0304 - Ec 2

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Question Paper Economics – II (122) : April 2003

Section A : Basic Concepts (40 Points)

• This section consists of questions with serial number 1 - 40.

• Answer all questions.

• Each question carries one point.

1. Expecting a rise in the price of rice, Mr. Kamesh stocks an inventory of 100 kgs. of rice for his personal use. In national income accounting, this transaction is treated as

a. Personal consumption expenditure b. Private investment c. Private savings d. Inventory investment e. Both (a) and (d) above.

2. 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 by the same amount.

3. Which of the following statements is true with regard to price indices?

a. GDP deflator measures the cost of buying a fixed basket of goods and services b. Consumer Price Index (CPI) measures the prices of a larger basket of goods than the

GDP deflator does c. When automobile production in the economy is relatively large, automobiles receive a

relatively larger weight in the computation of the GDP deflator d. If prices of imports increase, the GDP deflator also increases e. When automobile production in the economy is relatively large, automobiles receive a

relatively larger weight in the computation of the CPI

4. When the Central Bank of a country resorts to contractionary or expansionary monetary policies to neutralize the change in money supply caused by changes in foreign exchange reserves, it is referred to as

a. Transmission mechanism b. Sterilization c. Stabilization d. Monetary mechanism e. Exchange rate mechanism.

5. End of the Kargil operation witnessed reduction in government expenditure, leading to a leftward shift in the aggregate demand curve in the economy. At the same time, if an oil price shock shifted the short-run aggregate supply curve up, which of the following could not have happened?

a. The prices remained more or less at the previous level, if the magnitude of change in aggregate demand is equal to the magnitude of change in aggregate supply.

b. Reduction in GDP c. Increase in the rate of unemployment d. Inflation, if the magnitude of change in aggregate supply is lower than the aggregate

demand e. Both (b) and (c) above.

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6. Keynes held that money is used

a. To settle transactions b. To meet unexpected contingencies c. To take advantage of fluctuating rates of interest d. Both (a) and (b) above e. (a), (b) and (c) above.

7. Value added by a firm is equal to

a. Firm’s revenue – Costs of intermediate goods b. Cost of producing a good – Costs of raw materials c. Wages + Interest payments + Indirect taxes – Profits d. Wages + Interest payments + Indirect taxes + Costs of intermediate goods + Profits e. Price of the goods sold – Profits.

8. 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 IS curve to the left d. Not affect the position of IS curve but shift LM curve to the right e. Not affect the position of LM curve but shift IS curve to the right.

9. Which of the following is considered to be the most appropriate measure for the standard of living of a country, like India?

a. GDP at market prices b. GNP at factor cost c. Per capita GDP d. National income e. Personal income.

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

a. Negative net investment b. Zero net investment c. Positive net investment d. Negative gross investment e. Zero gross investment.

11. When there is an unanticipated inflation, which of the following sections of an economy benefit?

a. Borrowers b. Fixed income earners c. Holders of currency d. Lenders e. None of the above.

12. A tax is regressive if

a. The proportion of income paid as taxes increases as income increases b. The proportion 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.

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13. Which of the following statements pertaining to Phillips curve is not correct?

a. In the short run, unemployment does not return to its natural rate and there exists a trade-off between inflation and unemployment.

b. If the expected inflation rises, the Phillips curve shifts upward to the right, indicating higher inflation at each unemployment level.

c. The position of the short-run Phillips curve depends on the expectations regarding inflation.

d. In the long-run the Phillips curve becomes vertical. e. In the long run, the policymakers will have enough time to depress aggregate demand to

lower inflation and raise unemployment.

14. 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 d. When direct taxes exceed indirect taxes e. When subsidies exceed indirect taxes.

15. Which of the following is not true if the central bank imposes a reserve ratio of 100%?

a. The banking system can no longer affect the supply of money in the economy b. Change in the foreign exchange reserves will result in an equal change in the 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.

16. Which of the following is not a stock variable?

a. Foreign exchange reserves b. Public debt c. Wealth of a country d. Inflation e. Money supply.

17. Omar has just completed his graduation in commerce. He is looking for a suitable job, but the only job that he can find is that of a cook in a restaurant. This situation can be described as

a. Frictional unemployment b. Structural unemployment c. Cyclical unemployment d. Natural unemployment e. Disguised unemployment.

18. If interest elasticity of demand for investment and consumption is zero

a. Equilibrium income depends solely on the position of LM curve b. Equilibrium income depends solely on the position of IS curve c. 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.

19. In the Balance of Payments statement, expenditure incurred by a foreign government for the maintenance of their embassy in India is recorded as a credit item under which of the following heads?

a. Transfers b. Investment income c. Government not included elsewhere (G.n.i.e.) d. Miscellaneous e. Rupee debt service.

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20. Which of the following is an example of a government transfer payment?

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.

21. Which of the following is true if, for a given period, there is no change in the foreign exchange reserves of a country?

a. Balance in the current account is equal to the balance in capital account b. Surplus (deficit) in the current account is equal to Deficit (surplus) in the capital accountc. Current account balance is zero d. Trade balance is zero e. Capital account balance is zero.

22. Which of the following is true if the Central Bank reduces the Reserve Ratio?

a. 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.

