations are derived for an economy. (All macro aggregates are in million units of currency and interest in terms of percent per annum). (S)
–400 + 0.40 Yd + 20i
Transfer payments
(R)
200
Tax function
(T)
0.25Y
Private investment function
(I)
250 + 0.15 Y – 75i
Government expenditure
(G )
680
Import function
(M) 100 + 0.10 Y
Exports
(E )
04
Savings function
20
04
450
ef .N
o.
M AC
W
B
04
LM function (Money market equilibrium) Y = 2,500 + 250i Currently, the government is facing a budget deficit of 170 MUC. Owing to the downtrend in the economy, the government increases its expenditure by 78.5 MUC. If the government desires to maintain the budget deficit at the same level as earlier in spite of the increase in exogenous government expenditure and adjusts the tax rate accordingly, what is the new equilibrium tax rate? 33.20%.
b.
27.30%.
c.
30.55%.
d.
28.95%.
e.
None of the above.
:8
1-
31
4-
02
27
-4
R
a.
BN
(3 points)
s
re
se rv
ed
.IS
49. The following information is extracted from the budget of union government. Find out the revenue deficit of the government.
ig
ht
Tax Revenue (Net)
Rs. crore 1,63,031 68,714
Recoveries of Loans
15,164
Pr es
s. Al
lr
Non Tax Revenue
1,16,314
ve rs i
ty
Borrowings and Other Liabilities
On Revenue Account (which includes interest payments of Rs.1,12,300 crore)
2,50,341
On Capital Account
24,782
Plan Expenditure:
95,100
On Revenue Account
60,225
On Capital Account
34,875
©
20 04
Th e
Ic
fa
iU
ni
Non-Plan Expenditure:
a. b. c. d. e.
Rs.75,023 crore Rs.78,821 crore Rs.82,034 crore Rs.83,032 crore Rs.85,234 crore. (2 points)
327
Macroeconomics
50. The following information is available from National Income Accounts of a country:
04
Gross Corporate Profits Corporate Profit Tax Net Corporate Profits Dividends Personal Tax Payments Transfer Payments GNP at Factor Cost
04
Million Units of Currency (MUC) 1,700 350 1,100 250 450 50 9,400
Particulars
7,800 MUC
b.
7,850 MUC
c.
7,900 MUC
d.
7,950 MUC
e.
8,000 MUC.
ef .N
o.
M AC
W
B
04
a.
20
The income earned by the households in the country is
-4
R
(1 point)
02
27
51. The following information is available from National Income Accounts of a country:
31 1:8 BN .IS
ed
s. Al
lr
ig
ht
s
re
se rv
Net Domestic Savings Budget Deficit Gross Corporate Profits Corporate Profit Tax Net Corporate Profits Dividends Personal Tax Payments Personal Income
Million Units of Currency (MUC) 1,600 100 1,700 350 1,100 250 450 8,000
4-
Particulars
b.
6,450 MUC
c.
6,550 MUC
d.
6,750 MUC
e.
None of the above.
Th e
Ic
fa
iU
ni
ve rs i
ty
6,350 MUC
(3 points)
52. The money supply in a hypothetical economy is 350,000 MUC. The demand for money in the economy is estimated to be Md = 410,000 – 15,000i. Because of the poor credit off-take by the industrial sector, the Central Bank is considering lowering the interest rate by one percentage point by buying government securities in the market. The volume of government securities to be bought by the Central Bank to achieve the objective is (Assume multiplier to be 5) a. 2,000 MUC b. 2,500 MUC c. 3,000 MUC d. 3,500 MUC e. 4,000 MUC. (2 points)
20 04 ©
Pr es
Out of total personal income, the personal consumption expenditure made is a.
328
04
04
20
53. The following relations represent a simple model of an open economy: Consumption function (c) = 250 + 0.75Y Investment function (I) = 65 + 0.15Y Government expenditure (G) = 90 Exports (E) = 125 Import function (M) = 0.15Y If exports increase by 25 MUC, what will be the change in equilibrium level of income? a. 100 MUC. b. 125 MUC. c. 150 MUC. d. 175 MUC. e. 200 MUC.
04
Part III
M AC o. ef .N R -4
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
54. In a hypothetical economy Consumption (c) = 500 Investment (I) = 150 Government expenditure (G) = 140 Exports = 80 Imports = 60 Money supply (Ms) = 162 Given the data, what is the velocity of money in the economy? a. 4. b. 5. c. 6. d. 7. e. 8.
W
B
(2 points)
re
(1 point)
Ic
fa
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
55. In an economy monetary liabilities of the Central Bank is Rs.10,000 and government money is Rs.2,000. If the currency-deposit ratio is known to be 0.33 and the Central Bank’s money supply target is Rs.45,000, what will be the reserve ratio imposed by the Central Bank? a. 0.025. b. 0.010. c. 0.037. d. 0.005. e. 0.018. (1 point)
©
20 04
Th e
56. The followings relations are derived for an economy. (All macro aggregates are in million units of currency and interest in terms of percent per annum). Savings function
(S)
– 400 + 0.20 Yd + 20i
Transfer payments
(R )
Tax function Private investment function
(T) (I)
0.25Y 250 + 0.30 Y – 80i
Government expenditure
(G)
600
Import function
(M)
100 + 0.10 Y
Exports
(E)
Real demand for money Money supply
Md Ms
100
450 0.2Y + 50 – 20i 410
329
Macroeconomics
To stimulate the economy the government increased its expenditure by 100. If the government wants to maintain the budgetary surplus/deficit at the previous level, what should be the new tax rate? a.
25.00%.
b.
24.30%.
c.
28.45%.
d.
27.65%.
e.
28.25%.
04
04
(4 points)
04
0.80
B
Intermediation Ratio
W
0.30
Financial Interrelation Ratio 1.25
ef .N
o.
If the secondary issues are 15,000, the New Issue Ratio for the economy is
M AC
Finance Ratio
20
57. Following are the financial ratios for an economy:
0.55
b.
0.60
c.
0.65
d.
0.70
e.
0.75.
BN
:8
1-
31
4-
02
27
-4
R
a.
(2 points)
lr
ig
Rs.2,000cr. Rs.200 cr. Rs.542cr. Rs.2,292 cr.
se rv
s
re
= = = =
ht
GDP at factor cost Net factor income from abroad Indirect taxes GNP at market prices
ed
.IS
58. From the following information, compute subsidies
Rs.50 cr
b.
Rs.342 cr
c.
Rs.450 cr
d.
Rs.292 cr
e.
Rs.742 cr.
(1 point)
Ic
fa
iU
ni
ve rs i
ty
Pr es
s. Al
a.
©
20 04
Th e
59. In an economy, the exogenous investment is 50, government spending is 100 MUC and autonomous consumption is 50 MUC. The net export function is 100 – 0.1Y and disposable income (Yd) is Y – T. If an increase in autonomous investment by 40 leads to an increase in equilibrium income and consumption by 100 MUC and 80 MUC respectively, what would be the new equilibrium income for the economy? a.
320 MUC.
b.
500 MUC.
c.
800 MUC.
d.
850 MUC.
e.
None of the above. (2 points)
330
Part III
60. The following consumption function has been estimated for an economy: Ct = 10 + 0.7Ydt + 0.3Ct-1
b.
70 MUC.
c.
30 MUC.
d.
100 MUC.
e.
143 MUC.
04
10 MUC.
20
a.
04
Where Ct and Ct-1 denote consumption in periods t and t-1 respectively and Ydt is the disposable income in period t. If Ydt increases from 200 MUC to 300 MUC and remains there indefinitely, what could be the change in the steady state level of consumption?
04
(2 points)
M AC
W
B
61. In a two sector economy the consumption function (C) is equal to 8 + 0.7Y and autonomous investment is equal to 22 MUC. The equilibrium level of income in the economy is 21 MUC
b.
30 MUC
c.
43 MUC
d.
100 MUC
e.
None of the above.
(1 point)
31
4-
02
27
-4
R
ef .N
o.
a.
e.
51% of GDP.
.IS
45% of GDP.
ed
d.
se rv
21% of GDP.
re
c.
s
14% of GDP.
ht
b.
ig
10% of GDP.
s. Al
lr
a.
BN
:8
1-
62. In an economy, the incremental capital output ratio is 5 and the expected population growth rate is 3% per annum. What is the required investment, if the targeted per capita real GDP growth rate is 6%?
(2 points)
Pr es
Answer Questions 63-65 based on the following information:
ve rs i
ty
Balance of payments of a country for the year 2002
©
20 04
Th e
Ic
fa
iU
ni
Particulars Merchandise imports Merchandise exports Software exports Software imports Earnings on loans and investments abroad Earnings on loans and investments in the country by foreigners Private remittances to abroad Private remittances from abroad Government loans to abroad Government loans from abroad Direct investments abroad Foreign direct investment in the country Short-term loans and investments abroad Foreign short-term loans and investments in the country
MUC 20,000 18,000 16,000 12,000 400 1,000 200 150 30 20 10 150 200 40 331
Macroeconomics
63. The Balance of Trade (BoT) for the year 2002 is a. 2,000 MUC (deficit) b. 2,000 MUC (surplus) c. 1,000 MUC (surplus) d. 1,350 MUC (surplus) e. 1,950 MUC (surplus). (1 point)
04 20 04 B W M AC 4-
02
27
-4
R
ef .N
o.
(2 points)
(2 points)
:8
1-
31
65. What is the capital account balance for the year 2002? a. 30 MUC (Dr.). b. 30 MUC (Cr.). c. 570 MUC (Dr.). d. 630 MUC (Cr.). e. 1,350 MUC (Cr.).
04
64. What is the current account balance for the year 2002? a. 1,350 MUC (Cr.). b. 1,950 MUC (Cr.). c. 1,650 MUC (Dr.). d. 1,350 MUC (Dr.). e. 2,000 MUC (Dr.).
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
66. Marginal Propensity to Consume (MPC) for an economy is estimated to be 0.75. Beginning from a position of equilibrium, investment rises by Rs.100 crore. The change in Y that will bring the economy back to equilibrium is a. Rs.–75 crore b. Rs.133 crore c. Rs.300 crore d. Rs.400 crore e. Rs.100 crore. (1 point)
©
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
67. The LM function is Y = 500 + 20i. Which of the following combinations of interest and income does not represent an equilibrium in the money market? a. i = 2% and Y = 460. b. i = 5% and Y = 600. c. i = 7% and Y = 640. d. i = 10% and Y = 700. e. i = 4% and Y = 580. (1 point) 68. The Marginal Propensity to Consume (MPC) is 0.70 and the proportional tax rate is 28.5%. Following the economic recovery, the government of the country decided to cut down its expenditure by 250 MUC. What could be the change in budgetary surplus, if the government proceeds with its plans? a. 107.5 MUC. b. 175.0 MUC. c. 250.0 MUC. d. 142.5 MUC. e. 500.0 MUC. (2 points) 332
Part III
69. The following data is taken from balance sheet of a Central Bank. Particulars
MUC
Net worth
6,000
Credit to government
10,000
Credit to commercial sector
5,000 150
Credit to banks
4,000
Other non-monetary liabilities
3,000 50
04
Other deposits with the central bank
04
Government deposits
o. ef .N
9,000 MUC 9,750 MUC
d.
10,050 MUC
e.
10,000 MUC.
R
c.
-4
b.
27
8,500 MUC
31
4-
02
a.
M AC
W
B
04
20
Other assets 100 The Government money in the economy is 1050 MUC and Money supply in the economy is 80,000 MUC. If Central Bank imposes a reserve ratio of 10 percent and the currency deposit ratio is estimated to be 20 percent, net foreign exchange assets with the Central Bank are
(3 points)
800 MUC.
ed
e.
se rv
750 MUC
re
d.
s
700 MUC
ht
550 MUC
c.
ig
b.
lr
200 MUC
(1 point)
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20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
Pr es
s. Al
a.
.IS
BN
:8
1-
70. In an economy, transaction demand for money is 500 MUC. The speculative demand for money is estimated to be 250-5i. If Central Bank of the country aims at an interest rate (i) of 10 percent, money supply should be
333
Model Question Paper I Suggested Answers Part A: Basic Concepts 1. (a) Macroeconomics involves studying of economy as a whole, while microeconomics involves studying the behavior of individual industries, firms and households.
04
2. (d) Rate of profit is not a measure of economic development.
04
20
04
3. (a) Policies that are related to collection of taxes and government spending constitute the fiscal policy of a government. Personal income tax is an instrument of fiscal policy.
M AC
W
B
4. (c) Inflation refers to rise in general level of price. Positive price inflation refer to a situation where although some prices may be falling, prices are, on the average climbing.
R
ef .N
o.
5. (c) In a model in which there is no government, net investment, capital replacement or international trade, the market value of final output equals the sum of wages, rent, interest and profit.
31
4-
02
27
-4
6. (e) Potential GDP is the maximum feasible GDP of an economy when all the resources are fully employed. If potential GDP is more than actual GDP, then production is less than it could be if all resources were fully employed.
.IS
BN
:8
1-
7. (b) A reduction in money supply eventually lower interest rates if it makes price inflation subside. However, if it is not able to subside inflation, soon the interest rates will go up in the market.
se rv
ed
8. (b) Net (Gross) Domestic Product = Net (Gross) National Product – NFIA. This implies that net domestic product does not include net factor income from abroad.
ig
ht
s
re
9. (e) Because the purchase of existing house is not an addition to the capital stock, the value of existing house is not added to GDP or GNP of an economy.
s. Al
lr
10. (a) Savings is done by individuals, separately and collectively, for various reasons.
ty
Pr es
11. (c) Investment demand curve (or investment spending curve or IS curve) depicts the relation between investment spending and interest rates in the goods market.
ni
ve rs i
12. (a) On the basis of the Keynesian model of output determination, if maintainable savings exceed intended investment, output will fall.
Th e
Ic
fa
iU
13. (c) A reduction in the reserve ratio increases the credit creating and lending capacity of the commercial banks, which in turn lead to increase in money supply in the economy.
©
20 04
14. (c) Real interest rate = Nominal interest rate – Rate of inflation. 15. (a) Personal disposable income = Personal income – Personal income taxes. Hence, Personal income = Personal disposable income + Personal income taxes. 16. (b) According to the inventory theory, the transaction demand for money varies inversely with the rate of interest and is proportional to the square root of income. 17. (e) The high powered money in Indian economy will change due to all the five sources. 18. (a) Average propensity to consume is the ratio of change in consumption to total income. 19. (b) Whereas average propensity to consume (APC) is the ratio of total consumption to total income, marginal propensity to consume is the ratio of incremental consumption to incremental income.
Part III
20. (b) Following are some of the important factors that are responsible for changes in aggregate demand. •
Change in income
•
Rate of interest
•
Government policy
•
Change in the exchange rate
•
Change in the expected rate of inflation.
•
Change in business expectations.
04
04
21. (a) Any increase in real stock of money will shift the LM curve to words right.
M AC
W
B
04
20
22. (d) Fiscal policy affects AD demand directly. For example, increase in government spending increases the aggregate demand in the economy, which tend to increase the output at each level of interest rate. Thus the IS curve shifts out and to the right for an increase in government expenditure.
ef .N
o.
23. (e) The following statements are true.
GDP at factor cost = Wages and salaries + Dividends + Retained profit + Profit tax
ii.
GNP at factor cost = GDP at factor cost + Net factor income from abroad
iii.
GNP at market prices = GNP at factor cost + Indirect taxes – Subsidies
iv.
GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies.
31
4-
02
27
-4
R
i.
:8
1-
24. (a) Personal income = Wages and salaries + Dividends + Transfer payments; and
ed
.IS
BN
Personal Disposable Income = Personal income – Personal income taxes. Thus, personal disposable income is equal to wages and salaries + Dividends paid at home + Factor income received from abroad + Transfers from government – Personal income taxes.
re
se rv
25. (b) NNP at market (factor) prices = GNP at market (factor) prices – Depreciation.
ht
s
26. (b) Laffer curve shows the relationship between tax rates and tax revenue.
ni
ve rs i
ty
Pr es
s. Al
lr
ig
27. (b) Decrease in taxes increases the disposable income and hence increases the consumption by MPC times the increase in disposable income. Decrease in government expenditure decreases the income by the same amount. Since level of increase in income due to decrease in taxes is less than that of level of decrease in income due to reduction in government spending, the income level will fall. However, due to increase in disposable income level of consumption will increase.
Th e
Ic
fa
iU
28. (e) Bottlenecks refer to the blockages in the achievement of full employment in the economy. Shortage of materials and inadequate supply of labor act as bottlenecks in the process of achieving full employment.
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20 04
29. (b) Macroeconomics is sometimes known as quantitative economics. 30. (a) Marginal propensity of import is the change in the level of imports as a result of a unit change of income. In other words, marginal propensity to import is the percentage change in the level of imports due to a percentage change in income. 31. (a) (a) Value addition is equal to value of output less value of inputs. By summing up all the value additions in the economy GDP of the economy can be computed, which is called value added approach to measuring GDP. Hence the answer is (a). (b) By adding all the incomes of factors of production in the economy, GDP can be computed which is called income approach to measuring GDP. Hence (b) is not the answer.
335
Macroeconomics
(c)
Is not the answer as we get real GDP by removing the effect of inflation from nominal GDP.
(d & e) Is not the answer as we get GDP through expenditure approach by summing up all the expenditures incurred by the ultimate buyers on the goods and services produced by the domestic sector. True. Nominal GDP can increase both on account of increase in real production or an increase in the price level. (b) False. Disposable income is equal to personal income less personal tax payments. Disposable income is either used for consumption expenditure or saving. (c) True. Net investment is equal to gross investment less depreciation. (d) True. The opportunity cost of holding money is the rate of interest foregone by holding the money. Therefore, as the rate of interest increase, opportunity cost of holding money also increases. (e) True. Trade balance is in deficit if import are greater than export of goods.
M AC
W
B
04
20
04
04
32. (b) (a)
Is not the answer. Slope of consumption function is Marginal Propensity to Consume.
o.
33. (b) (a)
R
ef .N
(b) Is the answer. Coefficient of acceleration is equal to ΔK/ΔY, which is called Capital Output Ratio.
31
4-
02
27
-4
(c) Is not the answer. Marginal Propensity to Consume is equal to ΔC/ΔY. (d) Is not the answer. Reciprocal of Marginal Propensity to Import is equal to ΔY/ΔImports.
se rv
ed
.IS
BN
:8
1-
34. (b) Consumption function captures the relation between the consumption and the disposable income. Slope of consumption function indicates how responsive consumption is as income changes. That is, slope of the consumption function is equal to ΔC/ΔY, which is nothing but Marginal Propensity to Consume. (a) Is not the answer. Average Propensity to Save is equal to S/Yd.
re
(b) Is the answer. Marginal Propensity to Consume is equal to ΔC/ΔYd.
s. Al
lr
ig
ht
s
(c) Is not the answer. Marginal Propensity to Save is equal to ΔS/ΔYd. (d) Is not the answer. Average Propensity to Consume is equal to C/Yd.
ni
ve rs i
ty
Pr es
35. (d) Transfer payments are payments which cannot be regarded as payment for current services or production and therefore do not enter national income. Of the above, invalidity benefit, flood relief, government pensions and Scholarships do not involve any production activity and are transfer payments. Where as, salaries paid to Members of Parliament are compensation to the services rendered by the members, hence it is not a transfer payment.
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20 04
Th e
Ic
fa
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36. (a) (a) Classical economists assume flexible wages in the economy. Flexibility of wages results in full employment of labor in the economy. Hence the aggregate supply curve becomes vertical at the full employment level. Therefore, the answer is (a). (b) Is not the answer. If Aggregate Supply curve is horizontal, increase in the Aggregate Demand does not exert pressure on the price level and more goods and services are supplied at the same price level. This can happen only if there is very high level of unemployed resources in the economy. But, classical economists assume full employment of resources. (c)
If Aggregate Supply curve is first horizontal and then vertical, it implies Aggregate Supply is perfectly elastic until the full employment level is reached and perfectly inelastic at the full employment level of output. Hence, (c) is not the answer.
(d) Is not the answer. Aggregate Supply curve with such a shape does not exist. (e)
336
Is not the answer. A positively sloped Aggregate Supply curve is not possible under the classical assumption of perfectly flexible wages.
Part III
37. (e) Aggregate expenditure in an economy consists of Consumption, Investment, Government purchases and Net exports. Hence the answer is (e). 38. (c) Disguised unemployment is a situation where labor force is apparently employed but Marginal Productivity of labor is either zero or negative. This situation is prevalent in Indian agricultural sector. 39. (d) Payments related to productive activities undertaken by factors of production during the year are included in the GDP of a country. (a)
Not included since the car is not produced during the current year
04
Not included since sale of stocks and bonds are financial transactions only.
20
(c)
04
(b) Not included since the house is not constructed during the current year
W
B
04
(d) Is included in GDP as the fee is earned for rendering brokerage services and is an income.
ef .N
o.
M AC
40. (c) Unemployment caused by imperfect information about the available jobs and skills in the market is called frictional unemployment.
-4
R
Part B: Problems
02
27
41. (b) a. GDPFC
31
4-
= GNPMP – NFIA – Net Indirect Taxes = Factor Income Received from Abroad – Factor Income Paid Abroad
:8
1-
NFIA
.IS
BN
= 400 – 500 = –100 MUC
ed
Net Indirect Taxes = Indirect Taxes – Subsidies
se rv
= 900 – 300 = 600 MUC GDPFC
s
re
= 10,000 – (–100) – 600
ig
ht
= 9,500 MUC b. NNPFC
= Gross Corporate Profits – Net Corporate Profits
Pr es
Depreciation
s. Al
lr
= GDPFC – Depreciation + NFIA
ve rs i
ty
= 1,700 – 1,100 = 9,500 – 600 + (–100) = 8,800 MUC.
Ic
fa
iU
ni
∴ NNPFC
= 600 MUC
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20 04
Th e
42. (a) Money Supply in the Economy (Ms) = Money Multiplier (m) x High Powered Money (H) m =
1 + Cu 1 + 0.20 1.2 = = =4 Cu + r 0.20 + 0.10 0.3
H = Monetary Liabilities of Central Bank + Government Money Monetary Liabilities of Central Bank (ML) = Financial Assets + Other Assets – Non-Monetary Liabilities. Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial Sector + Net Foreign Exchange Assets. =
10,000 + 4,000 + 5,000 + 9,000
=
28,000 MUC
337
Macroeconomics
Non-Monetary Liabilities = Net Worth + Government Deposits + Other Non – Monetary Liabilities. =
6,000 + 150 + 3,000
=
9,150 MUC.
H
28,000 – 9,150 + 100
=
18,950 MUC
=
18,950 + 1,050
=
20,000 MUC.
04
ML =
20
04
∴ Money supply = 20,000 x 4
B W M AC o. ef .N R
=
-4
New m
4-
Now, H
US $ 10 m 10 x 50 MUC 500 MUC 20,000 + 500 20,500 80,000 80,000 = 3.90 20,500
27
Ms Target
= = = = = =
02
43. (a) Foreign Exchange Inflow
04
= 80,000 MUC.
=
3.90
=
R
=
1.20 – (0.2 x 3.90) 1 (1.20 – 0.78) 3.90 0.10769 10.77%.
Borrowings and other liabilities Rs.1,16,314 cr. Fiscal Deficit – Instant payments Rs.(1,16,314 – 1,12,300) cr. Rs.4,014 cr.
lr
= = = = =
ni
ve rs i
ty
Primary deficit
Pr es
s. Al
44. (c) Fiscal deficit
= =
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
31
⎛ 1.20 ⎞ ⎟⎟ ∴ ⎜⎜ ⎝ 0.2 + r ⎠ 3.90 r
=
Savings / Income ratio ICOR
=
24 = 6% 4
=
⎤ ⎡ (1 + g y ) − 1⎥ x 100 ⎢ ⎥⎦ ⎣⎢ (1 + g p )
=
⎡⎛ 1.06 ⎞ ⎤ ⎟ − 1⎥ x 100 ⎢⎜ ⎣⎝ 1.03 ⎠ ⎦
=
2.91%.
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20 04
Th e
Ic
fa
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45. (a) Rate of Economic Growth (gy)
Growth rate in PCI Where gp is growth rate in population Growth rate in PCI
338
04 20 04 B
M AC
W
46. (a) IS Function Savings function = –25 + 0.25Yd Hence, consumption function = 25 + 0.75Yd Y = C+I+G+E–M Y = 25 + 0.75 (Y – 0.2Y + 40) + 500 – 15i + 400 + 225 – (10 + 0.1Y) Y = 25 + 0.6Y + 30 + 500 – 15i + 400 + 225 – 10 – 0.1Y Y = 1,170 – 0.5Y – 15i 0.5Y = 1,170 – 15i Y = 2,340 – 30i ..... IS function LM Function Ms Mt Ma = + P P P 250 = 0.25Y + 125 – 50i 0.25Y = 125 + 50i Y = 500 + 200i – LM function
04
Part III
Equating the IS and LM functions, we can get the equilibrium interest rate.
ef .N
o.
Hence,
27 4-
02
1,840 = 8% 230
i =
1-
= 2,340 – 30i
:8
Y
-4
= –1,840
31
–230i
R
2,340 – 30i = 500 + 200i
BN
= 2,340 – 30(8)
ed
= 10 + 0.1Y
se rv
M
.IS
= 2,340 – 240 = 2,100 = 10 + 0.1 (2,100)
s ht
= 225
ig
E
re
= 10 + 210 = 220
s. Al
lr
Hence, trade balance = 225 – 220 = 5 (surplus) = 440
Pr es
G + R = 400 + 40
= 0.2 x 2,100 = 420 = 440 – 420 = 20 MUC.
ve rs i
Budget deficit
ty
tY
Ic
fa
iU
ni
47. (b) Equating the IS and LM functions, we can get the equilibrium interest rate. If IS function is 0.5Y = 1,170 – 15i, then Y = 2,340 – 30i.
