Question Paper

Economics (CFA520) : July 2007

Answer all questions.

Marks are indicated against each question.

1. At a local supermarket, the price of Simla apples varies every week. Mr. Mishra, who is a regular buyer
of apples, spends exactly Rs.50 on apples every week, irrespective of the price. For Mr. Mishra, the
price elasticity of demand for apples is
(a)
(b)
(c)
(d)
(e)

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Perfectly elastic
Perfectly inelastic
Unit elastic
Relatively elastic
Relatively inelastic.
(1 mark)

2. Which of the following statements are false?

I.
Elasticity of demand is graphically represented by the slope of the demand curve.
II.
Elasticity of demand increases, as one goes down along the demand curve.
III. If the demand is inelastic, a decrease in price increases the total revenue of the firm.
IV. Elasticity of demand is measured by dividing change in quantity demanded with the change in the
price of the good.
(a)
Both (I) and (II) above
(b)
Both (II) and (III) above
(c)
(I), (II) and (III) above
(d)
(I), (II) and (IV) above
(e)
All (I), (II), (III) and (IV) above.

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(1 mark)
3. When the quantity supplied of a commodity exceeds the quantity demanded at a given price, the price
(a)
(b)
(c)
(d)
(e)

Remains the same

Increases
Decreases
First increases, then decreases
First decreases, then increase.

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(1 mark)
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4. The demand curve is usually

(a)
(b)
(c)
(d)
(e)

Downward sloping from left to right

Upward sloping from left to right
U-Shaped
Horizontal straight line
Vertical straight line.

(1 mark)
5. If the demand equation is given as Qd = 100 4P and price is Rs.10, the point elasticity of demand is
(a)
4.00
(b)
0.67
(c)
0.06
(d)
0.10
(e)
0.60.

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(2 marks)
6. A product priced at Rs.900 has price elasticity of demand equal to 6. What is the marginal revenue?

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(a)
(b)
(c)
(d)
(e)

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Rs.700
Rs.750
Rs.800
Rs.850
Rs.900.
(2 marks)

7. Which of the following is/are not true regarding consumer surplus?

I.
II.
III.

Consumer surplus is helpful to the government in fixing taxes.

Consumer surplus helps the monopolists in fixing price of a commodity.
In case of imported products which are cheaper than domestic products the consumer surplus is
less.
IV. A higher consumer surplus indicates that the economy is stable.
(a)
(b)
(c)
(d)
(e)

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Only (I) above

Only (II) above
Only (III) above
Both (I) and (III) above
Both (II) and (IV) above.
(1 mark)

8. Which of the following statements is not true?

(a)
(b)
(c)
(d)
(e)

The concept of total utility is subjective so it is very difficult to measure it

Beyond the satiety point the marginal utility will be negative
In terms of calculus the marginal utility of a good is the slope of the total utility function
Total utility is the difference between the marginal utilities of current and preceding units of the
product
Marginal utility analysis explains the inverse relationship between the price and quantity
demanded.
(1 mark)

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9. At the point of tangency between budget constraint and indifference curve, the consumer
(a)
(b)
(c)
(d)
(e)

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Minimizes his budget

Maximizes his budget
Is unaffordable to buy the desired goods
Attains maximum satisfaction at a given budget
Consumes only one good.
(1 mark)

10.The locus of points of tangency between budget line and the indifference curves is called as the
(a)
(b)
(c)
(d)
(e)

Income consumption curve

Production consumption curve
Isoquant curve
Isocost line
Production possibility curve.

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(1 mark)
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11.Diamond- water paradox shows the operation of

(a)
(b)
(c)
(d)
(e)

Law of demand
Law of supply
Law of diminishing marginal utility
Law of variable proportions
Law of equi-marginal utility.
(1 mark)
X1.5

12.The utility function of a consumer is given as U =

Y. Prices of good X and Y are Rs.6 and Rs.8
respectively. Consumers weekly budget is Rs.500. What is the optimum allocation of expenditure in
terms of units of both the products for the consumer?
(a)

20 units of X and 35 units of Y

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(b)
(c)
(d)
(e)

25 units of X and 50 units of Y

50 units of X and 25 units of Y
20 units of X and 55 units of Y
25 units of X and 35 units of Y.
(2 marks)

13.For a consumer in equilibrium, Marginal Rate of Substitution of good a for good b (MRSab) is 5. If
price of the good a (Pa) is Rs.95, price of good b (Pb) is
(a)
(b)
(c)
(d)
(e)

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Rs. 17
Rs. 19
Rs. 6
Rs. 14
Rs. 15.
(2 marks)

14.At equilibrium the marginal utilities of product X and product Y are 520 utils and 650 utils respectively.
If the price of product Y at equilibrium is Rs.75, what is the price of product X at equilibrium?
(a)
(b)
(c)
(d)
(e)

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Rs.55
Rs.50
Rs.60
Rs.65
Rs.70.
(2 marks)

15.The demand function for a good is estimated to be P = 25 0.5Q. What would be the consumer surplus,
if the market price is Rs.5?
(a)
(b)
(c)
(d)
(e)

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Rs. 480
Rs. 320
Rs. 280
Rs. 512
Rs. 400.
(1 mark)
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16.Opportunity costs are also known as

(a)
(b)
(c)
(d)
(e)

Spill-over costs
Money costs
Alternative costs
External costs
Sunk costs.
(1 mark)

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17.Cost functions are derived from

(a)
(b)
(c)
(d)
(e)

Production function
Demand function
Supply function
Revenue function
Profit function.
(1 mark)

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18.If the firms total revenue exceeds its economic costs, the residual is called as
(a)
(b)
(c)
(d)
(e)

Pure profit
Producer surplus
Accounting profit
Normal profit
Abnormal profit.
(1 mark)

19.The cost that can be easily attributed to a product or a process is called as

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(a)
(b)
(c)
(d)
(e)

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Fixed cost
Variable cost
Implicit cost
Private cost
Separate cost.
(1 mark)

20.Which of the following statements is not true?

