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Question Paper Economics (CFA520): October 2007
Answer all questions. Marks are indicated against each
question.
1. The demand for most products varies directly with the change
in consumer income. Such products are known as
(1 mark)
(a) Normal goods (b) Prestigious goods (c) Complementary goods
(d) Inferior goods (e) Substitute goods.
< Answer >
2. The situation of market equilibrium occurs when
(1 mark)
(a) Demand for the goods is greater than supply of the goods (b)
Quantity demanded for the goods equals quantity supplied of the
goods (c) The price, sellers ask for the goods is less than the
price consumers pay of those goods (d) There exist a shortage of
the supply of the goods (e) Demand for the goods is less than
supply of the goods.
< Answer >
3. Essexx Design Inc. produces very costly and attractive sports
watches. Now Sofex Inc. introduced a stylish sports watch in the
market. The watches of Essexx Design Inc. and Sofex Inc. are
considered to be perfect substitutes. The cross elasticity of
demand between these watches is
(1 mark)
(a) Infinity (b) Positive, less than infinity (c) Zero (d) Less
than zero (e) One.
< Answer >
4. Which of the following does not cause a shift in the demand
curve?
(1 mark)
(a) Change in the price of the good (b) Change in the income of
the buyers (c) Change in the personal preferences (d) Change in the
price of the related goods (e) Change in the consumer patterns.
< Answer >
5. The demand and supply functions of a commodity are estimated
as Qd = 100 P
Qs = 20 + 3P The equilibrium price and quantity of the good
are
(1 mark)
(a) Rs.60 and 40 units respectively (b) Rs.40 and 60 units
respectively (c) Rs.50 and 50 units respectively (d) Rs.30 and 70
units respectively (e) Rs.70 and 30 units respectively.
< Answer >
6. Current demand for apples in a city is 1,000 boxes per week.
In the city, price elasticity of demand for apples is 1.25 and
income elasticity of demand is 2.00. For the next period, if per
capita income is
< Answer >
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expected to increase by 7% and price of apples is expected to
increase by 10%, demand for apples is expected to be
(2 marks)
(a) 875 boxes per week (b) 1,000 boxes per week (c) 1,250 boxes
per week (d) 1,140 boxes per week (e) 1,015 boxes per week.
7. The falling part of a total utility curve indicates
(1 mark)
(a) Increasing marginal utility (b) Decreasing marginal utility
(c) Zero marginal utility (d) Negative marginal utility (e)
Indeterminate marginal utility.
< Answer >
8. The difference between the price an individual is willing to
pay and the price he or she actually pays is
(1 mark)
(a) Producer cost (b) Monopolist profit (c) Economic profit (d)
Producer surplus (e) Consumer surplus.
< Answer >
9. Marginal utilities of goods A and B are 500 utils and 1,000
utils respectively. The price of good B is Rs.200. If the consumer
is in equilibrium, the price of good A is
(1 mark)
(a) Rs. 60 (b) Rs. 70 (c) Rs. 80 (d) Rs. 90 (e) Rs.100.
< Answer >
10. If the average product of labor (APL) is 30L L2, the maximum
possible total product (TPL) is
(2 marks)
(a) 2,000 units (b) 4,000 units (c) 6,000 units (d) 8,000 units
(e) 12,000 units.
< Answer >
11. Average productivity of labor for a firm is 50 when labor
employed is 100 units. When labor employed is increased to 104
units, average productivity of labor declines to 48 units. At
current input level the marginal productivity of labor is
(1 mark)
(a) 1 unit (b) 2 units (c) 1 unit (d) 2 units (e) 5 units.
< Answer >
12. Production function for a firm is Q = 100L 0.1L2. If 10
units of labor are used, average productivity of labor is (a) 90
units (b) 99 units (c) 100 units (d) 200 units
< Answer >
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(1 mark) (e) 220 units.
13. Which of the following represents the Marginal Rate of
Technical Substitution (MRTS)?
(1 mark)
(a) Slope of the isocost curve (b) Slope of the indifference
curve (c) Slope of the isoquant curve (d) Slope of the budget line
(e) Slope of the average cost curve.
< Answer >
14. Maximum point on the average product curve is reached
when
(1 mark)
(a) Marginal product is zero (b) Marginal product is maximum (c)
Marginal product is minimum (d) Marginal product is negative (e)
Marginal product equals average product.
< Answer >
15. The point beyond which no rational firm would employ labor
is
(1 mark)
(a) When the average product of labor is equal to marginal
product of labor (b) When the marginal product of labor is maximum
(c) When the marginal product of labor is zero (d) When the total
product of labor is zero (e) When the average product of labor is
zero.
< Answer >
16. If the total cost function is TC = 200 4Q + 6Q2 and the
output is 4 units, the marginal cost is
(2 marks)
(a) Rs.24 (b) Rs.32 (c) Rs.44 (d) Rs.35 (e) Rs.41.
< Answer >
17. The cost schedule of a firm is given below:
The average fixed cost of producing 4th unit of output is
(1 mark)
Output (units) Total Fixed Cost (Rs.) Total Variable Cost (Rs.)
1 100 50 2 100 150 3 100 350 4 100 650 5 100 1, 050
(a) Rs.100 (b) Rs. 50 (c) Rs. 20 (d) Rs. 25 (e) Rs.500.
< Answer >
18. A firm will shut down its operations in the short run if
(1 mark)
(a) It incur losses (b) Fixed costs exceed its revenue (c)
Average variable costs exceed its average revenue (d) Total revenue
falls short of total cost (e) Total fixed cost exceeds its total
variable costs.
< Answer >
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19. Mr. Sachin can earn money from various activities. His
hourly earnings from cricket is Rs.5,000, acting Rs.30,000,
coaching Rs.10,000 and ceremonies Rs.15,000. The opportunity cost
of an hour of coaching for Sachin is
(1 mark)
(a) Rs. 5,000 (b) Rs.10,000 (c) Rs.15,000 (d) Rs.30,000 (e)
Rs.40,000.
< Answer >
20. Increasing marginal costs with increase of output
implies
(1 mark)
(a) Decreasing average returns (b) Decreasing average fixed
costs (c) Decreasing average variable costs (d) Decreasing total
costs (e) Decreasing average costs.
< Answer >
21. Lixan Imaging is a Mumbai based image digitization company,
specializing in digitizing visual collections. It has developed a
project-based model incorporating best practices into the
digitization workflow. The vertical distance between total variable
cost and total cost of Lixan Imaging is equal to
(1 mark)
(a) Marginal cost (b) Average variable cost (c) Total fixed cost
(d) Average fixed cost (e) Average total cost.
< Answer >
22. The total revenue and total cost functions of Nike Shoe
Company are
TR = 400Q , TC = 600 +70Q + Q2
What is the profit maximizing output for the firm?