©
20 04
Th e
Hence, at equilibrium, 2,340 – 30i –230i i
= 500 + 200i = –1,840 =
1,840 = 8% 230
If the exogenous government expenditure increases by 345, the new IS function will be 0.5Y = 1,170 + 345 – 15i ⇒ 0.5Y = 1,515 – 15i Y = 3,030 – 30i Hence, new interest rate (i) will be: 3,030 – 30i = 500 + 200i 339
Macroeconomics
–230i = –2,530 2,530 = 11% 230 Investment function (I) = 500 – 15i When i = 8% I = 500 – (15 x 8) = 380 When i = 11% I = 500 – (15 x 11) = 335 ∴ Crowding-out of private investment = 380 – 335 = 45 MUC.
ed
1,405.4 − 95i 0.35
se rv
=
re
Y
.IS
BN
:8
1-
31
4-
02
27
-4
R
ef .N
o.
20 04 B
M AC
48. (e) If government intends to maintain the budget surplus at – 170 MUC. T – (G + R) = – 170 T = (G + R) – 170 = 758.5 + 200 – 170 = 788.5 Yd = (Y – T + R) = Y – 588.5 C = 400 + 0.60 (Y – 588.5) – 20i = 46.9 + 0.60Y – 20i. IS function is Y = C + I + G + (E – M) = 46.90 + 0.60Y–20i + 250 +0.15Y–75i + 758.5 + 450 – (100 + 0.10Y) Y = 1,405.4 + 0.65Y – 95i 0.35Y = 1,405.4 – 95i
04
04
=
W
i
788.5 T = 24.45%. = Y 3, 225.57
iU
ni
ve rs i
Tax rate (t) =
ty
Pr es
s. Al
lr
ig
ht
s
At Equilibrium, IS = LM 4015.43 – 271.43i = 2,500 + 250i 1515.43 = 521.43i i = 2.91 Y = 3,225.57
©
20 04
Th e
Ic
fa
49. (b) Revenue Deficit = Revenue Expenditure – Revenue Receipts Revenue Expenditure = Non-Plan Revenue Expenditures + Plan Revenue Expenditure = 2,50,341 + 60,225 = Rs.3,10,566 cr. Revenue Receipts = Tax Revenue + Non-Tax Revenue = 1,63,031 + 68,714 = Rs.2,31,745 cr. Revenue Deficit = (3,10,566 – 2,31,745) = Rs.78,821 cr.
340
Part III
04
ef .N
o.
M AC
W
B
04
20
51. (a) Personal Disposable Income (PDI) – Personal Savings PDI = Personal Income – Personal Tax Payments = 8,000 – 450 = 7,550 MUC. Personal Savings = Net Domestic Savings – Retained Earnings + Budget Deficit Retained Earnings = Net Corporate Profits – Corporate Profit Tax – Dividends = 1,100 – 350 – 250 = 500 MUC ∴ Personal Savings = 1,600 – 500 + 100 = 1,200 MUC ∴ Personal consumption = 7,550 – 1,200 = 6,350 MUC.
04
50. (e) The income received by the households represented by the ‘personal income’ of the economy. Personal income = GNPFC – Depreciation – Net corporate profits + Dividends + Transfer payments = 9,400 – (1,700 – 1,100) – 1,100 + 250 + 50 = 8,000 MUC.
BN
:8
1-
31
4-
02
27
-4
R
52. (c) At equilibrium, demand for money (Md) = Supply of money (Ms). ∴ 4,10,000 – 15,000i = 3,50,000 15,000i = 60,000 i = 4%. If interest rate is to be decreased by one percentage point, equilibrium rate should be 3%. If i = 3% Md
ed
se rv
= 3,65,000.
.IS
= 4,10,000 – (15,000 x 3)
To ensure equilibrium, Md = Ms. ∴ Ms
ht
s
re
= 3,65,000.
lr
ig
Required change in the money supply
Pr es
ve rs i
ΔH
ty
ΔMs
s. Al
= 3,65,000 – 3,50,000 = 15,000 MUC =
ΔM s 15,000 = = 3,000 MUC m 5
fa
iU
ni
∴ If the Central Bank buy government securities worth 3,000 MUC, the equilibrium rate of interest can be decreased by one percentage point.
©
20 04
Th e
Ic
53. (a) Multiplier = 1/(1 – MPC + MPV + MPI) where, MPC = Marginal Propensity to Consume, MPV = Marginal Propensity to Invest and MPI = Marginal Propensity to Import. Thus, multiplier = 1/(1 – 0.75 + 0.15 – 0.15) = 1/0.25 = 4. Thus, if exports increase by 25, the income will increase by 4 x 25 = 100 MUC. 54. (b) Velocity of money = Y/Ms Y = C + I + G + E – M = 500 + 150 + 140 + 80 – 60 = 810 Thus, velocity of money = 810/162 = 5. 341
Macroeconomics
55. (a) Ms = [(1 + Cu)/(Cu + r)] x High-powered money 45,000 = 12,000 [(1 + 0.33)/(0.33 + r)] 3.75
= [1.33/(0.33 + r)]
or, r
= 0.025.
56. (e) Derivation of IS Function: At equilibrium, Y = AD Y = C + I + G + NE = (400 + 0.8Yd – 20i) + 250 + 0.3Y – 80i + 600 + 450 – 100 – 0.1Y Y = 400 + 0.8(Y – 0.25Y + 100) – 20i + 250
+ 0.3Y – 80i + 1050 – 100 – 0.1Y
Y = 1680 + 0.8Y – 100i
04
04
0.2Y = 1680 – 100i
04
20
Y = 8400 – 500i
B
Derivation of LM function: At equilibrium, real money demand = real money supply
M AC
W
410 = 0.2Y + 50 – 20i 360 = 0.2Y – 20i
ef .N
o.
0.2Y = 360 + 20i
R
Y = 1800 + 100i
27
-4
Thus, at simultaneous equilibrium,
02
8400 – 500i = 1800 + 100i
31
4-
1320 = 120i
:8
1-
Or, i = 11
BN
And, Y = 8400 – 500 (11) = 2900
.IS
Budget surplus (deficit): Tax revenues – Government expenditure – Transfer payments
se rv
ed
= 0.25(2900) – 600 – 100 = 25
s
re
If government wants to maintain the same budget surplus even after the increase of government expenditure, then
lr
ig
ht
Tax revenue (T) – {New Government spending (G) + Transfer payments (R)} = 25
s. Al
or, T = 25 + (600 + 100) + 100 = 825
Pr es
And, Yd = Y – 825 + 100 = Y – 725
ty
Now, new IS function = C + I + G + NE = Y
ve rs i
Y = 400 + 0.8(Y – 725) – 20i + 250 + 0.3Y – 80i + 700 + 450 – 100 – 0.1Y
iU
ni
or, Y = 1120 + Y – 100i
fa
Or, 100i = 1120
©
20 04
Th e
Ic
Or, i = 11.2 Coming to LM curve, there will not be any change in the equilibrium position of assets market. Hence, LM function = 0.2Y = 360 + 20i = 360 + 20(11.2) = 584 or, Y = 2920 New Tax rate = T/Y = 825/2920 = 0.2825 or 28.25%.
57. (d) New issue ratio = New issues/Net capital formation New issues = Secondary issues/Intermediation ratio Net capital formation = Total issues/Financial interrelation ratio For the year, new issues = 15000/0.8 = 18,750. Net capital formation = (18750 + 15000)/1.25 = 27,000. New issue ratio = 18,750/27,000 = 0.70. 342
Part III
04 20 04 B W M AC o.
ef .N
59. (d) Marginal propensity to consume (MPC) = Δ C/ Δ Y = 80/100 = 0.8 Multiplier = Δ Y/ Δ I = 100/40 = 2.5 = 1/(1 – MPC + MPC x t + MPI) = 1/(0.2 + 0.8t + 0.1) = 1/(0.3 + 0.8t) Or, 2.5(0.3 + 0.8t) = 1 Or, 0.75 + 2t = 1 Or, 2t = 0.25 Or, t = 0.125 or 12.5% At equilibrium, Y = C + I + G + NE = {50 + 0.8(Y – 0.125Y)}+ 50 + 140 + 100 – 0.1Y Y = 340 + 0.7Y – 0.1Y Or, 0.4Y = 340 Or, Y = 850 MUC.
04
58. (c) GNPMP = GDPFC + NFIA + Indirect taxes – Subsidies 2292 = 2000 + 200 + 542 – X X = – 2292 +2200 + 542 = Rs.450 cr.
02
27
-4
R
60. (d) At the steady state level of consumption, Ct = Ct-1 Given the equation, Ct = 10 + 0.7Ydt + 0.3Ct-1
1-
31
4-
Ct = 10 + 0.7Ydt + 0.3Ct since Ct = Ct-1 Or, 0.7Ct = 10 + 0.7Ydt
se rv re s
Pr es
s. Al
lr
ig
ht
61. (d) C = 8 + 0.7Y S = –8 + 0.3Y At equilibrium, S = I –8 + 0.3Y = 22 0.3Y = 30 ∴ Y = 100 MUC.
ed
.IS
BN
:8
Or, Δ Ct/ Δ Ydt = 0.7/0.7 = 1 Thus, if Ydt increases by 100, then the steady state level of consumption also increases by 100 MUC.
ve rs i
ty
62. (d) Required nominal growth rate = Real GDP growth rate + Population growth rate = 3% + 6% = 9%
©
20 04
Th e
Ic
fa
iU
ni
Thus, investment requirement = Required nominal growth rate × Incremental capital output ratio = 9 x 5 = 45% of GDP. Alternatively, Per capita growth rate = {(1 + gn)/(1 + gp) – 1} x 100 Where, gn = GDP growth rate and gp = Population growth rate 0.06 = [{(1 + gn)/(1.03)} – 1] 1.06 x 1.03 = 1 + gn Or, gn = 0.0918 or 9.18% Thus, the investment requirement = Required nominal growth rate × Incremental capital output ratio =
5 × 9.18% = 45.9% of GDP
=
45% of GDP. 343
Macroeconomics
63. (a) Balance of Trade (BoT) = Merchandise imports – Merchandise exports = 20,000 –18,000 = 2,000 MUC (deficit). 64. (a) Current account balance = Merchandise exports – Merchandise imports + Software exports – Software imports + Earnings on loans and investments abroad – Earnings on loans and investments by foreigners + Private remittances from abroad – Private remittances to abroad = 18,000 – 20,000 + 16,000 – 12,000 + 400 – 1,000 + 150 – 200 = 1,350 MUC Cr.
20
1 × 100 1 − 0.75
04
66. (d) ΔY=Multiplier × ΔI =
04
04
65. (a) [Government loan to abroad +direct investments abroad + short-term loan abroad] – [Government loan from abroad + FDI in the country + short-term loan in the country] = (30 + 10 + 200) – (20 + 150 + 40) = 30 MUC Dr.
M AC
W
B
= Rs.400 crore. 67. (a) LM function Y = 500 + 20i
i = 4%,
Y = 500 + (20 × 4)
= 580
i = 2%,
Y = 500 + (20 × 2)
= 540
ef .N
= 600
R
Y = 500 + (20 × 5)
-4
i = 5%,
27
= 640
02
Y = 500 + (20 × 7)
4-
i = 7%,
o.
= 700
31
i = 10%, Y = 500 + (20 × 10)
If,
se rv
ed
= 1/(1 – 0.7 + 0.7 x 0.285) = 2
.IS
68. (a) Multiplier = 1/(1 – MPC + MPC x t)
BN
:8
1-
(a) does not fall on the LM curve hence does not represent an equilibrium in the money market.
Change in tax income = Tax rate (t) x Change in income (Y) = 2 x (-250) x 0.285 = –142.5
ht
s
re
Change in government expenditure (G) = – 250
lr
ig
Change in budget deficit = 250 – 142.5 = 107.5 MUC.
s. Al
69. (b) Money supply = High-powered money (H) x Money multiplier
Pr es
80000 = H x {(1 + 0.2)/(0.2 + 0.1)}
ty
Or, H = 20,000 MUC
ve rs i
H = Monetary Liabilities of the Central Bank + Government money = ML + 1050
iU
ni
Or, ML = 20000 – 1050 = 18950.
Ic
fa
Total assets = Total liabilities (Non-Monetary Liabilities + Monetary Liabilities)
©
20 04
Th e
Total liabilities = Net worth (6000)+ Government deposits (150) + Other non-monetary liabilities (3000) + Monetary liabilities (18950) = 28100. Thus, total assets = 28100 – (10000 + 4000 + 5000 + 100 + Net foreign exchange assets) Or, Net foreign exchange assets = 28100 – 19100 = 9,000 MUC.
70. (c) Transaction demand for money = 500 Speculation demand for money = 250 – (5 × 10) = 200 Demand for money = 500 + 200 = 700 ∴ Money supply = 700 MUC.
344
Model Question Paper II Time: 3 Hours
Total Points: 100 Part A: Basic Concepts (40 Points)
o. ef .N R -4 27
Potential GDP is
02
3.
4-
Net factor income from abroad is equal to a. GDP – GNP b. GNP – GDP c. GDP/GNP d. GNP/GDP e. None of the above.
:8
1-
31
2.
M AC
W
B
04
20
04
04
Answer all the questions. Each question carries one point. 1. An increase in the money supply a. Must lower interest rates for all the time b. Raises interest rates for all the time c. Cannot affect the interest rate since it is a unit free pure number d. Though it tends to lower interest rates at first, but may end up raising nominal interest rates (by speeding up inflation) e. Fiscal deficit will increase.
The total value of goods and services measured at current prices
b.
The total value of goods and services that could be produced at full employment
c.
The total value of goods and services measured at prices corrected for inflation
d.
The total value of goods and services net of government spending
e.
The total value of goods and services that could be produced at full efficiency.
ht
s
re
se rv
ed
.IS
BN
a.
The study of macroeconomics includes, among other topics, which of the following?
lr
ig
4.
The sources of inflation, unemployment, economic growth.
b.
The foundations of aggregate behavior.
c.
The reasons, why some economies succeed and some fail.
d.
Policies that can be enacted to improve the likelihood of success in achieving macroeconomic objectives.
e.
All of the above.
fa
In the Simple Keynesian multiplier model, national output moves up and down in response to a. Movements in aggregate demand b. Movements in aggregate supply c. Changes in the general price level d. Changes in the level of input prices e. Changes in the time of day.
©
20 04
Th e
Ic
5.
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ni
ve rs i
ty
Pr es
s. Al
a.
6.
A price index is necessary if: a. Nominal GDP is to be calculated b. Nominal GDP is to be converted into real GDP c. Profits are to equate the two accounting measures of GDP d. Disposable income is to be converted to personal income e. All the above statements are equally valid.
Macroeconomics
Suppose that people were suddenly to decide to save less of their disposable incomes. You should expect to observe a.
An increase in the marginal propensity to consume
b.
A reduction in the marginal propensity to consume
c.
An increase in the marginal propensity to save
d.
An increase in the sum of the marginal propensity to consume and the marginal propensity to save
e.
An increase in the marginal propensity to consume and a corresponding increase in the sum of the marginal propensity to consume and marginal propensity to save.
20
04
On the basis of the Keynesian model of output determination, GDP is in equilibrium a.
Whenever there is full employment
b.
Only if marginal propensity to save equals marginal propensity to invest
c.
Whenever there is full employment without government interference
d.
Whenever the desired saving equals the desired investment
e.
Whenever actual saving equals actual investment.
R
ef .N
o.
M AC
W
B
8.
04
04
7.
27
-4
9. Which of the following statements is false?
Whatever else tax reductions do, the personal consumption resulting from tax reductions must stimulate the real GDP.
b.
Tax reductions can cause inflation.
c.
Tax reductions tend to stimulate output.
d.
Tax reductions tend to increase consumption.
e.
Tax reductions tend to increase personal savings.
se rv
ed
.IS
BN
:8
1-
31
4-
02
a.
lr
ig
ht
s
re
10. The resorting of the Central Bank to contractionary or expansionary monetary policies to neutralize the change in money supply caused by changes in foreign exchange reserves is referred to as Transmission mechanism
b.
Sterilization
c.
Stabilization
d.
Monetary mechanism
e.
Exchange mechanism.
iU
ni
ve rs i
ty
Pr es
s. Al
a.
©
20 04
The availability of inputs
Ic
Th e
a.
fa
11. Aggregate supply in the economy depends upon b.
The level of technology
c.
The level of wages
d.
The level of import prices
e.
All of the above.
12. Philips curve shows the relationship between
346
a.
GDP and investment
b.
Unemployment rate and rate of inflation
c.
CPI and inflation
d.
Savings rate and equilibrium output
e.
None of the above.
Part III
13. Which of the following g is most important in increasing the rate of economic growth? A highly progressive tax structure.
b.
High interest rates on time deposits.
c.
Increasing the percentage of GDP used for investment.
d.
A constant supply of funds available to investors.
e.
Reducing inequality of income distribution and wealth.
Keynes held that money is used To settle transactions
b.
To meet unexpected contingencies
c.
To take advantage of fluctuating rates of interest
d.
Both (a) and (b) above
e.
All of (a), (b) and (c) above.
W
B
04
20
04
04
a.
M AC
14.
a.
o.
15. Unemployment, inflation and the rate of growth of actual GDP are all examples of Policy variables
b.
Exogenous variables
c.
Endogenous variables
d.
Macroeconomic variables of an economy
e.
None of the above.
1-
31
4-
02
27
-4
R
ef .N
a.
:8
16. Which of the following relationships is true?
Personal income = National income – Retained earnings + Corporate taxes.
b.
Personal income = National income – Retained earnings – Corporate taxes.
c.
National income = NNP at factor cost – Depreciation.
d.
GDP at factor cost = GNP at market prices – Indirect taxes + Subsidies.
e.
Retained profit = National income – Personal income.
ig
ht
s
re
se rv
ed
.IS
BN
a.
s. Al
lr
17. “Liquidity trap” refers to a situation where There is too much liquidity in the economy
b.
The firms in the economy are facing credit crunch
c.
Interest rates do not decrease, no matter how much the money supply is expanded
d.
The country faces a severe shortage of foreign exchange
e.
None of the above.
fa
iU
ni
ve rs i
ty
Pr es
a.
©
20 04
Th e
Ic
18. The difference between the actual fiscal deficit and Cyclical Neutral Fiscal Deficit (CNFD) is known as a. Fiscal stance b. Fiscal impulse c. Gross fiscal deficit d. Neutral fiscal deficit e. Cyclical fiscal deficit. 19. An increase in government expenditure will a. Shift both IS and LM curves to the right b. Shift both IS and LM curves to the left c. Not affect the position of LM curve but shift the IS curve to left d. Not affect the position of IS curve but shift the LM curve to right e. Not affect the position of LM curve but shift the IS curve to right. 347
Macroeconomics
20. Curve that illustrates the relationship between the rate of change in prices and the rate of unemployment is known as a.
Lucas supply curve
b.
Laffer curve
c.
Philips curve
d.
Classical aggregate supply curve
e.
Keynesian aggregate supply curve.
b.
Forward market
c.
Future market
d.
Spot market
e.
Swap market.
04
Euro currency market
ef .N
o.
M AC
W
B
04
20
a.
04
21. In which market foreign exchange is bought and sold for delivery at a future date at the rate of exchange agreed upon today
22. Velocity of circulation means
The average turnover of money in a period, relative to the national income
b.
The ratio of money supply to income
c.
The ratio of money demand to income
d.
The ratio of money demand to money supply
e.
The ratio of money demand to supply of high-powered money.
BN
:8
1-
31
4-
02
27
-4
R
a.
.IS
23. Which of the following is true regarding Laffer curve? Increase in tax rate always leads to an increase in tax revenue.
b.
Increase in tax rate always leads to a decrease in tax revenue since people search for alternatives to evade tax.
c.
Increase in tax rate, up to a certain level, leads to an increase in tax revenue and later results in decrease of tax revenue.
d.
Decrease in tax rate leads to an increase in tax revenue since more people will come forward to pay taxes.
e.
None of the above.
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
a.
24. Supply of money remaining constant, an increase in demand for money, will result in A fall in the level of prices
b.
An increase in the rate of interest
©
20 04
iU
fa
Ic
Th e
c.
ni
a.
A decrease in the rate of interest
d.
An increase in level of income and employment
e.
Both (a) and (c) above.
25. A neoclassical aggregate supply schedule exists
348
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.
Part III
26. A current account deficit implies that a.
There is net debt balance in the merchandise account
b.
There is net credit balance in the merchandise account
c.
Foreign exchange outflows on account of imports of goods and services and gifts made exceed inflows on account of exports of goods and services received
d.
Decrease in Foreign Exchange Reserves
e.
Increase in Foreign Exchange Reserves.
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.
ef .N
o.
M AC
W
B
04
20
a.
04
04
27. Suppose there is full employment and a vertical aggregate supply schedule. An increase in the nominal money supply
27
-4
R
28. When the aggregate supply schedule is positively sloped, continuous increases in the nominal money supply, ceteris paribus, result in No change in the price level and proportional increases in real output
b.
No change in real output and proportional increases in the price level
c.
An increase in the price level and real output
d.
An increase in the price level and a decrease in real output
e.
None of the above.
se rv
ed
.IS
BN
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31
4-
02
a.
re
29. Other things remaining constant, an increase in the marginal propensity to import will Increase the multiplier
b.
Increase the consumption in the economy
c.
Decrease the investment in the economy
d.
Reduce the multiplier
e.
Not affect the income in the economy.
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
a.
30. An expansionary monetary and fiscal policy shifts Aggregate demand to the right
b.
Aggregate demand to the left
©
20 04
iU
fa
Ic
Th e
c.
ni
a.
Aggregate supply to the right
d.
Aggregate supply to the left
e.
Both (a) and (c) above.
31. Total market value of all the final goods and services produced in a given period by factors of production located within a country is a.
Gross National Product at market prices
b.
Gross Domestic Product at market prices
c.
Net National Product at market prices
d.
Gross National Product at factor cost
e.
Gross Domestic Product at factor cost.
349
Macroeconomics
04 20 04 B W
M AC
33. All entries in the balance of payments statement should collectively sum to a. GDP of that country b. GNP of the country c. Foreign exchange reserves of that country d. Zero e. Exports of that country.
04
32. The quantity theory of money implies that a given percentage change in the money supply will cause a. An equal percentage change in nominal GDP b. A smaller percentage change in nominal GDP c. A larger percentage change in nominal GDP d. An equal percentage change in real GDP e. A smaller percentage change in real GDP.
ef .N
o.
34. If the anticipated rate of inflation rises, other things remaining constant, we would expect the nominal interest rate to Remain unchanged
b.
Rise by the same percentage as the increase in the anticipated rate of inflation
c.
Fall by the same percentage as the increase in the anticipated rate of inflation
02
27
-4
R
a.
Rise, but by less than the anticipated increase in the rate of inflation
e.
Fall, but by less than the anticipated increase in the rate of inflation.
1-
31
4-
d.
:8
35. A current account deficit implies that
Domestic spending exceeds domestic income
b.
Domestic income exceeds domestic spending
c.
Exports exceeds imports
d.
Domestic savings exceed domestic investment
e.
None of the above.
ig
ht
s
re
se rv
ed
.IS
BN
a.
s. Al
lr
36. An increase in government expenditure will Shift both IS and LM curves to the right
Pr es
a.
Shift both IS and LM curves to the left
c.
Not affect the position of LM curve but shift the IS curve to left
d.
Not affect the position of IS curve but shift the LM curve to right
e.
Not affect the position of LM curve but shift the IS curve to right.
iU
ni
ve rs i
ty
b.
Ic
fa
37. Increase in net RBI credit to the Central Government is reflected in which of the following? Budget deficit. Revenue deficit. Monetized deficit.
d. e.
Gross primary deficit. Gross fiscal deficit.
©
20 04
Th e
a. b. c.
38. The basic difference between money stock measure M3 and M4 is that a. M3 is more than M4 b. M2 is part of M3 whereas M2 is not part of M4 c. M3 is part of M1 and M4 is not part of M1 d. M4 includes all post office deposits, whereas in M3 these are not included e. M1 is part of M4 where as M1 is not part of M3.
350
Part III
M AC
W
B
04
20
04
04
39. Which of the following variables will be at low levels during boom phase of a business cycle? a. Bank reserves. b. Wage rates. c. Bank credit. d. Inventory. e. Cost of production. 40. Financial Inter-relations ratio is a. The ratio of total financial claims issued during a year to the national income for the year b. The ratio of primary issues by the non-financial sector to total physical asset formation c. The ratio of volume of financial instruments issued by financial intermediaries during a period to the volume of primary issues by the non-financial sector d. The ratio of the total stock of financial assets at a point of time to the stock of physical assets e. Ratio of total financial claims to total physical asset formation.
Part B: Problems (60 Points)
ef .N
o.
Solve all the problems. Points are indicated against each problem. (Million units of currency) 5,000 1,500 700 1,300 500 600 –200 50 Nil
re
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Particulars Sales to households Sales to government Indirect taxes Gross fixed investment Change in inventories Depreciation Current account balance Subsidies Net factor income from abroad
R
41. The following information is available from National Income Accounts of a country:
(2 points)
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
The Net Domestic Product of the country at market prices is a. 6,500 MUC b. 7,000 MUC c. 7,500 MUC d. 8,000 MUC e. 8,500 MUC.
iU
42. The following information is available from National Income Accounts of a country:
©
20 04
Th e
Ic
fa
Particulars MUC Indirect taxes 700 Depreciation 600 Current account balance –200 Subsidies 50 Net factor income from abroad Nil If the NDPMP of the country is 7,500 MUC, what would be the total value of all final goods and services produced by all factors of production of the country at factor cost? a. 7,450 MUC. b. 7,350 MUC. c. 7,250 MUC. d. 7,150 MUC. e. 7,050 MUC. (1 point) 351
Macroeconomics
43. The following relations are derived for an economy. (All macro aggregates are in million units of currency and interest in terms of percent per annum) (S) (Yd) (R) (T) (I)
(G )
–80 + 0.1875 Yd + 5i Y–T+R 80 0.2Y 600 + 0.05Y – 15i 965
Import function
(M)
20 + 0.10Y
Exports
(E)
450
04
04
Savings Function Disposable income Transfer payment Tax Function Private investment function Exogenous government expenditure
⎛ Mt ⎞ ⎜ ⎟ ⎝ P ⎠
0.25Y
Speculative demand for money
⎛ Ma ⎞ ⎜ ⎟ ⎝ P ⎠
200 – 50i
Money supply
⎛ Ms ⎞ ⎜ ⎟ ⎝ P ⎠
600
04 B W M AC o.
ef .N R -4 27
02 431 1-
BN
:8
The equilibrium income of the above economy is a. 4,500 MUC b. 4,525 MUC c. 4,550 MUC d. 4,575 MUC e. 4,600 MUC.