23. Subhash Pvt. Ltd., an Indian company, has a fully owned subsidiary in the USA. The profits earned by the subsidiary in the USA is recorded in

a. GDP of India and GNP of the USA b. GNP of both India and the USA c. Neither GDP nor GNP of India d. GNP of India and GDP of the USA e. GDP of both India and the USA.

24. Which of the following transactions is included in the current account 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.

25. Which of the following influence the transactions demand for money?

I. Level of income II. Frequency with which income is received III. Frequency with which expenditures are made IV. Interest rate in the economy

a. Both (I) and (II) above b. Both (II) and (III) above c. Both (I) and (IV) above d. (I), (II) and (IV) above e. (I), (II), (III) and (IV) above.

26. Which of the following is not correct?

a. NNP + Indirect taxes = National Income b. GNP = NNP + Depreciation c. Saving + Taxes = Investment + Government spending d. Personal income = Disposable income + Personal taxes e. Gross investment = Net Investment + Depreciation.

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27. Which of the following is true, if Mr. Somesh transfers Rs.1000 from his current account in a bank to a fixed deposit scheme in the same bank?

a. M1 falls, but M2 rises b. Both M1 and M2 rises c. M1 falls, but M3 rises d. M2 falls, but M3 remains constant e. Both M2 and M3 remain constant.

28. 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.

29. Which of the following is not a component in the Vicious Circle of Poverty?

a. Low saving and investment b. Low pace of capital accumulation c. Low productivity d. Low average incomes e. Low interest rates.

30. A current account deficit implies that

a. 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.

31. Which of the following policy instruments has the least ‘outside lag’?

a. Cash reserve ratio (CRR) b. Bank rate c. Repo rate d. Taxes e. Open market operations (OMO).

32. 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.

33. According to monetarism, other things remaining the same, if the velocity of money increases, then

a. The stock of money would increase b. The nominal GDP would decrease c. Price level would rise d. The real GDP would increase e. Both (a) and (b) above.

34. Which of the following would you suggest to counter a recession?

a. Decrease in government expenditure b. Decrease in transfer payments c. Decrease in the discount rate d. Decrease in the money supply e. Increase in the tax rate.

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35. Monetized deficit refers to

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 – Primary deficit e. RBI’s credit to the commercial banks.

36. Which of the following statements is true?

a. GDP takes into account both transfer payments and leisure time b. GDP takes into account transfer payments, but not leisure time c. GDP takes into account leisure time, but not transfer payments d. GDP takes into account neither transfer payments nor leisure time e. GDP takes into account both the services of a housewife and services of a driver

engaged by a company.

37. Which of the following is a temporary accommodation provided by the RBI to the Central Government to meet mismatches in cash flows?

a. Ad hoc treasury bills b. Ways and means advances c. Gross fiscal deficit d. Tap T-bills e. Government dated securities.

38. 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.

39. Which of the following is true if the central bank of a country sells government securities in the open market?

a. LM curve shifts to left b. LM curve shifts to right c. IS curve shifts to left d. IS curve shifts to right e. Interest rates will fall

40. Monetary policy will be more effective when

a. The economy is facing recession b. The private investment is more sensitive to interest rate c. The private investment is less sensitive to interest rate d. The economy is suffering from liquidity trap e. The economy is in boom.

END OF SECTION A

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Section B : Problems (60 Points)

• This section consists of questions with serial number 41 - 78.

• Answer all questions.

• Points are indicated against each question.

41. 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 100

Tax function (T) 0.25Y Private investment function (I) 250 + 0.30 Y – 80i

Government expenditure )G( 600

Import function (M) 100 + 0.10 Y

Exports ( )E 450

Real demand for money Md 0.2Y + 50 – 20i Money supply Ms 410

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%.

(4 points)

42. Following are the financial ratios for an economy:

Finance Ratio 0.30 Intermediation Ratio 0.80 Financial Interrelation Ratio 1.25

If the secondary issues are 15,000, the New Issue Ratio for the economy is

a. 0.55 b. 0.60 c. 0.65 d. 0.70 e. 0.75.

(2 points)

43. From the following information, compute subsidies GDP at factor cost = Rs.2000 cr. Net factor income from abroad = Rs.200 cr. Indirect taxes = Rs.542 cr. GNP at market prices = Rs.2292 cr.

a. Rs. 50 cr b. Rs.342 cr c. Rs.450 cr d. Rs.292 cr e. Rs.742 cr.

(1 point)

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44. 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)

a. 10.04% b. 10.50% c. 11.25% d. 15.00% e. 16.00%.

(2 points)

45. In an economy, the exogenous investment is 50, government spending is 100 and autonomous consumption is 50. 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 and 80 respectively, what would be the new equilibrium income for the economy?

a. 320 b. 500 c. 800 d. 850 e. None of the above.

(2 points)

46. The following consumption function has been estimated for an economy:

Ct = 10 + 0.7Ydt + 0.3Ct-1

Where Ct and Ct-1 denote consumption in periods t and t-1 respectively and Ydt is the disposable income in period t. If Ydt increases from 200 to 300 and remains there indefinitely, what could be the change in the steady state level of consumption?

a. 10 b. 70 c. 30 d. 100 e. 143.