(a)
(b)
(c)
(d)
(e)

Fixed cost is incurred even if the production is zero

Total average cost cannot be zero
Average fixed cost decreases with every increase in output
The average total cost curve is flatter than average variable cost curve
The minimum point of average cost will be to the left of the minimum point of the average
variable cost.
(1 mark)

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21.Both marginal and average costs are equal to each other when
(a)
(b)
(c)
(d)
(e)

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Marginal cost is minimum

Average cost is minimum
Fixed cost is minimum
Total cost is maximum
Marginal cost is maximum.
(1 mark)

22.The total cost function of a firm is given as TC = 500 2Q + 3Q2. If the current output is 5 units,
average cost is
(a)
(b)
(c)
(d)
(e)

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Rs.110
Rs.111
Rs.112
Rs.113
Rs.114.
(2 marks)
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23.A firm faces the following average variable cost function:

AVC = 300 9Q + 0.5Q2
If fixed costs amounts to Rs. 150, what is the minimum possible marginal cost?
(a)
(b)
(c)
(d)
(e)

Rs.244
Rs.242
Rs.241
Rs.246
Rs.248.
(2 marks)

24.Total cost function for a firm is TC = 20Q 0.3Q2 + 0.01Q3. What is the output at which marginal cost
is minimum?
(a)
(b)
(c)
(d)
(e)

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6 units
7 units
8 units
9 units
10 units.
(2 marks)

25.Consider the following total cost function of a firm:

TC = 5,000 + 800Q 9Q2 + 0.25Q3
Which of the following statement is/are true?
I.

The average variable cost function is 800 9Q + 0.25Q2.

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II.
Fixed cost is Rs. 5,000.
III. Marginal cost function is 800 9Q + 0.25Q2.
IV. Average cost function is 800Q 9Q2.
(a)
(b)
(c)
(d)
(e)

Only (I) above

Only (II) above
Only (III) above
Only (IV) above
Both (I) and (II) above.
(1 mark)
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26.The average cost function of a firm is given as follows:

AC =

800
+ 80 + 4Q
Q
.What is total cost for the firm at an output of 20 units?

(a)
(b)
(c)
(d)
(e)

Rs. 3,800
Rs. 3,900
Rs. 3,700
Rs. 3,600
Rs. 4,000.
(2 marks)

27.The demand function of a firm is given as P = 1,000 50Q and the average variable cost function is
estimated as AVC = 250 + 25Q. At the equilibrium level of output if the average fixed cost is Rs.60,
then what is the total cost at that level of output (assume short run)?
(a)
(b)
(c)
(d)
(e)

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Rs. 2,175
Rs. 2,165
Rs. 2,155
Rs. 2,075
Rs. 2,265.

(2 marks)
The
firm
in
a
perfectly
competitive
market
is
a
price
taker.
This
is
because
28.
(a)
The firm has some, but not complete, control over its product price
(b)
There are large number of buyers and sellers in the market that any individual firm cannot affect the
market
(c)
Each firm produces a homogeneous product
(d)
There is easy entry or exit from the market
(e)
Of absence of transport cost.
(1 mark)
29.There are 100 firms with identical cost functions operating in a perfectly competitive industry. The
demand function for the industry is estimated to be Qd = 6,000 490P. If the cost function of a firm is

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TC = 100 100Q + 5Q2, equilibrium price of the product is

(a)
(b)
(c)
(d)
(e)

Rs. 9.00
Rs. 9.50
Rs. 10.00
Rs. 11.50
Rs. 9.75.
(2 marks)

30.Delta Ltd., is operating in a perfectly competitive industry. The total cost function of Delta Ltd., is
estimated to be TC = 1,200 + 600Q 50Q2 + Q3. Industry supply function is Qs = 200 + 4P. If profit
maximizing output for Delta Ltd., is 150 units, the total quantity supplied by the industry is
(a)
(b)
(c)
(d)
(e)

2,11,600 units
2,12,000 units
2,12,600 units
2,11,000 units
2,10,000 units.

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(2 marks)
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31.In a perfectly competitive market in the long run no firm earns abnormal profit. This is
(a)
(b)
(c)
(d)
(e)

Due to homogenous products they produce

Because of constant price
Due to existence of large number of buyers
Due to free entry and exit of firms
Because of absence of transport cost.
(1 mark)

32.Which of the following statements is not true about monopoly?

(a)
(b)
(c)
(d)
(e)

There are barriers to entry

A monopolists individual demand curve possesses the same general properties as the industry
demand curve for a perfectly competitive market
A monopolist may maximize profit with respect to variations of either output or price
The monopolist must increase the price of every unit in order to sell additional units
The rate decline in the MR of monopolist is twice the rate of decline in price.

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(1 mark)
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33.In a monopoly, price is

(a)
(b)
(c)
(d)
(e)

Lesser than the marginal revenue

Greater than the average revenue
Greater than the marginal revenue
Equal to the total revenue
Equal to marginal cost.
(1 mark)

34.Which of the following is false in the first degree price discrimination under monopoly?
(a)
(b)
(c)
(d)
(e)

The monopolist will be able to extract the entire consumers surplus

The price of each unit will be different
By following the first degree price discrimination, the monopolist earns more than what he could
otherwise earn at a uniform price per unit
The price of the first unit will be less than that of the subsequent units
It is another name for perfect price discrimination.

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(1 mark)
35.Alpha Ltd., has a monopoly in producing a product X. The demand function for this product is
estimated as Q = 75 P. The total cost function is TC = 25Q. What is the profit?
(a)
(b)
(c)
(d)
(e)

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Rs.400
Rs.625
Rs.725
Rs.600
Rs.450.
(2 marks)

36.In a duopoly market there are two firms firm A and firm B having TCA = 10QA and
TCB = 0.5Q2B . If the demand function for the industry is Q = 200 4P, what is the Cournots
equilibrium output for the industry?
(a)
(b)
(c)
(d)
(e)

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89 units
90 units
91 units
92 units
88 units.
(2 marks)

37.Which of the following represents the possible combinations of two goods that can be produced in a
certain period of time under the condition of given technology and fully employed resources?
(a)

Isoquant curve

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(b)
(c)
(d)
(e)

Production possibility frontier

Laffer curve
Phillips curve
Business cycles.
(1 mark)
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38.Which of the following variables is/are flow variable(s)?