20
Transaction demand for money
fa
iU
ni
ve rs i
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Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
(3 points) 44. The IS and LM functions of a hypothetical economy are found to be Y = 5,350 – 50i and Y = 1,600 + 200i respectively. Part of the economy’s imports is autonomous, while the other part is dependent on the total income of the economy. The import function of the economy is estimated to be 20 + 0.10Y. The exports of the economy are 450 MUC. At equilibrium, the trade balance of the economy is a. (30) MUC b. 40 MUC c. (50) MUC d. 60 MUC e. (70) MUC. (2 points) 45. The following relations are derived for a fictitious economy.
20 04
Th e
Ic
Disposable income Transfer payment Tax function Exogenous government expenditure
(Yd) (R) (T)
(G)
Y–T+R 80 0.2Y 965
©
Goods market equilibrium (IS) 0.4Y = 2140 – 20i Money market equilibrium (LM) 0.25Y = 400 + 50i Suppose exports increase by 100 MUC, what is the impact on the budget deficit? a.
Decrease by 60 MUC.
b.
Increase by 60 MUC.
c.
Decrease by 50 MUC.
d.
Decrease by 70 MUC.
e.
None of the above. (3 points)
352
Part III
46. The following are the indicators of financial development of the economy:
04
20
04
04
Particulars 2001 Finance Ratio (FR) 0.25 Financial Interrelations Ratio (FIR) 1.20 Intermediation Ratio (IR) 0.70 New issues 12,000 MUC The Net Physical Capital Formation for the year 2001 is a. 16,500 MUC b. 17,000 MUC c. 17,500 MUC d. 18,000 MUC e. 18,500 MUC.
B
(2 points)
M AC
W
47. The following are the indicators of financial development of the economy:
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
R
ef .N
o.
Particulars 2000 2001 Finance Ratio (FR) 0.28 0.25 Financial Interrelations Ratio (FIR) 1.75 1.20 Intermediation Ratio (IR) 0.75 0.70 For the year 2001 new issues are 12,000 (MUC). Which of the following statements is/are true with respect to the above data? a. Decrease in FR indicates increased financial deepening of the economy. b. Financial development of the country is less than the overall economic development of the country during the period. c. Decline in IR shows financial intermediation in the economy. d. Ultimate users of funds indirectly access funds from ultimate savers, thereby avoiding financial intermediaries like banks and financial institutions. e. Both (b) and (d) above.
re
(1 point)
s. Al
lr
ig
ht
s
48. The following monetary data on financial development of an economy has been obtained for the year 2000-2001.
Th e
Ic
fa
iU
ni
ve rs i
ty
Pr es
New is sues ratio 0.74 Net physical capital formation 2,00,445 Secondary issues 1,15,605 What is the Intermediation Ratio in the economy? a. 0.69. b. 0.86. c. 0.78. d. 0.92. e. None of the above.
20 04
(1 point)
©
49. The following balances are extracted from balance sheet of a Central Bank. Particulars Net worth Other deposits Government deposits Credit to government Credit to commercial sector Credit to banking sector Other non-monetary liabilities Other assets
(Million units of currency) 1,000 50 100 1,500 800 1,200 200 300 353
Macroeconomics
04
Current money supply in the economy is 12,000 MUC. Currency deposit ratio for the economy is 0.20 and reserve ratio imposed by the Central Bank is 10%. Government money in the economy is negligible and can be ignored. What are the net foreign exchange assets (reserves) of the country, assuming there are no excess reserves with the banking sector? a. 510 MUC. b. 450 MUC. c. 500 MUC. d. 520 MUC. e. 530 MUC.
20
04
(3 points)
1-
31
4-
02
27
-4
R
ef .N
o.
M AC
W
B
04
50. The High-powered money in an economy is 3,000 MUC. Current money supply in the economy is 12,000 MUC. The currency deposit ratio is estimated to be 0.20 and reserve ratio imposed by the Central Bank is 0.10. If the banking sector maintains excess reserves equivalent to 10% of their deposits, what would be the money supply? a. 8,800 MUC. b. 9,000 MUC. c. 9,100 MUC. d. 9,150 MUC. e. 9,200 MUC. (2 point)
BN
:8
51. The following information is related to external transactions of India for the year 2000-01.
ed se rv re
44,894 59,264 19,185
ig
ht
s
Merchandize exports Merchandize imports Services rendered by Indians to rest of the world
US $ million
.IS
Particulars
©
20 04
Th e
Ic
fa
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ni
ve rs i
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Pr es
s. Al
lr
Services rendered by rest of the 16,392 world to Indians Foreign investment in India 12,617 Foreign investment abroad 9,706 Loans by India 18,545 Loans to India 23,076 Transfers and income to India 15,577 Transfers and income from India 6,264 Other capital (credit) 16,133 Other capital (debit) 16,088 Errors and omissions (credit) 633 What are the current and capital account balances of the country for the year 2001? a.
$2,264 million and $ 7,487 million respectively.
b.
$ (2,126) million and $ (7,487) million respectively.
c.
$ (2,392) million and $ 6,235 million respectively.
d.
$ 2,448 million and $ (6,235) million respectively.
e.
None of the above. (2 points)
354
Part III
04 20 04 B W (3 points)
31
4-
02
27
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M AC
Particulars (Rs. in crore) Tax revenue 1,16,857 Non-tax revenue 45,137 Recoveries of loans 9,908 Other capital receipts 5,000 Borrowings/other liabilities 91,025 Non plan expenditure On revenue account (of which interest payment is 1,66,301 Rs.75,000 crore) On capital account 29,624 Plan expenditure On revenue account 43,761 On capital account 28,241 The revenue and primary deficit of the government for the year 2001-02 are a. Rs.49,502 crore and 16,025 crore b. Rs.47,239 crore and 14,075 crore c. Rs.48,068 crore and 16,025 crore d. Rs.45,002 crore and 15,225 crore e. Rs.48,068 crore and 15,225 crore.
04
52. The following estimates are extracted from the Union Budget for the year 2001-02.
:8
1-
53. The following information is available from National Income Accounts of a 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
Particulars (Million units of currency) Sales to households 5,000 Corporate profits 2,000 Corporate profit tax 800 Depreciation 600 Transfer payments 300 Dividends 200 Personal tax payments 200 GNP at factor cost 7,450 The savings made by the households during the year is a. 100 MUC b. 125 MUC c. 150 MUC d. 175 MUC e. 200 MUC.
©
54.
Particulars Sales to government Indirect taxes Corporate profits Corporate profit tax Depreciation Transfer payments Dividends Subsidies Personal tax payments Personal savings
(2 points) (Million units of currency) 1,500 700 2,000 800 600 300 200 50 200 150 355
Macroeconomics
The Gross Domestic Savings for the current year is a.
1,450
b.
1,550
c.
1,600
d.
1,700
e.
1,650. (2 points)
55. The consumption function for an economy is ascertained as
04
04
Ct = 250 + 0.60 Ytd + 0.20 Ct–1
802.25 MUC.
e.
808.10 MUC.
o.
d.
ef .N
794.15 MUC.
R
c.
-4
782.35 MUC.
27
b.
02
759.50 MUC.
(2 points)
1-
31
4-
a.
M AC
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B
04
20
Where Ct and Ct–1 denote consumption in period t and t–1 respectively and Ytd is the disposable income in period t. The Ytd has been 500 for a long time. If Ytd increases by 100 in period ‘t’, what will be the consumption in the second period, t + 2 (Assume the steady state level of consumption in the economy)?
d.
15.00%.
e.
16.00%.
ig
11.25%.
lr
c.
s. Al
10.50%.
Pr es
b.
ty
10.04%.
ve rs i
a.
ht
s
re
se rv
ed
.IS
BN
:8
56. The currency deposit ratio in an economy is estimated to be 0.4. The central bank of the country imposed a reserve ratio of 10%. Monetary liabilities of the central bank stood at 50,000 million units of currency (MUC). Due to an exogenous boost to the economy, the foreign exchange reserves of the country are expected to increase by 500 million dollars during the next period. If the central bank would like to neutralize the impact of change in foreign exchange reserves on the money supply by adjusting the reserve ratio, what should be the new reserve ratio? (Assume that the exchange rate is 12 units of local currency to a dollar)
iU
ni
(2 points)
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20 04
Th e
Ic
fa
57. The following information relates to an economy: Particulars National income Wages & Salaries Interest income Rental income
MUC 300 180 45 30
The profit in the economy is a. b. c. d. e.
15 MUC 25 MUC 35 MUC 45 MUC 55 MUC. (1 point)
356
Part III
Answer Questions 58-61 based on the following information:
M AC
W
B
04
20
04
04
MUC 5,000 4,200 1,075 800 750 75 100 650 350 350 950 300 150
o.
Particulars NDP at market prices NNP at factor cost Personal saving Gross domestic investment Corporate profits (profit before tax) Transfer payments by the government Subsidies Net domestic investment Corporate profit tax Personal tax payments Indirect taxes Government budget deficit Dividends
BN .IS ed se rv
(2 points)
s. Al
lr
ig
ht
s
re
59. The value of GDP at factor cost is a. 4,100 MUC b. 4,150 MUC c. 4,250 MUC d. 4,300 MUC e. 4,400 MUC.
(1 point)
:8
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31
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02
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-4
R
ef .N
58. What is the Net Factor Income Earned from Abroad (NFIA) in the economy? a. –1,650 MUC. b. 1,650 MUC. c. –50 MUC. d. 50 MUC. e. 100 MUC.
Ic
fa
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ni
ve rs i
ty
Pr es
60. Personal income in the economy is a. 3,525 MUC b. 3,375 MUC c. 3,675 MUC d. 4,725 MUC e. 5,025 MUC. (1 point)
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20 04
Th e
61. The current account balance in the economy is a. 225 MUC b. 325 MUC c. 375 MUC d. 875 MUC e. None of the above. (3 points) 62. The following information is extracted from National Income Accounts of an economy: Investment by business sector = 100 MUC Corporate profit tax = 50 MUC Dividends paid by the business sector = 15 MUC Retained earnings = 20 MUC 357
Macroeconomics
Corporate profits for the economy is a. 20 MUC b. 35 MUC c. 85 MUC d. 150 MUC e. 185 MUC. (1 point)
04
:8
1-
31
4-
02
27
10 MUC 20 MUC 30 MUC 40 MUC 50 MUC.
(2 points)
.IS
BN
a. b. c. d. e.
-4
R
ef .N
o.
M AC
W
B
04
20
Particulars MUC Factor income paid abroad by the business sector 10 Factor incomes received by household sector 160 Transfers to household sector 20 Wages and salaries paid by the business sector 100 Dividends paid by the business sector (of which Rs.10 is paid abroad) 20 Household savings 60 Factor income received from abroad by the household sector 20 The amount paid by the government to the households towards wages and salaries is
04
63. Consider the following data:
(1 point)
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
64. Savings function of an economy is S = –300 + 0.25 Yd. Break-even disposable income for the economy is a. 75 MUC b. 300 MUC c. 900 MUC d. 1,200 MUC e. 1,500 MUC.
ve rs i
65. The following information is extracted from the National Income Accounts of an economy:
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20 04
Th e
Ic
fa
iU
ni
Particulars Factor income received by domestic residents from business sector Factor income received by domestic residents from foreigners Gross investment Retained earnings Net indirect taxes Corporate profit taxes Personal income taxes Net factor income from abroad Dividends National Income (NI) of the economy is a. 560 MUC b. 620 MUC c. 640 MUC d. 720 MUC e. 810 MUC.
MUC 500 20 200 25 60 15 100 –5 100
(2 points) 358
Part III
R
ef .N
o.
M AC
W
B
04
20
04
04
66. The IS function and LM function of an economy are estimated to be Y = 2860 + 0.5Y – 60i and Y = 2600 + 400i respectively. The investment function in the economy is 800 – 50i. If the government wants to increase the output by 10% by raising the government expenditure, what is the crowding out in the economy? a. 52.5 MUC. b. 55.5 MUC. c. 62.5 MUC. d. 500.0 MUC. e. None of the above. (2 points) 67. The money supply in an economy is estimated to be 250 MUC and the transaction ‘plus’ precautionary demand for money is 0.20Y. The speculative demand for money is 150 – 50i. If the income level in the economy is 700 the rate of interest in the economy is a. 0.7% b. 0.8% c. 0.9% d. 1.0% e. 1.2%. (1 point) Answer Questions 68 and 69 based following information:
re
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
-4
Year Nominal GNP GNP deflator 2001-02 5000 250 2002-03 6600 300 68. What is the growth rate of real GNP from year 2001-02 to 2002-03? a. 10.0%. b. 32.0%. c. 20.0%. d. 58.4%. e. 53.6%. (1 point)
ty
Pr es
s. Al
lr
ig
ht
s
69. What is the rate of inflation in the economy for the year 2002-03? a. 10.0%. b. 32.0%. c. 20.0%. d. 58.4%. e. 53.6%.
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Th e
Ic
fa
iU
ni
ve rs i
(1 point) 70. GDP of a country is 8000 MUC. Value of output produced in the domestic country by foreign factors of production is 200 MUC and value of the output produced by domestic factors of production in foreign countries is 100. GNP of the country is a. 7,700 MUC b. 7,800 MUC c. 7,900 MUC d. 8,100 MUC e. 8,200 MUC. (1 point) 71. The LM function of an economy is estimated to be Y = 750 –50i. The transaction demand for money and speculative demand for money are 0.25Y and 150 – 20i respectively. If output in the economy is 600 MUC, the velocity of money in the economy is a. 0.40 b. 4.00 c. 5.00 d. 2.50 e. 250.00. (3 points) 359
Macroeconomics
72. In a hypothetical economy, the high-powered money is 2000 MUC and the money supply is 6000. Currency deposit ratio is estimated to be 0.2. The central bank sells government securities worth 500 MUC in the open market. Even after the open market sale, if the central bank wants to maintain the money supply at the same level, the reserve ratio should be 0.1%
b.
1.0%
c.
3.0%
d.
10.0%
e.
30.0%.
04
a.
04
(1 point)
W
B
04
20
73. Suppose that people hold 50% of their money in currency. If the reserve ratio is 10% and total demand for money is Rs.5,000, then the amount required by banks to meet the reserve requirement is equal to Rs.250
b.
Rs.2,250
c.
Rs.2,500
d.
Rs.5,000
e.
None of the above.
(1 point)
4-
02
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ef .N
o.
M AC
a.
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31
74. There are different stages in the production of good ‘Zebra’. The values at each stage are given as under:
lr
ig
ht
s
re
se rv
ed
.IS
BN
Particulars Value Raw material 30 Manufacturing 50 Packaging 80 Retailing 120 The value added in manufacturing stage and the total value added in the process of producing Zebra are 20 and 120, respectively 50 and 120, respectively 20 and 100, respectively 50 and 100, respectively 20 and 50, respectively.
iU
ni
ve rs i
ty
Pr es
s. Al
a. b. c. d. e.
(1 point)
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20 04
Th e
Ic
fa
75. In a hypothetical economy, if the marginal propensity to consume is 0.8; marginal propensity to import is 0.14; and the tax rate is 20%, then the value of multiplier will be a.
2
b.
3
c.
4
d.
5
e.
6. (1 point)
360
Macroeconomics
Model Question Paper II Suggested Answers Part A: Basic Concepts 1. (d) Increase in money supply reduces the interest rates but it may end up raising the nominal rates by increasing inflation. 2. (b) GNP = GDP + Net factor income from abroad.
04
04
3. (b) Potential GDP is the maximum feasible GDP of an economy when all the resources are fully employed.
W
B
04
20
4. (e) Macroeconomics deals with the study of economy as a whole; it seeks to analyze the sources of inflation, unemployment, economic growth. It also explains about the policies to be implemented for the achievement of macroeconomic objectives.
R
ef .N
o.
M AC
5. (a) In the Simple Keynesian model, movements of the economy from one equilibrium point to another can be gauged with the help of a single assumption that business firms raise production as soon as demand increases and that this results in an equivalent raise in income payments. Thus, the Simple Keynesian multiplier model is based on the principle that national output moves up and down in response to movements in aggregate demand.
02
27
-4
6. (b) Real GNP is the GNP in current rupees deflated for the changes in the prices of items included in nominal GNP. [Hint: Real GNP = Nominal GNP/Price index].
1-
31
4-
7. (a) If the people decide to save less, MPS decreases. So MPC increases. [Hint: MPC = Y – MPS].
BN
:8
8. (d) According to the Keynesian model of output determination, GDP is in equilibrium when planned savings equals planned investment.
re
se rv
ed
.IS
9. (a) Tax reductions induce more consumption, but decrease the government expenditure. If increase in the consumption is same as decrease in government expenditure then output won't change. So it is not always true that increase in personal consumption resulting from tax decreases would increase the real GDP.
lr
ig
ht
s
10. (b) Sterilization is neutralization of changes in the money supply caused by changes in the foreign exchange reserves of a country.
Pr es
s. Al
11. (e) There are several factors which affect Aggregate supply such as change in the cost of production, supply shocks, technology, raw materials labor supply, etc. All the factors given affect the aggregate supply in an economy. Hence answer is (e).
ve rs i
ty
12. (b) Philips curve shows the relationship between the inflation rate and unemployment rate.
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20 04
Th e
Ic
fa
iU
ni
13. (c) Increase in investment leads to efficiency in the use of resources and increase the rate of economic growth. 14. (e) Keynes held that demand for money consists of i. Transaction demand for money ii. Precautionary demand for money and iii. Speculative demand for money Hence, the answer is (e). 15. (d) Since unemployment, inflation and the growth rate of GDP are all variables showing the economy as a whole (in the macro sense) these are all macroeconomic variables. 16. (b) Personal income is the total income received by individuals that is available for consumptions saving and payment of personal taxes. Personal income = National income – Retained earnings – Corporate taxes. 17. (c) A liquidity trap refers to a situation where lower interest rates fail to stimulate demand. It may arise when a slowing economy reduces demand for loans. Lenders see asset quality deteriorate and become more reluctant to lend. The combination of reluctant bankers and borrowers turns loan growth negative, which further depresses economic activity. During this period, interest rates do not decrease, no matter how much the money supply is expanded. 361
Macroeconomics
18. (a) Fiscal stance is the difference between actual fiscal deficit and cyclical neutral fiscal deficit. 19. (e) Expansionary fiscal policies will shift the IS curve towards right but will not affect LM curve. 20. (c) Philips curve shows the relationship between unemployment and inflation (i.e. rate of change in prices). 21. (b) The market in which foreign exchange is bought and sold for delivery at a future date at the rate of exchange agreed upon today is called forward market.
04
22. (a) Velocity of circulation is the rate at which money moves as it carries out its functions or it is the average number of times per year that each rupee of stock of money is spent for output.
B
04
20
04
23. (c) Laffer curve shows the relation between total tax revenue and tax rates. It shows that increase in tax rates up to a certain level leads to an increase in tax revenue and latter results in decrease of tax revenue.
BN
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1-
31
4-
02
27
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R
ef .N
o.
M AC
W
24. (b) Ceteris paribus, an increase in demand for money, increases the rate of interest in the economy. The figure given below explains this phenomenon.
ed
.IS
25. (c) A neoclassical aggregate supply schedule exists when the demand for labor and supply of labor schedules adjust immediately to a change in the price level.
ht
s
re
se rv
26. (c) A current account deficit implies that foreign exchange outflows on account of import of goods and services and gifts made exceed inflows on account of exports of goods and services received.
Pr es
s. Al
lr
ig
27. (b) As the aggregate supply curve is vertical, increase in nominal money supply only lead to increase in price level. But it will not have any effect on the real money supply or the composition of output, because the economy already running at full employment.
ni
ve rs i
ty
28. (c) When the aggregate supply schedule is positively stopped, continuous increase in the nominal money supply center is paribus, results in an increase in the price level and real output.
Th e
Ic
fa
iU
29. (d) Multiplier = 1/[1 – b + MPI), where MPI is marginal propensity to import. This shows inverse relationship between multiplier and marginal propensity to import. Thus, an increase in the marginal propensity to import decreases the value of the multiplier.
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20 04
30. (a) An expansionary monetary and fiscal policy increases the aggregate demand in the economy, which leads to shift in AD curve towards right. 31. (b) a.
GNPMP is the total market value of the final goods and services produced in a given period by factors of production owned by the citizens of a country.
b.
GDPMP is defined as the total market value of all the final goods and services produced in a given period by factors of production located within a country.
c.
NNPMP is GNPMP – depreciation.
d.
GNPFC is the total value of the final goods and services produced in a given period by factors of production owned by the citizens of a country and valued at factor cost.
e.
GDPFC is the total market value of the final goods and services produced in a given period by factors of production located within a country and valued at factor cost.
362
Part III
32. (a) Quantity theory of money (QTM) says MV = PY Where, M = money supply V = velocity of money P = price level Y = real GDP PY = nominal GDP Assuming V is a constant, a change in M leads to an equal percentage change in PY.
s
(c) Increase in net RBI credit to government is called Monetized deficit.
ht
37.
re
se rv
ed
.IS
BN
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1-
31
4-
02
27
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R
ef .N
o.
M AC
W
B
04
20
04
04
33. (d) Preparation of BoP statement is based on double-entry system of bookkeeping. Hence, all debt items should equal credit items, and the balance is zero. 34. (b) Expected nominal interest rate = Real interest rate + Expected rate of inflation. Therefore, if the expected inflation goes up, expected nominal rate of interest also goes up by the same amount. Hence the answer is (b). 35. (a) Y = C + I + G + Net Exports Where Y = Domestic income C + I + G = Domestic spending. Y – (C + I + G) = Net Exports (Current Account Balance) If Current Account Balance is negative, then domestic spending is greater than domestic income. ∴ The answer is (a). (b) If domestic income exceeds domestic spending, there is current account surplus. (c) Current account balance is equal to exports – imports. If exports exceed imports, there is current account surplus. (d) If domestic savings exceed domestic investment, domestic income exceeds domestic spending and there is current account surplus. 36. (e) Expansionary monetary policy will shift the LM curve to the right and contractionary monetary policy will shift the LM curve to the left. Expansionary fiscal policies will shift the IS curve towards right but will not affect LM curve.
ni
b. c. d.
During a boom bank reserves will be high as the bank credit is high to support the increased economic activity. Wage rate will be high as demand for labor increase during the boom phase. As the economic activity increase during the boom phase bank credit also increases. During a boom demand increased at a faster rate and inventories tend to be low. All other variables tend to increase during a boom. Cost of production will be high as demand for factors of production will be relatively high during the boom phase.
ve rs i
a.
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20 04
Th e
Ic
fa
iU
39. (d)
ty
Pr es
s. Al
lr
ig
38. (d) M2 = M1 + Post office savings Bank Deposits M3 = M1 + Time Deposits M4 = M3 + All post office deposits. ∴ The answer is (d).
e.
40. (d) Financial Inter relations ratio =
Total Stock of Financial Assets Total Stock of Physical Assets
Or =
Total Financial Claims Issued Net Physical Capital Formation
Therefore, the Answer is (d).
363
Macroeconomics
Part B: Problems 41. (c) NDP at market prices = Sales to households + Sales to government + Net investment + Net exports (Current Account Balance) = 5,000 + 1,500 + 1,200 – 200 = 7,500 Net Investment = Gross fixed investment + Change in inventories – Depreciation = 1,300 + 500 – 600 = 1,200.
04
04
42. (a) GNP at factor cost = NDPMP + Depreciation – Indirect taxes + Subsides + Net factor income from abroad
=
C
=
80 + 0.8125 Yd – 5i
Yd
=
(Y – T + R) = (Y – 0.2Y + 80)
=
0.8Y + 80
=
80 + 0.8125 [0.8Y + 80] – 5i = 145 + 0.65Y – 5i.
B W M AC o.
C + I + G + (E – M)
=
145 +0.65Y – 5i + 600 + 0.05Y – 15i + 965 + 450 – (20 + 0.10Y)
BN
se rv
ed
.IS
2,140 + 0.60Y – 20i 2,140 − 20i Y = = 5350 –50i .… (1) 0.40 LM Function
:8
1-
31
4-
=
=
∴ 600
Pr es
s. Al
= 0.25Y + 200 – 50i
0.25Y
= 400 + 50i = 1,600 + 200i .… (2)
ve rs i
ty
Y
ig
lr
Money Supply = 600
ht
s
re
Money demand (Md) = 0.25Y + 200 – 50i
ni
Equilibrium Y and i can be found by equating (1) and (2)
iU
∴
=
1,600 + 200i
250i
=
3,750
i
=
15%
Y
=
5,350 – (50 x 15)
=
4,600.
Th e
Ic
fa
5,350 – 50i
©
20 04
∴
44. (a) At equilibrium, 5,350 – 50i = 1,600 + 200i 250i = 3,750 i = 3,750/250 = 15 Hence, Y = 5,350 – 50 (15) = 4,600. Trade balance = 450 – [20 + 0.10 (4,600) ] = – 30 MUC. 364
ef .N
02
27
IS Function Y
R
C
–80 + 0.1875 Yd + 5i
04
S
-4
43. (e)
20
= 7,500 + 600 – 700 + 50 + 0 = 7,450.