(2 points)

47. In a two sector economy the consumption function (C) is equal to 8 + 0.7Y and autonomous investment is equal to 22. The equilibrium level of income in the economy is

a. 21 b. 30 c. 43 d. 100 e. None of the above.

(1 point)

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48. 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%?

a. 10% of GDP b. 14% of GDP c. 21% of GDP d. 45% of GDP e. 51% of GDP.

(2 points)

Questions 49-51 are based on the following information:

Balance of payments of a country for the year 2002

Particulars MUC Merchandise imports 20,000 Merchandise exports 18,000 Software exports 16,000 Software imports 12,000 Earnings on loans and investments abroad 400 Earnings on loans and investments in the country by foreigners 1,000 Private remittances to abroad 200 Private remittances from abroad 150 Government loans to abroad 30 Government loans from abroad 20 Direct investments abroad 10 Foreign direct investment in the country 150 Short-term loans and investments abroad 200

Foreign short-term loans and investments in the country 40

49. The balance of trade (BoT) for the year 2002 is

a. 2000 MUC (deficit) b. 2000 MUC (surplus) c. 1000 MUC (surplus) d. 1350 MUC (surplus) e. 1950 MUC (surplus).

(1 point)

50. What is the current account balance for the year 2002?

a. 1350 MUC (Cr.) b. 1950 MUC (Cr.) c. 1650 MUC (Dr.) d. 1350 MUC (Dr.) e. 2000 MUC (Dr.).

(2 points)

51. 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. 1350 MUC (Cr.)

(2 points)

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52. 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)

53. 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)

54. 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. What could be the change in budgetary surplus, if the government proceeds with its plans?

a. 107.5 b. 175.0 c. 250.0 d. 142.5 e. 500.0.

(2 points)

55. The following data is taken from balance sheet of a Central Bank.

Particulars MUC Net worth 6000 Credit to government 10000 Credit to commercial sector 5000 Government deposits 150 Credit to banks 4000 Other non-monetary liabilities 3000 Other deposits with the central bank 50 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

a. 8500 MUC b. 9000 MUC c. 9750 MUC d. 10050 MUC e. 10000 MUC.

(3 points)

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56. In an economy, transaction demand for money is 500. 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

a. 200 b. 550 c. 700 d. 750 e. 800.

(1 point)

57. The following information relates to an economy:

National income : 300 Wages & Salaries : 180 Interest income : 45 Rental income : 30

The profit in the economy is

a. 15 b. 25 c. 35 d. 45 e. 55.

(1 point)

Questions 58 – 61 are based on the following information:

Particulars MUC NDP at market prices 5,000 NNP at factor cost 4,200 Personal saving 1,075 Gross domestic investment 800 Corporate profits (profit before tax) 750 Transfer payments by the government 75 Subsidies 100 Net domestic investment 650 Corporate profit tax 350 Personal tax payments 350 Indirect taxes 950 Government budget deficit 300 Dividends 150

58. What is the Net Factor Income Earned from Abroad (NFIA) in the economy?

a. –1650 MUC b. 1650 MUC c. –50 MUC d. 50 MUC e. 100 MUC.

(1 point)

59. The value of GDP at factor cost is


(2 points)

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60. Personal income in the economy is


(1 point)

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 Corporate profit tax = 50 Dividends paid by the business sector = 15 Retained earnings = 20

Corporate profits for the economy is

a. 20 b. 35 c. 85 d. 150 e. 185.

(1 point)

63. Consider the following data: Particulars MUC

Factor income paid abroad by the business sector 10 Factor incomes received by household sector 160 Transfers to household sector 20 Wages and salaries paid by the business sector 100 Dividends paid by the business sector (of which Rs.10 is paid abroad) 20 Household savings 60 Factor income received from abroad by the household sector 20

The amount paid by the government to the households towards wages and salaries is


(2 points)

64. Savings function of an economy is S = – 300 + 0.25 Yd. Break-even disposable income for the economy is

a. 75 b. 300 c. 900 d. 1200 e. 1500.

(1 point)

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65. The following information is extracted from the National Income Accounts of an economy: Particulars MUC

Factor income received by domestic residents from business sector 500 Factor income received by domestic residents from foreigners 20 Gross investment 200 Retained earnings 25 Net indirect taxes 60 Corporate profit taxes 15 Personal income taxes 100 Net factor income from abroad –5 Dividends 100

National Income (NI) of the economy is


(2 points)

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 b. 55.5 c. 62.5 d. 500.0 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)

Questions 68-69 are based on the following information:

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)

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69. What is the rate of inflation in the economy for the year 2002-03?

a. 10.0% b. 32.0% c. 20.0% d. 58.4% e. 53.6%.

(1 point)

70. GDP of a country is 8000. Value of output produced in the domestic country by foreign factors of production is 200 and value of the output produced by domestic factors of production in foreign countries is 100. GNP of the country is

a. 7700 b. 7800 c. 7900 d. 8100 e. 8200.

(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)

72. In a hypothetical economy, the high-powered money is 2000 MUC and the money supply is 6000. Currency deposit ratio is estimated to be 0.2. The central bank sells government securities worth 500 MUC in the open market. Even after the open market sale, if the central bank wants to maintain the money supply at the same level, the reserve ratio should be

a. 0.1% b. 1.0% c. 3.0% d. 10.0% e. 30.0%.