I.
Capital stock.
II.
A firms assets.
III. Gross fixed investment.
IV. Price index.
(a)
(b)
(c)
(d)
(e)

Only (III) above

Both (I) and (II) above
Both (II) and (III) above
Both (II) and (IV) above
(II), (III) and (IV) above.
(1 mark)
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39.Which of the following price indices is most widely used for determining inflation in India?
(a)
(b)
(c)
(d)
(e)

Wholesale price index

GDP deflator
Consumer price index
Producer price index
GNP deflator.
(1 mark)

40.The following information is extracted from the National Income Accounts of an economy. All figures
are in millions units of currency (MUC).
Particulars
Depreciation
Government expenditure
Corporate taxes
Gross domestic investment
Transfer payments
Personal taxes
Net income earned from abroad
Undistributed corporate profits

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MUC
236
1,188
288
1,278
278
810
44
600

If the national income is 10,000 MUC, the personal disposable income in the economy would be
(a)
(b)
(c)
(d)
(e)

8,960 MUC
8,580 MUC
10,240 MUC
9,230 MUC
7,440 MUC.
(2 marks)

41.An economy produces only two commodities bread and butter. During the year 2006, it increased its
production of bread to 1,500 units and of butter to 2,500 units, which is exactly double as compared to
last year. The commodity prices in the economy during the two years are given below: (Consider 2005
as the base year)
Year
2005
2006
Nominal GDP for the year 2005 was
(a)
(b)

Rs.67,500
Rs.87,500

Price of Bread
(Rs. per unit)
20
25

Price of Butter
(Rs. per unit)
15
20

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(c)
(d)
(e)

Rs.33,750
Rs.43,750
Rs.23,450.
(2 marks)
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42.The following is the information from national accounts of an economy:

Particulars
Factor income paid abroad
Factor income received from abroad
Depreciation
Subsidies
National income

MUC
42,000
31,500
42,000
21,000
1,68,000

The GDP at factor cost is

(a)
(b)
(c)
(d)
(e)

1,24,800 MUC
1,30,200 MUC
1,68,400 MUC
2,20,500 MUC
1,25,600 MUC.
(2 marks)

43.In an economy, the investment function is given by I = 1000 40i. If an increase in government
spending by 250 MUC increases the interest rate in the economy by 5%, what could be the amount of
crowding out in the economy?
(a)
(b)
(c)
(d)
(e)

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100 MUC
150 MUC
75 MUC
200 MUC
90 MUC.
(2 marks)

44.Acceleration coefficient in an economy is 2. Investment in a period is equal to 75% of the difference

between the desired capital stock and the existing capital stock. If income in period t is expected to
increase by 200 MUC, investment during the period t will be
(a)
(b)
(c)
(d)
(e)

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200 MUC
300 MUC
400 MUC
500 MUC
600 MUC.
(2 marks)

45.For an economy marginal propensity to consume is estimated to be 0.80 and the proportional tax rate is
25percent. If government expenditure increases by 100 MUC, change in budget deficit is
(a)
(b)
(c)
(d)
(e)

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37.50 MUC
75.00 MUC
77.00 MUC
100.00 MUC
150.00 MUC.
(2 marks)

46.The government decreases both its expenditure and tax receipts by Rs.10 billion. This would
(a)
(b)
(c)
(d)
(e)

Reduce the equilibrium level of income

Increase the equilibrium level of income
Reduce the equilibrium level of income only if the government had previously been running a
deficit
Leave the equilibrium level of income unaffected
Increase the equilibrium level of income only if the government had previously been running a
surplus.
(1 mark)

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47.In the standard IS-LM model, which of the following is true if the government raises tax rate and the
Reserve Bank of India decides to hold the money supply constant?
(a)
(b)
(c)
(d)
(e)

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Disposable income remains constant

IS curve shifts to the right
LM curve shifts to the left
Interest rate falls
Interest rate increases.
(1 mark)

48.For an economy, goods market equilibrium is estimated as

0.5 Y = 1250 75i.
If expansionary monetary polices decrease the rate of interest in the economy by one percentage point,
the equilibrium income will
(a)
Decrease by 75 MUC
(b)
Increase by 75 MUC
(c)
Decrease by 150 MUC
(d)
Increase by 150 MUC
(e)
Increase by 200 MUC.
(2 marks)
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?
(a)
(b)
(c)
(d)
(e)

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52.50 MUC
55.50 MUC
62.50 MUC
100.00 MUC
125.00 MUC.
(2 marks)
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50.The following functional relations are derived for an economy.

Consumption function

100 + 0.75Yd

Government expenditure
Gross investment function
Tax function
Net exports
Transaction Demand for Money

G
I
T
NE
(Mt/P)

400
200 10i
0.20Y
100 0.10Y
0.20Y

Speculative Demand for Money

(Ma/P)

200 4i

Supply of Money

(Ms/P)

500

The equilibrium level of income is

(a)
(b)
(c)
(d)
(e)

1,200 MUC
1,550 MUC
1,320 MUC
1,410 MUC
2,100 MUC.
(2 marks)

51.Which of the following shifts short-run aggregate supply curve to left?

I.
II.
III.
(a)
(b)

A decrease in the price level.

An increase in the expected price level.
An increase in the capital stock.
Only (I) above
Only (II) above

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(c)
(d)
(e)

Both (I) and (II) above

Both (II) and (III) above
All (I), (II) and (III) above.
(1 mark)

52.In the short run, changes in aggregate demand determine the level of prices and income. In the long run,
changes in aggregate demand determine only the level of
(a)
(b)
(c)
(d)
(e)

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Income
Prices
Aggregate supply
Interest rates
Employment.
(1 mark)
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53.The following balances are taken from the balance sheet of the Central Bank of a country:
Particulars
Net worth
Credit to Central Government
Credit to commercial banks
Other non-monetary liabilities
Other assets
Government deposits
Foreign exchange assets

MUC
400
1,000
500
100
200
100
200

If the government money in the economy is 100 MUC, the high-powered money in the economy is
(a)
(b)
(c)
(d)
(e)

1,400 MUC
1,500 MUC
1,650 MUC
1,600 MUC
1,250 MUC.
(2 marks)
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54.Compute the money supply from the following information:

High powered money
Currency deposit ratio in the economy
Cash reserve requirement of the central bank
(a)
(b)
(c)
(d)
(e)

Rs. 8,800 Cr.

20%
5%

Rs.
440 Cr
Rs. 1,760 Cr
Rs. 2,200 Cr
Rs. 42,240 Cr
Rs. 36,960 Cr.
(1 mark)

55.The following monetary data on financial development of an economy is obtained for the year 2006.
New issues ratio
Net physical capital formation
Secondary issues

0.77
Rs. 1,77,000 Cr
Rs. 1,19,935 Cr

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What is the intermediation ratio for the economy?