(2 marks)
(a) 100 units (b) 110 units (c) 140 units (d) 180 units (e) 200
units.
< Answer >
23. Mr. Akash, the manager of The Fast Trak Corp., a shoe
manufacturing company develops dozens of dramatically different
methods of making shoes, which decreases the Fast Trak Corp.s
variable costs of producing shoes. The Fast Trak Corp. faces the
following average variable cost function:
AVC = 300 10Q + 0.5Q2
Fixed costs are Rs.150. What is the minimum possible average
variable cost?
(2 marks)
(a) Rs.225 (b) Rs.250 (c) Rs.275 (d) Rs.300 (e) Rs.325.
< Answer >
24. In perfect competition, the long run equilibrium price is
equal to I. Marginal Revenue. II. Average Cost. III. Marginal
Cost.
< Answer >
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IV. Average Revenue.
(1 mark)
(a) Both (I) and (III) above (b) (I), (II) and (III) above (c)
(I), (III) and (IV) above (d) (II), (III) and (IV) above (e) All
(I), (II), (III) and (IV) above.
25. The horizontal demand curve for a firm is one of the
characteristic features of
(1 mark)
(a) Oligopoly (b) Monopoly (c) Monopolistic competition (d)
Perfect competition (e) Duopoly.
< Answer >
26. In the long run, which of the following is true of a firm in
a perfectly competitive industry?
(1 mark)
(a) It operates at its minimum average cost (b) The price is
more than the average fixed cost (c) The marginal cost is greater
than marginal revenue (d) The fixed cost is lower than the total
variable cost (e) The price is equal to minimum of average variable
cost.
< Answer >
27. Neelam Pvt. Ltd. is operating in a perfectly competitive
industry. If the firm doubles its output during the year, then
(1 mark)
(a) Price of the product falls more than proportionately (b)
Price of the product falls less than proportionately (c) Price of
the product falls proportionately (d) Price of the product remains
same (e) Price of the product rises.
< Answer >
28. Which of the following conditions are necessary in the short
run equilibrium in monopolistic competition?
(1 mark)
(a) Marginal cost = Marginal revenue (b) Price = Average total
cost (c) Price = Marginal revenue (d) Price = Marginal cost (e)
Price = Average fixed cost.
< Answer >
29. The following is the cost function of Manish & Co., a
sole producer of oil paints. C = 100 + 20Q Manish & Co. can
segregate the market into two different sub markets A and B. The
demand functions for the two markets are estimated as PA = 50
QA
PB = 30 0.5QB The output at which the monopolist makes the
maximum profit is
(2 marks)
(a) 50 units (b) 35 units (c) 25 units (d) 40 units (e) 30
units.
< Answer >
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30. Media Soft, a multimedia firm enters a monopolistically
competitive market. The demand and cost function faced by Media
Soft are given as P = 10,000 20Q TC = 3,00,000 + 2,197Q 20Q2 + Q3
The short run equilibrium output of the firm is
(2 marks)
(a) 11 units (b) 51 units (c) 61 units (d) 71 units (e) 81
units.
< Answer >
31. The industry demand function for a product in a duopoly is P
= 500 2Q. The reaction functions of the two firms are as
follows:
Q1 = 380 2Q2
Q2 = 200 Q1 Equilibrium price of the product is
(2 marks)
(a) Rs.100 (b) Rs.180 (c) Rs.200 (d) Rs.380 (e) Rs.400.
< Answer >
32. Ring tone, a firm specializing in mobile handsets, faces a
monopolistically competitive market. In the long run, the company
will earn only normal profits because of
(1 mark)
(a) Advertising outlay incurred for the product (b) Freedom of
entry and exit (c) Product differentiation (d) Downward sloping
demand curve (e) Small size of the market.
< Answer >
33. If a monopolist faces an upward shift in marginal cost
curve, then
(1 mark)
(a) The price increases and output decreases (b) Both the price
and output will increase (c) The price decreases and output
increases (d) Both the price and output will decrease (e) Both the
price and output will remain constant.
< Answer >
34. Which of the following is not a common characteristic of
perfect competition and monopolistic competition?
(1 mark)
(a) Large number of sellers (b) Free entry (c) Homogeneous
product (d) Large number of buyers (e) Free exit.
< Answer >
35. Best Cereals Inc. (BCI) produces and markets Tasties, a
popular ready-to-eat breakfast cereal. The demand and supply
functions of Tasties are as follows: QD = 150 3P
QS = 50 +10P
< Answer >
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If excise tax of Rs.3 is imposed on Tasties, the proportion of
tax that will be borne by the consumers is
(2 marks)
(a) 88% (b) 77% (c) 63% (d) 56% (e) 44%.
36. The total cost function and demand function of a good are
estimated to be TC = 100 5Q + 2Q2 and Q = 100 P respectively. If
the current output is 5 units, the average profit is
(2 marks)
(a) Rs. 50 (b) Rs. 60 (c) Rs. 65 (d) Rs. 70 (e) Rs.120.
< Answer >
37. For a firm, the average cost function is estimated as
AC = + 20 + 4Q.
What is total variable cost for the firm at an output of 15
units?
(2 marks)
(a) Rs. 100 (b) Rs. 750 (c) Rs.1,200 (d) Rs.1,300 (e)
Rs.2,100.
< Answer >
38. In a perfectly competitive market, the marginal revenue
curve
(1 mark)
(a) Slopes downward (b) Slopes upward (c) Is vertical (d) Is
horizontal (e) Is absent.
< Answer >
39. The following data is taken from National Income Accounts of
a country:
Personal income in the country is
Particulars Million Units of Currency (MUC) 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
(a) 1,363 MUC (b) 1,121 MUC (c) 1,230 MUC (d) 1,296 MUC (e)
1,496 MUC.
< Answer >
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(2 marks) 40. The following is the information from National
Accounts of an economy:
The GDP at market prices is
(2 marks)
Particulars MUC Direct taxes 2,400 Indirect taxes 11,400 Factor
income paid abroad 12,000 Factor income received from abroad 9,000
Depreciation 12,000 Subsidies 6,000 National income 48,000
(a) 24,800 MUC (b) 30,200 MUC (c) 68,400 MUC (d) 52,350 MUC (e)
45,600 MUC.
< Answer >
41. Which of the following statements is true?
(1 mark)
(a) Net national product at factor cost plus depreciation equals
gross national product at market prices
(b) National income minus corporate profits minus personal taxes
plus transfer payments equals personal income
(c) Personal disposable income minus personal taxes equals
personal consumption (d) Gross domestic product at market prices
minus net factor income from abroad equals gross
national product at market prices (e) Per capita income equals
the summation of national income and population.
< Answer >
42. Gross domestic product is the market value of
(1 mark)
(a) All goods and services exchanged in an economy (b) All goods
and services exchanged in an economy during a year (c) All final
goods and services exchanged in an economy during a year (d) All
transactions in an economy during a year (e) All final goods and
services produced in an economy during a year.