(1 point)

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

a. Rs.250 b. Rs.2,250 c. Rs.2,500 d. Rs.5,000 e. None of the above.

(1 point)

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74. There are different stages in the production of good ‘Zebra’. The values at each stage are given as under:

Particulars Value Raw material 30 Manufacturing 50 Packaging 80 Retailing 120

The value added in manufacturing stage and the total value added in the process of producing Zebra are

a. 20 and 120, respectively b. 50 and 120, respectively c. 20 and 100, respectively d. 50 and 100, respectively e. 20 and 50, respectively.

(1 point)

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)

76. 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)

77. 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 50000. The level of investment in the economy is

a. 10000 b. 11000 c. 12000 d. 13000 e. 14000.

(2 points)

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78. Refer to the graph below:

The level of autonomous consumption in the economy is

a. 1000 b. 2000 c. 4000 d. 4200 e. 6000.

(1 point)

END OF SECTION B

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Suggested Answers Economics – II (122) : April 2003

Section A : Basic Concepts

1. Answer : (a)

Reason : From economic point of view, there is no difference between a household’s building up an inventory of rice and a grocery store doing the same. However, according to national income accounting, building up an inventory of rice is considered to be personal consumption expenditure, while store’s purchase is treated as inventory investment.

(a) Since Mr. Kamesh stocks an inventory of rice for his personal consumption and not for business purpose, it is treated as consumption expenditure.

(b) Mr. Kamesh stocked up the rice only for future consumption and not for gaining returns from it. Hence, it cannot be considered as private investment.

(c) As the stock is meant for consumption, it certainly is not a saving.

(d) Additional stocks of materials and work-in-progress acquired by a firm or person during the year that forms part of business is called inventory investment. Accretion of stock of rice for personal consumption does not fall under inventory investment.

(e) Only (a) is the correct answer, and hence (e) cannot be the answer.

2. Answer : (a)

Reason : When MPC = 0

Multiplier = 101

1=

−. Therefore, the equilibrium income would also decrease by the same

amount as decrease in investment.

3. Answer : (c)

Reason : It is Consumer Price Index (CPI) that measures the cost of buying a fixed basket of goods and services, but not the GDP deflator. GDP deflator considers much wider group of goods, all final goods and services produced during the year, than WPI and CPI. The basket of goods included in the GDP deflator varies from year to year, depending on what is produced in the economy during the year.

a. (a) is not correct. GDP deflator measures changes in the price levels of a basket of goods that varies from year to year depending on the goods and services produced during the year.

b. The basket of goods of the GDP deflator includes all final goods and services produced during the year irrespective of their nature (i.e. consumer or producer goods), and hence is broader than WPI and CPI.

c. The basket of goods included in the GDP deflator changes every year depending on what is produced in the economy in that year. Thus, when automobile production is large, it receives a relatively larger weight in the computation of GDP deflator.

d. GDP deflator includes only prices of goods and services that are produced within the boundaries of a country. Hence prices of imports do not affect the GDP deflator.

e. CPI measures only the cost of buying a fixed basket of goods and services, hence increase in automobile production does not affect computation of the CPI.

4. Answer : (b)

Reason : Sterilization means neutralization of changes in the money supply caused by changes in the foreign exchange reserves of a country.

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5. Answer : (d)

Reason : If the magnitude of supply shock is more than change in aggregate demand, the prices will move up. When aggregate demand and aggregate supply decrease, output will decrease, leading to high-unemployment in the economy. When the change in aggregate demand is more than change in aggregate supply, the prices will come down.

a. When both aggregate supply and demand decrease, the prices would remain more or less at the previous level, unless the magnitude of one is more than other. Hence, statement (a) is true.

b. If there is reduction in the government spending, GDP also decreases because it is a component of GDP (GDP = C + I + G + NE). Hence, statement (b) is true.

c. When government spending falls, unemployment increases because of fall in aggregate demand. Hence, statement (c) is true.

d. If the degree of change in aggregate supply is less than the aggregate demand then the price level in the country will come down. Hence, statement (d) is false.

6. Answer : (e)

Reason : 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).

7. Answer : (a)

Reason : The difference between what the producer pays for the intermediate goods and what he receives from the finished goods is called the firm’s value added. In other words, value added by the firm = Price of the Good – Cost of Intermediate Goods used.

8. Answer : (e)

Reason : Expansionary fiscal policies will shift the IS curve towards right but will not affect LM curve.

9. Answer : (c)

Reason : In developing and underdeveloped countries population pressures is tremendous. In many of these countries growth rate of population is more than the growth rate of GDP. In such cases living standard of the people, in fact, declines in spite of the growth in the real GDP. Any economy, ultimately, is interested in the well-being of its people. Therefore, per capita output and income can better capture the economic growth achieved by an economy. GDP at market prices, GDP at factor cost, national income and personal income are all macro aggregates and does not show average of each individual’s income or output. Hence the correct answer is (c).

10. Answer : (a)

Reason : When investment < Depreciation, capital stock decreases and net investment will be negative. Note that capital consumption is nothing but depreciation.