(a)
(b)
(c)
(d)
(e)

0.80
0.70
0.88
0.90
0.92.
(2 marks)

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

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(a)
(b)

Central governments borrowings from RBI

Loan taken by one commercial bank from the other commercial bank

(c)
(d)
(e)

Refinancing of NABARD loans

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

>

(1 mark)
The
classical
view
of
the
labor
market
is
basically
consistent
with
the
assumption
of
__________
57.
aggregate supply curve.
(a)
A horizontal
(b)
A vertical
(c)
An upward-sloping
(d)
A downward-sloping
(e)
Rectangular hyperbola.
(1 mark)

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58.In the classical theory, saving and investment determine

(a)
(b)
(c)
(d)
(e)

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The price level

Unemployment
The supply of money
Interest rates
The demand for money.
(1 mark)

59.Who among the following advocates that, economics focuses on the role government plays in
stabilizing the economy by managing aggregate demand?
(a)
(b)
(c)
(d)
(e)

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Keynesian
Monetarist
New classical
Classical
Rational expectations.
(1 mark)
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60.A continuous decline in prices is referred to as

(a)
(b)
(c)
(d)
(e)

Inflation
Deflation
Reflation
Hyper-inflation
Stagflation.
(1 mark)

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

(a)
(b)
(c)
(d)
(e)

In the short run, unemployment does not return to its natural rate and there exists a trade-off
between inflation and unemployment
If the expected inflation rises, the Phillips curve shifts upward to the right, indicating higher
inflation at each unemployment level
The position of the short-run Phillips curve depends on the expectations regarding inflation
In the long-run the Phillips curve becomes vertical
In the long run, the policymakers will have enough time to depress aggregate demand to lower
inflation and raise unemployment.
(1 mark)

62.Robert begins his job search soon after his Post-graduation in Computer Science. After two months of
search, he is hired by a software company as a system administrator. The nature of unemployment
encountered by Robert is
(a)
(b)
(c)
(d)

Structural
Frictional
Cyclical
Seasonal

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(e)

Disguised.
(1 mark)
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63.Recession is defined as
(a)
(b)
(c)
(d)
(e)

Two or more quarters of increasing inflation

The period after the trough of a business cycle
The period before the peak of the business cycle
Two or more quarters of declining output
Two or more quarters of declining inflation.
(1 mark)

64.Which of the following is not true if the central bank imposes a reserve ratio of 100%?
(a)
(b)
(c)
(d)
(e)

The banking system can no longer affect the supply of money in the economy
Change in the foreign exchange reserves will result in an equal change in the money supply
The lending capacity of banks would narrow down to zero
A rupee deposited in a bank reduces the money supply in the economy by one rupee
Money supply in the economy will be equivalent to the high-powered money.

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>

(1 mark)
65.An expansionary fiscal policy combined with a liberal monetary policy results in
I.
A lower level of output.
II.
A higher level of output.
III. A lower interest rate.
IV. A higher interest rate.
V.
A lower or higher interest rate depending on the relative magnitude of fiscal and monetary
policies.
(a)
(b)
(c)
(d)
(e)

<
Answer
>

Both (I) and (III) above

Both (I) and (IV) above
Both (II) and (III) above
Both (II) and (V) above
Both (I) and (V) above.
(1 mark)
<
Answer
>

66.Which of the following is not a major determinant of economic growth?

(a)
(b)
(c)
(d)
(e)

Tastes and preferences of consumers

Technological advancement
Natural resources
Physical capital
Human resources.
(1 mark)

67.Budget Estimate for the year 2006 is given below.

Tax Revenue (net to Centre)
Non-tax revenue
Recoveries of Loans
Other Receipts
Borrowings and other Liabilities
Non-plan Expenditure
On Revenue Account (of which Interest
Payments is Rs.4,92,892cr.)
On Capital Account
Plan Expenditure
On Revenue Account
On Capital Account
The estimated revenue deficit for the year 2006 was
(a)

Rs.4,53,168 cr

(Rs. crore)
7,36,676
2,79,064
72,092
52,800
6,14,548
11,57,536
1,13,748
3,07,372
1,76,524

<
Answer
>

(b)
(c)
(d)
(e)

Rs.4,38,328 cr
Rs.4,77,168 cr
Rs.4,49,168 cr
Rs.7,98,504 cr.
(2 marks)

68.The record of a country's transactions in goods, services and assets with the rest of the world is known
as
(a)
(b)
(c)
(d)
(e)

<
Answer
>

Current account
Balance of trade
Capital account
Balance of payments
Errors & omissions.
(1 mark)

69.If the US has to forego 3 tons of strawberries in order to produce 10 gallons of wine and Brazil has to
forego 2 tons of strawberries in order to produce 1 gallon of wine then
(a)
(b)
(c)
(d)
(e)

<
Answer
>

Both Brazil and US have a comparative advantage in wine

Both Brazil and US have a comparative advantage in strawberries
Brazil has a comparative advantage in wine and US in strawberries
Brazil has a comparative advantage in strawberries and US in wine
US has absolute advantage in both wine and strawberries.
(1 mark)
<
Answer
>

70.Indias overall Balance of Payments for the year 2006 is given below.

(US $ million)
Credit
Items
Merchandise
2,65,000
Services
1,24,930
Transfers
76,125
Income
14,130
Foreign Direct Investment
23,950
Portfolio Investment
37,675
External Assistance
13,865
Commercial Borrowings (MT & LT)
13,685
Commercial Borrowings (Short Term)
40,945
Commercial Banks
84,630
Others
2,680
Rupee Debt Service

Other Capital
32,010
Errors & Omissions
3,170
During the year 2006, over all Balance of Payments position for India was
(a)
$ 91,400 million (surplus)
(b)
$ 84,900 million (deficit)
(c)
$ 86,400 million (deficit)
(d)
$ 86,400 million (surplus)
(e)
$ 84,900 million (surplus).