< Answer >
43. Consumption function for an economy is estimated to be
C = 1,000 + 0.80 Yd
Which of the following is true if Yd is zero?
(1 mark)
(a) Consumption is zero (b) Savings are Rs.1,000 (c) Income must
be greater than taxes (d) Dissavings are Rs.1,000 (e) Savings are
zero.
< Answer >
44. In an economy the marginal propensity to consume is 0.70 and
marginal propensity to import is 10%. Assuming that the investment
is autonomous and increases by 1,000 MUC during the year, the
income in the economy increases by
(2 marks)
(a) 625 MUC (b) 2,500 MUC (c) 3,000 MUC (d) 4,000 MUC (e) 5,000
MUC.
< Answer >
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45. The consumption function for a two sector economy is C =
1,800 + 0.5Y and investment is an autonomous component. If
equilibrium income is 4,400 MUC, what is the investment in the
economy?
(1 mark)
(a) 2,600 MUC (b) 200 MUC (c) 400 MUC (d) 2,650 MUC (e) 7,200
MUC.
< Answer >
46. The investment multiplier explains the change in national
product due to change in
(1 mark)
(a) Consumption expenditure (b) Investment expenditure (c)
Government expenditure (d) Export (e) Import.
< Answer >
47. The IS function and LM function in an economy are estimated
to be Y = 4,800 + 0.5Y 50i and Y = 4,600+ 400i respectively. The
investment function in the economy is 1,600 100i. If the government
spending increases by 200 MUC, which of the following is true about
the interest rate in the economy?
(2 marks)
(a) Increases from 10.00% to 10.50% (b) Increases from 10.00% to
10.25% (c) Increases from 10.00% to 12.00% (d) Increases from
10.00% to 15.00% (e) Increases from 10.00% to 10.80%.
< Answer >
48. Which of the following shift the LM curve to the right? I.
Increase in money supply. II. Purchase of bonds by the RBI. III.
Decrease in the price level.
(1 mark)
(a) Only (I) above (b) Only (II) above (c) Both (I) and (II)
above (d) Both (II) and (III) above (e) All (I), (II) and (III)
above.
< Answer >
49. The IS function and LM function of an economy are estimated
to be Y = 2,860 + 0.5Y 60i and Y = 2,600 + 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?
(2 marks)
(a) 52.5 MUC (b) 55.5 MUC (c) 62.5 MUC (d) 500.0 MUC (e) 100.0
MUC.
< Answer >
50. Which of the following is true if the prices of factor
inputs increase in an economy?
(1 mark)
(a) Aggregate supply curve shifts to the left (b) Aggregate
supply curve shifts to the right (c) Aggregate demand curve shifts
to the right (d) Aggregate demand curve shifts to the left (e) Both
aggregate supply and demand curves remain constant.
< Answer >
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51. In the short run, if an economy emerges from a
recession,
(1 mark)
(a) Aggregate demand shifts left, the price level decreases and
real output decreases (b) Aggregate demand shifts right, the price
level increases and real output increases (c) Aggregate supply
shifts right, the price level decreases and real output increases
(d) Aggregate supply shifts left, the price level increases and
real output decreases (e) Aggregate supply shifts right, the price
level increases and real output increases.
< Answer >
52. The central banks monetary liabilities as on June 30, 2007
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?
(2 marks)
(a) 6.25% (b) 8.10% (c) 9.10% (d) 5.00% (e) 4.25%.
< Answer >
53. The following are the excerpts from the balance sheet of the
Central bank of a country:
If the government money is 225 MUC, the high powered money in
the economy is
(2 marks)
Particulars MUC Notes in circulation 900 Other deposits 450
Other non-monetary liabilities 900 Statutory and contingency
reserves 3,780 Credit to Central Government 10,080 Shares &
loans to financial institutions 4,950 Central bank claims on
Commercial banks 3,150 Net foreign exchange assets 1,350 Other
assets 450
(a) 14,850 MUC (b) 15,750 MUC (c) 16,425 MUC (d) 16,650 MUC (e)
15,525 MUC.
< Answer >
54. As on March 31, 2007, 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
(2 marks)
(a) 5,000 MUC (b) 5,500 MUC (c) 6,000 MUC (d) 6,550 MUC (e)
6,600 MUC.
< Answer >
55. Which of the following does not affect the balance sheet of
Reserve Bank of India?
(1 mark)
(a) Central governments 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.
< Answer >
56. An important difference between the approaches of the
Classical economists and Keynesian economists < Answer
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to achieve a macroeconomic equilibrium is that
(1 mark)
(a) Keynesian economists actively promote the use of fiscal
policy while the classical economists do not
(b) Keynesian economists actively promote the use of monetary
policy to improve aggregate economic performance while classical
economists do not
(c) Classical economists believe that monetary policy will
certainly affect the level of output while Keynesians believe that
money growth affects only prices
(d) Classical economists believe that fiscal policy is an
effective tool for achieving economic stability while Keynesians do
not
(e) Keynesian economists actively promote the use of rational
expectations while the classical economists do not.
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57. Which of the following is true for a classical aggregate
supply curve?
(1 mark)
(a) Aggregate supply curve is horizontal (b) Aggregate supply
curve is positively related to real output (c) Aggregate supply
curve is negatively related to real output (d) Aggregate supply
curve is unrelated to price level (e) Aggregate supply curve is
rectangular hyperbola.
< Answer >
58. According to Keynesian theory, full employment refers to a
situation where there is
(1 mark)
(a) Zero unemployment (b) Natural rate of unemployment (c) Least
demand for labor (d) Least supply of labor (e) Demand for goods
which is less than supply.
< Answer >
59. The Chief Economist to the Government told the Cabinet that
the people cannot be influenced if the government increases 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
(1 mark)
(a) Classical economics (b) Rational expectations (c) Keynesian
economics (d) Supply-side economics (e) Monetarism.
< Answer >
60. Unemployment that results from the normal workings of the
labor market is a combination of
(1 mark)
(a) Frictional and structural unemployment (b) Cyclical and
structural unemployment (c) Frictional and cyclical unemployment
(d) Frictional and disguised unemployment (e) Higher quantity
demanded and lower quantity supplied in the labor market.
< Answer >
61. Which of the following would you suggest to counter a
recession?
(1 mark)
(a) Decrease in government expenditure (b) Decrease in transfer
payment (c) Decrease in the discount rate (d) Decrease in the money
supply (e) Increase in the tax rate.
< Answer >
62. Which of the following is not a major determinant of
economic growth? (a) Tastes and preferences of consumers (b)
Technological advancement
< Answer >
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(1 mark)
(c) Natural resources (d) Physical capital (e) Human
resources.