11. Answer : (a)

Reason : As the purchasing power of rupee decreases in future, due to inflation, the real value of money paid by the borrowers to the lender would be less. If inflation is anticipated, the lender would include them in the interest rate.

a. An unexpected increase in inflation makes the borrower to pay back money that has less real value than was expected. As nominal interest rates do not include unexpected inflation, real interest rate would be less than the expected rate. Thus, borrower will be benefited from unanticipated inflation.

b. Fixed income earners get only fixed nominal income. With the inflation, the real value of money received decreases. Hence they are losers during inflation.

c. Inflation reduces the purchasing power of the rupee held and thereby reduces the value of rupee held by the currency holders.

b. Because of unexpected increase in inflation the lender receives money from the borrower which has a lesser real value than expected. Interest rate on loans only comprises expected inflation. Thus, lenders would suffer from unexpected inflation by quoting less interest

19

rate than it should have been.

12. Answer : (b)

Reason : A tax is regressive if proportion of income paid as taxes decreases as income increases. If the proportion increase, it is a progressive tax and the tax is proportional if the proportion remains constant.

13. Answer : (e)

Reason : In the long run, there exists no trade-off between unemployment and inflation because of full adjustment of inflationary expectations. The position of the short-run Phillips curve depends on inflationary expectations. Increased expectations concerning inflation shifts the Phillips curve to the right and up.

a. In the short run, the unemployment does not return to its natural rate and there exists a trade-off between inflation and unemployment because in the short run expected inflation may not be equal to actual inflation.

b. The position of the short-run Phillips curve depends on the expectations concerning inflation. Increased expectations concerning inflation shift the Phillips curve up and to the right representing higher inflation at each unemployment level.

c. If the expected inflation rises (falls), the Phillips curve shifts toward right (left). Hence, the statement is correct.

d. As there exists no relationship between unemployment and inflation in the long run, the long run Phillips curve stands vertical.

e. When the period is short, expected and actual level of inflation may not be the same and there exists a trade-off between unemployment and inflation. But, in the long run, with full adjustment of inflationary expectations, there will not be any relationship between unemployment and inflation. Hence, the statement is not correct.

14. Answer : (e)

Reason : GDPFC = GDPMP – Indirect taxes + Subsidies

∴ If GDPFC > GDPMP, Subsidies > Indirect taxes

15. Answer : (d)

Reason : Money supply = Currency in the hands of the public + Demand Deposits with banks. A rupee deposited in a bank reduces currency by Rs.1 but raises deposits by Rs.1, and hence does not affect the money supply in the system. As banks are holding entire deposits in reserves, it cannot affect money multiplier and hence supply of money.

a. If banks maintains 100% of their deposits as reserves, there could be no lending and hence no deposit creation. Thus, when the reserve ratio is 100%, the banking system can no longer affect the money stock in the country.

b. Money supply = Money multiplier x High-powered money (H). When the banks maintain 100% reserves, the value of money multiplier will be 1. Hence, change in the foreign exchange reserves leads to an equal change in the money supply.

c. If banks have to maintain 100% of their deposits with RBI, then naturally the lending capacity of banks would be narrowed down to zero.

d. A rupee deposited in a bank reduces the currency with the public, but at the same time increases the deposits of the banks. Hence, there will be no affect on the money supply in the economy. Hence, the statement is not correct.

e. Money supply = Money multiplier x High-powered money (H). When banks maintain 100% reserves, then the value of money multiplier will come down to 1. If the value of money multiplier is 1, then naturally the money supply must be equal to high-powered money.

16. Answer : (d)

Reason : 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.

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17. Answer : (b)

Reason : Structural unemployment arises when the regional or occupational pattern of the job vacancies does not match the pattern of workers availability and suitability. Unemployment that arises when there is general downturn in business activity is called cyclical unemployment. Unemployment that is caused by constant changes in the labor market is called frictional (natural) unemployment. Omar is facing unemployment in the form of unavailability of decent job that meets his qualifications and hence is considered has structural unemployement.

18. Answer : (b)

Reason : If interest elasticity of demand for investment and consumption is zero, IS curve is

Y = )t1(b1

A

−−

Hence, equilibrium income depends on the position of IS curve only.

19. Answer : (c)

Reason : G.n.i.e. implies government not included elsewhere. A credit entry of the G.n.i.e. includes items like funds received from a foreign government for the maintenance of their embassy, consulates, etc. in India. Under the heading ‘Miscellaneous’, items like payment to a foreign technical consultant for professional services rendered by him will appear. Investment income holds items related to income earned by residents on holding financial assets abroad. The item ‘Rupee Debt Service’ is defined as the cost of meeting interest payments and regular contractual repayments of principal of a loan along with any administration charges in rupees by India.

20. Answer : (d)

Reason : Transfer payments are payments which do not have any production activity associated with the payment and are not considered as income in National income accounting. In the given examples food coupons are issued free of cost and hence a transfer payment. All other payments involve some production activity for the period under consideration.