Debit
3,27,370
93,900
1,835
38,540
5,895
32,955
26,165
22,175
36,050
44,865
1,230
2,370
14,545

(2 marks)
71.Which of the following chain of events results from an expansionary monetary policy?
(a)
(b)
(c)
(d)

Aggregate output increases, the demand for money increases, the interest rate increases, planned
investment decreases, and aggregate output decreases
Money supply increases, the interest rate decreases, planned investment increases, aggregate
output increases, and money demand increases
Money demand increases, the interest rate decreases, planned investment increases, aggregate
output increases, and money demand increases
Money supply increases, the interest rate increases, planned investment increases, aggregate

<
Answer
>

(e)

output increases, and money demand increases

Money supply decreases, interest rate decreases, planned investment decreases, aggregate output
decreases, money demand decreases.
(1 mark)

72.In the last few years the forex reserves in India have been increasing. Which of the following
sterilization policies the Reserve Bank of India would adopt?
(a)
(b)
(c)
(d)
(e)

<
Answer
>

Increase cash reserve ratio

Decrease cash reserve ratio
Decrease discount rate
Buy government securities
Qualitative restrictions.
(1 mark)
<
Answer
>

73.Inflation accompanied by a slowing of economic activity is

(a)
(b)
(c)
(d)
(e)

Known as deflation
A result of a stagnant aggregate supply
A result of fiscal stimulus
Known as stagflation
Known as recession.
(1 mark)

Suggested Answers
Economics (CFA520) : July 2007
1.

2.

3.

4.

5.

Answer : (c)
Reason : Total expenditure on a good will not change when the price of a good changes if demand
is unit elastic. When the demand is unit elastic, the upward pressure on expenditure caused
by the price increase would be equally off-set by the downward pressure on expenditure
resulting from the reduction in the quantity demanded. Thus, expenditure of a consumer
on a good with unitary elastic demand remains the same irrespective of the change in the
price of good. (a) If the demand is perfectly elastic, the proportionate change in quantity
demanded would be far higher than the proportionate change in price. Thus, expenditure
of the consumer increases (decreases) with the fall (increase) in the price of the good
because of higher proportionate change in quantity demanded. (b) If the demand is
perfectly inelastic, the proportionate change in quantity demanded would be far lesser than
the proportionate change in price. Thus, expenditure of the consumer decreases (increases)
with the fall (increase) in the price of the good because of lower proportionate change in
quantity demanded. (c)If the demand is unit elastic, the proportionate change in quantity
demanded would be equal to the proportionate change in price. Thus, expenditure of the
consumer remains the same with the decrease or increase in the price of the good because
of proportionate change in quantity demanded. (d) If the demand is relatively elastic, the
proportionate change in quantity demanded would be higher than the proportionate change
in price. Thus, expenditure of the consumer increases (decreases) with the fall (increase)
in the price of the good because of higher proportionate change in quantity demanded. (e)
If the demand is relatively inelastic, the proportionate change in quantity demanded would
be lesser than the proportionate change in price. Thus, expenditure of the consumer
decreases (increases) with the fall (increase) in the price of the good because of lower
proportionate change in quantity demanded.
Answer : (e)
Reason : Elasticity of demand is defined as percentage change in the quantity demanded due to the
percentage change in the price; price elasticity of demand = percentage change in the
quantity demanded / percentage change in the price of the commodity.
I.
The slope of the demand curve represents the change in the price of the good to the
change in the quantity demanded of the good.
II.
As one goes down the demand curve the price elasticity of demand decreases.
III. When the demand for the good is inelastic, a fall in the price of the good does not
result in a greater increase in the quantity demanded. Hence, there would be no
increase in the total revenue of the firm.
IV. Elasticity of demand is measured by dividing the percentage change in the quantity
demanded by percentage change in the price and not by dividing the change in
quantity demanded by change in the price. (Note: ED = Percentage change in the
quantity demanded/Percentage change in price).
The correct answer is (e).
Answer : (c)
Reason : When the quantity supplied of a commodity exceeds the quantity demanded at a given
price, the price will decrease.
Answer : (a)
Reason : Demand curve is usually drawn as downward sloping as we move from left to right as
demand increases with price fall of a commodity
Answer : (b)
Reason : P = Rs.10 Qd = 100 4 (10)
100 40 = 60

q
p = 4(slope)

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

Ep = 4 10 / 60 = - 0.67
6.

< TOP >

Answer : (b)

AR 1
Reason :

MR =

MR =
7.

Answer :
Reason :

8.

Answer :
Reason :

9.

Answer :
Reason :

10.

Answer :

ep
1

{ }

900 1

6 since AR = price

= 900 ( 5/6) =Rs. 750.

(c)
I.
Is true. Consumer surplus is useful to the government to fix taxes. It is useful to fix
taxes since the rich or the upper class people have more consumer surplus compared
to the rest. Consumer surplus also reveals the purchasing pattern of the economy. By
observing the nature of the products moving in the market, the government can fix
the taxes through the classification of products.
II.
Is true. Consumer surplus helps the monopolists in fixing price of a commodity.
While pricing a commodity, if a monopolist considers consumer surplus, he can
retain the customer for a longer period.
III. Is not true. In case of imported products which are cheaper than domestic
products
the consumer surplus is more. This is because he is paying less
for the imported product which is giving him the same level of satisfaction.
IV. Is true. A higher consumer surplus indicates that the economy is stable and vise
versa. A negative consumer surplus indicates that the economy is not functioning
efficiently.
(d)
The total utility at any point of time is the summation of marginal utilities of current and
preceding units of consumption.
(d)
The point of tangency between the budget constraint and the indifference curve indicates
that the consumer is in equilibrium. That is consumer attains maximum amount of
satisfaction implying that all the other combinations give him the lesser utility or
unassailability given his budget. Hence the correct answer is (d).
(a)

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< TOP >

< TOP >

Reason :
11.

12.

The locus of points of tangency between budget line and the indifference curves is called
as the income consumption curve
Answer : (c)
Reason: Diamond water paradox explains that the more of a commodity we have, the marginal
utility starts deminishing. If the availabity of the product is less, marginal utility would be
high.
Answer : (c)

< TOP >

Reason :

MU X =

MU Y =

U
X

U
Y

= 1.5X Y
.5

=X

1.5

PX = 6
PY = 8
The consumer can maximize his satisfaction by equating

< TOP >

< TOP >

MU X

MU Y

PX
PY

.5

1.5X Y
X

1.5

1.5Y
X

6
8

6
8

12Y = 6X
X = 2Y
Given the budget of Rs.500,
PX .X + PY .Y = 500

(6 2Y ) + 8Y

= 500

20Y

= 500

= 25

X = 2Y = 50
13.

hence the optimum allocation is X = 50 units and Y = 25 units

Answer : (b)
Reason : When the consumer is in equilibrium,

< TOP >

Pa

MRSab = Pb
95

5 = Pb
Pb = Rs.19
14.