63. Inflation accompanied by a slowing of economic activity
is
(1 mark)
(a) Known as deflation (b) A result of a stagnant aggregate
supply (c) A result of fiscal stimulus (d) Known as stagflation (e)
Known as a recession.
< Answer >
64. The Phillips curve shows the short run trade off between
(1 mark)
(a) Inflation and unemployment (b) Unemployment and output (c)
Inflation and the nominal interest rate (d) The nominal interest
rate and investment (e) Inflation and output.
< Answer >
65. Economic growth is said to have occurred when there is an
increase in
(1 mark)
(a) Interest rate (b) Aggregate demand (c) The rate of inflation
(d) Productive capacity (e) Wage rate.
< Answer >
66. Which of the following policy measures is considered as
fiscal policy measures?
(1 mark)
(a) The government cuts taxes or raises spending to get the
economy out of a slump (b) The government changes the quantity of
money supplied to affect the price level, interest rates,
and exchange rates (c) The government stimulates aggregate
supply to stimulate the potential growth of output and
income (d) The government changes the statutory liquidity ratio
(e) The government restricts imports and stimulates exports.
< Answer >
67. Expansionary monetary policy affects the goods market
because
(1 mark)
(a) It raises interest rates and leads to lower investment
spending (b) It lowers interest rates and raises investment
spending (c) It leads to an expansionary fiscal policy (d) It
lowers both interest rates and investment spending (e) It lowers
both interest rates and exports.
< Answer >
68. If the government increased its spending and the Reserve
Bank of India increased the money supply, which of the following
would we expect to happen in the short run?
(1 mark)
(a) Increases in both output and the price level (b) A decrease
in output and an increase in the price level (c) Decreases in both
output and the price level (d) Ambiguous changes in both output and
the price level (e) A decrease in price level and an increase in
output.
< Answer >
69. A current account deficit implies that (a) There is net
debit balance in the merchandise account
< Answer >
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(1 mark)
(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.
70. Which of the following is true if, for a given period, there
is no change in the foreign exchange reserves of a country?
(1 mark)
(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 account (c) Current
account balance is zero (d) Trade balance is zero (e) Capital
account balance is zero.
< Answer >
71. In balance of payments statement, short term inflows and
outflows of capital are recorded in
(1 mark)
(a) Current account (b) Capital account (c) Official reserves
account (d) Errors and omissions account (e) Transfer payments
account.
< Answer >
72. Who among the following will be benefited most from
unanticipated inflation? I. Creditors. II. Debtors. III. Retirees
earning fixed income. IV. Employees whose salaries are linked to
the consumer price index.
(1 mark)
(a) Only (I) above (b) Only (II) above (c) Both (I) and (II)
above (d) Both (II) and (III) above (e) Both (III) and (IV)
above.
< Answer >
73. Which of the following best describes an expansionary fiscal
policy?
(1 mark)
(a) Increase in government spending and increase in money supply
(b) Increase in government spending and decrease in taxes by the
same amount (c) Decrease in government spending and decrease in
money supply (d) Decrease in government spending and increase in
taxes (e) Increase in government spending and increase in
taxes.
< Answer >
74. In the short run, an increase in the governments budget
deficit is most likely to reduce
(1 mark)
(a) Interest rate (b) Inflation (c) The demand for imported
goods and services (d) Unemployment (e) Money supply.
< Answer >
75. The following information is available from balance of
payments of an economy:
The foreign exchange reserves of the country will
Item MUC Trade balance 5,000 Current account balance 2,000
Capital account balance 7,000
< Answer >
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(2 marks)
(a) Decrease by 5,000 MUC (b) Decrease by 2,000 MUC (c) Remain
unchanged (d) Increase by 5,000 MUC (e) Increase by 2,000 MUC.
76. Financial assets of the RBI does not include
(1 mark)
(a) RBIs credit to government (b) Credit to commercial banks (c)
RBIs credit to commercial sector (d) Net foreign exchange assets
with RBI (e) Furniture and buildings of RBI.
< Answer >
77. The following information is taken from Union Budget for the
year 2006: Rs.(crore)
The revenue deficit for the year 2006 was
(2 marks)
Revenue Receipts Tax Revenue (Net) 1,72,965 Non-tax Revenue
72,140 Capital Receipts Recoveries of Loans 17,680 Other Receipts
12,000 Borrowings & Other Liabilities 1,35,524 Non-plan
Expenditure On Revenue Account 2,70,169 (Of which, interest
payments is Rs.1,17,390 crore) On Capital Account 26,640 Plan
Expenditure On Revenue Account 70,313 On Capital Account 43,187
(a) Rs.95,300 crore (b) Rs.95,377 crore (c) Rs.90,300 crore (d)
Rs.94,500 crore (e) Rs.97,735 crore.
< Answer >
78. Consider the following information:
The current account balance for the country is
(2 marks)
Particulars MUC Earnings on loans and investments from abroad
500 Earnings on loans and investments to abroad 2,200 Import of
services 4,000 Private remittances to abroad (transfers) 500
Private remittances from abroad (transfers) 500 Exports of services
2,000 Merchandize exports 15,000 Merchandize imports 12,000
(a) 700 MUC (Surplus) (b) 700 MUC (Deficit) (c) 500 MUC
(Deficit) (d) 500 MUC (Surplus) (e) Zero.
< Answer >
-
Suggested Answers Economics (CFA520): October 2007
1. Answer : (a) Reason : In case of normal goods, a given
increase in income results in increase of demand. Normal goods
can
be further classified into luxury good or necessary goods based
on the value of the income elasticity of demand. If the value of
income elasticity is more than one, it signifies that the good is a
luxury item. Since, the value of the income elasticity of demand is
not known; we can classify the good to be normal goods. a. In case
of normal goods the quantity demanded increases/decreases with the
increase/decrease
in the income levels of the consumers. b. In case of
necessities, though there would be positive change in the quantity
demanded of the
good for a given change in the income, the percentage change in
the quantity demanded would be less than the percentage change in
the income. Since, we do not know the value of the income
elasticity of demand; we cannot classify the good as luxury or
necessary good.
c. Complementary goods are those which are jointly used to
satisfy a want. Cross elasticity of demand, and not income
elasticity of demand, is used to determine the relationship between
the two goods.
d. In case of inferior goods percentage change in the quantity
demanded is negative with the change in the income. Hence, (d) is
not the correct answer.
e. In case of Luxury goods, the percentage change in quantity
demanded is greater than the percentage change in the income.
Since, we do not know whether the percentage change in quantity
demanded is greater than the percentage change in the income, we
cannot classify the good to be luxury good.
< TOP >
2. Answer : (b) Reason : When total quantity demanded in the
market equals total quantity supplied, the market is said to be
in equilibrium.
< TOP >
3. Answer : (a) Reason : The cross-elasticity of demand between
two perfect substitutes is infinity. Here, the smallest possible
increase (decrease) in the price of one good causes an infinitely
large
increase (decrease) in the quantity demanded of other good.