21. Answer : (b)

Reason : Because of the double entry concept underlying the recording of transactions, BoP account must always be in balance. Thus, ‘Balance in current account + Balance in capital account + Change in reserves = Zero’. When there is no change in the foreign exchange reserves, then ‘balance in current account + balance in capital account = zero’ (or) balance in current account = - (balance in capital account).

a. Balance in current account + Balance in capital account = Change in reserves. When balance in current account ‘plus’ balance in capital account is zero, then balance in the current account = - balance in capital account. Hence, statement (a) is not correct.

b. There will no change in the foreign exchange reserves of a country only when surplus (deficit) in current account is equal to deficit (surplus) in capital account.

c. Current account balance may or may not be zero when the change in foreign exchange reserves of a country is zero.

d. Trade balance (exports – imports) may or may not be zero when the change in foreign exchange reserves of a country is zero.

e. Capital account balance may or may not be zero when the change in foreign exchange reserves of a country is zero.

22. Answer : (c)

Reason : As reserve ratio (r) is reduced banks will be left with more reserves on the basis of which they can lend more thereby creating additional demand deposits (DD). As demand deposits increase money supply also increase as DD is a significant component of the money supply.

Y

IS LM

i LM1

21

23. Answer : (d)

Reason : GDP of a country is the value of all final goods and services produced in the boundaries of the country within a given period. GNP, on the other hand, is the value of all final goods and services produced by the factors of production (i.e. capital, labor, land, entrepreneurship) of the country. Since profits are earned within the boundaries of the USA, the GDP of the USA includes the annual earnings of the company’s subsidiary. The GNP of India includes the profit of the subsidiary because the profits are earned by using the factors of production owned by Indians.

24. Answer : (d)

Reason : Dividends on portfolio investments is an income earned by a factor of production (capital). This is included in Income under Invisibles in Current Account. All other items are part of capital account.

25. Answer : (e)

Reason : Transactions demand for money refers to an individual’s demand for money balances required to carry out routine transactions such as paying for groceries, bus fares, paying electricity bills, etc. Other things being constant, money balances for transactions purposes will increase with the nominal value of transactions (and hence nominal GNP) and income. Frequency with which income is received and expenditures are made also affect the amount of money demanded for transaction purposes. Both transactions and precautionary demand for money varies inversely with the rate of interest.

26. Answer : (a)

Reason : National income = NNPMP – indirect taxes + subsidies = NNPMP – Net indirect taxes. Therefore, answer is (a). All other relations are correct.

27. Answer : (d)

Reason : Savings account deposits as well as fixed deposits form part of M3 definition of money supply. M1 = Currency with the public + Demand deposits with the banking system, while M2 = M1 + Post office savings bank deposits. Thus, transfer of funds from savings account, reduces both M1 and M2. However, M3 remains constant as decrease in savings account deposits is equally compensated by the increase in time deposits with the banking system.

28. Answer : (b)

Reason : 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.

29. Answer : (e)

Reason : The concept of vicious circle of poverty refers to a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty. Low income leads to low saving and investment; low saving and investment retard the pace of capital accumulation and thereby affect productivity; low productivity results in lower income levels in the economy. Low interest rate is not an element in the vicious circle of poverty.

30. Answer : (a)

Reason : Y= C + 1 + G + Net Exports

Where Y = Domestic income

C + 1 + G = Domestic spending.

Y – (C + 1 + G) = Net Exports (Current Account Balance)

If Current Account Balance is negative, then domestic spending is greater than domestic

22

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.

31. Answer : (d)

Reason : ‘Outside lag’ which is the lag between the change in the variables immediately under control and their impact on real variables such as output and employment is much longer in the case of monetary policy as it does not directly influence the income and expenditure flows. CRR, Bank rate, Repo rate and OMO are policy instruments of monetary policy and have greater outside lag. ‘Taxes’ is a tool of fiscal policy and has lesser outside lag.

32. Answer : (d)

Reason : a. During a boom bank reserves will be high as the bank credit is high to support the increased economic activity

b. Wage rate will be high as demand for labor increase during the boom phase

c. As the economic activity increase during the boom bank credit also increases

d. During a boom demand increased at a faster rate and inventories tend to be low. All other variables tend to increase during a boom.

e. Cost of production will be high as demand for factors of production will be relatively high during the boom phase.

33. Answer : (c)

Reason : ‘Velocity of money’ refers to the speed at which money changes hands. The ratio of nominal GDP to the money stock defines the income velocity of money (that is, V = GDP/M = PQ/M). Thus, the price level in the economy will increase because of rise in velocity of money, given the money supply.

34. Answer : (c)

Reason : To counter the recession the fiscal and monetary policies should be expansionary. a. Decrease in government expenditure is a contractionay fiscal policy. This measure will

worsen the recessionary situation. b. Decrease in government expenditure is a contractionay fiscal policy. This measure will

worsen the recessionary situation. c. Decrease in the discount rate increase money supply in the economy and is an expansionary

monetary policy. This will counter the recession by increasing the aggregate demand in the economy.

d. Decrease in money supply is a contractionay monetary policy. This measure will worsen the recessionary situation.

e. Increase in the tax rate is a contractionay fiscal policy. This measure will worsen the recessionary situation.

35. Answer : (c)

Reason : 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.

36. Answer : (d)

Reason : In computing GDP, transfer payments, leisure time and non-marketable services are not taken into account. Therefore, the answer is (d).

37. Answer : (b)

Reason : The system of ad hoc treasury bills as a means of financing the budget deficit was discontinued from 1997. This system is replaced by a system of ways and means advances (WMA). Under the new arrangement, the temporary mismatches between expenditure and receipts will be

23

outside the Reserve Bank’s support to the government’s borrowing program during the year.