Answer : (c)
Reason : If X and Y are products and MU and P represents marginal utility and price respectively,
consumer reaches an equilibrium where MUx/Px = MUy/Py
So 520/Px = 650/75
Px =

15.

16.

17.

520

< TOP >

75
= 60
650

Px = Rs. 60.
Answer : (e)
Reason : When P = 5; 25 0.5Q = 5, or Q = 40.
When the market price is Rs.5, the consumer surplus = 40 20 = Rs. 400.
Answer : (c)
Reason : The opportunity cost is the benefit of using resources for the next best alternative uses.(a)
Is not the answer because opportunity costs are not spill-over cost.(b)Is not the answer
because opportunity costs are not money cost(c)Is the answer because opportunity costs
are alternative cost(d)Is not the answer because opportunity costs are not external cost.(e)
Is not the answer because sunk costs are those costs which are incurred in the future as
result of a contractual agreement.
Answer : (a)

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< TOP >

Reason :
18.

Cost functions are derived from production function which describes the available
efficient methods of production at any particular point of time.
Answer : (a)

< TOP >

Reason :

If the firms total revenue exceeds its economic costs, the residual accruing to the
entrepreneur is called as economic or pure profit.

< TOP >

19.
20.

21.
22.

Reason : The cost that can be easily attributed to a product or a process is called as separate cost.
Answer : (e)
Reason : Option (e) is not true. The reason for this is that the marginal cost curve cuts the average
cost curve and the average variable cost curve at their minimum points and as the marginal
cost curve is upward rising curve and the average cost curve being flatter than average
variable cost curve. Hence the minimum point of average cost will be to the right of the
minimum point of the average variable cost.
Answer : (b)
Reason : Both marginal and average costs are equal to each other when average cost is minimum.
Answer : (d)
Reason :

23.

< TOP >

Answer : (e)

TC =
AC =

< TOP >

< TOP >

3Q2

500 2Q +
500/Q 2 + 3Q
=
500/5 2 + 15
=
Rs.113.

Answer : (d)
Reason :

< TOP >

< TOP >

AVC = 300 9Q + 0.5 Q2

VC = Q X AVC = 300 Q 9Q2 + 0.5Q3
Fixed cost = 150
TC = FC + VC = 150 + 300Q 9Q2 + 0.5Q3

dTC
MC = dQ = 300 18Q + 1.5Q2
Minimum possible MC is where

dMC
dQ = 0
dMC
dQ = -18 + 3Q = 0
3Q = 18
Q=6

24.

MC = 300 18 (6) + 1.5 (6)2

= 300 108 + 54
= Rs.246.
Answer : (e)
Reason :

< TOP >

TC = 20Q 0.3 Q2 + 0.01Q3

dTC
MC = dQ = 20 0.6 Q + 0.03Q2
dMC
MC is minimum when dQ = 0
dMC
dQ = -0.6 + 0.06 Q = 0
0.06 Q = 0.6
Q = 10 units
25.

Answer : (e)
Reason :

when TC = 5000 + 800Q -9Q2 + 0.25Q3

< TOP >

VC = 800Q -9Q2 + 0.25Q3 AVC = 800 9Q + 0.25Q2

FC = 5000
MC = 800 18Q + 0.75Q2
26.

AC = 5000/Q + 800 - 9Q + 0.25Q2

Answer : (e)
Reason : AC = 800/Q + 80 + 4Q

< TOP >

TC = 800 + 80Q + 4Q2

TVC = 80Q + 4Q2
At output 20,

27.

TC = 800+80(20) + 4(20)2
= 800+ 1600 + 1600 =Rs.4,000.
Answer : (a)
Reason : Since the firm is operating in short run the equilibrium condition of the firm will be
MR = MC
Given
P =1000 50Q
So TR = P x Q

< TOP >

= 1000Q 50Q2
MR = 1000 100Q
Given
AVC = 250 + 25Q
VC = 250Q +25Q2
MC = 250 + 50Q
At equilibrium MR = MC
= 1000 100Q = 250 + 50Q
= 750 = 150Q
=Q=5
At this level of output the AFC = Rs. 60. So FC = 60 x 5 = Rs.300

28.

Answer :
Reason :

29.

Answer :
Reason :

30.

Answer :
Reason :

VC = 250(5) + 25(5)2 = 1250 + 625 = Rs. 1875

TC = FC + VC
= 300 + 1875 = Rs.2,175
(b)
A firm is considered a price taker in perfect competition because there are so many
buyers and sellers in the market that any individual firm cannot affect the market.
(c)
For a firm operating in a perfectly competitive industry, the part of MC curve which is
above the AVC curve is the supply curve of the firm.
MC = TC/Q = - 100 + 10Q = P( because at equilibrium MC = MR and in perfect
competition MR = AR = P = Demand)
Or, 10Q = P + 100
Or, Q = 0.10P + 10
There are 100 firms, hence Qs = 100x Q = 10P + 1000
Equilibrium price is where, Qs = Qd
6000 490P = 10P + 1000
Or, 500P = 5000
Or, P = Rs.10
(c)
To maximize profits, a perfectly competitive firm produces an output where P = MC

< TOP >

< TOP >

< TOP >

MC = TC/Q = 600 100Q + 3Q2

P = 600 100Q + 3Q2, where Q = 150 units (given)

31.

Answer :
Reason :

32.

Answer :
Reason :

33.

Answer :
Reason :

34.

Answer :
Reason :

35.

Answer :
Reason :

Hence, P = 600 100(150) + 3(150)2 = 53,100

Thus, total industrial production is equal to (200 + 4 x 53,100) = 2,12,600 Units.
(d)
In a perfectly competitive market in the long run no firm earns abnormal profit because of
existence of free entry and free exit into the industry. So when ever there is some extra
profit in the industry some new firms will enter into the market and compete away the
extra profit. Thus in the perfect competition the firms will earn only normal profits.
(d)
The monopolist must decrease the price of every unit in order to sell additional units, that
is why the marginal revenue curve of the monopolists slopes downwards from left to right.
(c)
Monopoly is a market structure in which there is one seller of the product implying that
the producer has complete control over market supply of the commodity. The monopolist
must decrease the price he receives for every unit in order to sell an additional unit.
Hence, the marginal revenue of the monopolist would be lesser than price. Hence, the
correct answer is (c).
(d)
First degree price discrimination involves charging the maximum price possible for each
unit of output. It is also called perfect discrimination. The price of the first unit is greater
than the price of the subsequent units.
(b)
Demand function of the firm is given as Q = 75 P
P = 75 Q
TR = P Q

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

= 75Q Q2
MR = 75 2Q
TC = 25Q
MC = 25
Profit maximizing output is obtained when MR = MC
= 75 - 2Q = 25
2Q = 50
Q = 25
P = 75 Q
= 75- 25 = 50
Profit = TR TC
TR = P Q
= 50 25 = 1250
TC = 25Q
= 25 25 = 625
36.

profit = 1250 625 =Rs.625.