< TOP >
4. Answer : (a) Reason : Movement of the demand curve implies
that the change in the price of the good will lead to change
in the demand for the good. For instance, fall in the price
leads to extension in the demand curve. Similarly increase in the
price of good leads to contraction in the demand for the good. A
shift in the demand curve is caused by a change in any non-price
determinant of demand. The curve can shift to the right or left.
The factors that are responsible for shift in the demand curve may
be listed out as follows: Income of the consumers prices of other
goods (substitutes or complements) Tastes and preferences of
consumers. a. It is appropriate in this instance because it is not
the factor that is responsible for the shift in the
demand curve but it represents the movement along the demand
curve. b. It is not appropriate in this instance because it is one
of the factors that is responsible for shift in
the demand curve. c. It is not appropriate in this instance
because it is one of the factors that is responsible for shift
in
the demand curve. d. It is not appropriate in this instance
because it is one of the factors that is responsible for shift
in
the demand curve. e. It is not appropriate in this instance
because it is one of the factors that is responsible for shift
in
the demand curve. The correct answer is (a).
< TOP >
5. Answer : (d) Reason : 100 P = - 20 + 3P
< TOP >
-
or P = Rs.30 Q = 100 P = 100 30 = 70 units.
6. Answer : (e) Reason : Qd = 1000
ep = 1.25
ey = 2.00
ed =
1.25 =
% change in Q = 12.5%
ey =
2.00 =
% change in Q = 14.00% Net effect is = 14.00 12.5 = 1.5% 1000
1.5% = 15
Demand for apple is expected to be = 1000 + 15 = 1015 boxes per
week.
< TOP >
7. Answer : (d) Reason : When marginal utility becomes negative,
it implies that the total utility has start diminishing
< TOP >
8. Answer : (e) Reason : Consumer surplus is the difference
between the willingness price and actual price for a consumer.
a. Producer costs represent the cost incurred by the producer in
producing the good. b. Monopolist Profit: Economic profit generated
as a result of a firms market control. Its termed
monopoly profit as a reflection of the most prominent market
structure with market controlmonopoly.
c. Economic Profit: The difference between business revenue and
total economic cost. This is the revenue received by a business
over and above the minimum needed to produce a good.
d. Producers Surplus: The revenue that producers obtain from
selling a good over and above the opportunity cost of production.
This is the difference between the minimum supply price that
sellers would be willing to accept and the price that is actually
received.
e. Consumer Surplus is the satisfaction that consumers obtain
from a good over and above the price paid. This is the difference
between the maximum demand price that the consumer would be willing
to pay and the price that he actually pays.
The correct answer is (e).
< TOP >
9. Answer : (e)
Reason :
PA = = Rs.100.
< TOP >
10. Answer : (b) Reason : APL= 30L L
2
< TOP >
-
TPL = APL L = 30L2 L3
TPL can be maximized when MPL = 0
Therefore, TPL / L = 60L 3L2 = 0
L (60 3L) = 0 L =0 or L = 20. Output can be maximized by
employing 20 labors. Maximum possible TPL = 30(20)2 (20)3 = 12,000
8,000 = 4,000 units.
11. Answer : (b) Reason : TP (when labor = 100 units) = 100 x 50
= 5000
TP (When labor = 52 units) = 104 x 48 = 4992 Thus, MP = (4992
5000)/(104 100) = -8/4= -2 unit.
< TOP >
12. Answer : (b) Reason : The production function for a firm Q =
100L 0.1L2
APL = = 100 0.1 L.
When L = 10, APL = 100 0.1(10) = 100 1 = 99 units.
< TOP >
13. Answer : (c) Reason : The slope of the isoquant represents
the Marginal Rate of Technical Substitution (MRTS) between
labor (L) and capital (K). MRTS is equal to the ratio of the
marginal productivities of two factors. a. The slope of the isocost
curve represents ratio of wages (w) and interest (r). b. The slope
of the indifference curve signifies marginal rate of substitution
of goods (MRS). c. The slope of the isoquant curve signifies the
marginal rate of technical substitution (MRTS)
between labor and capital. d. The slope of the budget line
represents ratio of price of good X and good Y. e. The slope of the
average cost curve only shows the rate of change in average cost
curve with
respect change in output.
< TOP >
14. Answer : (e) Reason : When marginal product (MP) is greater
than average product (AP), AP will be increasing. When MP
< AP, AP will be decreasing. Therefore, AP is maximum when AP
is equal to MP. When MP=0, total product is maximum and AP will be
decreasing. Hence option (a) is not the answer.
When MP is maximum, AP is less than MP and AP will be
increasing. Hence option (b) is not the answer.
When MP is minimum, AP will be decreasing. Hence option (c) is
not the answer. When MP is negative, AP will be decreasing. Hence
option (d) is not the answer.
< TOP >
15. Answer : (c) Reason : A rational firm always employs labor
up to the point when the marginal product of labor is zero. If
the firm employs beyond that point, it reduces the efficiency of
the fixed factors, which results in a fall in the total product
instead of rising. (a) Is not the answer because a rational firm
will employ labor when the average product of labor
is equal to marginal product of labor. (b) Is not the answer
because a rational firm will employ labor when the marginal product
of labor
is maximum. (c) Is the answer because no rational firm would
employ labor when the marginal product of labor
is zero. (d) Is not the answer because when the labor is zero,
the total product of labor will be zero. (e) Is not the answer
because when the labor is zero, the average product of labor will
be zero
< TOP >
16. Answer : (c) Reason : When Q = 4, MC = 12Q 4 = 12(4) 4 =
44.
< TOP >
-
17. Answer : (d) Reason : AFC = TFC/Q
Average Fixed Cost of Producing 4 units = 100/4 =Rs.25
< TOP >
18. Answer : (c) Reason : When the variable costs of the firm
exceed its revenue, it can reduce the losses by shutting down
its
operations. Even if its fixed costs exceed its revenue, the firm
may not shut down its operations because the firm can reduce its
fixed cost loss through sales.
a. In the short run, the firms will continue their operations
even though they incur losses. b. If the revenue is more than
variable costs, it can reduce the losses caused by fixed costs. c.
When the variable costs of the firm exceed its revenue, it can
reduce the losses by shutting
down its operations d. If total revenue is more than total costs
it signifies losses. In the short run, the firms will
continue their operations even though they incur losses. e.
Revenue is more important to take a decision on continuation of
operation.
< TOP >
19. Answer : (d) Reason : Opportunity cost of an hour of
coaching for Sachin is equal to the best opportunity forgone
because
of coaching i.e. acting Rs.30,000.