38. Answer : (e)

Reason : APS + APC = 1

If APS < 0 , APC > 1

39. Answer : (a)

Reason : When the Central bank sells government securities in the open market, it reduces the money supply in the economy, which in turn increases interest rate in the economy. This reduction in money supply shifts the LM curve to the left.

a. is the correct answer. When the Central Bank sells government securities in the open market, it reduces the money supply in the country, leading to leftward shift in the LM curve.

b. LM curve shifts to the right if the money supply increases.

c. Changes in the money supply only affects the LM curve and hence the IS curve remains undisturbed.

d. Changes in the money supply only affects the LM curve and hence the IS curve remains undisturbed.

e. When the LM curve shifts leftward, the interest rates raises. Hence, (e) is not correct.

40. Answer : (b)

Reason : Monetary policy mainly controls the economy by regulating the interest rates through changes in money supply. If the private investment is more sensitive to interest rate, then monetary policy can more effectively regulate the economy.

a. A recessionary condition cannot make a monetary policy more effective.

b. When private investment is more sensitive to interest rate monetary policy will be more effective as a small change in the interest rate would lead to a greater change in the output.

d. During liquidity trap, the effectiveness of monetary policy decreases because during such policy, changes in interest rate cannot have any effect on investments.

e. Effectiveness of the monetary policy is not determined by the phases of business cycle.

Section B : Problems

41. Answer : (e)

Reason : 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

0.2Y = 1680 – 100i

Y = 8400 – 500i

Derivation of LM function: At equilibrium, real money demand = real money supply

410 = 0.2Y + 50 – 20i

360 = 0.2Y – 20i

0.2Y = 360 + 20i

Y = 1800 + 100i

Thus, at simultaneous equilibrium,

8400 – 500i = 1800 + 100i

1320 = 120i

Or, i = 11

And, Y = 8400 – 500 (11) = 2900

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Budget surplus (deficit): Tax revenues – Government expenditure – Transfer payments

= 0.25(2900) – 600 – 100 = 25

If government wants to maintain the same budget surplus even after the increase of government expenditure, then

Tax revenue (T) – {New Government spending (G) + Transfer payments (R)} = 25

Or, T = 25 + (600 + 100) + 100 = 825

And, Yd = Y – 825 + 100 = Y – 725

Now, new IS function = C + I + G + NE = Y

Y = 400 + 0.8(Y – 725) – 20i + 250 + 0.3Y – 80i + 700 + 450 – 100 – 0.1Y

Or, Y = 1120 + Y – 100i

Or, 100i = 1120

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%.

42. Answer : (d)

Reason : 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.

43. Answer : (c)

Reason : GNPMP = GDPFC + NFIA + Indirect taxes – Subsidies

2292 = 2000 + 200 + 542 – X

X = – 2292 +2200 + 542

= Rs.450 cr.

44. Answer : (e)

Reason : 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%.

45. Answer : (d)

Reason : Marginal propensity to consume (MPC) = ∆ C/ ∆ Y = 80/100 = 0.8

Multiplier = ∆ Y/ ∆ I = 100/40 = 2.5 = 1/(1 – MPC + MPC x t + MPI) = 1/(0.2 + 0.8t + 0.1) = 1/(0.3 + 0.8t)

Or, 2.5(0.3 + 0.8t) = 1

Or, 0.75 + 2t = 1

Or, 2t = 0.25

Or, t = 0.125 or 12.5%

At equilibrium,

Y = C + I + G + NE = {50 + 0.8(Y – 0.125Y)} + 50 + 140 + 100 – 0.1Y

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Y = 340 + 0.7Y – 0.1Y

Or, 0.4Y = 340

Or, Y = 850.

46. Answer : (d)

Reason : At the steady state level of consumption, Ct = Ct-1

Given the equation, Ct = 10 + 0.7Ydt + 0.3Ct-1

Ct = 10 + 0.7Ydt + 0.3Ct since Ct = Ct-1

Or, 0.7Ct = 10 + 0.7Ydt

Or, ∆ Ct/ ∆ Ydt = 0.7/0.7 = 1

Thus, if Ydt increases by 100, then the steady state level of consumption also increases by 100.

47. Answer : (d)

Reason : C = 8 + 0.7Y

S = –8 + 0.3Y

At equilibrium, S = I

–8 + 0.3Y = 22

0.3Y = 30

∴ Y = 100

48. Answer : (d)

Reason : Required nominal growth rate = Real GDP growth rate + Population growth rate

= 3% + 6% = 9%

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.

49. Answer : (a)

Reason : Balance of Trade (BoT) = Merchandise imports – Merchandise exports

= 20,000 –18,000 = 2000 MUC (deficit)

50. Answer : (a)

Reason : 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 = 18000 – 20000 + 16000 – 12000 + 400 – 1000 + 150 – 200 = 1350 Cr.

51. Answer : (a)

Reason : [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 Dr.

52. Answer : (d)

26

Reason : ∆Y=Multiplier × ∆I = 10075.01

1×

− = Rs.400 crore.