Answer : (c)
Reason : Q = 200 4P
Or 4P = 200 Q
Or P = 50 0.25Q
But, we know that Q = QA + QB
Hence, P = 50 0.25QA 0.25QB

< TOP >

Thus, TRA = P x QA = QA(50 0.25QA 0.25QB)

Thus, TRA = 50QA 0.25QA2 0.25QAQB
Thus, MRA = 50 0.5 QA 0.25QB
MRA = MCA
50 0.5QA 0.25QB = 10
Or, 40 0.5QA = 0.25QB
Or, 160 2QA = QB
TRB = P x QB = QB(50 0.25QA 0.25QB)
TRB = 50QA 0.25QB2 0.25QAQB
MRB = 50 0.5QB 0.25QA
But, MRB = MCB
=50

0.5QB 0.25QA = QB

Or, 50 - 0.25QA = 1.5QB

Or, 50 0.25QA = 1.5(160 2QA)
Or, 50 0.25QA = 240 3QA
Or, 2.75QA = 190
Or, QA = 69 QB = 160 2(69) = 22
Q = QA + QB = 69 + 22 = 91 units.
37.

Answer : (b)
Reason : The production possibility curve represents the various combinations of two goods that
can be produced given the resources and level of technological development. It is nothing
but the locus of various combinations of two goods and the production possibility frontier
represents the maximum combinations of two goods.

< TOP >

38.

Answer : (a)
Reason : A variable is a stock if it is measured at a particular point of time. It is a flow variable if it
is measured over a period of time.
Investment is measured over a period of time hence is a flow variable.
Capital stock, a firms assets, price index are stock variable.
Answer : (a)
Reason : In India, Whole Sale Price index (WPI) is widely used for determinime of inflation.
Because the Office of the Economic Advisor to the Government of India publishes
wholesale price indices for individual commodities, commodity groups and the overall
WPI monthly. They are reported in a number of other publications also.
Answer : (b)
Reason : Personal income = national income undistributed corporate profits corporate taxes
+transfer payments
= 10000600288+278 = 9390
Personal disposable income = personal income personal taxes
= 9390 810= 8580 MUC.
Answer : (c)
Reason : Nominal GDP for 2005 is given by

< TOP >

39.

40.

41.

< TOP >

< TOP >

< TOP >

Price of bread in 2005quantity of bread in 2005 + Price of butter in 2005 quantity of

butter in 2005
42.

75020 + 1250 15 = Rs.33,750

Answer : (d)

< TOP >

Reason :

43.

44.

National income = NNP at factor cost = 168,000

GDP at factor cost = NNP at factor cost + Depreciation - NFIA = 168,000 + 42,000
(31500 42000) = 220,500 MUC.
Answer : (d)
Reason : Crowding-out refers to decrease in private investment because of increase in interest rate
caused by the increase government spending . Crowding out = 40 5 = 200 MUC.
Answer : (b)
Reason :

< TOP >

< TOP >

Investment in period t = 0.75 Desired investment in period t

Desired investment in period t = Acceleration co-efficient change in income
= 2 200
= 400
Investment in period t = 0.75 400 = 300 MUC

45.

The answer is (b).

Answer : (a)
Reason : MPC
=
0.80
T
=
25%

Multiplier =

1
1 MPC(1 t ) =

< TOP >

1
1 0.8(1 0.25)

If G increase by 100, Y = 100 2.5 = 250

T

= t . Y = 0.25 250 = 62.50

= 100,

T = 62.50
46.

47.

48.

49.

Budget deficit (G T) = 37.50.

Answer : (a)
Reason : Reduce the equilibrium level of income because decrease in government expenditure
would reduce the AD by Rs.10 billion. Whereas decrease in tax receipts increase the AD
by MPC 10 billion. This results in net decrease in AD thereby reducing equilibrium
level of income.
Answer : (d)
Reason : If the government raises tax rate, it has an effect on the IS curve because it is a fiscal
policy and the IS curve shifts to left. And at the same time the Reserve Bank of India keep
the money supply constant. It implies that there is no change in the LM curve. This will
result in a fall in the interest rate.
(a) Is not the answer because when the Government raises tax rate, disposable income
falls.
(b) Is not the answer because if the government raises tax rate and the Reserve Bank of
India hold the money supply constant, the IS curve shifts to the left.
(c) Is not the answer because if the government raises tax rate and the Reserve Bank of
India hold the money supply constant, there is no shift in the LM curve.
(d) Is the answer because if the government raises tax rate and the Reserve Bank of India
hold the money supply constant, the IS curve shifts to the left while LM curve
remain unchanged which means that the interest rate falls.
(e) Is not the answer because interest rate doesnt increase.
Answer : (d)
Reason : If expansionary fiscal policies decrease the rate of interest by 1%. The equilibrium
income will increase by (75/0.5) = 150 MUC
Answer : (c)
Reason : At simultaneous equilibrium,
0.5Y = 2860 60i (or) Y = 5720 120i is equal to Y = 2600 + 400i

< TOP >

< TOP >

< TOP >

< TOP >

50.

51.
52.

53.

54.