< TOP >
20. Answer : (b) Reason : a. When marginal cost is increasing
with the increase of output, average returns may be
increasing or decreasing. b. When output is increasing, average
fixed costs decreases whether or not marginal cost is
increasing or decreasing. c. When marginal cost is increasing
with the increase of output, average variable costs may be
increasing or decreasing. d. When MC is rising, TC also
increases e. When marginal cost is increasing with the increase of
output, average costs may or may not
increasing.
< TOP >
21. Answer : (c) Reason : The total cost curve is deduced from
the total fixed cost and the total variable cost. The total cost
is
represented as the vertical integration of the total fixed cost
and total variable cost. So, the vertical distance between TVC and
TC is equal to total fixed cost. (a) Is not the answer because the
vertical distance between TVC and TC is not equal to marginal
cost. (b) Is not the answer because the vertical distance
between TVC and TC is not equal to average
variable cost (c) Is the answer because the vertical distance
between TVC and TC is equal to total fixed cost (d) Is not the
answer because the vertical distance between TVC and TC is not
equal to average
fixed cost. (e) Is not the answer because the vertical distance
between TVC and TC is not equal to average
total cost.
< TOP >
22. Answer : (b) Reason : Profit maximizing output is determined
where MR = MC. MR= 400 Q
MC = 70 + 2Q 400 Q = 70 + 2Q 3Q = 330 Q = 110 units.
< TOP >
23. Answer : (b)
Reason : Minimum possible AVC is where =0
But = 10 + Q
< TOP >
-
But = 10 + Q
10 + Q = 0 Q = 10 AVC = 300 10 (10) + 0.5 (10)2 =Rs. 250.
24. Answer : (e) Reason : The demand curve is horizontal to
x-axis implies that the producers can produce as much as
quantity
of output to the given level of price. Therefore, the producer
under perfect competition is a price-taker. The long-run
equilibrium, all the existing firms get normal profits because of
free entry and exit of firms. Hence the equilibrium condition in
the long run for a firm would be P = AR = MR = MC.
Hence, the correct answer is (e).
< TOP >
25. Answer : (d) Reason : Perfect competition is a form of
market structure which represents a market without rivalry
among
the individual firms. When the product is similar and identical,
given all other conditions, a perfectly competitive firm can only
be a price taker. The price of the good is determined by the market
forces. The demand curve is horizontal to x-axis implying that the
producers can produce as much as quantity of output to the given
level of price.a.Oligopoly is a form of market structure where
there are few sellers. The demand curve is indeterminable because
of the interdependence between the firms and it depends on the
reaction curves of the competitor.b.Monopoly is a form of market
structure where there is only one producer of the good. The demand
curve is downward sloping implying that the producer is a
price-maker. The distinguishing feature of this form of market
structure is that the average costs of production continually
decline with increased output as a result of which average costs of
production will be lowest when a single large firm produces the
entire output demanded.c.Monopolistic competition is a market
structure where there are many firms selling closely related but
non-identical goods. The demand curve is downward sloping because
of product differentiation.d.The demand curve in the perfect
competition is horizontal to x-axis implying that producer can
produce as much as the quantity of output for a given level of
price.e.The demand curve of a duopolist is indeterminate because of
high degree of interdependence between the firms. Hence, the
correct answer is (d).
< TOP >
26. Answer : (a) Reason : A perfectly competitive firm cannot
earn abnormal profits in the long run because new firms enter
into the industry and competition reduces the price of the good.
Conversely, when the firm gets losses in the long run, it would
move out of the industry. Thus, an existing firm only gets normal
profits in the long run. In perfect competition, normal profit is
possible only when the firm operates at its minimum average cost.
a. In perfect competition, normal profit is possible only when the
firm operates at its minimum
average cost. b. It is not appropriate in this instance because
in the long-run all inputs are variable and there are
no fixed costs. c. It is not appropriate in this instance
because marginal cost greater than marginal revenue is not
a desirable situation for a firm to continue in the industry. d.
It is not appropriate in this instance because fixed cost lower
than total variable cost does not
indicate any thing. Further, there would be no fixed costs in
the long-run. e. It is not appropriate because P = Min. AVC only
indicates shut down point in the short run. Hence, the correct
answer is (a).
< TOP >
27. Answer : (d) Reason : There exists large number of buyers
and sellers in a perfectly competitive industry. When there are
large number of buyers and sellers no individual seller, however
large, can influence the price by change the output. Since the firm
is operating in a perfectly competitive market, the price remains
the same even if the firm doubles its output. (a) Is not the answer
because in a perfectly competitive industry, if the firm doubles
its output
during the year, then price of the product does not fall more
than proportionately (b) Is not the answer because in a perfectly
competitive industry, if the firm doubles its output
during the year , price of the product does not fall less than
proportionately
< TOP >
-
(c) Is not the answer because in a perfectly competitive
industry, if the firm doubles its output during the year price of
the product does not fall proportionately
(d) Is the answer because in a perfectly competitive industry,
if the firm doubles its output during the year, price of the
product remains same
(e) Is not the answer because insufficient data cannot be the
answer. 28. Answer : (a)
Reason : Each firm is earning only normal profits that is the
point where, marginal revenue = marginal cost. < TOP >
29. Answer : (c) Reason : MRA = MC;
TRA = 50QA QA2
MRA = 50 2QA 50 2QA =20 QA = 15; TRB = 30QB 0.5QB2;
MRB = 30 QB; MRB = MC;30 QB = 20; QB = 10; Total output, Q = 15
+ 10 = 25 units.
< TOP >
30. Answer : (b) Reason : Given, P = 10,000 20Q
TC =300,000 + 2197Q 20Q2 + Q3 TR = P.Q = 100,00Q 20Q2 MR =10,000
40Q MC = 2,197 40Q +3Q2 MR = MC gives 10,000 40Q = 2,197 40Q + 3Q2
or 7803 = 3Q2 Q 2 = 2601 which gives Q = = 51
Hence the correct answer is 51 units
< TOP >
31. Answer : (a) Reason : By solving the reaction functions of
the firms, the industry output can be derived.
Q1 = 380 2Q2 (I) Q2 = 200 Q1 (II) Putting the equation (II) in
(I) Q1 = 380 2 (200 Q1) or, Q1 = 380 400 + 2Q1 or, Q1 = 20 or, Q1 =
20. Q2 = 200 20 = 180.
The equilibrium output for the industry Q = Q1 + Q2 = 20 + 180 =
200. P = 500 2(200) = Rs.100.
< TOP >
32. Answer : (b) Reason : (a) It is not the answer as economies
of scale just means advantages of large-scale production. The
< TOP >
-
reason for tangency of price with average cost curve is that
there is freedom of entry and exit of firms. (b) It is the answer
as freedom of entry ensures that all firms earn only normal profits
while exit
ensures that the loss making firms exit the industry and the
others make normal profits. (c) It is not the answer as product
differentiation is not a reason for the firms attaining normal
profits. (d) It is not the answer as downward sloping demand
curve does not in itself mean normal profits (e) It is not the
answer, as a downward sloping demand curve in itself does not mean
normal
profits. Hence the correct answer is (b)
33. Answer : (a) Reason : When a monopolist faces an upward
shift in his marginal cost curve, the price of his product will
increase while the quantity demanded will decrease
< TOP >
34. Answer : (c) Reason : The difference between perfect
competition and monopolistic competition is with regard to type
of
product which they produce. Producer under perfect competition
produces homogeneous goods while the producer operating under the
conditions of monopolistic competition produces differentiated
products. Large number of sellers is a common characteristic
feature of both perfect competition and monopolistic competition.