04 20 04
B
45. (e) 0.4Y = 2,140 – 20i Y = 5,350 – 50i 0.25Y = 400 + 50i Y = 1,600 + 200i At equilibrium, 5,350 – 50i = 1,600 + 200i 250i = 3,750 Or, i = 15%. Hence, Y = 5,350 – 50(15) = 4,600. Budget deficit = T – G – R = 0.2(4,600) – 965 – 80. 920 – 965 – 80 = –125. If exports increase by 100, the new IS function would be 0.4Y = 2,140 + 100 – 20i
04
Part III
M AC
W
0.4Y = 2,240 – 20i
4-
02
27
-4
R
ef .N
o.
Or, Y = 5,600 – 50i At equilibrium, IS = LM Thus, 5,600 – 50i = 1,600 + 200i 250i = 4,000 i = 16%.
1-
31
Y = 5,600 – 50(16) = 4,800
ed
Secondary issues New issues
se rv
IR =
46. (b)
.IS
BN
:8
Thus, budget deficit = T – G – R = 0.2(4,800) – 965 – 80 = –85. Thus, decrease in budget deficit=125–85=40 MUC.
ht
ig
= 8,400 (MUC)
s
re
∴ Secondary issues for the year 2001= (0.70 x 12,000)
s. Al
lr
Total issues = New issues + Secondary issues
Pr es
= 12,000 + 8,400
ty
= 20,400 (MUC) Total Issues Net Physical Capital Formation (NPCF)
ve rs i =
iU
ni
FIR
20,400 = 17,000 (MUC). 1.20
Th e
Ic
fa
∴ NPCF =
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20 04
47. (b) Decrease in FR indicates decreased financial deepening of the economy. That is, financial development of the country is less than the overall economic development of the country during the period. Decline in IR indicates financial disintermediation in the economy. That is, ultimate users of funds directly access funds from ultimate savers, thereby avoiding financial intermediaries like banks and financial institutions. 48. (c) Intermediation ratio = Secondary issues/ Primary issues New issues ratio = Primary issues/Net capital formation = 0.74 Thus, 0.74 = x/2,00,445 Or, x = 1,48,329.3 Hence, intermediation ratio = 1,15,605/1,48,329.3 = 0.78 approximately.
365
Macroeconomics
⎡ 1 + Cu ⎤ 49. (c) Money Supply (Ms) = H x ⎢ ⎥ ⎣ Cu + r ⎦
Where, High Powered Money (H) = Monetary Liabilities of RBI (MLRBI) + Government money. H=
Ms ⎡ 1 + Cu ⎤ ⎥ ⎢ ⎣ Cu + r ⎦
=
12,000
= 3,000 MUC
⎡ 1 + 0.2 ⎤ ⎥ ⎢ ⎣ 0.2 + 0.10 ⎦
04
Since Government money is negligible, H equals MLRBI. =
Financial Assets of RBI (FARBI) + Other Assets – Non-monetary Liabilities (NMLRBI).
FARBI
=
Credit to Government + Credit to Commercial Sector + Credit to banking sector + Net Foreign Exchange Assets (NFEA).
=
1,500 + 800 + 1,200 + NFEA = 3,500 + NFEA.
M AC
NMLRBI
W
B
04
20
04
MLRBI
Net Worth + Government Deposits + Other Non-Monetary Liabilities 1,000 + 100 + 200 = 1,300 MUC.
∴ 3,000
=
3,500 + NFEA + 300 – 1,300
NFEA
=
3,000 – 2,500 = 500 MUC.
27
-4
R
ef .N
o.
= =
4-
02
Therefore, net foreign exchange assets of the country are 500 MUC.
1-
31
50. (b) H = 3,000
:8
Ms = 12,000
BN
Cu = 0.2
ed
.IS
Reserve Ratio = CRR + Excess Reserve Ratio = 0.1 + 0.1 = 0.2
re
se rv
Thus, the new money supply in the market = H x Money multiplier = 3,000 x (1 + 0.2)/(0.2 + 0.2) = 9,000 MUC.
ht
s
51. (e)
s. Al
lr
ig
US $ Millions
Pr es
Current Account
Credit
Debit
Net
4489
59264
(1437)
Merchandise
ii.
Invisibles (a + b)
34762
22656
12106
a.
Services
19185
16392
2793
Transfers and Income
15577
6264
9313
79656
81920
(2264)
ve rs i
ty
i.
b.
fa
iU
ni
A.
Th e
Ic
Total current Account (i + ii)
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20 04
B.
Capital Account i.
Foreign investment
12617
9706
2911
ii.
Loans
23076
18545
4531
iii.
Other capital
16133
16088
45
51826
44339
7487
633
-
633
126259
5856
5856
(5856)
Total Capital Account (i + ii + iii)
366
C.
Errors and Omissions
D.
Overall Balance (A + B +C)
132115
E.
Foreign Exchange Reserves
-
Part III
52. (c) Revenue Surplus (Deficit) = Revenue Receipts – Revenue Expenditure = [Tax Revenue + Non-tax Revenue] – [Plan and Non-plan Revenue Expenditure] = [(1,16,857 + 45,137) – (1,66,301 + 43,761)] = Rs. (48,068) million. Primary Deficit = Borrowings and liabilities –Interest payments = 91,025 – 75,000 = Rs. 16,025 million. 53. (c) Personal Savings
= Personal Disposable Income (PDI) – Personal Consumptions = Personal Income (PI) – Personal Income Tax
PI
= NNPFC – Corporate profits + Dividends + Transfer payments
NNPFC
= GNPFC – Depreciation = 7,450 – 600 = 6,850 MUC
PI
= 6,850 – 2,000 + 200 + 300 = 5,350 MUC
PDI
= 5,350 – 200 = 5,150 MUC
Personal Savings
= 5,150 – 5,000 = 150 MUC.
W
B
04
20
04
04
PDI
o.
M AC
54. (c) Gross Domestic Savings = Retained earnings (RE) + Budget surplus + Personal savings + Depreciation.
ef .N
RE = Corporate Profits–Corporate Profit tax – Dividends = 2,000 – 800 – 200 = 1,000 MUC
-4
R
BS = Tax Revenue – Government Purchases – Transfer Payments – Subside = (700 + 800 + 200) – 1,500 – 300 – 50 = –150 MUC
31
4-
02
27
∴ Gross Domestic Savings = 1,000 – 150 + 150 + 600 = 1,600 MUC.
:8
1-
Ct = 250 + 0.60 Ytd + 0.20 Ct – 1
55. (a)
ed
∴
.IS
Ct = Ct-1
BN
At steady state level of consumption.
ig
ht
= 250 + 0.60 Ytd
lr
0.80 Ct
s
re
Ct = 250 + 0.60 Ytd + 0.20 Ct
se rv
At steady state level of consumption.
250 + 0.60Ytd 0.80
s. Al
=
Pr es
Ct
ve rs i
ty
= 312.5 + 0.75 Ytd .
Ytd = 500
iU
ni
When
= 312.5 + (0.75 x 500) = 687.5 MUC
fa
Ct
Ic
increase by 100,
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20 04
Th e
If
Ytd
Ct+1 = 250 + (0.60 x 600) + (0.20 x 687.5) = 747.50 MUC Ct+2 = 250 + (0.60 x 600) + (0.20 x 747.50) = 759.50 MUC. ∴ Consumption in the second period, Ct+2, is 759.50.
56. (e) Money multiplier = {(1 + 0.4)/(0.4 + 0.10)} = 2.8 Money supply (before increase of foreign exchange reserves) = 2.8 x H = 2.8 x (50000) = 140,000. Computation of new CRR: 140,000 = {(1 + 0.4)/(0.4 + r)} (50000 + 500 × 12) 140,000 = {1.4/(0.4 + r)} × 56000 0.4 + r = (1.4 x 56000/140,000) or, r = 0.56 – 0.4 = 0.16 =16%. 367
Macroeconomics
02
27
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R
ef .N
o.
M AC
W
B
04
20
04
04
57. (d) National income (NNP at FC) = wages & salaries + interest income + rental income + profit Or, Profit = 300 – 180 – 45 – 30 = 45 MUC. 58. (d) NFIA = NNPMP – NDPMP NNPMP = NNPFC + Indirect Taxes – Subsidies = 4,200 + 950 – 100 = 5,050 MUC Thus, NFIA = 5,050 – 5,000 = 50 MUC. 59. (d) GDPFC = NDPMP + Depreciation – Indirect Taxes + Subsidies 5000 + (800 – 650) – 950 + 100 = 4,300 MUC. 60. (c) Personal Income (PI) (i.e. income received by the households) = NI – Corporate profit + Dividends + Transfer payments = 4,200 – 750 + 150 + 75 = 3,675 MUC. 61. (c) Current account balance (CAB) = Net Domestic Savings (NDS) – Net Domestic Investment (NDI) NDS = Retained Earnings (RE) + Budget surplus + PS RE = Corporate Profits – Corporate Profit Tax – Dividends = 750 – 350 – 150 = 250 Thus, NDS = 250 – 300 + 1,075 = 1,025 MUC. Thus, CAB = 1,025 – 650 = 375 (surplus). 62. (c) Corporate profits = Corporate profit tax + Dividends + Retained earnings = 50 + 15 + 20 = 85.
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1-
31
4-
63. (c) Wages and salaries paid by the government = Factor income received by households – (Wages and salaries paid by the business sector + Dividends paid to households + Factor income received from abroad) = 160 – 100 – 10 – 20 = 30.
0.25 Yd
.IS
= – 300 + 0.25Yd = 0
S
300 = 1,200 MUC. 0.25
ht
s
=
se rv
Yd
ed
= 300
re
∴
BN
64. (d) At break-even level of disposable income, savings are zero.
Pr es
s. Al
lr
ig
65. (a) National income (NI) = Factor income received by domestic residents + Factor income received by domestic residents from foreigners + Corporate profit taxes + Retained earnings = 500 + 20 + 15 + 25 = 560 MUC.
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ty
66. (c) At simultaneous equilibrium, 0.5Y = 2860 – 60i (or) Y = 5720 – 120i is equal to Y = 2600 + 400i Or, 5720 – 120i = 2600 + 400i Or, 3120 = 520i Or, i = 6 Thus, Y = 2600 + 400(6) = 5000 When government spending is raised to meet the objective, Y = 5000 + 10% = 5500. If Y = 5500, then using LM function, 400i = 5500 – 2600 (or) i = 7.25% Initial investment = 800 – 50 (6) = 500 New investment = 800 – 50 (7.25) = 437.5 Change in investment = 500 – 437.5 = 62.5 MUC. 67. (b) Money supply = Money demand = (Transaction-cum-precautionary demand for money + speculative demand for money) Thus, 250 = (0.2 x 700) + (150 – 50i) Or, 110 = 150 – 50i Or, 50i = 40 Or, i = 0.8%. 368
Part III
68. (a) Growth rate of real GNP = {(Real GNP 2002-03/Real GNP 2001-02) – 1} x 100 Real GNP 2002-03 = 6600 x 100/300 = 2200 Real GNP 2001-02 = 5000 x 100/250 = 2000 Growth rate = {(2200/2000) – 1} x 100 = 10%. 69. (c) Inflation rate = (GNP deflator of current period – GNP deflator of previous year) ‘divided by’ GNP deflator of previous year x 100 = (300/250 – 1) x 100 = 20%. 70. (c) GNP = =
100 – 200
=
– 100
=
8000 – 100
=
7900 MUC.
04
20
04
04
Factor income received from abroad – Factor income paid abroad.
B
∴ GNP
=
W
NFIA
GDP + NFIA
M AC
71. (d) Velocity of money = Y/Ms
o.
Money supply (Ms) = Money demand (Md)
ef .N
= 0.25(600) + 150 – 20(3) = 240
-4
R
Ms = 240
27
Thus, velocity of money = 600/240 = 2.5
4-
02
(Working notes: Y = 600 = 750 – 50i
= (2000 - 500) {(1 + 0.2)/(0.2 + r)
.IS
= 10%.
ed
Or, r
BN
6000
= High-powered money (H) x {(1 + Cu)/(Cu + r)}
:8
72. (d) Money supply (Ms)
1-
31
Or, i = 150/50 = 3).
se rv
73. (a) Total money = Rs.5,000.
re
50% of total money which is held in the form of currency is Rs.2,500.
ht
s
Demand deposit component of money supply is Rs.2,500.
s. Al
lr
ig
Given the reserve ratio of 10%, required reserves are 2,500 × 0.10 = Rs.250.
Pr es
74. (a) Total value added in the process = Market value of the final product = 120
ty
Value added in the manufacturing stage = Total value of the good after manufacturing stage – Total cost for procuring raw-material = 50 – 30 = 20.
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75. (a) Multiplier = 1/(1 – MPC + MPC x tax rate + MPI) = 1/(1 – 0.8 + 0.8 x 0.2 + 0.14) = 2.
369
Model Question Paper III Time: 3 Hours
Total Points: 100 Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point.
c.
The private investment is likely to increase because of fall in interest rate
d.
The trade deficit is likely to come down
e.
None of the above.
04
The private investment is likely to fall because of increase in interest rate
20
b.
W
B
04
The output is likely to fall
ef .N
o.
What are economic goods? Goods that are very expensive.
b.
Goods that are in scarce or limited supply.
c.
Goods that a country produces and then trades to another country.
d.
Goods that are vital to an individual’s welfare.
e.
All of the above.
1-
31
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R
a.
BN
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2.
a.
04
Ceteris paribus, if government expenditure increases
M AC
1.
Change the prevailing interest rate.
b.
Lower the inflation rate.
c.
Lower the unemployment rate.
d.
Both (a) and (b) above.
e.
All of the above.
re
se rv
ed
a.
.IS
Which of the following could be an objective of monetary policy?
Pr es
s. Al
lr
ig
ht
s
3.
For an economy operating below its potential, the effect on GDP of an increase in intended investment will normally be
ve rs i
ty
4.
An increase in output is greater than the increase in investment
b.
Nothing at all, unless savings also increase at once, since investment and savings must always be equal Nothing at all, since consumption must go down by as much as investment goes up
d.
An increase in output equal to the amount of investment
e.
An increase in output has less than the amount of investment.
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c.
Ic
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a.
5.
Suppose that government spending rises. Assume that the economy is operating at a level slightly below the level of potential GDP. The effect of this policy change should be a.
Higher prices with no change in output
b.
Higher prices with higher output
c.
Higher prices with lower output
d.
Lower prices with higher output
e.
Lower prices with no change in output.
Part III
6.
Which of the following is least applicable to the concept of NDP? A measure of output.
b.
A market value of final goods and services.
c.
The sum of all transactions involving money in an economy.
d.
A measure of income.
e.
GDP minus depreciation.
Internal balance refers to 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.
W
B
04
20
04
04
Equilibrium in balance of payments
Which of the following statements is false? b.
Increases in saving can cause increases in current output.
c.
Increases in investment can cause increases in output.
d.
Decreases in taxes can cause increases in output.
e.
Decreases in government spending can cause decreases in output.
02
27
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ef .N
o.
Increases in output can cause increases in investment.
1-
Coins, currency and time deposits
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a.
31
The definition of M1 includes Coins, currency and demand deposits
c.
Coins, currency and all bank deposits
d.
All currencies, both in banks and in the hands of the public
e.
Coins and currency only.
se rv
ed
.IS
BN
b.
re
9.
a.
4-
8.
a.
M AC
7.
a.
ig
ht
s
10. Raising the discount rate, if effective, tends to Expand the money supply and lower interest rates
b.
Expand the money supply and raise interest rates
c.
Contract the money supply and raise interest rates
d.
Contract the money supply and lower interest rates
e.
Expand the money supply with same interest rates.
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Pr es
s. Al
lr
a.
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20 04
Positively related to the income level and the rate of interest
Ic
Th e
a.
fa
11. The demand for money is 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.
12. Which of the following situations would you expect to see during a period of recession? a.
Falling tax receipts.
b.
Falling corporate profits.
c.
Falling stock prices.
d.
Falling business investment.
e.
All of the above. 371
Macroeconomics
04 20 04
W
B
14. The “marginal propensity to save” can be described as a. The desire to save more and consume less b. The fraction of extra income that goes into extra savings c. The fraction of extra income that fluctuates between consumption and savings d. The conditioned reflex or habit to be thrifty e. The fraction of total income that is saved.
04
13. GDP differs from NDP by a. The amount of total taxes b. Government expenditure on goods and services c. Government transfer payments d. The difference between gross investment and net investment e. Purchases by business firms from other business firms.
M AC
15. A tax is regressive if
The percentage of income paid as taxes increases as income increases
b.
The percentage of income paid as taxes decreases as income increases
c.
The absolute amount of tax paid is directly proportional to income
d.
The tax rate is constant
e.
None of the above.
4-
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o.
a.
1-
31
16. GDP at factor cost exceeds GDP at market price
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 from investment
d.
When direct taxes exceed indirect taxes
e.
When subsidies exceed indirect taxes.
s
re
se rv
ed
.IS
BN
:8
a.
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
17. In which market simultaneous spot and forward contract are entered into by two parties? a. Euro currency market. b. Forward market. c. Future market. d. Spot market. e. Swap market.
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Ic
fa
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18. When the value of output exceeds planned spending a. There is unsold output, and the level of income will fall b. There is unsold output, and the level of income will rise c. There is no unsold output, and the level of income does not change d. Any of the above can happen e. None of the above. 19. Which of the following is/are true? a. The tax revenue will be zero when tax rate is zero. b. The tax revenue will be zero when tax rate is 100%. c. The tax revenue will be highest when tax rate is 100%. d. Laffer curve takes ‘U’ shape when tax rate and tax revenue are taken on X and Y axes respectively. e. Both (a) and (b) above.
372
Part III
20. An a. b. c. d. e.
increase in the marginal propensity to import Has the same effect upon the multipliers as an increase in the MPC Has no effect upon the multipliers Increases the value of the multipliers Decreases the value of the multipliers None of the above.
W
B
04
20
04
04
21. Which of the following relationships is not true? a. NDP at Factor Cost = GDP at Factor Cost + Depreciation. b. GDP at Market Prices = GDP at Factor Cost + Indirect Taxes – Subsidies. c. Net Domestic Saving = Net National Saving + Retained Earnings of Foreign Companies. d. Gross Domestic Capital Formation = Gross Fixed Investment + Change in Inventories. e. None of the above.
c.
Leftward shift of the LM curve
d.
Leftward shift of the IS curve
e.
None of the above.
o.
Rightward shift of the IS curve
ef .N
b.
R
Rightward shift of the LM curve
Nominal income and nominal interest rate
b.
Real income and real interest rate
c.
Real income and nominal interest rate
d.
Nominal income and real interest rate
e.
None of the above.
re
se rv
ed
.IS
BN
:8
a.
1-
23. In the demand for money function we include
31
4-
02
27
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a.
M AC
22. In the IS-LM model of income determination, an increase in the propensity to save leads to a
lr
ig
ht
s
24. When investment spending is negatively related to the rate of interest, equilibrium income in the goods market Is unrelated to the rate of interest
b.
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.
iU
ni
ve rs i
ty
Pr es
s. Al
a.
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20 04
Th e
a.
Ic
fa
25. Which of the following theories is called as the Neoclassical theory of interest? The Keynesian Theory.
b.
Liquidity Preference Theory.
c.
The Time Preference Theory.
d.
Expectations Theory.
e.
Loanable Fund Theory.
26. 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.
All of the above. 373
Macroeconomics
27. When the actual rate of inflation turns out to be higher than expected a.
Borrower will gain
b.
Lender will gain
c.
The gain depends on the extent of difference between the actual rate of inflation and the expected rate of inflation
d.
Both (a) and (c) above
e.
None of the above.
The change in autonomous spending to the change in income
c.
The change in consumption to the change in income
d.
The change in income to the change in consumption
e.
None of the above.
04
b.
20
The change in income to the change in autonomous spending
M AC
W
B
04
a.
04
28. The value of the expenditure multiplier relates
ef .N
o.
29. A situation in which the marginal physical productivity of labor is zero is known as Seasonal unemployment
b.
Cyclical unemployment
c.
Disguised unemployment
d.
Structural unemployment
e.
Voluntary unemployment.
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1-
31
4-
02
27
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R
a.
Revenue budget.
c.
Capital budget.
d.
Cyclical budget.
e.
None of the above.
.IS
b.
ed
Structural budget.
lr
ig
ht
s
re
se rv
a.
BN
30. Which budget calculates the effect of business cycle on budget?
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Ic
fa
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Pr es
s. Al
31. The IS curve shows a. A positive relationship between rate of interest and level of income b. A negative relationship between rate of interest and level of income c. A positive relationship between rate of interest and level of investment d. A negative relationship between rate of interest and level of investment e. A positive relationship between level of income and level of investment. 32. Laffer curve shows the relationship between a. Price level and unemployment b. Tax rates and tax revenue c. Interest rate and income level d. Income and money supply e. Demand for money and supply of money. 33. The real rate of interest a. Equals the nominal rate plus the rate of inflation b. Equals the rate of inflation minus the nominal rate c. Equals the nominal rate minus the rate of inflation d. Tends to increase when inflation rises e. Is more relevant to investors than consumers.
374
e.
When subsidies exceed indirect taxes.
04 20 04 B W
R
When direct taxes exceed indirect taxes
27
-4
d.
ef .N
o.
M AC
34. Money earned abroad and remitted to home country is a. Included in home country GDP b. Included in home country GNP c. Included in both home country GDP and GNP d. Excluded from both home country GDP and GNP e. Included in home country GDP but excluded from home country GNP. 35. The basic difference between money stock measures M3 and M4 is that a. M3 is more than M4 b. M2 is part of M3 where as M2 is not part of M4 c. M3 is part of M1 and M4 is not part of M1 d. M4 includes all post office deposits, where as in M3 these are not included e. M1 is part of M4 where as M1 is not part of M3. 36. GDP at factor cost exceeds GDP at market price a. When the net factor income from abroad is negative b. When the net factor income from abroad is positive c. When depreciation of fixed capital exceeds gross investment
04
Part III
NNP at market prices
c.
NDP at factor cost
d.
NNP at factor cost
e.
GNP at market price.
31
b.
1-
NDP at market prices
se rv
ed
.IS
BN
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a.
4-
02
37. National Income is
Foreign exchange reserves.
b.
Public debt.
c.
Wealth of a country.
d.
Inflation.
e.
Money supply.
ty
Pr es
s. Al
lr
ig
ht
s
a.
re
38. Which of the following is not a stock variable?
ve rs i
39. If interest elasticity of demand for investment and consumption is zero Equilibrium income depends solely on the position of LM curve
b.
Equilibrium income depends solely on the position of IS curve
©
20 04
iU
fa
Ic
Th e
c.
ni
a.
There is no speculative demand for money
d.
Speculative demand for money is infinity
e.
Fiscal policy is totally ineffective in changing any of the real variables.
40. ‘Liquidity trap’ refers to a situation wherein a.
There is too much liquidity in the economy
b.
The firms in the economy are facing credit crunch
c.
Interest rates does not decrease, no matter how much the money supply is expanded
d.
The country faces severe shortage of foreign exchange
e.
Excessive government borrowing reduces the availability of credit in the market.
375
Macroeconomics
Part B: Problems (60 Points) Solve all the problems. Points are indicated against each problem. 41. The following balances are taken from balance sheet of the Central Bank of an economy.
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Th e
Ic
fa
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Pr es
s. Al
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ht
s
re
se rv
ed
.IS
BN
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1-
31
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27
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o.
M AC
W
B
04
20
04
04
Particulars MUC Credit to Government 950 Credit to Bank 350 Government Deposits 20 Other non-monetary liabilities 5 Net worth 500 Credit to commercial sector 125 Net foreign exchange assets 25 Other assets 65 The currency/deposit ratio has been ascertained as 0.20. The amount of Government money is 10 million units of currency. Total money supply in the economy is 4000 million units of currency. The reserve ratio imposed by the Central Bank is a. 9% b. 10% c. 11% d. 11.5% e. 12%. (3 points) 42. The monetary liabilities of the RBI and the government money in circulation are Rs.990 MUC and 10 MUC respectively. The currency deposit ratio is estimated to be 20%. If there is an increase of 100 MUC in Central Bank Credit to Government, accompanied by Government purchase of foreign exchange worth 10 MUC from the RBI, what would be the money supply in the economy? (Assume reserve ratio is 10%) a. 4,340 MUC. b. 4,350 MUC. c. 4,360 MUC. d. 4,370 MUC. e. 4,380 MUC. (2 points) 43. The following relations are derived for an economy. Saving function (S) –100 + 0.25Yd Investment function (I) 400 – 15i Tax function (T) 0.20 Y Government expenditure (G) 900 Transaction demand for money (Mt) 0.25Y Speculative demand for money (Ma) 250 – 50i Money supply 600 Exports (E) 500 Import function (M) 50 + 0.10Y All macroeconomic aggregates are in million units of currency (MUC) and the rate of interest is in percentage. What is the budget deficit of the economy at equilibrium? a. 200 MUC. b. 210 MUC. c. 215 MUC. d. 220 MUC. e. 225 MUC. (3 points)
376
Part III
44. The IS function and LM function of an economy are 0.5Y = 1850 – 15i and 0.25Y = 350 + 50i. If exports increase by 200 and autonomous imports decrease by 30 MUC, the new equilibrium income and budget deficit are a.
3,800 MUC and 140 MUC
b.
3,750 MUC and 150 MUC
c.
3,750 MUC and 160 MUC
d.
3,800 MUC and 170 MUC
e.
3,800 MUC and 180 MUC.
TB decreases by 30 MUC and private investment decreases by 15 MUC.
b.
TB decreases by 40 MUC and private investment decreases by 15.
c.
TB decreases by 30 MUC and private investment decreases by 20 MUC.
d.
TB decreases by 40 MUC and private investment decreases by 20 MUC.
e.
None of the above.
27
-4
R
ef .N
o.
M AC
a.
W
B
04
20
04
04
(3 points) 45. In an economy, the equilibrium functions in goods market and money market are Y = 3,700 – 30i and Y = 1,400 + 200i. The investment function in the economy is 400 – 15i and the net exports is 450 – 0.1Y. Suppose autonomous investment increased by 230 MUC, then what would be the impact on trade balance and private investment in the economy?