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% of 5000 = 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.
Answer : (b)
Reason : Goods market equilibrium: AD = Y
C + I + G + NE = Y
100 + 0.75(Y 0.2Y) + 200 10i + 400 + 100 0.1Y = Y
800 + 0.6Y 10i 0.1Y = Y
800 + 0.5Y 10i = Y
0.5Y = 800 10i
Y = 1600 20i
Money market equilibrium: Ms = Md

Answer :
Reason :
Answer :
Reason :
Answer :
Reason :

0.2Y + 200 4i = 500

0.2Y 4i = 300
0.2Y = 300 + 4i
Y = 1500 + 20i
At simultaneous equilibrium,
1600 20i = 1500 + 20i
100 = 40i
i = 2.5
Y = 1500 + 20i = 1500 + 20(2.5) = 1550 MUC.
(b)
An increase in the expected price level shifts short-run aggregate supply curve to left.
(b)
In the short run, changes in aggregate demand determine the level of prices and income.
In the long run, changes in aggregate demand determine only the level of prices.
(a)

Total assets = Total liabilities

(Credit to Central Government + Credit to commercial banks + Foreign exchange assets +
Other assets) = (Net worth + Government deposits + Other non-monetary liabilities +
Monetary liabilities)
(1000 + 500 + 200 + 200) = (400 + 100 + 100 + ML)
1900 = 600 + ML
Or, ML = 1300.
High-powered money (H) = Monetary liabilities of Central Bank + Government money =
1300 + 100 = 1400 MUC.
Answer : (d)
Reason :

1 + Cu

Money supply = H Cu + r
Where H = High powered money

< TOP >

< TOP >

< TOP >

< TOP >

< TOP >

Cu = Currency deposit ratio

1 + 0.20

R = reserve ratio = 8800 0.20 + 0.05 = Rs.42,240 Cr.

55.

< TOP >

Answer : (c)

Pr imary issues by non financial sec tor

Reason :

New issues ratio =

Total physical assets formation

x
Thus 0.77 = 1, 77, 000
X = 1,36,290
Hence primary issues by non-financial sector are 1,36,290 units
1,19, 935
Intermediation ratio = 1, 36, 290 = 0.88
56.

57.

58.

59.

60.
61.

62.

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.
Answer : (b)
Reason : The classical view of the labour market is basically consistent with the assumption of a
vertical aggregate supply curve
Answer : (d)
Reason : In the Classical Theory, saving and investment determine interest rates. Interest rate is
determined at the equilibrium point of saving and investment. As the saving increases
interest rate decreases and vice versa. Similarly, there is direct relationship between
investment and interest rates.
Answer : (a)
Reason : Keynesian economics focuses on the role government plays in stabilizing the economy by
managing aggregate demand.
Answer : (b)
Reason : A continuous decline in prices is referred to as Deflation.
Answer : (e)
Reason : In the long run, the Philips curve is vertical. Hence, there is no inverse relation between
inflation and unemployment. Any policy change effected at this juncture will have no
effect.
Answer : (b)
Reason : (a) Structural unemployment arises when the regional or occupational pattern of the job
vacancies does not match the pattern of workers availability and suitability. The
above situation does not represent structural unemployment.
(b) Unemployment that is caused by constant changes in the labor market is called
frictional (natural) unemployment. It occurs on account of two reasons: (a)
employers not fully aware of all available workers and their job qualifications;

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and (b) available workers are not fully aware of the jobs being offered by employers.
Even though the suitable job is available for Mr.Robert it took him 2 months to
find the job. Thus, the unemployment encountered by Robert is in the nature of
frictional (natural) unemployment.
(c) Unemployment that arises when there is general downturn in business activity
is called cyclical unemployment.
(d) Unemployment that arises because of seasonal variations is called seasonal
unemployment. For example, agricultural labors normally face unemployment
during summer.
(e) When marginal productivity becomes negative because of excess employment
we call it as disguised unemployment. In less developed countries like India
there is widespread disguised unemployment in agricultural sector.
63.

64.

65.

66.

67.

68.

69.

70.

Answer : (d)
Reason : Recession is, technically, defined as decline in output for two or more consecutive
quarters.
Answer : (d)
Reason : If the central bank imposes a reserve ratio of 100%, the entire deposits are kept with the
central bank and the money multiplier is not affected. Hence (d) is the false statement.
Answer : (d)
Reason : An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary plicy
shifts the LM curve to the right. It will result in a higher level of output, but the level of
interest rate is dependent on the relative magnitude of fiscal and monetary policies

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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:

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Improvement in technology

Natural resources

Capital

Human resources
Change in tastes and preferences of consumers only affect the demand of an individual for
good or services, and it does not increase the production capabilities of an economy.
Answer : (d)
Reason : Revenue deficit
= Revenue expenditure Revenue receipt
Revenue Expenditure
= Non plan revenue expenditure + Plan revenue expenditure
= 1157536+307372 = 1464908
Revenue receipts
= Tax revenue + Non. Tax revenue
= 736676+279064 = 1015740
= 1464908 1015740 = Rs. 449168 cr.
Revenue Deficit
Answer : (d)
Reason : Balance of payments statement is described as a nations record of its goods, services and
assets transactions with the rest of the world. This is recorded in the form of double entry
bookkeeping.
Answer : (d)
Reason : In the example, the opportunity cost of producing 10 gallons of wine for United States is
3 tons of strawberries while for Brazil, it is only 2 tons. This means less opportunity cost
for Brazil and a comparative advantage for brazil in strawberry production.
Answer : (e)
Reason : Overall balance of payment
= Total Credit of the Bop Total debit of the Bop
= 732795647895

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71.

72.

73.

= $ 84900million (surplus)
Answer : (b)
Reason : An expansionary monetary policy increases the money supply. This will decrease the
interest rates boosting planned investment and aggregate demanbd. This will further
increase aggregate output and hence money demand.
Answer : (a)
Reason : In an economy, the high-powered money is the aggregate of monetary liabilities of the
central bank and government money. The foreign exchange reserves are the asset of the
central bank. When the foreign exchange reserves increases, the monetary liabilities also
increase. This in turn increases the high-powered money in the economy and thereby the
money supply. If the economy is already affected by inflation, the central bank must step
in to curb this expansion of money supply by either contracting its lending its lending to
the banking systems (by increasing the discount rate) or by open market operations (sale
of government securities) or by increasing the cash reserve ratios of the commercial bank.
(a)
Is the answer because the Reserve Bank of India increase CRR to correct the
imbalances created by changes in foreign exchange reserve.
(b) Is not the answer because RBI wouldnt decrease CRR. It will not help in correcting
the imbalances created by changes in foreign exchange reserve.
(c)
Is not the answer because due to increase in foreign exchange reserves, RBI
increases the discount rate.
(d) Is not the answer because RBI checks the expansion of money supply by open
market operations, i.e. sale of government securities.
(e) Is not the answer because RBI would not adopt qualitative restrictions.
Answer : (d)
Reason : Slowing of economic activity accompanied by inflation is defined as stagflation.
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