Free entry and exit is also common characteristic feature of
perfect and monopolistic competition. Homogeneous product is the
characteristic feature of only perfect competition. Differentiated
product is the characteristic feature of monopolistic competition.
Hence it is not the common feature of perfect and monopolistic
competition. Large number of buyers is also common characteristic
feature of both perfect competition and monopolistic competition.
Large number of sellers and homogeneous product are the features of
perfect competition. Hence the correct answer is (c).
< TOP >
35. Answer : (b) Reason : When tax is imposed,
Qs = 50 + 10(P 3) = 50 + 10P 30 Or, Qs = 20 + 10P At
equilibrium, 20 + 10P = 150 3P Or, 13P = 130 P = 10 Earlier
equilibrium price, 150 3P = 50 + 10P Or, 100 = 13P Or, P = 100/13 =
7.7
Increase in price = 10 7.7 = Rs.2.3. Thus, the burden borne by
the consumer is 2.3/3 = 76.67% = 77%
< TOP >
36. Answer : (d) Reason : Profit = TR TC
TR = P x Q P = 100 Q Hence, TR = (100 Q) Q = 100Q Q2 Hence,
profit = 100Q Q2 (100 5Q + 2Q2) Average profit function: 100 Q 100
/Q +5 2Q Thus, if current output is 5 units, average profit will be
100 5 20 +5 10 = 70.
< TOP >
37. Answer : (c) Reason : AC = 100/Q + 20 + 4Q TC = 100 + 20Q +
4Q2 TVC = 20Q + 4Q2
At output 15, TVC = 20(15) + 4(15)2
= 300 + 900 =Rs. 1200
< TOP >
-
38. Answer : (d) Reason : Perfect competition is a form of
market structure which represents a market without rivalry
among
the individual firms. The characteristics of perfect competition
are: Large number of buyer and sellers Homogeneous product No
barriers to entry Perfect information Perfect mobility of factors
of production. There are large numbers of buyers and the demand
curve which is the marginal revenue curve is horizontal to the
x-axis implying that the producer can produce as much as the
quantity of output for a given level of price. All the additional
goods can be sold at the market price only, hence in a perfect
competition, P = MR = AR. Hence the correct answer is (d).
< TOP >
39. Answer : (e) Reason : Personal Income = National Income
Undistributed corporate profit corporate tax + Transfer
payments National Income = GNP at market price Depreciation
(consumption of capital) Indirect taxes +
Subsidies = 1,700 190 173 + 20 = 1,357 Personal Income = 1,357
28 75 + 242 = 1,496 MUC
< TOP >
40. Answer : (c) Reason : National income = NNP at factor
cost
NNP at factor cost = GDP at market price Indirect taxes +
subsidies + NFIA Depreciation Or, GDP at market price = NNP at
factor cost + Indirect taxes subsidies - NFIA + Depreciation =
48000 + 11400 6000 ( 3000) + 12000 = 68400 MUC.
Where NFIA = (Factor income received from abroad Factor income
paid abroad) = (9000 12000) = -3000 MUC
< TOP >
41. Answer : (b) Reason : National income minus corporate
profits minus social security taxes plus transfer payments
equal
personal income. This is the true statement.
< TOP >
42. Answer : (e) Reason : Gross domestic product is the market
value of all final goods and services produced in an economy
during a one-year period.
< TOP >
43. Answer : (d) Reason : If Yd is zero, consumption is Rs.
1000, which is autonomous consumption. This consumption is
financed by dissavings or borrowing. Hence dissavings are
Rs.1000
< TOP >
44. Answer : (b)
Reason : Multiplier = 1/(1 MPC + MPI) = 1/(1 0.70 + 0.1) = =
2.5
Thus if investment increases by 1,000, income increases by 1000
2.5 = 2,500 MUC.
< TOP >
45. Answer : (c) Reason : Y = C + I Y = 1800 + 0.5 Y + I 0.5 x
4400 = 1800 + I I = 400.
< TOP >
46. Answer : (b) Reason : The investment multiplier explains the
change in national product due to change in investment
expenditure.
< TOP >
47. Answer : (e) Reason: At equilibrium, IS = LM
Y = 4800 + 0.5Y 50i Y = 9600 100i IS function
< TOP >
-
Y = 4,600+ 400i LM function Thus at simultaneous equilibrium,
9600 100i = 4,600+ 400i Or, 5000 = 500i Or, I = 10.00 When
government spending increase by 200, the IS function becomes 0.5Y=
(4800 + 200) 50i 0.5Y = 5000 50i Or, Y = 10000 100i Thus, at
equilibrium, 4,600+ 400i = 10000 100i Or,500i = 5400 Or, I =
10.80.
48. Answer : (e) Reason : An increase in nominal money supply, a
decrease in the price level, or a purchase of bonds by the
RBI increases real money stock, which shifts the LM curve to the
right.
< TOP >
49. 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.
< TOP >
50. Answer : (a) Reason : Aggregate demand (supply) curve is a
curve showing relationship between the level of real domestic
output demanded (available) at each possible price level. The
aggregate demand shows the overall demand for goods and services
produced in a country. Thus, AD = C + I + G + NE. A shift in the
aggregate demand curve takes place if the any of the factor other
than price levels affect the aggregate demand. Aggregate supply, on
the other hand, shows the overall supply of goods and services at
various price levels. Any factor other than price level that affect
the aggregate supply results in shift in aggregate supply curve.
Increase in the factor input prices reduces the incentive for
production that lead to reduction in aggregate supply. A reduction
in supply because of any other factors other than price level is
shown by a leftward shift in the aggregate supply curve. A shift in
the aggregate demand curve is caused by changes in the consumption
spending, investment spending, government spending and net export
spending. Changes in the prices of factor inputs do not affect
aggregate demand. Hence, statement (a) is correct.
< TOP >
51. Answer : (b) Reason : If an economy is reviving from a
recession, in the short run, there will be an increase in the
demand.
This increase in demand causes an increase in price which in
turn results in a rise in real output.
< TOP >
52. Answer : (a) Reason : High powered money = monetary
liabilities + government money = 10,500 + 1,500 = 12,000
Ms = H
48,000 = 12,000
= (1 + 0.25)/(0.25 + r) = 4
< TOP >
-
= 1 + 4r = 1 + 0.25 4r = 0.25 r = 0.0625 = 6.25%.