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
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1-
31
4-
02
(3 points) 46. In an economy which has a capital-output ratio of 5:1, population is expected to grow at the rate of 2 percent p.a. If the targeted per capita real GDP growth rate is 4 percent, then the rate of investment (i.e. investment as % of GDP) required to achieve the target is a. 25% b. 30% c. 35% d. 40% e. None of the above. (3 points) 47. The following information is extracted from the union budget for the year 2001-02.
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Ic
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Pr es
Particulars Tax revenues Non-tax revenues Recoveries of loans Borrowings and other liabilities Other receipts (of which disinvestment proceeds committed for redemption of public debt 2,000 cr.) Non-plan revenue expenditure (including interest payments of Rs.2,02,532 Non-plan capital expenditure Planned revenue expenditure Planned capital expenditure The revenue and capital surplus (deficit) of the economy are a. (Rs.1,54,850) crore and Rs.1,56,850 crore b. (Rs.1,54,850) crore and Rs.1,54,850 crore c. (Rs.1,56,850) crore and Rs.1,56,850 crore d. (Rs.1,56,850) crore and Rs.1,56,850 crore e. None of the above.
In crore of rupee 2,92,418 1,14,928 27,078 2,24,550 20,000 4,57,536 43,238 1,04,660 71,540
(3 points)
377
Macroeconomics
04
48. The borrowings and other liabilities of a hypothetical economy is Rs.2,24,550. The capital receipts (incl. disinvestment proceeds committed for redemption of public debt Rs.2,000) is Rs.20,000. Suppose the non-plan revenue expenditure of Rs.4,57,536 includes interest payments of Rs.2,02,532, then the primary and fiscal deficit for the year 2001-02 are a. Rs.22,018 and Rs.2,24,550 respectively b. Rs.10,231 and Rs.2,24,550 respectively c. Rs.10,011 and Rs.1,11,399 respectively d. Rs.10,231 and Rs.1,11,399 respectively e. Rs.10,011 and Rs.1,11,409 respectively. (2 points)
20 04
o.
M AC
W
B
MUC 20,000 18,000 16,000 12,000 400 1,000 100 150 50 20
1,450 Cr.
e.
1,600 Cr.
1-
d.
:8
1,400 Dr.
BN
c.
.IS
1,450 Dr.
ed
b.
se rv
1,400 Cr.
re
a.
31
4-
02
27
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R
ef .N
Particulars Merchandize imports Merchandize exports Export of services, including travel and transportation Import of services, including travel and transportation Earnings of loans and investments abroad Earnings of loans and investments in country X by foreigners Private remittances to abroad Private remittances from abroad Government loans to abroad Government loans from abroad What is the current account balance of country X for the year 2001?
04
49. The following information pertains to the balance of payments of country X for the year 2001.
ig
ht
s
(2 points)
s. Al
lr
50. The following information pertains to the balance of payments of country Y for the year 2001.
Pr es
Particulars
Earnings of loans and investments abroad
ve rs i
ty
Earnings of loans and investments in country Y by foreigners
50
Direct investments abroad
30
Ic Th e 20 04 ©
1,000 20
fa
Government loans from abroad
400
iU
ni
Government loans to abroad
MUC
Foreign direct investment in country Y
150
Short-term loans and investments abroad
300
Foreign short-term loans and investments in country Y What is the capital account balance of country X for the year 2001? a.
(150) MUC.
b.
(160) MUC.
c.
(170) MUC.
d.
(180) MUC.
e.
(190) MUC.
40
(2 points)
378
Part III
51. For Country X Gross Domestic Investment for the year 2001 is 5,000 MUC. If gross retained earnings of the business sector are 2,000 MUC and household savings are 5,500 MUC, then what is the budget surplus or deficit? (Assume current account balance to be 1,450 MUC) 950 MUC.
b.
(1,000) MUC.
c.
(1,050) MUC.
d.
1,100 MUC.
e.
1,150 MUC.
04
a.
04
(2 points)
R
ef .N
o.
M AC
3,870 MUC. 3,750 MUC. 3,720 MUC. 3,840 MUC. 3,920 MUC.
-4
a. b. c. d. e.
W
B
04
20
52. The current account and capital account balances of a country are 1,450 MUC (credit) and 170 MUC (debit) respectively. If money multiplier is estimated to be 3, what is the impact of balance of payments position on the money supply in the economy?
31
4-
02
27
(1 point) 53. The following information is taken from the national income accounts of a hypothetical economy: MUC 3,000 600 200 1,400 600 2,000 1,500
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
.IS
BN
:8
1-
Particulars GNP at market prices Gross investment Net investment Consumption Government purchases of goods and services National income Wages and salaries The amount of net indirect taxes collected by the government is a. 500 MUC b. 550 MUC c. 600 MUC d. 650 MUC e. 700 MUC.
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20 04
Th e
Ic
fa
iU
ni
(2 points) 54. The following information is taken from the national income accounts of a hypothetical economy: Particulars MUC GNP at market prices 3,000 Gross investment 600 Net investment 200 Consumption 1,400 Government purchases of goods and services 600 National income 2,000 The net exports made by the country is a. 300 MUC b. 350 MUC c. 400 MUC d. 450 MUC e.
500 MUC. (1 point) 379
Macroeconomics
55. The following information is taken from the national income accounts of a hypothetical economy: 2,000
Wages and salaries
1,500
Proprietor’s income + Rental income
200
Net interest
100
Dividends
50 300
Personal tax payments
200
04
Transfer payments
04
National income
04
MUC
20
Particulars
c.
200 MUC and 1,850 MUC
d.
250 MUC and 1,850 MUC
e.
None of the above.
o.
250 MUC and 1,750 MUC
ef .N
b.
R
200 MUC and 1,750 MUC
02
27
-4
a.
M AC
W
B
The amount of profits earned by the corporates and the total disposable income of the households are
31
4-
(2 points)
:8
1-
56. The following information is extracted from National Income Accounts of a country: Million Units of Currency
BN
Particulars
se rv
ed
Gross domestic investment
.IS
NDP at market prices Subsidies
ht
1,600 200 1,300 1,900
lr
ig
Indirect taxes
s
re
Net domestic investment
10,000
7,350 MUC.
b.
8,240 MUC.
c.
8,600 MUC.
d.
8,720 MUC.
e.
8,800 MUC. (2 points)
Th e
Ic
fa
iU
ni
ve rs i
ty
Pr es
a.
s. Al
What is the value of GDP at factor cost?
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20 04
57. The Government of India is expecting tax collections (net) to the tune of Rs.1,84,169 crore during the year 2003-04. The borrowings and other liabilities are expected to be Rs.1,53,637 crore. If the non-plan revenue expenditure of the government is Rs.2,89,384 crore (inclusive of interest payments of Rs.1,23,223 crore), the primary deficit for the year 2003-04 is a.
Rs.1,53,637 crore
b.
Rs.1,35,747 crore
c.
Rs.1,05,215 crore
d.
Rs. 30,414 crore
e.
None of the above. (1 point)
380
Part III
58. In a closed two sector economy, there are 50 individuals. All the individuals have identical consumption functions but have different disposable incomes. One of the individual’s consumption function is C = 100 + 0.7Yd. Aggregate disposable income in the economy is 50,000 MUC. The level of investment in the economy is 10,000 MUC
b.
11,000 MUC
c.
12,000 MUC
d.
13,000 MUC
e.
14,000 MUC.
04
a.
-4
R
ef .N
o.
M AC
W
B
04
20
04
(2 points) 59. If the Average Propensity to Consume (APC) in an economy is 1.05, Average Propensity to Save (APS) in the economy would be a. – 0.05 b. – 0.95 c. 1.00 d. 1.05 e. Insufficient data. (1 point)
se rv
ed
.IS
BN
:8
1-
31
4-
02
27
60. The annual growth rate of GDP in a country is estimated to be 5.06%. If the per capita GDP growth rate is 2%, what is the growth rate of population? a. 2.530%. b. 0.395%. c. 3.000%. d. 4.530%. e. 2.000%. (1 point)
b.
80 MUC
c.
0 MUC
d.
250 MUC
e.
330 MUC.
Pr es
580 MUC
(1 point)
Th e
Ic
fa
iU
ni
ve rs i
ty
a.
s. Al
lr
ig
ht
s
re
61. The money supply in an economy is 330 MUC. At equilibrium, the transaction demand for money and the interest rate (i) in the economy are 250 and 8 percent respectively. If the precautionary demand for money is zero, the speculative demand for money in the economy is
©
20 04
62. The following are the indicators of financial development of an economy: Financial Interrelations Ratio = 1.2 Finance Ratio = 0.25 Intermediation Ratio = 0.70 If new issues for the year are 24,000 (MUC), what would be the Net Physical Capital Formation for the year? a. 34,000 MUC. b. 16,800 MUC. c. 40,800 MUC. d. 24,000 MUC. e. 12,580 MUC. (2 points) 381
Macroeconomics
63. In a hypothetical economy, the nominal income increased by 6%. If the prices increased by 4%, the real income increases by a. b. c. d. e.
10.0% 2.0% 1.5% 0.667% 2.5%. (1 point)
Answer the questions 64 and 65 based on the following information:
04
04
For a two-sector economy, the consumption function is C = 100 + 0.75Y
20
And the autonomous investment in the economy is 100 MUC.
02
27
-4
R
ef .N
o.
M AC
W
B
04
64. If the current output is 800 MUC, what will be the involuntary inventory accumulation in the economy? a. 0 MUC. b. 100 MUC. c. 200 MUC. d. 50 MUC. e. 250 MUC. (1 point)
se rv
ed
.IS
BN
:8
800 MUC. 1,000 MUC. 850 MUC. 950 MUC. 1,050 MUC.
re
a. b. c. d. e.
1-
31
4-
65. Suppose the autonomous investment increases from 100 MUC to 150 MUC, what would be the consumption at the equilibrium?
ht
s
(2 points)
lr
ig
66. The following information pertains to the balance of payments of a country for the year 2002-03:
s. Al
Particulars
1,40,240
Merchandize exports
1,16,320
ve rs i
ty
Pr es
Merchandize imports
2,30,010
Services rendered by foreigners to residents
1,25,234 2,000
Cash remitted by non-residents for their family maintenance
4,000
Income earned by residents on ownership of financial assets
1,000
fa
Gifts sent to non-residents by the residents
Ic
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Services rendered to foreigners
Th e 20 04 © 382
MUC
Foreign direct investment 1,00,000 If the capital account balance (credit) is 202,000 MUC, what is the change in foreign exchange reserves? a. 69,056 MUC. b. 1,79,056 MUC. c. 2,85,856 MUC. d. 23,920 MUC. e. 1,23,144 MUC. (2 points)
Part III
67. At an income level of Rs.20,000 the saving is zero. If the Marginal Propensity to Save (MPS) is 0.3, the autonomous consumption is a.
Rs.4,900
b.
Rs.5,000
c.
Rs.6,000
d.
Rs.7,000
e.
Rs.8,000. (1 point)
04
Questions 68 and 69 are based on the following information:
R -4
ed
(1 point)
Pr es
s. Al
lr
ig
ht
s
re
69. GDP deflator for the year 2003 is a. 125 b. 142 c. 140 d. 130 e. 121.
.IS
BN
:8
1-
31
4-
02
27
Rs.67,500 Rs.87,500 Rs.33,750 Rs.43,750 Rs.23,450.
se rv
a. b. c. d. e.
o.
Price of Butter (Rs. per unit) 15 20
Year
ef .N
Price of Bread (Rs. per unit) 2002 20 2003 25 68. Nominal GDP for the year 2002 is
M AC
W
B
04
20
04
An economy produces only two commodities – bread and butter. During the year 2003, it doubled its production to 1500 units of bread and 2500 units of butter, as compared to last year. The commodity prices in the economy during the two years are given below: (Consider 2002 as the base year)
(2 points)
ve rs i
ty
70. Consider an economy described by the following equations:
ni
Government spending (G)
= 1,000 MUC
Consumption (C)
= 500 + 0.75Yd
Ic
fa
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Taxes (T)
20 04
Th e
Investment demand (I)
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= 1,000 MUC
= 100 – 50i
Transaction demand for money (Mt/P) = 0.25Y
Speculative demand for money (Ma/P) =125 – 50i Money supply (Ms/P)
= 500 MUC
The amount of domestic saving in the economy is a.
0 MUC
b.
(52.5) MUC
c.
(137.5) MUC
d.
(102.5) MUC
e.
102.5 MUC. (3 points) 383
Macroeconomics
71. The following information is available for an economy: Income elasticity of demand for real balances Acceptable inflation rate Money multiplier If the real GDP is desired to grow at 5%, what is the grow?
04
04
14.0%. 3.5%. 32.0%. 8.0%. 5.5%.
20
a. b. c. d. e.
2.0 4% 4 rate at which reserve money should
B
04
(2 points)
27
-4
R
ef .N
o.
Rs.1,100 Rs.1,200 Rs.800 Rs.1,000 None of the above.
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20 04
Th e
Ic
fa
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ve rs i
ty
Pr es
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lr
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s
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se rv
ed
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BN
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1-
31
4-
02
a. b. c. d. e.
M AC
W
72. A government employee received a cheque for Rs.1,200 drawn on the RBI. When the cheque is credited to the employee’s account, high-powered money in the economy increases by
384
(1 point)
Model Question Paper III Suggested Answers Part A: Basic Concepts 1. (b) Other things being equal, increase in government expenditure increases the interest rates in the economy, which in turn crowds out private investment.
04
2. (b) Economic goods are those goods that are scare or limited in supply.
B
04
20
04
3. (e) Monetary and fiscal policies are aimed at reaching macroeconomic objectives. Thus objectives of monetary and fiscal policies are similar to macroeconomic objectives. All the options given are objectives of monetary policy. Hence, the answer is (e).
o.
M AC
W
4. (a) For an economy operating below its potential, the effect on GDP of an increase in intended investment will normally be greater than the increase in investment due to multiplier effect.
R
ef .N
5. (b) Increase in government spending is an expansionary fiscal policy which increases the price level and output in the economy.
02
27
-4
6. (c) The sum of all transactions involving money in an economy is least applicable to the concept of NDP.
:8
1-
31
4-
7. (d) When government spending is used as a policy instrument in order to achieve full employment, it is called internal balance.
ed
.IS
BN
8. (b) Savings reduces the consumption expenditure, which is a basic component of total output (income). Hence, increase in savings reduces the consumption, which in turn pull the income level down.
se rv
9. (b) M1 = Currency with the public + Demand deposits with the banks.
lr
ig
ht
s
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10. (c) Raise in discount rate discourages banks to rediscount their bills with the RBI, which leads to contraction in money supply in the economy. Reduction of money supply pushes the interest rates up in the market.
ty
Pr es
s. Al
11. (d) Demand for money increases (decreases) with the increase (decrease) in the level of income. On the other hand, increased (decreased) interest rate tend to reduce (increase) the demand for money.
iU
ni
ve rs i
12. (e) When these is recession in the economy, the tax receipts will come down, there will be decrease in corporate profit, stock prices will start falling, and these will not be any new business investment.
20 04
Th e
Ic
fa
13. (d) GDP = NDP + Depreciation (or) GDP – NDP = Depreciation. Similarly, on the other hand, gross investment – Net investment = Depreciation. Hence, difference between GDP and NDP is equal to difference between gross investment and net investment.
©
14. (b) The Marginal Propensity to Save (MPS) can be described as the fraction of extra income that goes into extra savings. 15. (b) A tax is regressive if potentials of income paid taxes decreases as income increases. 16. (e) GDP at market prices = GDP at factor cost + Indirect taxes – Subsidies (or) GDP at factor cost = GDP at market price + Subsidies – Indirect taxes. Hence, if GDP at factor cost exceeds GDP at market prices subsidies must be greater than the indirect taxes. 17. (e) In swap market, simultaneous spot and forward contract are entered into by two counterparties. 18. (a) When the output exceeds the spending there will naturally be some unsold output. As unsold output is not included in income, the income level decreases in the economy.
Macroeconomics
19. (e) Laffer curve shows the relation between total tax revenue and tax rates. It shows that increase in tax rates up to a certain level leads to an increase in tax revenue and latter results in decrease of tax revenue. According to Laffer curve, tax revenue will be zero when tax rate is at zero or at 100%. 20. (d) Multiplier = 1/[1 – b + MPI), where MPI is marginal propensity to import. This shows inverse relationship between multiplier and marginal propensity to import. Thus, an increase in the marginal propensity to import decreases the value of the multiplier. 21. (a) GDP at factor cost (market prices) – Depreciation = NDP at factor cost (market prices).
04
22. (d) In the IS-LM model of income determination, an increase in the propensity to save leads to the leftward shift of the IS curve.
M AC
W
B
04
20
04
23. (b) The demand for money is the demand for real money balances – real balances for short – because people hold money for what it will buy. Demand for money depends upon the real income and real interest rate. It depends on the level of real income because individuals hold money to pay for their purchases, which in turn, depend on the income. The demand for money also depends upon the cost of holding money, which is indicated by real interest rate.
02
27
-4
R
ef .N
o.
24. (b) When investment spending is inversely (negatively) related to the interest rate, a fall in the interest rate induces an increase in investment expenditure and also possibly consumption expenditure, which in turn lead to increase in the level of aggregate demand and ultimately the income. This shows an inverse relationship between rate of interest and income in the goods market.
31
4-
25. (d) Rational expectations theory is called neo-classical theory of interest.
BN
:8
1-
26. (b) Expenditure on consumer goods comes under consumption expenditure and hence does not included in gross investment.
ed
.IS
27. (a) The borrower will gain and lenders will loss, as the purchasing power of money will decrease by a greater amount than expected.
s
re
se rv
28. (a) The value of expenditure multiplier relates the change in income (Y) as a result of change in the autonomous spending (J).
s. Al
lr
ig
ht
29. (c) Disguised unemployment refers to a situation where more than the required number of people are visibly occupied in some work contributing nothing to the output.
Pr es
30. (d) Cyclical budget calculates the effect of business cycle on budget. It measures the changes in the revenue expenditure and deficit that arise due to business fluctuations.
fa
iU
ni
ve rs i
ty
31. (b) IS curve shows various combinations of rate of interest and level of income where the goods market is in equilibrium. There is a negative relation between rate of interest and level of income because of negative relation between rate of interest and consumption and investment expenditure.
Th e
Ic
32. (b) Laffer curve shows the relationship between tax rates and tax revenue.
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20 04
33. (c) Nominal rate of interest = Real rate of interest + Inflation. Therefore the answer is (c).
34. (b) Money earned abroad and remitted to home country is factor income received from abroad, which is included in GNP of the home country and GDP of the host country. 35. (d) M2 = M1 + Post office savings Bank Deposits M3 = M1 + Time Deposits M4 = M3 + All post office deposits. ∴ The answer is (d).
386
Part III
36. (e) GDPFC = GDPMP – Indirect taxes + Subsidies ∴ If GDPFC > GDPMP, Subsidies > Indirect taxes. 37. (d) NNPFC is also called a National Income. 38. (d) A variable is defined as a stock variable if it is measured at a point of time and as a flow variable if it is measured over a period of time. Of all the variables listed, only inflation is measured over a period of time and hence is a flow variable. 39. (b) If interest elasticity of demand for investment and consumption is zero, IS curve is A
04
04
1 − b(1 − t)
20
Y=
04
Hence, equilibrium income depends on the position of IS curve only.
ef .N
o.
M AC
W
B
40. (c) Liquidity trap is a situation where the demand for money is infinitely elastic. At the current interest rate the public is willing to absorb any amount of money. Hence, increase in money supply will not decrease the rates of interest. Other options are not correct.
R
Part B: Problems
27
-4
41. (b)
4-
02
High powered money = Monetary Liabilities of RBI + Government Money
31
Monetary liabilities of RBI = Financial Assets + Other Assets – Non-monetary liabilities.
=
65 MUC.
se rv
Other Assets
.IS
950 + 350 + 125 + 25 = 1,450 MUC
ed
=
BN
:8
1-
Financial Assets = Credit to Government + Credit to Banks + Credit to Commercial sector + Net Foreign Exchange Assets
s
re
Non-monetary liabilities = Government deposits + Other non-monetary liabilities + Net worth 20 + 5 + 500 = 525 MUC.
ig
ht
=
s. Al
lr
∴ Monetary liabilities = 1,450 + 65 – 525 = 990 MUC.
Pr es
Government money = 10 MUC. ∴ High powered money = 990 + 10 = 1,000 MUC.
ve rs i
ty
Money Supply = H x m 1 + Cu Cu + r
fa
iU
ni
m = money multiplier =
©
20 04
Th e
Ic
4,000 = 1,000 × m m=
4,000 = 4. 1,000
1 + Cu Cu + r
=4
1+ 0.2 =4 0.2 + r
1.2 = 0.8 + 4r ∴r=
1.20 − 0.8 = 0.10 = 10%. 4
387
Macroeconomics
42. (c) Money supply (Ms) = High-powered money (H) x Money Multiplier (m) = [(990 + 10) + 100 – 10] [(1 + 0.2)/(0.2 + 0.1)] = 1,090 x 4 = 4360 MUC.
04 20 04 B W M AC o. ef .N R -4 27 02
31 1:8
BN
350 + 50i = 1,400 + 200i. LM function 0.25
.IS
=
4-
∴ 600 = 0.25Y + 250 – 50i 0.25Y = (600 – 250) + 50i Y
04
43. (d) Savings function (S) = –100 + 0.25Yd Consumption function (C) = 100 + 0.75Yd Yd = Y – T = Y – 0.20Y = 0.80Y ∴ C = 100 + 0.75 × 0.80Y = 100 + 0.6Y Goods market equilibrium: Y = C+I+G+E–M = 100 + 0.6Y + 400 – 15i + 900 + 500 – 50 – 0.10Y Y = 1,850 + 0.5Y – 15i Y = 3,700 – 30i IS function Money market equilibrium: Ms = Md Md = Mt + Ma = 0.25Y + 250 – 50i
ed
Both the markets will be simultaneously in equilibrium when, IS = LM
re
se rv
∴ 3,700 – 30i = 1,400 + 200i 230i = 3,700 – 1,400 = 2,300
s. Al
lr
ig
ht
s
∴ i = 10% Y = 3,700 – 30i = 3,400 MUC. Budget deficit = Government expenditure – Tax revenue
Pr es
Taxes = 0.20Y = (0.20 × 3,400) = 680 MUC
©
20 04
Th e
Ic
fa
iU
ni
ve rs i
ty
∴ Budget deficit = 900 – 680 MUC = 220 MUC. 44. (a) 0.5Y = 1850 – 15i and 0.25Y = 350 + 50i. When E increase by 200 and imports decrease by 30, the IS function will be 0.5Y = 1,850 + 200 – (– 30) – 15i 0.5Y = 2,080 – 15i Or, Y = 4,160 – 30i LM function 0.25Y = 350 + 50i can be written as Y = 1,400 + 200i By equating IS & LM functions, 4,160 – 30i = 1,400 + 200i 2,760 = 12% 230 = 4,160 – (30 × 12) = 3,800 MUC. = (0.20 × 3,800) = 760 MUC
=
Y Tax revenue
∴ Budget deficit = 900 – 760 = 140 MUC.
388
1-
31
4-
02
27
-4
R
ef .N
o.
M AC
W
B
04
20
04
45. (a) Before increase of autonomous investment: By equating IS and LM functions, 3,700 – 30i = 1,400 + 200i 2,300 = 230i i = 10 When i =10, then Y = 3,700 – 30(10) = 3,400 MUC. Thus, trade balance = 450 – 0.1(3,400) = 110 (surplus) Investment = 400 – 15(10) = 250 MUC. When autonomous investment increases by 230 MUC, the IS function would become Y = 3,700 – 30i + 230 = 3,930 – 30i By equating IS and LM functions, At equilibrium, 3,930 – 30i = 1,400 + 200i 2,530 = 230i i = 11% When i =11, then equilibrium income Y = 3,930 – 30(11) = 3,600. If Y = 3,600, then trade balance = 450 – 0.1Y = 450 – 0.1(3,600) = 90. Private investment = 400 – 15(11) = 235. Thus, trade balance decrease by 110 – 90 = 30 and investment decrease by 250 – 235 = 15.
04
Part III
.IS ed
(1 + g) (1 + p)
g = GDP growth rate
re
Where,
=
se rv
Per capita GDP growth rate
BN
:8
46. (b)
ht
s
P = growth rate of population = 0.04
Pr es
1 + g = 1.04 × 1.02
s. Al
lr
ig
To achieve the targeted per capita GDP growth rate of 4%.
= 0.0608 = 6.08%
ty
g
ve rs i
Given COR of 5, required investment is
iU
ni
6.08 × 5 = 30.4% of GDP.
fa
Alternative approach:
Th e
Ic
Target per capita real GDP growth = 4% p.a.
©
20 04
Expected population growth
= 2.0% p.a.
Growth required in GDP to achieve target per capita GDP growth = 4 + 2 = 6% p.a. Capital output ratio = 5:1 The required rate of investment as a percentage of GDP = 5 × 6 = 30% approx.
47. (b)
Tax revenues Non-tax revenues Recoveries of loans Borrowings and other liabilities
In crore of rupee 2,92,418 1,14,928 27,078 2,24,550 389
Macroeconomics
In crore of rupee Other receipts (of which disinvestment proceeds committed for redemption of public debt is 2,000 cr.) Non-plan revenue expenditure (including interest payments of Rs.2,02,532)
20,000 4,57,536 43,238 1,04,660 71,540
Non-plan capital expenditure Planned revenue expenditure Planned capital expenditure
20
04
04
Revenue surplus/Deficit = Revenue receipts – Revenue expenditure = [Tax revenues + Non-tax revenues] – [Planned revenue expenditure + Un-plan revenue expenditure]
B
04
= 2,92,418 + 1,14,928 – 4,57,536 – 1,04,660 = Rs.(1,54,850) crore.
ef .N
o.