53. Answer : (a)

Reason : LM function Y = 500 + 20i

If, i = 10%, Y = 500 + (20 × 10) = 700

i = 7%, Y = 500 + (20 × 7) = 640

i = 5%, Y = 500 + (20 × 5) = 600

i = 4%, Y = 500 + (20 × 4) = 580

i = 2%, Y = 500 + (20 × 2) = 540

(a) does not fall on the LM curve hence does not represent an equilibrium in the money market.

54. Answer : (a)

Reason : Multiplier = 1/(1 – MPC + MPC x t) = 1/(1 – 0.7 + 0.7 x 0.285) = 2

Change in tax income = Tax rate (t) x Change in income (Y) = 2 x (-250) x 0.285 = -142.5

Change in government expenditure (G) = - 250

Change in budget deficit = 250 – 142.5 = 107.5.

55. Answer : (b)

Reason : Money supply = High-powered money (H) x Money multiplier

80000 = H x {(1 + 0.2)/(0.2 + 0.1)}

Or, H = 20,000 MUC

H = Monetary Liabilities of the Central Bank + Government money = ML + 1050

Or, ML = 20000 – 1050 = 18950.

Total assets = Total liabilities (= Non-ML + ML)

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.

56. Answer : (c)

Reason : Transaction demand for money = 500

Speculation demand for money = 250 – (5 × 10) = 200

Demand for money = 500 + 200 = 700

∴ Money supply = 700.

57. Answer : (d)

Reason : National income (NNP at FC) = wages & salaries + interest income + rental income + profit

Or, Profit = 300 – 180 – 45 – 30 = 45.

58. Answer : (d)

Reason : NFIA = NNPMP – NDPMP

NNPMP = NNPFC + Indirect Taxes – Subsidies = 4200 + 950 – 100 = 5050

Thus, NFIA = 5050 – 5000 = 50.

59. Answer : (d)

Reason : GDPFC = NDPMP + Depreciation – Indirect Taxes + Subsidies

5000 + (800 – 650) – 950 + 100 = 4,300 MUC.

60. Answer : (c)

Reason : Personal Income (PI) (i.e. income received by the households) = NI – Corporate profit + Dividends + Transfer payments = 4200 – 750 + 150 + 75 = 3675.

27

61. Answer : (c)

Reason : 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 + 1075 = 1025.

Thus, CAB = 1025 – 650 = 375 (surplus).

62. Answer : (c)

Reason : Corporate profits = Corporate profit tax + Dividends + Retained earnings

= 50 + 15 + 20 = 85

63. Answer : (c)

Reason : 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.

64. Answer : (d)

Reason : At break-even level of disposable income, savings are zero.

∴ S = –300 + 0.25Yd = 0

0.25 Yd = 300

Yd = 25.0

300 = 1200.

65. Answer : (a)

Reason : 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.

66. Answer : (c)

Reason : 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.

67. Answer : (b)

Reason : 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%.

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68. Answer : (a)

Reason : 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. Answer : (c)

Reason : 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. Answer : (c)

Reason : GNP = GDP + NFIA NFIA = Factor income received from abroad – Factor income paid abroad. = 100 – 200 = – 100

∴ GNP = 8000 – 100

= 7900.

71. Answer : (d)

Reason : Velocity of money = Y/Ms Money supply (Ms) = Money demand (Md) = 0.25(600) + 150 – 20(3) = 240 Ms = 240 Thus, velocity of money = 600/240 = 2.5 (Working notes: Y = 600 = 750 – 50i

Or, i = 150/50 = 3).

72. Answer : (d)

Reason : Money supply (Ms) = High-powered money (H) x {(1 + Cu)/(Cu + r)} 6000 = (2000 - 500) {(1 + 0.2)/(0.2 + r)

Or, r = 10%.

73. Answer : (a)

Reason : Total money = Rs.5,000.

50% of total money which is held in the form of currency is Rs.2,500.

Demand deposit component of money supply is Rs.2,500.

Given the reserve ratio of 10%, required reserves are 2,500 × 0.10 = Rs.250.

74. Answer : (a)

Reason : Total value added in the process = Market value of the final product = 120

Value added in the manufacturing stage

= Total value of the good after manufacturing stage – Total cost for procuring raw-material

= 50 – 30 = 20.

75. Answer : (a)

Reason : Multiplier = 1/(1 – MPC + MPC x tax rate + MPI) = 1/(1 – 0.8 + 0.8 x 0.2 + 0.14) = 2.

76. Answer : (d)

Reason : Primary deficit = Fiscal deficit – interest payment

= Rs.153,637 Cr. – 123,223 Cr. = Rs.30,414 Cr.

Where Fiscal deficit = Borrowings and other liabilities of the government

= Rs.153,637 Cr.

77. Answer : (a)

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Reason : At equilibrium, Y = C + I = C + S

Aggregate consumption function = (100 x 50) + 0.7Yd = 5000 + 0.7Yd = 5000 + 0.7(50000) = 40000. Thus, investment (I) = Saving (S) = 50000 – 40000 = 10000.

78. Answer : (a)

Reason : MPC = Change in consumption / Change in disposable income

= ∆C/∆Yd = (4200 – 2000) / (4000 – 1250)

= 0.8

If MPC = b = 0.8, then

4200 = a + 0.8(4000)

4200 = a + 3200

or, a = 4200 – 3200 = 1000.

0304 - Ec 2

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