53. Answer : (e) Reason : High powered money = Monetary
liabilities of central bank + Government money
Monetary liabilities of central bank = Financial Assets + Other
assets Non-monetary liabilities Financial Assets = Credit to
government + claims on commercial banks + credit to commercial
sectors + foreign exchange assets = 10,080+ 3,150 + 4,950 + 1,350=
19530 Non-monetary liabilities = 900+ 3780 = 4680 Monetary
liabilities of central bank = 19,530 + 450 4,680 = 15,300 High
powered money = 15,300 + 225 = 15,525 MUC
< TOP >
54. Answer : (c) Reason : Stock of high powered money ( H)
= monetary liabilities of the central bank + government money =
1,250 MUC Current deposit ratio (Cu) = 0.20 Reserve ratio (r) =
0.05
Money supply Ms =
=
= 4.8 1,250 = 6,000 MUC
< TOP >
55. Answer : (b) Reason : The balance sheet of Reserve Bank of
India contains particulars of Banks current assets and
liabilities. (a) Is not the answer because Central governments
borrowings from RBI constitutes assets of
RBI.It will affect the balance sheet. (b) Is the answer because
loan taken by one commercial bank from the other is a inter bank
loan. It
will not affect the balance sheet of the Reserve Bank of India.
It is neither a liability nor an asset to the RBI.
(c) Is not the answer because refinancing of NABARD loans
constitutes assets of RBI. (d) Is not the answer because increase
in reserves of commercial banks increases the liabilities of
RBI. (e) Is not the answer because increase in net foreign
exchange assets increases the assets of RBI.
< TOP >
56. Answer : (a) Reason : An important difference between the
approaches of the classical and Keynesian economists use to
achieve a macroeconomic equilibrium is that Keynesian economists
actively promote the use of fiscal policy; the classical economists
do not. Classical economists believe intervention can be
de-stabilizing and advocate laissez- faire economy. Therefore the
answer is (a).
< TOP >
57. Answer : (d) Reason : According to classical economist,
aggregate supply curve is a vertical straight line. Hence it is
unrelated to the price level.
< TOP >
58. Answer : (b) Reason : According to Keynesian theory the term
full employment refers to a situation where there is natural
Rate of unemployment.
< TOP >
59. Answer : (b) Reason : 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
< TOP >
-
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).
60. Answer : (a) Reason : Frictional unemployment is a short-run
job/skill matching problem while structural unemployment is
a long-run matching problem.
< TOP >
61. 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 contractionary monetary policy.
This measure will worsen the recessionary situation.
e. Increase in the tax rate is a contractionary fiscal policy.
This measure will worsen the recessionary situation.
< TOP >
62. Answer : (a) Reason : Economic growth refers to situation
where increased productive capabilities of an economy are made
possible by either an increasing resource base or technological
advance. A country, thus, can achieve economic growth through: a.
Improvement in technology b. Natural resources c. Capital d. Human
resources
Change in tastes and preferences of consumers only affect the
demand of an individual good or services, and it does not increase
the production capabilities of an economy.
< TOP >
63. Answer : (d) Reason : Slowing of economic activity
accompanied by inflation is defined as stagflation.
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64. Answer : (a) Reason : Phillips curve in the short-run shows
an inverse relation between inflation and unemployment. But in
the long run there is no trade-off because Phillips curve is
vertical in the long-run.
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65. Answer: (d) Reason: Economic growth, by definition, is said
to occur hen there is an increase in the productive capacity
of the nation, shifting the production possibility frontier to
the right.
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66. Answer : (a) Reason : Fiscal policy refers to policies
pertaining to government spending and taxation. The overall
conduct
of these policies play an important role in maintaining economic
stability in the economy.
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67. Answer : (b) Reason : Expansionary monetary policy effects
the goods market because it lowers interest rates and raises
investment spending.
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68. Answer : (a) Reason : If the government increased its
spending and the Reserve Bank of India increased the money
supply,
it will lead to increases in both output and the price level in
the short run.
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69. Answer : (c) Reason : Current account captures the
transactions related to trade in goods and services, transfer
payments
and factor incomes. If foreign exchange out flow on account of
these is more than inflows, the current account is in deficit.
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70. 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
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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 + balance in capital account is zero, then
balance in the current account = Negative balance in capital
account. Hence, statement (a) is not correct.
b. There will be 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.
71. Answer : (b) Reason : Though the outflows or inflows of
capital are short term, they are still recorded in the capital
account.
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72. Answer : (b) Reason : The real value of repayments in the
future will fall with an increase in the inflation causing an
increase in the wealth of the debtors. With the same reasoning
the wealth of the creditors, retirees on fixed income, employees
whose salaries are linked to the CPI will decrease for an increase
in the rate of inflation.
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73. Answer : (b) Reason : Expansionary fiscal policy refers to
increase in government spending and decrease in taxes.
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74. Answer : (d) Reason : When the budget deficit increases,
there is higher expenditure undertaken by the government, which
will mean more public work projects. This will further boost
employment and reduce unemployment.
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75. Answer : (d) Reason : Change in foreign exchange reserves =
Current account balance + Capital account balance = 2,000 + 7,000 =
5,000 MUC. i.e. increase by 5,000 MUC.
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76. Answer : (e) Reason : Financial assets of the banking system
consist of all those assets (loans, foreign exchange assets)
which are which are under the control of the banks, including
the central banks. (a) RBIs credit to government is considered as a
financial asset, as the government is liable to
return to the RBI and also gives a nominal return. (b) Similarly
is the case with the other banks credit to the government, as said
above is part of the
financial asset of the banking system. (c) Credit given to the
commercial sector also gives a return to the bank hence it is part
of the
financial assets of the banking system. (e) Buildings are
physical assets and not financial assets and are shown as other
assets in the
balance sheet of the bank.
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77. Answer : (b) Reason : Revenue Deficit = Revenue expenditure
Revenue Receipts Revenue Expenditure = Non-plan revenue expenditure
+
plan revenue expenditure = 2,70,169 + 70313 = Rs.3,40,482 Cr
Revenue Deficit = 3,40,482 (1,72,965 + 72,140) = Rs.95,377 Cr.
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78. Answer : (b) Reason : Current account balance = Credit
(Current account) debit (Current account)
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= [Earnings on loans and investments from abroad + Private
remittances from abroad (transfers) + Exports of services +
Merchandize exports] [Earnings on loans and investments to abroad +
Private remittances to abroad (transfers) + Import of services +
Merchandize imports] = [500 + 500 + 2,000 + 15,000] [2,200 + 500 +
4,000 + 12,000] = 18,000 18,700 = 700i.e. 700 MUC (Deficit)