M AC
W
Capital surplus/Deficit = Recoveries of loans + Borrowings and other liabilities + Other receipts – Non-plan capital expenditure – Plan capital expenditure – Disinvestment proceeds = 27,078 + 2,24,550 + 20,000 – 43,238 – 71,540 – 2,000 = Rs.1,54,850 crore.
-4
= Borrowings and Liabilities = Rs.2,24,550 crore
27
Fiscal Deficit
R
48. (a)
4-
02
Primary Deficit = Fiscal Deficit – Interest payments = 2,24,550 – 2,02,532 = Rs.22,018 crore.
1-
31
49. (d)
Credit
Debit
18,000
20,000
(2,000)
16,000
12,000
4,000
400
1,000
(600)
150
100
50
34,550
33,100
1,450
:8
Item
BN
I. Merchandize
se rv
ed
.IS
II. Invisibles (a + b + c)
Net
re
a. Services
lr
ig
c. Transfers
ht
s
b. Income
Pr es
s. Al
Current account balance (I + II)
ty
50. (c)
I. Foreign investment II. Loan capital Capital account balance (I + II)
Credit Debit 150
30
Net 120
60
350 (290)
210
380 (170)
Th e
Ic
fa
iU
ni
ve rs i
Item
©
20 04
51. (c) Gross Domestic Savings (GDS) = GDI + Current Account Balance (CAB) GDS = =
Household savings + Gross retained earnings of business sector + Budget surplus of government 5,500 + 2,000 + BS = 7,500 + BS
GDI = 5,000 MUC CAB = 1,450 MUC ∴
7,500 + BS = 5,000 + 1,450 BS = 6,450 – 7,500 = –1,050 MUC (Budget deficit).
390
Part III
52. (d) Change in money supply (ΔMs) = Money multiplier x Change in high powered money (H) Since the overall BoP position is a surplus of 1,280 MUC (1,450 – 170), forex reserves increase by the same amount, which leads to increase in H by 1,280 MUC. ∴
ΔMs = 3 × 1,280 = 3,840 MUC.
53. (c) NNP at Market Prices = GNP at Market Prices – depreciation Depreciation
= Gross investment – Net investment = 600 – 200 = 400 MUC
04
= NNP at market prices – National income
20
Net indirect taxes
04
∴ NNP at market prices = 3,000 – 400 = 260
B W
Net Exports = GNPMP – (C + I + G)
M AC
54. (c)
04
= 2,600 – 2,000 = 600 MUC.
= 3,000 – (1,400 + 600 + 600) = 3,000 – 2,600 = 400 MUC.
ef .N
o.
55. (e) Corporate profits =
27
-4
R
National income – (Wages and salaries + Rental income + Proprietor’s income + Net interest)
4-
2,000 – 200 + 300 + 50 = 2,150 MUC.
:8
=
National income – Corporate profits + Transfer payments + Dividends
31
Personal income =
02
2,000 – (1,500 + 200 + 100) = 2,000 – 1,800 = 200 MUC.
1-
=
BN
Personal disposable income = Personal income – Personal taxes
ed
.IS
= 2,150 – 200 = 1,950 MUC.
se rv
56. (c)
s
re
NDPMP + Depreciation = GDPMP = 10,000 + (1,600 – 1,300) = 10,300 MUC
= Fiscal deficit – Interest payment
s. Al
57. (a) Primary deficit
lr
ig
ht
GDPMP – Indirect taxes + Subsidies = GDPFC = 10,300 – 1,900 + 200 = 8,600 MUC.
Pr es
= Rs.1,53,637 Cr. – 1,23,223 Cr. = Rs.30,414 Cr.
ve rs i
ty
Where Fiscal deficit = Borrowings and other liabilities of the government = Rs.1,53,637 Cr.
iU
ni
58. (a) At equilibrium, Y = C + I = C + S
Th e
Ic
fa
Aggregate consumption function = (100 x 50) + 0.7Yd = 5,000 + 0.7Yd = 5,000 + 0.7(50,000) = 40,000. Thus, Investment (I) = Saving (S) = 50,000 – 40,000 = 10,000 MUC.
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59. (a) APC + APS = 1 Thus, APS = 1 – APC = 1 – 1.05 = – 0.05.
60. (c) Per capita GDP growth rate = (1 + g)/(1 + p) – 1; where g = growth rate of GDP and p = growth rate of population. = (1 + 0.0506)/(1 + 0.02) – 1 = 0.03 or 3%. 61. (b) At equilibrium, Supply of money = Demand for money Demand for money = Transaction demand for money + Speculative demand for money + Precautionary demand for money Or, speculative demand for money = 330 – 250 – 0 = 80 MUC.
391
Macroeconomics
62. (a) Intermediation Ratio = Secondary issues/New issues Or, secondary issues = Intermediation ratio x New issues = 0.7 x 24,000 = 16,800 MUC Total issues = New issues + Secondary issues = 24,000 + 16,800 = 40,800 MUC Financial Interrelations Ratio = Total issues/Net Physical Capital Formation (NPCF) Or, Net Physical Capital Formation (NPCF) = Total issues/Financial Interrelations Ratio = 40,800/1.2 = 34,000 MUC. 63. (b) Growth rate of Real income = Nominal income – Price level = 6% – 4% = 2%.
04
04
64. (a) When output (income) = 800, aggregate demand = C + I = 100 + 0.75(800) + 100 = 800. When AD = Y, there will be no involuntary inventory accumulation in the economy.
04
20
65. (c) Multiplier = 1/MPS (in a two-sector economy)
B
Thus, multiplier = 1/0.25 = 4
M AC
W
If autonomous investment increases to 150 (i.e. 50), then the income increases by 50 x 4 = 200. That means, new Y = 800 + 200 = 1000.
ef .N
o.
Therefore, consumption = 100 + 0.75(1000) = 850 MUC.
66. (c) Change in foreign exchange reserves = Current account balance + Capital account balance
27
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Current account balance = (116,320 + 230,010 + 4000 + 1000) - (140,240 + 125,234 + 2000) = 351330 – 267474 = 83856 i.e. current account surplus (Credit)
4-
02
Thus, change in foreign exchange reserves = 83856 + 202,000 = 285856 MUC.
1-
31
67. (c) When saving is zero, Y = C + S = C + I; C = Y = Rs.20,000
.IS ed
se rv
If MPS = 0.3, MPC = 1 – 0.3 = 0.7. Thus, 20,000 = a + (0.7 x 20,000)
BN
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C = a + bY; where a = Autonomous Consumption, and b = Marginal Propensity to Consume (MPC)
re
a = 20,000 – 14,000 = Rs.6,000.
s. Al
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68. (c) Nominal GDP for 2002 = (Quantity of bread in 2002 x Price of bread in 2002) + (Quantity of butter in 2002 x Price of butter in 2002) = (750 x 20) + (1250 x 15) = 15,000 + 18,750 = Rs.33,750.
Pr es
69. (d) Real GDP for 2003 = (Quantity of bread in 2003 x Price of bread in 2002) + (Quantity of butter in 2003 x Price of butter in 2002) = (1500 x 20) + (2500 x 15) = Rs.67500.
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Nominal GDP for 2003 = (Quantity of bread in 2003 x Price of bread in 2003) + (Quantity of butter in 2003 x Price of butter in 2003) = (1500 x 25) + (2500 x 20) = 37500 + 50000 = 87,500.
Th e
Ic
GDP deflator =
Nominal GDP ×100 Real GDP
20 04
= (87500/67500) x 100 = 1.296 x 100 = 129.6 or 130.
70. (c) Goods market will be in equilibrium when Y = AD = C + I + G
©
Y
= 500 + 0.75(Y – T) + 100 – 50i + 1000 = 1600 + 0.75(Y – 1000) – 50i
Y
= 850 + 0.75Y – 50i 0.25Y = 850 – 50i
….. IS curve
Money market will be in equilibrium when: Money supply (Ms) = Money demand (Md) 500 = 0.25Y + 125 – 50i 375 = 0.25Y – 50i 392
Part III
0.25Y = 375 + 50i
….. LM curve
Thus, at simultaneous equilibrium, 850 – 50i = 375 + 50i 475 = 100i i = 4.75 When i = 4.75, 0.25Y = 375 + 50 (4.75) = 612.5 Or, Y = 612.5/0.25 = 2450. i.
Private saving = Y – T – C = 2450 – 1000 – [500 + 0.75(2450 – 1000)] Public saving = T – G = 1000 – 1000 = 0
iii.
Domestic saving = Private saving + Public saving = (137.5) + 0 = (137.5) MUC.
B
04
ii.
20
04
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= 1450 – [500 + 1087.5] = (137.5)
M AC
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71. (b) Rate of growth of money stock (gM) = a.gY + gP Where, ‘a’ = income elasticity of demand for real balances
ef .N
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‘gY’ = expected rate of growth in real GDP ‘gP’ = acceptable rate of inflation
-4
R
Thus, ‘gM’ = (2 x 5) + 4 = 14%
02
27
Given money multiplier is 4,
4-
Rate of growth of reserve money = 14/4 = 3.5%.
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72. (b) When a cheque is drawn on the central bank, the money in circulation with public increases that in turn increases the monetary liabilities of the central bank. Since monetary liabilities of the central bank and government money form part of high-powered money, it also increases by the same amount for a given increase in monetary liabilities of the central bank. Hence the answer is (b).
393
Model Question Paper IV Time: 3 Hours
Total Points: 100 Part A: Basic Concepts (40 Points)
Answer all the questions. Each question carries one point. Which of the following statements is correct? b.
A change in an exogenous 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.
None of the above. Saving equals investment
b.
Consumption plus investment equals the value of output
c.
Planned saving equals planned investment
d.
Aggregate spending equals the revenues of the business sector
e.
Both (b) and (c) above.
GDP/GNP
d.
GNP/GDP
e.
None of the above.
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A depletion of inventories.
b.
An increase in recruiting labor force.
c.
An upward movement of the price level.
d.
Requests for wage increases.
e.
All of the above.
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a.
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Velocity of money is given by a.
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c.
1-
Nominal GDP/real GDP
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b.
BN
Real GDP/nominal GDP
.IS
a.
If the level of aggregate demand were greater than the level of aggregate supply in the economy, which of the following choices could also be seen?
5.
6.
o.
a.
GDP deflator is given by
4.
04 20
04
B M AC
Equilibrium occurs in a two-sector model when
3.
04
A variable is endogenous when its value is determined by forces outside the model.
4-
2.
a.
W
1.
Money supply/GDP
b.
Money supply/investment
c.
Investment/money supply
d.
GDP/money supply
e.
None of the above.
Which of the following is not a function of money? a. Medium of exchange. b. Unit of account. c. Supply of reserves. d. Store of value. e. A standard of deferred payments.
Part III
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7. Which of the following cannot be identified as a basic trend of economic development? a. Population has grown less rapidly than the growth of the capital stock. b. There has been a strong upward trend in real wage rates. c. The percentage of GDP used to finance investment in physical capital has been roughly constant. d. The rate of profit has been gradually but steadily declining. e. Both (b) and (d) above. 8. During the course of typical business fluctuations, there is more variation in a. Industrial price than in real industrial output b. Consumer goods production than in capital goods production c. Agricultural production than in non-agricultural production d. Durable goods production than in non-durable goods production e. Government production than in private production. 9. Which of the following statements is true? a. Investment and interest rates are negatively related. b. Investment and interest rates are positively related. c. An increase in government expenditure is likely to cause a drop in income. d. Both (a) and (c) above. e. Both (b) and (c) above. 10. Policies directed at stimulating exports can influence a. The domestic employment b. Price stability c. The growth of actual GDP relative to potential GDP d. The foreign trade balance e. All of the above. 11. Net investment is derived from gross investment by Subtracting inventory costs from gross investment
b.
Adjusting gross investment for inflation
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a.
Subtracting profits retained by firms from gross investment Reducing gross investment by the rupee value of business ventures that failed during a stated period
e.
Subtracting capital depreciation.
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Pr es
c. d.
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12. Factors affecting consumption include Income
Ic
fa
a.
Wealth
c.
Expectations
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Th e
b.
d.
Both (a) and (b) above
e.
All of the above.
13. Which of the following would be a liability of a commercial bank? a.
Deposits in the bank.
b.
Loans made by the bank to individuals.
c.
Loans made by the bank to other banks.
d.
Bonds purchased by the bank.
e.
Investments made in mutual funds.
395
Macroeconomics
14. When a Central Bank wishes to increase the quantity of money held by the public, it a.
Sells bonds
b.
Buys bonds
c.
Sells goods or services
d.
Buys goods or services
e.
None of the above. 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.
None of the above.
M AC
W
B
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04
a.
04
15. When Ct = f(Yd, t – 1)
Primary deficit.
ef .N
e.
R
Revenue deficit.
-4
d.
27
Capital deficit.
02
c.
4-
Fiscal deficit.
31
b.
1-
Budget deficit.
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o.
16. Which of the following is the largest deficit for the government?
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BN
17. Which of the following model explains that people can quickly and easily adjust their living standards upwards but downward adjustment is very difficult? Relative Income Hypothesis.
b.
Permanent Income Hypothesis.
c.
Life Cycle Hypothesis.
d.
Inventory – Theoretic Approach.
e.
Expectation Hypothesis.
Pr es
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18. When excise tax on cigarettes was hiked, it was found that total expenditure on cigarettes increased. A possible explanation is that The tax increase was not passed onto consumer
b.
People smoke more when cigarette prices go up
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Income elasticity of demand for cigarettes is very high
Ic
Th e
c.
ni
a.
d.
Demand for cigarettes is price inelastic
e.
None of the above.
19. Which of the following is true of I-S curve? When transfer payments are increased,
396
a.
I-S curve will shift to the left
b.
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 affect.
Part III
20. GDP is not a very good measure of economic prosperity because a.
The expenditure and production methods of estimating 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.
04
21. The impact of a recession is likely to have a stronger impact on the economy when MPC is larger
b.
MPC is smaller
c.
MPS is larger
d.
MPS is smaller
e.
Both (b) and (c) above.
ef .N
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M AC
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B
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20
04
a.
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22. In an inflationary period, an appropriate policy for the Reserve Bank of India would be to a. Sell government securities in the open market b. Encourage commercial banks to increase their loans c. Lower the cash reserve ratio d. Lower the bank rate e. None of the above. 23. In an economy during a particular year, GDP exceeds GNP. This must imply that a. Indirect taxes exceed subsidies b. Net factor income from abroad is negative c. Government tax revenue exceeds its expenditure d. The merchandize trade balance is in surplus e. Subsidies exceed indirect taxes. 24. A decline in foreign exchange reserves of a country, other things remaining the same will a. Cause a capital inflow into the country b. Cause a contraction of money supply in the country c. Force the country to borrow from foreign countries d. Increase the prices of imported goods e. None of the above. 25. When I sell a share for Rs.250 which I had bought for Rs.130 a. National income goes up b. Money supply goes up c. National income goes down d. High-powered money increases e. None of the above. 26. A current account deficit implies that a. b. c. d. e.
There is net debit balance in the merchandize account There is net credit balance in the merchandize account Foreign exchange outflows on account of imports of goods and services and gifts made exceed inflows on account of exports of goods and services received Decrease in Foreign Exchange Reserves Increase in Foreign Exchange Reserves. 397
Macroeconomics
04 20 04
02
27
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28. If the RBI raises the reserve ratio a. High-powered money and money supply must increase b. High-powered money will increase and money supply will decrease c. Both high-powered money and Money supply will decrease d. High-powered money will remain unchanged and money supply will decrease e. Outstanding bank credit will increase. 29. Stagflation is a period of a. High inflation b. Low inflation c. High unemployment d. Low unemployment e. Both (a) and (c) above.
04
27. Dynamic multipliers occur when a. The assumption of ceteris paribus is dropped b. The economy is not in equilibrium c. Consumption is unrelated to disposable income d. There is a lagged response between consumption and disposable income e. None of the above.
31
GDP takes into account both transfer payments and leisure time. GDP takes into account transfer payments, but not leisure time. GDP takes into account leisure time, but not transfer payments. GDP takes into account neither transfer payments nor leisure time. GDP takes into account both the services of a housewife and services of a driver engaged by a company. 31. If the marginal propensity to consume is zero, a decrease in investment would lead to a. A decrease in the equilibrium level of income by the same amount b. No change in the equilibrium level of income c. An unending downward spiral in equilibrium level of income d. An unending upward spiral in the equilibrium level of income e. An increase in the equilibrium level of income. 32. The government decreases both its expenditure and tax receipts by Rs.10 billion. This would a. Reduce the equilibrium level of income b. Increase the equilibrium level of income c. Reduce the equilibrium level of income only if the government had previously been running a deficit d. Leave the equilibrium level of income unaffected e. Increase the equilibrium level of income only if the government had previously been running a surplus. 33. “The money payments which are not due to any current productive activity on the part of income receiver” is called
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a. b. c. d. e.
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4-
30. Which of the following statements is true?
a. b. c. d. e. 398
Plan expenditure Transfer payments Consumption expenditure Past expenditure Either (b) or (d) above.
Part III
34. Which of the following is/are not considered in the calculation of national income? Teaching in a class.
ii.
Shirt stitched by a father for his son.
iii.
Patient attended to by a doctor.
iv.
Services of a housewife.
a.
Both (i) and (ii) above.
b.
Both (i) and (iv) above.
c.
Both (ii) and (iv) above.
d.
Both (ii) and (iii) above.
e.
All (i), (ii), (iii) and (iv) above.
04
20
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35. J M Keynes held that changes in the money supply Affect aggregate demand mainly by causing changes in the interest rate
b.
Affect aggregate demand mainly by causing changes in the price level
c.
Affect aggregate demand mainly by causing changes in the velocity of money
d.
Alone cannot affect output or employment
e.
All of the above.
27
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a.
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02
36. National product at market prices is higher than national product at factor cost by the amount of Indirect taxes
b.
Subsidies
c.
Indirect taxes – subsidies
d.
Indirect taxes + subsidies
e.
Depreciation.
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37. Which method is used to compute national income in India? Output method.
b.
Income method.
c.
Expenditure method.
d.
All of the above.
e.
Both (a) and (b) above.
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38. The best single indicator of the standard of living is Normal GNP Real GNP
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Th e
Ic
b.
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a. c.
Per capita Normal GNP
d.
Per capita Real GNP
e.
None of the above.
39. Large government borrowings to finance its deficit will a.
Increase the supply of loanable funds
b.
Exert downward pressure on interest rates
c.
Have no impact on interest rates
d.
Put upward pressure on interest rates
e.
Makes it easier for the commercial sector to borrow money.
399
Macroeconomics
40. If the Average Propensity to Save (APS) is negative, then the Average Propensity to Consume (APC) is a.
Negative
b.
Zero
c.
Positive but less than one
d.
One
e.
Greater than one.
04
Part B: Problems (60 Points)
20
04
Solve all the problems. Points are indicated against each problem.
7,000
Credit to Banks
4,000
B W
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Credit to Government
o.
Million units of currency (MUC)
M AC
Particulars
04
41. The following balances are taken from the Balance Sheet of the Central Bank of a country.
500
R
Government Deposits
25
27
-4
Other non-monetary liabilities
1,000
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Net worth
31
Credit to commercial sector
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Net foreign exchange assets
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Other assets
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Deposits of banks
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Other Deposits
2,000
11,000 100 6,000 600
85,500 MUC.
c.
90,400 MUC.
ty
95,300 MUC.
e.
96,200 MUC.
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(3 points)
Th e
Ic
42. The net worth of a Central Bank is 1000 and the money supply in the economy is 90,400. The monetary liabilities of the Central Bank are 22,600. Because of intervention in the foreign exchange market, net worth of the central bank is expected to erode by 50% in the next period. If the Central Bank desires to maintain the current level of money supply by changing the reserve ratio, what should be the new reserve ratio? (Assume currency/deposit ratio to be 24%) a. 7.06%. b. 6.59%. c. 6.51%. d. 7.69%. e. 8.01%. (3 points)
20 04 ©
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b.
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80,600 MUC.
Pr es
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ht
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The currency/deposit ratio has been ascertained as 0.24. Reserve ratio imposed by the central bank is 7%. The amount of Government money is 25 million units of currency. What is the money supply in the economy?
400
Part III
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43. The consumption function estimated for an economy is Ct = 80 + 0.6 Ytd + 0.2 Ct – 1. If Ytd increase by 100 and remains at that level, what is the change in steady state level of consumption? a. Consumption increases by 55. b. Consumption decreases by 55. c. Consumption increases by 75. d. Consumption decreases by 75. e. Consumption increases by 100. (2 points) 44. The following relations are estimated for an economy: Savings function (S) = – 380 + 0.35Yd + 10i Tax function (T) = 0.30Y Investment function (I) = 300 + 0.15Y – 50i Transfer payments (R) = 200 Government Expenditure (G) = 1,200 Exports (E) = 900 Import function (M) = 50 + 0.105Y Money Supply (Ms) = 1,000 Transaction Demand for Money (Mt) = 0.25Y Speculative Demand for Money (Ma) = 350 – 100i (All macroeconomic aggregates are in million units of currency (MUC) and the rate of interest is in percentage.) What is the equilibrium level of income of the economy? a. 3,000 MUC. b. 4,000 MUC. c. 5,000 MUC. d. 6,000 MUC. e. 7,000 MUC. (3 points)
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Pr es
45. The IS and LM functions in an economy are 0.5Y = 2,860 – 60i and 0.25Y = 650 + 100i. The government expenditure (G) during the period is 1,200. If the government desires to increase the equilibrium output by 10% in the next period, it must increase its expenditure (G) by a. 425 MUC b. 475 MUC c. 350 MUC d. 575 MUC e. 325 MUC. (3 points) 46. The IS function in an economy is estimated to be Y = A – 120i. The transaction demand for money (Mt) and speculative demand for money (Ma) are 0.25Y and 350 – 100i. The equilibrium income (output) of the economy is 5000 MUC. The government directed the Central Bank to undertake appropriate monetary policy to increase the equilibrium output by 10%. Suppose the central bank wants to achieve the goal by increasing the money supply (Ms), then it should increase the supply of money to a. 1,542 MUC b. 1,323 MUC c. 1,252 MUC d. 1,444 MUC e. None of the above. (3 points)
401
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47. The following information is taken from Union Budget for the year 2002 – 03: (Rs.crore) Tax Revenue (Net) 1,72,965 Non-tax Revenue 72,140 Recoveries of Loans 17,680 Other capital receipts 12,000 Borrowings & Other Liabilities 1,35,524 Non-plan revenue expenditure 2,70,169 (Of which, interest payments is Rs.1,17,390 crore) Non-plan capital expenditure 26,640 Planned revenue expenditure 70,313 Planned capital expenditure 43,187 The revenue and capital deficits of the country for the year 2002-03 are a. Rs.95,377 crore (deficit) and Rs.95,377 crore (surplus) b. Rs.95,377 crore (deficit) and Rs.90,229 crore (surplus) c. Rs.92,389 crore (deficit) and Rs.95,377 crore (surplus) d. Rs.92,389 crore (deficit) and 90,229 crore (surplus) e. None of the above.
04
Macroeconomics
2.6% of GDP.
e.
2.8% of GDP.
BN
d.
.IS
2.1% of GDP.
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c.
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1.3% of GDP.
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b.
s
1.8% of GDP.
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a.
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27
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(3 points) 48. In an economy domestic savings – income ratio is 25% and the population is expected to grow at the rate of 1.5%. Incremental Capital Output Ratio (ICOR) for the economy is 4. If the targeted growth in Per Capita Income is 5%, What will be the required external financing to achieve the target?
lr
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(3 points)
Pr es
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49. The following information is taken from Union Budget for the year 2002-03:
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Tax Revenue (Net) Non-tax revenue Recoveries of loans Other capital receipts Borrowings & Other liabilities Non-plan revenue expenditure (Of which, interest payments is Rs.1,17,390 crore).
Rs. crore 1,72,965 72,140 17,680 12,000 1,35,524 2,70,169
Non-plan capital expenditure 26,640 Planned revenue expenditure 70,313 Planned capital expenditure 43,187 The fiscal and primary deficit of the country for the year 2002-03 a. Rs.1,35,524 crore and Rs.18,134 crore b. Rs.1,35,524 crore and Rs.20,226 crore c. Rs.1,28,342 crore and Rs.18,134 crore d. Rs.1,28,342 crore and Rs.20,226 crore e. Rs.1,35,524 crore and Rs.22,144 crore. (3 points)
402
Part III
50. The following monetary data on financial development of an economy has been obtained for the year 2000-2001. New issues ratio Net physical capital formation Secondary issues The intermediation ratio for the economy is 0.63
b.
0.78
c.
0.84
d.
0.87
e.
0.90.
04
20
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a.
0.74 2,00,445 1,15,605
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B
(2 points)
M AC
51. The following information is available for an economy.
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Income elasticity of demand for real balances 3.0 Acceptable rate of inflation 6% Money multiplier 3 If the real GDP is desired to grow at 4%, the rate at which reserve money should grow is a. 5.5% b. 5.0% c. 6.0% d. 6.5% e. 7.0%. (2 points) 52. The following information is extracted from the National Income Accounts of an economy: Million units of currency (MUC)
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Factor incomes received by domestic residents from Business sector Foreigners Gross investment Business savings Net investment Subsidies Corporate profit taxes Personal income taxes Net factor income from abroad Budget deficit Net transfer to household sector Consumption expenditure Indirect taxes The GDP of the economy at market price is a.
625 MUC
b.
650 MUC
c.
675 MUC
d.
700 MUC
e.
725 MUC.
500 20 200 25 150 10 15 100 –5 10 7 319 70
(2 points) 403
Macroeconomics
53. The following information is extracted from the National Income Accounts of an economy:
e.
None of the above.
04 20 04 B M AC
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29 MUC (surplus)
R
d.
-4
35 MUC (deficit)
27
32 MUC (surplus)
c.
31
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27 MUC (deficit)
02
a.
W
Business savings Subsidies Corporate profit taxes Personal income taxes Budget deficit Net transfer to household sector Indirect taxes National income Consumption Gross investment Net investment The current account balance of the economy is
04
Million units of currency (MUC) 25 10 15 100 10 7 70 560 319 200 150
Particulars
(2 points)
.IS
Rs. in crore 14,000 1,00,422 1,07,000 10,000 30,000 7,000
fa
iU
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
se rv
ed
Particulars Indirect taxes NDP at market prices GNP at market prices Personal income taxes Retained profit Depreciation The national income of the economy is a. Rs.82,000 crore b. Rs.84,000 crore c. Rs.86,000 crore d. Rs.88,000 crore e. Rs.90,000 crore.
BN
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1-
54. The following information is extracted from the National Income Accounts of an economy for the year 2000-2001.
Ic
(1 point)
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Th e
55. The following information relates a hypothetical economy: Particulars Consumption Investment Government expenditure Money supply The velocity of money in the economy is a. 2.0 b. 3.0 c. 3.3 d. 5.0 e. 6.0.
(Rs. in crore) 500 170 140 162
(1 point) 404
Part III
56. The monetary liabilities of the central bank of an economy are 20,000 MUC. The government money in the economy is 200 MUC. Currency deposit ratio for the economy is estimated to be 0.2 and reserve ratio imposed by the central bank is 5 percent. If foreign exchange reserves of the country decline by 200 MUC, what would happen to the money supply? Decline by 960 MUC.
b.
Increase by 960 MUC.
c.
Decline by 820 MUC.
d.
Increase by 820 MUC.
e.
Decline by 480 MUC.
04
a.
04
(2 points)
500
400.0
400
287.5
250
04
475.0
B
Disposable Income (Yd)
ef .N
o.
M AC
W
Consumption (C)
20
57. The consumption schedule for a two sector economy is given below:
27
-4
R
250.0 200 If savings in the economy is 100, the equilibrium income in the economy is 750 MUC
b.
700 MUC
c.
800 MUC
d.
950 MUC
e.
1,050 MUC.
se rv
ed
.IS
BN
:8
1-
31
4-
02
a.
(2 points)
b.
200 MUC
c.
500 MUC
d.
260 MUC
e.
140 MUC.
Pr es
40 MUC
(2 points)
Th e
Ic
fa
iU
ni
ve rs i
ty
a.
s. Al
lr
ig
ht
s
re
58. In an economy the marginal propensity to consume is 0.75, the tax rate is 20%, and marginal propensity to import is 10%. The net exports function in the economy is estimated to be 100 – 0.2Y. Assuming that the investment is autonomous and increases by 500 MUC during the year, the trade balance deteriorates by
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59. Monetary liabilities of the Central Bank in an economy are 20,000 MUC and government money is 2000 MUC. The currency-deposit ratio is estimated to be 0.25. If the Central Bank wants to set the money supply at 50,000 MUC, what should be the reserve ratio that the Central Bank should impose on banks to achieve the targeted money supply? a.
0.25.
b.
0.30.
c.
0.50.
d.
0.425.
e.
0.20. (2 points)
405
Macroeconomics
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fa
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s
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02
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o.
M AC
W
B
04
20
04
04
60. The following balances are taken from the balance sheet of the Central Bank of a country: Particulars (MUC) Net worth 400 Credit to central government 1000 Credit to commercial banks 500 Other non-monetary liabilities 100 Other assets 200 Government deposits 100 Foreign exchange assets 200 If the government money in the economy is 100 MUC, the high-powered money in the economy is a. 1,400 MUC b. 1,500 MUC c. 1,650 MUC d. 1,600 MUC e. 1,250 MUC. (2 points) 61. The IS function and LM function in an economy are estimated to be Y = 5700 + 0.5Y – 100i and Y = 5200 + 800i respectively. The investment function in the economy is 1600 – 100i. If the government spending increases by 100, which of the following is true about the interest rate in the economy? a. Increases from 6.2 to 6.5. b. Increases from 6.1 to 6.5. c. Increases from 6.2 to 6.4. d. Increases from 6.0 to 6.4. e. None of the above. (2 points) 62. In an economy, the investment function is given by I = 1000 – 40i. If an increase in government spending by 250 MUC increases the interest rate in the economy by 5%, what could be the amount of crowding out in the economy? a. 100 MUC. b. 150 MUC. c. 75 MUC. d. 200 MUC. e. 90 MUC. (1 point) 63. The following information is extracted from the National Income Accounts of an economy. All figures are in millions units of currency (MUC). Particulars MUC Compensation to employees 1,942 Exports of goods and services 134 Depreciation 118 Government expenditure 594 Gross domestic investment 639 Transfer payments 139 Imports of goods and services 165 Personal taxes 405 Net income earned from abroad 22 Personal consumption expenditure 2,191 The NDP at market prices is a. 1,472 MUC b. 3,275 MUC c. 2,346 MUC d. 1,782 MUC e. 3,393 MUC. (2 points) 406
Part III
64. The following information is extracted from the National Income Accounts of an economy. All figures are in millions units of currency (MUC). Particulars
MUC
Depreciation
236
Government expenditure
1,188
Corporate taxes
288
Transfer payments
278
Personal taxes
810 44
04
600
B
Retained earnings
20
Net income earned from abroad
04
1,278
04
Gross domestic investment
M AC
W
If the national income is 10,000 MUC, the personal disposable income in the economy would be 8,960 MUC
b.
8,580 MUC
c.
10,240 MUC
d.
9,230 MUC
e.
7,440 MUC.
4-
02
27
-4
R
ef .N
o.
a.
1-
31
(2 points)
BN
:8
65. The following information is available from the consolidated balance sheet of the banking sector:
ed
.IS
Particulars
se rv
Net Bank Credit to the Government
2000 3000
re
Bank Credit to the Commercial Sector
(Rs. Billion)
2200
lr
ig
ht
s
Net Foreign Exchange Assets of the Banking Sector
ve rs i
ty
Pr es
s. Al
Net Non-Monetary Liabilities of the 1200 Banking Sector If the money supply in the economy is 6200 MUC, the government currency liabilities to the public is Rs.200 billion
b.
Rs.6,000 billion
c.
Rs.6,200 billion
Ic
fa
iU
ni
a.
Rs.7,400 billion
e.
None of the above.
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Th e
d.
(1 point)
66. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC, private savings for the year is a.
500 MUC
b.
1,000 MUC
c.
1,500 MUC
d.
2,000 MUC
e.
2,500 MUC. (1 point) 407
Macroeconomics
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Ic
fa
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ve rs i
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Pr es
s. Al
lr
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s
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BN
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31
4-
02
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ef .N
o.
M AC
W
B
04
20
04
04
67. 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 a. 200 MUC b. 300 MUC c. 400 MUC d. 500 MUC e. 600 MUC. (1 point) 68. In an economy demand for money is Md = 500 + 0.2Y – 20i If money supply in the economy is 2340 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. (1 point) 69. The current level of income is 500 MUC. Full employment income level is 600 MUC. If the marginal propensity to consume is 0.75 and there is a proportional income tax of 20%, to bring about full employment, the government spending a. Should be increased by 40 MUC b. Should be decreased by 40 MUC c. Should be increased by 100 MUC d. Should be decreased by 100 MUC e. None of the above. (1 point) 70. For an economy, goods market equilibrium is 0.5 Y = 1250 – 75i. If expansionary monetary polices decrease the rate of interest in the economy by one percentage point, the equilibrium income will a. Decrease by 75 MUC b. Increase by 75 MUC c. Decrease by 150 MUC d. Increase by 150 MUC e. Insufficient data. (1 point) 71. In an economy, there are three industries X, Y and Z. X sells goods worth of Rs.900 to Y and goods worth Rs.700 to Z. Consumers divide their expenditures equally between Y’s goods and Z’s goods. If the national product is Rs.2000, and if there are no other transactions than mentioned above, the value added by industries Y and Z respectively are a. Rs.200, Rs.700 b. Rs.100, Rs.300 c. Rs.900, Rs.700 d. Rs.1,000, Rs.1,000 e. Rs.1,600, Rs.2,000. (1 point) 408
Model Question Paper IV Suggested Answers Part A: Basic Concepts
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o.
M AC
W
B
04
20
04
04
1. (b) An exogenous variable is one whose value is determined by forces outside the economic model. Hence, change in the exogenous variable is classified as an autonomous change. 2. (c) In a two sector model, equilibrium occurs when planned saving equals planned investment. 3. (b) Real GDP = Nominal GDP/GDP deflator. Hence, GDP deflator = Nominal GDP/Real GDP. 4. (e) If the level of aggregate demand were greater than the level of aggregate supply in the economy, soon the inventory stock will be depleted, firms will recruit more labor to meet the increased demand, demand-pull inflation occurs, and labor will demand more wages. 5. (d) Velocity of money is the speed at which a given sum of money circulates in the economy, i.e. the average number of times a unit of money changes hands in a specified time period. GDP = MV, where M = money supply and V = velocity of money. Hence, velocity of money, V = GDP/Money supply. 6. (c) Supply of reserve is not a function of money. 7. (d) Economic development is defined as a process of economic transition involving the structural and a raising of GNP and per capita income. From the fact ‘the rate of profit has been gradually but steadily declining’ we cannot identify the trend of economic development. 8. (d) There will be more variation in durable goods production than in non-durable goods production during ups and downs in the business cycles. 9. (a) Investment spending is addition to the firm’s capital such as machines or buildings typically firms borrow to purchase investment goods. Higher the interest rate, lesser will be willingness to borrow or invest. Firms want to borrow and invest more when interest rates are lower. This shows an inverse relationship between investment and interest rate. 10. (e) Policies directed to stimulating exports can influence all the given factors in an economy. 11. (e) Net investment = Gross investment – Capital depreciation. 12. (e) All the given factors affect the consumption behavior of individuals. 13. (a) Once deposits are made in a bank, the bank become liable to pay back our amount as per specifications. Hence, deposits form a liability of a commercial bank. 14. (b) If the RBI purchases bonds from the public, the money flows from the RBI to the public, which leads to an increase in money supply. 15. (c) When consumption spending lags the receipt of disposable income by one period, it is given by Ct = f(Yd, t–1). 16. (b) Fiscal deficit is the largest deficit for the government. 17. (a) Relative income hypothesis states that people can easily and quickly adjust to higher living standards, but adjust slowly for lower standards of living. 18. (d) The total expenditure in cigarettes increased irrespective of the like in excise tax because income elasticity of demand for cigarettes is very high. 19. (c) Increase in autonomous expenditure results in an outward (rightward) shift of the IS curve. As transfer payments is a part of government autonomous expenditure, increase in transfer payments results in increase of government autonomous expenditure, which make the IS curve to shift rightwards. 20. (e) GDP is not a very good measure of economic prosperity because, it does not include non-monetized transactions/activities. For example, the national product fails to account household production because such production does not include a market transaction. As a result the household services of millions of people are excluded from the national income accounts. Further, GDP does not include environmental degradation such as pollution, etc.
Macroeconomics
21. (e) The impact of a recession is likely to have a stronger impact on the economy when MPC is smaller or MPS is larger. Note that MPC = 1 – MPS. Hence, if MPC is small, it indicates larger MPS. 22. (a) In an inflationary period, the RBI would undertake measures to reduce money supply in the economy to reduce inflation. Selling of government securities in the open market reduces the money supply, thereby helps to contain inflation. 23. (b) GNP = GDP + Net factor income from abroad (NIFA); this implies that when GDP exceeds GNP, net factor income from abroad will be negative.
20
04
04
24. (b) The foreign exchange reserves of a country apart from serving to balance the BoP statement of an economy have a strong impact on the monetary policy pursued by the central bank in the domestic sector. When foreign exchange reserves rises (declines), the money supply increases (decreases).
re
se rv
ed
.IS
BN
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1-
31
4-
02
27
-4
R
ef .N
o.
M AC
W
B
04
25. (e) Buying and selling stocks are not included in GDP, as it involves only swapping paper assets and the amount spent on these assets does not directly involve current production. 26. (c) Current account captures the transactions related to trade in goods and services, transfer payments and factor incomes. If foreign exchange outflow on account of these is more than inflows, the current account is in deficit. 27. (d) A single shock in autonomous demand produces a slow or distributed lag effect on output. Dynamic multiplier shows how a given change in autonomous investment affects the level of output overtime. Dynamic multipliers occur only when there is a lagged response between consumption and disposable income. 28. (c) Money Multiplier = (1 + Cu)/(Cu + r) Money Supply = [(1 + Cu)/(Cu + r)] x High powered money. Hence, if RBI increases the reserve ratio, money supply decreases. However, there will not be any change in high-powered money, H. Note that changes in reserve ratio (r) and currency deposit (Cu) affect only money multiplier but not high-powered money (H). 29. (e) Stagflation is a period characterized by high inflation and high unemployment levels. 30. (d) In computing GDP transfer payments, leisure time and non-marketable services are not taken into account. Therefore, the answer is (d).
ig
ht
s
31. (a) When MPC = 0
lr
1 = 1. Therefore, the equilibrium income would also decrease by the same 1− 0 amount as decrease in investment.
Pr es
s. Al
Multiplier =
fa
iU
ni
ve rs i
ty
32. (a) Reduce the equilibrium level of income because decrease in government expenditure would reduce the AD by Rs.10 billion. Whereas decrease in tax receipts increase the AD by MPC × 10 billion. This results in net decrease in AD thereby reducing equilibrium level of income.
Th e
Ic
33. (b) Transfer payments are money payments which are not associated with any current production activity on the part of income receives.
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34. (c) Alternatives ii and iv does not involve marketable transaction hence ignored in calculation of national income. 35. (a) The transmission mechanism in the Keynesian theory is Change in Money supply → Change in r → Change in C & I → Change in AD. 36. (c) The relation between market price (MP) and factor cost (FC) is MP = FC + Indirect taxes – Subsidies. 37. (d) All the three approaches are used to compute national income in India. 38. (d) Per capita real GNP is the best indicator of the standard of living.
410
Part III
39. (d) Keeping the supply of loanable funds at the same level increase in government borrowings increase the demand for loanable funds and put upward pressure on the rate of interest. 40. (e) APS + APC = 1 If APS < 0 , APC > 1.
Part B: Problems 41. (c) High powered money = Monetary Liabilities of RBI + Government Money Monetary liabilities of RBI = Financial Assets + Other Assets – Non-monetary liabilities Credit to Government + Credit to Banks + Credit to commercial sector + Net Foreign exchange assets 24,000 MUC
=
100 MUC.
04
=
W
B
7,000 + 4,000 + 2,000 + 11,000
M AC
Other Assets
=
20
04
04
Financial Assets =
o.
Non-monetary liabilities = Government deposits + Other non-monetary liabilities + Net worth
ef .N
= 500 + 25 + 1,000 = 1,525 MUC
-4
R
∴ Monetary liabilities = 24,000 + 100 – 1,525
∴ High powered money (H)
= 22,575 + 25
31
= 25 MUC
:8
= 22,600 MUC
1-
Government money
4-
02
27
= 22,575 MUC.
= H×m
Money multiplier (m)
= [(1 + 0.24)/(0.24 + 0.07)] = 4
ed
.IS
BN
Money Supply
se rv
Money Supply in the economy = 22,600 × 4 = 90,400 MUC.
re
42. (d) If net worth is eroded by 50%, Net worth = 500 MUC.
ig
ht
s
∴ Monetary liabilities = 22,600 + 500 = 23,100
s. Al
lr
H = 23,100.
23,100 [(1 + 0.24)/(0.24 + r)]
=
0.0769
=
7.69%
ni
ve rs i
r
=
ty
90,400
Pr es
If money supply is held constant,
fa
iU
∴ The central bank should increase the reserve ratio to 7.69%.
Th e
Ic
43. (c) Ct = 80 + 0.6 Ytd + 0.2 Ct – 1
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At steady state, Ct = Ct – 1 ∴ Ct
=
80 + 0.6 Ytd + 0.2Ct
0.8 Ct
=
80 + 0.6 Ytd
Ct
=
100 + 0.75 Ytd
ΔCt
=
0.75 × Δ Ytd
=
0.75 × 100
=
75
∴ If
Ytd
increase by 100, steady state level of consumption increase by 75.
411
Macroeconomics
=
– 380 + 0.35 Yd + 10i
C
=
380 + 0.65Yd – 10i
Yd
=
(Y – tY + R)
=
(Y – 0.3Y + 200)
44. (c) S
∴C
=
380+ 0.65 (Y – 0.3Y + 200) – 10i
=
510 + 0.455Y – 10i.
IS function
-4 27 02
650 + 100i = 2,600 + 400i 0.25
LM function.
31
Y=
0.25Y + 350 – 100i
4-
∴ 1,000 =
R
ef .N
o.
M AC
W
B
04 20
04
= C + I + G + (E – M) = 510 + 0.455Y – 10i + 300 + 0.15Y – 50i + 1200 + 900 – 50 – 0.105Y Y = 2,860 + 0.5Y – 60i Y = 5,720 – 120i IS function. LM function Ms = Md Md = Mt + Ma = 0.25Y + 350 – 100i
04
Y
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At equilibrium LM = IS 2,600 + 400i = 5,720 – 120i 520i = 3,120 i = 6% Y = 5,000 MUC. 45. (e) 0.5Y = 2,860 – 60 i Or, Y = 5,720 – 120i 0.25Y = 650 + 100i Or, Y = 2,600 + 400i At equilibrium LM = IS 2,600 + 400i = 5,720 – 120i 520i = 3,120 i = 6% Y = 5,000. If Y is to increase by 10% new equilibrium income is 5,000 (1 + 0.10) = 5,500 Y = 2,600 + 400i LM function If Y = 5,500 400i = 5,500 – 2,600 i = 7.25% IS function with G as a variable is
412
0.5Y =
(2,860 – 1,200 + G) – 60i
Y
=
(1,660 + G − 60i) 0.5
Y
=
3,320 + 2G – (120 × 7.25)
2G =
3,050
G
1,525.
=
Part III
∴ Increase in G = 1,525 – 1,200 = 325 MUC. 46. (a) If Y = 5,000, then A = 5,000 + 120i We know that, 0.25Y
= 650 + 100i
Thus, i
= [0.25(5000) – 650]/100 = 6
Thus, A
= 5,000 + 120(6) = 5,720.
Thus, Y
= 5,720 – 120i
IS function
If Y is to increase by 10% new equilibrium income is 5,000 (1 + 0.10) = 5,500.
04
If Y = 5,500,
= Md
20
Ms
04
= 1.83%
Md = 0.25Y + 350 – 100i
M AC
W
B
i
04
120i = 5,720 – 5,500
LM function
ef .N
o.
If Y = 5,500 and i = 1.83%
R
= (0.25 × 5,500) + 350 – (100 × 1.83)
Ms
27
-4
= 1,542 MUC.
4-
02
47. (a) Revenue surplus (deficit) = Revenue receipts – Revenue expenditure
31
= 1,72,965 + 72,140 – 2,70,169 – 70,313 = Rs. (95,377) crore
[(1 + gp) (1 + gn) – 1]
se rv
Where, = Growth rate is GDP
gp
= Growth rate is per capita income (GDP)
gn
= Growth rate is population
gy
= [(1.05) (1.015) – 1]
s. Al
lr
ig
ht
s
re
gy
Pr es
∴
.IS
=
ed
48. (b) gy
BN
:8
1-
Capital surplus (deficit) = Capital receipts – Capital expenditure = [17,680 + 12,000 + 1,35,524] – [26,640 + 43,187] = Rs.95,377 crore.
ty
= 0.06575
Investment − Income ratio ICOR
ni
=
fa
iU
gy
ve rs i
= 6.575%.
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Th e
Ic
∴ To achieve the target gy, Investment – Income ratio for the economy is (gy x ICOR) = 6.575 × 4 = 26.3%
External financing required =
Required investment – Domestic savings
=
26.3 – 25.00
=
1.3% of GDP.
49. (a) Fiscal deficit = Borrowing and liabilities = Rs.1,35,524 crore Primary deficit = Fiscal deficit – Interest payments = 1,35,524 – 1,17,390 = Rs.18,134 crore.
413
Macroeconomics
50. (b) NIR =
Primary issues by non − financial sector Total physical assets formation
Thus,
x 2,00,445
x
= 0.74 x 2,00,445 = 1,48,329.3 units
04
0.74 =
04
o.
M AC
1,15,605 = 0.779 or 0.78. 1,48,329.3
=
B W
Volume of dinancial instruments issued by financial intermediaries Volume of primary issues by non financial sectors
IR =
20
04
Hence, primary issues by non financial sector is 1,48,329.3 units
R -4
31
4-
02
27
= 3.0; = 4%; and = 6% = a.gy + gp = (3 x 4) + 6 = 18%
BN
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1-
Income elasticity of demand for real balances (a) Expected rate of growth in real GDP (gy) Acceptable rate of inflation (gp) Rate of growth of money stock (gm)
ef .N
51. (c) Given,
.IS
Given, money multiplier is 3, rate of growth of reserve money
(Gross investment – Net investment)
=
200 – 150 = 50 MUC
s. Al
lr
=
Pr es
Depreciation
ig
ht
s
re
se rv
ed
= 18/3 = 6%. 52. (c) GDPMP = Factor income paid to domestic residents by the production sector + Factor income paid to foreign residents by the production sector + Business savings + Corporate profit tax + Depreciation + Indirect taxes – Subsidies.
ty
Factor income paid abroad = Factor income received from abroad – NFIA
ve rs i
=
20 – (– 5) = 25
ni
∴ GDPMP = 500 + 25 + 25 + 15 + 50 + 70 – 10 = 675 MUC.
fa
iU
53. (a) CAB = Domestic savings (DS) – Domestic investment (DI)
Th e
Ic
DS = Business savings + Government savings + Household savings
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Household savings = Personal disposable income – Personal consumption PDI = NI – Business savings – Corporate profit tax + Net transfers – Personal income tax
PDI
=
560 – 25 – 15 + 7 – 100 = 427 MUC
∴ PS
=
427 – 319 = 108 MUC
∴ CAB
=
(25 – 10 + 108) – 150 = – 27 MUC
∴ Current account deficit = 27 MUC. 54. (c) National income = NNPFC = GNPMP – Indirect taxes – Depreciation = 1,07,000 – 14,000 – 7,000 = Rs.86,000 crore. 55. (d) Velocity of money = Y/Ms = 810/162 = 5 Y = C + I + G = 500 + 170 + 140 = 810 Ms = 162. 414
Part III
M AC
W
B
04
20
04
04
56. (a) Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where High powered money = monetary liabilities of the central bank + government money. ΔMs = ΔH. m When foreign exchange reserves of the country decline by Rs.200 MUC, the monetary liabilities also fall by 200 MUC. Thus, money supply decline by 4.8 x 200 = 960 MUC. 57. (c) C = α + βYd Where, α = autonomous consumption and β = marginal propensity to consume (MPC) β = ΔC/ΔYd = (475 – 400)/100 = 0.75 If MPC = 0.75, autonomous consumption: 475 = a + 0.75(500) Or, a = 100. Thus, C = 100 + 0.75Yd Or, S = – 100 + 0.25Yd When S = 100, 100 = –100 + 0.25Yd Or, 200 = 0.25Yd Or, Yd = 800 MUC Since the economy is a two sector economy, Y = Yd (disposable income).
ef .N
o.
58. (b) Multiplier = 1/(1 – MPC + MPC × t + MPI) = 1/(1 – 0.75 + 0.75 × 0.2+0.1) = 1/(0.4+0.1) = 2.0
-4
R
Thus if investment increases by 500, income increases by 1000. Thus, change in trade balance
27
= – 0.2 x 1000 = (200) MUC.
31
4-
02
59. (b) High-powered money (H) = Government money + Monetary liabilities of the Central Bank = 20,000 + 2000 = 22,000 MUC.
:8 .IS
BN
Or, 22,000 x {(1.25/0.25 + r)} = 50,000 0.55 = 0.25 + r Or, r = 0.3.
1-
Money supply, Ms = H x {(1 + Cu)/(Cu + r)}
se rv
ed
60. (a) High-powered money (H) = Monetary liabilities of Central Bank + Government money = 1300 + 100 = 1400.
s
re
Total assets = Total liabilities
s. Al
lr
ig
ht
(Credit to Central Government + Credit to commercial banks + Foreign exchange assets + Other assets) = (Net worth + Government deposits + Other non-monetary liabilities + Monetary liabilities)
Pr es
(1000 + 500 + 200 + 200) = (400 + 100 + 100 + ML) 1900 = 600 + ML
ve rs i
ty
Or, ML = 1300 MUC.
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20 04
Th e
Ic
fa
iU
ni
61. (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 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.
415
Macroeconomics
62. (d) Crowding-out refers to decrease in private investment because of increase in interest rate caused by the increase government spending. Crowding out = 40 x 5 = 200 MUC. 63. (b) GDP at market price = C + I + G + NX = 2191 + 639 + 594 + (134 – 165) = 3,393 Thus, NDP at market price = GDP at market price – depreciation = 3,393 – 118 = 3,275 MUC. 64. (b) Personal income = National income – (corporate taxes + retained earnings) + Transfer payments = 10,000 – (288 + 600) + 278 = 9,390. Personal disposable income = personal income – personal taxes = 9,390 – 810 = 8,580 MUC.
20
04
04
65. (a) Money Supply = Net bank credit to Government + Bank credit to commercial sector + Net foreign exchange assets of the banking sector – Net non-monetary liabilities of the banking sector + Government money
04
Rs.6,200 billion = 2,000 + 3,000 + 2,200 – 1,200+ Government money
W
B
Government money = 6,200 – 6,000 = Rs.200 billion.
M AC
66. (d) Domestic savings = Private savings + Public savings
o.
Private savings = 1,500 – (–500) = 2,000 MUC.
ef .N
∴ The answer is (d).
R
67. (b) Investment in period ‘t’ = 0.75 × Desired investment in period ‘t’
27
-4
Desired investment in period ‘t’ = Acceleration coefficient × Change in income
4-
02
= 2 × 200 = 400
1:8
∴The answer is (b). At equilibrium Ms = Md.
ed
.IS
BN
68. (e) Md = 500 + 0.2Y – 20i 500 + 0.2Y – (20 × 8)
0.2Y
2,340 – 500 + 160 = 2,000
re
10,000 MUC. Therefore the answer is (e).
ht
s
=
ig
Y
se rv
∴ 2,340 = =
s. Al
lr
69. (a) Multiplier (m)
ΔY = 100
iU
ni
ΔY 100 = 40 MUC. = m 2.5
fa
ΔG =
ty
Pr es
1 1 1 = = = 2.5 1 − MPC(1 − t) 1 − 0.75(1 − 0.20) 0.40
ve rs i
=
31
∴Investment in period ‘t’ = 0.75×400 = 300 MUC
Th e
Ic
70. (d) 0.5Y = 1250 – 75i
©
20 04
Y = 2500 – 150i If i decrease by one percentage point, equilibrium income would increase by 150 MUC.
71. (b) Value added by the industry Y = 2,000/2 – 900 = 1,000 – 900 = Rs.100 Value added by the industry Z = 2,000/2 – 700 = 1,000 – 700 = Rs.300.
416
Model Question Paper V Time: 3 Hours Part A: Basic Concepts (40 Points) Answer all the questions. Each question carries one point. On the basis of the Keynesian model of output determination, the multiplier effect means that An increase in investment will increase consumption more than itself
b.
An increase in investment will increase output by more than itself
c.
An increase in investment will increase output by as much as itself
d.
An increase in investment will increase saving by more than itself
e.
An increase in investment will increase consumption by less than itself.
In the equation C = C + cY, C is
04
A parameter whose value depends upon the level of disposable income
c.
A behavioral coefficient
d.
A dependent variable
e.
None of the above.
B W
ef .N
R -4 27 02 41-
The circular flow of income for a private sector model shows 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.
None of the above.
re
se rv
ed
.IS
BN
:8
a.
Primary factors of production are
ig
ht
4.
Labor, land and capital
s. Al
lr
a.
Labor and capital
c.
Land and capital
d.
Labor and land
e.
Irreplaceable inputs.
ni
ve rs i
ty
Pr es
b.
The result of subtracting a depreciation allowance from GDP is
20 04
Disposable income
Ic
Th e
a.
fa
iU
5.
©
20
b.
s
3.
6.
04
A parameter helping to determine the level of consumption
o.
a.
31
2.
04
a.
M AC
1.
b.
Personal income
c.
Net domestic product
d.
Yearly capital expenditure
e.
Adjusted gross domestic product.
If people do not consume all their incomes and if they put the unspent amount into a bank, they are, in national income and product terms a.
Saving but not investing
b.
Investing but not saving
c.
Both saving and investing
d.
Neither saving nor investing
e.
Saving, but investing only to the extent that they buy securities.
Macroeconomics
7.
When we speak of expressing the prices of goods in an economy, we are speaking primarily of money’s role as A store of value or wealth
b.
A precautionary hedge
c.
A medium of exchange
d.
A unit of account
e.
A standard of deferred payments.
Suppose that the supply of money were fixed. An increase in the demand for money should be expected to cause The equilibrium rate of interest to increase
b.
The equilibrium quantity of money demanded to increase
c.
Either answer (a) or (b), depending upon the circumstance
d.
Both answers (a) and (b), without reservations
e.
None of the above.
Trade policy.
M AC o. ef .N
-4
e.
27
Budget deficit
02
d.
4-
Monetary policy
31
c.
1-
Fiscal policy
:8
b.
BN
Supply shocks
R
Stagflation is usually caused by a.
W
B
04
20
a.
.IS
9.
04
04
8.
a.
se rv
ed
10. An expansion phase of the usual business cycle can be most appropriately represented as An outward shift in the aggregate demand curve
b.
A downward shift in the aggregate demand curve
c.
An upward shift in the aggregate supply curve
d.
A downward shift in the aggregate supply curve
e.
A rotation of the aggregate supply curve to a more vertical position.
Pr es
s. Al
lr
ig
ht
s
re
a.
ve rs i
ty
11. A Keynesian economist thinks that Government spending always crowds-out private investment and spending
b.
Higher government spending can be accomplished without crowding-out in the short run
Ic
fa
iU
ni
a.
Unemployment is a disequilibrium situation that cannot persist very long
d.
Stabilization policy is usually futile
e.
Government spending cannot crowd-out private investment and spending.
©
20 04
Th e
c.
12. If you want to compute disposable personal income from NDP, then one thing you must not do is
418
a.
Deduct depreciation
b.
Add government transfer payments
c.
Deduct indirect business taxes
d.
Deduct social security levies
e.
Deduct undistributed corporation profits.
Part III
©
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
13. In deciding whether to hold money on other interest-bearing assets, people will compare a. The inflation rate and the nominal interest rate on the other investment b. The nominal interest rate on money and the nominal interest rate on the other investment c. The value of the other asset and the stream of future profits from it d. The purchasing power of the money and the loss incurred due to foregone consumption e. Only the inflation rate. 14. Most models of economic growth conclude that a. Technological change will impoverish at least one factor of production b. Technological change can benefit at most one factor of production c. Technological advance increases labor’s share of output d. Technological advance can increase the real returns to all factors of production e. Technological change is usually the enemy of labor because pieces of capital can replace labor in the workplace. 15. In stating that C = f(Yd, W) a. It is hypothesized that Yd is a more important determinant of C than W b. It is hypothesized that W is a more important determinant of C than Yd c. W and Yd are dependent variables explaining C d. Yd and W are independent variables explaining C e. None of the above. 16. When the LM curve is very steep, an increase in autonomous government expenditure a. Will have little impact on rate of interest and will result in an increase in income b. Will have little impact on income and mainly interest rate will increase c. Will significantly reduce interest rate and increase level of income d. Will have little effect on interest rate and income e. Will have high impact on rate of interest and will result in a decrease in income. 17. Narrow money includes currency with public, demand portion of savings deposits and a. Demand and time deposits with banks and other deposits with RBI b. Demand and time deposits with banks c. Demand deposits with banks and other deposits with RBI d. Demand deposits with banks and other deposits with RBI and post office savings deposits e. Demand deposits with banks and other deposits with RBI, and post office savings deposits and time deposits. 18. A decrease in currency-deposit ratio on the part of the public will cause a. An increase in high-powered money and money supply b. An increase in bank reserves and decrease in money supply c. An increase in money supply but will not change the high-powered money d. A decrease in money supply while the high-powered money will not change e. A decrease in money supply while the high-powered money will increase. 19. Which of the following is a ‘transfer payment’? a. The payment received by a Central Government employee from the Central Government on his being transferred from Delhi to Chennai, to meet the traveling expenses. b. A pension cheque received by former railway employee. c. Payment received from the neighbors for caring for their garden while they were on vacation. d. The payment received by teacher. e. The payment received by nurse for taking care of a child. 419
Macroeconomics
20. In a simple model of a closed economy the government expenditure is assumed to the exogenous. While calculating the income multiplier, marginal propensity to consume is considered and marginal propensity to invest is not considered. This is because Only consumption of consumer goods is related to income level
b.
Investment is assumed to be exogenous
c.
Macroeconomic models are usually based on simplistic assumptions
d.
Investment is assumed to be consistent
e.
None of the above.
04
a.
b.
A non-monetary liabilities of the RBI
c.
Part of money supply but not high-powered money
d.
Part of both high-powered money and money supply
e.
None of the above.
20
Part of high-powered money but not of money supply
ef .N
o.
M AC
W
B
04
a.
04
21. Government deposits with the RBI are
27
-4
R
22. Suppose the net export function is NX = X – mY and the net export balance is zero. An increase in autonomous investment spending will Increase the net export balance and the income level
b.
Increase the income level but make the net export balance negative
c.
Increase the income level and have no effect upon the net export balance
d.
Have no effect upon the income level but cause the net export balance to become negative
e.
None of the above.
ed
.IS
BN
:8
1-
31
4-
02
a.
se rv
23. Which of the following is false?
Speculative demand for money varies directly with the interest rate.
b.
If the frequency at which a person receives income is increased, transactionary demand for money increases.
c.
Transactionary demand for money varies positively with income and such variation is usually more than proportionate.
d.
Both (a) and (b) above.
e.
All of (a), (b) and (c) above.
ni
ve rs i
ty
Pr es
s. Al
lr
ig
ht
s
re
a.
©
20 04
A decrease in the equilibrium level of income by the same amount
Ic
Th e
a.
fa
iU
24. If the marginal propensity to consume is zero, a decrease in investment would lead to b.
No change in the equilibrium level of income
c.
An unending downward spiral in the equilibrium level of income
d.
An unending upward spiral in the equilibrium level of income
e.
An increase in the equilibrium level of income by the same amount.
25. Which of the following components of Investment can be negative?
420
a.
Plant and machinery.
b.
Residential construction.
c.
Inventory.
d.
Non-residential construction.
e.
None of the above.
Part III
26. Simultaneous equilibrium in the money (LM) and goods (IS) markets exist 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.
27. Which of the following reduces the likelihood that fiscal policy in the real world will help to promote economic stability? Policy planners cannot estimate the impact on income and output that may result from a fiscal action.
b.
The time lag between the recognition that a policy change is needed and the actual impact of the policy change makes it difficult to time fiscal policy properly.
c.
Policy planners are reluctant to implement expansionary fiscal policy even during a serious recession.
d.
Empirical studies have observed that policy planners will be more concerned with inflation than unemployment. Thus, fiscal policy will generally be restrictive except at the time of deflation.
e.
None of the above.
27
-4
R
ef .N
o.
M AC
W
B
04
20
04
04
a.
31
4-
02
28. If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause An increase in unemployment in near future
b.
An acceleration in the inflation rate, unless government expenditures are also, reduced
c.
An increase in the interest rate, since individuals will reduce their savings in response to the tax cut
d.
A decrease in consumption, unless the expected budget deficit is financed by selling bonds to foreigners
e.
An acceleration in the inflation rate, unless government expenditures are also increased.
ht
s
re
se rv
ed
.IS
BN
:8
1-
a.
lr
ig
29. Commercial banks deposits with the RBI are Part of high-powered money but not of money supply
b.
A non-monetary liability of the RBI
c.
Part of money supply but not of high-powered money
d.
Part of both high-powered money and money supply
e.
None of the above.
iU
ni
ve rs i
ty
Pr es
s. Al
a.
Th e
a.
Ic
fa
30. The dividends received by an Indian company from its Malaysian subsidiary would be included in
©
20 04
b.
GDP of India and GNP of Malaysia GNP of India and GDP of Malaysia
c.
GNP of both India and Malaysia
d.
GDP of both India and Malaysia
e.
GDP of India.
31. Supply-side economics is also called a.
Classical economics
b.
Keynesian economics
c.
Post-Keynesian economics
d.
Marshallian economics
e.
New classical economics.
421
Macroeconomics
32. The balanced budget multiplier is not effected by a.
Marginal propensity to save
b.
Marginal propensity to import
c.
Investment coefficient
d.
Both (a) and (b) above
e.
Both (b) and (c) above.
33. Money earned abroad and remitted to home country is Included in home country GDP
b.
Included in home country GNP
c.
Included in both home country GDP and GNP
d.
Excluded from both home country GDP and GNP
e.
None of the above.
M AC
W
B
04
20
04
04
a.
Aggregate supply varies positively with price level
b.
Aggregate supply is independent of the price level
c.
Involuntary unemployment cannot exist
d.
Nominal and real wages are perfectly flexible
e.
None of the above.
4-
02
27
-4
R
ef .N
a.
o.
34. According to the simple Keynesian model
1-
31
35. A change in the money supply has greater effect upon equilibrium income if The private sector spending is more interest-sensitive
:8
a.
The private sector spending is less interest-sensitive The expenditure multiplier is smaller than anticipated
d.
The demand for money is more interest-sensitive
e.
Both (a) and (d) above.
re
se rv
ed
.IS
BN
b. c.
ig
ht
s
36. Usually Marginal Propensity to Consume (MPC) is > Zero
b.
< Zero
c.
>1
d.
0 but < 1. 37. (e) GDPFC
= GDPMP – Indirect taxes + Subsidies
∴ If GDPFC > GDPMP, Subsidies > Indirect taxes. 38. (c) Net investment = Gross investment – Depreciation 436
Part III
If Gross investment > Depreciation, Net investment > 0, hence other options are wrong. 39. (d) NPFC is also called a National Income. 40. (b) If interest elasticity of demand for investment and consumption is zero, IS curve is Y=
A 1 − b(1 − t)
Hence, equilibrium income depends on the position of IS curve only.
20
04
04
Part B: Problems
W
B
04
41. (a) M1 = Currency with public + Demand deposits with banks + Demand portion of savings deposits with banks + Other deposits with RBI. + 11,254) = Rs.5,14,940 crore.
M AC
= (2,89,636 + 3,884 + 1,982 + 9,972) + (1,98,212
M3 = M1 + Time deposits (i.e. fixed deposits) with banks
-4
R
Thus, M4 = (5,14,940) + 9,67,120 + 51,938 = Rs.15,33,998 crore.
ef .N
o.
M4 = M3 + All Post Office Deposits
02
27
42. (e) Multiplier = 1/(MPS + MPI) = 1/(0.25 + 0.1) = 1/0.35 = 2.857
1-
31
4-
Thus, if autonomous expenditure increases by (200 – 60) = 140, then GDP increases by 2.857 x 140 = 400.
:8
43. (c) Total issues= Primary issues + Secondary issues
= Primary issues × Intermediation ratio
ed se rv
Total Issue Finance Ratio
re
National Income =
.IS
BN
Secondary issues
ht
s
Particulars
Pr es
1,60,000
–1,140 + 0.5Yd + 12i
=
ty
S
s. Al
Total issues 44. (b)
1,00,000 × 0.60 = 60,000
lr
ig
Secondary issues
Year 2000
ni
=
iU
Yd
ve rs i
Consumption (C) = 1140 + 0.5Yd – 12i Y – T + R = (Y – 0.3Y + 600)
Ic
fa
Goods Market
©
20 04
Th e
At equilibrium in goods market Y
=
C+1+G+E–M
Y
=
1,140 + 0.5 (Y – 0.3Y + 600) – 12i + 900 + 0.1Y – 100i + 3440 + 1636 – 150 – 0.15Y
Y = 7,266 + 0.3Y – 112i 0.7Y = 7,266 – 112i Y = 10,380 – 160i … IS function At equilibrium Y = 9,580 9,580 = 10,380 – 160i 160i = 800 i = 5% 437
Macroeconomics
Money Market =
Ms
Md
=
Mt + Ma
Mt
=
0.25 Y
Ma
=
1,050 – 150i
∴ Md
=
0.25Y + 1,050 – 150i
=
0.25 (9,580) + 1,050 – (150 × 5) = 2,695 MUC.
04
Md
04
The money market is in equilibrium when
04
20
∴The money supply is 2,695 MUC.
W
B
45. (a) If the money supply increases by 190, new money supply is 2,695 + 190 = 2,885 MUC.
M AC
LM function =
Md
2,885
=
0.25Y + 1050 – 150i
0.25Y
=
1,835 + 150i
=
7,340 + 600i …. LM Function
02
Y
27
-4
R
ef .N
o.
Ms
31
4-
At equilibrium, LM and IS functions are equal
.IS
BN
[Note: Y = (7,266 – 112i)/0.7 = 10,380 – 160i]
:8
1-
∴ 10,380 – 160i = 7340 + 600i
=
3040
i
=
4%
Y
=
9740 MUC.
ht
s
re
se rv
ed
760i
=E–M
lr
ig
Trade Balance (TB)
s. Al
Before increase in MS, TB
Pr es
= 1,636 – 150 – 0.15 × 9,580 = 49 MUC.
ve rs i
ty
After increase in MS, TB
ni
= 1,636 – 150 – 0.15 × 9,740 = 25 MUC.
©
20 04
Th e
Ic
46. (b)
fa
iU
Impact on TB =Decrease by 24 MUC.
High powered money
= Monetary Liabilities of RBI + Government Money
Monetary liabilities of RBI
= Financial Assets + Other Assets – Non-monetary liabilities
Financial Assets
= Credit to Government + Credit to Banks + Credit
Net foreign exchange to Commercial sector + Assets = 18,000 + 12,000 + 7,000 + 21,000 = Rs.58,000 million Other Assets
= Rs.250 million
Non-monetary liabilities = Government deposits + Other non-monetary liabilities + Net worth = 600 + 400 + 10,000 = Rs.11,000 million
438
Part III
∴Monetary liabilities = 58,000 + 250 – 11,000 = 47,250 Government money
= Rs. 750 million
∴High powered money (H) = 47,250 + 750 =Rs.48,000 million =Hxm
Money multiplier (m)
=
1+ Cu Cu + r
=
1 + 0.30 0.30 + 0.075
=
1.30 = 3.47 0.375
M AC
W
B
04
20
04
04
Money supply (Ms)
ef .N
o.
∴Money Supply in the economy
R
= 48,000 x 3.47 = Rs.1,66,560m.
4-
02
27
-4
47. (c) If foreign exchange reserves of India decline by Rs.600m, then high-powered money (H) in the economy reduces to 48,000 – 600 = 47,400. Consequently, the money supply in the economy decreases by 3.47 x 600 = Rs.2,082 million.
1-
31
48. (a) Ms = High-powered money (H) x Money multiplier (m)
BN
:8
If foreign exchange reserves decline by 600m, then high-powered money would also reduce by 600m. Thus, H = 48,000 – 600 = 47,400.
ed se rv
1 + 0.30 0.30 + r
ht
1.30 x 47,400 1,66,560
ig
=
=
Pr es
0.3699 – 0.30 = 0.0699
ve rs i
r
0.3699
ty
61,620 = 1,66,560
s. Al
lr
0.30 + r
s
re
1,66,560 = 47,400
.IS
If RBI would like to sterilize
ni
=
6.99% = 7%
©
20 04
Th e
Ic
49. (b)
fa
iU
∴RBI should decrease the CRR to 7%.
Item
Credit
Debit
Net
Current Account I.
Merchandise
II. Invisible (a + b + c)
32,639
42,121
(9,482)
26,413
17,657
8,756
a.
Services
15,316
13,677
1,639
b.
Income
1,912
3,931
(2019)
c.
Transfers
9,185
49
9,136
59,052
59,778
(726)
Current account balance (I + II)
439
Macroeconomics
835 10,724
(835) 1,922
12,585
4,246
–
2,049
72,363
5,569
5,569
(5,569)
04
(471)
20
471
04
3,500 130
B
555 –
W
Net (726)
o.
M AC
Debit 726
ef .N
Item Credit A. Current account balance Capital Account i. Foreign investment 4,055 ii. Net external assistance 130 iii. Net commercial borrowings – (MT & LT) iv. Net short-term borrowings – v. Other capital 12,646 B. Capital account balance 16,831 (i + ii + iii + iv + v) C. Errors & omissions 2,049 D. Overall balance 77,932 (A + B + C) E. Change in forex reserves – Thus, foreign exchange reserves increase by 5,569.
04
50. (d)
©
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
51. (e) Change in money supply (ΔMs) = Money multiplier x Change in high powered money (H). Since the overall BoP position is a surplus of US $5,569m, forex reserves increase by the same amount, which leads to an increase in H by 5,569 x 50 = Rs.2,78,450m. ∴ΔMs = 4 x 2,78,450 = Rs.11,13,800 m. 52. (e) National Income (NNPFC) = Sum of all factor incomes earned by domestic factors of production = Rent + Wages and salaries + Interest + Profits = 2,000 + 30,000 + 1,500 + 6,500 = 40,000 MUC. 53. (c) NNPFC = Sum of all factor income earned by domestic factors of production = Rent + Wages and salaries + Interest + Profits = 2,000 + 30,000 + 1,500 + 6,500 = 40,000 MUC. GDPMP = NNPFC + Depreciation + Indirect Taxes – Subsidies – NFIA Depreciation = Gross Investment – Net investment = 11,000 – 7,000 = 4,000 MUC GDPMP = 40,000 + 4,000 + 4,200 – 700 – 0 = 47,500 MUC. 54. (d) Personal Income (PI) = National income – Corporate profits + Dividends + Transfer payments = 40,000 – 6,500 + 500 + 1,200 = 35,200 MUC. 55. (a) Net Domestic Savings (NDS) = Personal Savings + Business Savings + Government Savings. Business Savings (Retained earnings) = Corporate Profits – Corporate Profit Tax – Dividends = 6,500 – 5,000 – 500 = 1,000 MUC. Government Savings = Net Tax Collections – Government Expenditure – Transfer payments = (5,000+8,000+4,200–700)– 16,000 – 1,200 = –700 MUC. ∴ NDS = 5,600 + 1,000 – 700 = 5,900 MUC. 56. (b) The consumption function for an economy is ascertained as d Ct = 250 + 0.60 Y t + 0.20 Ct–1 d Where Ct and Ct–1 denote consumption in period t and t–1 respectively and Y t is the disposable income in period t. If there is steady state level of consumption, then Ct = Ct-1. Thus, Ct = 250 + 0.6Yd + 0.2Ct Or, 0.8Ct = 250 + 0.6Yd Or, Ct = 312.5 + 0.75Yd
Thus, if Yd = 500, then Ct = 312.5 + 0.75(500) = 687.5 MUC. 440
Part III
57. (c) Acceleration Coefficient (A)
A
=
Investment Change in Income
=
2000 = 4. 500
58. (a) Money Supply = Net bank credit to Government + Bank credit to commercial sector + Net foreign exchange assets of the banking sector – Net non-monetary liabilities of the banking sector + 2000+3000+2200-1200+ Government money
04
Rs.6200billion =
W
B
Growth rate of population = 8 – 6 = 2%.
M AC
60. (d) Velocity of money
o.
Total expenditure(PY) Money supply (M)
ef .N
=
-4
R
Total expenditure = C + I + G = 500 + 170 + 140 = 810
02
27
Money supply = 810/5 = Rs.162cr.
4-
61. (d) National savings = Private savings + Public savings
1:8
∴The answer is (d).
ed
.IS
BN
(1 − b) (1 − t ) . ΔG 1 − b (1 − t )
= Marginal Propensity to Consume = 0.75
T
= tax rate = 0.20
ig
ht
s
ΔG = 100
se rv
b
re
Where
31
Private savings = 1500 – (–500) = 2000 MUC.
62. (b) Δ BS =
04
59. (a) Growth in per capita income = Growth in economy – Growth rate of population
20
04
Government money = Rs.200billion.
lr
(1 − 0.75) (1 − 0.20) × 100 =–50 MUC. 1 − 0.75 (1 − 0.20)
s. Al
= −
Pr es
∴Δ BS
ty
63. (a) Total money = Rs.5,000.
ve rs i
50% of total money which is held in the form of currency is Rs.2,500.
ni
Demand deposit component of money supply is Rs.2,500.
©
20 04
Th e
Ic
fa
iU
Given the reserve ratio of 10%, required reserves are 2,500 × 0.10 = Rs.250. 64. (d) At break-even level of disposable income, savings are zero. ∴ S 0.25 Yd Yd
= –150 + 0.25Yd = 0 = 150 =
150 = 600 MUC. 0.25
7, 000 = Rs.3,500. 2 66. (b) Notional income = wages and salaries + Interest income + Rental income + Profit
65. (d) Average holding of money is Y/2 =
∴ Profit = 100 – 60 – 15 – 10 = 15 BUC. 67. (d) 0.5Y = 1250 – 75i Y = 2500 – 150i If i decrease by one percentage point, equilibrium income would increase by 150 MUC. 441
Macroeconomics
68. (c) Income of the economy for period ‘t’ is equal to Aggregate Supply during the period ‘t’. Based on the assumption that AS lags AD by one period, income for period ‘t+1’ will be equivalent to AD during period ‘t’. Therefore, income during period ‘t+1’ will increase by 10 as the AD in period ‘d’ increases by 10. Hence the answer is (c). 69. (d) For any economy APS + APC = 1. Therefore, if APS = -0.05, APC = 1.05 70. (b) Multiplier =
1 1 − β (1 − t )
04
β = MPC = 1 – MPS = 1 – 0.25 = 0.75
Where
20
1 1 = = 2.5. 1 − 0.75 × (1 − 0.20) 0.40
W
B
Multiplier =
04
∴
04
t = tax rate
M AC
71. (b) IS function Y = 500 – 20i
i = 5%,
Y = 500 – (20 × 5)
= 400
i = 4%,
Y = 500 – (20 × 4)
= 420
ef .N
= 360
R
Y = 500 – (20 × 7)
-4
i = 7%,
o.
Y = 500 – (20 × 10) = 300
If, i = 10%,
02 431
1 . ΔI 1− β
=
1 .50 = 200 0.25
ed
.IS
BN
:8
1-
=
se rv
72. (b) ΔY
27
i = 2%, Y = 500 – (20 × 2) = 460 Hence, (a) does not fall on the IS curve.
MPS = 1 – MPC
ht
ig
= 0.25 × 200 = 50
s
re
∴ΔS = MPS × ΔY
Pr es
s. Al
lr
∴ Savings increase by 50. 73. (e) Nominal GDP
ve rs i
ty
⎡ GDP deflator in the current year ⎤ = ⎢Re al GDP × ⎥ GDP deflator in the base year ⎦ ⎣
fa
iU
ni
175 ⎤ ⎡ × 100 = ⎢1,000 × × 100 = 1,750. 100 ⎥⎦ ⎣
©
20 04
Th e
Ic
∴Nominal GDP for the year 2001 = 1,750. 74. (c) S – I = CAB S = 1800 – 100 = 1700 I = 2000 ∴ CAB = 1700 – 2000 = –300 MUC ∴ Current Account Deficit = 300 MUC. 75. (b) National product = Rs.1500. Since this is equally spent on industries B and C, expenditure on B & C will be 1500/2 = Rs.750. Value added = Value of output – Value of input For Industry B, 750 – 600 = Rs.150 Industry C, 750 – 500 = Rs.250. 76. (d) Nominal rate of interest = Real rate of interest + Inflation = 5 + 2 = 7%.
442
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